FAR 3 Flashcards
What are the rules and journal entries for the recovery of a previously recorded inventory loss
GAAP - NO Inventory recovery
IFRS - a loss can be recovered - but ONLY to the extent of the previously recorded loss
If the previous impairment was $20 the journal entry to recover is:
dr. Inventory $20
cr. Inventory markdown expense $20
This is a reversing journal entry - it reverses the markdown expense recorded during the previous period.
What is deferred revenue
These are Revenues that have been received before they have been earned
- When you get the money you must either perform the service or return the money
- This makes it a liability until the point when it is earned
- For the company that made the payment - h
GAAP - What are the three main aspects of financial reporting
GAAP addresses three main aspects of financial reporting:
Recognition - when is an item is recorded on financial statements
Measurement - How is an item recorded on the financial statements
Disclosure- You need to disclose anything not on the financial statements
What is in Relevance Characteristic
Predictive Value: Does it help make predictions about future events?
Confirmatory Value - Doe sit provide information about earlier expectations or predictions?
Material - Does the information matter to the user? - size/scope standpoint
PC -materialistic
What is in Faithful Representation
Free from Error - info doesn’t contain any material errors
Neutrality - the info is free from bias
Completeness - all necessary facts included in the info
FeNCe
What are the enhancing Characteristics
Comparability - can the info be compared to other companies in the same industry (consistency)
Understandability - a user with a reasonable understanding of business can understand and draw conclusions from the info
Timeliness - the info is recent enough to make a decisions
Verifiability - indépendant observers would reach the same conclusions
CUT - V
What is FASB’s standard setting process
1 - project gets put on the agenda
2 - they conduct research and issue a discussion memorandum
3- They hold public hearings
4 - They evaluate research and comments from interested parties - Issue an Exposure Draft (first version)
5 - Solicit additional comments and modify exposure draft
6 - Finalize the new accounting guidance by a vote - (majority = 4 out of the 7 members) new standard is ASU
When is an item material
- If it would make a difference to users of F/S in making decisions about their relationship with the reporting entity
- An item is material is its omission or misstatement would have caused the suer to make a different decision
- There are no industry specific guidelines because what is considered material really depends on the users of the F/S and how they are using them.
What are the three basic elements of financial reporting
assets liabilities and equity or net assets
Revenues, expenses , gains and losses are elements of what?
Comprehensive income - which is a component of Equity
What is managerial accounting and how is it different from financial accounting
designed to provide info to internal users
- therefore they can use whatever format or accounting approach that makes sense to the internal users
- Financial accounting is meant for external users - therefore it must follow guidelines that are generally understandable. In order to do this they must apply financial reporting framework - such as GAAP
What are the two main criteria for revenue recognition
Revenue must be earned - the goods or services have been provided to the customer
- The receivable but be realizable - this is reasonable assurance that the receivable will be collected
What do you do if there are two or more performance obligations
The total revenue is allocated between the two in proportion to their separate sales prices
If you sell a product and a service - Example: sold a widget for $1000 and threw in a 3 year service contract for free - worth $150
1000 + 150 = 1150
product = 1000 / 1150 * 1000 = 870 for product
service = 150/1150 * 1000 = 152
The product is delivered in the sales period and the revenue is recognized in the sales period
The service contract is actually recognized over the 3 year contract term = 152/3 = 50 per year
When is the new revenue recognition standard NOT apply
ASC 606 - leases, non monetary exchanges, insurance contracts - and specifics of different financial instruments
What are the 5 steps of Revenue Recognition
1 - identify the contract with the customer
2 - identify the performance obligations (products) in the contract
3 - determine the transaction price - This is the amount that the providing entity expects to be entitles to in exchange for the goods or service
4 - allocate the transaction price to the performance obligations in the contract
(use standalone prices - if they are not observable - the entity will estimate them)
5 - recognize revenue when or as the entity satisfies the performance obligation
recognize only the revenue amount that is substantially complete (even if you already have the money) - this is Deferred Revenue until you earn it - therefore it is considered a liability until it is earned.
How are gift cards and gift certificates outstanding at year end accounting for on the B/S
The are Deferred Revenue (liability) until they are either used and then become Revenue or if they expire - then they become Revenue
What is a non current asset
It is an asset that provides an economic resource that will provide a probable future benefit, it is within the control of the entity, and results from an event or transaction that has already occurred
If for example you pay 3- months of sales taxes on projected sales and will get it back in 3 years if you meet all of the requirements - then it is considered an non-current asset
When your items are out on consignment – how should they be captured in inventory
They shook be captured in YOUR inventory at year end at their cost - not sales price
When can you not use the Fair Value Option
- Investments in entities that will be consolidated
- Obligations or assets related to pension
- Lease - related financial assets
- Demand deposits of financial institutes
- Instruments that are part of Stock holders Equity
What is an example of Level II input - Fair Value
Example - comparing recently sold homes that are similar to your home to come up with a value
- or your have temporarily restricted stocks. Where unrestricted are sold on the market and it is commonly agreed that the restriction would reduce it by 10%
