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FAR Flashcards

1
Q

How are changes in accounting principle applied?

A

Retrospective Application:
Prior Periods adjusted
Retained Earnings adjusted
Completed Contract to % Completion
Ex: LIFO to FIFO

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2
Q

Would a change from Completed Contract to Percentage of Completion be a change in accounting principle- or a change of estimate?

How would it be applied?

A

A change of principle.

Applied retrospectively.

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3
Q

Would a change from LIFO to FIFO be a change in accounting principle or a change of estimate?

How would this change be applied?

A

A change in accounting principle.

Applied retrospectively.

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4
Q

How is a change in accounting estimate applied?

A

A change in accounting estimate is applied prospectively (going forward).

No backwards adjustment is made.

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5
Q

Would a change from straight line depreciation to double declining balance be a change in accounting principle or a change in estimate?

How would this change be applied?

A

Change in depreciation method would be a change in accounting estimate.

It is applied prospectively.

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6
Q

How is a correction of an accounting error made?

A

Cumulative effect of error gets adjusted to the beginning balances of assets and liabilities in the earliest period presented in the comparative statements.

The correction of the error must be included in the footnotes.

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7
Q

What are the requirements for a prior period adjustment?

A

Effect is Material

Is identifiable in Prior Period

Couldn’t be estimated in Prior Periods

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8
Q

How is a change from a non-GAAP accounting method to a GAAP method recorded?

A

It is treated as a correction of an accounting error.

Cumulative effect of error gets adjusted to the beginning balances of assets and liabilities in the earliest period presented in the comparative statements

Correction of the error must be included in the footnotes

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9
Q

How does an inventory error effect the financial statements?

A

Effect on Ending Inventory : Effect on Net Income

If one is overstated- both overstated. If one is understated- both understated.

Misstating inventory corrects itself after TWO periods.

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10
Q

How is a change in entity recorded?

A

Applied retrospectively.

All prior periods presented for comparative purposes must reflect the change

Footnote disclosures must be made

Changing to Consolidated Statements

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11
Q

How are changes in accounting principle applied?

A

Retrospective Application:
Prior Periods adjusted
Retained Earnings adjusted
Completed Contract to % Completion
Ex: LIFO to FIFO

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12
Q

Would a change from Completed Contract to Percentage of Completion be a change in accounting principle- or a change of estimate?

How would it be applied?

A

A change of principle.

Applied retrospectively.

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13
Q

Would a change from LIFO to FIFO be a change in accounting principle or a change of estimate?

How would this change be applied?

A

A change in accounting principle.

Applied retrospectively.

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14
Q

How is a change in accounting estimate applied?

A

A change in accounting estimate is applied prospectively (going forward).

No backwards adjustment is made.

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15
Q

Would a change from straight line depreciation to double declining balance be a change in accounting principle or a change in estimate?

How would this change be applied?

A

Change in depreciation method would be a change in accounting estimate.

It is applied prospectively.

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16
Q

How is a correction of an accounting error made?

A

Cumulative effect of error gets adjusted to the beginning balances of assets and liabilities in the earliest period presented in the comparative statements.

The correction of the error must be included in the footnotes.

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17
Q

What are the requirements for a prior period adjustment?

A

Effect is Material

Is identifiable in Prior Period

Couldn’t be estimated in Prior Periods

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18
Q

How is a change from a non-GAAP accounting method to a GAAP method recorded?

A

It is treated as a correction of an accounting error.

Cumulative effect of error gets adjusted to the beginning balances of assets and liabilities in the earliest period presented in the comparative statements

Correction of the error must be included in the footnotes

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19
Q

How does an inventory error effect the financial statements?

A

Effect on Ending Inventory : Effect on Net Income

If one is overstated- both overstated. If one is understated- both understated.

Misstating inventory corrects itself after TWO periods.

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20
Q

How is a change in entity recorded?

A

Applied retrospectively.

All prior periods presented for comparative purposes must reflect the change

Footnote disclosures must be made

Changing to Consolidated Statements

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21
Q

What is a serial bond?

A

Any bond that matures in installments

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22
Q

What is a term bond?

A

Any bond that matures on a single date

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23
Q

What is a debenture bond?

A

A bond not secured by any collateral

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24
Q

What is a sinking fund bond?

A

Cash is held in a sinking fund for repayment of bond at maturity

5 years of requirements and maturity details should be disclosed

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25
Q

What is the formula to calculate proceeds of a bond sale?

A

Present Value of the principal payment at maturity+ Present Value of Interest Payments made
: Market Value of Bond Proceeds

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26
Q

How is the present value of a bond calculated?

A

Step 1: PV of $1 @ Yield Rate (not Stated Rate)
x Bond Face Value

PLUS

Step 2: PV of an Ordinary Annuity of $1 for Term @Yield
x (Stated Rate x Face)

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27
Q

Which costs are included in bond issuance costs? How are they recorded?

A

Include Engraving; Printing; Legal; Underwriter; Registration

Debited to a deferred charge account and amortized over life of Bond using S/L

Bond Proceeds - Bond Issuance Costs : Net Bond Proceeds

Time of amortization begins when issued

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28
Q

How are bonds reported when classified as trading securities?

A

Reported at FMV with unreleased gains and losses being included in earnings

29
Q

How are bonds amortized under the interest method?

A

Both discount and premium amortization amounts increase each year

30
Q

Describe the book value method when converting from bonds to stocks.

A

No gain or loss recognized

APIC is the plug for the difference between the Bond’s Book Value and the Par Value of the Common Stock

31
Q

What is the stated rate for a bond?

A

Rate on the face of the bond

32
Q

What is the market rate on a bond?

A

Rate that bonds are currently selling for

33
Q

What happens when the bond’s market rate is greater than the stated rate?

A

Bond will need to sell at a discount in order for buyers to be interested. The difference in market rate vs. the stated is made up by the buyer purchasing the bond for less than par value

34
Q

What happens when a bond’s market rate is less than the stated rate?

A

Bond will need to sell at a premium in order for buyers to be interested. The difference in market rate vs. the stated is made up by the buyer purchasing the bond for more than par value

35
Q

How does accrued interest on a bond affect the purchase price?

A

The total cash that seller receives will be MORE than they normally would (set aside any considerations for premium or discount; they are irrelevant for this point).

Basically; the purchaser of the bonds must give the bond issuer the amount of accrued interest up front.

36
Q

When does interest expense start accruing on a bond?

A

When the bonds are issued

37
Q

How is an interest payment on a bond calculated?

A

Cash for payment : Stated rate x Face amount

38
Q

What amount of interest is expensed on a bond interest payment?

A

Interest expense : effective yield x carrying value

Any difference between expense and cash payment is applied as amortization against premium/discount

39
Q

What are convertible bonds? Which recording method is used?

A

Bonds that can be converted to stock

Book value method used if no gain or loss

Market value method used if there is a gain or loss

40
Q

How is the retirement of bonds recorded?

A

Gain or Loss is Ordinary

Extraordinary if both unusual and infrequent

41
Q

When is a gain recognized in a debt restructuring?

A

If terms are modified; and future payments are now less than the carrying amount of the debt; then a Gain is recognized

42
Q

What is the gain recognized under a settlement of debt?

A

Gain recognized:

Difference between cash paid and carrying amount of debt

Difference between non-cash asset given and re-valued at FMV and debt carrying amount

43
Q

For a creditor; how is a loan impairment recorded?

A

If future cash flows discounted at loan’s Effective Interest Rate are less than Carrying Value:

Effective Rate calculated using original rate; not modified rate

44
Q

When is the fair value method used for recording interest in a separate company?

A

20% Ownership or Less

Accounted for as a purchase

If amount paid is less than fair value; results in a gain in current period

45
Q

When is the equity method used when purchasing another company’s stock? How is it recorded?

A

Ownership 21% to 50%

Gives significant influence

Purchase Price - Par Value : Goodwill

Dividends received from the investee reduce the investment account and are not income

46
Q

When are companies required to file consolidated financials? How is it recorded?

A

Ownership of other company is greater than 50%

Investment account is eliminated

Only parent company prepares consolidated statements; not subsidiary.

Acquired assets/liabilities are recorded at Fair Value on acquisition date.

Eliminating entries for inter-company sales of inventory & PPE; also inter-company investments

47
Q

When is consolidation not required?

A

Ownership less than 50%

OR

Majority owner does not control - i.e. bankruptcy or foreign bureaucracy

48
Q

What occurs under a step acquisition?

A

Acquirer held previous shares accounted for under Fair Value Method or Equity Method; and are now re-valued to Fair Value

Results in a Gain or Loss in current period

49
Q

What is the difference between an acquisition and a merger?

A

Acquired companies continue to exist as a legal entity - their books are just consolidated with the parent company in the parent’s financial statements

Merged companies cease to exist and only the parent remains

50
Q

How are acquisition costs recorded in a merger?

A

Expensed in period incurred - i.e. NOT capitalized:
Accounting; Legal; Valuation; Consulting; Professional

Netted against stock proceeds:
Stock registration and issuance costs

51
Q

What is a current asset?

A

Cash plus other assets that are expected to be sold or converted to cash during the current operating cycle

Includes: Demand deposits, cash equivalents, accounts receivable, inventory, pre-paids, and short-term investments

52
Q

What is a current liability?

A

A liability expected to be paid within 12 months or less

53
Q

How is the Quick Ratio calculated?

A

(Cash + A/R + Trading Securities) / Current Liabilities

54
Q

How is the Current Ratio calculated?

A

Currents Assets / Current Liabilities

55
Q

How is Working Capital calculated?

A

Currents Assets - Current Liabilities

56
Q

How is A/R Turnover calculated?

A

Credit Sales / Average A/R

57
Q

How is Inventory Turnover calculated?

A

COGS / Average Inventory

58
Q

How is Day Sales in Inventory calculated?

A

365 / Inventory Turnover

59
Q

How is Days to Collect A/R calculated?

A

Average A/R / Average Sales per Day

60
Q

How are gain contingencies recorded?

A

They are NOT accrued due to Conservatism

61
Q

When are loss contingencies recorded?

A

If Probable - they are accrued (if estimable) and disclosed

If Reasonably Possible - they are disclosed

If Remote - don’t accrue or disclose

62
Q

What is a temporary difference related to deferred taxes?

A

GAAP says to recognize a revenue/expense in one period and tax laws say to recognize it in another

Example: Dividends from a subsidiary accounted for using the Equity Method - tax income but not book income

63
Q

What is a deferred tax asset?

A

Deduction will reduce future income taxes expense.

64
Q

What is a deferred tax liability?

A

Income will be taxable in a future period and will increase future tax expense

65
Q

Which period’s tax rate is used to calculate a deferred tax asset or liability?

A

The FUTURE enacted tax rate not the current one.

It is never discounted to present value.

66
Q

What valuation allowance is used with respect to a deferred tax asset?

A

If it isprobable that not all of a Deferred Tax Asset (debit) will be realized then the Deferred Tax Asset account must be written down (credit) to reflect this

67
Q

What effect do permanent differences have on deferred income taxes?

A

They have no tax impact.

When calculating the total differences between book and tax income subtract the permanent differences from the total before applying a future enacted tax rate

68
Q

What is deferred income tax expense?

A

The sum of Net Changes in Deferred Tax Assets and Deferred Tax Liabilities

GAAP Method for calculating is theAsset and Liability Approach

Note: IFRS uses the Liability approach only

69
Q

How are deferred tax assets classified as current or non-current on the balance sheet?

A

Current Deferred Tax Assets and Liabilities will impact income tax expense within 12 months. All current amounts are netted and reported as a single amount on the Balance Sheet

Non-Current Deferred Tax Assets and Liabilities will impact income tax expense 12 months or more fromt he Balance Sheet Date. All non-current amounts are netted and reported as a single amount on the Balance Sheet

FAR (19 decks)

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