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FAR Flashcards

1
Q

When common stock and preferred stock are issued in a lump sump purchase- how is APIC allocated?

A

APIC for each is allocated by its respective % of the total FMV of the shares x the proceeds.

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2
Q

When is APIC recorded on a stock subscription?

A

APIC increases on date subscription is recorded - not on the date paid for or issued

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3
Q

To what extent is retained earnings restricted if legally restricted due to Treasury Stock?

A

It will be restricted to the extent of the balance in the Treasury Stock account.

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4
Q

When are dividends in arrear recorded for cumulative preferred stock?

A

They are not accrued until declared.

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5
Q

When are dividends in arrears included as a disclosure and not an accrual in the financial statements?

A

If a year passes and no Cumulative Preferred Stock is declared- then the dividends in arrears are included as a disclosure - not an accrual in the Financial Statements.

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6
Q

What is the gain or loss when a non-monetary asset is distributed to a shareholder?

A

The gain or loss is the difference between the FMV of the asset distributed at the date of distribution and its carry amount on the company’s books

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7
Q

What is the effect on retained earnings when a non-monetary asset is distributed to a shareholder?

A

The effect on Retained Earnings is the Carrying Amount of the asset

RE will be debited when the dividend is declared for the FMV of the asset- which is more (or less) than the carrying amount

Gain/Loss recorded when the asset is distributed will offset the original effect of the debt to RE and will be a wash

The net effect of the entry is that RE will decrease by the CV of the asset

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8
Q

When is Retained Earnings debited for FMV of Stock for a stock dividend?

A

When Stock Dividend is less than 25% of Common Stock outstanding

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9
Q

When is Retained Earnings debited for Par Value for a stock dividend?

A

When Stock Dividend is greater than 25% of common stock outstanding

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10
Q

What is the effect of a stock dividend or a stock split on total shareholder equity?

A

Stock dividends and stock splits both have no effect on Total Shareholder Equity

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11
Q

What is the affect on APIC from a stock split?

A

Stock splits only affect par value - APIC remains the same.

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12
Q

When is compensation expense recorded at the time of grant for a stock option?

A

Compensation expense is recorded at the time of grant if options are exercisable immediately

They are based on past service.

Expense recognized : FV Stock Option x # of Shares

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13
Q

What interest rate is used to discount stock options?

A

The risk-free interest rate

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14
Q

What date is used as the measurement date for share-based payments classified as liabilities?

A

The settlement date.

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15
Q

How are compensation costs for share-based payments classified as liabilities measured?

A

Compensation costs for share-based payments classified as liabilities are measured by the change in the fair value of the instrument for each reporting period

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16
Q

What is the net increase to shareholder equity in a reorganization where a company pays cash and issues stock to satisfy unsecured creditors?

A

Net increase to SHE : Gain on settlement of debt + Credit to SHE from stock issuance

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17
Q

What is the primary purpose of a quasi-reorganization?

A

To eliminate a deficit balance in RE by restating its assets to Fair Value

It does not directly protect a company from its creditors

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18
Q

How is return on Common Stockholder’s Equity calculated?

A

(Net Income - P/S Dividends) / Average Common Stockholders Equity

Note: Average CSE : Common Stock + RE

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19
Q

How is book value per share of common stock calculated?

A

Total Shareholder Equity
- Total Preferred Stock
- P/S Dividends in Arrears
- P/S Liquidation Premium
:Total Book Value

Book Value per Share : Total Book Value / Shares outstanding

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20
Q

How is the dividend per share payout ratio calculated?

A

Dividends per share / earnings per share

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21
Q

How is basic Earnings Per Share (EPS) calculated?

A

(Net Income - Preferred Dividends) / Average C/S Outstanding

Note - If cumulative- subtract the P/S dividend regardless of whether or not they’re declared.

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22
Q

For EPS purposes- which date is used for calculation purposes when a stock split or stock dividend has occurred?

A

For EPS purposes- treat C/S stock splits or stock dividends as if they occurred at the beginning of the year- regardless of when actually issued during the year

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23
Q

For which areas is EPS required to be shown?

A

EPS is only required to be shown for Income from Continuing Operations and Net Income.

All others (discontinued operations- extraordinary items) can be shown on the Financial Statements or in the notes

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24
Q

When do stock options increase share outstanding?

A

Only if they are dilutive.

Their exercise price is LESS than the market value

If not- you ignore them in the calculation

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25
Q

How is EPS calculated when convertible bonds are taken into consideration?

A

[Net Income + Bond Interest (Net of Tax)] / (Average Common Stock Shares + Convertible Equivalents)

Bond interest is added back because if converted- there would be no bond interest expense

Contingent Issue Agreements are included in Diluted EPS if contingency is met

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26
Q

When common stock and preferred stock are issued in a lump sump purchase- how is APIC allocated?

A

APIC for each is allocated by its respective % of the total FMV of the shares x the proceeds.

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27
Q

When is APIC recorded on a stock subscription?

A

APIC increases on date subscription is recorded - not on the date paid for or issued

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28
Q

To what extent is retained earnings restricted if legally restricted due to Treasury Stock?

A

It will be restricted to the extent of the balance in the Treasury Stock account.

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29
Q

When are dividends in arrear recorded for cumulative preferred stock?

A

They are not accrued until declared.

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30
Q

When are dividends in arrears included as a disclosure and not an accrual in the financial statements?

A

If a year passes and no Cumulative Preferred Stock is declared- then the dividends in arrears are included as a disclosure - not an accrual in the Financial Statements.

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31
Q

What is the gain or loss when a non-monetary asset is distributed to a shareholder?

A

The gain or loss is the difference between the FMV of the asset distributed at the date of distribution and its carry amount on the company’s books

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32
Q

What is the effect on retained earnings when a non-monetary asset is distributed to a shareholder?

A

The effect on Retained Earnings is the Carrying Amount of the asset

RE will be debited when the dividend is declared for the FMV of the asset- which is more (or less) than the carrying amount

Gain/Loss recorded when the asset is distributed will offset the original effect of the debt to RE and will be a wash

The net effect of the entry is that RE will decrease by the CV of the asset

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33
Q

When is Retained Earnings debited for FMV of Stock for a stock dividend?

A

When Stock Dividend is less than 25% of Common Stock outstanding

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34
Q

When is Retained Earnings debited for Par Value for a stock dividend?

A

When Stock Dividend is greater than 25% of common stock outstanding

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35
Q

What is the effect of a stock dividend or a stock split on total shareholder equity?

A

Stock dividends and stock splits both have no effect on Total Shareholder Equity

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36
Q

What is the affect on APIC from a stock split?

A

Stock splits only affect par value - APIC remains the same.

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37
Q

When is compensation expense recorded at the time of grant for a stock option?

A

Compensation expense is recorded at the time of grant if options are exercisable immediately

They are based on past service.

Expense recognized : FV Stock Option x # of Shares

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38
Q

What interest rate is used to discount stock options?

A

The risk-free interest rate

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39
Q

What date is used as the measurement date for share-based payments classified as liabilities?

A

The settlement date.

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40
Q

How are compensation costs for share-based payments classified as liabilities measured?

A

Compensation costs for share-based payments classified as liabilities are measured by the change in the fair value of the instrument for each reporting period

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41
Q

What is the net increase to shareholder equity in a reorganization where a company pays cash and issues stock to satisfy unsecured creditors?

A

Net increase to SHE : Gain on settlement of debt + Credit to SHE from stock issuance

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42
Q

What is the primary purpose of a quasi-reorganization?

A

To eliminate a deficit balance in RE by restating its assets to Fair Value

It does not directly protect a company from its creditors

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43
Q

How is return on Common Stockholder’s Equity calculated?

A

(Net Income - P/S Dividends) / Average Common Stockholders Equity

Note: Average CSE : Common Stock + RE

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44
Q

How is book value per share of common stock calculated?

A

Total Shareholder Equity
- Total Preferred Stock
- P/S Dividends in Arrears
- P/S Liquidation Premium
:Total Book Value

Book Value per Share : Total Book Value / Shares outstanding

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45
Q

How is the dividend per share payout ratio calculated?

A

Dividends per share / earnings per share

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46
Q

How is basic Earnings Per Share (EPS) calculated?

A

(Net Income - Preferred Dividends) / Average C/S Outstanding

Note - If cumulative- subtract the P/S dividend regardless of whether or not they’re declared.

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47
Q

For EPS purposes- which date is used for calculation purposes when a stock split or stock dividend has occurred?

A

For EPS purposes- treat C/S stock splits or stock dividends as if they occurred at the beginning of the year- regardless of when actually issued during the year

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48
Q

For which areas is EPS required to be shown?

A

EPS is only required to be shown for Income from Continuing Operations and Net Income.

All others (discontinued operations- extraordinary items) can be shown on the Financial Statements or in the notes

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49
Q

When do stock options increase share outstanding?

A

Only if they are dilutive.

Their exercise price is LESS than the market value

If not- you ignore them in the calculation

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50
Q

How is EPS calculated when convertible bonds are taken into consideration?

A

[Net Income + Bond Interest (Net of Tax)] / (Average Common Stock Shares + Convertible Equivalents)

Bond interest is added back because if converted- there would be no bond interest expense

Contingent Issue Agreements are included in Diluted EPS if contingency is met

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51
Q

Which Personal Financial Statements are required?

A

Required: Statement of Financial Condition (Statement of Changes in Net Worth is optional)

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52
Q

How are assets and liabilities valued in a Personal Financial Statement?

A

Estimated current value

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53
Q

How are estimated taxes that would be paid if all assets were converted into cash and all liabilities paid presented on a Personal Financial Statement?

A

Presented on Statement of Financial Condition between Liabilities and Net Worth

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54
Q

What is the general presentation on a statement of financial condition?

A

Assets
- Liabilities
- Estimated taxes on assets sold
: Net Worth

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55
Q

How is life insurance presented on a Personal Financial Statement?

A

Only shown if there is cash surrender value

It is shown net of loans against the policy

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56
Q

How are business interests shown on a Personal Financial Statement?

A

Business Interests that constitute a large percentage of total assets should be separated from other investments

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57
Q

What is the discreet view in an Interim Financial Statement?

A

Interim period is a separate accounting period - not GAAP

Same accounting principles used for annual reporting should be used.

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58
Q

What is the integral view in an Interim Financial Statement?

A

Interim period is a part of the annual period - GAAP

Gross profit method may be used to estimate COGS and inventory

Temporary declines in inventory aren’t recognized

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59
Q

How are discontinued operations & extraordinary items reported in Interim Financial Statements?

A

Aren’t prorated

Fully recognized in Interim Period as incurred

If it occurs in Q3 - it’s recognized in Q3

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60
Q

How are cumulative gains and losses reported in Interim Financials?

A

Reported as if they occurred in the first quarter

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61
Q

How is inventory valuation handled in Interim Financials?

A

If inventory experiences a decline in value during an interim period - the loss is recognized in the interim period

If the loss is expected to be only temporary - no loss is recognized

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62
Q

What is one of the primary problems with interim reporting?

A

The matching principle gets messed up - Expenses incurred in one period may benefit future periods

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63
Q

For whom is Segment Reporting required?

A

Publicly traded companies

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64
Q

What factors cause a segment to be significant and therefore to be reported separately?

A

Revenue of segment is 10% or more of total

Profit is 10% or more of total

Segment assets are 10% or more of total

75% Test - All segment revenues must equal 75% of total external revenues

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65
Q

What is the disclosure requirement regarding sales of 10% or more for one customer?

A

If 10% or more of enterprise revenue comes from one customer - the segment making the sales must be disclosed

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66
Q

How is a Capital Lease recorded?

A

Capitalize at cost: Asset & Liability Recorded at Present Value of Future Lease Payments

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67
Q

What footnote disclosures are required for a Capital Lease?

A

Future minimum rental commitments

By year - for 5 years

All remaining years as a group

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68
Q

What are the requirements for a Capital Lease for a lessor?

A

Same as for lessee (Title- BPO or Substance)- PLUS:

Collectability of lease payments is predictable

No uncertainties about the lessor reimbursing the lessee for costs incurred

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69
Q

What are the characteristics of an Operating Lease for a lessee?

A

Risk of ownership does NOT pass

No asset or liability is recorded on the financial statements

Leasehold improvements - capitalized and depreciated over the lesser of lease life or leasehold improvement’s life.

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70
Q

What are the characteristics of an Operating Lease for a LESSOR?

A

Rent revenue recorded

Leased property remains an asset and depreciated by lessor

If payments fluctuate over the term of the lease- rent revenue recognized on a straight line basis

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71
Q

What are the characteristics of a Direct Financing Lease?

A

Interest Revenue (or expense for lessor) decreases with passage of time

Principal amount increases with each payment

Carrying amount of Lease decreases

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72
Q

How is a sale-leaseback recorded?

A

Any profit on the sale is deferred and amortized

Exception: If PV of lease payments is 10% or less of the asset’s FMV- the gain is recognized

If PV of lease payments is greater than 10% of FMV and the lease is operating- all of the gain is recognized except the amount of the PV of the lease payments

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73
Q

What are the characteristics of lease payments under an annuity due situation?

A

Payments begin at the start of the lease period

Think: Rent/Mortgage payments are Due at the first of the month

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74
Q

What are the characteristics of lease payments under an ordinary annuity situation?

A

Payments begin after the end of the first year

Think: An annuity that pays you at the end of each year

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75
Q

What are the characteristics of a Capital Lease for a lessee?

A

Risk of ownership passes to lessee by:
Title,
Bargain Purchase Option (BPO),
Substance - Lease is more than 75% of asset’s useful life or PV of minimum lease payments are more than 90% of fair value

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76
Q

Which costs are inventoriable?

A

Purchases - Net of Discounts, Freight, Warehouse expenditures

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77
Q

When does ownership of goods transfer when shipped FOB Shipping Point?

A

FOB Shipping Point puts the inventory into the hands of the buyer from the loading dock

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78
Q

When does ownership transfer when goods are sent FOB Destination?

A

FOB Destination keeps the items in the seller’s inventory until it reaches the buyer

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79
Q

Which costs are non-inventoriable?

A

Sales Commissions

Interest on liabilities to vendors

Shipping expense to customers

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80
Q

When are discounts recorded under the gross method?

A

Under the gross method, discounts are recorded only when used.

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81
Q

Under the net method, when are discounts recorded?

A

Under the net method, discounts are recorded whether used or not.

Unused discounts are allocated to financing expense.

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82
Q

How is gross margin calculated?

A

Gross Margin : Sales - COGS (BI + P - EI)

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83
Q

Describe the periodic inventory system.

A

Inventory is counted at certain times throughout the period

Weighted-average cost flow method is used.

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84
Q

Describe the perpetual inventory system.

A

Inventory count continually updated

Uses a moving-average cost flow method

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85
Q

In periods of rising prices, under which cost flow system would ending inventory be the same under both periodic and perpetual inventory methods?

A

Under the FIFO system, periodic and perpetual inventory methods will both have the same ending inventory.

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86
Q

How is inventory turnover calculated?

A

COGS / Average Inventory

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87
Q

How is Average Day’s Sales in inventory calculated?

A

365 / Inventory Turnover

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88
Q

Under a consignment system, who holds the consigned goods in inventory?

A

The CONSIGNOR holds the consigned items in their inventory count. The cost includes the shipping to the consignee.

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89
Q

Under a consignment system, does the consignee hold consignment inventory in their own inventory?

A

No. Consignment goods are maintained in the inventory of the consignor, not the consignee.

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90
Q

What effect does overstatement or understatement of inventory have on ending retained earnings?

A

Misstatement of beginning inventory does NOT have an effect on ending retained earnings.

Misstatement of ENDING inventory does have an effect on retained earnings.

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91
Q

How does misstatement of ending inventory effect Ending Retained Earnings?

A

EI Over : COGS Under : ERE Over

EI Under : COGS Over : ERE Under

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92
Q

Which costs are included in COGS first under the FIFO (first in first out) system?

A

The first (oldest) inventory you have in stock is the first inventory you record for COGS purposes. If your oldest inventory on the shelf cost you $1 when you bought it, COGS is $1

This is just for inventory pricing. It has nothing to do with physically selling the oldest item on the shelf - It is purely for accounting purposes

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93
Q

Which costs are included in COGS under the LIFO (last in first out) system?

A

The last (newest) inventory you have in stock is the first inventory you record for COGS purposes. If your newest inventory on the shelf cost you $1.50 when you bought it, COGS is $1.50

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94
Q

How is Weighted Average Cost Per Unit calculated under a weighted average inventory system?

A

COGAS / Total Units : Weighted Average Cost Per Unit

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95
Q

How does FIFO’s COGS relate to LIFO’s in a time of changing prices?

A

FIFO’s relationship to COGS will be opposite LIFO’s relationship to COGS in periods of falling/rising prices.

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96
Q

How do FIFO and LIFO change in a period of rising prices?

A

FIFO has the Lowest COGS

FIFO is a cat that sees a mouse starts Low and is Rising

If COGS is Low, that means EI is High

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97
Q

How do FIFO and LIFO change in a period of falling prices?

A

FIFO has the Highest COGS

Remember: FIFO, that silly cat, got High from Catnip and is Falling off the couch

If COGS is High, that means EI is Low

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98
Q

Under a Lower of Cost or Market, how are the benchmarks calculated?

A

Market Ceiling : Net Realizable Value : Selling Price - Selling Costs

Market : Replacement Cost

Market Floor : Net Realizable Value - Normal Profit

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99
Q

Which organization’s standards are the most authoritative in the hierarchy of international accounting?

A

The International Accounting Standards Board (IASB)

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100
Q

Where is the first place management should look for guidance on international recognition and accounting policies?

A

The International Financial Reporting Standards (IFRS) issued by the IASB

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101
Q

Which framework helps to develop standards for international accounting?

A

The IASB Framework

  • The framework is NOT a standard itself
  • The framework does not supersede any standard’s authority
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102
Q

What is the objective of the IFRS framework?

A

To provide users with information on international accounting.

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103
Q

Which assumptions are followed within the IRFS framework?

A

Entity is a Going Concern

Entity uses the accrual basis of accounting.

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104
Q

What are the Qualitative Characteristics of accounting information within IFRS?

A

Relevance & Faithful Representation

Relevance - Makes a difference to the user
Includes:
Predictive Value - Future Trends
Confirming Value - Past Predictions

Faithful Representation
Includes:
Completeness - Nothing omitted that would impact the decision-making of a user
Neutrality - Information is presented is without bias
Free from Error - No material errors or omissions

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105
Q

What are the Enhancing Characteristics of IFRS?

A

Comparability - Allows users to compare different items among various periods
Verifiability - Different people would reach a similar conclusion on the information presented
Timeliness - Information is made available early enough to impact the decision making of users
Understandability - Information is easy to understand

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106
Q

How does comparability differ under GAAP versus IFRS?

A

Comparative information from prior year is required under IFRS.

GAAP requires that if multiple years are presented they are consistently prepared however it doesn’t require prior year comparative statements.

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107
Q

What is the Pervasive Constraint within IFRS?

A

Cost vs. Benefit

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108
Q

Which items are considered reporting elements under IFRS?

A 
Asset
Liability
Equity
Income
Expense
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109
Q

What are the criteria for recognition on IFRS financial statements?

A

Probable future economic benefit

Can be measured reliably

If the value or outcome cannot be measured reliably IFRS requires the use of the Cost Recovery Method.

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110
Q

When transitioning to IFRS what type of financial statement must be produced for the first reporting period?

A

A full comparative statement using IFRS.

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111
Q

If IFRS was implemented in June 2012 for use in the December 31 2012 financial statements what is the Date of Transition?

A

January 1 2011 because a full year of comparative statements is required from the previous year

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112
Q

For Property Plant and Equipment which election is the most efficient method for converting assets to IFRS?

A

The Fair Value election

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113
Q

Where on the financial statements are adjustments for adopting to IFRS made?

A

In the entity’s retained earnings or equity

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114
Q

How is going concern different under IFRS than from GAAP?

A

Going Concern is an assumption under IFRS

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115
Q

How are extraordinary items treated under IFRS?

A

IFRS doesn’t allow extraordinary items.

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116
Q

How is the completed contract method used under IFRS?

A

Completed contract method is not allowed under IFRS.

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117
Q

How is LIFO treated under IFRS?

A

IFRS does not allow LIFO.

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118
Q

Which financial statements are required under IFRS?

A

Statement of Comprehensive Income

Statement of Changes in Equity

119
Q

How is the term income used in IFRS?

A

Income is used instead of revenue and encompasses BOTH revenue and gains.

120
Q

How is the term profit used in IFRS?

A

In IFRS the term profit is used instead of Net Income.

121
Q

How does IFRS treat gains?

A

They are treated the same as revenue and are not separated on the financial statements.

122
Q

How does IFRS treat losses?

A

In IFRS losses are treated the same as expenses but they ARE separated on the financial statements.

123
Q

How does refinancing of current liabilities to long-term liabilities under IFRS differ from GAAP?

A

Under IFRS current liabilities can only be refinanced into a non-current liability if the refinance agreement is EXECUTED prior to the balance sheet date.

GAAP requires only intent to refinance not actual execution.

124
Q

How do contingent liabilities differ between GAAP and IFRS?

A

Under GAAP there are three classifications of contingent liabilities - Probable Reasonably Possible and Remote.

Under IFRS contingencies are uncertain future events and are classified as a provision if probable and measurable even if uncertain in timing or amount.

125
Q

How are bonds recorded under IFRS?

A

Bonds may be recorded on the Statement of Financial Position using one of two methods

Fair Value through profit or loss

  • Liability revalued at the end of each period
  • Gain or Loss recognized in period

Amortized Cost
*Using Effective Interest Method

126
Q

How are deferred taxes treated under IFRS?

A

They use the liability method - all deferred tax liabilities must be reported but only probable deferred tax assets can be reported.

They are non-current on the statement of financial position.

127
Q

When can deferred tax assets and liabilities be netted under IFRS?

A

ONLY if they are related to the same country/taxing authority

For example China Deferred Tax Assets can’t offset Japan Deferred Tax Liabilities

128
Q

Which tax rates are used for calculating deferred tax assets/liabilities under IFRS?

A

The enacted rate or substantially enacted tax rate.

GAAP is the enacted tax rate only

129
Q

Which items are recorded on the Income Statement in IFRS?

A 
Income
Finance Costs
Tax Expense
Discontinued Ops
Profit/Loss
Non-controlling interest in Profit/Loss
Net profit/loss attributable from equity
130
Q

How are property plant and equipment (PP&E) recorded and valued under IFRS?

A

Recorded at cost

Valued using either:

Cost model - asset carried at cost less accumulated depreciation and impairment loss

Revaluation model - asset adjusted to fair value less accumulated depreciation

131
Q

What are the requirements for using the revaluation model for PP&E under IFRS?

A

Asset must be able to be reliably measured

Must be applied to whole class of assets not just one asset

No guidance on how often assets should be revalued under IFRS

132
Q

How is investment property reported under IFRS?

A

Initially recorded at cost

Revalued using either Fair Value model or Cost model

133
Q

How is profit or loss recorded in the current period for investment property under the Fair Value model of IFRS?

A

Recorded on the Income Statement

Investment P/L : IS

PP&E P/L : OCI

134
Q

Under IFRS how is investment property reported under the Cost Model?

A

Carried at Cost minus Accumulated Depreciation

Fair Value must still be disclosed in the notes to the financial statements

135
Q

How are leases reported under IFRS?

A

Operating Leases can be recorded as Investment Property if measured at Fair Value

All other investment property must use Fair Value Model if one asset uses it

136
Q

How are intangible assets valued under IFRS?

A

Using either the Cost Model (cost less Accumulated Depreciation and Impairment Loss)

or

the Revaluation Model (Fair Value less Accumulated Depreciation)

137
Q

How is internally generated goodwill reported under IFRS?

A

It is not recognized.

138
Q

How is amortization of intangibles handled under IFRS?

A

If asset has a finite life it is amortized over useful life.

If asset has indefinite life it is not amortized but is tested for impairment at the reporting date.

139
Q

When must a lease be recorded as a Finance Lease under IFRS?

A

If the substantial risks of ownership have passed to the Lessee then the Lease must be accounted for as a Finance Lease

140
Q

How are defined benefit plans recorded under IFRS?

A

Project-unit-credit method calculates the PV of the defined benefit obligation

141
Q

How are interest expense and/or finance costs classified on an IFRS statement of cash flows?

A

They can be classified as either Operating or Financing

Once a classification is chosen all future costs must be classified there

142
Q

How are significant non-cash transactions recorded on an IFRS statement of cash flows?

A

They must be included in the notes to the financial statements.

143
Q

What are the three major types of funds in governmental accounting?

A

Governmental, Proprietary, Fiduciary

144
Q

Which two accounting bases are used in governmental accounting?

A

Accrual basis - current economic resources focus (revenues recognized when earned)

Modified accrual basis - current financial resources focus (revenues recognized when available and measurable)

145
Q

What is a budget appropriation?

A

The highest amount allowed for a particular expenditure under a budget.

146
Q

What is an encumbrance?

A

Records purchase and reserves it for the encumbrance.

147
Q

What is the opening budgetary entry?

A

Dr Estimated Revenues Control
Cr Appropriations Control
Dr/Cr Budgetary Fund Balance (plug)

148
Q

What is the closing budgetary entry?

A

Dr Appropriations Control
Dr/Cr Budgetary Fund Balance (plug)
Cr Estimated Revenues Control

149
Q

What are the types of governmental funds?

A 
General Fund
Special Revenue Fund
Permanent Fund
Capital Projects Fund
Debt Service Fund
150
Q

What is a General Fund?

A

The operating fund of the governmental unit

Records Significant Revenues: Taxes; Tickets; Fines; Licenses

Records Significant Expenditures: Police; Education; Fire Dept

151
Q

What is a Special Revenue Fund?

A

Restricted for a specific purpose such as street repair.

152
Q

What is a Permanent Fund?

A

Legally restricted fund; where only earnings can be used to fund programs.

Principal remains intact.

153
Q

What is a Capital Projects Fund?

A

Used to acquire and build facilities.

154
Q

What is a Debt Service Fund?

A

Handles repayment of long-term debt and related interest.

155
Q

Which fund statements are issued in Governmental Accounting?

A

Balance Sheet

Statement of Revenues; Expenditures; and Changes in Fund Balance

156
Q

When is Revenue recorded in Governmental Accounting?

A

When it is BOTH available and measurable; regardless of when it is spent.

157
Q

What is Derived Tax Revenue?

A

Money collected from people doing things:

Sales tax (buying cars) or income tax (people working)

158
Q

What is Imposed Tax Revenue?

A

Tax assessed just because things exist

Example: property tax on a car (even if it’s never driven); real estate tax

Recorded as a revenue when BUDGETED.

Estimated uncollectible property tax revenues don’t offset revenues; so don’t net them.

159
Q

What are the types of Proprietary Funds?

A

Internal Service Funds - to serve the needs of other governmental units (i.e. motor pool)

Enterprise Funds - provide goods or services to external users (i.e. post office)

160
Q

What are the Fund Balance Types?

A 
Restricted - Restricted by Contributor 
 Committed - Restricted by Government
 Assigned - Intended for a purpose
 Unassigned - Available to be spent
 Non-spendable - Not in a spendable state
161
Q

What are the types of Fiduciary Funds?

A

Agency Fund - government acts as an agent or custodian

Pension Trust Fund - Government is a trustee for a pension plan

Investment Trust Fund - Government is a trustee over a series of investments

Private Purpose Trust - Trust that benefits various individuals and entities

162
Q

How are Assets & Liabilities presented on the Statement of Net Position?

A

Assets (Current & Non-Current)
Deferred Outflows of Resources
Liabilities (Current & Non-Current)
Deferred Inflows of Resources

163
Q

How are Capital Assets shown on a governmental Statement of Net Assets?

A

They are shown net of debt

Asset Cost - Accumulated Depreciation - Asset Liabilities : Net Assets

164
Q

How is infrastructure reported on a governmental Statement of Net Assets?

A

Modified approach:

Reported at cost; no accumulated depreciation

165
Q

How is a Statement of Net Assets divided?

A

Into Governmental Activities and Business Activities

166
Q

How are activities presented in a Statement of Activities?

A

They are divided by function

If the activities of a component are distinguishable from the rest of the governmental entity; then discreet presentation is required

If the activities of the component cannot be identified and separated from the rest of the governmental activities; then blended presentation is warranted.

Component units are reported in the Entity-Wide Financial Statements and not the Fund Financial Statements.

167
Q

What is the primary objective of governmental accounting?

A

To provide information that is useful and benefits a wide range of users including:

Costs of services provided

Sufficiency of revenues to cover costs

Financial position of entity

168
Q

What Financial Statements are required for Defined Benefit Pension plans?

A

Statement of Fiduciary Net Position and Statement of Changes in Fiduciary Net Position

169
Q

What are the components of the Statement of Fiduciary Net Position for Defined Benefit Pension Plans?

A

Assets; Deferred Outfows; Liabilities; Deferred Outflows; Fiduciary Net Position

170
Q

What are the components of the Statement of Changes in Fiduciary Net Position for Defined Benefit Pension plans?

A

Additions (Contributions and Net Investment Income) - Deductions (Benefits Payments and Admin Expense) : Net Change in Fiduciary Net Position

171
Q

What should be included in the Financial Statement notes for Defined Benefit Pension Plans?

A

Types of Benefits; Plan Member Classes; Board Information; Investment Policies and FV Determination

172
Q

How are Research and Development costs recorded?

A

They are expensed in the period incurred and are not capitalized.

173
Q

Which expenditures are included in the cost of a building?

A

All expenditures to get the building into working condition are ready for use

174
Q

Which expenditures are included in the cost of land?

A

All expenditures to get the land ready for its intended use:

Title & County Fees

Clearing of Land - Dirt work etc.

Demolition and removal of old buildings (minus any scrap or salvage)

Note: capitalized land costs are not depreciated

175
Q

In an exchange of non-monetary assets how much gain is recognized if no additional cash is exchanged when there is no significant difference in resulting cash flows?

A

If the cash flows from the assets exchanged are not significantly different no gain or loss is recognized on a non-monetary exchange as it lacks commercial substance.

The new asset is recorded at the book value of the asset given up.

The only gain that can be recognized is any boot (cash) received.

176
Q

In an exchange of non-monetary assets what gain is recognized if resulting cash flows are significantly different?

A

If resulting cash flows are significantly different then the transaction has commercial substance and a gain/loss is recorded on the exchange.

The new asset is recorded at the FAIR VALUE of the assets given up unless the asset acquired has a fair value that is easier to determine.

177
Q

How is donated property recorded by the donee?

A

Recorded at Fair Value + costs associated with getting the property into working condition for its designed purpose

Exam Tip - Think of a charity holding afair and then donating the property which is then recorded atfair value

178
Q

How is donation of property recorded by the donor?

A

Recorded at Fair Value of asset given up.

Gain or Loss is recorded.

179
Q

How is double-declining balance (DDB) depreciation calculated?

A

(1 / Useful Life) x 2 x Book Value

Ignore salvage value.

180
Q

How is Sum of Year’s Digits (SYD) depreciation calculated?

A

(Cost - Salvage Value) x (Remaining Useful Life / SYD) : Depreciation expense

For example the depreciation factor for the third year of a 10-year asset would be:

: 8 / (10+9+8+7+6+5+4+3+2+1) : 8/55 : 14.5%

Remaining useful life : 8 SYD : 55

181
Q

How is straight line depreciation calculated?

A

(Cost - Salvage Value) / Useful life : depreciation expense

182
Q

When is an asset considered to be impaired? How is impairment loss calculated?

A

When the un-discounted future cash flows are less than the carrying value of the asset.

Carrying Value - Fair Value : Impairment Loss

Note: impaired assets that recover their value can’t be written back up once written down

183
Q

How are legal fees to defend a patent amortized?

A

If the patent is SUCCESSFULLY defended the legal fees are amortized over the patent’s economic life.

If unsuccessful they are expensed immediately.

184
Q

What are the two steps for testing goodwill impairment?

A

Compare the CV to the FV. If FV is greater than CV no impairment exists you’re done.

If impairment appears to exist the assets and liabilities should be compared to the total value of the reporting unit. The difference is Goodwill. Compare this amount to the CV of the Goodwill and write it down accordingly.

185
Q

How are costs for developing software recorded?

A

Expenses prior to technological feasibility are expensed as R&D.

After technological feasibility but prior to production costs are capitalized.

Expenses incurred during production are charged to inventory.

Expenses incurred training on internal use software are expensed.

186
Q

What expenditures are included in the cost of equipment?

A

All expenditures to get the asset into working condition and ready for use:

Purchase price + liabilities assumed
Shipping
Taxes
Insurance
Installation
Testing
Legal fees
Construction loan interest

Any alterations to existing facilities or equipment necessary for the new purchase and installation that extend the life or increase the efficiency of these assets are capitalized.

187
Q

What is the primary objective of accounting?

A

To measure income

188
Q

What is the most authoritative set of accounting pronouncements?

A

The FASB Codification

All pronouncements fall under the Codification umbrella

189
Q

What are the 2 Levels of Authority within the FASB codification?

A

Authoritative and Non-Authoritative

190
Q

How does managerial accounting differ from financial accounting?

A

Managerial Accounting has a timeliness focus

Managerial Accounting is not required to follow GAAP

191
Q

Which financial reports are required to be filed with the SEC?

A

Form 10K - Annual and Audited
Form 10Q - Quarterly and Reviewed

192
Q

What is the focus of financial reports for individual companies?

A

Focus is on the needs of users to help them make decisions and assessments about the company

Does not make assessments of the economy

193
Q

What are the Primary Constraints of Financial Reporting?

A

Cost vs. Benefit

Materiality

194
Q

What are the Secondary Constraints of Financial Reporting?

A

Consistency - Year vs. Year

Comparability - Company vs. Company

195
Q

What are the Qualitative Characteristics of Financial Reporting?

A

Relevance & Faithful Representation

Relevance - Makes a difference to the user
Includes:
Predictive Value - Future Trends
Confirming Value - Past Predictions
Materiality - Could affect User Decisions

Faithful Representation
Includes:
Completeness - Nothing omitted that would impact the decision-making of a user
Neutrality - Information is presented is without bias
Free from Error - No material errors or omissions

196
Q

What are the Enhancing Qualitative Characteristics of Financial Reporting?

A

Comparability Verifiability Timeliness and Understandability

Comparability - Allows users to compare different items among various periods
Verifiability - Different people would reach a similar conclusion on the information presented
Timeliness - Information is made available early enough to impact the decision making of users
Understandability - Information is easy to understand

197
Q

How does Conservatism affect the recording of accounting transactions?

A

When an estimate is necessary due to uncertainty conservatism chooses the best option that won’t overstate the financial position of the company

198
Q

What is an accrual?

A

Earned (Revenue) or Incurred (Expense) but no Cash Receipt/Outlay yet

199
Q

What is a deferral?

A

Cash Receipt/Outlay but not Earned (Revenue) or Incurred (Expense)

200
Q

What is recognition in accounting?

A

When an item is recorded and included in the financial statements

201
Q

Describe fair value with respect to an asset

A

The price you would receive if you sold the asset

Assumes asset is at its highest and best value

Assumes asset is sold at its most advantageous market to get the best price possible

202
Q

What market assumptions are made in a fair value assessment?

A

Buyer and Seller are not Related

Buyer and Seller are Knowledgeable

Buyer and Seller are able to transact - i.e. This isn’t a hypothetical transaction for Fair Value measurement purposes. The buyer actually does have the $10M to purchase the asset you’re trying to value at $10M

Buyer and Seller are both motivated to buy/sell

203
Q

What items are included in a Level 1 input in the fair value hierarchy?

A

Price quotes or market prices

For example NYSE or NASDAQ

204
Q

What items are included in a Level 2 valuation input?

A

Interest rates

Prime rate

205
Q

What items are included in Level 3 inputs of the fair value hierarchy?

A

Unobservable inputs such as assumptions or forecasts

Lowest priority for valuation

206
Q

What are acceptable valuation techniques for fair value?

A

Market approach - uses market transactions and prices to value the asset

Income approach - uses present value discounts earnings

Cost approach - uses replacement cost to value the asset

207
Q

What are current assets?

A

Cash

Inventory or Assets expected to be converted or consumed during a business’ operating cycle

Deferred Gross Profit on Installment Sales (Contra Asset)

Receivables expected to be collected in 12 months or less

208
Q

What are current liabilities?

A

Liabilities that will use current assets during the present operating cycle

209
Q

What is an accrued liability?

A

Expense that has been incurred but not paid

Example: rents payable

210
Q

What is a deferred revenue?

A

A type of current liability

Payments that have been received but cannot be recorded as revenue yet

Example: Tenant pre-pays rent - Landlord still must perform to earn it and is a liability until this happens

211
Q

When are revenues recognized?

A

When they have been earned; i.e. company has performed

212
Q

What is a gain?

A

Increase in equity from an activity or event that is not central to the main activities of the business

Can be operating or non-operating

213
Q

What is a loss?

A

Decrease in equity from an activity or event that is not central to the main activities of the business

Can be operating or non-operating

214
Q

What is an operating cycle?

A

Average time it takes to turn materials or services into Cash

215
Q

What is the present value of future cash flows?

A

Valuation method - the current value of a future amount of money using a specific interest rate

216
Q

What is historical cost?

A

How much an asset cost - (net of depreciation and amortization)

217
Q

What is replacement cost?

A

How much it would cost to reacquire an asset today (Entrance Cost)

218
Q

What is a market cost?

A

The sale price of an asset (Exit Cost)

219
Q

What is Net Realizable Value?

A

Sale Price of an Asset - Selling/Disposal Fee

220
Q

When is royalty income recognized? How is it recognized?

A

Recognized when earned

If the royalty % is applied against net sales then subtract the estimated return amount from the gross sales first and then apply the royalty rate

221
Q

When is revenue recognized in an installment sale?

A

Revenue recognized upon receipt of cash

Only used when cash collection is uncertain

222
Q

What is deferred gross profit?

A

Gross Profit that can’t be recognized until cash is received

D.GP : Gross Profit % x Accounts Receivable

Pay attention to the year if GP% varies

223
Q

What is the cost recovery method?

A

No revenue recognized until all costs are recovered from purchase of the asset

Most conservative method of revenue recognition when collection of sale price is uncertain

224
Q

What is subscription revenue? How is it recorded?

A

Payment has been received but performance is not complete.

As company performs revenue is recognized.

Recorded as a Deferred Revenue (Liability) on Balance Sheet

225
Q

How are franchise revenues recorded?

A

Franchisor - Startup franchise fee revenue deferred until substantial performance

Franchisee - Costs are deferred until corresponding revenue is recognized

226
Q

How do you calculate sales revenue starting from cash basis income?

A

Mnemonic: SPEAR-BAR

Sales (i.e. Customer Payments)+ Ending Accounts Receivable- Beginning Accounts Receivable
: Sales Revenue on an Accrual Basis

227
Q

How do you calculate COGS starting from Cash Basis?

A

Mnemonic: CRAP-I

Cash Remitted (i.e. paid)
+Increase in Accounts Payable
-Increase in Inventory
:COGS on an Accrual Basis

228
Q

How are discontinued operations reported? When are they used?

A

Reported Net of Tax after Continuing Operations but before Extraordinary Items

Company decides to cease operating a segment of its business (represents a strategic shift and has major effect on operations and financials)

Includes Income (or loss) from the period plus the gain (or loss) from disposal

229
Q

For discontinued operations, what are the three requirements for disposal assets?

A

They must be Held for Sale - Sold - or Disposed of another way

230
Q

What qualifies as an extraordinary item? How is it recorded?

A

Both unusual AND infrequent

Reported Net of Tax after Discontinued Operations

Note: Usual or Infrequent Items are reported as part of Continuing Operations

231
Q

What is constant dollar accounting?

A

Adjusts assets to reflect a consistent level of purchasing power due to inflation

Uses the Consumer Price Index (CPI)

232
Q

When are expenses recognized?

A

When they are incurred. Accrue if not yet paid.

233
Q

What are accrued expenses?

A

Those incurred but not paid.

Product costs - Expenses should be matched with associated revenues as they are recognized (sales commission on a used car sale)

Period costs - Expenses amortized and recognized with the passage of time

234
Q

When should impaired assets be written down to fair value and expensed?

A

Immediately.

235
Q

What major items should be classified under General & Administrative (G&A) expenses?

A

Office staff salaries

Office/building rent

Office supplies

Note: Sales staff salaries and portions of the building assigned to Sales should be allocated to Selling Expense not G&A

236
Q

What are business start-up costs?

A

One-time costs for opening a new business

Expensed as they are incurred

237
Q

When is interest not expensed?

A

Interest on projects (software) for internal use is not expensed but is instead capitalized

238
Q

What are the major components of Comprehensive Income?

A

Net Income + Other Comprehensive Income (OCI):

Revenues/Expenses

Gains/Losses

Cumulative accounting adjustments

Reclassifications adjustments

Non-owner changes in equity

239
Q

What items are considered cumulative accounting adjustments?

A

Foreign Currency Translation Adjustments

Unrealized gains on AFS Securities

Minimum Pension Liability adjustment for defined benefit plans

240
Q

What is the purpose of a reclassification adjustment?

A

Avoids double counting items that were included in both Net Income and OCI

Example: AFS Securities previously included in OCI are now sold at a loss and reported on the Income Statement

241
Q

Where is Comprehensive Income reported?

A

Reported in a Single or Combined Income Statement

242
Q

What disclosures on accounting policies are required in financial statements?

A

Accounting Principles used

Basis of Consolidation

Inventory Pricing Methods

Depreciation Method

Amortization of Intangibles

243
Q

What are some major risks and uncertainties that must be disclosed?

A

Nature of Operations

Use of Estimates and listing of Significant Estimates

Concentration vulnerability

244
Q

Under Cash Basis Accounting how are Revenue and Expenses recognized?

A

Revenue is recognized with Cash Inflow and Expenses Recognized with Cash Outflow

245
Q

Is Cash Basis Accounting ok for Tax Returns?

A

Yes

246
Q

Is Cash Basis Accounting GAAP?

A

No - GAAP uses Accrual Accounting

247
Q

What is an advantage of Modified Cash Basis Accounting?

A

It avoids the complexities of GAAP but provides more information that Cash Basis Accounting

248
Q

Is Modified Cash Basis GAAP?

A

No - GAAP uses Accrual Accounting

249
Q

What are the 3 acceptable options for Income Tax Basis Accounting

A

Cash Basis - Accrual Basis - Hybrid Method

250
Q

What are the advantages of the Small and Medium Sized Entity Framework?

A

It simplifies reporting and disclosures for small companies - Reduces Book vs Tax differences - avoids Fair Value measurements (Historical Cost)

251
Q

What are the two options for Income Taxes under the Small and Medium Sized Entity Framework?

A

Deferred Taxes Method and Taxes Payable Method

252
Q

What are the two options for Startup Costs under the Small and Medium Sized Entity Framework?

A

Expensed or Amortized (15 years)

253
Q

How is Goodwill treated under the Small and Medium Sized Entity Framework?

A

Amortized (15 years)

254
Q

What are the required liquidation basis financial statements?

A

Statement of Net Assets in Liquidation and Statement of Changes in Net Assets in Liquidation

255
Q

What is a Development Stage Entity?

A

A company that is still in the formation stage and hasn’t yet begun principal operations or produced significant revenue

256
Q

What is the key benefit of the accounting rules for Development Stage Entities?

A

Cost savings without sacrificing financial statement usefulness

257
Q

How are derivatives recorded?

A

At cost when acquired re-valued to fair value each period on Balance Sheet.

258
Q

How are unrealized gains/losses on trading securities recorded?

A

Recorded on income statement

259
Q

How are gains and losses on Available for Sale (AFS) securities recorded?

A

They are included in Other Comprehensive Income.

260
Q

What is a Fair Value Hedge? How is it recorded?

A

Fair Value Hedge offsets exposure to changes in the value of a recognized asset/liability or of an unrecognized commitment

Initially recorded on Balance Sheet at Fair Value

Gains/Losses recorded on Income Statement

261
Q

What is a Cash Flow Hedge? How is it recorded?

A

Cash flow hedges protect from exposure to fluctuations in cash flows.

Initially recorded on Balance Sheet at Fair Value

Gains/Losses going to OCI

Example: A cereal company enters into a futures contract on grain purchases to offset the risk that grain will go up in price.

262
Q

Where are gains and losses on foreign currency hedges recorded?

A

In Other Comprehensive Income (OCI)

263
Q

What disclosures are required for derivative transactions?

A

Objectives and Strategies

Context to help investor understand the instrument

Risk Management Policies

Complete List of Hedged Instruments

264
Q

How do transactions denominated in in a currency other than a company’s functional currency affect the income statement?

A

Fluctuations in that currency cause a gain or loss that must be recognized on the income statement as Income from Continuing Operations

265
Q

What causes a Foreign Currency Transaction G/L?

A

A change in exchange rates between the functional currency and the transaction currency

266
Q

Where are Foreign Currency Transaction G/L recorded?

A

Income Statement

267
Q

Where are Foreign Currency Translation G/L recorded?

A

OCI

268
Q

If the Functional Currency equals the Local Currency - what rate is used for translating Assets and Liabilities?

A

Current Rate as of the Balance Sheet Date

269
Q

If the Functional Currency equals the Local Currency - what rate is used for translating Revenues and Expenses?

A

Weighted Average Exchange Rate for the year

270
Q

If the Functional Currency equals the Reporting Currency - what Exchangee Rate is used??

A

Use Weighted Average - Historical Exchange Rates (Inventory and Pre-paid Assets and Property Plant and Equipment) and Current Exchange Rates (Monetary Assets and Liabilities and Inventory @ Market and Trading Securities and Deferred Taxes)

271
Q

What is a serial bond?

A

Any bond that matures in installments

272
Q

What is a term bond?

A

Any bond that matures on a single date

273
Q

What is a debenture bond?

A

A bond not secured by any collateral

274
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

275
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

276
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)

277
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

278
Q

How are bonds reported when classified as trading securities?

A

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

279
Q

How are bonds amortized under the interest method?

A

Both discount and premium amortization amounts increase each year

280
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

281
Q

What is the stated rate for a bond?

A

Rate on the face of the bond

282
Q

What is the market rate on a bond?

A

Rate that bonds are currently selling for

283
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

284
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

285
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.

286
Q

When does interest expense start accruing on a bond?

A

When the bonds are issued

287
Q

How is an interest payment on a bond calculated?

A

Cash for payment : Stated rate x Face amount

288
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

289
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

290
Q

How is the retirement of bonds recorded?

A

Gain or Loss is Ordinary

Extraordinary if both unusual and infrequent

291
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

292
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

293
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

FAR (20 decks)

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