FAR 4-5 - Sheet1 Flashcards
Q1501. The Return on Sales = Net Income / Sales and tells you what?
A1501. How much the company profits from each dollar of sales.
Q1502. The Asset Turnover = Sales / Total Assets and tells you what?
A1502. It gives an overall measure of the company’s efficiency (For each dollar of assets, how many dollars does it generate in sales?)
Q1503. Return on Equity = Net Income / Stockholder’s Equity and tells you what?
A1503. Number of pennies earned during the year on each dollar invested
Q1504. Price Earnings Ratio = Market Value of Shares / Net Income
A1504. Amount investors are willing to pay for each dollar of earnings; indication of growth potential
Q1505. The _________ ratio is the single measure that summarizes the financial status of a company.
A1505. Return on Equity = net income / equity
Q1506. DuPont framework breaks down Return on Equity how?
A1506. ROE = profitability x efficiency x leverage return on sales x asset turnover x assets to equity ratio net income/sales x sales/assets x assets/equity
Q1507. When the DuPont framework shows a problem with profitability, where should you look to find expenses to manage?
A1507. The Common Size income statement can provide a year over year look at expense that may be growing and thus driving down profitability.
Q1508. Average Collection Period
A1508. Average receivables / average daily sales
Q1509. Average daily sales
A1509. Sales / 365
Q1510. Average receivables
A1510. Beginning receivables balance + ending balance / 2
Q1511. The Number of days’ sales in inventory is average inventory / average daily cost of goods sold and tells you what?
A1511. The average number of days of sales that can be made using only the supply of inventory on hand.
Q1512. Fixed Asset Turnover is computed as sales / average fixed assets and tells you what?
A1512. The number of dollars in sales generated by each dollar of fixed assets.
Q1513. Return on Assets is computed as net income / total assets and tells you what?
A1513. The number of pennies made on each dollar of assets.
Q1514. What is another name for a company’s Profit?
A1514. Margin
Q1515. The degree to which assets are used to generate sales is called…
A1515. turnover
Q1516. These are an indication of the extent to which a company is using other people’s money to purchase assets…
A1516. Leverage Ratios
Q1517. What do you call borrowing that allows a company to purchase more assets than its stockholders are able to pay for through their own investments?
A1517. Leverage
Q1518. Debt ratio = total liabilities / total assets and tells you what?
A1518. the percentage of total funds, both borrowed and invested that a company acquires through borrowing.
Q1519. Debt to Equity ratio = total liabilities / total equity and tells you what?
A1519. the number of dollar of borrowing for each dollar of equity investment.
Q1520. Times interest earned = income / interest expense for the period and tells you what?
A1520. The number of times the company can make its interest payments - a higher number reflects a greater likelihood that the company can meet future interest obligations.
Q1521. There are two factors that help make financial ratios useful - what are they?
A1521. When ratios can be benchmarked to comparable values for the same company in prior years Ratio values for other companies in the same industry are available.
Q1522. In the US, what usually is the first asset listed on the Balance Sheet?
A1522. cash
Q1523. Around the world, what usually is the first asset listed on the balance sheet?
A1523. long term assets
Q1524. Accountants use their judgment to report two items on the balance sheet - what are they?
A1524. Recognition - what is listed and what isn’t? Valuation - what dollar amounts to associate with the listed items
Q1525. What do you call a listing of an organization’s assets and of its liabilities at a certain time?
A1525. Balance Sheet
Q1526. What do you call the difference between assets and liabilities?
A1526. Equity
Q1527. Define a current Asset
A1527. Assets expected to be used and liabilities expected to be paid or otherwise satisfied, within a year are current items. The most common are cash, accounts receivable and inventory.
Q1528. What do you call amounts owed to a business by its credit customers that are usually collected in cash within 10 to 60 days?
A1528. Accounts receivable
Q1529. What do you call goods held for sale in the normal course of business?
A1529. Inventory
Q1530. Why would a company pre-pay an expense?
A1530. By paying for an expense in advance now, a business is able to conserve cash that otherwise would have had to be spend in the future.
Q1531. Name some common long-term assets
A1531. investments; property, plant and equipment; intangible assets
Q1532. What is depreciation?
A1532. The wear and tear of items since they were originally purchased.
Q1533. What are intangible assets?
A1533. assets that have no physical or tangible characteristics: agreements, contracts, rights that provide economic benefits to a company by permitting the use of a certain production process; trade name or similar item. patents, trademarks, copyrights, franchises, and goodwill.
Q1534. What is goodwill?
A1534. When one company buys another and pays more than the value of the identifiable assets of the acquired company.
Q1535. What are current liabilities?
A1535. Those obligations to be paid within one year, the most common being accounts payable.
Q1536. What are short-term loans payable?
A1536. formal, interest bearing loans that are expected to be paid back within one year.
Q1537. Is the current portion of long-term debt considered a short term liability?
A1537. Yes. The portion of the liability that is payable within the 12 months from the balance sheet date is classified as a current liability.
Q1538. What is unearned revenue?
A1538. A company’s obligation to provide service to customers who have paid the company for a service they have not yet received.
Q1539. Name some examples of long-term debt
A1539. long term notes, bonds, mortgages, and similar obligations.
Q1540. Explain deferred income tax liability
A1540. A liability that can be thought of as the income tax expected to be paid in future years on income that has already been reported in the income statement but which, because of the tax law, has not yet been taxed.
Q1541. What is minority interest?
A1541. A long-term liability that represents that a corporation has subsidiaries that are not 100% owned by the corporation. For Example, Sears only owns 54% of Sears Canada.
Q1542. What do you call the difference between assets and liabilities?
A1542. Stockholder’s equity
Q1543. What are the differences between common and preferred stock?
A1543. Common stock holders can be thought of as true owners of the company because if the company does poorly, the common stockholders are likely to lose some or all of their investment because they can receive cash from the corporation only after the claims of all other parties are satisfied. Preferred stock holders aren’t better, just different. They surrender some rights (like voting) to be first in line when the company pays its liabilities. The preferred stockholders would be paid before common stockholders.
Q1544. What is “additional paid-in capital?”
A1544. The amount invested by stockholders that exceeds the par value of the issued shares.
Q1545. When it is determined that an item should be listed in the financial statements, what do you call the process of assigning a dollar value to the item?
A1545. Valuation
Q1546. What do you call the process of determining how an economic event impacts the financial statements?
A1546. Transaction analysis
Q1547. What is a company’s “asset mix?”
A1547. The proportion of total assets in each asset category and is determined to a large degree by the industry in which the company operates
Q1548. What is a company’s “Financial mix?”
A1548. The percentage of total financing (liabilities plus equity) in each individual category.
Q1549. The process of analyzing business events, collecting and processing information relating to those events, and summarizing that information is called - what?
A1549. The Accounting cycle
Q1550. There are 4 steps to the accounting cycle, what are they?
A1550. 1 - analyze transactions 2 - record the effect of the transactions in a journal entry 3 - Summarize the effects of the transaction (a - post journal entries to the ledger, b - prepare a trial balance) 4 - Prepare reports a) make adjusting entries, b) prepare financial statements c) close the books
Q1551. What is the accounting equation?
A1551. Assets = liabilities + owner’s equity
Q1552. What is the name for the accounting system devised 500 years ago and its still used today?
A1552. T accounts
Q1553. What is on the left side of the T account, what is on the right?
A1553. Left/Debit - Right/Credit
Q1554. When an asset grows and decreases, what is the debit, what is the credit?
A1554. Asset grows - debit Asset shrinks - credit
Q1555. When a liability grows and decreases, what is the debit, what is the credit?
A1555. Liability grows - credit Liability shrinks - debit
Q1556. When equity grows and decreases, what is the debit, what is the credit?
A1556. Equity grows - debit Equity Shrinks - credit
Q1557. When you credit a revenue account, what else are you also increasing?
A1557. Retained Earnings
Q1558. When you debit an expense account, you are increasing the amount of expense that in turn reduces what?
A1558. Retained Earnings
Q1559. When listing transactions, what is listed first?
A1559. The account being debited is listed first and the account being credited is listed second
Q1560. What are the three steps involved in a journal entry?
A1560. 1 - Identify which accounts are involved. 2 - for each account, determine if it is increased or decreased. 3 - for each account, determine by how much it changed
Q1561. What processed is used so you don’t have to sort through all of the journal entries to determine an account’s balance?
A1561. Posting
Q1562. What do you call the collection of all of a company’s accounts?
A1562. Ledger
Q1563. When you collate all of a company’s ledger accounts and their balances, what is that?
A1563. Trial Balance
Q1564. What action do you take to transfer all revenue, expense, and dividend amounts to the retained earnings account and reset the income statement and dividend accounts to zero in preparation for accumulating new information for the same period?
A1564. Closing
Q1565. What are the two considerations used for adjusting entries?
A1565. 1 - Determine whether the amounts recorded for all assets and liabilities are correct. If not, debit or credi the appropriate asset or liability. (Basically - fix the balance sheet.) 2- Determine what revenue or expense adjustments are required because of the changes in recorded amounts of assets and liabilities. Debit or credit the appropriate revenue or expense. In short, fix the income statement.
Q1566. There are two occasions to adjust the closing entries
A1566. 1) new information requires an adjustment to a transaction that has already been recorded. 2) No transaction has been recorded even though a business event has occurred. ((chemical cleanup closets, Interest earned but not collected as cash, wages earned at the end of a year but not paid until the first of the new year.)
Q1567. There are 4 reasons asserted in the text that may tempt a manager to manipulate earnings, what are they?
A1567. 1- Meet internal targets 2 - Meet external expectations 3 - income smoothing 4 - Window dressing for an IPO or a loan
Q1568. The practice of thoughtfully reporting earnings to meet expectations is called
A1568. Earnings management
Q1569. What do you call the practice of carefully timing the recognition of revenues and expenses to even out the amount of reported earnings from one year to the next?
A1569. Income smoothing
Q1570. What do you call timing large one-time gains or losses in the same quarter, resulting in a smooth upward trend in reported earnings?
A1570. Strategic Matching
Q1571. The earnings management continuum moves from savvy timing on the left to fraud on the right. In order, what are the example methods displayed?
A1571. Strategic matching, Change in methods with full disclosure, change in methods without full disclosure, Non GAAP accounting, Fictitious transactions.
Q1572. What is a pro forma earnings number?
A1572. The regular GAAP earnings number with some revenue, expenses, gains or losses excluded. (The exclusions are held out because the companies claim that GAAP doesn’t accurately reflect the company’s performance.
Q1573. Proforma numbers have earned a knickname because of their ability to show the company in a positive light.
A1573. EBS - Everything but the bad stuff.
Q1574. What is the GAAP Oval?
A1574. The GAAP oval represents the flexibility a manager has, within GAAP, to report one earnings number from among many possibilities based on different methods and assumptions. The best case and worst case numbers that fall outside the gaap Oval would be unethical to report.
Q1575. What is the cost of capital?
A1575. The cost of capital is the cost a company bears to obtain external financing.
Q1576. Why is the cost of capital important?
A1576. A company’s cost of capital is critical because it determines which long-term projects are profitable to undertake.
Q1577. What determines the cost of capital?
A1577. A key factor is the risk associated with the company.
Q1578. Who do you estimate the amount you should allocated for bad debts?
A1578. 1) estimate the percentage of sales 2) Aging.
Q1579. What is the phrase that accountants use to refer to the recording of a sale in the formal accounting records?
A1579. Revenue Recognition
Q1580. What are the two criteria for revenue recognition?
A1580. You have the cash or a valid promise of future payment OR The promised work has been substantially completed
Q1581. In general, is revenue recognized prior to the point of sale?
A1581. No - because either the valid promise of payment has not been made OR The company has not provided the service
Q1582. What do you call it when you clients don’t pay their bills?
A1582. Bad Debts
Q1583. Costs in approving a potential customer for credit requiring into their credit history and verifying their income and preexisting conditions
A1583. Book Keeping Costs
Q1584. What do you call the real costs associated with having cash tied up in the form of receivables?
A1584. Carrying Costs
Q1585. Define “net 30”
A1585. A credit term stating that the net amount of an invoice is due within 30 days of the date of sale.
Q1586. Define 2/10, n/30
A1586. 2/10 - A 2 percent discount is allowed if the payment is made within 10 days of the invoice. If the discount is not taken, the full amount is due in 30 days
Q1587. What do you call the process of estimating the amount of bad debts created by credit sales during a year?
A1587. Allowance Method
Q1588. How is a Bad Debt Expense reported?
A1588. As an Operating Expense in the Income statement.
Q1589. What do you call the method using historical or industry data to estimate what fraction of total credit sales that will be uncollectable?
A1589. Percentage of Sales Method
Q1590. What do you call the process where, at the end of the year, you examine the age and collectability of your accounting receivable?
A1590. Aging Method
Q1591. Using a credit (or reduction) of accounts receivable, this method accounts for bad debt.
A1591. A write off
Q1592. The revenue cycle is not complete until…
A1592. All promises related to the sale of a product or service have been satisfied.
Q1593. What safeguarding tool assigns two different individuals to handle cash and record cash?
A1593. Separation of duties, it makes it more difficult to steal cash if two people are involved.
Q1594. What disciplined, rigid process ensures that personal responsibility for the handling of cash occurs each day?
A1594. Daily Cash deposits
Q1595. What cash control procedure is used with company checks?
A1595. Company checks are pre-numbered.
Q1596. What is it called to use existing receivables as collateral for a loan?
A1596. Assignment.
Q1597. What is it called when once company sells some of its receivables to another company?
A1597. Factoring
Q1598. What is it called when a US company makes a sale and accepts payment in a foreign currency?
A1598. Foreign Currency Transaction
Q1599. If a company makes a foreign currency transaction for $10 and on the exchange date the value is only $9.50 how would it be recorded?
A1599. The company would record a .50 exchange loss.
Q1600. What two ratios are most commonly used to evaluate how a company is managing its accounts receivable?
A1600. Accounts receivable turnovers: sales/average accounts receivable Average Collection period: 365 / accounts receivable turnover
Q1601. Generally, the bad debt allowance (as a percentage of total receivables) should be steady. If it fluctuates, what could that signify?
A1601. 1) The company has is accepting a different type of credit customer 2) A change in economic circumstances of existing customers
Q1602. What do you call the name given to goods that are either manufactured or purchased for resale in the normal course of business?
A1602. Inventory
Q1603. What do you call the costs removed from the asset classification (inventory) on the balance sheet and reported on the income statement as an expense?
A1603. Cost of goods sold
Q1604. There are 3 types of inventory, name them
A1604. Raw Materials, Work in process, Finished goods
Q1605. There are two types of delivery, what are they?
A1605. FOB - Free on Board, FOB Shipping Point
Q1606. Describe FOB - Free on Board shipping
A1606. The seller is paying the shipping costs and thus owns the inventory until it is delivered. Ownership changes hands when the goods reach their destination
Q1607. Describe FOB Shipping Point
A1607. The buyer is paying the shipping costs and as a result, owns the inventory while it is in transit
Q1608. Describe Goods on Consignment delivery
A1608. A supplier will ship the inventory to a dealer on consignment. This transfer is not a sale, the supplier still owns the inventory and the dealer is under no obligation to pay for the inventory. In effect, the dealer is offering to sell the consigned goods on behalf of the supplier.
Q1609. True / False - Inventory cost consists of all costs involved in buying the inventory and preparing it for sale.
A1609. True
Q1610. Name some cost examples that would NOT be included in the cost of inventory.
A1610. Cost of maintaining the finished goods warehouse or retail showroom - salesperson’s salaries - advertising cost - cost of the corporate headquarters - company president’s salary
Q1611. Describe ABC cost system
A1611. The ABC (Activity based cost system) strives to allocate overhead based on clearly identified cost drivers - characteristics of the production process that are known to create overhead costs.
Q1612. What do you call the inventory purchased or manufactured during the period when it is added to beginning inventory and that group’s total cost?
A1612. The cost of goods available for sale.
Q1613. What do you call the inventory system that continuously tracks changes in inventory levels?
A1613. Perpetual Inventory system
Q1614. What do you call the inventory system that counts the inventory every once in a while (maybe quarterly)
A1614. Periodic
Q1615. What do you call inventory that is lost, stolen or spoiled during a period?
A1615. Inventory Shrinkage
Q1616. There are 4 inventory valuation methods, what are they?
A1616. FIFO (First in first out) LIFO (Last in first out) Average cost method Specific identification
Q1617. Describe the Average Cost Method
A1617. Each unit is assigned the same cost. The method is based on the assumption that each unit should be charged at an average cost, with the average being weighted by the number of units acquired at each price.
Q1618. Describe FIFO
A1618. First in First Out assumes that the oldest units are the first ones sold. Units are charged at the price of the oldest units.
Q1619. Describe LIFO
A1619. LIFO - Last in First out assumes that the newest units are the first ones sold. Units are charged at the price of the newest units.
Q1620. In a time of generally rising inventory prices the cost of goods sold is highest with what method and lowest with what method?
A1620. Highest with LIFO (the last units purchased were most likely purchased at the newer, higher price.) Lowest with FIFO (The older units were probably purchased at the older, lower price.)
Q1621. Why would a company use LIFO and most likely expense each unit at a higher per unit cost?
A1621. TAXES. If a company uses LIFO in a time of rising prices, the reported cost of goods sold is higher, reported taxable income is lower and cash paid for income taxes is lower.
Q1622. Describe a LIFO Layer
A1622. A LIFO layer is when the number of purchased units exceeds the number of unit sold creating a LIFO Layer in Ending Inventory. Picture a company that sells coal. The newest coal is put on top of the pile and the older coal continues to sit on the bottom of the pile
Q1623. What is the LIFO Reserve?
A1623. The difference between the LIFO ending inventory amount and the amount obtained using another inventory valuation method.
Q1624. What do you call the simplest inventory estimation technique that is based on the observation that the relationship between sales and costs of goods sold is usually fairly stable.
A1624. The Gross Profit Method
Q1625. What is this equation? (sales - cost of goods sold / sales)
A1625. Gross profit percentage
Q1626. Describe the “lower of cost or market” theory
A1626. Accounting conservatism dictates that INCREASES in inventory values are not recognized until the inventory is actually sold. The same conservatism causes accountants to recognize DECREASES in inventory as soon as they occur.
Q1627. What do you call the value expected to be received when the inventory is sold, composed of the selling price less any costs associated with selling the inventory?
A1627. The Net Realizable Value
Q1628. An alternative to Net realizable value, this measure of the market value uses the wholesale cost to buy equivalent new inventory items
A1628. Inventory’s Replacement Cost
Q1629. What do you call the measure of how many times a company turns over or replenishes its inventory during a year?
A1629. Inventory Turnover
Q1630. Inventory Turnover equation is?
A1630. Inventory Turnover = cost of goods sold / average inventory
Q1631. Inventory turnover can also be converted into the number of days’ sales in inventory. How?
A1631. Number of days’ sales in inventory = 365 / Inventory turnover
Q1632. How does the use of LIFO affect the company’s cost of goods sold and inventory values?
A1632. HIGHER cost of goods sold / LOWER inventory values
Q1633. You can learn about a company’s use of its operating cash flow by computing the number of days’ purchases in accounts payable. How?
A1633. Number of days’ purchases in accounts Payable = 365 days / (purchases / average accounts payable)
Q1634. Name the employee compensation timeline
A1634. payroll / compensated absences / stock options & bonuses / postemployment benefits / pensions and postretirement bonuses
Q1635. Payroll seems simple, but gets messy. Why?
A1635. Taxes. FICA (Federal insurance contributions act - social security tax) FUTA (federal unemployment taxes) - Federal and state withholding taxes
Q1636. The company obligates itself to pay employees for a certain number of days in the future even when the employee does not produce any economic input - under what method?
A1636. Compensated absences
Q1637. Where is the expense associated with compensated absences recorded?
A1637. The expense for compensated absences is recognized in the period in which those days are EARNED, not when they’re used.
Q1638. There are two methods for accounting for employee stock options - what are they?
A1638. Intrinsic value method - based on the assumption that the value of an option is measured by whether there is any value in recognizing the option on the day it is granted. If the option is for $40 and the stock is at $50, there is a $10 intrinsic value. 2) Fair value method - the real value of the option lies in the chance that the stock price may increase above the option exercise prices some time during the life of the option.
Q1639. What do you call benefits incurred after an employee has ceased to work for an employer but before that employee retires?
A1639. Post Employment benefits. (severance package, retraining costs, education costs, etc.)
Q1640. What do you call a cash compensation after you retire?
A1640. Pension
Q1641. There are two types of pensions - what are they?
A1641. Defined contribution plan - requiring the company to insert a certain amount into the pension each year. Defined Benefit plan - the company promises employees a certain monthly cash amount after they retire based on the factors like # of years worked for company, highest salary, etc.
Q1642. Name an example of a “postretirement benefit other than pension”
A1642. Health plan after retirement
Q1643. There are two reasons why reported income tax payments for a company may differ from the actual amount paid - why?
A1643. 1 - as with many other expenses, income taxes are not necessarily pain in cash in the year in which they are incurred. 2- the difference between reported income tax expense and the actual amount of cash paid for taxes is that income tax expense is based on reported financial accounting income whereas the amount of cash paid for income taxes is dictated by the applicable government tax law.
Q1644. US Corporations run two sets of books, why?
A1644. One for financial information for shareholders, one for taxes
Q1645. Define a deferred tax asset
A1645. The expected benefit of a tax deduction for an expense item that has already been incurred and reported to shareholders but is not yet deductible according to IRS rules.
Q1646. Why would rapid depreciation help a company for tax purposes?
A1646. Rapid depreciation allows a company to reduce its taxable income and its income tax payments in the early years of the life of an asset, thus making it easier to buy the building or machinery in the first place.
Q1647. When considering between listing an expenditure as an expense or an asset, what is the determining question?
A1647. Will this expenditure offer an economic benefit for future period? If so, then its an asset. If it is simply going to be used up and not provide future benefit then its an expense (like office supplies)
Q1648. Software development withheld, how should you record ALL R&D expenses?
A1648. The FASB concluded that R&D should be listed as an expense in the period incurred.
Q1649. As a special exception for software R&D, how does technical feasibility work?
A1649. The special accounting standard for software development states all costs up to the point where technological feasibility is established are to be expensed as research and development.
Q1650. There are two methods of recording expenses for oil/gas drilling - what are they?
A1650. Full-cost method. All exploratory costs are capitalized because the cost of drilling dry wells is part of the cost of finding productive wells. 2- The successful efforts method states that dry holes are expensed and only successful holes are capitalized.
Q1651. What do you call an uncertain circumstance involving a potential gain or loss that will not be resolved until some future event occurs?
A1651. Contingency
Q1652. There are three classes of contingencies - what are they?
A1652. Probable, possible and remote
Q1653. Depreciation Expense Amortization Expense Loss on Impairment are found on what Finan doc?
A1653. Income Statement
Q1654. Operating Asset depreciation (indirect method) Financing Cash paid (received) to purchase (from sale of) long-term assets Cash paid to acquire another company Are found on what Financial doc?
A1654. Statement of cash flows
Q1655. Long-term Assets Property, Plant, & Equipment Accumulated Depreciation Intangible Assets are found on what financial doc?
A1655. Balance sheet
Q1656. What exhibits these traits: not held for resale to customers are used by a business to generate revenues
A1656. Long Term operating assets Including Property, plant, and equipment Intangible assets
Q1657. Name some examples of PPE
A1657. Tangible, long-lived assets Acquired for use in business operations Land Buildings Machinery Equipment Furniture
Q1658. Name three characteristics of Intangible Assets
A1658. Long-lived assets Used to facilitate the operation of a business Do not have physical substance Patents Trademarks Licenses Franchises Goodwill
Q1659. What are the Long term Asset stages?
A1659. Evaluate / Acquire / Estimate & Recognize / Monitor / Dispose
Q1660. What process is this?The process of evaluating a long- term project that may include purchasing property, plant, and equipment
A1660. Capital Budgeting Common capital budgeting models: Payback period Accounting rate of return Net present value
Q1661. Define Payback Period
A1661. The time it takes for a company to recover its original investment in cash PP = Initial Invest / Annual Cash flow
Q1662. How do you find Rate of Return?
A1662. Annual Accounting income / Initial Investment
Q1663. Define the cost of PP&E
A1663. includes any costs necessary to bring the asset to the condition and location for its intended use
Q1664. How do you account for Subsequent expenditures after a PPE purchase?
A1664. Normal repairs and maintenance are expensed in the current period Expenditures which extend the useful life or increase the productive capacity are capitalized Asset book value is increased Annual depreciation is revised
Q1665. Define a Lease
A1665. A lease is a contract whereby one party (lessee) is granted the right to use property owned by another party (lessor) for a specified period of time for a specified cost
Q1666. What are the differences between an operating lease and a capital lease?
A1666. Operating lease - equivalent to a rental Lease payments charged to expense Capital lease – equivalent to a purchase The asset acquired is recorded in property, plant and equipment The leased asset is depreciated over the lease period A lease liability is shown in the liability section of the balance sheet
Q1667. What is this? The acquisition price of the asset is equal to fair market value of noncash consideration plus any cash given
A1667. Acquisition by Exchange
Q1668. How do you record an acquisition through donation?
A1668. The asset is recorded at its fair market value at time it is received Debit Land / Credit Gain - donated asset
Q1669. How do you record an acquisition with a basket purchase?
A1669. Fixed assets purchased for a lump sum need to be recorded separately The total purchase price must be allocated among individual assets received in proportion to their appraised values
Q1670. How do you record an acquisition of an entire company?
A1670. All acquired assets are recorded on the books of the acquiring company at their fair values as of the acquisition date The excess of the purchase price over the fair value of the identifiable assets represents goodwill
Q1671. How do you record an acquisition through self construction?
A1671. Self-constructed assets are recorded at cost, including all expenditures necessary to build the asset and make it ready for its intended use Costs include: Materials and labor used directly in construction A reasonable share of general overhead If interest is included it is called capitalized interest Interest should be included equal to the amount that could have been saved if the money used on the construction had instead been used to repay loans
Q1672. Define the characteristics of an intangible asset
A1672. Long-term Nonmonetary Generate revenues Grant a right to use of a product, process, name, image, customer list, or business practice Uncertainty about future benefits greater than that of tangible assets Specifically identifiable Except goodwill
Q1673. Define a Patent
A1673. An exclusive right to use, manufacture, process, or sell a product granted by the U.S. Patent Office. Patents have a legal life of 17 years, but their economic life may be shorter
Q1674. Define a Copyright
A1674. The exclusive right of the creator or heirs to reproduce and/or sell an artistic or published work. Granted by the U.S. government for a period of 50 years after the death of the creator. Amortized over the shorter of its economic life or legal life.
Q1675. Define a trade name
A1675. A symbol or name that allows the holder to use it to identify or name a specific product or service. A legal registration system allows for an indefinite number of 20- year renewals
Q1676. What is this? An exclusive right to use a formula, design, technique, or territory.
A1676. Franchise
Q1677. Define Goodwill
A1677. The ability of a company to earn above-normal income. Recorded goodwill is the excess amount paid to acquire a company, over and above the fair market value of the company’s identifiable assets.
Q1678. A business combination occurs when one company buys all of the assets of the another…how do you account for the combination?
A1678. The combination is accounted for using the purchase method (as if one company is buying the other)
Q1679. Describe the Purchase Method
A1679. The identifiable assets and liabilities are recorded at their fair values The excess of the purchase price over the fair value of the identifiable net assets is recorded as goodwill Goodwill represents the company’s reputation, superior business practices, and market position Goodwill is only recorded when it is purchased
Q1680. Is this depreciation? The systematic allocation of an asset’s cost to the periods of benefit
A1680. Yes
Q1681. Is this Depreciation? Accumulation of a cash fund for asset replacement A determination of an asset’s current value
A1681. No
Q1682. Name two factors that cause depreciation
A1682. Causes of depreciation: Physical deterioration Due to use, passage of time, and exposure to the elements Obsolescence Outdated, outmoded, or inadequate
Q1683. What is this? An estimate of the asset’s worth at the time of its disposal
A1683. Residual value (salvage value)
Q1684. What is this? The original cost minus the residual value Estimated useful life A measure of the service potential in terms of years or units produced
A1684. Depreciable Cost
Q1685. What are the three depreciation methods?
A1685. Straight-line Allocates an equal amount of asset cost per year Units-of-production Allocates cost based on the productive output of the asset Declining balance An accelerated method which allocates more cost to depreciation in the early years than the later years
Q1686. What depreciation method is this: An equal amount of depreciation expense is allocated to each period
A1686. Straight-line method
Q1687. What depreciation method is this? Annual depreciation is determined by applying a fixed percentage to the remaining book value at the beginning of each year
A1687. Declining balance 1/life x rate = percentage rate
Q1688. The straight line method is appropriate for what type of assets?
A1688. assets whose benefits diminish on a fairly uniform basis Most companies use the straight-line method due to its simplicity
Q1689. The double-declining-balance method is appropriate for what type of assets?
A1689. assets that give up a greater portion of their benefits in the early years
Q1690. What is this called? Property is depreciated for half the taxable year in which it is placed in service, regardless of when use actually begins
A1690. The Half Year Convention
Q1691. What happens to salvage value for tax purposes
A1691. it’s ignored
Q1692. Is Depreciation a source of cash?
A1692. Depreciation is not a source of cash; it is a noncash expense Depreciation indirectly affects cash flow depreciation reduces taxable income results in lower income taxes being paid
Q1693. If later events require a change in economic life and residual value, what happens?
A1693. A change in estimate is not an error correction A change in estimate is reflected by spreading the remaining depreciable cost over the remaining useful life of the asset
Q1694. With finite life intangible assets, name 3 characteristics
A1694. Amortize over the economic useful life or legal life, whichever is shorter Not to exceed 40 years Direct subtraction from the asset account
Q1695. What is this called? Occurs when an event happens after the purchase of an asset that reduces its value Recognized in the financial statements as a reduction in the value of the asset on the balance sheet and a loss on the income statement
A1695. Impairment of an asset value
Q1696. What do you call the difference between the book value of the asset and the fair value
A1696. Impairment
Q1697. When are gains in PPE recognized?
A1697. Gains are recognized in income only when assets are sold
Q1698. When you compare US and International accounting standards, what is one of the key differences in accounting for PPE?
A1698. Conservatism controls the US and gains are only recognized at sale. The IAS allows upward revaluation.
Q1699. Name 3 ways to dispose of long-term assets
A1699. retirement, sale, or trade-in of operating assets
Q1700. What method of disposal is this? Occurs when an operating asset is removed from service and is disposed of without the company receiving any proceeds An difference between the cost and balance in the accumulated depreciation account results in a loss on this activity
A1700. Retirement
Q1701. Where are Gains/Losses reported on the Income Statement?
A1701. In the “other” category
Q1702. What ratio is used to evaluate the appropriateness of the level of a company’s PP&E?
A1702. FAT - Fixed Asset Turnover = Sales / Average PPE Can be interpreted as the number of dollars in sales generated by each dollar of fixed assets
Q1703. Chapter 12 review slide - over
A1703. Long-term assets provide the infrastructure for production and distribution Capital budgeting models include the payback period, accounting rate of return, and net present value analysis Patents, franchises, licenses, and goodwill are intangible assets. Straight-line and declining balance are common depreciation methods Recognizing impairment for PPE is a two-step process Gain (loss) on asset disposal occurs if proceeds received are greater (less) than the asset’s book value at date of sale
Q1704. What are the steps in the life cycle of a security issue?
A1704. Determine / purchase / classify / earn / monitor / sell
Q1705. Name the 5 reasons that companies invest in other companies
A1705. Safety cushion; Cyclical cash needs; A return on investment; Influence; Control - Safety cushion: Investments are sometimes made to give a company a ready source of funds as a margin of safety - Cyclical cash needs: Some companies have a seasonal business cycle requiring large amounts of cash for inventory buildup followed by increased sales and cash collections - A return on investment: Companies invest simply to earn a rate of return - Influence: Companies can invest to Ensure a supply of raw materials, Influence a board of directors, Diversify their product offerings - Control: An investment resulting in over 50% ownership of a company’s shares of stock produces a controlling interest The investing company can control the other company’s operating, investing, and financing decisions
Q1706. What involves a promise of interest payments and repayment of the principal amount of the debt?
A1706. Debt Securities - Debt security investors have priority over equity investors in terms of interest payments and principal in the event of a corporate liquidation
Q1707. What represents an actual ownership interest in a corporation
A1707. Equity Securities Equity investors have the right to vote in corporate matters such as election of directors Equity investors may receive a rate of return from dividends and appreciation of stock price
Q1708. What are those debt and equity securities purchased with the intent to take advantage of short-term price changes
A1708. Trading Securities
Q1709. What are those debt and equity securities purchased for safety, to hold temporarily excess cash, or to earn a normal long-run return
A1709. Available-for-sale securities
Q1710. What are are debt securities purchased with the intent of holding the securities until they mature
A1710. Held to Maturity Securities
Q1711. What are equity securities purchased in order to exercise ownership influence (at least 20% of the shares) over another company
A1711. Equity method securities
Q1712. At what price are investment securities recorded?
A1712. Cost Cost includes The market price Any additional expenditures required in making the purchase E.g., stockbroker’s fee
Q1713. Where are Realized gains and losses from the sale of securities are included?
A1713. Income Statement A gain or loss is realized when it is confirmed and verified through the actual sale of the security
Q1714. Where are Changes in the market value (unrealized gains and losses) are recognized?
A1714. income statement The market value is reported on the balance sheet as an asset
Q1715. How are available for sale securities recorded on the balance sheet?
A1715. The market value is reported on the balance sheet as an asset The accumulated unrealized gain/loss is treated as a stockholders’ equity adjustment
Q1716. How do you compute the overall rate of return?
A1716. Portfolio return / portfolio beginning balance
Q1717. How are unrealized gain/losses measured?
A1717. Measured from beginning of year to end of year Asset adjusted to end-of-year market value Gain (Loss) reported Trading portfolio: on income statement Available-for-Sale portfolio: on Balance Sheet (Equity Section) in Accumulated Other Comprehensive Income
Q1718. How are realized gains/losses measured?
A1718. Measured as the difference between historical cost and the sale proceeds Gain (Loss) reported Trading portfolio: on income statement Available-for-Sale portfolio: on income statement
Q1719. What type of Securities have these traits: Debt securities Intent to hold until maturity date Cash inflows While owned, interest At maturity date, maturity value Reported at amortized cost Unrealized gains and losses are not measured or recognized
A1719. Held to Maturity Securities
Q1720. If the purchase price of a bond is LESS than the face value, what is it?
A1720. Discount, because the market’s interest rate is HIGHER than the bond’s
Q1721. If the purchase price of a bond is Equal to the face, what is it?
A1721. Par
Q1722. If the purchase price of a bond is GREATER than the face value, what is it?
A1722. Premium
Q1723. What is the equity method when discussion securities?
A1723. The equity method is used when an investor company has significant influence over an investee company Significant influence is presumed if a company owns between 20% and 50% of the company
Q1724. Describe the accounting for equity method securities
A1724. The investment asset is originally recorded at its acquisition cost Account for activity using the accrual method: Record revenue as earned, not paid Accrual method prevents manipulation of income by investor entity.
Q1725. How does the investor account for the investee’s reported net income?
A1725. Reported as revenue and increases the carrying value of the Investment account on the balance sheet Cash dividends received are recorded as an increase to Cash and a decrease to the Investment account (return of investment)
Q1726. What needs to be done with the books when an investor owns a controlling interest (over 50% ownership of the voting stock of the investee)
A1726. The investor/parent is able to determine both the financial and operating policies of investee/subsidiary Consolidated financial statements are required
Q1727. What do you call the interest of other shareholders for subsidiaries that are not 100% owned by the parent
A1727. Minority Interest
Q1728. Ch 13 summary
A1728. Companies make investments in securities for a variety of reasons Equity investments are classified as trading, available-for-sale, or equity-method; debt security investments are classified as trading, available-for-sale, or held-to-maturity Trading and available-for-sale securities are carried at market value; held-to-maturity bond investments are carried at amortized cost; equity-method investments are carried at adjusted-cost Consolidated financial statements are prepared if the parent owns more than 50% of a subsidiary; minority interest reports the equity of other investors in subsidiaries that are not wholly- owned
Q1729. What is a liability?
A1729. Probable future sacrifices of economic benefits arising from present obligations of a particular entity to transfer assets or provide services to other entities in the future as a result of past transactions or events.
Q1730. There are two types of liabilities, what are they?
A1730. Monetary liabilities are obligations payable in a fixed sum of money Examples: accounts payable, accruals Nonmonetary liabilities are obligations to provide fixed amounts of goods and services Example: revenues received in advance of providing a service
Q1731. There are two types of liabilities, what are they?
A1731. Current liabilities are obligations expected to be satisfied within one year of the balance sheet date Examples: accounts payable, accrued liabilities, current maturity of mortgage Long-term liabilities are obligations expected to be satisfied after one year from the balance sheet date Examples: bonds payable, remainder of mortgage
Q1732. What is the Current ratio?
A1732. Measures the ability to repay debt in the short run Current ratio = current assets / current liabilities
Q1733. What current ratio is considered indicative of liquidity concerns? Historically and now?
A1733. Historically, less than 2:1 indicative of liquidity concerns Now, due to advances in technology, frequently less than 1:1
Q1734. When are contingent liabilities recognized?/
A1734. Contingent liabilities are recognized if Probable and Can be reasonably estimated
Q1735. Current liabilities are shown at face value, how are long- term liabilities shown?
A1735. Present day value. (what it would cost to completely pay off the obligation today
Q1736. There are 5 common types of short term operating liabilities, what are they?
A1736. Accts Payable, Accrued liabilities, short term debt, promissory notes (commercial paper), line of credit
Q1737. What do you call A loan backed by an asset whose title is pledged to the lender
A1737. Mortgage A mortgage is payable in equal installments (an annuity) Each payment is comprised of interest and principal Interest is charged on the declining principal balance
Q1738. What do you call a loan backed by certain assets as collateral?
A1738. secured loan
Q1739. What is a written agreement between a borrower and a lender in which the borrower agrees to
A1739. Bond - Repay a stated sum on a future date Make periodic interest payments at specified dates After issuance, bonds may be publicly traded on a bond exchange
Q1740. There are four names for the denomination of a bond - what are they?
A1740. The denomination is also called the Principal Face value Maturity value Par value
Q1741. What do you call the date on which a bond matures?
A1741. Maturity Date
Q1742. What are two other names for the bond’s stated interest rates
A1742. Face Rate or Coupon rate Is specified on the bond at issuance Is set as close as possible to the market rate established by the money market depends on the prevailing interest rates and perceived risk of the company Remains constant over the life of the bond Is applied to the face of the bond to calculate interest payments to bondholders Most bonds pay interest semiannually Stated interest rate is always an annual amount
Q1743. What type of bonds don’t pay interest periodically?
A1743. zero coupon bonds - Are issued at a deep discount The discount represents interest to be earned over the life of the bond Are a popular form of issue with governmental units
Q1744. What type of bonds have all principle due on a single date?
A1744. Term Bonds
Q1745. What type of bonds have bonds payable at specific intervals
A1745. serial bonds
Q1746. Also called debentures, these are issued without any security to back them
A1746. Unsecured Bonds
Q1747. Also called mortgage bonds, these are secured by the borrower’s collateral or specified assets
A1747. Secured Bonds
Q1748. What type of bonds may at some future, specified date be exchanged for, or converted into, the company’s common stock
A1748. Convertible Bonds
Q1749. What types of bonds allow the borrower, or issuer, to call or redeem the bonds prior to their maturity
A1749. Callable Bonds
Q1750. What are the 4 factors that influence bond prices?
A1750. Stated interest rates, Prevailing market rates, length of time to maturity, perceived risk of investment
Q1751. How are Bonds recorded and recognized in the financial statements?
A1751. at the present value of future cash flows Interest annuity (face × stated rate × time) Maturity value
Q1752. Depending on the relationship between the stated interest rate and the yield rate, how are bonds valued?
A1752. par value par value minus a discount par value plus a premium
Q1753. When bonds are repaid at maturity, Bonds Payable is decreased and Cash is decreased
A1753. Cash -10000 bond pay -100000
Q1754. What is collection of cash and short-term securities that is set aside for repayment of the principal of the bonds
A1754. A bond sinking fund is an asset reported in the investment section of the balance sheet
Q1755. What occurs when a firm’s long-term debt is retired before maturity
A1755. Early extinguishment of debt. A gain or loss occurs when there is a difference between the reacquisition price and the carrying value of the debt The gain or loss is reported as a component of income from continuing operations on the income statement
Q1756. What are the economic advantages of leasing for the LESEE
A1756. No (or low) down payment Avoid risks associated with ownership Technological obsolescence Physical deterioration Changing economic conditions Flexibility
Q1757. What are the economic advantages for the lessor
A1757. Increased sales Ongoing business relationship with the lessee Residual value retained
Q1758. What type of lease is accounted for as if the lease agreement transfers ownership of the asset to the lessee The lease is equivalent to a financed purchase An asset and liability must be recorded on lessee’s books
A1758. Capital Lease
Q1759. What type of lease is accounted for as rental agreements, with no transfer of effective ownership associated with the lease Lease payments are recorded as rent expense by the lessee and rent revenue to the lessor
A1759. Operating Lease
Q1760. If any one of the following criteria are met, then the lease is classified as a capital lease
A1760. The lease transfers ownership of the property to the lessee by the end of the lease term The lease contains a bargain purchase option The lease term is equal to 75% or more of the estimated economic life of the leased property The present value of the minimum lease payments equals or exceeds 90% of the fair market value of the property
Q1761. What do you call Obligations of a company that are not disclosed on the financial statements
A1761. Off-balance sheet financing Three common types of off-balance sheet financing are Operating leases Unconsolidated subsidiaries Joint ventures
Q1762. What is a subsidiary that is accounted for using the equity method
A1762. Unconsolidated subsidiary Companies that purchase less than 50% of an investee do not have to prepare consolidated financial statements The investee’s debt is kept off the balance sheet
Q1763. What occurs occur when companies join forces to share the costs, risks, and benefits associated with specifically defined projects
A1763. Joint Venture A joint venture is carefully structured to ensure that the liabilities of the venture are not disclosed in the balance sheets of the companies They are often just a special type of unconsolidated subsidiary
Q1764. What do you call Using debt to finance asset purchases
A1764. leverage
Q1765. What is debt ratio equation?
A1765. debt ratio = total liabilities / total assets Rule of thumb: Most large U.S. companies borrow about half the funds they use to purchase assets
Q1766. What is the debt to Equity ratio?
A1766. DEQ = total liabilities / total equity
Q1767. ch 14 summary
A1767. Liabilities are existing obligations for future economic sacrifice Accounts payable and other short-term operating accruals are generally non-interest-bearing Long-term liabilities are reported at the present value of future cash flows Bonds are issued to borrow funds from multiple sources. Bonds can be issued at par, at a discount, or at a premium. Leases are either rental in nature (operating) or in essence, purchases (capital). Four specific criteria exist for capital leases Off-balance-sheet financing arises with operating leases, unconsolidated subsidiaries, and joint ventures Debt-related financial ratios indicate the degree of leverage and the extent of a company to make period interest payments.
Q1768. The first body of the accounting profession who determine GAAP
A1768. Committee on Accounting Procedure and they developed Accounting Research Bulletins (ARB)
Q1769. The second body of the accounting profession who determine GAAP
A1769. Accounting Principles Board and they developed Opinions (APBO)
Q1770. The third body of the accounting profession who determine GAAP
A1770. Financial Accounting Standards Board (FASB) developed Statements of Financial Accounting Standards (SFAS) to define specific methods and procedures for various accounting issues. FASB interpretations clarify GAAP. Technical Bulletins further clarify GAAP
Q1771. Statements of Financial Accounting Concepts (SFAC)
A1771. intended to establish the objectives and concepts to use by the FASB in developing accounting and reporting standards. Provide common foundation and basic reasoning, however they do not establish GAAP
Q1772. Hierarchy of Sources of GAAP (BOSSII)
A1772. B - Accounting Research Bulletins O - Accounting Principles Board Opinions S - FASB Statements of Financial Accounting Standards S - FASB Staff Positions I - FASB Interpretations I - FASB Statement Implementation Issues
Q1773. Objectives of Financial Reporting by Business Enterprises
A1773. Disclose entities performance, focus in on the informational needs to external users. Objectives provide: - Investment and credit decisions - Assessing future cash flow prospect (value) - Enterprise’s resource, the debt equity claims (Risk/required return)
Q1774. Qualitative Characteristics of Accounting Information
A1774. Financial Information must be: - Understandable to decision makers - Relevant (timely info) - Reliable (verifiable and neutral) - Comparable - Consistent - Material - Less costly than the benefit provided
Q1775. What is the hierarchy of accounting qualities
A1775. (BUD) - Benefits > Cost - Understandability (understandable to a wide variety of users who possess a reasonable amount of knowledge about the economy) - Decision Usefulness - Materiality
Q1776. What are the primary decision specific qualities
A1776. Relevance (Passing Feels Terrific) - Predictive Value - Feedback Value - Timeliness Reliability (Nobody Relies on Financials unless Verified) - Neutrality - Representational Faithfulness - Verifiability
Q1777. What are the secondary and interactive qualities
A1777. - Comparability (coke vs pepsi) - Consistency (2009 vs 2008), consistent accounting policies and procedures must be applied by the company from period to period, unless the new method more fairly presents the information
Q1778. Constraints of accounting qualities
A1778. - Benefits must outweigh the cost of obtaining the information Materiality, the information could make a difference in decision made by the users
Q1779. What consists of the full set of financial statements
A1779. - Statement of financial position (balance sheet) - Statement of earnings (the income statement) - Statement of comprehensive income - Statement of cash flows - Statement of changes in owner’s equity
Q1780. What is the historical cost assumption
A1780. The general rule is the financial information is accounted for and based on cost and not current market value except for a few exceptions
Q1781. Revenue Recognition Principle
A1781. General rule is revenue should be recognized when it is earned and when it is realized or realizable Earned happens when goods are transferred or risk of loss happens and with service, when the service is substantially complete Realized is when cash is exchanged Realizable is claims to cash
Q1782. What is the matching principle
A1782. In accordance with the matching principle, all expenses incurred to generate a specific amount og revenue in a period are matched against that revenue
Q1783. What is accrual accounting
A1783. Accrual simply means to record without the exchange of cash, revenues are recognized when they are earned and expenses are recognized in the same period as the related revenue
Q1784. Conservatism Principle
A1784. When selecting the GAAP method, select the method that is least likely to overstate assets and understate liabilities. GR: Defer est. gains until realized Record probable est. losses immediately
Q1785. Comprehensive Income
NAME?
Q1786. Revenues and Expenses are an example of …
A1786. Recurring Operations
Q1787. Gains and Losses are …
A1787. Non operating unusual or infrequent
Q1788. Assets
A1788. probable future economic benefit
Q1789. Liabilities
A1789. Probable future sacrifices of economic benefits
Q1790. Equity (Net Assets)
A1790. Simply Assets minus the liabilities
Q1791. What is the basic value asset/ liabilities formula
A1791. CF1(future cash flows)/(1+r)
Q1792. Five Elements of Present Value Measurement
A1792. (a) Estimate of future cash flows (b) Expectations about timing variations of future cash flows (c) Time value of money (risk free rate of interest) (effects discount rate) (d) The price for Bearing Uncertainty(effects discount rate) (e) Other factors (liquidity issues, market imperfections) (effects discount rate)
Q1793. What are the two methods to compute present value
A1793. - Traditional Approach, bonds when scheduled payments are known - Expected cash flow approach, warranties, when uncertain about future payments
Q1794. What are the uses of the income statement
A1794. To determine profitability, value, and credit worthiness
Q1795. What is Cost
A1795. Cost and expense is not synonymous. Cost is the amount actually paid for something
Q1796. When do you expense and when do you capitalize?
A1796. Expense to the Income Statement if you reasonably believe it will not generate revenue in future periods Capitalize to the balance sheet if you reasonably believe the asset will generate revenue in future periods
Q1797. Unexpired Costs
A1797. Can generate revenue in the future so treated like an asset. Allocated in a systematic and rational manner or matched.
Q1798. Ex. Unexpired Costs: Inventory———-> Unexpired prepaid cost of insurance—> Net book value of fixed assets—–> Unexpired cost of patents———->
A1798. Expired Costs: Cost of goods sold Insurance expense Depreciation expense Patent expense (amortization)
Q1799. Revenues
A1799. Selling price for services or inventory. Revenues are reported at their gross amounts.
Q1800. Expenses
A1800. COGS, selling general & administrative. Expenses reported at their gross amount
Q1801. Net Concept Gain or Losses
A1801. SP(NRV)-Net Book Value (Cost - accumulated depreciation)= Gain or Loss “Net” Gains and losses are reported on their net amount. Gains come from sales other than inventory such as PPE and investments Losses come from sales of PPE, Investments, and also writedowns and write offs
Q1802. What is reported on the Income Statement
A1802. - Income (or loss) from continued operations (gross of tax) - Income (or loss) from discontinued operations (net of tax) -Extraordinary item (report net of tax)
Q1803. What is included in Income (or loss) from continued operations (gross of tax)
A1803. Income from continuing operations includes operating activities (revenue, COGS, other expenses) and also non operating activities (gains, losses, other revenues), and income taxes
Q1804. What is included in Income (or loss) from discontinued operations (net of tax)
A1804. Income from discontinued operations ins presented net of tax
Q1805. What is extraordinary items
A1805. Extraordinary items are presented net of tax and include items that are unusual in nature and infrequent in occurrence.
Q1806. Cumulative effect of change in accounting principle
A1806. General rule is to report net of tax on the statement of retained earnings. record the cumulative effect, and it must be a change from one acceptable method if accounting to another because the new method presents the financial information more fairly than the old method
Q1807. Reporting Rules
A1807. - Line items above “income from continuing operations” are shown gross (before tax), and line items below are shown net of tax
Q1808. What does the mnemonic “IDEA” stand for
A1808. - Income from continuing operations (reported both gross and then net on the income statement) - Discontinued operations (reported net and also on the income statement) - Extraordinary items (net and on the income statement) - Accounting principle change (net and on the retained earnings statement)
Q1809. What is the single step income statement
A1809. IIn the single step income statement presentation of income from continuing operations, total expenses (including income tax expenses) are subtracted from total revenue.
Q1810. COGS includes …
A1810. freight in
Q1811. Selling expense includes…
A1811. freight out
Q1812. What is the COGS formula?
A1812. Beginning Inventory + Purchases / Cost of Goods Manufactured ________________________ Cost of goods available for sale - Ending Inventory ________________________ COGS
Q1813. What is the flow of information for Net Income
A1813. In a single step income statement, the net income from the income statement is then added to the beginning retained earnings in the statement of retained earnings. The retained earnings at the end of the period is then carried over to the balance sheet and apart of stockholders equity.
Q1814. What is the multiple step income statement?
A1814. The multiple step income statement reports operating revenues and expenses separately from non operating revenues and expenses and other gains and losses. Provides enhanced user information
Q1815. How do u find Net Sales if not given?
A1815. Gross - (Returned + Discounts)
Q1816. What is Advertising expense considered?
A1816. It is considered part of the selling expense
Q1817. Discontinued Operations
A1817. Discontinued operations are still reported separately from continuing operations in the income statement according to the IDEA mnemonic, net of tax. The (normally) loss from discontinued operations can consist of an IMPAIRMENT LOSS, A GAIN/LOSS FROM ACTUAL OPERATIONS, AND A GAIN/LOSS ON DISPOSAL. all of these amounts are included in discontinued operations in the period in which they occur
Q1818. Component of an entity
A1818. is part of an entity for which operations and cash flows can be distinguished. Component may be: - Operating segment - Reportable segment - A reporting unit - A subsidiary - An Asset group
Q1819. What is an asset group
A1819. a asset group is a collection of assets to be disposed of together as a group in a single (disposal) transaction and the liabilities directly associated with those assets that will be transferred in that same transaction.
Q1820. How do you consider something “held for sale”
A1820. All of these requirements must be met: - Management commits to a plan to sell the component - The component is available for immediate sale in its present condition - An active program to locate a buyer has been initiated - The sale of the component is probable and the sale is expected to be complete within one year - The sale of the component is being actively marketed - Actions required to complete the sale make it unlikely that significant changes to the plan will be made or that the plan will be withdrawn.
Q1821. Will be reported in discontinued operations if either the component:
A1821. - Has been disposed of , or - Is classified as held for sale ( must meet all six requirements)
Q1822. Both the following conditions must be met in order to report in discontinued operations the results of the operations of the component that has been disposed of or is held for sale
A1822. - Eliminated from ongoing operations - No significant continuing involvement
Q1823. What type of items are included in the results of discontinued operations
A1823. - Results of operations of the component (for that period) - Gain of Loss on disposal of the component (reported in period of sale) - Impairment Loss (and subsequent increases in fair value) of the component
Q1824. Anticipated future gains or losses
A1824. Not recognized until they occur
Q1825. Present as a Separate Component if Income
A1825. The results of discontinued operations, net of tax, are reported as a separate component of income before extraordinary items.
Q1826. Extraordinary Items
A1826. Unusual, infrequent, and material
Q1827. How do you disclose extraordinary items
A1827. Extraordinary items must be separately disclosed in the income statement, net of any related tax effects, after discontinued operations.
Q1828. Examples of extraordinary items
A1828. - The abandonment of, or damage to, a plant due to an infrequent earthquake or an infrequent flood - An appropriation of a plant by the government - A prohibition of a product line by a newly enacted law or regulation - Certain gain or losses from extinguishment of long-term debt, provided they are not part of the entity’s recurring operations and thus must say unusual and infrequent
Q1829. Non Extraordinary items
A1829. Normal Recurring or Non operating (unusual or infrequent) Reported before tax (gross) not net of tax - gain or loss from sale of PPE - writedown, writeoffs of: receivables, inventories, intangibles, long term securities - gain or loss from foreign currency transaction or translation - losses from employee strikes - long term debt extinguishments
Q1830. Material Unusual OR infrequent items (non operating)
A1830. If material, these items should be reported as a separate line item as part of income from continuing operations (and not net of tax)
Q1831. What are the three accounting changes and how are they classified
A1831. - Changes in accounting estimate (prospective) - Changes in accounting principle (GR —> “Retro”) - Changes in accounting entity (Restate)
Q1832. Changes in accounting estimate
A1832. (prospectively) a change in accounting estimate occurs when it is determined that the estimate previously used by the company is incorrect, when there’s new information available.
Q1833. Changes in accounting principle
A1833. A change in accounting principle is a change in accounting from one acceptable method of GAAP to another acceptable method of GAAP. - Only change principles if the new principle more fairly presents the information
Q1834. Direct effects of change in accounting principles
A1834. The direct effects of a change in accounting principle are adjustments that would be necessary to restate the financial statements of prior periods
Q1835. Indirect effects of change in accounting principles
A1835. differences in non discretionary items based on earnings (bonuses) that would have occurred if the new principle had been used in prior periods.
Q1836. Cumulative effects of change in the accounting principles
A1836. If non-comparative financial statements are being presented, then the cumulative effect of a change in accounting principle is equal to the difference between the amount of beginning retained earnings in the period of change and what the retained earnings would have been if the accounting change had been retrospectively applied to all prior affected periods.
Q1837. Reporting Changes in an accounting principle
A1837. Changes should be mentioned in the retained earnings. The general rule is that such changes should be recognized by adjusting the beginning retained earnings in the earliest period presented for the cumulative effect of the change, and, if prior period financial statements are presented, they should be restated (retrospective application)
Q1838. Exceptions to the general rule of reporting changes in accounting principle.
A1838. Exceptions to the general rule include changes to LIFO and changes in depreciation, amortization and depletion. When these two occur, you prospectively change it, treat it like a estimate change.
Q1839. Changes in Accounting Entity
A1839. Retrospective application. Occurs when the entity being reported on has changed composition. Examples include consolidated or combined financial statements that are presented in place of statements of the individual companies.
Q1840. Prior period adjustments
A1840. (Restatement) Corrections of errors in the financial statement of prior periods. (changes from non GAAP to GAAP is correction of error. If comparative financial statements presented, correct the information, if year is presented. If not presented, adjust the beginning retained earnings of the earliest year presented, if the year is not presented (NET OF TAX)
Q1841. What is comprehensive income
A1841. Non owner transactions. Change in equity (net assets) of business enterprise during a period from transactions and other events and circumstances from non owner sources. Net Income (per the income statement) + Other comprehensive income (PUFE) ___________________________ comprehensive income
Q1842. Where is PUFE reported
A1842. PUFE is not reported in the income statement, directly to equity adjustments
Q1843. What does PUFE stand for ?
A1843. - Pension changes in funded status - Unrealized Gains and Losses (available for sale) - Foreign currency items - Effective portion of the cash flow hedge
Q1844. Reclassification Adjustments
A1844. Once displayed as part of other comprehensive income but now reclassified and now flow through the income statement
Q1845. Accumulated Other Comprehensive Income
A1845. Shown in stockholders equity, a component of equity that includes the total other comprehensive income for the period and previous periods.
Q1846. What are the three ways to present comprehensive income?
A1846. First, comprehensive income should not be presented on a per share basis. 1. Below the total for net income in a statement that reports results of operations (start with revenue) 2.In a separate statement of comprehensive income that begins with net income 3. In a statement of changes in equity
Q1847. What are the required disclosures from the three formats ?
A1847. - The tax effects of each component included in current “Other Comprehensive Income” - The accumulated balances of components of “Other Comprehensive Income” (the accumulated balances by component may be shown on the balance sheet, in the statement of changes in equity, or in the notes to the financial statements - Total accumulated other comprehensive income in the balance sheet as an item of equity - The reclassification adjustments
Q1848. What are the two key components of the balance sheet?
A1848. Assets and Liabilities and Stockholder’s Equity
Q1849. What main components make up Assets?
A1849. Current assets investments, property plant and equipment, intangible assets, other assets, and that finally makes up the total assets.
Q1850. What are considered current assets
A1850. Cash an cash equivalents Trading securities at fair value Accounts receivable, net allowance for uncollectible accounts Notes receivable Merchandise inventory, at lower of cost or market Prepaid expenses
Q1851. What are considered investments
A1851. Available for sale securities at fair value Held to maturity securities Land held for future plant site
Q1852. Property, plant, and equipment
A1852. Land building equipment Less: Accumulated depreciation
Q1853. Intangible assets
A1853. Goodwill Patents, net of amortization
Q1854. Other assets
A1854. Bond issue cost Pension and other post-retirement benefit assets
Q1855. What main components make up Liabilities and stockholders’ equity
A1855. Current Liabilities Long term liabilities TOTAL LIABILITIES Stockholders Equity TOTAL STOCKHOLDERS EQUITY TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY
Q1856. Current Liabilities
A1856. Long-term debt due within one year Accounts payable Notes payable Interest payable Salaries payable Income tax payable Advances from customers (unearned revenue) Unearned rent revenue
Q1857. Long term liabilities
A1857. Bond payable (10%, due December 31, 2009) Plus: Unamortized premium on bonds or Less: Unamortized discount on bonds Deferred income tax liability Pension and other postretirement benefit liabilities TOTAL LIABILITIES
Q1858. Stockholders’ equity
A1858. Capital stock, (preferred and common stock, must state the par value, how many share authorized, how many issued and how many outstanding) Paid in capital in excess of par Total paid-in capital Retained earnings Accumulated other comprehensive income Treasury stock at cost (# shares) TOTAL STOCKHOLDERS’ EQUITY TOTAL LIABILITIES AND STOCKHOLDERS EQUITY
Q1859. What are disclosures ?
A1859. GAAP requires that a description of all significant policies should be included as an integral part of the financial statements. Should be the first or second note to the financial statements
Q1860. What are identified and described in the disclosures ?
A1860. Principles and methods Criteria Policies Pricing
Q1861. Remaining Notes
A1861. The remaining notes contain all other information relevant to decision makers. These notes are used to disclose facts not presented in either the body of the financial statements or in the “Summary of Significant Accounting Policies” EXAMPLES Changes in stockholders equity Required marketable securities Contingency losses Contractual obligations Pension plan description Post balance sheet disclosures Discontinued segment
Q1862. Interim Financial Statements
A1862. Quarterly reports required for publicly traded companies. Matching of revenue and expenses by quarter Timeliness over reliability Integral part of the annual financial statements
Q1863. Segment Reporting
A1863. - The objective is to provide information on the business activities to help users of the financial statements - Must use same accounting principles as main financial statements - Intercompany transactions not eliminated for reporting - Segment reporting applies to public companies only
Q1864. What are the required disclosures for all public enterprises when it comes to segment reporting?
A1864. -Operating segments (annual and interim) -Products and services -Geographic areas -Major customers
Q1865. Segment Reporting
A1865. - Required disclosures to provide information on the business activities to help users of the financial statements - Intercompany transactions are not eliminated - Public companies only
Q1866. What are the required disclosures for all public enterprises (concerning segment reporting)
A1866. - Operating segments (annual and interim) - Products and services - geographic areas - Major customers
Q1867. What is the definition of an operating segment
A1867. An operating segment is a component of an enterprise -engages in business activities from which it may earn revenue and incur expenses -Operating results are regularly reviewed by the enterprise’s “Chief operating decision maker” -Traceable cash flow
Q1868. Quantitative thresholds for reportable segments (Materiality tests)
A1868. 10% “size” test (must only meet one) - is 10% or more of the combined revenue, internal and external, of all operating segments - Absolute amount o its reported profit or loss is 10% or more of the greater, in absolute amount - Segment meets the size test if its assets are 10% or more of the combined assets of all operating segments
Q1869. 75% “reporting sufficiency” test
A1869. If the total of external revenue reported by operating segments constitute less than 75% of external revenue, additional operating segments need to be identified as reportable segments, even if they do not meet the above three test, until at least 75% of external revenue is included in reportable segments
Q1870. Segment Profit (or loss) formula
A1870. Revenue(for that segment internal and external sales) - Directly traceable costs - Reasonably allocated costs (by ceo) ____________________________ Operating profit (or loss)
Q1871. Items normally excluded from segment profit
A1871. - general corporate expenses and revenues - Interest expense (unless bank) - income taxes - equity in earnings and losses of an unconsolidated subsidiary - gains or losses from discontinued operations - extraordinary items - minority interest- non controlling
Q1872. Development Stage Enterprises
A1872. Start ups, pioneering development -Start up/ organizational costs, expense immediately under GAAP
Q1873. Disclosure for development stage enterprise
A1873. Developmental stage enterprise must issue the same financial statements as any other enterprise. prepared in conformity with GAAP. Additional required disclosures are as follows - identify the financial statements as those of a development stage enterprise (in heading) - In the balance sheet, describe cumulative net losses as “deficit accumulated during the development stage” - In the income statement, show revenue and expenses for each period being presented and present a cumulative amount (generally of losses) from the company’s inception - In the statement of cash flows, include cumulative amounts of cash inflows and outflows from the company’s inception and currents amounts of cash inflows and outflows for each period presented
Q1874. SFAS No. 157 applies to all fair value measurement except
A1874. 1. Share based payment and related interpretative pronouncements 2. Inventory pricing
Q1875. What is fair value
A1875. Fair value is the price to sell an asset or transfer a liability in an orderly transaction between market participants at the measurement date
Q1876. Stuff to be familiar with with fair market
A1876. - Fair value is measured for a specific asset or liability, or a group of assets and or liabilities - Fair value is a market specific measure, not entity specific - Fair market is measured in the principal, or most advantageous, market for the asset or liability - Fair value is an exit price - A fair value measure should reflect all of the assumptions that market participants would use in pricing the asset or liability, including assumptions about risk - Fair value does not include transaction costs, but may include transportation costs if location is an attribute of the asset or liability - The fair value of an asset assumes the highest and best use of the asset - The fair value of a liability should include the liability’s nonperformance risk
Q1877. Orderly transaction
A1877. The asset or liability is exposed to the market for a period before the measurement date long enough to allow for marketing activities that are usual and customary for transactions involving such assets or liabilities. Cannot be a forced transaction (basically not a fire sale)
Q1878. Market participants
A1878. Buyers and sellers who are independent (not related parties). Able and willing to transact for the asset or liability
Q1879. Principal market
A1879. The market with the greatest volume or level of activity for the asset or liability
Q1880. Most advantageous market
A1880. Use if there is no principal market. the best price for the asset or liability after considering transaction cost, although transaction cost are used to determine the most advantageous market, transaction costs are not included in the final value measurement.
Q1881. Valuation techniques
A1881. - Market approach - The income approach - The cost approach
Q1882. Market approach
A1882. Uses prices and other relevant information from the market transactions involving identical or comparable assets or liabilities to measure fair value (real estate)
Q1883. Income approach
A1883. Converts future amounts, including cash flows or earnings, to a single discontinued amount to measure fair value (Rent, future cash flows)
Q1884. The cost approach
A1884. The cost approach uses current replacement cost to measure the fair value of assets
Q1885. Hierarchy of inputs
A1885. There are 3 level of inputs , level 1,2, and 3 inputs.
Q1886. Level 1 inputs
A1886. Level 1 inputs are quoted prices in active markets for identical assets or liabilities that the reporting entity has access to on the measurement date.
Q1887. When is revenue from sales of products recognized?
A1887. Recognized on date of sales
Q1888. When is revenue that stems from allowing others the use of the entity’s assets recognized?
A1888. Recognized as the time passes
Q1889. When is revenue from the performance of services is recognized
A1889. In the period the services have rendered and are able to be billed
Q1890. What four criteria must be met for each element of the contract before any revenue can be recognized
A1890. - Persuasive evidence of an arrangement exists (Signed contract) - Delivery has occurred or services have been rendered (risks & rewards transfer) - The price is fixed and determinable (no price contingency) - Collection is reasonably assured (Standard collection terms)
Q1891. Deferred Credits
A1891. Deferred credits are essentially liabilities. You either earn it, or have to return it. Deferred credits (unearned revenue) are recognized as income through the passage of time.
Q1892. When should expenses be recognized
A1892. Expenses should be recognized according to the matching principle utilizing association of cause and effect, systematic and rational approach, or expense when no future benefit can be measured
Q1893. Realization
A1893. Realization occurs when the entity obtains cash or the right to receive cash or has converted a noncash resource into cash (Real World)
Q1894. Recognition
A1894. Recognition is the actual recording of transactions and events in the financial statements (Record)
Q1895. Matching
A1895. One of the most important principles in financial accounting is the matching principle, which indicated that expense must be recognized in the same period in which the related revenue is recognized. Matching of revenues and costs is the simultaneous or combined recognition of the revenues and expenses that results directly and jointly from the same transactions or events
Q1896. Accrual
A1896. Accrual accounting is required by GAAP and is the process of employing the matching principle to the recognition of revenues and expenses( Income statement impact (no current cash impact))
Q1897. Deferral
A1897. Deferral of revenues or expenses will occur when cash is received or expended but is not recognizable for financial statement purposes. Deferral typically results in the recognition of a liability or prepaid expense (NO current income statement impact (Balance sheet only, cash impact))
Q1898. Accrued Assets (or Accrued Revenues)
A1898. Recognized or earned through the passage of time but not yet paid to the entity DR: A/R CR: Accrued Revenue
Q1899. Accrued Liabilities
A1899. Expenses recognized or incurred through the passage of time but not yet paid by the entity DR: Accrued expense CR: Accrued liabilities A/P
Q1900. Estimated Liabilities
A1900. Estimated liabilities represent the recognition of probable future charges that result from a prior act (warranties, coupons) DR: Accrued expense CR: Accrued liabilities
Q1901. Expired Costs
A1901. Expense on income statement, have no future benefit - Insurance expense (pro rate portion) - Costs of goods sold are directly allocated to the periods in which the sales take place - Period costs
Q1902. Unexpired costs
A1902. Stay on the balance sheet (for now) EX (fixed assets and inventory)
Q1903. What does prepaid expenses (current assets) result in down the road?
A1903. They result in expired costs DR: prepaid expense CR: Cash
Q1904. What does deferred charges result in down the road?
A1904. They result in unexpired costs DR: Deferred charges CR: Cash/ Assets
Q1905. Revenue recognition: Deferred credits (deferred income or unearned revenue)
A1905. Deferred credits are located in the liability section of the balance sheet, just above shareholder’s equity DR: CASH CR: Unearned revenue/ deferred revenue B/S only
Q1906. Royalty income
A1906. Royalty revenue is recognized when earned
Q1907. Revenue recognition when the right of return exists
A1907. Revenue from a sales transaction where the buyer has the right to return the product shall be recognized at the time of sale only if all the required conditions are met - The sales price is substantially fixed at the date of sale - The buyer assumes all risks of loss bc the goods are considered in the buyer’s possession - The buyer has paid some form of consideration - The amount of future returns can be reasonably estimated.
Q1908. Initial Franchise fees
A1908. Revenue when “substantially performed”
Q1909. Continuing Franchise fees
A1909. Revenue when earned. These fees are received for ongoing services provided by the franchisor to the franchisee
Q1910. Franchisor Accounting (Franchise Fee Revenue) Unearned Revenue
A1910. Unearned revenue is recognized once substantial performance on such future services has occurred. - Initial franchise fee (not yet earned) - Prepaid continuing franchise fee
Q1911. Franchisor Accounting (Franchise Fee Revenue) Earned Revenue
A1911. Franchisor report revenue from initial franchise fees when substantially performed.
Q1912. Substantial Performance Conditions
A1912. - Franchisor has no obligation to refund any payment (cash otherwise) received - Initial services required of the franchisor have been performed - All other conditions of the sale have been met
Q1913. Classification of intangible assets
A1913. Intangible assets may be either specifically identifiable(patents, copyrights, franchise) or not specifically identifiable (goodwill)
Q1914. How do you record purchased intangible assets
A1914. Recorded at cost
Q1915. how do you record internally Developed Intangible Asset
A1915. Expense
Q1916. What are the exceptions of recording internally developed intangible assets
A1916. These items may be capitalized - Legal fees and other costs related to a successful defense of the asset - Registration or consulting fees -Design costs - Other direct costs to secure the asset
Q1917. Capitalization of Costs is measured by
A1917. - The amount of cash disbursed or the fair market value of other assets distributed - The present value of amounts to be paid for liabilities incurred - The fair value of consideration received for stock issued
Q1918. Amortization
A1918. The value of intangible assets eventually disappears; therefore, the cost of each type of intangible asset (except goodwill and assets with indefinite lives) should be amortized by systematic charges to income over the period estimated to be benefited. Candidates should be aware that a patent is amortized over the shorter of its estimated life or remaining legal life. - Straight line method of amortization should be applied unless a company demonstrates that another systematic method is more appropriate
Q1919. Worthless
A1919. write off entire remaining cost to expense
Q1920. Impairment
A1920. Write down the intangible asset and recognize lost if an intangible asset becomes impaired.
Q1921. Changes in useful life
A1921. Recalculate and amortize
Q1922. Sale
A1922. Calculate gain or loss
Q1923. Initial franchise fee for the franchisee
A1923. Intangible asset, amortize over the expected period of benefit of the franchise
Q1924. Continuing Franchise Fees
A1924. Expense as incurred
Q1925. Start up costs
A1925. Start up cost including organizational costs should be expense when incurred
Q1926. Legal Fees
A1926. Capitalize fees to obtain intangible assets such as legal and registration fees incurred to obtain an intangible asset.
Q1927. Legal fees incurred in defending an intangible asset
A1927. Successful = Capitalize Unsuccessful = Expense
Q1928. Goodwill
A1928. Goodwill is the representation of intangible resources and elements connected with an entity
Q1929. How many ways to calculate goodwill?
A1929. There are two ways to calculate goodwill, Purchase of assets and, Purchase of equity
Q1930. Purchase of assets
A1930. Compares the cost of the acquired business with the fair value of the net tangible and identifiable intangible assets. The excess of cost over the FV of the nets assets is goodwill
Q1931. Purchase of equity
A1931. This method involves the purchase of a company’s capital stock. Goodwill is the excess of the stock purchase price over the fair market value of the net assets acquired.
Q1932. Maintaining goodwill
A1932. cost associated with maintaining, developing, or restoring goodwill are not capitalized as goodwill instead they are expensed . Goodwill generated internally or not purchased is not capitalized as goodwill
Q1933. Research and Development
A1933. General Rule = expense Exceptions: - Materials, equipment, or facilities that have alternate future uses (depreciate assets) - R&D costs of any nature undertaken on behalf of others under a contractual arrangement
Q1934. Computer software development costs (developed to be sold, leased, or licensed)
A1934. Expense cost incurred until technological feasibility has been established for the product Capitalize costs incurred after technological feasibility has been established for the product
Q1935. What is technological feasibility
A1935. A detailed program design or Completion of working model
Q1936. Annual amortization of capitalized software costs
A1936. greater of percentage of revenue = Total capitalized amount X (current gross revenue for period/ total projected gross revenue for period) Straight line= total capitalized cost/ estimate of economic life
Q1937. What are the 3 methods of accounting for equity securities?
A1937. 1. Cost 2. Equity 3. Consolidated FS
Q1938. What are 2 Equity Method Criteria?
A1938. 1. Significant influence 2. Between 20% and 50% ownership
Q1939. What are the JE’s for earnings and dividends under the equity method?
A1939. Earnings: DR Investment CR Investment Income Dividends: DR Receivable CR Investment
Q1940. How are intercompany profits and losses eliminated for the equity method?
A1940. E’s profit on sale of inv. to R / Sale price = E’s gross margin ratio x E’s inv. still in R’s end. inv. = E’s recorded profit on R’s ending inv. DR Investment income (profit x ownership) CR Investment
Q1941. What must be done when changing to the equity method?
A1941. The investment acct, results of operations, & RE must be retroactively adjusted.
Q1942. What are the 3 categories of investments in marketable securities?
A1942. 1. Held-to-Maturity (HTM) 2. Trading 3. Available-for-Sale (AFS)
Q1943. What are 3 Held-to-Maturity (HTM) Security Characteristics?
A1943. 1. Reported at amortized cast, FV must be disclosed 2. Not adjusted for unrealized holding gains/losses 3. Investor has intent & ability to hold to maturity
Q1944. What are 3 Trading Security Characteristics?
A1944. 1. Debt or equity securities w/ purpose of selling in near future 2. Reported at FV, if determinable. 3. Unrealized holding gains/losses included in current earning.
Q1945. What are 3 Available-for-Sale (AFS) Security Characteristics?
A1945. 1. Debt or equity securities not classified as Trading or HTM 2. Reported at FV, if determinable. 3. Unrealized holding gains/losses reported in OCI.
Q1946. How is a decline in FV that is other than temporary accounted for under AFS or HTM?
A1946. Write down the investment to FV & a realized loss is recognized in current earnings.
Q1947. Under the cost method, is the investment acct for earnings or dividends adjusted?
A1947. No. Except for liquidating dividends
Q1948. What is an example of a liquidating dividend?
A1948. A dividend distribution in excess of earnings after acquisition.
Q1949. If a partial disposal of an Equity Method investment makes it less than 20%, should you stop accruing your share of the investee income?
A1949. Yes. A change in the method of accounting must be made to the cost method.
Q1950. When a security is transferred TO Trading, what is done with unrealized holding G or L?
A1950. Recognize in earnings immediately.
Q1951. What happens when a security is transferred FROM Trading?
A1951. Previously recognized unrealized holding G or L are NOT reversed. Security is transferred at FV with G or L recognized upon transfer.
Q1952. When a debt security is transferred from HTM to AFS, what happens to unrealized holding G or L?
A1952. Recognize in OCI
Q1953. When a debt security is transferred from AFS to HTM, what happens to unrealized holding G or L?
A1953. Report in OCI & amortize over security’s remaining life.
Q1954. Upon disposal of an Equity Method investment, what is the G or L?
A1954. Difference between the carrying amount at the date of disposal and its sale price.
Q1955. Upon disposal of a Cost Method investment, what is the G or L?
A1955. Difference between the carrying amount and the proceeds.
Q1956. Do changes in the common stock market value affect an Equity Method investment?
A1956. No.
Q1957. For AFS or HTM, what is the G or L from a sale?
A1957. Difference between net proceeds and the cost or unamortized cost of the security.
Q1958. For Trading, what is the G or L from a sale?
A1958. Difference between net proceeds and the FV at the most recent balance sheet date.
Q1959. For AFS, is regard given to previously recognized unrealized losses or recoveries?
A1959. No regard given.
Q1960. What is a financial instrument?
A1960. Cash, evidence of ownership interest in an entity, or a contract w/ obligation and rights
Q1961. What are the 3 characteristics of a derivative instrument?
A1961. 1. Underlying & notional amount or payment provision 2. Zero or small investment 3. Net settlement
Q1962. What is an underlying?
A1962. A specified interest rate, security price, commodity price, foreign exchange rate, index of prices or rates, or other variable.
Q1963. What is a notional, or face, amount?
A1963. A number of currency units, shares, pounds, or other units.
Q1964. How can a derivative be an asset or a liability?
A1964. Because it is both a right & obligation.
Q1965. How are changes in FV of non-hedge derivatives reported?
A1965. Gains or losses in earnings.
Q1966. What 3 ways are unrealized G or L’s from changes in FV of hedge derivatives is accounted for?
A1966. 1. FV Hedge - reporting in earnings. 2. Cash Flow Hedge - effective portion in OCI, ineffective portion in earnings. 3. Foreign Currency Hedge - same as 2.
Q1967. What are the characteristics of the 3 types of Hedging Derivatives?
A1967. 1. FV Hedge - exposure to changes in FV of A or L. 2. Cash Flow Hedge - exposure to variable cash flows on existing, recognized A or L. 3. Foreign Currency Hedge - exposure of net investment in foreign operation.
Q1968. What are the JE’s to record the commodity futures at (1) the current date, and (2) the date of acquisition?
A1968. 1. DR Investment in Futures CR Due to Broker 2. DR Investment in Futures CR Unrealized Gain on Derivative-OCI
Q1969. What is the JE to record the summary entry for (1) the purchase of inventory and, (2) the realization of gain on commodity furtures?
A1969. 1. DR Inventory CR Investment in Futures 2. DR Unrealized Gain on Derivative-OCI CR Gain on Derivatives
Q1970. Who pays for freight charges when shipped FOB Shipping Point? When is title passed?
A1970. The buyer. Title passes when goods are shipped.
Q1971. Who pays for freight charges when shipped FOB Destination Point? When is title passed?
A1971. The seller. Title passes when goods are received by the buyer.
Q1972. When more than one trade discount is given, what is the proper accounting?
A1972. Apply to the declining balance successively. (i.e. price = $100, discounts = 20%, 10%) $100 - 20%(100) = $80 - 10%(80) = $72
Q1973. What are the two allowance methods of estimating uncollectible receivables?
A1973. 1. Percentage-of-Sales Method. (based on credit sales) 2. Percentage-of-Outstanding-Receivables Method.
Q1974. What are the JE’s for (1) recording bad debt expense, and (2) recording accounts written off? (same for both allowance methods)
A1974. 1. DR Bad Debt Expense CR Allowance for Uncollectible Accts 2. DR Allowance for Uncollectible Accts CR Accounts Receivable - John Doe
Q1975. Notes Receivable can be classified as two types, what are they?
A1975. 1. Interest-bearing (interest paid in addition to face amount). 2. Noninterest-bearing (interest included in face amount).
Q1976. How are notes receivable valued?
A1976. At present value
Q1977. How are noninterest-bearing notes valued?
A1977. PV or the FV of the property, good, or service exchanged, whichever is more clearly determinable.
Q1978. For noninterest-bearing notes, how should the discount or premium be accounted for?
A1978. Amortized over the life of the note by use of the Interest Method.
Q1979. What are the 3 methods of measuring impairment on a receivable?
A1979. 1. PV Method 2. Market Price Method 3. FV of Collateral Method
Q1980. How is the PV Method of receivable impairment measured?
A1980. PV of future principal & interest cash inflows.
Q1981. How is the Market Price Method of receivable impairment measured?
A1981. Loan’s observable market price.
Q1982. How is the FV of Collateral Method of receivable impairment measured?
A1982. FV of collateral pledged, if the loan is collateral-dependent. Method used for foreclosures.
Q1983. What are the 4 methods of converting receivables immediately into cash?
A1983. 1. Discounting 2. Assignment 3. Factoring 4. Pledging
Q1984. When converting receivables immediately into cash, what does “with recourse” mean?
A1984. The seller of the note is liable to the buyer for its maturity value. Seller has all the risk.
Q1985. What is the difference between a Periodic Inventory System and a Perpetual Inventory System?
A1985. Periodic: Inventory on hand is periodically determined by physical count. Perpetual: A continuous record is maintained of items going in or out of inventory.
Q1986. What is the Relative Sales Value Method?
A1986. A group of varying units are purchased at a single lump- sum price (basket purchase), total cost of the units is based on their relative sales value.
Q1987. What costs are included in Finished Goods Inventory?
A1987. Direct materials Direct labor Variable overhead Fixed overhead
Q1988. What costs are included in Merchandise Inventory?
A1988. Cost, net of: discounts, freight-in, taxes, insurance while in transit, warehousing, etc.
Q1989. Are interest costs capitalized for inventories?
A1989. Not interest costs for items that are routinely manufactured or otherwise produced in large quantities on a repetitive basis.
Q1990. During periods of rising prices, how is the LIFO inventory cost-flow method affected?
A1990. Higher cost of sales and a lower amount for ending inventory than FIFO.
Q1991. What is the calculation to determine the cost of ending inventory under FIFO?
A1991. 1. The # of units in ending inventory. 2. Segregate ending inventory into price layers, w/ most recent purchase prices. 3. The cost of each layer (unit cost x # of units) 4. Add up the cost of all the layers.
Q1992. Do perpetual & periodic systems of inventory result in the same dollar value under FIFO?
A1992. Yes.
Q1993. For D-V LIFO, how do you calculate the price index?
A1993. Ending Inventory valued at current year costs ————————————————– Ending Inventory valued at base year costs
Q1994. How is the base year dollar cost determined for D-V LIFO?
A1994. In the year of adoption: Total inventory cost —————————— # of units
Q1995. When is a layer of inventory added in D-V LIFO?
A1995. When ending inventory exceeds the beginning inventory (both stated in base year dollars)
Q1996. Which LIFO method requires that records of separate lot prices be kept for each item?
A1996. Quantity LIFO
Q1997. In LCM, what does market mean? What are the exceptions?
A1997. Replacement cost. Exceptions: 1. Market should not exceed the net realizable value (ceiling), 2. Market should not be less than the net realizable value minus normal profit (floor),
Q1998. In LCM, what is net realizable value?
A1998. Estimated selling price less reasonably predicable costs of completion and disposal.
Q1999. What 4 steps are used to find LCM?
A1999. 1. Compare ceiling w/ floor & replacement costs. 2. Use the middle amount for market. 3. Compare that middle amount w/ cost (historical). 4. Use the lower of the two.
Q2000. When the utility of inventory is impaired or otherwise reduced by damage, or any other cause, what inventory method should be used?
A2000. LCM.
