FAR

Question 1

How are changes in accounting principle applied?

Answer 1

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

Question 2

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

How would it be applied?

Answer 2

A change of principle.

Applied retrospectively.

Question 3

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

How would this change be applied?

Answer 3

A change in accounting principle.

Applied retrospectively.

Question 4

How is a change in accounting estimate applied?

Answer 4

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

No backwards adjustment is made.

Question 5

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

How would this change be applied?

Answer 5

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

It is applied prospectively.

Question 6

How is a correction of an accounting error made?

Answer 6

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

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

Question 7

What are the requirements for a prior period adjustment?

Answer 7

Effect is Material

Is identifiable in Prior Period

Couldn’t be estimated in Prior Periods

Question 8

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

Answer 8

It is treated as a correction of an accounting error.

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

Correction of the error must be included in the footnotes

Question 9

How does an inventory error effect the financial statements?

Answer 9

Effect on Ending Inventory : Effect on Net Income

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

Misstating inventory corrects itself after TWO periods.

Question 10

How is a change in entity recorded?

Answer 10

Applied retrospectively.

All prior periods presented for comparative purposes must reflect the change

Footnote disclosures must be made

Changing to Consolidated Statements

Question 11

What is a temporary difference related to deferred taxes?

Answer 11

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

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

Question 12

What is a deferred tax asset?

Answer 12

Deduction will reduce future income taxes expense.

Question 13

What is a deferred tax liability?

Answer 13

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

Question 14

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

Answer 14

FUTURE enacted tax rate not the current one.

It is never discounted to present value.

Question 15

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

Answer 15

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

Question 16

What effect do permanent differences have on deferred income taxes?

Answer 16

They have no tax impact.

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

Question 17

What is deferred income tax expense?

Answer 17

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

GAAP Method for calculating is theAsset and Liability Approach

Note: IFRS uses the Liability approach only

Question 18

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

Answer 18

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

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

Question 19

How are derivatives recorded?

Answer 19

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

Question 20

How are unrealized gains/losses on trading securities recorded?

Answer 20

Recorded on income statement

Question 21

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

Answer 21

They are included in Other Comprehensive Income.

Question 22

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

Answer 22

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

Initially recorded on Balance Sheet at Fair Value

Gains/Losses recorded on Income Statement

Question 23

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

Answer 23

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

Initially recorded on Balance Sheet at Fair Value

Gains/Losses going to OCI

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

Question 24

Where are gains and losses on foreign currency hedges recorded?

Answer 24

In Other Comprehensive Income (OCI)

Question 25

What disclosures are required for derivative transactions?

Answer 25

Objectives and Strategies

Context to help investor understand the instrument

Risk Management Policies

Complete List of Hedged Instruments

Question 26

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

Answer 26

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

Question 27

What causes a Foreign Currency Transaction G/L?

Answer 27

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

Question 28

Where are Foreign Currency Transaction G/L recorded?

Answer 28

Income Statement

Question 29

Where are Foreign Currency Translation G/L recorded?

Answer 29

OCI

Question 30

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

Answer 30

Current Rate as of the Balance Sheet Date

Question 31

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

Answer 31

Weighted Average Exchange Rate for the year

Question 32

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

Answer 32

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