FAR Flashcards
If there is commercial substance to an exchange, the exchange is measured at:
Fair Value. The gain is equal to the old asset’s fair value and it’s book value. If the fair value was 30 and its book value is 25, the gain is 5.
How does retail inventory method establish lower of cost or market valuation for ending inventory?
By excluding net markdowns from the cost to retail ratio.
Can consolidated financial statements be prepared from a business combination that was accounted for using the acquisition method OR the pooling of interests method?
Yes to both. The pooling of interest method CANNOT be used anymore for business combinations, combinations that happened before that still need to be consolidated.
Does a foreign sub using the local currency as its functional currency has their financials translated or remeasured?
Translated.
Does a foreign sub using US dollars as its functional currency has their financials translated or remeasured?
Remeasured.
Under translation, common stock is translated at the what exchange rate?
The historic exchange rate.
500 shares of 6%, $100 par callable preferred stock are called at $101. The shares were issued at $103 per share. What is the journal entry to record the retirement?
DR preferred stock for 50,000DR PIC-preferred for 1,500CR PIC retirement of preferred for 1,000CR Cash for 50,500
Working capital:
current assets - current liabilities
Acid test:
(cash + net receivables)/current liabilities
Acc Rec turnover:
Sales/ avg net receivables
Inventory turnover:
COGS/ avg inventory
Times interest earned:
EBIT/ interest expense
Return on total assets:
(net income + after-tax interest expense)/ avg total assets
Return on equity:
Net income / avg owners equity
Dividend payout ratio
Common dividends / net income
What are the 2 primary qualitative characteristics?
Relevance and Faithful representation
2 components of relevance:
Predictive value and confirmatory value
3 components of Faithful Representation
Completeness, neutrality, and free from material error
What are the 4 enhancing characteristics?
Comparability, verifiability, timeliness, and understandability
Times interest earned is:
income before interest and income tax over interest expense
What is a central characteristic of a joint venture?
Shared control. None of the participating parties are likely to have unilateral control of the joint venture.
What is the defensive-interval ratio?
The ratio of quick assets to daily operating expenditures. The ratio is showing the length of time in days that the firm can operate with its present liquid resources- so it’s a liquidity measure.
Inventory turnover ratio:
COGS/ avg inventory for the period
Where are G/L on remeasurment and translation booked?
Remeasurement is on the income statement, translation go in an equity account. Remeasurement is when the foreign sub’s currency is the US dollar. It’s translation if the sub’s currency is the local foreign currency.
Receivables turnover ratio:
Net sales / avg net accounts receivable
What statements are usually included in personal financial statements?
A statement of financial condition and a statement of changes in net worth.
If a donation is conditional, how should it be accounted for?
As a refundable advance.
For donation of specialized services to a nonprofit, at what value should they be recognized?
Fair value.
For a NP, are contributions spread over a few years restricted or non restricted?
The contribution in the current year is non restricted(unless it comes with an actual restriction), and the contributions for future years are recognized at present value and are RESTRICTED.
When are the payments for an “Annuity Due” made?
At the beginning of each period.
How is a lease payment calculated when the lease payments are due at the beginning of the period?
You divide the FAIR VALUE of the leased equipment by the ANNUITY DUE rate.
What is the journal entry at the inception of a capital lease and the payments are due at the beginning of each period?
DR: Leased asset for its fair value amountCR: Lease Liability for plug amountCR: Cash for the payment amount
How do you calculate the interest expense at the end of the year on a capital lease with payments at the beginning of the period? What is the journal entry?
You multiply the remaining lease liability amount by the interest capitilization rate.DR: Interest expenseCR: Lease liability
How does the LESSOR in a capital lease determine the amount of Lease Receivable?
Multiply the payment by the number of payments.
What is the journal entry by the LESSOR for a capital lease with payments at the beginning of each period?
DR: Lease receivableDR: Cash for the payment amountDR: COGS for the book value amountCR: Unearned interest for the lease rec amount MINUS the BVCR: Equipment for BV amountCR: Sales for the FV amount
Working capital formula
current assets - current liabilities
Acid test formula
(cash + net receivables) / current liabilities
Acc Rec turnover formula
Sales / avg net receivables
Inventory turnover
COGS / avg inventory
Avg collection period for acc receivable?
Net credit sales / avg net acc receivable…. then you divide 365 by that number
What financial statements are required for the Governmental funds?
1)Balance sheet and 2) Statement of revenues, expenditures, and changes in fund balance
What statements are required for the Proprietary funds?
1)Statement of Net Postition2)Statement of revenues, expenditures, and changes in net position3)Statement of cash flows
What statements are required for the fiduciary funds?
1)Statement of net position2)Statement of changes in fiduciary net positiion
Which fund type does the government-wide financials EXCLUDE that are included on the CAFR?
Fiduciary funds.
What are the 3 sections of the CAFR?
1) Introductory2) Financial3) Statistical
If an investment in 30% of another company is accounted for using the fair value method, what is recognized as net income from the investment?
Cash dividends received and increases in the fair value of the investment are recognized in net income from the investment. The portion of the company’s net income is NOT recognized in net income from the investment.
A contest prize expense is the present value of the?
Total cost incurred. If the prize is an annual $50,000 payment for 20 years and the company takes out an annuity of $418,250 after making the initial $50,000 payment, the contest prize expense in the current year is $468,250.
The ending balance of the asset retirement obligation should be the:
Beginning balance + the DISCOUNTED cash flow estimate of the new asset + accretion expense - the amount paid during the year.
The debt service fund records cash transfers from the general fund as what, and cash payments as what?
Operating transfers and Expenditures.
During a period of inflation, would a perpetual inventory system result in the same dollar amount of ending inventory as a periodic inventory system under FIFO and LIFO?
Yes with FIFO, No with LIFO. The perpetual system would be calculating COGS based on the latest goods acquired prior to each sale versus all the latest goods acquired during the period under a periodic system.
Does a NOL carryforward directly reduce taxes or taxable income?
Taxable income. If the NOL is 40,000 and taxable income is 60,000, then it reduces taxable income down to 20,000, which is then multiplied by the tax rate.
During a business combination, can the acquisition date be before, on, or after the closing date?
It can be any of the 3.
For state or local governments, encumbrances outstanding at year end should be reported as:
Assigned or committed fund balance.
What does income and dividends from a sub do to the investment account under the equity method?
Income increases the investment, and dividends reduce the investment account.
What is the focus of proprietary funds?
Income determination. Proprietary funds use accrual accounting and they are similar in reporting to private businesses.
What is the entry in the General Fund to record equipment purchased with a capital lease?
DR: ExpendituresCR: Other financing sourcesThe general fund doesn’t record fixed assets. The general fund fixed asset account group would record the acquired equipment.
What are funds classified as that can only be used for a specific purpose because of restraints imposed by formal action of the government’s highest level of decision making authority?
According to GASB Statement No. 54, amounts that can only be used for a specific purpose, because of constraints imposed by formal action of the government’s highest level of decision-making authority, should be reported as Committed Fund Balance. The Restricted Fund Balance classification should be used when constraints are placed on the use of resources are either (a) externally imposed by creditors, grantors, contributors, or laws or regulations of other governments, or (b) imposed by law through constitutional provisions or enabling legislation.
What is the process for recording collection of accounts that had been written off?
First you debit accounts receivable and credit allowance for doubtful accounts to restore the amounts that had been written off. Then you debit cash for the amount collected, and you credit accounts receivable to take them off the books since they’ve been collected.
In the general fund, what 3 accounts are affected when property taxes are levied?
Revenue control is credited, property taxes receivable is credited, and allowance for uncollectible taxes is credited. Bad Debt Expense is ONLY an accrual accounting concept, and IS NOT used in modified accrual accounting.
When the direct method for LCM is used, what is the journal entry to write down inventory?
DR: Cost of goods soldCR: Inventory
When using the allowance method under LCM, what is the JE to write down inventory?
DR: Holding lossCR: Allowance for LCM
Under the fair value option, what is recognized as income from the investment company?
Cash dividends and the increase in fair value of the investment are both recognized in net income of the investor.
How does the installment sale method work?
Each payment consists of return of cost and gross profit. You calculate the gross profit percentage by taking the sales price and subtracting the carrying value, and then dividing that number by the sales price. Then you multiply the principal portion of the payment by the gross profit percentage, and then add in the interest payment amount, and that is the amount of revenue to recognize. The return of cost portion of the payment is NOT recognized as revenue.
Gains or losses on retirement of debt used to automatically be classified as extraordinary gains or losses, but now they are:
immediately recognized in full in income from continuing operations.
What rate is used to calculate the amount of dividends from a foreign currency?
The spot rate on the date of declaration is used regardless of translation or remeasurement.
How is the refinancing of a liability due within a year treated under GAAP and IFRS?
Under GAAP, if the refinancing happens before the ISSUANCE date of the financial statements, then it can be considered long term again. Under IFRS, the refinancing has to happen before the BALANCE SHEET DATE for it to be considered a long term liability again.
How is interest expense and dividends paid classified as far as cash flow under IFRS?
Interest expense and dividends paid can be classified as EITHER operating or financing activities.
How is interest revenue and dividend revenue classified under IFRS for cash flows?
They can both be either cash flows from operating OR investing activities.
If the percentage of completion method cannot be applied, how are profits recognized on long-term contracts under GAAP and IFRS?
Under GAAP the profits will be recognized once the job is completed- which is the completed contract method. Under IFRS, all profits will be recognized when all the costs have been recovered- the cost recovery method.
If an IFRS company decides to revalue its equipment each year, what effect would a drop of $2000 in value above regular depreciation be?
It would be a 2000 expense for that year, recognized in income. BUT…. an increase in the value would go under other comprehensive income.
What is the main capital lease criteria under IFRS?
That the lease life is a “major portion” of the equipment life. Thus, a lease of 60% of the equipment’s life would qualify as a capital lease.
If both parties consider a lease to be a capital lease, what interest rate do they both use under IFRS?
They both use the implicit rate built into the contract.
Under IFRS, a contingent loss must be recognized if it is…
More likely than not. Even just 51% vs 49% meets this criteria.
How is a prior service cost due to a change in the projected benefit obligation due to a contractual adjustment treated under IFRS and GAAP?
Under IFRS it is expensed immediately to the extent that benefits have vested. Under GAAP it is recorded to accumulated other comprehensive income and then amortized to expense over the years the employees are expected to work.
A bond with face value of 100k is sold at 110k due to a convert option into common stock. How is this recorded under GAAP and IFRS?
Under IFRS 100k would be the liability and the 10k is recorded as equity. Under GAAP the full 110k is debt until it is actually converted.
How is an impairment loss on equipment determined under IFRS?
A loss must be recognized if the book value exceeds the higher of the PRESENT VALUE of the future cash flows and the fair value less necessary costs to sell the equipment.
GAAP vs IFRS research and development costs?
Under GAAP all research and development costs are expensed as incurred. Under IFRS, research costs are expensed, but development costs are capitalized if the company believes that future economic benefits are probable and that the product being developed is commercially and technically feasible.
How are legal costs to successfully defend a patent treated under GAAP and IFRS?
Under GAAP the costs are added to the cost of the patent. Under IFRS the costs are expensed UNLESS the cost increase the future benefits to be derived from the asset.
How are biological assets valued under IFRS?
At fair value less costs to sell.
How is the reversal of an impairment loss recorded under IFRS?
The recovery of an impairment in value must be recognized if the circumstances that caused the impairment are reversed.
A company has two checking accounts: one with 100k and one with negative 10k. How are they reported under GAAP and IFRS?
Under GAAP the negative is reported as a liability, so the cash line will show 100k. Under IFRS they are netted so the cash line would show 90k.
In a period of rising prices, a company that wants to maximize profits will use what inventory method?
FIFO. In rising prices using FIFO, the earliest goods will be sold first which makes COGS lower and NI higher.
Formula for ending DV LIFO balance:
Beginning DV LIFO + (increase at base-year dollars)(price index)300,000 + (400,000 - 300,000)(1.1) = 410,000
What is the ceiling and floor of LCM?
Ceiling is Net Realizable Value and Floor is NRV less a normal profit margin.
Explain LCM
If replacement cost is within the range of the ceiling and floor, then market is replacement cost.If the RC is greater than the ceiling, then market is the ceiling amount.If RC is less than the floor, then market is limited to the floor amount.
How are trademarks classified, capitalized, amortized, and impaired?
They can be either definite or indefinite life, only expenditures made to external parties are capitalized, amortization depends on whether they are definite or indefinite life, as does impairment.
How are customer lists classified, capitalized, amortized, and impaired?
They can be either definite or indefinite life, only expenditures made to external parties are capitalized, they are amortized, impairment is decided by the recoverable cost test.
How is an initial franchise fee classified, capitalized, amortized, and impaired?
Can be definite or indefinite life, only capitalize expenses to external parties, amortization depends on definite or indefinite, as does impairment.
When a liability has a carrying value less than fair value, does an unrealized gain or loss exist?
An unrealized loss exists. It would be a debit to Impairment loss, and a credit to the liability to increase it to its fair value.
In financial statements prepared on the income-tax basis, how should nondeductible expenses such as meals be reported?
Included in the expense category in determination of income. These are still business expenses and need to be included to calculate income on the financial statements.
For grants, what is a prime factor in determining eligibility for accrual?
The expenditure of resources (spending the money)
What would an entity most likely do to hedge an investment in a foreign operation?
Borrow from another foreign entity with the same foreign currency as the operation being hedged. Since borrowing is a liability, any changes in the foreign currency would offset the investment.
If intercompany fixed asset balances are NOT eliminated, will consolidated income or loss be overstated.
Both can be overstated.
When there is NOT commercial substance to an exchange, gains are recognized:
In proportion to the amount of cash received.
Under the cost method, is the Sub’s income or dividends recognized by the parent?
Dividends are recognized as income to the parent.
When transferring a receivable, the loss is the difference between the carrying value of the portion of the asset transferred and the cash received for the:
Transferred portion. Usually the total carrying value will be allocated between the portion of the asset surrendered and portion retained, based on relative fair values.
For estimating income taxes for personal financial statements, assets and liabilities measured at their tax bases should be compared to assets and liabilities measured at their:
Estimated current value and estimated current amount.
Before assets are distributed as a property dividend, the unrecognized holding gain or loss is:
Recognized. If a firm pays a property dividend of a stock it bought for 20,000 when its market value is 25,000, there is a debit to retained earnings for 25,000 and a gain on disposal of 5,000 is recognized.
Bond prices and interest rates are inversely related. When interest rates increase,
the market value of bonds decrease, because there are now better opportunities on the market.
Are fund-based statements or government wide statements included on a CAFR?
They both are. The gov-wide statements focus on the financial results and health of the gov while the fund based statements report how various revenues are derived and spent.
What are the 3 columns on the gov-wide statements?
Gov activities, business type activities, and total gov activities
Which funds are not included in the gov-wide financial statements?
Fiduciary funds.
How is an internal service fund reported on the gov wide statements if another gov agency is its main beneficiary?
As a gov fund instead of a business type fund.
What accounting basis is used to report the gov wide financial statements?
Full accrual accounting.
What statements are required for the gov wide statements?
The statement of net position and the statement of activities
How would 5 year bonds appear in the fund based statements and the gov wide statements?
They wont show up in the fund based statements because they aren’t a claim against current assets. They will show up as a long term liability in the gov wide statements.
Does a firm selling put options on its own stock affect liabilities or equity?
It increases liability by the fair value of the options.The liability will be extinguished when the option is exercised or when it expires.
When computing avg shares outstanding during the year, how are stock dividends treated?
Stock dividends are treated as outstanding for the entire year. It is when new stock is issued that it is multiplied by the portion of the year remaining.
Is additional compensation to former shareholders after a business combination considered additional costs of the business combination?
No.
Can a forecasted transaction be hedged?
Yes- in a cash flow hedge since it is forecasted and therefore subject to changes in related cash flow.
Is a finder’s fee for a lease expensed or allocated over the lease term?
The finder’s fee benefits the entire lease term and is therefore expensed evenly over the lease term.
What exchange rate is used to TRANSLATE a foreign sub’s income statement?
The average exchange rate.
If a company changes from FIFO to weighted avg inventory during 2005, how is the cumulative effect of the change measured?
The change is measured as of the beginning of the year of change.
Are the direct costs or the general expenses in a business combination deducted from the corp’s net income from the combination?
Both are expensed in the period incurred.
Does the recording of an asset retirement obligation for a natural resources development site increase the liability or the depletion base?
Both. It is a credit to a liability, and a debit to the natural resources account, which is the depletion base.
Under international accounting, the vested portion of prior service cost is immediately recognized in:
Pension expense. The unvested portion is gradually recognized under delayed recognition in pension expense.
If financial statements prepared on another basis besides GAAP are not appropriately titled, the auditor must:
Disclose any reservations in an explanatory paragraph and qualify the opinion for the inappropriate title of the statements.
Under IFRS for SMEs, which inventory valuation method is NOT allowed?
LIFO.
Personal financial statements should report assets and liabilities at:
Estimated current values(fair values) at the date of the financial statements.
What financial statements are included in a set of personal financial statements?
A statement of financial condition (balance sheet) is always included, and a statement of changes in net worth may be included, but is NOT required.
In a personal statement of financial condition, a life insurance policy should be reported at cash surrender value less any:
Loans outstanding against the policy.
In a cash flow hedge, the item being hedged is measured using:
The present value of expected cash inflows or outflows. The item being hedged could be associated with an asset, a liability, or a forecasted transaction.
What is the purpose of reporting comprehensive income?
To summarize all changes in equity from nonowner sources.
What are the “other comprehensive income” items? (4)
Unrealized G/L on AFS securities, unrealized G/L on pension costs, foreign currency translation adjustments, and unrealized G/L on certain derivative transactions.
Who pays the shipping with FOB shipping point?
The title passes to buyer at the shipping point, so the buyer is responsible for paying the shipping charges.
Who pays the shipping with FOB destination?
The seller pays shipping charges to get the goods to the buyer. The title passes to the buyer once they reach their destination.
Under IFRS, how should a company report their investments in bonds when it is a part of their business model to hold such investments solely to receive the cash and interest from principal repayment?
At amortized cost.
Can impairment losses on intangibles be reversed?
No. Losses on plant assets held for disposal can be reversed to the extent of previous losses but intangible impairment losses cannot be reversed.
Which governmental fund type can report a positive amount in the Unassigned fund balance?
The general fund. Other governmental funds cannot have a positive balance in their unassigned fund.
In a sale-leaseback, how is the gain on sale recognized?
It is amortized over the lease term. A 50,000 unearned gain on a sale-leaseback over 10 years will result in 5,000 being recognized in each of the 10 years.
If a city imposes a 2% tax on hotel charges which will be used to promote tourism in the city, what type of nonexchange transaction is this?
It is a Derived Tax Revenue.
How are the different governmental funds reported on the fund-based balance sheet?
The general fund has its own column, then the major funds each have their own column, and then the rest of the individual funds that are not considered major are grouped into a single column.
A fund balance is the amount of assets greater than liabilities. What are the different classes of the fund balance?
Unrestricted- which means it’s none of the below and is available for future use.Nonspendable and restricted. This means the money is restricted as to use by an outside party.Committed means the money is committed to a specific use by the highest level of decision making.Assigned means the money has been assigned by officials that are NOT the highest level of authority.
If a city plans on collecting $10k a month from property taxes for the next 18 months, how much revenue should be reported in year one?
$140,000. 10k for each month of the year plus Jan and Feb of the following year.
How is $10k of bonds reported on the gov wide and fund-based statements?
They are a regular liability on the gov wide statements and “other financing source” on the fund based statements.
How is a bond due in 3 months reported on the gov wide & fund-based statements?
It is ‘bonds payable’ on both.
If a city takes on a project but accepts no liability for the work being done, what type of fund is used.
An agency fund.
How does a transfer from the gen fund to capital projects get reported?
The general fund shows a “other financing use”, the capital projects fund shows a “other financing source”, and both balances will show up in the total gov funds column. This are no eliminations of “intercompany transactions”.
What is the difference between the purchases method and consumption method for the government fund accounting?
Under purchases, the whole purchase is immediately recognized as an expenditure. Under the consumption method, the supplies are moved to expenditures as they are used.
Is a computer or office supplies reported as an asset on the fund-based governmental statements?
Office supplies are an asset- capitalized assets such as a computer are not.
how is a capital lease recorded in the gov fund-based statements?
The PV of the payments is recorded as an expenditure, and an increase in ‘other financing sources’.
Do infrastructure assets get depreciated?
They do unless the modified approach is adopted. Then you have to set a minimum level of acceptable condition and maintain documentation to show that the asset is kept at that level.
For general purpose gov statements, is MD&A required?
Yes, it must be included but it is separate from both the gov wide & fund-based statements.
What are the 3 requirements to be a special purpose gov?
1) separately elected governing body. 2) It is legally independent so that it can sue, be sued, and buy and sell property in its own name. 3) Be fiscally independent of all other governments.
On the statement of activities, what is included in program revenues?
Any revenue generated by the activity, as well as any grants related specifically to that activity. This is then netted against the expense.
In troubled debt restructuring, what does the creditor do, and how do they recognize interest on the restructured loan?
They reduce the amount owed to the present value of future cash flows on the ORIGINAL interest rate. Then, they recognize interest by using the original interest rate times the BV of the new receivable. The debtor recognizes a loss as the difference between the current BV of its receivable and the present value of the future cash flows.
In troubled debt restructuring, what does the debtor do?
They compute the total cash flows now owed. So you take the future interest payments and add them to the new principal amount.
If you have an investment that isn’t enough to be equity method, then you invest more later that does take it to equity method, how is that treated?
The equity method is retroactively applied to the first amount. So if you owned 10% the whole year then bought another 20% at year end, you would recognize 10% of the company’s earnings under the equity method.
How is a capitalized interest problem done? (average accumulated expenditures)
First calculate the average accumulated expenditures. That is taking the amounts spent through the year each multiplied by the portion of the year remaining.Next you calculate avoidable interest. Avoidable interest is the interest on the construction specific loan(s), and then the amount of other debt above the amount of the construction loans.Then calculate actual interest. The lesser of the avoidable interest and the actual interest is the amount that can be capitalized.
When converting financial statements using translation, paid in capital accounts are translated using the ______ rate?
Historic rate in effect when the account arose or the investment was made.
If a firm buys land to build a warehouse on, is the interest from the land loan and the warehouse construction capitalized?
Only interest on the warehouse construction can be capitalized.
If a firm is going to discontinue a segment early next year, but there is a loss in that segment ending this year, how is that loss reported?
As an operating loss of the discontinued segment. This section is below income from continuing ops but above extraordinary items.
What is an accelerated filer and how long do they have after their fiscal year end to file their 10-K?
Aggregate worldwide market value of voting and nonvoting stock of $75 million or more, but less than 700 million. They have 75 days to file 10-K.
What is a large accelerated filer and how long do they have after their fiscal year end to file their 10-K?
Market cap of 700 million or more. They have 60 days to file their 10-K.
A foreign currency transaction is settled in ______ but measured and recorded on the US entity’s books in ________.
Non dollarsDollars.
Where are foreign currency exchange gains or losses on acc rec reported?
In current income as an item of income from continuing operations.
What disclosure is required relating to sinking funds and long term debt?
FAS 47 requires the disclosure of the aggregate amount of maturities and sinking fund requirements for all long-term debt for each of the five years following the balance sheet date. The detail of each year for both is shown.
When does a liquidating dividend occur?
When the investee pays more income than was earned during the period the investor owned the shares of the investee.
Describe the cost method:
The cost method is for an investment that DOES NOT give the investor significant influence. The dividends are recognized in income of the investor. The investment remains on the balance sheet at cost unless there is a permanent decline in value, or there is a liquidating dividend.
Under IFRS, are gains and losses on the changes in fair value of equity investments reported in the income statement or in other comprehensive income?
It can be either. If the investment is held for trading purposes, then the changes in fair value are reported in profit/loss.If it’s NOT held for trading, the investor may elect to report changes in fair value through other comp. income.
What type of investments can be transferred between categories under IFRS?
Only debt. Equity securities are not allowed to be transferred between categories under IFRS. When investments are transferred, prior period statements must be restated for comparative purposes.
Under IFRS, if debt securities are held NOT as part of the business plan, what are they measured at?
Fair value.
Under IFRS, if debt securities are held as part of the business plan, what are they measured at?
Amortized cost.
Under the equity method for GAAP, what effect does the sub’s income and dividends have on the investor’s investment account?
The investor’s share of income increases the investment account, and dividends decrease the investment account. The investor’s share of income from the investee is also recognized as income for the investor.
Which form of business combination results in a NEW legal entity?
Consolidation. In consolidation, 2 or more existing entities are combined into one new legal entity.In a merger, one pre-existing entity is combined into another pre-existing entity. In an acquisition, one entity acquires a controlling interest and both continue to exist as separate legal entities.
