FAR - Basic Concepts

Question 1

Amount of deferred gross profit relation to collections >12 months beyond BS date should be reported in…

Answer 1

Current Asset section as a contra account - conceptually it is a reduction of an asset and it is in current as it is an asset which is reasonable expected to be realized in cash or sold/consumer in the ‘normal operating cycle’ of the business.

Question 2

Which principle pertains to the writeoff of a patent?

Answer 2

Immediate recognition - assets in prior periods discovered to be impaired are charged as expense

Question 3

Under installment basis, for a property that is acquired and then sold, how much of the gain is recognized in the income statement at year end?

Answer 3

Sale price less cost = gain.
As collection is reasonably assured (ex: appreciation and high credit rating), entire gain is recognized at time of sale.

Question 4

How to report royalty revenue at year end if given 2010 and 2011, royalties receivable and unearned royalties, and royalty remittance amount?

Answer 4

Note the remittance amount is broken up between earned and unearned revenue. Set up T account for royalties receivable: beg bal - cash + earned royalties = ending bal. Unearned royalties are added separately.

Question 5

When are initial franchise and continuing franchise fees recognized as revenue?

Answer 5

Initial franchise fees are recognized as revenue when all of the initial franchisor services are substantially performed. Continuing fees are recognized as they are earned.

Question 6

If moving from cash to accrual basis, how are supplies impacted if unknown beg bal?

Answer 6

Supplies expense is impacted leading to understate expense, overstating income. As cumulative expense is properly stated, no effect on RE.

Question 7

Completeness is an ingredient of Relevance &/! faithful representation?

Answer 7

Completeness is ingredient of faithful representation but not of relevance

Question 8

Under the installment method, GP on an installment sale is recognized in income when?

Answer 8

In proportion to cash collections received.

Installment method only used when collection of the sale price is not reasonably assured.

Question 9

Under installment method, how can you calculate AR if given GP rate and deferred GP?

Answer 9

Deferred GP / GP Rate = AR

Take the outstanding Deferred GP balance and use corresponding GP rate

Question 10

What does IFRS allow/not allow - LIFO, Completed Contact, Extraordinary items, Lower of cost or Net realizable value

Answer 10

LIFO not allowed, Completed Contact not allowed (use % of completion instead), Extraordinary items not allowed
Lower of cost or Net realizable value used to value inventory

Question 11

Which characteristic related to both accounting relevance and faithful representation?

Answer 11

Comparability applies to both
Free from error- faithful rep only
Predictive value - relevance only
Neutrality only refers to the quality of faithful rep

Question 12

When is installment sales method of revenue rec used?

Answer 12

When sales are material, and collection of the sale price is not reasonable assured

Question 13

How is a new FASB statement issued?

Answer 13

After a majority vote of the FASB members

Question 14

What does and does not interact with both relevance and faithful representation to contribute to the usefulness of info? Comparability, Timeliness, Neutrality, Understandability

Answer 14

Comparability, Timeliness, Understandability - both

Neutrality - component of faithful rep, not relevance

Question 15

What is included in comprehensive income?

Answer 15

Revenues, expenses, gains, losses, and intermediate components such as GM, Operating income, Contribution margin, Income from continuing operations - it is COMPREHENSIVE. Does not include investment by owners or distribution to owners.

Question 16

How much should the liability for accrued interest be 16 months in, at year end for a two year note, interest and principal payable at end of two years? The company does not elect the fair value option for reporting this note.

Answer 16

Although interest does not need to be paid until the end, proper accounting requires an adjusting entry be made to accrue the years interest expense, so 16 months is accrued

Question 17

What fixed asset fund can you record depreciation on? Capital Projects, General, Internal Service, OR Special Revenue

Answer 17

Internal Service fund provides services on a cost basis to other govt funds so to recoup the costs of capital assets, depreciation must be taken and computed in the service charges to other funds. - similar to a business enterprise

Question 18

For marketable debt securities AND marketable equity securities, do they have to be reported at quoted market prices in a personal statement of financial condition.

Answer 18

Yes to both, as both are marketable

Question 19

Under IFRS, a voluntary change in accounting method is applied -

Answer 19

Retrospectively - applying the policy as if the policy had always been applied

Question 20

How do you account for a 3 year insurance policy that is paid in full before it expires? Original payment was recorded as a prepaid asset, what is impact on total assets and SE in final year?

Answer 20

Both total assets and SE decrease as the premium (a prepaid asset) must be amortized to expense. Increase in expense, decreases SE and prepaid assets.

Question 21

According to IASB, two criteria required for incorporating items into the income statement or statement of financial position are

Answer 21

Meets definition of an element and can be measured reliably.

Comparability, consistency, relevance, and reliability are qualitative characteristics.

Question 22

How should subscription revenue be recorded if they are collected already?

Answer 22

Revenues are to be recognized when realized and earned, thus it is unearned subscription revenue. Treatment of collection for tax purposes does not determine treatment for financial accounting purposes.

Question 23

How does an increase in inventory and AP impact (add to /deduct from) cash payments to suppliers to get COGS?

Answer 23

Cash pmts to suppliers + Increase in AP - Increase in Inventory = COGS
An increase in inventory means costs of items purchased are unsold. Increase in AP means items purchased have not been paid for and not included in cash payments.

Question 24

What does the concept of faithful representation in financial reporting include?

Answer 24

Info is representationally faithful if it is neutral, complete, and free from error.

Question 25

Cash basis shows 150k in pretax income, what is accrual basis showing if AR decreased by 20k and AP increased by 16k?

Answer 25

Cash basis is higher by 36k, AR decreased meaning 20k more cash was received and AP increased meaning accrual basis expenses were 16k more than cash payments. Accrual basis net income = Cash basis - 20k - 16k

Question 26

According to FASB, earnings are the same/ exclude gains and losses that are included/excluded from comprehensive income

Answer 26

Earnings and comprehensive income have the same broad components but are not the same because certain classes of gains and losses are included in comprehensive but excluded from earnings

Question 27

What impacts deferred gross profit for installment sales?

Answer 27

Depends on installment sales less cost of installment sales and % of collections on total installment sales.
Regular sales, cost of regular sales, general and admin expenses do not affect deferred GP account

Question 28

Is cash collection a critical event for income recognition in the cost recovery method AND the installment method?

Answer 28

Yes to both. Under cost recovery, no profit is recognized until cumulative cash exceed the cost of asset sold. Both methods require cash collected before income is recognized.

Question 29

Trademark was licensed for royalties of 10% of net sales of trademarked items. Returns estimated at 1% of gross sales. 75k advance was paid against future royalty earnings. Gross sales for items were 600k. How much should company that offered trademark report as royalty income?

Answer 29

Advance does not matter. The 1% returns have to be subtracted from gross sales to determine NET sales, then take 10% for 59,400.

Question 30

Under Statement of Financial Accounting Concepts 6, the term RECOGNIZED is synonymous with RECORDED/REALIZED/MATCHED/ ALLOCATED

Answer 30

RECORDED - process of formally recording an item into FS
Realized is incorrect as it identifies G/L on assets disposed or sold
Matched is for revenue rec with expenses
Allocated is assigning part of revenue or expenses to different periods

Question 31

Under SFAC8, predictive value is an ingredient of the fundamental quality of…

Answer 31

RELEVANCE
Reliability is not in the Concept statements
Verifiability is only an enhancing quality
Representational faithfulness ingredients are completeness, neutrality, free from error.

Question 32

IASB - qualitative characteristics of reliability are…

Answer 32

Neutrality, completeness, prudence, and representational faithfulness, substance over form

Note that predictive value, confirmatory value, and materiality relate to RELEVANCE.

Question 33

Under SFAC8, which relates to both relevance and faithful representation? TIMELINESS/PREDICTIVE VALUE/COMPLETENESS/NEUTRALITY

Answer 33

TIMELINESS - enhancing quality of both
Predictive value relates only to relevance
Completeness relates only to faithful rep
Neutrality is an ingredient of faithful rep, and not related to relevance

Question 34

When is the expenses recognized? Company has 695k balance in advertising expense account before any yearend adj. Included in 695 is 80k for printing for Jan 2011 sales campaign. TV telecast in Dec 2010 billed on Jan2, 2011 invoice of 45k paid Jan11, 2011. What is 2010 year end advertising expense?

Answer 34

660. Do not include the 80 as it is for 2011 and include the 45k. The 45k is an expense and a liability.

Question 35

Franchisee has to pay initial fee of 75k. 30k is paid on signing and the balance is by note, due in 3 annual payments of 15k each. PV of note is 36k. Down payment is nonrefundable and represents services of franchisor. However, there are still substantial services required. Collectability is certain. What does franchisor record for the first year of unearned franchise fees?

Answer 35

36k - Franchise fee revenue is recognized when all material services have been substantially performed by franchisor. 
DR Cash 30k
DR Notes Receivable 45k
CR Discount on note 9k
CR Franchise rev 30k
Unearned franchise 36k

Question 36

FASB: Do consistency and verifiability relate to both relevance and faithful representation?

Answer 36

YES to both - both are enhancing qualitative characteristics

Question 37

Company uses installment method for revenue rec. 2010 sales receivables are 60k to 30k. 2011 are 0 to 69k. Installment sales for 2010 and 2011 are 80k and 90k. Cost of sales is 40k and 60k. What is deferred gross profit in 12/31/2011 BS?

Answer 37

38k - Under installment method, gross profit is deferred at time of sale and recognized by applying GP rate to subsequent cash collections. Deferred GP = GP% X AR balance
GP% = Year sales/GP
2010 GP% is 50% and 2011 is 33.3%
Take YE receivable 30k X 50% + 69k X 33.3% = 39k

Question 38

Company installed cabinets to display its goods in customers stores. It is expected to be used for 5 years. Their income statement should include it in…

Answer 38

1/5 of the costs in SG and A expenses - as depreciation is recognized on the capitalized fixed asset

Question 39

Which accounting pronouncement is the most authoritative? FASB Concepts / Technical Bulletin/ Codification / AICPA Statement of Position

Answer 39

FASB Accounting Standards Codification - effective July 1, 2009 supersedes all previous and is the only source of US GAAP

Question 40

Company uses IFRS. If company cannot reliably estimate income and expenses of customer contracts, they should use which method to recognize revenue?

Answer 40

Cost recovery method - as required under IFRS
% of completion is used when income and expense can be reliably measured.
Completed contract is not allowed under IFRS
Installment method is under US GAAP, not IFRS

Question 41

FASB: predictive is a value of Relevance AND/OR/NOT faithful representation?

Answer 41

Contributes to relevance only

Question 42

Which organization sets International Financial Reporting Standards?

Answer 42

IASB - issues IFRS
IASC set the former Intl Accounting Standards
FASB sets US standards

Question 43

How are organization costs be treated under GAAP?

Answer 43

Expenses immediately - start up costs and organization costs expenses as incurred.

Question 44

Company has disbursements for purchases 580k, increase in AP 50k, decrease in inventory 20k. What is COGS

Answer 44

COGS is BI + Net purchases - EI
Cash has to be adjusted. AP increased meaning that total purchases exceeded cash payments for purchases. Inventory decreased meaning BI exceeded EI by 20k. This is added to payments for purchases to get COGS of 650. Cash paid for purchases + increase in AP + decrease in INV = COGS

Question 45

Company - all insurance premiums paid are debited to prepaid insurance. For interim FS, company makes monthly estimated charges to insurance expense with an offset to prepaid insurance.
Prepaid insurance at Dec 2010 - 150k
Charges to insurance expense during 2011 (including YE adj of 25k) - 625k
Unexpired insurance premiums at Dec 2011 - 175k
What is the total amount of insurance premiums paid by company during 2011?

Answer 45

650k
Set up a T account
Prepaid insurance beginning balance of 150k
Credit of 625k
Debit of premium paid X
Ending balance of 175k

Question 46

Installment method: how to calculate deferred gross profit when given payments including interest?

Answer 46

Interest does not impact the gross profit. Find the gross profit % which is the profit/sale price. Multiply the GP% by the remaining portion of the sales price payments (excluding interest).

Question 47

Cost recovery method: when do you recognize the interest revenue?

Answer 47

No profit (incl interest revenue) of any type can be recognized until cumulative receipts exceed the cost of asset sold.

Question 48

Magazine subscriptions collected in advance are reported as…

Answer 48

Deferred revenue in the liability section of the BS.
Deposit and prepayments for goods or services to be provided in the future are deferred revenues. It is a liability as the company has an obligation to provide goods to those who paid in advance.

Question 49

What are the qualitative characteristics of relevance under IASB and US GAAP?

Answer 49

IASB - predictive value, confirmatory value, materiality
US GAAP - timeliness, predictive value, feedback value
FASB concept statements - verifiability, neutrality, representational faithfulness
Comparability and consistency are a part of relevance in the IASB framework

Question 50

Rent revenue collected 1 month in advance should be accounted for as a current OR accrued liability?

Answer 50

Current liability - as it is unearned. CL are obligations whose liquidation is reasonably expected to require the use of existing resources properly classifiable as current assets or the creation of other CL - includes collections received in advance of delivery of goods or services.
Accrued liability relates to an expense and not unearned revenue.

Question 51

In a barter transaction for goods that are similar in nature and value, how is income recognized?

Answer 51

No income recognized

Question 52

FASB definition: Replacement cost
Current market value
Historical cost
Net realizable value

Answer 52

Replacement cost - equivalent that would have to be paid if the same assets were acquired currently
Current market value - price that would be received to sell a asset or paid to transfer a liability in an orderly transaction in the market
Historical cost - price paid for an asset
Net realizable value - nondiscounted amount of cash or equivalent into which an asset is expected to be converted in due course of the business less direct costs necessary to make that conversion

Question 53

When is it proper to recognize revenues prior to the sale of merchandise?

Answer 53

When the ultimate sale of the goods is at an assured sales price. Only when a sale is effected.

Inventory valuation above cost can only be justified by: an inability to determine approx costs, immediate marketability at a quoted price, and the characteristic of unit changeability.

Question 54

IASB: What is the financial statement element that is defined as increases in economic benefits during the accounting period in the forms of inflows or enhancements of assets or decreases of liability that result in increases in equity, other than those relating to contributions from equity participants is —-

Answer 54

Income - IASB has 5 elements: asset, liability, equity, income, and expense. Income includes both gains and revenue. Profits are income less expenses. “Gain” is not included in IASB.

Question 55

Smith purchased a sole proprietorship for 350. The assets had a carrying value of 375, and market value of 360. GP for the year was 60 and Smith’s drawings were 20. What is reported as Capital - Smith under cash basis FS?

Answer 55

390. The ending balance of the Capital account = Beginning + Investments + Income - Drawing
     Beginning is the cost of the assets purchased (350), NOT the carrying value or market value.

Question 56

How do you account for proceeds received from the advance sale of nonrefundable tickets for a theatre performance before the performance?

Answer 56

As unearned revenue for the entire proceeds. Revenue should not be recognized until earned. When a sale takes place before the delivery of the performance, the revenues should be earned as the performance takes place.

Question 57

Company reported rental revenue of 2210 in its cash basis income tax return for the 2011 YE. Rent receivable for 2011 is 1060 and 2010 is 800. Writeoffs during the year is 30. Under accrual basis, what is reported rental rev?

Answer 57

Create T account for rental receivable
Dr have beginning 800, ending have 1060. On the Cr side, have 2210 as the cash received, and 30 for writeoffs. Then find the plug of the actual revenue.

Question 58

Which expense recognition principle applies to each?
- allocation of insurance cost
- sales commission
depreciation of fixed assets
- officer's salaries

Answer 58

• allocation of insurance cost - systematic and rational allocation
• sales commission - cause and effect (based on presumed direct association with related sales rev)
  depreciation of fixed assets - systematic and rational allocation
• officer’s salaries - immediate

Question 59

Company has royalty agreement. Company has to remit royalty earned and due at 10/31 each year and also pay in advance estimated royalties for next year. Company adjusts prepaid roy at YE. 
1/1 Prepaid Roy is 65
10/31 Roy pmt (charged to roy exp) 110
12/31 YE credit adj to roy exp 25
What should be 2011 prepaid roy?

Answer 59

90
12/31 the balance is 65 as no adj made until YE.
The 110 pmt is debited to roy exp when paid.
At 12/31 the credit adj was
DR: prepaid roy 25, CR roy exp 25
This makes the balance 90

Question 60

When is deposit method used?

Answer 60

1. Until the sale is consummated, when all activities necessary for closing have been performed.
2. If the buyers initial and continuing investments are not adequate to demonstrate a commitment to pay for the property and the seller is not reasonably assured of recovering the costs of the property if the buyer defaults.

Question 61

When is reduced profit method used?

Answer 61

Used only when the initial investment is adequate to demonstrate a commitment to pay for the property but the continuing investments are not. The continuing investments must also meet certain additional reqs for the method to be used.

Question 62

When is cost recovery method used? When seller’s receivable is subject to future subordination?

Answer 62

Although the sale has been consummated and the initial and continuing investments are adequate to demonstrate a commitment to pay - if the seller’s receivable is subject to future subordination, it means it precludes recognition of profit in full thus cost recovery is used.

Question 63

When is full accrual method used?

Answer 63

Used only if profit on the sale indeterminable, the earning process is virtually complete, and all of the below:

1. sale is consummated
2. buyers initial and continuing investments are adequate to demonstrate a commitment to pay
3. seller’s receivable is not subject to future subordination
4. the seller has transferred to the buyer the usual risks and rewards of ownership and they no long have a substantial continuing involvement in the property

Question 64

Recognizing depletion expense is an example of Allocation and/or Amortization - YES/NO?

Answer 64

BOTH YES. Allocation is defined as the process of assigning or distributing an amount according to a plan or formula and amortization as an allocation process for accounting for prepayments and deferrals. Allocation is broader and includes amortization. Amort includes recognizing expenses for depletion, deprec, insurance, and earned subscription rev.

Question 65

Historical cost, current market value, discounted cash flow, replacement cost - when are each used in financial accounting

Answer 65

Historical cost - is measurement base
Current market value - in the case of precious metals having a fixed selling price with no substantial cost of marketing
DCF - assets capitalized under long term leases
Replacement cost - inventories when the replacement cost has fallen below historical cost

Question 66

To be relevant, info should have..

Answer 66

Confirmatory value, predictive value, or both.
Verifiability is an enhancing characteristic.
Understandability is only related to quality of info to user.
Costs and benefits are constraints related to accounting info.