FAR CPAexcel (Old) Flashcards
What are the requirements in applying the FV option?
- Applied on instru by instru basis
- Applied to an entire instru
- Irrevocable except at a new election date
- If applied to HTM and AFS, these sec will be treated as trading sec (the traditional measurement method for HTM is amortized cost)
When using fair value, what disclosures are required only in annual statements?
The methods and significant assumptions used to estimate fair value are only required in annual statements
Define FV
Fair value is the price that would be received to sell an asset or price that would be paid to transfer a liability in an orderly transaction between market participants at measurement date.
Note that FV is an exit price. FV is NOT an entry price (entry price can also be called as transaction price).
what traditional method is used to measure A/R?
NRV (net realizable value)
The general-purpose external financial report (also called the annual report) is prepared by applying Generally Accepted Accounting Principles (GAAP). The general-purpose external financial report has 7 components:
- income stmt
- stmt of comp income
- balance sheet
- stmt of changes in OE
- stmt of cash flows
- footnote disclosures and supplementary schedules
- auditor’s opinion
what does GAAP include?
- Pronouncements issued by CAP (committee on accounting procedure), APB (accounting principles board), and FASB.
- FASB Codification is the sole authoritative source for such GAAP and includes guidance from the above sources. For publicly traded entities, they also have to follow SEC guidance.
What is excluded from the Codification? there are 5 of them. memory mnemonics: corgi - a cute little dog is excluded from ASC
The Codification does not include accounting guidance related to:
- other comprehensive basis of accounting
- income tax basis accounting
- cash basis accounting
- regulatory accounting principles (e.g., insurance)
- governmental accounting standards
Does FASB ASC include SEC guidance?
ASC includes relevant SEC rules and interpretative releases (applicable only to publicly traded firms). ASC includes relevant portions of SEC content but does not contain the entire text of relevant SEC rules, regulations, interpretive releases and staff guidance. For example, ASC does not include SEC content related to MD&A (Management’s Discussion and Analysis) and other items presenting outside the financial statements.
Both U.S. and international GAAP reflect the _________ basis of accounting
Both U.S. and international GAAP reflect the accrual basis of accounting
The revenue and expense are recorded in the period the economic event _______ .
The revenue and expense are recorded in the period the economic event occurred
Explain accruals and deferrals:
- when the economic event occurs first you create an accrual account (you are accruing the cash owed or to be paid as an asset or liability)
- when the cash activity occurs first you create a deferral account (you are deferring the recognition of an expense or revenue as an asset or liability).
The income statement is prepared by applying the all-inclusive approach. That is, almost all revenues, expenses, gains, and losses are shown on the income statement and are included in the calculation of net income. What does it not include?
Exceptions are prior period adjustments and OCI items
- PPA are the effects of corrections of errors affecting prior year net income. Prior period adjustments are shown on the Statement of Retained Earnings as adjustments to the beginning balance of retained earnings in the year the error is discovered.
- OCI includes unrealized gains and losses on available-for-sale, certain pension adjustments, foreign currency translation adjustments, and hedge accounting (OCI items reflect non-owner changes in equity)
what’s another name for balance sheet?
stmt of financial position
2 presentation formats for balance sheet
- account form
In the account form, the assets are shown on the left side of the page, and the liabilities and owners’ equity are shown on the right side. This format emphasizes the balance sheet equation: A=L+OE.
- report form
In the report form, which is the most popular form, the three categories of accounts are listed from top to bottom, as in a report, with assets always shown first.
presentation order of balance sheet items
- Assets are presented in order of decreasing liquidity. The most liquid assets (such as cash) are shown first, and less liquid assets are shown last (such as property, plant and equipment).
- Liabilities are shown in order of maturity. Current liabilities are presented first, and then, long-term liabilities are presented.
- Owners’ Equity items are shown in order of permanence. For a corporation, the contributed capital accounts are shown first and retained earnings is typically shown as the final item in Stockholders’ Equity. Retained earnings are thought to be less permanent due to the fact that dividends are a distribution of earnings.
definition of balance sheet items: CA & CL
- Current assets – Assets that are in the form of cash, or will be converted into cash, or consumed within one year of the balance sheet date or the operating cycle of the business, whichever is longer
- Current Liabilities – Liabilities that are due in the upcoming year or in the operating cycle of the business, whichever is longer, and that will be met through the transfer of a current asset or the creation of another current liability. Both criteria must be met in order for a liability to be classified as current.
- Remember, the current portion of long-term debt is classified as current; it is the amount of debt previously classified as long-term that is now due within one year of the balance sheet date
Several different measurement bases are currently used in the balance sheet. For example, an account receivable listed at $10,000 does not necessarily mean the same thing as $10,000 listed for an intangible asset.
Account Type & their Measurement Basis
- Property, Plant & Equipment, Intangibles Historical
- Cost and Depreciated/Amortized Historical Cost
- Receivables
- Net Realizable Value
- Inventory
- Lower of Cost or Market
- Investments in Marketable Securities
- Market Value
- Liabilities
- Present Value
- Owners’ Equity
- Historical Value of Cash Inflows and Residual Valuation
what changes does the Statement of Stockholders’ Equity present?
The changes in contributed capital, additional paid-in capital, and retained earnings. These changes arise from the purchase and sale of the entity’s stock, the changes in comprehensive income, and the payment of dividends.
cash equivalents are short-term investments that:
- convertible into a known and fixed amount of cash, and
- have an orginal maturity to the purchaser of 3 months or less
- a U.S. treasury obligation purchased when there are three months or less remaining to maturity is a cash equivalent. Investments in stocks are not cash equivalents because they have no maturity value and are not convertible into a specific unchanging amount of cash.
- NOTE: In reviewing the SCF, it is important to remember the articulation between the BS and the SCF. If the SCF employs a pure cash definition of funds, the first asset listed on the BS will be cash. If the SCF employs a broader definition of funds (cash and cash equivalents), the first asset listed on the BS will be Cash and Cash Equivalents.
define and give examples of the 3 sections of the stmt of cash flow
- Operating – cash flows related to transactions related to the income statement.
- Operating cash inflows include receipts from customers and interest. Cash outflows include payments to suppliers, to employers, and to taxing authorities
- Investing – cash flows related to the acquisition and disposal of long-term assets and investments (other than cash equivalents and trading securities - these are operating).
- Investing cash outflows include purchases of plant assets and investments. Cash inflows include proceeds from the sale of these items.
- Financing – Cash flows related to the liabilities and owners’ equity sections of the balance sheet.
- Financing cash inflows include issuing debt and equity securities. Cash outflows include retirement of debt and equity securities, and dividend payments.
Changes to authoritative GAAP are accomplished through _________.
Changes to authoritative GAAP are accomplished through FASB Accounting Standards Updates (ASU).
NOTE: ASUs are not authoritative – they are only a vehicle to update the codification and are not permanent in their own right, but a way to amend the codification. When changes to the codification happen, the FASB updates the Codification and issues the ASU simultaneously.
define codification structure
areas > topics > subtopics > sections > subsections > paragraphs
define 9 specific areas and their corresponding numbers of the ASC
- 100: general principles
- 200: presentation (does not address recognition and measurement)
- 300: assets
- 400: liabilties
- 500: equity
- 600: revenue
- 700: expenses
- 800: broad transactions ((transactions involving more than one area such as interest, and subsequent events)
- 900: industry (special industry accounting)
Each subtopic of the ASC has the same 16 sections with the associated numeric identifier:
Subsections – In some cases, a section is divided into subsections to facilitate the exposition. Subsections are not ___________ .
Subsections – In some cases, a section is divided into subsections to facilitate the exposition. Subsections are not numbered.
structure of the ASC: within ASC, paragraph numbers do not change over time. New paragraphs will use a _________ .
structure of the ASC: within ASC, paragraph numbers do not change over time. New paragraphs will use a letter extension.
define the relationship between GAAP and the Conceptual Framework
The framework does not constitute GAAP but rather provides consistent direction for the development of GAAP. The conceptual framework is a “constitution” for developing GAAP.
what is the objective of general purpose financial reporting?
Decison usefulness. The objective of general purpose financial reporting is to provide information about the entity useful to current and future investors and creditors in making decisions as capital providers.
what are the qualitative characteristics of accounting information?
memory mnemonics:
Roger is PC and Materialistic, he’s never on FENCe, and CUT like a V.
(Roger is Politically Correct and a little bit of Materialistic. He is never on FENCe. He likes workout because he wants his body CUT like a V. )
- Primary characteristics are Relevance and Faithful Representation
- Relevance - PCM: predictive value, confirmatory value, material
- Faithful Representation - ENC: free from error, neutrality, completeness
- Enhancing characteristics are CUT like a V
- comparability
- understandibility
- timeliness
- verifiability
Can the two primary qualitative characteristics (Relevance and Faithful Representation) of conceptual framework be conflict? Give examples of when relevance is over faithful representation and in reverse.
NOTE that relevance and faithful representation may conflict
Examples:
- Relevance over faithful representation. Accounting estimates (depreciation, bad debt expense, pension estimates) emphasize relevance over faithful representation. Firms are providing estimates, rather than certain amounts. Reasonable approximations, although they cannot be perfectly reliable, are preferred by financial statement users to either (1) perfect information issued too late to make a difference, or (2) no information at all.
- Faithful representation over relecanve. Using historical cost as a valuation base is an example of emphasizing faithful representation over relevance. Historical cost is very reliable because it is based on past information. But historical cost is considered to be less current and therefore less relevant than market value.
