FAR - Deck 1 all units Flashcards
When is a liability classified as current?
The portion of debt scheduled to mature in the following fiscal year ordinarily should be classified as a current liability.
When is a liability classified as non-current?
If an entity intends to refinance current obligations on a noncurrent basis and demonstrates an ability to consummate the refinancing, the obligation should be excluded from current liabilities and classified as noncurrent.
Note: One method of demonstrating the ability to refinance is to issue noncurrent obligations or equity securities after the balance sheet date but before the financial statements are issued.
When is an asset classified as current?
An asset is classified as current on the statement of financial position if it is expected to be realized within the entity’s operating cycle or 1 year, whichever is longer.
Define current assets
Current assets consist of “cash and other assets or resources commonly identified as reasonably expected to be realized in cash or sold or consumed during the normal operating cycle or 1 year, whichever is longer, of the business.”
What does current liabilities NOT include?
Current liabilities do not include:
Current obligations if an entity
(1) intends to refinance them on a noncurrent basis and (2) demonstrates an ability to do so.
NOTE: The ability to refinance may be demonstrated by
- Entering into a financing agreement meeting all conditions before the balance sheet is issued.
- Issuing a noncurrent obligation or equity securities after the end of the reporting period but before issuance of the balance sheet.
- The amount excluded from current liabilities must not exceed the proceeds from the new obligation or equity securities issued.
- Debts to be paid from funds accumulated in noncurrent asset accounts. Thus, a liability for bonds payable in the next period will not be classified as current if payment is to be from a noncurrent fund.
What are general and administrative expenses?
Day to day operating costs that are not related to sales and production.
They include accounting, legal, and other fees for professional services; officers’ salaries; insurance; wages of office staff; miscellaneous supplies; utilities costs; and office occupancy costs
What is the formula for COGS?
For manufacturer:
Beg. finished goods Inventory
+ COGM
- End. finished goods Inventory
= COGS
For a retailer: Same formula except COGM will be PURCHASES
How does a transaction that is unusual in nature or infrequent in occurrence should be reported as a(n)
Reported as a component of income from continuing operations, but not net of applicable income taxes.
Define selling expenses
Selling expenses (or ‘sales expenses’) are the costs that a business incurs in the process of selling products and services. They include all of the costs of promoting and selling products and services to customers, which means they include marketing costs and direct sales costs and delivery.
What items are subjected to the application of intraperiod income tax allocation?
Income tax expense or benefit is allocated to (1) continuing operations, (2) discontinued operations, (3) other comprehensive income, and (4) items debited or credited directly to shareholders’ equity.
Note: Operating income is NOT subjected to that application.
How is a change in accounting principle accounted for?
A change in accounting principle is accounted for retrospectively, and the cumulative effect of the change is not included in comprehensive income.
What does the statement of Retained earnings comprise of?
NI (Loss) +/- any prior period adjustments (net of tax), + Dividends declared - Treasury stock
What happens to the lease cost recognied in the I/S if the discount rate decreases?
The lease cost increases due to higher interest expense.
NOTE: A decrease in the discount rate increased the PV of lease pmts, leading to a higher lease liability and higher interest expense, increasing the total lease cost recognized in the I/S.
In non-recourse factoring, which party assumes the credit risk of the receivables?
The factor. If the debtor fail to pay, the factor bears the loss, NOT the company that sold the receivables.
Where are the transaction gains and losses for a receivable or payable stated in foreign currency reported?
Should be reflected in current income.
For consolidation financial statements, which exchange rates should be used to translate the value of revenues, expenses, gains, losses, assets and liabilities, in the parent company’s reporting currency? Ex. subsidiary uses Euros and parent uses US$
Revenues, expenses, gains, and losses are usually translated at weighted-average rate for the period.
Assets and liabilities are translated at the exchange rate at fiscal year end.
What is the functional currency of entity?
The functional currency is the currency of the primary economic environment in which the entity operates. Normally, that environment is the one in which it primarily generates and expends cash. (usually the local currency)
Where should translation adjustments for gains and losses be reported in consolidated financial statements?
They should be reported in other comprehensive income.
NOTE: Translation adjustments are gains and losses from translating financial statements from the functional to the reporting currency.
When there is a loss on a payable denominated in a foreign currency, what is the impact on the number of currency units exchanged?
A loss on a payable denominated in a foreign currency results when the number of dollars needed to purchase the fixed amount of the foreign currency increases, that is, when the number of foreign currency units exchangeable for a dollar decreases.
When there is a gain on a receivable denominated in a foreign currency, what is the impact on the number of currency units exchanged?
A gain on a receivable denominated in a foreign currency results when the fixed amount of the foreign currency can be exchanged for a greater number of dollars at the date of collection, that is, when the number of foreign currency units exchangeable for a dollar decreases.
How are material items that are UNUSUAL IN NATURE, INFREQUENT IN OCCURRENCE, OR BOTH reported in the income statement?
These items are reported as a SEPARATE component of income from CONTINUING OPERATIONS NOT net of taxes.
How are the results of a DISCONTINUED OPERATION reported in the income statement?
The results are reported SEPARATELY, NET OF TAX, presented AFTER THE RESULTS OF CONTINUING OPERATIONS
When are share options considered to be dilutive?
Share options are considered to be dilutive if the average market price for the period exceeds the exercise price.
How does the purchase of Treasury stock impact EPS?
The purchase of treasury stock reduces the number of outstanding shares, increasing the earnings per share ratio.
How must a stock dividend or stock split during the year be treated for computing the weighted average number of shares outstanding?
A stock dividend or split occurring at any time must be treated as though it occurred at the beginning of the earliest period presented for purposes of computing the weighted-average number of shares.
In computing the loss per share of common stock, how should cumulative preferred dividends earned or not earned be treated?
When preferred stock is cumulative, the dividend, whether earned or not, is deducted from income from continuing operations and net income, or added to any loss for the year, in computing earnings or loss, per share of common stock.
In computing the loss per share of common stock, how should noncumulative preferred dividends be treated?
When preferred stock is noncumulative, an adjustment is made for dividends declared.
NOTE: If the dividend is cumulative only if earned, no adjustment is necessary except to the extent of available income
The transaction price from contracts with customers generally should not be adjusted for the effect of the time value of money when
1) The time between the payment and the delivery of the promised good or service to the customer is 1 year or less.
2) The transfer of goods or services is at the discretion of the customer.
3) A substantial amount of the consideration promised is variable, and its amount or timing varies on the basis of future circumstances that are not within the control of the entity or the customer.
What are the criteria to recognize revenue over time?
1) The customer simultaneously receives and consumes the benefit.
2) The customer controls the asset as the entity does its work.
3) The asset has no alternative use to the entity and the entity has an enforceable right to payment for work completed to date.
What would result in a deferred tax asset for the current year?
1) Expenses or losses recognized under GAAP in the current year and deductible next year for tax purposes
2) Revenues or gains included in taxable income before they are recognized under GAAP.
What would result in a deferred tax liability for the current year?
1) Expenses or losses are deductible for tax purposes before they are recognized under GAAP.
2) Revenues or gains recognized under GAAP before they are included in taxable income.
Does compensation expenses for a stock option plan or a life insurance premium on the life of a key executive create temporary or permanent differences?
No. Because neither will result in taxable or deductible amounts in future years, they are permanent, not temporary differences.
What is a permanent difference for tax purposes?
A permanent difference is an event that is recognized either in pretax financial income or in taxable income but never in the other. It does not result in a deferred tax asset or liability.
What are some examples of permanent differences recognized in pretax financial income but NOT in taxable income?
Examples of items recognized in pretax financial income but not in taxable income are municipal bond interest, premiums paid by a beneficiary entity on insurance policies for its key executives, and the proceeds from such policies.
What are some examples of permanent differences recognized in taxable income but NOT in pretax financial income?
Examples of items recognized in taxable income but not in financial income are the dividends received deduction and percentage depletion.
How to calculate effective tax rate?
(Total tax divided by pre tax accounting income) x 100
