FAR F2 Flashcards
If a contract contains multiple service-related performance obligations what criteria will lead to the treatment of each service as a distinct obligation?
When the buyer can benefit from each service independently or in conjunction with her own available resources and when the promise to deliver each service is separately identifiable from the other services, then the performance obligation overall can be split apart into distinct components.
input and output methods of revenue recognition:
Input Methods:
-Cost-to-Cost: Revenue based on costs incurred to date vs. total estimated costs.
-Labor Hours: Revenue based on labor hours worked vs. total estimated hours.
-Materials Consumed: Revenue based on materials used vs. total estimated materials.
Output Methods
-Milestones Reached: Revenue recognized at specific milestones.
-Units Delivered: Revenue based on units delivered vs. total contract quantity.
-Surveys of Performance: Revenue based on assessed performance to date.
Cuthbert Industrials, Inc. prepares three-year comparative financial statements. In Year 3, Cuthbert discovered an error in the previously issued financial statements for Year 1. The error affects the financial statements that were issued in Years 1 and 2. How should the company report the error?
Financial statements for Years 1 and 2 should be restated. The carrying amounts of the assets and liabilities for these years will be corrected in each year’s financial statements and shown as restated in the three year comparative financial statements. As of the beginning of Year 3, the cumulative effect of the error will have been corrected and reflected in the carrying amounts of the affected assets and liabilities. an offsetting adjustment to the cumulative effect of the error is not made to comprehensive income to correct the error.
If ending inventory is overstated (understated), it implies that
implies that cost of goods sold (COGS) is understated (overstated) by the same amount.
Holt Co. discovered that in the prior year, it failed to report $40,000 of depreciation related to a newly constructed building. The depreciation was computed correctly for tax purposes. The tax rate for the current year was 20 percent. How should Holt report the correction of error in the current year?
As an increase in accumulated depreciation of $40,000. Depreciation expense should reflect the appropriate expense amount for the current year and should not be used to fix prior period errors. Accumulated depreciation (and original depreciation expense) are booked at a gross level (prior to accounting for any tax impact), so the correct adjustment will include a credit to accumulated depreciation of $40,000.
During Year 2, a company identified a Year 1 error that resulted in a $132,000 overstatement of depreciation expense. The company’s effective tax rate for Years 1 and 2 was 30 percent. Correcting the error on the opening Year 2 balance of retained earnings will result in:
An increase of $92,400. An overstatement of expense in Year 1 will result in an understatement of net income for the year. Net income is closed into retained earnings, which means retained earnings at the end of Year 1 were understated. The impact of the understatement in Year 1 is equal to $132,000 × (1 − 0.30) = $92,400.
Correcting the error will add $92,400 to the beginning retained earnings balance in Year 2.
what is the summary of significant accounting policies and what does it include?
it is typically the first note provided after the financial statements and will include components such as: measurement bases, accounting principles and methods, criteria, and policies such as basis of consolidation, depreciation methods, use of estimates, fiscal year definition, Inventory pricing, revenue recognition, etc.
Significant estimates should be disclosed in the footnotes when
it is reasonably possible (not probable) that the estimate will change in the near term and that the effect of the change will be material. Immaterial items are not disclosed.
For subsequent notes, if any, should the company duplicate a description of its changes to significant accounting policies?
No, The first or second note of the financial statements is the Summary of Significant Accounting Policies and includes information regarding measurement bases used in preparing financial statements. The company will not duplicate the information provided in this note in later footnotes. Instead the company will present calculations of the amounts that reflect the new policies.
Disclosure of vulnerability to concentration is required if all of the following criteria are met:
1- The concentration exists as of the financial statement date.
2- The concentration makes the entity vulnerable to the risk of a near-term severe impact.
3- It is at least reasonably possible that the events that could cause a severe impact from the vulnerability will occur in the near term.
What is a recognized subsequent event?
A subsequent event occurs after the balance sheet date but before the financial statements are issued. A subsequent event will only be recognized on the financial statements if it relates to a condition that existed as of the balance sheet date. Entities must recognize effects of all recognized subsequent events in the financial statements.
What is an unrecognized subsequent event?
It is a subsequent event that provide information about conditions that did not exit at the balance sheet date. Entities should not recognize effects of such events in the financial statements. However, they should be disclosed if disclosure is necessary to keep the financial statements from being misleading.
What is the difference between the subsequent event evaluation period for SEC filers and all other entities?
The subsequent event evaluation period for a “filer” (an entity that files its financial statements with the SEC) is through the date that its financial statements are issued. The date that financial statements are issued is the date that its financial statements have been widely distributed to financial statement users in a form and format that comply with GAAP. On the other hand, The subsequent event evaluation period for all other entities is through the date that the financial statements are available to be issued. The date that financial statements are available to be issued is the date that its financial statements are in a form and format that comply with GAAP and all approvals for issuance have been obtained.
Are entities that file financial statements with the SEC required to disclose the date through which subsequent events have been evaluated?
No, entities that file financial statements with the SEC are not required to disclose the date through which subsequent events have been evaluated.
Are entities that do not file financial statements with the SEC required to disclose the date through which subsequent events have been evaluated?
Yes, Entities that do not file their financial statements with the SEC are required to disclose both the date through which subsequent events have been evaluated along with whether that date is the date that the financial statements were issued or the date that the financial statements were available to be issued.
