FAR FLASHCARDS
What is the primary objective of accounting?
To measure income
What is the most authoritative set of accounting pronouncements?
The FASB Codification
All pronouncements fall under the Codification umbrella
What are the 2 Levels of Authority within the FASB codification?
Authoritative and Non-Authoritative
How does managerial accounting differ from financial accounting?
Managerial Accounting has a timeliness focus and is not required to follow GAAP
Which financial reports are required to be filed with the SEC?
Form 10K - Annual and Audited
Form 10Q - Quarterly and Reviewed
What is the focus of financial reports for individual companies?
Focus is on the needs of users to help them make decisions and assessments about the company
Does not make assessments of the economy
What are the Primary Constraints of Financial Reporting?
Cost vs. Benefit
Materiality
What are the Secondary Constraints of Financial Reporting?
Consistency - Year vs. Year
Comparability - Company vs. Company
What are the Qualitative Characteristics of Financial Reporting?
Relevance & Faithful Representation
Relevance - Makes a difference to the user
Includes:
Predictive Value - Future Trends
Confirming Value - Past Predictions
Materiality - Could affect User Decisions
Faithful Representation
Includes:
Completeness - Nothing omitted that would impact the decision-making of a user
Neutrality - Information is presented is without bias
Free from Error - No material errors or omissions
What are the Enhancing Qualitative Characteristics of Financial Reporting?
Comparability Verifiability Timeliness and Understandability
Comparability - Allows users to compare different items among various periods
Verifiability - Different people would reach a similar conclusion on the information presented
Timeliness - Information is made available early enough to impact the decision making of users
Understandability - Information is easy to understand
How does Conservatism affect the recording of accounting transactions?
When an estimate is necessary due to uncertainty conservatism chooses the best option that won’t overstate the financial position of the company
What is an accrual?
Earned (Revenue) or Incurred (Expense) but no Cash Receipt/Outlay yet
What is a deferral?
Cash Receipt/Outlay but not Earned (Revenue) or Incurred (Expense)
What is recognition in accounting?
When an item is recorded and included in the financial statements
Describe fair value with respect to an asset
The price you would receive if you sold the asset
Assumes asset is at its highest and best value
Assumes asset is sold at its most advantageous market to get the best price possible
What market assumptions are made in a fair value assessment?
Buyer and Seller are not Related
Buyer and Seller are Knowledgeable
Buyer and Seller are able to transact - i.e. This isn’t a hypothetical transaction for Fair Value measurement purposes. The buyer actually does have the $10M to purchase the asset you’re trying to value at $10M
Buyer and Seller are both motivated to buy/sell
What items are included in a Level 1 input in the fair value hierarchy?
Price quotes or market prices
For example NYSE or NASDAQ
What items are included in a Level 2 valuation input?
Interest rates
Prime rate
What items are included in Level 3 inputs of the fair value hierarchy?
Unobservable inputs such as assumptions or forecasts
Lowest priority for valuation
What are acceptable valuation techniques for fair value?
Market approach - uses market transactions and prices to value the asset
Income approach - uses present value discounts earnings
Cost approach - uses replacement cost to value the asset
What are current assets?
Cash
Inventory or Assets expected to be converted or consumed during a business’ operating cycle
Deferred Gross Profit on Installment Sales (Contra Asset)
Receivables expected to be collected in 12 months or less
What are current liabilities?
Liabilities that will use current assets during the present operating cycle
What is an accrued liability?
Expense that has been incurred but not paid
Example: rents payable
What is a deferred revenue?
A type of current liability
Payments that have been received but cannot be recorded as revenue yet
Example: Tenant pre-pays rent - Landlord still must perform to earn it and is a liability until this happens
When are revenues recognized?
When they have been earned; i.e. company has performed
What is a gain?
Increase in equity from an activity or event that is not central to the main activities of the business
Can be operating or non-operating
What is a loss?
Decrease in equity from an activity or event that is not central to the main activities of the business
Can be operating or non-operating
What is an operating cycle?
Average time it takes to turn materials or services into Cash
What is the present value of future cash flows?
Valuation method - the current value of a future amount of money using a specific interest rate
What is historical cost?
How much an asset cost - (net of depreciation and amortization)
What is replacement cost?
How much it would cost to reacquire an asset today (Entrance Cost)
What is a market cost?
The sale price of an asset (Exit Cost)
What is Net Realizable Value?
Sale Price of an Asset - Selling/Disposal Fee
When is royalty income recognized? How is it recognized?
Recognized when earned
If the royalty % is applied against net sales then subtract the estimated return amount from the gross sales first and then apply the royalty rate
When is revenue recognized in an installment sale?
Revenue recognized upon receipt of cash
Only used when cash collection is uncertain
What is deferred gross profit?
Gross Profit that can’t be recognized until cash is received
D.GP : Gross Profit % x Accounts Receivable
Pay attention to the year if GP% varies
What is the cost recovery method?
No revenue recognized until all costs are recovered from purchase of the asset
Most conservative method of revenue recognition when collection of sale price is uncertain
What is subscription revenue? How is it recorded?
Payment has been received but performance is not complete.
As company performs revenue is recognized.
Recorded as a Deferred Revenue (Liability) on Balance Sheet
How are franchise revenues recorded?
Franchisor - Startup franchise fee revenue deferred until substantial performance
Franchisee - Costs are deferred until corresponding revenue is recognized
How do you calculate sales revenue starting from cash basis income?
Mnemonic: SPEAR-BAR
Sales (i.e. Customer Payments)
+ Ending Accounts Receivable
- Beginning Accounts Receivable
: Sales Revenue on an Accrual Basis
How do you calculate COGS starting from Cash Basis?
Mnemonic: CRAP-I
Cash Remitted (i.e. paid)
+Increase in Accounts Payable
-Increase in Inventory
:COGS on an Accrual Basis
How are discontinued operations reported? When are they used?
Reported Net of Tax after Continuing Operations but before Extraordinary Items
Company decides to cease operating a segment of its business
Includes Income (or loss) from the period plus the gain (or loss) from disposal
What qualifies as an extraordinary item? How is it recorded?
Both unusual AND infrequent
Reported Net of Tax after Discontinued Operations
Note: Usual or Infrequent Items are reported as part of Continuing Operations
What is constant dollar accounting?
Adjusts assets to reflect a consistent level of purchasing power due to inflation
Uses the Consumer Price Index (CPI)
When are expenses recognized?
When they are incurred. Accrue if not yet paid.
What are accrued expenses?
Those incurred but not paid.
Product costs - Expenses should be matched with associated revenues as they are recognized (sales commission on a used car sale)
Period costs - Expenses amortized and recognized with the passage of time
When should impaired assets be written down to fair value and expensed?
Immediately.
What major items should be classified under General & Administrative (G&A) expenses?
Office staff salaries
Office/building rent
Office supplies
Note: Sales staff salaries and portions of the building assigned to Sales should be allocated to Selling Expense not G&A
What are business start-up costs?
One-time costs for opening a new business
Expensed as they are incurred
When is interest not expensed?
Interest on projects (software) for internal use is not expensed but is instead capitalized
What are the major components of Comprehensive Income?
Net Income + Other Comprehensive Income (OCI):
Revenues/Expenses
Gains/Losses
Cumulative accounting adjustments
Reclassifications adjustments
Non-owner changes in equity
What items are considered cumulative accounting adjustments?
Foreign Currency Translation Adjustments
Unrealized gains on AFS Securities
Minimum Pension Liability adjustment for defined benefit plans
What is the purpose of a reclassification adjustment?
Avoids double counting items that were included in both Net Income and OCI
Example: AFS Securities previously included in OCI are now sold at a loss and reported on the Income Statement
Where is Comprehensive Income reported?
Reported in a Single or Combined Income Statement
What disclosures on accounting policies are required in financial statements?
Accounting Principles used
Basis of Consolidation
Inventory Pricing Methods
Depreciation Method
Amortization of Intangibles
What are some major risks and uncertainties that must be disclosed?
Nature of Operations
Use of Estimates and listing of Significant Estimates
Concentration vulnerability
An entity had modified liability for its interactive data(XBRL) exhibits for a period
Of 24 months from the time the filer first is required to submit interactive data files.
Which of the following SEC filings would not include a set of financial statement
Form 3
Which form is not required to include audited financial statements?
Form 6-K
Under regulation S-X, an entity’s interim financial statements filed with the SEC should include all of the following, except
A statement of cash flows for the most recent first quarter
Under Regulation S-X, an entity’s annual financial statements filed with the SEC should include, at a minimum, two:
Balance Sheet
A company is an accelerated filer that is required to file Form 10-K with the U.S. SEC. What is the maximum number of days after the company’s fiscal year end that the company has to file Form 10- K with the SEC?
75 days
A company is required to file quarterly financial statements with the United States SEC on Form 10-Q. The company operates in an industry that is not subject to seasonal fluctuations that could have a significant impact on its financial condition. In addition to the most recent quarter end, for which of the following periods is the company required to present balance sheets on Form 10-Q?
The end of preceding fiscal year
An XBRL financial statement exhibit is required to be submitted with all of the following SEC filings, except
Forms 3, 4, and 5
Which of the following items in not required to be presented in an exhibit prepared using XBRL when a filer submits Form 10-K to the SEC?
Management’s discussion and analysis (MD&A)
Conceptually, interim financial statements can be described as emphasizing:
Timeliness over reliability
Interim financial reporting should be viewed primarily in which of the following ways?
As reporting for an integral part of an annual period.
For interim financial reporting, a company’s income tax provision for the second quarter should be determined using the:
Effective tax rate expected to be applicable for the full year as estimated at the end of the second quarter.
In general, an enterprise preparing interim financial statements should:
Use the same accounting principles followed in preparing its latest annual financial statements.
WHAT IS THE PURPOSE OF INCOME STATEMENT?
Provide information about the uses of the funds in the income process (expenses)
The uses of funds that will never be used to earn income (losses)
The sources of funds created by those expenses (revenues)
The sources of funds not associated with the earnings process (gains)
WHAT IS THE INCOME STATEMENT USEFUL FOR?
Determining profitability, Value of investment purposes and Credit worthiness. Also useful in predicting information about the future cash flows (the amounts, timing, and uncertainty of cash flows) based on past performance.
WHATS REPORTED ON THE INCOME STATEMENT?
A. Income (or loss) from CONTINUING Operations (individual line items show “gross of tax”, then total reported “net of tax”
B. Income (or Loss) from Discontinued Operations (reported “net of tax”)
C. Extraordinary Items (reported “net of tax”)
Items that are unusual in nature and infrequent in occurrence.
INCOME FROM CONTINUING OPERATIONS INCLUDES WHAT FROM OPERATING AND NON-OPERATING ACTIVITIES?
OPERATING ACTIVITIES- Revenues, cost of goods sold, selling expenses, and administrative expenses
NON-OPERATING ACTIVITIES- (Other revenues and gains and other expenses and losses) and income taxes.
WHATS REPORTED ON STATEMENT OF RETAINED EARNINGS?
Cumulative Effect of Change in Accounting principles (reported “net of tax”)
WHAT ARE THE “NORMAL LOSS” FROM DISCONTINUED OPERATIONS CONSIST OF?
An impairment loss, a gain/loss from actual operations, a gain/loss on
UNDER IFRS, A COMPONENT OF AN ENTITY MAY BE WHAT?
A separate major line of business or geographical area of operations or
A subsidiary acquired exclusively with a view to resale.
Extraordinary items are-NET OF TAX ON THE INCOME STATEMENT (Separately Disclosed.
Is defined as
UNUSUAL AND INFREQUENT
Under U.S. GAAP, extraordinary items are transactions and other events that are:
- Material in nature
- Of a character significantly different from the typical or customary business activities
AND - Not expected to recur in the foreseeable future ,and INFREQUENT
- Not normally considered in evaluating the ordinary operating results of an enterprise.
PROHIBITS THE REPORTING OF ANY AMOUNT AS EXTRAORDINARY ON THE INCOME STATEMENT OR IN THE NOTES TO THE FINANCIAL STATEMENTS
IFRS
should not be reported on a per share basis.
Comprehensive income
ALL NEW GAAP AND SEC AMENDMENTS ARE FULLY
INTEGRATED INTO THE EXISTING
STRUCTURE OF THE CODIFICATION
SEC was established by
the Securities Exchange Act of 1934
has the legal authority to establish GAAP.
SEC
UNDER IASB “Materiality is a component of
RELEVANCE
Under IASB framework, the subcategories of relevance are
Predictive Value
- Feedback Value
- Materiality
Under IASB framework, the subcategories of reliability are
- Neutrality
- Representational Faithfulness
- Substance over form,prudence, and completeness
Is the primary quality of accounting information
Decision Usefulness
In order for information to be useful, it has to be
Relevant to the decision making process
Has the ability to assist users in evaluating
past,present, or future events
Enables decision-makers to confirm prior expectations or to adjust or correct the assessment made
Feedback Value
Information is free from bias and free from outside influences
Neutrality
agreement b/w financial reporting and the resources or events represented
Representational Faithfulness
the information result could be duplicated with the same measurement techniques is called
Verifiablility
What are the measurement attributes for Assets and Liabilities
Historical Cost Current Cost Net realizable value current Market Value Present Value of future cash flows
Performance over period of time is the
income statement
