FAR Flashcards- Ninja notes
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
Managerial Accounting 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
What are the three components of Relevance?
Predictive value- future trends; Confirming Value- past predictions; Materiality- effects users decisionsg
What are the three components of Faithful Representation?
Completeness- nothing omitted that affects decisions; Neutrality- free from bias; Freedom from Error- no matieral omission or errors
What is the formula for Net Realizable Value?
Sale Price - Disposable fees - Selling Fees = Net Realizable Value
What is the formula for Royalty Income?
Gross Sales - Estimated Returns = Net Sales x Royalty % = Royalty Income
What is formula for Deferred Gross Profits?
AR x GP % = Deferred GP
Given GP amount, what is formula for AP?
AR = (GP Deferred/ GP %)
In a franchise agreement, what are the two parties involved and what are their roles?
Franchisee = You, pay costs to Franchiser and defer income until corresponding revenue recognized; Franchiser= Big company, pay franchise fee to start business and defer revenue until performance takes place
What criteria must be met for “Extraordinary Items”? How is item recorded if criteria not met?
Both unusual and infrequent; if not both criteria met, record as Continued operations
What is a product cost?
Expense matched with revenue associated. Ex: sales commission paid on car sold
What is a period cost?
Expense amortized and recognze with passage of time. Ex: General & Administrative expense - rent, supplies, office staff
What is a business start-up cost?
One-time cost for opening a new business
What is the market approach to valueing assets?
Market transactions and prices value the assets
What is used to value assets using the income approach?
PV, discounts and earnings value the assets
What is used to value assets using the Cost approach?
Value based on replacement cost
Who is the Franchisee in a Franchise transaction?
YOU, pay costs to franchisor and defer revenue until corresponding revenue recognized
Who is the Franchisor in a franchise transaction?
BIG Company- pay franchise fee to start business, defer revenue until performance takes place
What is the definition of Retrospective adjustments?
Prior periods adjusted and goes to OCI
What is the definition of Prospective adjustments?
Going-forward adjustment, Changes referred to in FS Notes
Which accounting changes result in Retrospective adjustments?
Change in Principle of accounting (LIFO vs FIFO invty valuation) and Change in Equity (Equity method to Consolidated FS)
Which accounting changes result in Prospective adjustments?
Change in Accounting Estimate (Straighty line to Double declining depreciation)
What is the purpose of Regulation S-K?
Under Securities Act of 1933; Company presents IPO, must obey Regulation S-K
Which sections are included under Regulation S-K?
General business and securities info, Financial, Mgt & Security holder info, Registration statement and prospectus provision, Industry guides w/ exhibits and asset back security, Roll-up transactions and mergers, Oil & Gas disclosures (if apply)
What is the formula for Depreciation basae?
Historical cost to new custommers - Salvage value = Deprec. Base to new owners
Who issues IFRS?
International Accounting Standards Board (IASB)
Which assumptions are made under IFRS?
Entity is going conern, Entity uses Accrual basis of accounting
What is the objective of the IFRS Framework?
Provides users with information
What is the purpose of the IASB Framework?
Helps to develop standards, it is NOT a standard itself nor does it supersede any standard’s authority
What is the criteria for recognition under IFRS?
Value must have a) Probable future economic benefit, b) Can be measured reliably
Which method is used when value or outcome cannot be measured reliably?
Cost Recovery Method
What is the Date of Transition?
First reporting period that an entity produces full comparative FSs using IFRS
What is the most efficient method for converting PP&E assets to IFRS?
Fair Value election
What are Contingencies?
Uncertain future events; GAAP- Probable, Reasonably possible, or Remote
What are Provisions?
If “probable” and “Measurable” according to IFRS; Payment is uncertain in Timing or amount
How can bonds be recorded on the Statement of Financial Position under IFRS?
Fair Value through Profit or Loss, Amortized Cost
How are bonds recorded using the Fair Value through Profit or Loss method?
Liability revalued at the end of each period, Gain/ Loss recognized in period
How are bonds recorded using the Amortized Cost method?
Using effective interest method
How are deferred taxes recorded under IFRS?
Using the “Liability Method”; all deferred tax liabilities must be reported, only “probable” deferred tax assets can be reported
When can Deferred Tax assets and liabilites be netted?
ONLY if they are related to the same country/ taxing authority
Which tax rate is used under IFRS?
Enacted tax rate OR Substantially enacted tax rate
Which tax rate is used under GAAP?
Enacted tax rate ONLY
How are Fixed Assets valued under IFRS?
Cost model- asset carried at Cost - Accum Deprec & Impairment Loss, Revaluation Model- asset adjusted to FV - Accum Deprec
Under Revaluation Model, how are adjustments in value treated?
Increase in value from adjustment reported in current period as OCI, Decrease in value from adjustment treated as expense
What criteria must be met for Revaluation Model of valuing Fixed Assets?
Asset must be able to be reliably measured, Model must be applied to whole class of assets not just ONE, no guidance on how often assets should be revalued under IFRS
How is Investment Property revalued?
Fair Value model- property is revalued to FV, Profit or Loss is recorded in current period on IS; Cost Model- carried at (Cost- Accum Deprec), FV must still be disclosed in the notes to the FS
How are Intangible Assets recorded under IFRS?
Cost model- asset carried at (Cost - Accum Deprec), Revaluation Model- asset adjusted to (FV - Accum Deprec)
How is internally generated Goodwill recognized?
It is NOT recognized
How is an intangible with a finite life amortized?
Amortized over its Useful life
How is an intangible with a indefinite life amortized?
Not amortized, Tested for Impairment at reporting date
When is a lease accounted for as a Finance Lease?
If substantial risks of ownership have passed to the Lessee
What is the Project-unit-credit method related to Defined Benefit pension plans?
Calculates the PV of the defined benefit obligation
How are significant non-cash transactions recorded on the Statement of Cash Flows?
Must be included in the notes to the FS
How are Interest Expenses or Finance Costs classifed on Statement of Cash Flows?
Can be classified as either Operating or Financing, once classificiation is chosen all future costs must be classified there
