FAR Module 12C Flashcards
What loss contingencies are not accrued or even disclosed in the footnotes?
Instead these losses are recorded and reported in the period when the event occurs that causes the loss
1) risk of loss or damage of enterprise property by fire, explosion, or other hazards
2) general or unspecified business risks
3) risk of loss from catastrophes assumed by property and casualty insurance companies including reinsurance companies
Regarding litigation, when should a loss be accrued
If the loss is reasonably estimable and is probable as of the balance sheet date
An employer should accrue a liability for employee compensation for future absences if all of what conditions are met
1) the employers obligation relating to employee rights to receive compensation for future absence is attributable to employee services that have already been rendered
2) the obligation relates to rights that vest or accumulate
3) payment of the compensation is probable
4) the amount can be reasonably estimated
If benefits accumulate but do not vest what accrual is necessary
Accrual is permitted but not required. Accrual is only definitely required when benefits vest
When are gain contingencies recorded?
What rules are specific to litigation?
It is best not to recognize gains until they are realized
A lawsuit gain is not recorded until all appeals are exhausted. Then you should still only record an Accounts Receivable as well as a corresponding allowance for bad debt.
Remember, winning does not equal collecting
What is the fair value option
As discussed in Module 9D, the company can elect the fair value option for reporting financial assets and financial liabilities.
How does the fair value option relate to financial instruments and nonfinancial instruments
The fair value option applies to firm commitments (that would otherwise not be recognized at inception) that only involve financial instruments.
Nonfinancial insurance contracts and warranties may only be reported at fair value if the obligation can be settled by paying a third-party to provide the goods and services
This ratio measures the ability to pay current liabilities from cash and near cash items
The acid test/quick ratio
What is the formula for the acid test/quick ratio
Cash + net receivables + marketable securities
/ current liabilities
This ratio measures ability to pay current liabilities from cash, near cash, and cash flow items
The current ratio
What is the formula for the current ratio
Current assets / current liabilities
This ratio measures how rapidly cash is collected from credit sales
The receivable turnover ratio
What is the formula for the receivable turnover ratio
Net credit sales / average net receivables
This ratio calculates the average length of time receivables are outstanding, which reflects credit and collection policies
The number of days sale in average receivables
What is the formula for the number of days sale in average receivables
365 / receivable turnover
This ratio indicates how rapidly inventory is sold
Inventory turnover ratio
What is the formula for the inventory turnover ratio
Cost of goods sold / average inventory
This ratio measures the number of days inventory is held before sale and therefore reflects the efficiency of the entities inventory policies
The number of days supply in average inventory
What is the formula for the number of days supply in average inventory
365 / inventory turnover
This category of ratios measures short-term viability
Solvency ratios
This category of ratios measures utilization of assets
Operational efficiency ratios
When you see a ratio called “X turnover” what does that mean
The denominator equals X
What is the formula for cost of goods sold
Beginning inventory plus cost of goods purchased equals cost of goods available-for-sale minus ending inventory equals cost of goods sold
What is the formula for cost of goods purchased
Gross purchases minus purchase discounts minus purchase returns and allowances equals net purchases plus freight in equals cost of goods purchase
What is the formula for net credit sales
Gross sales minus sales discount minus sales returns and allowances = net sales minus cash sales equals credit sales
When mixing an income statement item and a balance sheet item what do you do
Take the average of the balance sheet items.
You do this by:
ending balance year 1 + ending balance year 2 /two
IFRS uses this term to describe any asset that is cash, an equity instrument of another entity, a contractual right to receive cash or another financial asset, a contractual right to exchange a financial instrument, or a contract that will be settled in the reporting entity’s own equity instruments
A financial asset
IFRS 9 requires that financial assets be measured how
At amortized cost or fair value based on the entities business model for managing the financial asset and the contractual cash flow characteristics of the financial asset
A financial asset should be measured at amortized cost when
If the business model’s objective is to hold the asset in order to collect contractual cash flows and the terms of the contract indicate specific dates for the payment of principal and interest on the principal amount outstanding
T/F
similar to the US GAAP fair value option, an entity under IFRS may also elect at initial recognition to value a financial asset at fair value through profit or loss
TRUE
Under IFRS, when can obligations be reclassified from current to long term liabilities
Only when there is an agreement to refinance in place prior to the balance sheet date.
This is different under US GAAP where you only need the intent and ability to refinance
What is the definition of a “provision” under IFRS
A provision is a liability that is uncertain in timing or amount
Give examples of provisions under IFRS (5)
Taxes payable compensated absences bad debt warranties other estimated liabilities
What is the definition of a contingency under IFRS
If the outcome is probable and measurable it is not considered a contingency as we studied under US GAAP. Under IFRS, this is a provision.
The term contingency is used to describe an event which is not recognized because it is not probable that an outflow will be required or the amounts cannot be measured reliably.
A contingency will be disclosed if the economic benefits are probable under IFRS
Under IFRS what is the threshold test for “probable” in determining whether a provision should be made
“More likely than not” or >50%
