FAR Module 12C

Question 0

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

Answer 0

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

Question 1

Regarding litigation, when should a loss be accrued

Answer 1

If the loss is reasonably estimable and is probable as of the balance sheet date

Question 2

An employer should accrue a liability for employee compensation for future absences if all of what conditions are met

Answer 2

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

Question 3

If benefits accumulate but do not vest what accrual is necessary

Answer 3

Accrual is permitted but not required. Accrual is only definitely required when benefits vest

Question 4

When are gain contingencies recorded?

What rules are specific to litigation?

Answer 4

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

Question 5

What is the fair value option

Answer 5

As discussed in Module 9D, the company can elect the fair value option for reporting financial assets and financial liabilities.

Question 6

How does the fair value option relate to financial instruments and nonfinancial instruments

Answer 6

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

Question 7

This ratio measures the ability to pay current liabilities from cash and near cash items

Answer 7

The acid test/quick ratio

Question 8

What is the formula for the acid test/quick ratio

Answer 8

Cash + net receivables + marketable securities

/ current liabilities

Question 9

This ratio measures ability to pay current liabilities from cash, near cash, and cash flow items

Answer 9

The current ratio

Question 10

What is the formula for the current ratio

Answer 10

Current assets / current liabilities

Question 11

This ratio measures how rapidly cash is collected from credit sales

Answer 11

The receivable turnover ratio

Question 12

What is the formula for the receivable turnover ratio

Answer 12

Net credit sales / average net receivables

Question 13

This ratio calculates the average length of time receivables are outstanding, which reflects credit and collection policies

Answer 13

The number of days sale in average receivables

Question 14

What is the formula for the number of days sale in average receivables

Answer 14

365 / receivable turnover

Question 15

This ratio indicates how rapidly inventory is sold

Answer 15

Inventory turnover ratio

Question 16

What is the formula for the inventory turnover ratio

Answer 16

Cost of goods sold / average inventory

Question 17

This ratio measures the number of days inventory is held before sale and therefore reflects the efficiency of the entities inventory policies

Answer 17

The number of days supply in average inventory

Question 18

What is the formula for the number of days supply in average inventory

Answer 18

365 / inventory turnover

Question 19

This category of ratios measures short-term viability

Answer 19

Solvency ratios

Question 20

This category of ratios measures utilization of assets

Answer 20

Operational efficiency ratios

Question 21

When you see a ratio called “X turnover” what does that mean

Answer 21

The denominator equals X

Question 22

What is the formula for cost of goods sold

Answer 22

Beginning inventory 
plus cost of goods purchased 
equals cost of goods available-for-sale 
minus ending inventory 
equals cost of goods sold

Question 23

What is the formula for cost of goods purchased

Answer 23

Gross purchases 
minus purchase discounts 
minus purchase returns and allowances 
equals net purchases 
plus freight in 
equals cost of goods purchase

Question 24

What is the formula for net credit sales

Answer 24

Gross sales 
minus sales discount 
minus sales returns and allowances 
= net sales 
minus cash sales 
equals credit sales

Question 25

When mixing an income statement item and a balance sheet item what do you do

Answer 25

Take the average of the balance sheet items.

You do this by:

ending balance year 1 + ending balance year 2 /two

Question 26

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

Answer 26

A financial asset

Question 27

IFRS 9 requires that financial assets be measured how

Answer 27

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

Question 28

A financial asset should be measured at amortized cost when

Answer 28

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

Question 29

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

Answer 29

TRUE

Question 30

Under IFRS, when can obligations be reclassified from current to long term liabilities

Answer 30

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

Question 31

What is the definition of a “provision” under IFRS

Answer 31

A provision is a liability that is uncertain in timing or amount

Question 32

Give examples of provisions under IFRS (5)

Answer 32

Taxes payable 
compensated absences 
bad debt 
warranties 
other estimated liabilities

Question 33

What is the definition of a contingency under IFRS

Answer 33

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

Question 34

Under IFRS what is the threshold test for “probable” in determining whether a provision should be made

Answer 34

“More likely than not” or >50%