FAR Module 9A Flashcards
What basis is required by GAAP?
Accrual Basis
What basis violates GAAP?
Cash Basis
Installment sales formula for realized gross profit:
Cash collections * gross profit % = realized gross profit
Installment sales formula for gross profit %:
Net sales - cost of sales = gross profit
Gross profit/net sales = gross profit %
Installment sales formula for deferred gross profit:
Ending a/r * gp% = deferred gross profit
Define Installment sales
When collection of sale price is not reasonably assured we can use the installment sales method which allows revenue to be recognized as cash is collected rather than at the point of sale
Define cost recovery method; how is it different from the installment sales method?
Under the cost recovery method gross profit on the sale is deferred until the cumulative receipts exceed the cost of the asset sold, rather than deferring until some cash is received (like installment sales)
When can a franchise fee be recognized by the franchiser?
Only upon substantial performance of their initial service obligation
SFAC 7 is limited to …. And does not address ….
Measurement issues
Recognition questions
According to SFAC 7, the most relevant measure of a liability always reflects ….
The credit standing of the entity obligated to pay
When you read “expected” think…
Probability
The SFACs are basically the …
Rules to write the rules.
T/F
The SFACs are part of GAAP
FALSE
they seek to provide the theory behind accounting and reporting and only provide guidance when no GAAP exists
The objectives of financial reporting for business enterprises, according to the FASB conceptual framework, are based on…
The needs of the users of information, specifically the primary users
The enhancing qualitative characteristics of financial reporting are:
Comparability, verifiability, timeliness, and understandability
According to the FASB conceptual framework, the process of reporting an item in the financial statements of an entity is:
Recognition
The fundamental qualitative characteristic of faithful representation has what components?
Completeness
Neutrality
Free from error
According to the FASB conceptual framework, an entity’s revenue may result from…
An increase in an asset from primary operations and/or a decrease in a liability from primary operations
Essential characteristics of an asset include:
Probable future economic benefits
Controlled by a particular entity
Occurred as a result of past transactions or events
For a business about to dispose of assets, how should those assets be measured?
Using the net realizable value basis. All other measurement values are not appropriate because these amounts do not reflect the entity’s probable future benefit
If given an installment sales problem that involves a note receivable and thus interest how should the interest be treated?
Interest income is recognized in full and is not subject to the gross profit percentage
What conditions must be met for a company to recognize revenue on separate units under a multiple deliverables arrangement?
The delivered item has value on a stand alone basis and can be sold separately
If the arrangement includes a right of return for the delivered item, the undelivered item must be substantially in control of the vendor
The milestone method of accounting is used to recognize revenue for:
Research and development arrangements
The milestone method of revenue recognition provides that if a substantive milestone is achieved, what amount of revenue is recognized?
Contingent revenue is recognized in its entirety
Who sets IFRS?
IASB
The fundamental qualitative characteristics of relevance includes:
Predictive value & confirmatory value
According to the IASB framework, the two criteria required for incorporating items into the income statement or statement of financial position are that…
It meets the definition of an element and can be measured reliably
IFRS requires what method when the outcome of rendering services cannot be estimated reliably?
Cost recovery method
Component of relevance
Predictive value
Confirmatory value
Increases/decreases in net assets from incidental or peripheral transactions affecting an entity
Gains/losses
The process of converting non cash resources and rights into cash or claims to cash
Realization
The process of formally recording an item in the financial statements of an entity after it has met existing criteria and been subject to cost-benefit constraints and materiality thresholds
Recognition
All changes in net assets of an entity during a period except those resulting from investments by owners and distributions to owners.
Comprehensive income (FASB SFAC 6 definition)
Inflows or other enhancements of assets of an entity or settlements of its liabilities from delivering or producing goods, rendering services, or other activities that constitute the entity’s ongoing operations
Revenues
The amount of cash or it’s equivalent that could be obtained by selling an asset in orderly liquidations
Current market value/fair value
The quality of information that helps users to increase the likelihood of correctly forecasting the outcome of future events based on past or present events
Predictive value
A performance measure concerned primarily with cash to cash cycles
Earnings
Examples of accrual-type JEs
Accounts receivable, other receivables, salaries & wages payable, accounts payable, other payables
Examples of deferral-type JEs
Depreciation, prepaid expenses, unearned revenue
First section of Accounting cycle (steps 1-3)
Prepare transaction journal entries and record them in the journal
Post transaction journal entries to the general ledger
Prepare an unadjusted trial balance
Second section of accounting cycle (steps 4-6)
Prepare adjusting journal entries and record them in the journal. these can include accrual type adjusting journal entries and deferral type adjusting journal entries
Post adjusting journal entries to the general ledger
Prepare an adjusted trial balance
Third section of accounting cycle (step 7)
Prepare the financial statements and footnotes under US GAAP
This will include: the income statement, statement of changes in stockholder equity, balance sheet, and statement of cash flows
Last section of accounting cycle (steps 8-10)
Prepare the closing journal entries and record them in the journal.
Post closing journal entries to the general ledger.
Prepare a post closing trial balance.
Optional step is to prepare reversing journal entries, record them in the journal, and post them to the general ledger
If ending inventory is understated then cost of sales is…
Overstated. Ending Inventory and cost of sales move inversely
The entry to account for allowance for uncollectible accounts is…
Debit bad debt expense.
Credit allowance for uncollectible accounts.
When crediting accounts payable you will most likely debit what account?
Purchases
To recognize inventory that was not recorded what entry do you make?
Debit inventory
Credit cost of sales
What is the account “income summary”?
This account is used to close the books at the end of the period
If you want to correct an error or want to make a prior period adjustment what account do you debit or credit?
If it is a sole proprietorship use the capital account
if it is a large enterprise use retained earnings
When do you record a loss contingency?
When the loss is probable and you can reasonably estimate it
How does a sole proprietor pay themselves?
Using a withdraw account, there are no salary accounts for sole proprietors unless they have other employees.
What is the single source for all US GAAP
The accounting standards codification (ASC)
Define accrual
Accrual is where recognition precedes cash receipt or cash expenditure
Under what basis are expenses recognized as related revenues are recognized? Another way to say this is that you recognize revenues as they are earned, recognize expenses as they are incurred, and match expenses to revenues that those expenses helped to earn
Accrual basis
What basis recognizes income when cash is received and expenses when cash is disbursed
Cash basis
Define Deferral
Cash receipt or expenditure precedes accrual basis recognition
What is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date under current market conditions
Fair value/current market value
What is the amount of cash, or its equivalent, paid to acquire an asset
Historical cost
Define installment sales
Revenue is recognized as cash is collected
What is the non-discounted amount of cash, or its equivalent, into which an asset is expected to be converted during the normal course of business less direct costs to make the conversion
Net realizable value
What do you call costs that are not particularly or conveniently assignable to a product
Period costs
What is the current measure of an estimated future cash inflow or outflow, discounted at an interest rate for the number of periods between today and the date of the estimated cash inflow or outflow
Present Value
What are costs which can be associated with particular sales
Product costs
What term word do we use to describe these assets: related assets received or held are readily convertible into known amounts of cash or claims to cash
The assets are realized or realizable
