FAR Module 9D Flashcards
How do you state the date on a balance sheet
Specify a specific date
How do you state the date on an income statement
For the year ended …
How do you calculate net sales, which is referred to as simply “sales” on an income statement
Gross sales
- sales discounts
- sales returns and allowances
= net sales
How do you calculate cost of goods sold
Beginning inventory \+ cost of goods purchased = cost of goods available-for-sale - ending inventory = cost of goods sold
To calculate cost of goods sold you must know cost of goods purchased. How do you calculate cost of goods purchased?
Gross purchases - purchase discounts - purchase returns & allowances = net purchases \+ freight in/transport in = COG Purchased
This is an example of a “product” cost while everything else on the income statement is a “period” cost
Cost of goods sold
The following expenses are all examples of what? Selling expenses
General & administrative expenses
Research and development expenses
Organizational costs (also known as preopening costs)
Impairment loss (SEC registrant companies)
These are operating expenses
The following are examples of what: Interest revenue Equity and earnings of investee Gains on sales Unrealized holding gains
Other revenues/gains
The following are examples of what? Interest expense Amortization of bond issue costs Losses on sales of property, plant, and equipment Unrealized holding losses
Other expenses/losses
An event that is considered to be material but does not qualify as extraordinary is called what?
An unusual or infrequent item
This results from disposal of a business component
Discontinued operations
What are selling expenses? Give examples.
All expenses you incur to increase your sales are selling expenses.
Examples: bad debt expense, warranty expense, freight out/transportation out
Give examples of general & administrative expenses?
Paying the auditors, paying the CEO, paying for internal controls & compliance
An unusual and infrequent non recurring event which has material effects
Extraordinary items
Why are unusual or infrequent items not classified as extraordinary items
To be an extraordinary item it must be unusual AND infrequent not one or the other
What is the difference between a multiple step income statement and a single step income statement
They differ up to the line “income from continuing operations before provision for income taxes”, after this point they are identical.
A single step income statement simply splits into two categories: revenues and expenses. It does not calculate gross margin on sales.
On the other hand a multiple step income statement has more categories such as: operating expenses, other revenues and gains, other expenses and losses, etc.
Give examples of items that are NEVER extraordinary
1) foreign currency devaluing
2) effects of a strike
3) write-downs of any assets (inventory, PP&E, intangibles, goodwill, receivables)
A component can only be classified in the line “discontinued operations” in the first period that it meets these six criteria as being “held for sale”
1) management commits to a plan of disposal
2) the assets are available for sale
3) an active program to locate a buyer has been initiated
4) the sale is probable
5) the asset is being actively marketed for sale at a fair price
6) it is unlikely that the disposal plan will significantly change
Define comprehensive income under the FASB ASC definition
Comprehensive income is the sum of net earnings or loss (net income) and other comprehensive income
List examples of other comprehensive income
1) Unrealized gains and losses on available for sale investments (assuming the fair value option is not used), derivatives held as cash flow hedges, and foreign currency items
2) any reclassification adjustments
3) any adjustments necessary to recognize the funding status of pension plans or other postemployment benefits
4) cumulative foreign currency translation adjustment
What are managements two choices for presenting other comprehensive income
1) at the bottom of the income statement they can continue from net income to arrive at comprehensive income. This will include presenting a total amount for net income and its components, a total amount for other comprehensive income and its components, and total comprehensive income
2) on a separate statement that directly follows the statement of income and entity can present:
i) net income
ii) other comprehensive income and its components
iii) total comprehensive income
Regardless of which approach you choose when recording other comprehensive income you must show the ending balance of accumulated other comprehensive income where?
On the balance sheet after retained earnings
As unrealized gains (losses) that have been recorded and reported in other comprehensive income for the current or prior periods are later realized, they are recognized and reported in net income. To avoid double counting it is necessary to reverse the unrealized amounts that have been recognized. What is this called?
A reclassification adjustment
What are the main categories in a balance sheet
Assets, liabilities, and stockholders equity
What are the categories under assets in the balance sheet (5)
Current assets Long-term investments Property, plant, and equipment intangible assets, net of amortization other assets
Give examples of current assets (7)
Cash and cash equivalents Short-term investments accounts receivable notes receivable interest receivable inventory Prepaid expenses
Give examples of current liabilities (10)
Commercial paper accounts payable sales, wages, and commissions taxes withheld from employees dividends payable rent revenue collected in advance current portion of long-term debt current obligations under capital leases Deferred tax liability other accrued liabilities
This party is controlled by another enterprise that controls, or is under common control with another enterprise, directly or indirectly
Affiliate
Owners of more than 10% of the firms voting interests. this includes known beneficiary owners
These are principal owners
Affiliates, equity method investees, employee benefit trusts, principal owners, management or any party that can significantly influence a transaction
These are related parties
The financial statement must include disclosures of material transactions between related parties except for what two exceptions
1) compensation agreements, expense allowances, and other similar items in the ordinary course of business
2) transactions which are eliminated in the preparation of consolidated or combined financial statements
Disclosures of material transactions between related parties must include what
1) the nature of relationships
2) a description of transactions, including those assigned zero or nominal amount
3) dollar amounts of transactions for each income statement period and the effect of any change in method of establishing terms
4) amounts due to/from related parties, including terms and manner of settlement
T/F
When a control relationship exists you do not need to disclose the relationship if no transactions have occurred
FALSE
You must disclose such a relationship even if no transactions have occurred
The initial footnote to the statements should say what
Accounting policies must be set forth as the initial footnote to the statements
Under what situations is it necessary to disclose additional information in regards to accounting policies?
Disclosures are required if:
1) accounting policies are used when alternatives exist
2) principles are peculiar to a particular industry
3) unusual or innovative applications of accounting principles were used
These occur after the balance sheet date but before the financial statements are issued or available to be used
Subsequent events
A subsequent event in which the condition existed at the balance sheet date is called what?
A recognized subsequent event
How do you treat a recognized subsequent event
It must be recognized in the financial statements
A subsequent event in which the condition did not exist at the balance sheet date but arose after the balance sheet date is called what
A nonrecognized subsequent event
How do you treat a nonrecognized subsequent event
A nonrecognized subsequent event is not recognized in the financial statements. However, if the event is such that the financial statements would be misleading then a footnote disclosure should be made indicating the nature of the event and an estimate of the financial statement effects
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 (an exit price) is known as what
Fair value
What are the six steps involved in applying the fair value measurement approach
1) Identify the asset or liability to be measured
2) determine the principal or most advantageous market
3) determine the valuation premise
4) determine the appropriate valuation technique
5) obtain inputs for valuation (is it level 1, 2, or 3)
6) calculate the fair value the asset
When determining the valuation premise in the fair value measurement approach there are two categories that an asset can be placed in. What are these categories?
1) In use
2) In exchange
The “in use” category under the valuation premise for the fair value measurement approach says what about assets?
Asset provides maximum value by using it with other assets as a group. for this reason the valuation is based on a price to sell the asset assuming it is used with other assets
The “in exchange” category under the valuation premise for the fair value measurement approach says what about assets?
The asset provides maximum value on a stand alone basis. Therefore valuation is based on a price to sell the asset stand-alone
This valuation technique uses prices and relevant information from market transactions for identical or comparable assets or liabilities
Market approach
This valuation technique uses present value techniques to discount cash flows or earnings to present value amounts
Income approach
This valuation technique relies on current replacement cost to replace the asset with a comparable asset, adjusted for obsolescence
Cost approach
T/F
A level 1 input is the lowest level and highest priority
TRUE
T/F
A level 3 input is the lowest level and lowest priority
FALSE
Level 3 is the highest level and lowest priority
Level 1 input is equivalent to what valuation technique approach
The market approach
Level 2 input is equivalent to what valuation technique approach
Cost approach
Level 3 input is equivalent to what valuation technique approach
Income approach
For assets measured at fair value on a reoccurring basis what disclosures are necessary
1) valuation technique used
2) level of hierarchy or measurement used
3) any significant transfers between levels and the reason for transfer along with the entity’s transfer policy
Fair value measurement is what ASC topic number
820
Fair value option is what ASC topic number
825
The fair value option does not apply to what?
Consolidations, pensions, stock options, exit or disposal activities, leases, and financial instruments that are components of equity
Changing prices is what ASC topic number
255
Changing prices can be due to two different reasons. what are those reasons
1) increase in prices due to inflation
2) increase in prices due to demand or market appreciation
Give examples of monetary assets and liabilities
Cash, any receivables, any payables, held to maturity investments in bonds
What are nonmonetary items
Everything that is not cash, receivables, payables, or held to maturity investments in bonds
When there is an increase in price due to inflation what do you do with monetary assets and liabilities
Net them and then calculate a purchasing power gain or loss
What is the formula for calculating a purchasing power gain or loss when you are dealing with monetary assets and liabilities that have changed in price due to inflation
(End-of-the-year CPI - beg. of the year CPI)
divided by
(beginning of the year consumer price index)
When there is an increase in prices due to inflation what do you do with nonmonetary items?
Convert them by multiplying the non-monetary item by the following conversion factor:
Current period CPI/ base period CPI
When there is an increase in prices due to demand what do you do with monetary assets and liabilities
Nothing
When there is an increase in prices due to demand what do you do with nonmonetary items
Restate to current costs and calculate a holding gain or loss.
1) For PPE & Inventory use current cost UNLESS the recoverable amount is lower than current cost, in which case you use the recoverable amount
2) For Depr Exp & COGS use Average Current Cost: (BOY + EOY) / 2
What ASC topic number covers comprehensive income
220
What are the four types of other comprehensive bases of accounting (OCBOA)
Cash basis, modified cash basis, tax basis, regulatory basis
What would cash basis financial statements look like
In pure cash basis financial statements the only asset is cash. Revenue is recognized when cash is received and expenses are recognized when they are paid. The pure basis is rarely used
What would modified cash basis financial statements look like
Modified cash basis financial statements are cash basis statements with modifications that have substantial support. Modifications that have substantial support involve presenting the items as they would be in GAAP financial statements, providing that the presentation is not illogical
What do tax basis financial statements look like
Tax basis financial statements are statements prepared on the basis of tax laws and regulations. When financial statements are prepared on an income tax basis, the financial statement should not simply repeat items and amounts reported in the tax return. Thus, items such as nontaxable municipal interest and the nondeductible portion of travel and entertainment expense should be fully reflected in the tax basis income statement
What would regulatory basis financial statements look like
Regulatory financial statements are prepared based on the rules established by a regulatory agency
T/F
OCBOA financial statements should include a title such as “balance sheet” and “statement of income” similar to any other financial statement
False. OCBOA financial statement should not include titles such as “balance sheet” and “statement of income” because these terms are reserved for GAAP-based statements. Instead titles such as “balance sheet – tax basis” should be used
T/F
The liquidation basis of accounting can be used when liquidation is probable
False. The liquidation basis of accounting is only to be used when liquidation is imminent. This means that there is a remote likelihood the entity will return from liquidation.
What disclosures are necessary when a business is undergoing liquidation
1) The plan for liquidation.
2) Measurement methods and assumptions.
3) Expected liquidation period Costs and income
4) Expected liquidation timeframe.
T/F
Unless exempt by regulation, company assets of more than $10 million and 500 or more shareholders and securities that trade on a national securities exchange or an over-the-counter market must have the securities registered
True
Companies with registered securities are termed what
“Issuers”
Securities Regulation S – X describes what
The form and content of financial statements filed with the SEC
Securities Regulation S – K describes what
The requirements for information and forms required by Regulation S – X
Securities Regulation AB describes what
Reporting requirements for asset-backed securities
Securities Regulation FD mandates what
That publicly traded companies disclose material information to all investors simultaneously
What is Form S-1
A registration statement for US companies
What is Form F – 1
The registration statement for foreign companies.
What is Form 8-K
Information about material events for US companies
What is Form 6-K
Information about material events for foreign companies
What is Form 10-K
The annual report for US companies
What is Form 20F?
The annual report for foreign companies
What is Form 10-Q
Quarterly reports
What is Schedule 14A
A proxy statement
What qualifies you as a large accelerated filer
More than $700 million of aggregate worldwide market value of voting and nonvoting common stock
What qualifies you as an accelerated filer
Between $75 million and $700 million of aggregate worldwide market value of voting and nonvoting common stock
How long does a large accelerated filer have before their form 10 Q is due?
40 days after the end of the fiscal quarter
How long does a accelerated filer have before their form 10 Q is due?
40 days after the end of the fiscal quarter
How long do nonaccelerating filers have to file their form 10 Q
45 days after the end of the fiscal quarter
How long do large accelerated filers have to file their form 10K
60 days after the end of the fiscal year
How long do accelerated filers have to file their form 10K
75 days after the end of the fiscal year
How long do non-accelerated filers have to file their form 10K
90 days after the end of the fiscal year
What financial statements are presented under a trust
A statement of assets and liabilities, a statement of operations, the statement of changes in net assets
What is a big difference between US GAAP and IFRS when it comes to liabilities?
Under US GAAP if there is the intent and ability to refinance before the issuance of the financial statements reclassification to a long-term liability is permitted. Under IFRS an agreement to refinance the liability on a long-term basis must be executed prior to the financial statement date
Under IFRS what are the three methods for a statement of cash flow
The direct method, the indirect method, and the modified indirect method
Under IFRS interest and dividends received may be reported on the statement of Cash flows where?
In the operating or investing activities
Under IFRS interest and dividends paid may be reported on the statement of Cash flows where?
The operating or financing activities
The effects of non-cash transactions are reported where on the statement of Cash flows under IFRS
Nowhere. The effects of non-cash transactions are not reported on the statement of Cash flows. Instead, significant non-cash activities must be disclosed in the notes to the financial statements.
Under IFRS operating expenses on the income statement may be classified how
By nature or function
