FAR Retake Flashcards
How is the correction of an error in prior year Financial Statements treated?
The prior year Financial Statements have to be restated
How is the change from cash basis to accrual basis treated?
It’s treated as a correction of an error (non-GAAP to GAAP) the cumulative effect would be a prior period adjustment.
How is the voluntary change in accounting principles recognized? (retrospective or prospective)
Retrospective. The cumulative effect is reported as an adjustment of the beginning of year retained earnings at the earliest year presented
If you cannot determine whether a change in accounting estimate or change in accounting principle has occurred, how should the change be considered?
As a change in estimate
Acquisition Method - How are acquisition related costs treated?
They are expensed as incurred
How does an acquirer recognize a “Bargain Purchase” in a business acquisition?
It is treated as a gain in earnings at the acquisition date
Consolidations - How are intercompany loans and profits treated?
They must be eliminated in the preparation of combined financial statements
EPS - How is basic EPS reported?
On the face of the income statement
Stock Options - What kind of effect do options have when the average market price of common stock exceeds the exercise price of the options?
Diluting effect
Fair Value Measurements - If there is no principal market, what should the entity do?
The entity should use the most advantageous market for that asset
Fair Value Hedges - What is the intrinsic method?
The intrinsic method is the excess of the market price over the exercise price
How is the Gain or Loss on a Forward Contract computed?
Computed by multiplying the foreign currency amount of the forward contract by the difference between the Spot Rate at the BS date and the Spot Rate at the date of inception of the forward contract
Impairment - How is a loss calculated
If the carrying amount exceeds the future cash flows, an impairment loss should be recognized.
The loss is the excess of the asset’s carrying value over it’s fair value.
Interim Financials - How are discontinued operations treated?
They should be reported separately, net of tax, on the income statement for the interim period.
Disclosure in the notes to the interim statements is required
Interim Financials - How are temporary market declines that are expected to reverse treated?
They are not recognized in interim FS
If a transfer of Financial Assets does not qualify as a sale according to ASC 860 - how is it treated?
The transfer should be accounted for as a secured borrowing with a pledge for collateral
Statement of Cash Flows - Direct Method Disclosures
- Major classes of gross cash receipts and gross cash payments
- Amount of income taxes paid
- A reconciliation of NI to NCF from operations
Statement of Cash Flows - How is interest classified?
A cash outflow that is classified as an operating activity
Statement of Cash Flows - How are Lease Payments classified?
Only the principal portion of the monthly lease payment would be reported as cash outflows for financing activites
Statement of Cash Flows - How is cash flow per share disclosed?
It should not be disclosed under either the direct or indirect method
Statement of Cash Flows - How are cash payments to acquire equity instruments classified?
Investing activities
SEC Rulemaking Process (3)
- Concept Release
- Rule Proposal
- Rule Adoption
Most Authoritative accounting pronouncement?
FASB ASC
Who develops and distributes accounting standards for nongovernmental nonprofit entities?
FASB
What is Financial Accounting primarily based on?
The historical cost principle which specifies that assets be recorded and carried and their historical acquisition cost
GASB requires the issuance of 2 FS:
- Balance Sheet
- Statement of Activities
Define Inter-period Equity
Financial Reporting should provide information to determine whether current year revenues were sufficient to pay for current year services
Primary characteristics of Governmental Structure (3)
- The representative form of government and the separation of powers
- Federal system at government and the prevalence of intergovernmental revenues
- Relationship of taxpayers to services received
Who developed the Private Company Decision Making Framework?
FASB
Regulation S-K
Contains instructions for filing the non-financial statement forms required by the SEC
The Statement of Net Assets available for Benefits of the Plan must include: (4)
- Total Assets
- Total Liabilities
- Net Assets reflecting all investments at FV
- Net Assets available for Benefits
Credit Risk
- Is the potential loss from any party to an agreement failing to perform
- Must be disclosed
How is PP&E presented under IFRS on the BS?
It may be presented first on the BS
Price Earnings Ratio
Stock Price / EPS
IFRS/GAAP Comprehensive Income
Both allow a separate statement of comprehensive income or a combined statement
Inventory turnover
COGS / Average Inventory
(Gov) What is Derived Tax Revenue?
- Results from assessments imposed on exchange transactions
- Generally from earnings or consumption, such as income taxes or sales taxes
(Gov) How should component units be included in the Financial Reporting Entity?
Discrete Presentation
(Gov) What is the measurement focus of governmental fund accounting?
Current Financial Resources
(Gov) How are investments held in a permanent fund recognized/valued?
At their Fair Values
(Gov) How do governmental funds report acquisitions of capital assets under the modified accrual basis of accounting?
As expenditures, not assets.
(Gov) 5 Governmental Funds (PD-Consents to Smoking Grass)
- Permanent
- Debt Service
- Capital Projects
- Special Revenue
- General
(Gov) What is included in the Governmental Activities column of the Government wide FS?
-The Five Governmental funds and the Internal Service Fund
- Permanent
- Debt Service
- Capital Projects
- Special Revenue
- General
(Gov) Fiduciary Funds
- Pension Trust
- Investment Trust
- Private Purpose Trust
- Agency
(Gov) How does the general fund report transfers to other funds?
As Other Financing Uses; a form of expenditure under the modified accrual basis of accounting
(Gov) Required Basic Financial Statements
- Governmental Wide FS
- Statement of Net Position
- Statement of Activities
- Fund FS
- Notes
(Gov) MD&A
-Should compare current year results to the prior year with emphasis on the current year
(Gov) What fund type is excluded when governmental fund FS are converted to government wide FS?
Fiduciary Funds
(Gov) Assigned Fund Balance
The governing board “intends” to use for a specific purpose
(Gov) How are the Government wide statement of Net Position presented?
It must be divided into governmental and business type activities
(Gov) What method of accounting do Government Wide Financial Statements use?
Accrual Basis
(Gov) What is a “Fund” (2)
- The basic accounting unit
- Used to assist in ensuring fiscal compliance
(Gov) Required Proprietary Fund Financial Statements
- Net Position
- Revenues, Expenses & Changes in Net Position
- Statement of Cash Flows
How are Amendments incorporated into the FASB ASC?
By releasing ASU’s
Which tax rate do temporary differences use?
The enacted future rate
The 3 basic elements of financial reporting
- Assets
- Liabilities
- Equity (Net Assets)
2 primary Qualitative characteristics that make accounting information useful?
- Faithful Representation
- Relevance
Relevance incorporates
- Predictive value
- Confirmatory value
Faithful Representation includes principles of:
- Completeness
- Accuracy
- Neutrality
Fair Value Measurement Option
- Is irrevocable
- Must be approved on an instrument by instrument basis
- Must be applied to the entire instrument
Enhancing Qualitative characteristics of financial reporting (Roger is Cut like a V)
Relates to both Relevance and Faithful Representation
- Comparability
- Understandability
- Timeliness
- Verifiability
Faithful Representation (Roger is never on the FENCe)
- Free from Error
- Neutrality
- Completeness
3 Approaches to measure Fair Value (MIC)
- Market Approach
- Income Approach
- Cost Approach
Fair Value is what kind of approach?
Market Approach
Fair Value
- Does not take in account transaction costs or disposal costs
- When there is no principle market, the value is determined using observable market data from the most advantageous market
Fair Value Input levels for measuring Assets/Liabilities (#)
- Unadjusted quoted market prices for identical assets or liabilities in active markets
- Quote market prices derived from or corroborated by observable market data
- Inputs based on the reporting entity’s internal data
What adjustments are usually needed from a prior year error.
A prior year error will normally result in adjustments to the affected Asset & Liability accounts as of the beginning of the current year and also a prior period adjustment to Retained Earnings.
How is the correction of an error accounted for?
By retrospectively restating the prior period financial statements
(IFRS) IFRS allows a change in an accounting policy under 2 circumstances
1) Change is required by IFRS
2) Change will result in Financial Statements that are reliable and more relevant
Related Party disclosures
- Amounts due to or from related parties as of the Balance Sheet date
- Amount of Purchases/Sales to related parties
When is the liability for a dividend recorded?
On the Declaration date
(IFRS) Treasury Stock - Methods
- Cost Method
- Par Value Method
- Constructive Retirement Method
(IFRS) Constructive Retirement Method - Treasury Stock
- Similar to the par value method except common stock is debited for the par value of treasury shares acquired, rather than treasury stock
- Generally used when the company does not intend to reissue shares
What is the Intrinsic Value of the call option?
It is the difference between the exercise price and the market price.
What is the primary purpose of a qausi reorganization?
It is to give a corporation the opportunity to eliminate a deficit in retained earnings
Journal Entry for a stock dividend?
Debit: RE (For the FV of the shares issued)
Credit: Common Stock (Par value)
Credit: APIC (Excess)
What kind of disclosures are made for Cash?
Disclosures should be made for restricted cash and compensating balances
Bank Reconciliation Formula
Bank Statement \+Deposits in transit -Oustanding checks \+-Bank Errors = Book Balance
The noncontrolling interest in a subsidiary is considered a component of…?
Stockholder’s Equity
Core Revenue Recognition Principle - Components (2)
1) Revenue is to be recognized upon the transfer of promised goods and service to customers
2) The amount of revenue recognized represents the consideration the entity expects to receive in exchange for those goods and services
Interest Rate Swap Agreement - Inherent Risks
- Risk of exchanging a lower interest rate for a higher interest rate
- Risk of nonperformance by the counterparty to the government
For a financial instrument to be a derivative (4)
- At least one underlying amount
- At least one notional amount
- Contract may be settled on a Net basis
- No Net initial investment
A derivative financial instrument is best described as..?
A contract that has its settlement value tied to Underlying Notional Amount
The Underlying
Is the factor that is used in the formula applied to the notional amount to determine that amount that will be exchanged between parties
At what level should Goodwill be tested?
Goodwill shall be tested for Fair Value Impairment at each reporting unit level
(IFRS) Revaluation Model
May be applied to an intangible asset provided there is an active market for the asset
(IFRS) Can internally generated goodwill be recognized as an asset?
No
(IFRS) Which valuation methods does IFRS allow for intangible assets?
Cost Method or Revaluation Method
(NFP) Required Financial Statements
- Statement of Financial Position
- Statement of Activities
- Statement of Cash Flows
(NFP) New Financial Disclosures Required
Qualitative - Management of Liquid Resources
Qualitative & Quantitative - Ability of organization to meet short term cash expenditures
(NFP) Required Financial Statements for Non-Governmental Hospitals
- Balance Sheet
- Statement of Operations
- Statement of Changes in Net Assets
- Statement of Cash Flows
- FS Notes
(NFP) Is Hospital Charity Care considered Revenue?
No
(NFP) What are Unconditional pledges to contribute classified as? Current and multi year contributions?
Revenue
- Current Year Only
- Multi Year Future contributions are restricted
(NFP) What kind of revenues are expenses deducted from?
Expenses are only deducted from unrestricted revenues
(NFP) Endowments
- Use of investment is restricted; Income can be restricted or unrestricted
- Must be under control or receiving entity (Quasi Endowment) in order to be recorded in unrestricted Net Assets
(NFP) Refundable Advance
- Liability
- Promise to contribute assets pending on certain conditions being met
- Becomes unconditional once the possibility that it won’t happen is remote
(NFP) What valuation method is used for Investments?
Fair value is mostly used
EXCEPTION: Equity method used when significant influence exists
(NFP) How is depreciation allocated?
Allocated proportionately to various functions
(GOV) The GAAP Hierarchy for state and local governments
-GASB Statements
-GASB Technical Bulletins
-GASB Implementation Guides
-GASB Approved Literature
NON AUTHORITATIVE
-GASB Concept Statements
-FASB Pronouncements
(GOV) The 3 fund types
- Governmental
- Proprietary
- Fiduciary
(GOV) Fund Accounting - 2 Types
Accrual Basis
- Current Economic Resources
- Revenues Recognized when Earned
Modified Accrual Basis
- Current Financial Resources Focus
- Revenues recognized when available
(GOV) Budge Estimates - Appropriations & Encumbrances
Appropriations - Highest amount allowed for an Expenditure
Encumbrance - Record purchases and reserves it
(GOV) Governmental Funds - Basis of accounting, focus, revenue recognition
- Use Modified Basis of Accounting
- Have a Current Economic Financial Resource focus
- Revenue recognized when available and measurable (60 days)
(GOV) Governmental Fund Balance Types
- Restricted - restricted by contributor
- Committed - restricted by government
- Assigned - intended to be used
- Unassigned - available
- Non spendable - Isn’t in a “spendable” state (inventory)
How is Net Income treated by Noncash expenses that did not result from a cash outflow?
Net Income must be increased
(NFP) How are operating expenses normally reported?
As change sin Net Assets without donor restrictions
(NFP) Statement of Activities - Characteristics
- Includes Net Asset reclassification
- Activities that occurred during a period resulted in changes to net Assets
(NFP) Investments in debt securities
All investments in debt securities are measured at Fair Value in the statement of Financial Position
(NFP) When should a donation be reported as a “refundable advance”?
- When it is based on a conditional promise (matching funds)
- Reported as a liability until the condition is met, then revenues
(NFP) When should a conditional pledge be recognized?
When the pledge conditions have been met
(NFP) Primary focus of the Statement of Activities
To demonstrate how the organizations resources are used in providing various programs and services
(NFP) How are donor restricted cash contributions for long term purposes reported?
As a financing activity in cash flows
(NFP) Residual Interest
- Is the appropriate characterization of Net Assets of a NFP
- Equity or Net Assets is the residual interest in the assets of an entity that remains after deducting liabilities
(GOV) CAFR Sections
- Introductory
- Financial
- Statistical
(GOV) Government Wide Financial Statements - Measurement & basis
Measurement Focus - Economic Resources
Basis of Accounting - Modified Accrual
(GOV) Program Revenues
Resources that are generated in the process of a particular service or operating a particular part of a government
(GOV) Imposed Non Exchange Revenues
- Property taxes and fines
- Are assessed and not derived from transactions
(GOV) How is bond interest reported
Since governmental funds uses the modified accrual basis, Bond Interest will not be accrued, but merely recorded as an expenditure when paid
(IFRS) Change in Accounting Principle/Policy
- Same as US GAAP
- Retrospective Basis
(IFRS) Revaluation Method
Assets are periodically revalued and adjusted to their Fair Values and are amortized between revaluation dates
(IFRS) In order to be considered intangible, an asset must…
Be separable or it must arise from contractual or legal rights
When must the goodwill impairment test be performed for a public entity?
Any time during the fiscal year, provided that it is performed at the same time every year
Gain Contingencies
They are never accrued, but they should be disclosed in the notes
Under GAAP how are organization costs treated?
They are expensed immediately
The two acceptable inventory estimation methods under GAAP.
The Retail method and the Gross Profit Method
(IFRS) Allows for the recoveries of previously written down inventory, limited by the lower of:
- The amount required to restore the inventory to its current value
- The extent of the previously recorded loss
How are IFRS and GAAP inventories valued?
At the lower of cost or NRV
Periodic Approach - Inventory
Sales are recorded only after all the purchases for a period are recorded
3 Characteristics of a segment
1) Involved in a business activity that may result in earning revenues and incurring expenses. whether internal or external
2) Performance is evaluated by management for the purpose of resource allocation
3) Financial information identifiable to the component is available
A reportable segment contributes at least 10% total for all segments for 1 of the following
- Revenues
- Assets
- Profits
(Segment Reporting) - Revenue Test
Based on combined revenues of all segments, including those resulting from intersegment sales
-DOES NOT INCLUDE INTEREST EARNED
(Segment Reporting) - Asset Test
Includes identifiable assets only, Not Goodwill
(Segment Reporting) - Major Customers
Those that provide >= 10% consolidated revenue
(Segment Reporting) How many reportable segments are you limited to?
10 segments
(IFRS) Segment Reporting
Similar to GAAP
- Revenue test
- Asset test
- Profits test
Who is required to report segment information?
Only publicly traded entities
(Segment Reporting) Disclosures for Segments
For each reportable segment, a company will separately disclose its revenues from external customers and from transactions with other operating segments
(Segment Reporting) Management Approach
- Method used under ASC 280
- Method in segment reporting that helps define what constitutes a “segment”
Interim Financial Statements can be described as emphasizing:
- Timeliness
- Relevance
(IFRS) If Interim Financial Statements are presented, what else is required?
Four Basic Financial Statements and selected notes
Accumulated Benefit Obligation
Is the present value of all future retirement payments that the employee is already entitled to based on services rendered prior to that date
How are large stock dividends recorded (greater than 25%)?
They are recorded at Par or Stated Value
What entry is made when Rights are issues without consideration?
No Entry is made
How do expiring “Stock Warrants” effect the equity account
No effect on the overall equity account balance
How are dividends in arrears on preferred stock reported?
They are disclosed, but not accrued
If a company’s dividends exceeds its Retained Earning balance how is it treated?
The excess is considered a liquidating dividend, or return of capital.
When a company undergoes a “Quasi reorganization” how is a deficit in Retained Earnings is treated? Assets?
The deficit in RE is eliminated and assets that are overstated are written down to their Fair Values?
(IFRS) How is can Treasury Stock be accounted for? (3)
- Cost Method
- Par Value Method
- Constructive Retirement Method
When an asset is received in exchange for a noninterest bearing note, how is the transaction recognized?
At the FV of the note, the FV pf the asset, or the PV of the payments called for under the note. Whichever is more readily determinable
How are Type 2 Subsequent Events treated?
They are no recognized in the Financial Statements, but must be disclosed
Liquidation Basis of Accounting - How are assets valued?
Valued at the amount expected to be generated upon liquidation
How is interest expense on self constructed long terms assets treated?
It may be capitalized to the extent that interest is actually paid, subject to certain rules
How are deferred tax assets and liabilities classified?
As noncurrent on the balance sheet
Acquisition Method - How are expenses treated?
Direct costs associated with the acquisition are recognized as an expense in the period incurred
How should an acquirer recognized a “Bargain Purchase” is a business acquisition?
As a gain in earnings at the acquisition date
How is a majority voting interest determined?
Greater than 50% of the directly or indirectly owned outstanding voting shares of another entity
(Disclosures) Deferred Taxes
- Nature and amount of each type of operating loss and tax credit carry forward
- Types and amount of existing temporary differences
- NO requirement to disclose information about the types and amounts of permanent differences
(Gov) When are special revenue funds used?
they are used to account for revenues that are restricted or committed to being used to finance designated activities other than capital providers or debt service
(Gov) When is a debt service fund used?
Used to make principal and interest payments on the tax supported debts of the government and collect funds for that purpose
How are impairment losses treated for assets held for use?
Once an impairment loss is recognized it cannot be reversed for assets held for use.
If a transaction has commercial substance, how are gains and losses treated and what amount should the net asset be valued at?
Gains and losses are recognized and the new asset should be recorded at FMV
What costs should be included in the capital cost of land?
Any costs preparing it for its intended use
- surveying (title search and assessments)
- clearing
- grading
- landscaping
- razing or demolishing of old building
- real estate taxes in arrears
(IFRS) If an item in PP&E is revalued, what else must also be revalued?
The entire class of which the assets belongs to must also be revalued
(IFRS) How is inventory valued?
At the lower of cost or NRV
(IFRS) How are payments for interest reported on the statement of cash flows?
As a cash outflow for either operating activities or for financing activities
(IFRS) How are deferred tax assets or liabilities classified?
Same as GAAP; noncurrent
The 2 primary objectives for accounting for income taxes
- recognizing current year amount of taxes payable or refundable
- recognize amount of DTL’s and DTA’s reported for future tax consquences
How is the effect of a change in the opening balance of a Valuation Allowance that results from a change of circumstances reported?
In income from continuing operations
Which approach is used to calculate “Income Tax Expense”
The asset and Liability Approach
When cash is transferred to a sinking fund what kind of transaction is taking place.
A transfer from a current asset to a noncurrent asset
Which bonds mature in installments?
Serial Bons
List some Bond Issue Costs
- Legal and accounting fees
- Printing of prospectus
- Underwriting fees
When debt is issued at a discount, what does the interest expense equal?
The cash interest paid plus the discount
Formula for interest payable and Interest Expense on the bond
Face Value x Stated Coupon Rate
Carrying Value x Effective Rate
What is a defining feature of “Convertible Debt Securities”
An interest rate that is generally lower than nonconvertible debt
Asset Turnover
Sales / Total Assets
AR Turnover
Credit Sales / Average AR
Inventory Turnover
COGS / Average Inventory
Price Earnings Ratio
Market Price / EPS
If AFS securities experience a loss that is considered “other than temporary” (permanent); what must be down?
The security must be written down to a new cost basis and it is treated as a realized loss
How is a reclassification of a debt security from AFS to HTM handled? Unrealized holding gains/losses?
The transfer occurs at its market value on the date of the transfer.
-Any unrealized holding gain/loss is recognized in OCI and amortized as an adjustment to the effective interest rate on the security
How are investments in bonds that will be held to maturity recorded?
At cost; any discount or premium is amortized adjusting the carrying value of the bonds to the amortized cost
How are AFS securities gains/losses reported when the Fair Value Option is elected?
They are reported as a component of income from continuing operations
(Disclosures) Debt securities held to maturity
The market value of the investments in debt that are classified as HTM must be disclosed
When changing from the cost to the equity method; is it treated prospectively or retrospectively?
Prospectively
(IFRS) The equity method accounting approach used for Joint Operations under IFRS is known as…
The Proportionate Consolidation Approach
Gains and Losses of the effective portion of a hedging instrument will be recognized in current earnings in each reporting period for which can of hedge?
Fair Value Hedge; NOT Cash Flow Hedges
For a non issuer to apply the “Simplified Hedge” accounting approach to a cash flow hedge
The variable interest rate on the interest swap rate and the variable interest rate on the hedged borrowing are linked to the same index (ex: Federal Prime Rate)
What is the intrinsic value of a stock option?
Market Price - Exercise price
How are shipping of goods or transporting of goods to customers treated?
A selling expense and it is not included in either inventory or cost of sales
For inventory purposes what is NRV?
NRV is the sales price reduced by the costs to complete the units as well as costs required to sell the units
What interest rate is the Accretion expense for an Asset Retirement Obligation recorded at?
At the credit adjusted risk free interest rate, NOT the risk free interest rate
When are gains/losses recognized for Non monetary exchanges that have commercial substance?
Immediately
(Disclosures) PP&E
- Balances in each major class of property
- Accumulated Depreciation by major class or in aggregate
- Depreciation Expense
- Description of methods used to calculate depreciation
Direct Financing Lease
The lessor does not recognize any gain or loss on the sale of the leased asset and will only recognize interest income over the term of the lease, using the rate implicit in the lease
The Percentage of completion Method
Is recommended when collection is assured and the estimates of progress toward completion are reasonably dependable
When is the Completed contract method generally used?
When collection or progress toward completion cannot be measured
Completed Contract Method - When is revenue recognized?
Total revenue is recognized in the period in which the contract is complete
-Progress Billings are not considered
When a loss is expected for long term contracts when is it recognized?
Immediately
(IFRS) Foreign Operations - Currency classifications
- Foreign
- Functional
- Presentation
Unfunded accrued pension cost represents
Represents the cumulative amount by which cost exceeds the amounts contributed to the plan
