FAR SEC 1 Flashcards
Is operating income subject to intraperiod tax allocation?
No.
Which 4 types of income are subject to intraperiod tax allocation?
Items included in the determination of taxable income may be presented in different sections of the financial statements. Accordingly, intraperiod tax allocation is required. Income tax expense or benefit is allocated to (1) continuing operations, (2) discontinued operations, (3) other comprehensive income, and (4) items debited or credited directly to shareholders’ equity.
Where should a gain or loss from a transaction that is unusual or infrequent in occurrence be reported?
A material event or transaction that is unusual in nature, infrequent in occurrence, or both must be reported as a separate component of income from continuing operations. Such items must not be reported net of income taxes.
The order of presentation in the income statement is
Income from continuing operations
Discontinued operations
Which of the following statements would most likely be included among a set of financial statements prepared in conformity with a special purpose framework?
The statement of cash receipts and disbursements.
What are special purpose frameworks?
Special purpose frameworks are comprehensive bases of accounting other than U.S. GAAP (i.e., accrual accounting).
What are the 4 basic financial statements as per US GAAP?
Under U.S. GAAP, the set of basic financial statements is (1) the balance sheet (the statement of financial position), (2) the statement of income (the statement of operations), (3) the statement of comprehensive income, (4) the statement of changes in equity, and (5) the statement of cash flows.
What is the statement of cash receipts and disbursements?
The statement of cash receipts and disbursements is for a special purpose framework not prepared under GAAP.
A company pays more than the fair value to acquire treasury stock. The difference between the price paid to acquire the treasury stock and the fair value should be recorded as _________________.
Shareholders equity. Apart from cash paid or received, a firm cannot recognize assets, liabilities, gains, or losses from transactions in its own stock. Treasury stock is reported on the balance sheet as a subtraction from equity.
What are real or permanent accounts?
The accounts presented on the balance sheet are real or permanent accounts. They report an entity’s resources and financing elements that exist from period to period.
What are nominal or temporary accounts?
The accounts presented on the income statement are nominal or temporary accounts. They are reported for a period of time, closed at the end of the period, and reopened at the beginning of the next period with zero balances.
To what permanent account are nominal/temporary accounts closed at the end of a period?
Retained Earnings.
What is reported on the income statement? (2 elements)
1) RESULTS OF OPERATIONS ON ACRUAL BASIS. The results of operations are reported in the income statement (statement of earnings) on the accrual basis using an approach oriented to historical transactions.
2) REVENUES - EXPENSES + GAINS - LOSSES. The traditional income statement reports revenues from, and expenses of, the entity’s major activities and gains and losses from other activities.
What is the net income equation?
Revenues – Expenses + Gains – Losses = Net income or loss
Is it necessary to close each temporary account directly to equity at period-end?
No. The accountant need not close each transaction directly to equity. Net income or loss for the period is closed to retained earnings at the end of the period.
What kind of accounts are income statement elements reported in?
Nominal/Temporary accounts
What kind of accounts are balance sheet (statement of financial position) elements reported in?
Real/Permanent accounts
When is the term “continuing operations” used on the income statement or elsewhere in the financial reporting?
The term “continuing operations” is used only when a discontinued operation is reported.
When is the term “discontinued operations” used?
Any recognized amounts not included in continuing operations are reported in a separate section for discontinued operations.
Which 5 types of transactions are not included in net income?
1) Transactions with owners,
2) Error corrections,
3) Items reported initially in other comprehensive income,
4) Transfers to and from appropriated retained earnings, and
5) Effects on prior periods of accounting changes.
Which 3 formats are commonly used for the income statement?
1) Single-step
2) Multiple-step
3) Condensed
What is the single-step income statement?
The single-step income statement provides one grouping for revenues and gains and one for expenses and losses. The single step is the one subtraction necessary to arrive at net income.
What is the multiple-step income statement?
The multiple-step income statement reports operating revenues and expenses in a section separate from nonoperating items. It enhances disclosure by presenting subtotals.
What is the condensed income statement?
The condensed income statement is the most common method of presentation. It includes only the section totals of the multiple-step format. The enhanced disclosure of each line item is presented in the notes to the financial statements.
What is the most common format for the income statement?
The condensed income statement is the most common method of presentation.
What is the COGS Formula?
Beginning FG Inventory + Purchases or COGM - Ending FG Inventory = COGS
What is the Goods Available for Sale Formula?
Beginning FG Inventory + Purchases or COGM = Goods Available for Sale
What is the definition of COGS?
Cost of goods sold equals purchases for a retailer or cost of goods manufactured (COGM) for a manufacturer, adjusted for the change in finished goods (FG) in inventory.
What are the 2 COGM formulas?
1) WIP = work-in-process
Beginning WIP + Periodic Manufacturing Costs - Ending WIP COGM
2) FG = finished goods
Ending FG Inventory + COGS - Beginning FG Inventory = COGM
What is the definition of COGM?
Cost of goods manufactured equals the period’s manufacturing costs adjusted for the change in work-in-process. It also may be stated as cost of goods sold adjusted for the change in finished goods inventory.
How do selling expenses arise?
Selling expenses are incurred in selling or marketing.
What are examples of selling expenses? (4 examples)
1) SALES LABOR. Sales representatives’ salaries, commissions, and traveling expenses;
2) SALES DEPARTMENT OVERHEAD. Sales department rent, salaries, and depreciation; and
3) COMMUNICATIONS. Communications (e.g., Internet) costs.
4) SHIPPING COSTS. Shipping costs also may be classified as selling costs.
Are advertising costs selling expenses?
Yes.
When should advertising costs be expensed?
Advertising costs should be expensed either as incurred or when advertising first occurs.
What is cooperative advertising?
Sellers may agree to reimburse customers for the customers’ advertising costs (cooperative advertising). The revenues related to the transactions that created such obligations generally are recognized before reimbursement. Accordingly, the obligations must be accrued and the advertising costs expensed when the related revenues are recognized.
When is cooperative advertising expense recognized?
For cooperative advertising, the revenues related to the transactions that created such obligations generally are recognized before reimbursement. Accordingly, the obligations must be accrued and the advertising costs expensed when the related revenues are recognized.
What is the definition of general and administrative expenses?
General and administrative expenses are incurred for the direction of the entity as a whole and are not related entirely to a specific function, e.g., selling or manufacturing.
What are 6 examples of general and administrative expenses?
1) PROFESSIONAL EXPENSES. Accounting, legal, and other fees for professional services;
2) EXECUTIVE COMPENSATION. Officers’ salaries;
3) INSURANCE. Insurance;
4) ADMINISTRATIVE STAFF. Wages of office staff;
5) OFFICE SUPPLIES. Miscellaneous supplies; and
6) OFFICE RENT. Office occupancy costs.
How is interest expense recognized?
Interest expense is recognized based on the passage of time. In the case of bonds, notes, and finance leases, the effective interest method is used.
How are unusual or infrequently occurring items reported?
Material items that are unusual in nature, infrequent in occurrence, or both are reported as a separate component of income from continuing operations.
What are unusual or infrequently occurring items? (1 definition and 4 elements).
1). DEFINITION. Material items that are unusual in nature, infrequent in occurrence, or both are reported as a separate component of income from continuing operations.
2) These items must not be reported net of taxes.
3) Gains or losses of a similar nature that are not individually material must be aggregated.
4) The nature and financial effect of each item is disclosed in the notes to the financial statements or reported in the income statement.
5) The effects of such items on earnings per share must not be presented on the income statement.
Where are discontinued operations reported on the income statement?
This section is presented after the results of continuing operations.
Are discontinued operations reported without tax expense deducted?
No. The operating results of a discontinued operation are reported separately net of tax in the income statement.
Is it necessary for material gain or loss on disposal of a discontinued operation to be reported on the face of the income statement?
No. If a component of an entity (discontinued operation) is disposed of during the period, any gain or loss on disposal must be disclosed on the face of the income statement OR in the notes. This means that the gain/loss from discontinued operations would potentially not be shown on the income statement if it is disclosed on the notes instead.
How is a discontinued operation measured if it is classified as held for sale?
If a component of an entity (discontinued operation) is classified as held for sale, it is measured at the lower of its carrying amount or fair value minus cost to sell (discussed in Study Unit 7, Subunit 8).
What items are detailed in the operating results of a discontinued operation shown on the income statement? (2 elements)
1) Income/expense or gain/loss from operations and/or disposal of discontinued operation.
2) Income tax benefit from discontinued operation.
Are basic and diluted EPS reported on the face of the income statement for discontinued operations?
Yes.
What is the timeframe for reporting discontinued operations?
The income/expense + profit/loss for a discontinued operation are reported both before and after the date within a given period that an operating unit is first classified as discontinued or held-for-sale.
What is the timeframe for reporting discontinued operations on comparative financial statements?
If an operation is classified as discontinued, results are reported separately on the single period income statement under “discontinued operations” adding up the income/gain or expense/loss within the single period before and after the date of the classification of the operation as discontinued. For comparative statements with multiple periods, there is separate reporting for discontinued operations in any prior periods before the operation was classified as discontinued.
What is included in general purpose financial reporting? (3 elements)
General purpose financial reporting includes
1)the full set of financial statements,
2) the notes to the financial statements,
3) and required supplemental information.
What are the 4 financial statements included in a full set of financial statements as per GAAP?
1) Statement of Financial Position (Balance Sheet)
2) Statement of Comprehensive Income (Income Statement)
3) Statement of Shareholders’ Equity
4) Statement of Cash Flows
What are notes to the financial statements?
Notes to the financial statements supplement or further explain information on the face of the financial statements.
Give 2 examples of information included in notes to the financial statements.
1) descriptions of the accounting policies used
2) other disclosures required by generally accepted accounting principles (GAAP).
What 2 uses are prohibited for the notes to the financial statements?
(1) CORRECTION. to correct an improper presentation in the statements
(2) SUBSTITUTION. as a substitute for recognition in the statements
What 3 topics should be discussed in notes to the financial statements?
1) Financial statement line items
2) The reporting entity
3) Unrecognized past events and current circumstances that can affect cash flows
What is supplemental information?
Supplemental information, such as management’s discussion and analysis (MD&A), provides information in addition to that in the statements and notes.
Give one example of an item included in supplemental information.
management’s discussion and analysis (MD&A)
