FAR Set 1 Flashcards
How do you calculate annual gross profit under the percentage-of-completion method?
[total cost incurred/total expected cost] x [total expected gross profit] - total gross income previously recognized
What is the formula to calculate the percentage-of-completion?
total cost incurred to date/total est. cost of contract
(actual over estimated)
What are the requirements to qualify a transaction as a financing arrangement?
To qualify as a financing arrangement, the repurchase price must be greater than or equal to the original sales price and the expected market value. However the expected market value cannot exceed the repurchase price
List the order of a multi-step income statement
- Net Sales
- Less: COGS
- = Gross Profit
- Less: SG&A
- = Operating Income
- +/- Gains/Losses
- = Income from Continuing Operations
- Less: Income tax expense
- = Income before discontinued operations
- +/- Gain/Loss on discontinued segment (net of tax)
- = Net Income
How is a loss from discontinued operations calculated?
The loss is calculated by including all operating losses for the year from the discontinued segment, even if the decision to disposed was made mid-year. If the segment was sold in current year, any gain or loss will be included and aggregated net of tax. Any impairment loss will also be considered in the calculation
How is a change of accounting principle reported on a set of financial statements?
The change of accounting principle is accounted for retrospectively as an adjusted to beginning retained earnings unless it is not practical to do so. A change to LIFO inventory is impractical to calculate and therefore would be accounted for prospectively
Where is accumulated other comprehensive income reported?
Accumulated other comprehensive income is reported on the Statement of Financial Position i.e. the Balance Sheet. The current portion of other comprehensive income can be reported on The Statement of Comprehensive Income
When should financial statements of all prior periods be restated if there is a “change in entity”?
Financial statements should be restated when there is a “change in entity”
- if prior periods are presented
- when changing companies in consolidated financial statements
- consolidated financial statements versus previous individual financial statements
How does the FASB update or amend the U.S. GAAP Accounting Standards Codification?
The FASB updates the Accounting Standards Codification by issuing Accounting Standards Updates
What is included in the summary of significant accounting policies?
The summary of significant accounting policies include
- measurement bases
- accounting principles and policies
- criteria
What is required to be disclosed in the notes of financial statements regarding a company’s marketable securities?
The carrying value and the gross unrealized gains and losses of marketable securities are required to be disclosed in the notes to the financial statements
What criteria is needed to disclose vulnerability to concentration in the footnotes to the financial statements?
Disclosure of vulnerability to concentration is required when the following criteria is met:
- The concentration exists as of the balance sheet date
- The concentration will make the entity vulnerable to risk to severe impact in the near-term
- The risk is reasonably possible in the near-term
For an entity that does not file with the SEC, what date should the subsequent event evaluation period be disclosed in the notes to the financial statements?
The subsequent event period for an entity that does not file with the SEC is a date that runs through when the financial statements are available to issued. This date can be defined as:
- The financial statements are in form and format that comply with GAAP
- All approvals for issuance have been obtained
The evaluation period for a “filer”, (financial statements are filed with the SEC), the subsequent event period is the date that the financial statements are issued/distributed. However, no disclosure date is necessary
What is does Form 8-K report on?
- Form 8-K is a form that is required to be filed with all companies registered with the SEC. This form reports on all major corporate events including; corporate asset acquisitions/disposals, accountant changes, financial statement changes, management changes, etc.
After how many days is the 10-Q due for accelerated and non-accelerated filers?
The 10-Q is due for accelerate filers within 40 days of the period end. For non-accelerated filers the due date is within 45 days of the period end.
What are the parameters for a filer to be a large accelerated filer, an accelerated filer, and a small reporting company?
A large accelerated filer has a public float of $700M or more
An accelerated filer has a public float of $75M or more, but less than $700M. They must also have annual revenues of $100M or more
A smaller reporting company has a worldwide market value of less $75M
What adjustments are necessary to convert cash receipts to revenues as reported on an accrual basis?
Add: Ending A/R
Less: Beginning A/R
Less: Ending unearned revenue
Add: Beginning unearned revenue
What is the ratio for Asset Turnover
Sales (net) / Average total assets
What is the DuPont return on assets?
The DuPont return on assets is calculated as Net Profit Margin x Total Asset Turnover
Net Income/Net Sales x Net Sales/Avg Total Assets
Net sales cancels out leaving Net Income/Avg Total Assets
However, the DuPont approach makes it easier for investors to analyze how return on assets is affected by both
How is Times Interest Earned calculated?
EBIT / Interest Expense
How is Working Capital Turnover calculated?
Sales / Avg Working Capital (CA - CL)
In periods of inflation, what inventory method will produce the same ending inventory in a periodic and perpetual system?
The FIFO method will produce the same ending inventory for a periodic and perpetual system in times of inflation
What are the steps to calculate the amount of interest that may be capitalized on a construction project that is being built for an entity’s own use?
Step 1: Calculate the weighted average of accumulated expenditures by taking the expenditure amount x portion of year outstanding
Step 2: Compute the capitalized interest by multiplying the WAAE by the appropriate interest rate. If the WAAE is less than the amount borrowed, the interest rate is equal to the amount from the loan.
Step 3: Compare capital interest and actual interest. The amount cannot be greater than actual interest. The amount to capitalize is the lesser of the actual interest or capitalized interest
What are the step in determining an impairment loss for an intangible asset with a definite useful life?
- Determine if the carrying amount of the asset is recoverable by comparing the undiscounted future cash flows to the carrying amount of the asset. If the total amount of undiscounted future cash flows are less than the carrying amount, an impairment loss exists.
- The loss is would be equal the amount by which the carrying amount exceeds the fair value of the asset
How is a credit loss for an available-for-sale security recorded?
A credit loss for an available-for-sale security is recorded in the income statement when the fair value is less than the amortized cost but more than the present value of future cash flows
How is a credit loss calculated for a debt security?
The credit loss is equal to the difference between the amortized cost and the present value of expected cash flows (principle and interest)
Credit Loss = Amortized Cost - PVFCF
For available-for-sale debt securities, there is a credit loss if the FV of the security is below amortized cost. The security must by written down to the lower FV
What are the steps when a subsidiary is acquired for less than the fair value of underlying assets? (Bargain Purchase)
- The balance sheet is adjusted to fair value. This creates a negative balance in the acquisition account
- The identifiable intangibles assets are recognized at fair value. This also creates a negative balance in the acquisition account
- The total negative balance is reported as a gain
How is the ending noncontrolling interest (NCI) in a subsidiary calculated?
Beginning NCI
+ NCI share of subsidiary net income
− NCI share of subsidiary dividends
= Ending NCI
How do you calculate the balance sheet fair value adjustment?
BS FV Adjustment = FV net assets - BV net assets
How is goodwill calculated in an acquisition of a subsidiary?
Goodwill is the difference between the fair value of the subsidiary and the fair value of the net asset acquired
Under U.S. GAAP, how is NCI calculated?
NCI = Fair value of subsidiary x NCI %
Fair value of subsidiary = Consideration / % of ownership
How are dividends received recognized when an investor has no significant influence in the investee
The fair value method is performed with dividends being recognized as income to the extent of the investee’s cumulative earnings. Dividends in excess of cumulative earnings are treated as a return of capital and reduces the investment account (liquidating dividends)
What amount is reported for intercompany transactions from a parent to subsidiary or vice versa?
If a parents owns more than 50% of a subsidiary, then all intercompany transactions would be eliminated upon consolidation. Sales to outside parties would be picked up by the sub and the cost of sales would be the amount that the parent charged the sub for the goods
What amount should depreciation expense be decreased in a consolidation when an intercompany sale of assets occurs?
Depreciation expense should be decreased by the difference between the expense that would have been calculated if the asset was not sold and the expense of the new asset being acquired
How is the unrealized profit to be eliminated from inventory calculated in a intercompany transaction?
Interco profit on inventory x % of inventory still on hand
What will the consolidated stockholders’ equity be equal to on the day of acquisition?
On the date of acquisition the consolidated stockholders’ equity is equal to the parent company’s equity + the fair value of any noncontrolling interest
What is considered an exit and disposal activity?
- Costs to relocate employees
- Benefits related to involuntary employee termination
- Cost to terminate a contract that is not a capital lease
What is accretion expense and how is it calculated?
Accretion expense is the increase in an Asset Retirement Obligation liability due to the passage of time. It is calculated by taking the credit adjusted rate by the beginning ARO
How should a non-interest bearing note be recorded on the balance sheet?
A non-interest bearing note should be recorded at its present value calculated using the prevailing market interest rate
How is the ending carrying amount calculated when the effective interest amortization method is used to amortize the discount of a bond?
The ending carrying amount is equal to the beginning carrying amount plus the discount amortized in the current period
How do you calculate discount/premium of a bond?
A. Interest Expense = CV x Mkt %
B. Cash Payment = Face x Coupon %
Amortization of premium = B - A
How are finder’s fees and consultants reported when a business combination is accounted for as an acquisition?
How are registration fees for equity securities issued reported?
Finder’s fees are expensed in the period incurred
Registration fees for equity securities issued decrease APIC
What should a company recognize as a current asset or a current liability at year end, using the percentage-of-completion contract method?
If accumulated cost + estimated earnings exceed process billings, then a current asset is reported
If accumulated cost + estimated earnings are less than process billings, then a current liability is reported
How is a gain/loss recognized in the transfer of assets for troubled debt restructuring?
FV asset transferred - NBV asset transferred = Gain/Loss
Carrying amount of payable - FV asset transferred = Gain
What are the five criteria in order for a lease to be considered a finance lease?
- Ownership transfer at end of lease term
- A written option to purchase
- Net PV of future lease payments above 90% of fair value of asset
- Lease term 75% of the economic life of the asset
- Asset is specialized
If any one of the conditions are met, the lease is considered a finance lease
When is a financing liability recorded? At what amount should the liability be recorded?
If there is a difference between the sale price and fair value, a financing liability must be recorded. The amount of liability is equal to the difference and recorded on the seller/lessee’s books
When a lease is classified as a finance lease because there is a written purchase option that the lessee is reasonably certain to exercise, how would the lease be amortized?
The lease would be amortized based off the economic life of the asset because of the written purchase option. If only the 75% or 90% criteria were met, the lease would be amortized over the lease term
How are finance leases recorded?
Finances leases should be recorded as both an asset and a liability at the present value of minimum lease payments
If a lease is an operating lease and the monthly fee is reduced, how should the lease be expensed in the current year?
The lessee must take the total lease expense to be paid over the life of the lease term and divide it evenly over each period
How are fair value hedge gains and cash flow hedge gains reported on the financial statements?
Fair value hedge gains are reported in the earning section or income statement
Cash flow hedge gain are reported as a component of other comprehensive income
Why would an investor purchase a put option on a stock?
Put options on stock lock in the sale price of the stock. If the stock decreases in value the investor will have locked in the now higher price. If the stock goes up, the investor would not exercise the put option because he would benefit from the increase. Therefore an investor would purchase a put option if he believe the price of the stock would decrease
When translating foreign currency financial statements into the reporting currency, how are assets, liabilities, income statement items, and equity translated?
Assets and liabilities are translated to the reporting currency using the current (year-end) exchange rate. Exceptions are if (1) hyperinflationary economy or (2) a foreign entity does not maintain its accounts in a foreign functional currency. In these cases, the historical rates should be used for only those balance sheet accounts carried at “cost” (most non-monetary items)
The weighted average method is used for all income statement items
Common stock and APIC are translated using historical exchange rates
How are foreign currency translation and transaction gains and losses reported?
Foreign currency translation gains and losses are reported as a component of other comprehensive income
Foreign currency transaction gains and losses are reported on the income statement
How is the effective tax rate calculated?
Income tax expense / Pretax income
How is intercompany sales and cost of goods sold eliminated from the consolidated financial statements?
How is intercompany profit resulting from the intercompany sales of inventory eliminated?
If inventory purchased/sold by the Parent/Sub is still in stock and not sold to a third-party, the profit is eliminated from ending inventory
If inventory was sold to a third party, the profit is eliminated from cost of goods sold
How are gains and losses of treasury stock treated in the financial statements?
Gains and losses of treasury stock are adjusted to APIC with losses that exceed the balance in the APIC account will reduce retained earnings
How is book value per common share computed?
BV per common share = Common S/H equity / Common shares outstanding
Will a sale of treasury stock increase or decrease stockholders equity when the sale is less than cost?
Increase - for example if T/S initially purchased for 1,000 is sold for $600 cash and $200 exists in APIC - T/S
Cash 600
APIC - T/S 200
R/E 200
T/S 1,000
The net impact to stockholders’ equity is an increase of $600
How are property dividends recorded?
Property dividends are recorded at “fair value.” Retained earnings are decreased when property distributions are declared. The cost of the asset will be adjusted to fair market value and the difference will be a gain or loss on disposal
How does a stock dividend effect stockholders’ equity?
A stock dividend (less than 20-25% of the stock outstanding) transfers the FMV of the stock dividend at declaration date from retained earnings to capital stock and APIC
When is a public entity required to measure the cost of employee services in exchange for an award of equity interests?
Equity instruments issued for employee services are valued as of the date of the grant based on fair value
How should compensation expense be allocated for stock options to employees?
Compensation should be allocated over the period when services are performed. For example is options were exercisable on January 1, year 4, the service period would be 3 years if the stock options were granted on January 1, year 1
What is the maximum number of days after the company’s fiscal year end that a large accelerated filer, accelerated filer, and non-accelerated filer must file Form 10-K with the SEC
Large Accelerated - 60 days
Accelerated - 75 days
Non-Accelerated - 90 days
What is the formula for basic earnings per share?
Income available to common S/H / Weighted avg. # common shares outstanding
*Income available to common S/H = Net Income - Preferred Dividends
What determines is a security is consider dilutive?
A dilutive security will produce an EPS amount that is less than the basic EPS calculation.
For example, if the basic EPS is $1.50 and 7% convertible bonds, issued at par, with each $1,000 bond convertible into 40 shares of common stock (30% tax rate), the bonds would be dilutive
(1,000 x .07 x (1 - .30) = $49 income savings
49 / 40 shares = 1.225 per share, which is less than $1.50
If a company has cumulative preferred stock, how is that included in the basic EPS calculation?
Cumulative preferred stock will reduce the net income available to common shareholder by the dividends from preferred stock accumulated in the period whether or not the dividends have been declared.
What are some items that are listed as investing activities in the cash flow statement?
Investing activities include acquisitions and sales of long-term assets or investment assets.
- Purchase, sales and maturities of held-to-maturity and AFS securities
- Proceeds from sale of equipment
What are some items listed as operating activities in the statement of cash flows?
The operating activities section includes cash flows from working capital (current assets and current liabilities) and other income statement items.
Increases in current assets = decrease in cash (inverse)
Increase in current liabilities = increase in cash (direct)
What are some items that are listed as financing activities in the statement of cash flows?
Financing activities include obtaining resources from owners and providing them a return on, and a return of, their investment. Borrowing money and repaying amounts borrowed are also included in financing activities.
- Payment of dividends
- Issuance of common stock
- Issuance of bonds payable
- Proceeds from sale of treasury stock
How is cash paid to suppliers determined in preparing a statement of cash flows?
First you must determine how much inventory was purchased and how much was the change in accounts payable
Purchases = COGS + change in inventory
Cash Paid = Purchases - Change in A/P
How is lower of cost or market calculated?
Compare “floor” with “ceiling” and “replacement cost” and use the middle amount
That amount is compared with cost and the lower amount is used
Ceiling = Selling Price - cost to dispose or complete (NRV)
Floor = NRV - Normal profit margin
What are the steps when a subsidiary is acquired for less than the fair value of the underlying assets in a business combination?
- The balance sheet is adjusted to fair value, which creates a negative balance in the acquisition account
- The identifiable intangible assets are adjusted to FV, which increases negative balance in the acquisition account
- The total negative balance is recorded as a gain
What are cost associated with exit and disposal activities?
- Costs to relocate employees
- Costs to terminate a contract that is NOT a capital lease
- Benefits associated with the involuntary termination of an employee
What is form 8-K used for?
Form 8-K is used to report major corporate events for publicly traded companies, such as acquisitions
What is Form S-1 used for?
Form S-1 is used to report the initial registration of the issuance of new securities of a publicly traded company to the SEC
What amount of interest may be capitalized for a construction loan?
Capitalize interest equals the lesser of avoidable interest or total interest incurred. Avoidable interest equals the weighted average of accumulated expenditures
Interest may capitalized based on the WAAE, as long as it does not exceed the total amount of interest costs for the period
If the WAAE outstanding exceed the amount of specific borrowing, the excess interest would be calculated using the interest rate from other borrowings of the company
How should marketable debt securities be valued?
Marketable debt securities in which a company has the intent and ability to hold to maturity are reported at carrying amount “amortized cost” for both short term and long term securities, unless there is a permanent decline in market value
How is a credit loss recorded for available-for-sale securities?
A credit is equal to the difference between the amortized cost and the present value of expected cash flows (principal and interest to be received). An unrealized loss would be the difference between the present value and fair value and reported as an unrealized loss in OCI
How are lease payments recognized by the lessee?
The lessee calculates lease payments at the commencement date of the lease based on:
- fixed payments
- variable payments
- exercise price of purchase option
- termination penalties
- probable amount owed of the guaranteed residual
When a company translates account balances from another currency into U.S. dollars at year-end, how should balance sheet items and income statement items be translated?
Asset & Liabilities should be translated at the current/year-end rate
Income statement items are translated using a weighted average exchange rate
Balance sheet accounts are generally remeasured at current exchange rates. What are the exceptions?
- A self contained subsidiary with a 3 year inflation rate of 100% or more
- A foreign entity which does not maintain its accounts in a foreign functional currency
In these circumstances, the remeasured method is used and the historical rates should be used “only” for those accounts carried at “cost” (most non-monetary items)
What are the order of steps and conversion rates for a translation method in a foreign exchange adjustment
If the f/s of the foreign subsidiary are in the subsidiary’s functional currency, the f/s are translated to the reporting currency
Step 1: Income Statement - Weighted average rate
Step 2: Balance Sheet - At year-end rate, Stock and APIC at historical, Roll forward R/E
Step 3: Plug to equity (OCI - Cumulative Translation Adjustment)
What are the order of steps and conversion rates for a remeasurement method in a foreign exchange adjustment
- Remeasure items on balance sheet
- Monetary assets and liabilities using rates at the b/s date
- Nonmonetary assets and liabilities historical rate
- Difference is ending R/E
- Remeasure items on Income Statement
- At weighted average
- Historical for B/S items
- Gain/loss so net income is at amount necessary for R/E plug
What approach is used to determine income tax expense under GAAP?
The asset and liability approach (balance sheet approach) is used to determine income tax expense under GAAP. The amount of income tax expense is squeezed out of deferred tax assets and liabilities have been determined
When is intraperiod income tax allocation not required by GAAP?
GAAP does not required intraperiod tax allocation to operating income. Operating income is not shown “net of tax” on the income statement
If a company sells treasury stock at a price that exceeds its cost, how should the excess be recorded?
The excess amount would be recorded in APIC to the extent of the capital account. If losses exceed the amount in the APIC account, the additional loss would reduce R/E.
How is book value per common share calculated?
Common stockholder’s equity / Common shares outstanding
Any preferred shareholder interest must be removed from shareholders’ equity
What is the accounting treatment when a small stock dividend is declared?
A small stock divided is when the issuance is not expected to affect market price of the stock. The fair value of the stock on the date of declaration is transferred from retained earnings (debit) to common stock and APIC
What date are equity instruments that are issued for employee services valued?
Equity instruments that are issued to employee services are valued based on the fair market value on the date of the grant. Compensation expense is recognized over the service period
When calculating earnings per share, how is net income available to common shareholders affected by preferred stock
Income available to common shareholders is determined by deducting
- dividends declared in the period for non-cumulative preferred stock (regardless if it has been paid)
- dividends accumulated in the period on cumulative preferred stock (regardless if it has been declared)
When computing the weighted average of common shares outstanding, how are convertible securities handled?
Convertible securities are ignored for purposes of computing weighing average of common shares outstanding when computing basis earnings per share
When the indirect method is used, what should be reported as a separate disclosure in a statement of cash flows?
When the indirect method is used a supplemental disclosure of cash paid for interest and income taxes is required
How are gains and losses from the sale of used equipment reported in the statement of cash flows using the indirect method?
A gain from the sale of used equipment would be reported as a deduction from income in the operating section
A loss for the sale would be reported as an addition to income in the operating section
In the investing activities section, cash inflow from the sale should be reported for the entire proceeds from the sale
What are the required statements for defined benefit pension plans?
- Statement of Net Assets Available for Benefits
- Statement of Changes in Net Assets Available for Benefits
- Statement of Accumulated Plan Benefits
- Statement of Changes in Accumulated Plan Benefits
What are the required statements for defined contribution benefit plans?
- Statement of Net Assets Available for Benefits
- Statement of Change in Net Assets Available for Benefits
What is the calculation for the indirect method for operating activities in a statement of cash flows
- Net Income
- Depreciation
- Gains
- Losses
- Equity earnings > cash received
- increase in CA
- Decrease in CA
- Decrease in CL
- Increase in CL
Under the direct method, how is cash paid to suppliers reported in a cash flow statement?
Purchases = COGS + Change in inventory
Cash paid = Purchases - Change in A/P
When would an adjustment to diluted EPS be required when a company has warrants or options?
The calculation for diluted EPS will require an adjustment when warrants or options are in-the-money. The strike price is less that the average market price of the stock
How is diluted earnings per share calculated?
For convertible preferred stock and convertible bonds the if-converted method will be used
For convertible preferred stock, the dividends that were paid are assumed not to have been paid. They are not added back, but they are not substracted from net income like in the basic earnings per share calculation. They are simply ignored
For convertible bonds, the interest that was really paid would be assumed not to have been paid. The interest received is added to the numerator (net income)
The denominator would include the common shares and preferred shares that would be assumed to be converted into common shares
When are convertible bonds antidilutive?
Convertible bonds are antidilutive if converting them into stock increases earnings per share over basic earnings to share.
The interest savings is divided by the number of new shares created.
Example: $1,00,000 4% convertible bonds. Each $1,000 bond is convertible into 20 shares of common stock. Tax rate is 21%. Interest = $1,000,000 x 4% x ( 1 - tax rate). Number of shares = 1,000,000/1,000 x 20 shares
31,600 / 20,000 = 1.58
To meet the reporting sufficiency test for a reportable segment, what percentage is needed for intersegment and external revenue.
The reporting sufficiency test states that operating segments need to be identified as reportable if the total external revenue reported for identified segments is less than 75% for the company overall. Intersegment revenue is not relevant to the 75% reporting sufficiency test
How is a credit loss determined in a held-to-maturity bond?
Available-for-sale?
For a held-to-maturity security, the credit loss is equal to the difference between the amortized cost and the present value of future inflows when the present value is less than the amortized cost.
For a available-for-sale security, the credit loss would be limited to the difference between the amortized cost and fair value.
In testing for goodwill impairment, how is the impairment loss calculated?
Goodwill impairment exists if the fair value of the reporting unit is less than the carrying value. The difference is the impairment loss
What is the total amount of interest revenue on a direct finance lease?
The interest revenue on a direct financing lease is equal to the difference between the total lease payments and the present value of the lease payments
When are software costs capitalize and expensed?
Costs are expensed until the point of technological feasibility, after which they are capitalized until the time when product costs are incurred (post production, included in inventory)
Until technological feasibility has been established, cost incurred in creating a software package are expensed to research and development.
What is reported in Accumulated OCI for defined benefit plans?
Under U.S. GAAP, unrecognized prior service cost and unrecognized net gains or losses must be reported in AOCI (net of tax) until recognized as part of pension expense through amortization.
Prior service cost increases pension expense and is recorded as a debit to OCI
Net gain decrease pension expense and are recorded as a credit to OCI
When are options added to the denominator when computing diluted earnings per share?
If options are outstanding the method used to calculate the number of new shares resulting from options is the if-converted method. If the exercise price is below the market price, the options would be “in the money” and would be added to the denominator in the calculation for diluted earnings per share
When are losses recorded for a held-to-maturity debt security?
Using the current expected losses (CECL) model, a loss is recorded when amortized cost is greater than the expected present value of interest and principal to be received in a held-to-maturity debt security
