FAR SU2 Flashcards
Learn FAR SU2
What is a Current Asset?
Cash and other assets or resources commonly identified as reasonably expected to be realized in cash or sold or consumed during the normal operating cycle of the business. If the cycle is less than a year, 1 year is the period used for segregating current from noncurrent assets.
Examples of Current Assets
- Cash and cash equivalents
- Certain individual trading, available-for-sale, and held-to-maturity debt securities
- Receivables
- Inventories
- Prepaid expenses
- Certain individual investments in equity securities
What is a Noncurrent Asset?
Noncurrent assets are those not qualifying as current
What are Investment and Funds?
Investments and funds include nonoperating items intended to be held beyond the longer of 1 year or the operating cycle.
Examples of Investment and Funds
- Investments in equity securities made to control or influence another entity
- Other noncurrent equity securities. Certain individual available-for-sale and held-to-maturity debt securities may be noncurrent.
- Funds restricted as to withdrawal or use for other than current operations, for example, to:
a. Retire long-term debt,
b. Satisfy pension obligations, or
c. Pay for the acquisition or construction of noncurrent assets - Capital assets not used in current operations, such as:
a. Idle facilities or
b. Land held for a future plant site
What is Property, Plant, and Equipment (PPE)?
Tangible operating items recorded at cost and reported net of any accumulated depreciation.
They include
- Land and natural resources subject to depletion, e.g., oil and gas
- Buildings, equipment, furniture, fixtures, leasehold improvements, land improvements, noncurrent assets under construction, and other depreciable assets
What are Intangible Asset
Intangible assets are nonfinancial assets without physical substance.
Examples are patents and goodwill.
Example of Other Noncurrent Assets
Deferred tax assets and long-term receivables.
Examples of Current Liabilities
a. Trade payables
b. Other payables arising operations (such as accrued wages, salaries, rentals, royalties, and taxes).
c. Unearned revenues
d. Short term notes
e. Payments on the current portion of serial bonds or other noncurrent debt
When is a Noncurrent Obligation callable?
Noncurrent obligations callable at the balance sheet date because of a violation of the debt agreement or that will become callable if the violation is not cured within a specified period.
What do Current Liabilities NOT include?
Current obligations if an entity
(a) intends to refinance them on a noncurrent basis and;
(b) demonstrates an ability to do so.
What are Noncurrent Liabilities?
Noncurrent liabilities are those not qualifying as current. The noncurrent portions of the following items are reported in this section of the balance sheet:
- Noncurrent notes and bonds
- Lease liability
- Most postretirement benefit obligations
- Obligations under product or service warranty agreements
- Advances for noncurrent commitments to provide goods or services
- Deferred revenue
- Deferred tax liabilities arising from interperiod tax allocation are classified as noncurrent.
What is Equity or Net Assets?
The residual after total liabilities are subtracted from total assets.
What is included in Equity?
- Equity consists of the following:
a. Capital contributed by owners (par value of common and preferred stock issued and additional paid-in capital)
b. Retained earnings (income reinvested)
c. Accumulated other comprehensive income (all comprehensive income items not included in net income)
d. The noncontrolling interest in a consolidated entity
What is a Nominal Account?
A temporary account (Income Statement Accounts)
What is a Real Account?
A permanent account (Balance Sheet Accounts)
What are the 3 formats of Income Statements?
- Single-Step
- Multiple-Step
- Condensed
What is a Single-Step Income Statement used for?
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 a Multiple-Step Income Statement used for?
The multiple-step income statement matches operating revenues and expenses in a section separate from nonoperating items. It enhances disclosure by presenting subtotals.
What is a Condensed Income Statement used for?
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 Cost of Goods Sold?
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.
Beginning FG inventory \+ Purchases or COGM \_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_ Goods available for sale – Ending FG inventory \_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_ Cost of goods sold
What is Cost of Goods Manufactured?
Beginning work in process \+ Sum of periodic manufacturing costs – Ending work-in-process \_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_ Cost of goods manufactured
OR
Ending FG inventory \+ Cost of goods sold – Beginning FG inventory \_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_ Cost of goods manufactured
Examples of Selling Expenses
- Examples include:
a. Sales representatives’ salaries, commissions, and traveling expenses;
b. Sales department rent, salaries, and depreciation; and
c. Communications (e.g., Internet) costs. - Shipping costs also may be classified as selling costs.
- Advertising costs should be expensed either as incurred or when advertising first occurs.
What are Administrative (General) Expenses?
Administrative (general) 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. They include:
- Accounting, legal, and other fees for professional services;
- Officers’ salaries;
- Insurance;
- Wages of office staff;
- Miscellaneous supplies; and
- Office occupancy costs.
Accounting for material items that are unusual in nature and infrequent in occurrence
Material items that are unusual in nature, infrequent in occurrence, or both are reported as a separate component of income from continuing operations.
- These items must not be reported net of taxes.
- Gains or losses of a similar nature that are not individually material must be aggregated.
- The nature and financial effect of each item is disclosed in the notes to the financial statements or reported in the income statement.
- The effects of such items on earnings per share must not be presented on the income statement.
What transactions are not included in Net Income?
- Transactions with owners,
- Error corrections,
- Items reported initially in other comprehensive income,
- Transfers to and from appropriated retained earnings, and
- Effects on prior periods of accounting changes.
What transactions change the Statement of Retained Earnings?
- Net income (loss) for the period
- Any prior-period adjustments, net of tax
- Dividends declared
- Certain other rare items, e.g., reissuance of treasury stock under the cost method
What is the Modified Cash Basis?
The modified cash basis uses the cash basis for typical operating activities with modifications having substantial support, for example, reporting inventory, accruing income taxes, and capitalizing and depreciating fixed assets.
This method often is used by professional services firms, such as physicians, realtors, and architects.
What terms indicate operating activities?
Revenues
Expenses
What terms indicate non-operating activities?
Gains
Losses
Non-operating section of Multiple Step Income Statement special note regarding Dividend Revenue and Interest Expense
While revenues and expenses usually indicate that it is a operating income. Dividend Revenue and Interest Expense (unless related to a sale of a tangible good in COGS) are actually included in the Non-Operating section of the Multiple Step Income Statement
What is included in Other Comprehensive Income?
- Unrealized holding gains and losses on available-for-sale debt securities (except those that are hedged items in a fair value hedge)
- Gains and losses on derivatives designated and qualifying as cash flow hedges
- Certain amounts associated with recognition of the funded status of postretirement defined benefit plans
- Certain foreign currency items
- Changes in fair value attributable to instrument-specific credit risk of financial liabilities for which the fair value option is elected
What is the purpose of reporting comprehensive income?
To summarize all changes in equity from nonowner sources.
Comprehensive income includes all changes in equity of a business during a period except those from investments by and distributions to owners. It includes all components of (1) net income and (2) other comprehensive income (OCI).
According to authoritative GAAP issued by the FASB, an entity that presents a full set of financial statements
Must report comprehensive income if it has items of other comprehensive income (OCI).
If an entity has no items of OCI for any period presented, it need not report OCI or comprehensive income. Otherwise, it must report comprehensive income either (1) in one continuous statement of comprehensive income (with sections for net income and OCI) or (2) in two separate but consecutive statements (a statement of net income and a statement of OCI).
A company reports the following information as of December 31:
Sales revenue $800,000 Cost of goods sold $600,000 Operating expenses $ 90,000 Unrealized holding gain on available-for-sale debt securities, net of tax $30,000
What amount should the company report as comprehensive income as of December 31?
$140,000
Comprehensive income includes net income and other comprehensive income. Net income equals $110,000 ($800,000 sales revenue – $600,000 COGS – $90,000 operating expenses). Unrealized holding gains on available-for-sale debt securities ($30,000) are included in other comprehensive income. Thus, comprehensive income is $140,000 ($110,000 + $30,000).
Rice Co. was incorporated on January 1, Year 6, with $500,000 from the issuance of stock and borrowed funds of $75,000. During the first year of operations, net income was $25,000. On December 15, Rice paid a $2,000 cash dividend. No additional activities affected equity in Year 6. At December 31, Year 6, Rice’s liabilities had increased to $94,000. In Rice’s December 31, Year 6 balance sheet, total assets should be reported at
$617,000
Total assets equal the sum of total liabilities and equity. Total liabilities were $94,000 at year end, and equity amounted to $523,000 ($500,000 from issuance of stock + $25,000 net income – $2,000 cash dividend). Total assets are therefore $617,000 ($523,000 + $94,000).
Clear Co.’s trial balance has the following selected accounts:
Cash (includes $10,000 in bond-sinking
fund for long-term bond payable) $50,000
Accounts receivable 20,000
Allowance for doubtful accounts 5,000
Deposits received from customers 3,000
Merchandise inventory 7,000
Unearned rent 1,000
Investment in trading debt securities 2,000
What amount should Clear report as total current assets in its balance sheet?
$64,000
An asset is classified as current on the statement of financial position if it is expected to be realized within the entity’s operating cycle or 1 year, whichever is longer. Current assets include (1) cash and cash equivalents; (2) certain individual trading, available-for-sale, and held-to-maturity debt securities; (3) receivables; (4) inventories; (5) prepaid expenses; and (6) certain individual investments in equity securities. Funds restricted as to withdrawal or use for other than current operations are classified as noncurrent assets. Thus, the $10,000 in a sinking fund for a long-term bond payable is classified as a noncurrent asset. Current receivables are measured at net realizable value (i.e., net of allowance for uncollectible accounts). Trading debt securities are classified as current assets because they are bought and held primarily for sale in the near term. Accordingly, the total of current assets is $64,000 ($40,000 unrestricted cash + $15,000 current receivables at NRV + $7,000 merchandise inventory + $2,000 investment in trading debt securities).
Which of the following items is not subject to the application of intraperiod income tax allocation?
Operating income.
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. Operating income is not one of the categories of income subject to intra-period income tax allocation.
What financial statement is comprehensive income report on?
Accumulated other comprehensive income is reported in the equity section of the balance sheet.
Total other comprehensive income is transferred to a component of equity separate from retained earnings and additional paid-in capital.
What is the purpose of reporting comprehensive income?
To summarize all changes in equity from nonowner sources.
Comprehensive income includes all changes in equity of a business during a period except those from investments by and distributions to owners. It includes all components of (1) net income and (2) other comprehensive income (OCI).
A gain or loss from a transaction that is unusual in nature or infrequent in occurrence should be reported separately as a component of income
Before results of discontinued operations.
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
On April 1, Julie began operating a service proprietorship with an initial cash investment of $1,000. The proprietorship provided $3,200 of services in April and received a payment of $2,500 in May. The proprietorship incurred expenses of $1,500 in April that were paid in June. During May, Julie drew $500 from her capital account. What was the proprietorship’s income for the 2 months ended May 31 under the following methods of accounting?
Cash-Basis and Accrual-Basis
$2,500 and $1,700
Under the cash basis, $2,500 of income is recognized for the payments received in May for the services rendered in April. The $1,500 of expenses is not recognized until June. Under the accrual basis, the $3,200 of income and the $1,500 of expenses incurred in April but not paid until June are recognized.
The net income is $1,700 under the accrual basis. The cash investment and capital withdrawal are ignored because they do not affect net income.
Which of the following should be included in general and administrative expenses?
Interest and Advertising
Neither
General and administrative expenses are incurred for the entity as a whole and are not related entirely to a specific function, e.g., selling or manufacturing. They are included in the determination of operating income. Interest expense is a nonoperating item usually included under other expenses. Advertising expenses are operating items included in the selling expenses category.
Comprehensive income is best defined as
The change in net assets for the period excluding owner transactions.
Comprehensive income includes all changes in equity of a business entity except those changes resulting from investments by owners and distributions to owners. The components of comprehensive income are net income and other comprehensive income (OCI). Net income includes the results of operations classified as income from continuing operations and discontinued operations. Components of comprehensive income not included in the determination of net income are included in OCI, for example, unrealized gains and losses on available-for-sale debt securities.
What is the purpose of reporting comprehensive income?
To summarize all changes in equity from nonowner sources.
Comprehensive income includes all changes in equity of a business during a period except those from investments by and distributions to owners. It includes all components of (1) net income and (2) other comprehensive income (OCI).
OCI one continuous statement
One continuous statement must have two sections: net income and OCI. It must include:
- A total of net income with its components,
- A total of OCI with its components, and
- A total of comprehensive income.
OCI separate but consecutive statement
Separate but consecutive statements must be presented as follows:
- The first statement (the income statement) presents the components of net income and total net income.
- The second statement (the statement of OCI) is presented immediately after the first. It presents
a. The components of OCI,
b. The total of OCI, and
c. A total for comprehensive income. - The entity must begin the second statement with net income.
OCI two-statement presentation
A two-statement presentation is:
a. The final component of the statement of net income is net income.
b. The first component of the statement of OCI is net income, and the final component is comprehensive income.
OCI IFRS difference
An entity must group items of OCI as follows: (1) those that will not be reclassified to profit or loss (e.g., actuarial gains and losses on defined benefit pension plans) and (2) those that may be (e.g., exchange differences arising from foreign operations).
(T/F) If an entity chooses to present comprehensive income in two statements, the second statement presents a total for other comprehensive income.
True
The first of two separate but consecutive statements (the income statement) presents the components of net income and total net income. The second statement (the statement of OCI) is presented immediately after the first. It presents (1) the components of OCI, (2) the total of OCI, and (3) a total for comprehensive income.
(T/F) Other comprehensive income includes, among other things, realized gains and losses on available-for-sale securities.
False
OCI includes all items of comprehensive income not included in net income. Under existing accounting standards, items of OCI include, among others,
Unrealized gains and losses on available-for-sale debt securities (except those that are hedged items in a fair value hedge).
Gains and losses on derivatives designated and qualifying as cash flow hedges.
Certain amounts associated with recognition of the funded status of postretirement defined benefit plans.
Certain foreign currency items.
(T/F) An entity must report in the financial statements comprehensive income attributable to a noncontrolling interest.
True.
If a noncontrolling interest exists, amounts for net income and comprehensive income attributable to the parent and to the subsidiary must be reported in the appropriate statements.
(T/F) One amount may be presented for the aggregate tax effect on the total of other comprehensive income.
True.
Each component of OCI must be presented net of tax, or one amount must be presented for the aggregate tax effect on the total of OCI. In either case, the tax effect on each component must be disclosed.
(T/F) Accumulated other comprehensive income is a nominal account.
False.
The components of OCI are recorded initially in a temporary (nominal) account. The total OCI for a period must be transferred to a component of equity (a permanent or real account) separate from retained earnings and additional paid-in capital. The component must have a descriptive title, e.g., accumulated OCI.
In the income statement, gains from extinguishment of debt are most likely classified in
Income from continuing operations.
Gains from extinguishment of debt are included in income from continuing operations (net income if no discontinued operation is reported) in the income statement.
In Year 1, an entity recognized an unrealized holding loss on bonds. These bonds were classified as available-for-sale securities in the balance sheet. In Year 2, the bonds were sold at a loss. The pre-tax entry to record the sale is
Debit loss and credit OCI.
Reclassification adjustments must be made for each component of OCI. Their purpose is to avoid double counting when an item included in net income also was included in OCI for the same or a prior period. For example, if a gain or loss on available-for-sale securities is realized in the current period, the prior recognition of an unrealized holding gain or loss must be eliminated from accumulated OCI.
Is equipment a current or noncurrent asset?
Depreciation expense is accounted for annually and compounded in accumulated depreciation. Since the entire value of the equipment is depreciable, it is reported as a noncurrent asset on balance sheet.
Asset Classification- Leasehold improvements
Property, plant, and equipment.
These noncurrent assets are tangible operating items recorded at cost and reported net of any accumulated depreciation, e.g., leasehold improvements.
Asset Classification- Loans to officers not expected to be collectible within 1 year
Other noncurrent assets.
These items include noncurrent prepayments (often called deferred charges) and any other noncurrent assets not readily classifiable elsewhere (e.g., rearrangement costs). They include noncurrent receivables arising from such unusual transactions as loans to officers. (NOTE: The Sarbanes-Oxley Act of 2002 generally prohibits an issuer from extending personal credit to directors or officers.)
Asset Classification- Bonds payable issue costs
Not classified as an asset. Debt issuance costs do not meet the definition of an asset. These costs are reported in the balance sheet as a direct deduction from the face amount of the debt.
Asset Classification- Trading securities
Current assets.
Trading securities are acquired with the intent to sell them in the near term. They are held only for a short period of time. Current assets are expected to be realized in cash or sold or consumed during the entity’s operating cycle or 1 year, whichever is longer. Thus, trading securities are generally classified as current in the balance sheet.
Asset Classification- Goodwill
Intangible assets.
These assets are nonfinancial assets without physical substance. An example is goodwill.
Asset Classification- Cash equivalents
Current assets.
Current assets include (a) cash and cash equivalents; (b) receivables; (c) inventories; (d) certain individual trading, available-for-sale, and held-to-maturity securities; and (e) prepaid expenses.
Asset Classification- Cash restricted to payment of pension obligations
Investments and funds.
These noncurrent assets include nonoperating items intended to be held beyond the longer of 1 year or the operating cycle, e.g., funds restricted as to withdrawal or use for other than current operations, for example, to (a) retire noncurrent debt, (b) satisfy pension obligations, or (c) pay for the acquisition or construction of noncurrent assets.
Balance Sheet Item- Preferred stock
Capital stock.
Preferred stock’s par or stated value for shares issued is classified as capital stock.
Balance Sheet Item- Trade accounts payable
Current liabilities.
Obligations expected to be liquidated in the ordinary course of business during the longer of the next year or operating cycle are classified as current liabilities. Trade accounts payable is one of the most common current liabilities.
Balance Sheet Item- Direct costs of issuing common stock
Additional paid-in capital.
Direct costs of issuing stock reduce both the net proceeds received and additional paid-in capital.
Balance Sheet Item- Treasury stock (at cost)
Other classification.
Treasury stock recorded at cost is a reduction of total equity (a debit).
Balance Sheet Item- Appropriation for contingencies
Retained earnings.
Amounts may be appropriated (restricted) to disclose that earnings are to be used for purposes other than dividends.
Balance Sheet Item- Common stock subscriptions receivable
Other classification.
A stock subscription is a contractual arrangement to sell a specified number of shares at a specified price at some future date. Stock subscriptions receivable must be reported as a contra equity account.
Balance Sheet Item- Discount on bonds payable
Noncurrent liabilities.
Discount on bonds payable is a direct subtraction from the face amount of the bonds payable in the balance sheet.
Balance Sheet Item- Bonds payable issue costs
Noncurrent liabilities.
Costs to issue debt securities are reported in the balance sheet as a direct deduction from the face amount of the debt.
Income Item- Unusual material gain on assets donated to a business entity
Separate component of income from continuing operations.
A material event or transaction that an entity considers to be 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 on the face of the income statement net of income taxes.
Income Item- Earthquake damage to real estate holdings
Separate component of income from continuing operations.
An earthquake is unusual in nature and infrequent in occurrence. 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 on the face of the income statement net of taxes.
Income Item- Operating losses of discontinued component of an entity from beginning of year to measurement date
Separately reported component of income, net of tax.
The loss from operations of a discontinued component of the entity, including the gain or loss on disposal, is reported after income from continuing operations in the discontinued operations component of the income statement, net of tax.
Income Item- Loss on disposal of a discontinued component of an entity
Separately reported component of income, net of tax.
The loss from operations of a discontinued component of the entity, including the gain or loss on disposal, is reported after income from continuing operations in the discontinued operations component of the income statement, net of tax.
