FAR1 Flashcards
FAR
How are changes in accounting principle applied?
Retrospective Application:
Prior Periods adjusted
Retained Earnings adjusted
Completed Contract to % Completion
Ex: LIFO to FIFO
FAR
Would a change from Completed Contract to Percentage of Completion be a change in accounting principle- or a change of estimate?
How would it be applied?
A change of principle.
Applied retrospectively.
FAR
Would a change from LIFO to FIFO be a change in accounting principle or a change of estimate?
How would this change be applied?
A change in accounting principle.
Applied retrospectively.
FAR
How is a change in accounting estimate applied?
A change in accounting estimate is applied prospectively (going forward).
No backwards adjustment is made.
FAR
Would a change from straight line depreciation to double declining balance be a change in accounting principle or a change in estimate?
How would this change be applied?
Change in depreciation method would be a change in accounting estimate.
It is applied prospectively.
FAR
How is a correction of an accounting error made?
Cumulative effect of error gets adjusted to the beginning balances of assets and liabilities in the earliest period presented in the comparative statements.
The correction of the error must be included in the footnotes.
FAR
What are the requirements for a prior period adjustment?
Effect is Material
Is identifiable in Prior Period
Couldn’t be estimated in Prior Periods
FAR
How is a change from a non-GAAP accounting method to a GAAP method recorded?
It is treated as a correction of an accounting error.
Cumulative effect of error gets adjusted to the beginning balances of assets and liabilities in the earliest period presented in the comparative statements
Correction of the error must be included in the footnotes
FAR
How does an inventory error effect the financial statements?
Effect on Ending Inventory : Effect on Net Income
If one is overstated- both overstated. If one is understated- both understated.
Misstating inventory corrects itself after TWO periods.
FAR
How is a change in entity recorded?
Applied retrospectively.
All prior periods presented for comparative purposes must reflect the change
Footnote disclosures must be made
Changing to Consolidated Statements
FAR
What is a serial bond?
Any bond that matures in installments
FAR
What is a term bond?
Any bond that matures on a single date
FAR
What is a debenture bond?
A bond not secured by any collateral
FAR
What is a sinking fund bond?
Cash is held in a sinking fund for repayment of bond at maturity
5 years of requirements and maturity details should be disclosed
FAR
What is the formula to calculate proceeds of a bond sale?
Present Value of the principal payment at maturity+ Present Value of Interest Payments made
: Market Value of Bond Proceeds
FAR
How is the present value of a bond calculated?
Step 1: PV of $1 @ Yield Rate (not Stated Rate)
x Bond Face Value
PLUS
Step 2: PV of an Ordinary Annuity of $1 for Term @Yield
x (Stated Rate x Face)
FAR
Which costs are included in bond issuance costs? How are they recorded?
Include Engraving; Printing; Legal; Underwriter; Registration
Debited to a deferred charge account and amortized over life of Bond using S/L
Bond Proceeds - Bond Issuance Costs : Net Bond Proceeds
Time of amortization begins when issued
FAR
How are bonds reported when classified as trading securities?
Reported at FMV with unreleased gains and losses being included in earnings
FAR
How are bonds amortized under the interest method?
Both discount and premium amortization amounts increase each year
FAR
Describe the book value method when converting from bonds to stocks.
No gain or loss recognized
APIC is the plug for the difference between the Bond’s Book Value and the Par Value of the Common Stock
FAR
What is the stated rate for a bond?
Rate on the face of the bond
FAR
What is the market rate on a bond?
Rate that bonds are currently selling for
FAR
What happens when the bond’s market rate is greater than the stated rate?
Bond will need to sell at a discount in order for buyers to be interested. The difference in market rate vs. the stated is made up by the buyer purchasing the bond for less than par value
FAR
What happens when a bond’s market rate is less than the stated rate?
Bond will need to sell at a premium in order for buyers to be interested. The difference in market rate vs. the stated is made up by the buyer purchasing the bond for more than par value
FAR
How does accrued interest on a bond affect the purchase price?
The total cash that seller receives will be MORE than they normally would (set aside any considerations for premium or discount; they are irrelevant for this point).
Basically; the purchaser of the bonds must give the bond issuer the amount of accrued interest up front.
FAR
When does interest expense start accruing on a bond?
When the bonds are issued
FAR
How is an interest payment on a bond calculated?
Cash for payment : Stated rate x Face amount
FAR
What amount of interest is expensed on a bond interest payment?
Interest expense : effective yield x carrying value
Any difference between expense and cash payment is applied as amortization against premium/discount
FAR
What are convertible bonds? Which recording method is used?
Bonds that can be converted to stock
Book value method used if no gain or loss
Market value method used if there is a gain or loss
FAR
How is the retirement of bonds recorded?
Gain or Loss is Ordinary
Extraordinary if both unusual and infrequent
FAR
When is a gain recognized in a debt restructuring?
If terms are modified; and future payments are now less than the carrying amount of the debt; then a Gain is recognized
FAR
What is the gain recognized under a settlement of debt?
Gain recognized:
Difference between cash paid and carrying amount of debt
Difference between non-cash asset given and re-valued at FMV and debt carrying amount
FAR
For a creditor; how is a loan impairment recorded?
If future cash flows discounted at loan’s Effective Interest Rate are less than Carrying Value:
Effective Rate calculated using original rate; not modified rate
FAR
When is the fair value method used for recording interest in a separate company?
20% Ownership or Less
Accounted for as a purchase
If amount paid is less than fair value; results in a gain in current period
FAR
When is the equity method used when purchasing another company’s stock? How is it recorded?
Ownership 21% to 50%
Gives significant influence
Purchase Price - Par Value : Goodwill
Dividends received from the investee reduce the investment account and are not income
FAR
When are companies required to file consolidated financials? How is it recorded?
Ownership of other company is greater than 50%
Investment account is eliminated
Only parent company prepares consolidated statements; not subsidiary.
Acquired assets/liabilities are recorded at Fair Value on acquisition date.
Eliminating entries for inter-company sales of inventory & PPE; also inter-company investments
FAR
When is consolidation not required?
Ownership less than 50%
OR
Majority owner does not control - i.e. bankruptcy or foreign bureaucracy
FAR
What occurs under a step acquisition?
Acquirer held previous shares accounted for under Fair Value Method or Equity Method; and are now re-valued to Fair Value
Results in a Gain or Loss in current period
FAR
What is the difference between an acquisition and a merger?
Acquired companies continue to exist as a legal entity - their books are just consolidated with the parent company in the parent’s financial statements
Merged companies cease to exist and only the parent remains
FAR
How are acquisition costs recorded in a merger?
Expensed in period incurred - i.e. NOT capitalized:
Accounting; Legal; Valuation; Consulting; Professional
Netted against stock proceeds:
Stock registration and issuance costs
FAR
What is a current asset?
Cash plus other assets that are expected to be sold or converted to cash during the current operating cycle
Includes: Demand deposits, cash equivalents, accounts receivable, inventory, pre-paids, and short-term investments
FAR
What is a current liability?
A liability expected to be paid within 12 months or less
FAR
How is the Quick Ratio calculated?
(Cash + A/R + Trading Securities) / Current Liabilities
FAR
How is the Current Ratio calculated?
Currents Assets / Current Liabilities
FAR
How is Working Capital calculated?
Currents Assets - Current Liabilities
FAR
How is A/R Turnover calculated?
Credit Sales / Average A/R
FAR
How is Inventory Turnover calculated?
COGS / Average Inventory
FAR
How is Day Sales in Inventory calculated?
365 / Inventory Turnover
FAR
How is Days to Collect A/R calculated?
Average A/R / Average Sales per Day
FAR
How are gain contingencies recorded?
They are NOT accrued due to Conservatism
FAR
When are loss contingencies recorded?
If Probable - they are accrued (if estimable) and disclosed
If Reasonably Possible - they are disclosed
If Remote - don’t accrue or disclose
FAR
What is a temporary difference related to deferred taxes?
GAAP says to recognize a revenue/expense in one period and tax laws say to recognize it in another
Example: Dividends from a subsidiary accounted for using the Equity Method - tax income but not book income
FAR
What is a deferred tax asset?
Deduction will reduce future income taxes expense.
FAR
What is a deferred tax liability?
Income will be taxable in a future period and will increase future tax expense
FAR
Which period’s tax rate is used to calculate a deferred tax asset or liability?
The FUTURE enacted tax rate not the current one.
It is never discounted to present value.
FAR
What valuation allowance is used with respect to a deferred tax asset?
If it isprobable that not all of a Deferred Tax Asset (debit) will be realized then the Deferred Tax Asset account must be written down (credit) to reflect this
FAR
What effect do permanent differences have on deferred income taxes?
They have no tax impact.
When calculating the total differences between book and tax income subtract the permanent differences from the total before applying a future enacted tax rate
FAR
What is deferred income tax expense?
The sum of Net Changes in Deferred Tax Assets and Deferred Tax Liabilities
GAAP Method for calculating is theAsset and Liability Approach
Note: IFRS uses the Liability approach only
FAR
How are deferred tax assets classified as current or non-current on the balance sheet?
Current Deferred Tax Assets and Liabilities will impact income tax expense within 12 months. All current amounts are netted and reported as a single amount on the Balance Sheet
Non-Current Deferred Tax Assets and Liabilities will impact income tax expense 12 months or more fromt he Balance Sheet Date. All non-current amounts are netted and reported as a single amount on the Balance Sheet
FAR
How are derivatives recorded?
At cost when acquired re-valued to fair value each period on Balance Sheet.
FAR
How are unrealized gains/losses on trading securities recorded?
Recorded on income statement
FAR
How are gains and losses on Available for Sale (AFS) securities recorded?
They are included in Other Comprehensive Income.
FAR
What is a Fair Value Hedge? How is it recorded?
Fair Value Hedge offsets exposure to changes in the value of a recognized asset/liability or of an unrecognized commitment
Initially recorded on Balance Sheet at Fair Value
Gains/Losses recorded on Income Statement
FAR
What is a Cash Flow Hedge? How is it recorded?
Cash flow hedges protect from exposure to fluctuations in cash flows.
Initially recorded on Balance Sheet at Fair Value
Gains/Losses going to OCI
Example: A cereal company enters into a futures contract on grain purchases to offset the risk that grain will go up in price.
FAR
Where are gains and losses on foreign currency hedges recorded?
In Other Comprehensive Income (OCI)
FAR
What disclosures are required for derivative transactions?
Objectives and Strategies
Context to help investor understand the instrument
Risk Management Policies
Complete List of Hedged Instruments
FAR
How do transactions denominated in in a currency other than a company’s functional currency affect the income statement?
Fluctuations in that currency cause a gain or loss that must be recognized on the income statement as Income from Continuing Operations
FAR
What causes a Foreign Currency Transaction G/L?
A change in exchange rates between the functional currency and the transaction currency
FAR
Where are Foreign Currency Transaction G/L recorded?
Income Statement
FAR
Where are Foreign Currency Translation G/L recorded?
OCI
FAR
If the Functional Currency equals the Local Currency - what rate is used for translating Assets and Liabilities?
Current Rate as of the Balance Sheet Date
FAR
If the Functional Currency equals the Local Currency - what rate is used for translating Revenues and Expenses?
Weighted Average Exchange Rate for the year
FAR
If the Functional Currency equals the Reporting Currency - what Exchangee Rate is used??
Use Weighted Average - Historical Exchange Rates (Inventory and Pre-paid Assets and Property Plant and Equipment) and Current Exchange Rates (Monetary Assets and Liabilities and Inventory @ Market and Trading Securities and Deferred Taxes)
FAR
What is the primary objective of accounting?
To measure income
FAR
What is the most authoritative set of accounting pronouncements?
The FASB Codification
All pronouncements fall under the Codification umbrella
FAR
What are the 2 Levels of Authority within the FASB codification?
Authoritative and Non-Authoritative
FAR
How does managerial accounting differ from financial accounting?
Managerial Accounting has a timeliness focus
Managerial Accounting is not required to follow GAAP
FAR
Which financial reports are required to be filed with the SEC?
Form 10K - Annual and Audited
Form 10Q - Quarterly and Reviewed
FAR
What is the focus of financial reports for individual companies?
Focus is on the needs of users to help them make decisions and assessments about the company
Does not make assessments of the economy
FAR
What are the Primary Constraints of Financial Reporting?
Cost vs. Benefit
Materiality
FAR
What are the Secondary Constraints of Financial Reporting?
Consistency - Year vs. Year
Comparability - Company vs. Company
FAR
What are the Qualitative Characteristics of Financial Reporting?
Relevance & Faithful Representation
Relevance - Makes a difference to the user
Includes:
Predictive Value - Future Trends
Confirming Value - Past Predictions
Materiality - Could affect User Decisions
Faithful Representation
Includes:
Completeness - Nothing omitted that would impact the decision-making of a user
Neutrality - Information is presented is without bias
Free from Error - No material errors or omissions
FAR
What are the Enhancing Qualitative Characteristics of Financial Reporting?
Comparability Verifiability Timeliness and Understandability
Comparability - Allows users to compare different items among various periods
Verifiability - Different people would reach a similar conclusion on the information presented
Timeliness - Information is made available early enough to impact the decision making of users
Understandability - Information is easy to understand
FAR
How does Conservatism affect the recording of accounting transactions?
When an estimate is necessary due to uncertainty conservatism chooses the best option that won’t overstate the financial position of the company
FAR
What is an accrual?
Earned (Revenue) or Incurred (Expense) but no Cash Receipt/Outlay yet
FAR
What is a deferral?
Cash Receipt/Outlay but not Earned (Revenue) or Incurred (Expense)
FAR
What is recognition in accounting?
When an item is recorded and included in the financial statements
FAR
Describe fair value with respect to an asset
The price you would receive if you sold the asset
Assumes asset is at its highest and best value
Assumes asset is sold at its most advantageous market to get the best price possible
FAR
What market assumptions are made in a fair value assessment?
Buyer and Seller are not Related
Buyer and Seller are Knowledgeable
Buyer and Seller are able to transact - i.e. This isn’t a hypothetical transaction for Fair Value measurement purposes. The buyer actually does have the $10M to purchase the asset you’re trying to value at $10M
Buyer and Seller are both motivated to buy/sell
FAR
What items are included in a Level 1 input in the fair value hierarchy?
Price quotes or market prices
For example NYSE or NASDAQ
FAR
What items are included in a Level 2 valuation input?
Interest rates
Prime rate
FAR
What items are included in Level 3 inputs of the fair value hierarchy?
Unobservable inputs such as assumptions or forecasts
Lowest priority for valuation
FAR
What are acceptable valuation techniques for fair value?
Market approach - uses market transactions and prices to value the asset
Income approach - uses present value discounts earnings
Cost approach - uses replacement cost to value the asset
FAR
What are current assets?
Cash
Inventory or Assets expected to be converted or consumed during a business’ operating cycle
Deferred Gross Profit on Installment Sales (Contra Asset)
Receivables expected to be collected in 12 months or less
FAR
What are current liabilities?
Liabilities that will use current assets during the present operating cycle
FAR
What is an accrued liability?
Expense that has been incurred but not paid
Example: rents payable
FAR
What is a deferred revenue?
A type of current liability
Payments that have been received but cannot be recorded as revenue yet
Example: Tenant pre-pays rent - Landlord still must perform to earn it and is a liability until this happens
FAR
When are revenues recognized?
When they have been earned; i.e. company has performed
FAR
What is a gain?
Increase in equity from an activity or event that is not central to the main activities of the business
Can be operating or non-operating
FAR
What is a loss?
Decrease in equity from an activity or event that is not central to the main activities of the business
Can be operating or non-operating
FAR
What is an operating cycle?
Average time it takes to turn materials or services into Cash
FAR
What is the present value of future cash flows?
Valuation method - the current value of a future amount of money using a specific interest rate
FAR
What is historical cost?
How much an asset cost - (net of depreciation and amortization)
FAR
What is replacement cost?
How much it would cost to reacquire an asset today (Entrance Cost)
FAR
What is a market cost?
The sale price of an asset (Exit Cost)
FAR
What is Net Realizable Value?
Sale Price of an Asset - Selling/Disposal Fee
FAR
When is royalty income recognized? How is it recognized?
Recognized when earned
If the royalty % is applied against net sales then subtract the estimated return amount from the gross sales first and then apply the royalty rate
FAR
When is revenue recognized in an installment sale?
Revenue recognized upon receipt of cash
Only used when cash collection is uncertain
FAR
What is deferred gross profit?
Gross Profit that can’t be recognized until cash is received
D.GP : Gross Profit % x Accounts Receivable
Pay attention to the year if GP% varies
FAR
What is the cost recovery method?
No revenue recognized until all costs are recovered from purchase of the asset
Most conservative method of revenue recognition when collection of sale price is uncertain
FAR
What is subscription revenue? How is it recorded?
Payment has been received but performance is not complete.
As company performs revenue is recognized.
Recorded as a Deferred Revenue (Liability) on Balance Sheet
FAR
How are franchise revenues recorded?
Franchisor - Startup franchise fee revenue deferred until substantial performance
Franchisee - Costs are deferred until corresponding revenue is recognized
FAR
How do you calculate sales revenue starting from cash basis income?
Mnemonic: SPEAR-BAR
Sales (i.e. Customer Payments)+ Ending Accounts Receivable- Beginning Accounts Receivable
: Sales Revenue on an Accrual Basis
FAR
How do you calculate COGS starting from Cash Basis?
Mnemonic: CRAP-I
Cash Remitted (i.e. paid)
+Increase in Accounts Payable
-Increase in Inventory
:COGS on an Accrual Basis
FAR
How are discontinued operations reported? When are they used?
Reported Net of Tax after Continuing Operations but before Extraordinary Items
Company decides to cease operating a segment of its business (represents a strategic shift and has major effect on operations and financials)
Includes Income (or loss) from the period plus the gain (or loss) from disposal
FAR
For discontinued operations, what are the three requirements for disposal assets?
They must be Held for Sale - Sold - or Disposed of another way
FAR
What qualifies as an extraordinary item? How is it recorded?
Both unusual AND infrequent
Reported Net of Tax after Discontinued Operations
Note: Usual or Infrequent Items are reported as part of Continuing Operations
FAR
What is constant dollar accounting?
Adjusts assets to reflect a consistent level of purchasing power due to inflation
Uses the Consumer Price Index (CPI)
FAR
When are expenses recognized?
When they are incurred. Accrue if not yet paid.
FAR
What are accrued expenses?
Those incurred but not paid.
Product costs - Expenses should be matched with associated revenues as they are recognized (sales commission on a used car sale)
Period costs - Expenses amortized and recognized with the passage of time
FAR
When should impaired assets be written down to fair value and expensed?
Immediately.
FAR
What major items should be classified under General & Administrative (G&A) expenses?
Office staff salaries
Office/building rent
Office supplies
Note: Sales staff salaries and portions of the building assigned to Sales should be allocated to Selling Expense not G&A
FAR
What are business start-up costs?
One-time costs for opening a new business
Expensed as they are incurred
FAR
When is interest not expensed?
Interest on projects (software) for internal use is not expensed but is instead capitalized
FAR
What are the major components of Comprehensive Income?
Net Income + Other Comprehensive Income (OCI):
Revenues/Expenses
Gains/Losses
Cumulative accounting adjustments
Reclassifications adjustments
Non-owner changes in equity
FAR
What items are considered cumulative accounting adjustments?
Foreign Currency Translation Adjustments
Unrealized gains on AFS Securities
Minimum Pension Liability adjustment for defined benefit plans
FAR
What is the purpose of a reclassification adjustment?
Avoids double counting items that were included in both Net Income and OCI
Example: AFS Securities previously included in OCI are now sold at a loss and reported on the Income Statement
FAR
Where is Comprehensive Income reported?
Reported in a Single or Combined Income Statement
FAR
What disclosures on accounting policies are required in financial statements?
Accounting Principles used
Basis of Consolidation
Inventory Pricing Methods
Depreciation Method
Amortization of Intangibles
FAR
What are some major risks and uncertainties that must be disclosed?
Nature of Operations
Use of Estimates and listing of Significant Estimates
Concentration vulnerability
FAR
Under Cash Basis Accounting how are Revenue and Expenses recognized?
Revenue is recognized with Cash Inflow and Expenses Recognized with Cash Outflow
FAR
Is Cash Basis Accounting ok for Tax Returns?
Yes
FAR
Is Cash Basis Accounting GAAP?
No - GAAP uses Accrual Accounting
FAR
What is an advantage of Modified Cash Basis Accounting?
It avoids the complexities of GAAP but provides more information that Cash Basis Accounting
FAR
Is Modified Cash Basis GAAP?
No - GAAP uses Accrual Accounting
FAR
What are the 3 acceptable options for Income Tax Basis Accounting
Cash Basis - Accrual Basis - Hybrid Method
FAR
What are the advantages of the Small and Medium Sized Entity Framework?
It simplifies reporting and disclosures for small companies - Reduces Book vs Tax differences - avoids Fair Value measurements (Historical Cost)
FAR
What are the two options for Income Taxes under the Small and Medium Sized Entity Framework?
Deferred Taxes Method and Taxes Payable Method
FAR
What are the two options for Startup Costs under the Small and Medium Sized Entity Framework?
Expensed or Amortized (15 years)
FAR
How is Goodwill treated under the Small and Medium Sized Entity Framework?
Amortized (15 years)
FAR
How are Research and Development costs recorded?
They are expensed in the period incurred and are not capitalized.
FAR
Which expenditures are included in the cost of a building?
All expenditures to get the building into working condition are ready for use
FAR
Which expenditures are included in the cost of land?
All expenditures to get the land ready for its intended use:
Title & County Fees
Clearing of Land - Dirt work etc.
Demolition and removal of old buildings (minus any scrap or salvage)
Note: capitalized land costs are not depreciated
FAR
In an exchange of non-monetary assets how much gain is recognized if no additional cash is exchanged when there is no significant difference in resulting cash flows?
If the cash flows from the assets exchanged are not significantly different no gain or loss is recognized on a non-monetary exchange as it lacks commercial substance.
The new asset is recorded at the book value of the asset given up.
The only gain that can be recognized is any boot (cash) received.
FAR
In an exchange of non-monetary assets what gain is recognized if resulting cash flows are significantly different?
If resulting cash flows are significantly different then the transaction has commercial substance and a gain/loss is recorded on the exchange.
The new asset is recorded at the FAIR VALUE of the assets given up unless the asset acquired has a fair value that is easier to determine.
FAR
How is donated property recorded by the donee?
Recorded at Fair Value + costs associated with getting the property into working condition for its designed purpose
Exam Tip - Think of a charity holding afair and then donating the property which is then recorded atfair value
FAR
How is donation of property recorded by the donor?
Recorded at Fair Value of asset given up.
Gain or Loss is recorded.
FAR
How is double-declining balance (DDB) depreciation calculated?
(1 / Useful Life) x 2 x Book Value
Ignore salvage value.
FAR
How is Sum of Year’s Digits (SYD) depreciation calculated?
(Cost - Salvage Value) x (Remaining Useful Life / SYD) : Depreciation expense
For example the depreciation factor for the third year of a 10-year asset would be:
: 8 / (10+9+8+7+6+5+4+3+2+1) : 8/55 : 14.5%
Remaining useful life : 8 SYD : 55
FAR
How is straight line depreciation calculated?
(Cost - Salvage Value) / Useful life : depreciation expense
FAR
When is an asset considered to be impaired? How is impairment loss calculated?
When the un-discounted future cash flows are less than the carrying value of the asset.
Carrying Value - Fair Value : Impairment Loss
Note: impaired assets that recover their value can’t be written back up once written down
FAR
How are legal fees to defend a patent amortized?
If the patent is SUCCESSFULLY defended the legal fees are amortized over the patent’s economic life.
If unsuccessful they are expensed immediately.
FAR
What are the two steps for testing goodwill impairment?
Compare the CV to the FV. If FV is greater than CV no impairment exists you’re done.
If impairment appears to exist the assets and liabilities should be compared to the total value of the reporting unit. The difference is Goodwill. Compare this amount to the CV of the Goodwill and write it down accordingly.
FAR
How are costs for developing software recorded?
Expenses prior to technological feasibility are expensed as R&D.
After technological feasibility but prior to production costs are capitalized.
Expenses incurred during production are charged to inventory.
Expenses incurred training on internal use software are expensed.
FAR
What expenditures are included in the cost of equipment?
All expenditures to get the asset into working condition and ready for use:
Purchase price + liabilities assumed Shipping Taxes Insurance Installation Testing Legal fees Construction loan interest
Any alterations to existing facilities or equipment necessary for the new purchase and installation that extend the life or increase the efficiency of these assets are capitalized.
FAR
What are the three major types of funds in governmental accounting?
Governmental, Proprietary, Fiduciary
FAR
Which two accounting bases are used in governmental accounting?
Accrual basis - current economic resources focus (revenues recognized when earned)
Modified accrual basis - current financial resources focus (revenues recognized when available and measurable)
FAR
What is a budget appropriation?
The highest amount allowed for a particular expenditure under a budget.
FAR
What is an encumbrance?
Records purchase and reserves it for the encumbrance.
FAR
What is the opening budgetary entry?
Dr Estimated Revenues Control
Cr Appropriations Control
Dr/Cr Budgetary Fund Balance (plug)
FAR
What is the closing budgetary entry?
Dr Appropriations Control
Dr/Cr Budgetary Fund Balance (plug)
Cr Estimated Revenues Control
FAR
What are the types of governmental funds?
General Fund Special Revenue Fund Permanent Fund Capital Projects Fund Debt Service Fund
FAR
What is a General Fund?
The operating fund of the governmental unit
Records Significant Revenues: Taxes; Tickets; Fines; Licenses
Records Significant Expenditures: Police; Education; Fire Dept
FAR
What is a Special Revenue Fund?
Restricted for a specific purpose such as street repair.
FAR
What is a Permanent Fund?
Legally restricted fund; where only earnings can be used to fund programs.
Principal remains intact.
FAR
What is a Capital Projects Fund?
Used to acquire and build facilities.
FAR
What is a Debt Service Fund?
Handles repayment of long-term debt and related interest.
FAR
Which fund statements are issued in Governmental Accounting?
Balance Sheet
Statement of Revenues; Expenditures; and Changes in Fund Balance
FAR
When is Revenue recorded in Governmental Accounting?
When it is BOTH available and measurable; regardless of when it is spent.
FAR
What is Derived Tax Revenue?
Money collected from people doing things:
Sales tax (buying cars) or income tax (people working)
FAR
What is Imposed Tax Revenue?
Tax assessed just because things exist
Example: property tax on a car (even if it’s never driven); real estate tax
Recorded as a revenue when BUDGETED.
Estimated uncollectible property tax revenues don’t offset revenues; so don’t net them.
FAR
What are the types of Proprietary Funds?
Internal Service Funds - to serve the needs of other governmental units (i.e. motor pool)
Enterprise Funds - provide goods or services to external users (i.e. post office)
FAR
What are the Fund Balance Types?
Restricted - Restricted by Contributor Committed - Restricted by Government Assigned - Intended for a purpose Unassigned - Available to be spent Non-spendable - Not in a spendable state
FAR
What are the types of Fiduciary Funds?
Agency Fund - government acts as an agent or custodian
Pension Trust Fund - Government is a trustee for a pension plan
Investment Trust Fund - Government is a trustee over a series of investments
Private Purpose Trust - Trust that benefits various individuals and entities
FAR
How are Assets & Liabilities presented on the Statement of Net Position?
Assets (Current & Non-Current)
Deferred Outflows of Resources
Liabilities (Current & Non-Current)
Deferred Inflows of Resources
FAR
How are Capital Assets shown on a governmental Statement of Net Assets?
They are shown net of debt
Asset Cost - Accumulated Depreciation - Asset Liabilities : Net Assets
FAR
How is infrastructure reported on a governmental Statement of Net Assets?
Modified approach:
Reported at cost; no accumulated depreciation
FAR
How is a Statement of Net Assets divided?
Into Governmental Activities and Business Activities
FAR
How are activities presented in a Statement of Activities?
They are divided by function
If the activities of a component are distinguishable from the rest of the governmental entity; then discreet presentation is required
If the activities of the component cannot be identified and separated from the rest of the governmental activities; then blended presentation is warranted.
Component units are reported in the Entity-Wide Financial Statements and not the Fund Financial Statements.
FAR
What is the primary objective of governmental accounting?
To provide information that is useful and benefits a wide range of users including:
Costs of services provided
Sufficiency of revenues to cover costs
Financial position of entity
FAR
What Financial Statements are required for Defined Benefit Pension plans?
Statement of Fiduciary Net Position and Statement of Changes in Fiduciary Net Position
FAR
What are the components of the Statement of Fiduciary Net Position for Defined Benefit Pension Plans?
Assets; Deferred Outfows; Liabilities; Deferred Outflows; Fiduciary Net Position
FAR
What are the components of the Statement of Changes in Fiduciary Net Position for Defined Benefit Pension plans?
Additions (Contributions and Net Investment Income) - Deductions (Benefits Payments and Admin Expense) : Net Change in Fiduciary Net Position
FAR
What should be included in the Financial Statement notes for Defined Benefit Pension Plans?
Types of Benefits; Plan Member Classes; Board Information; Investment Policies and FV Determination
FAR
Which organization’s standards are the most authoritative in the hierarchy of international accounting?
The International Accounting Standards Board (IASB)
FAR
Where is the first place management should look for guidance on international recognition and accounting policies?
The International Financial Reporting Standards (IFRS) issued by the IASB
FAR
Which framework helps to develop standards for international accounting?
The IASB Framework
- The framework is NOT a standard itself
- The framework does not supersede any standard’s authority
FAR
What is the objective of the IFRS framework?
To provide users with information on international accounting.
FAR
Which assumptions are followed within the IRFS framework?
Entity is a Going Concern
Entity uses the accrual basis of accounting.
FAR
What are the Qualitative Characteristics of accounting information within IFRS?
Relevance & Faithful Representation
Relevance - Makes a difference to the user
Includes:
Predictive Value - Future Trends
Confirming Value - Past Predictions
Faithful Representation
Includes:
Completeness - Nothing omitted that would impact the decision-making of a user
Neutrality - Information is presented is without bias
Free from Error - No material errors or omissions
FAR
What are the Enhancing Characteristics of IFRS?
Comparability - Allows users to compare different items among various periods
Verifiability - Different people would reach a similar conclusion on the information presented
Timeliness - Information is made available early enough to impact the decision making of users
Understandability - Information is easy to understand
FAR
How does comparability differ under GAAP versus IFRS?
Comparative information from prior year is required under IFRS.
GAAP requires that if multiple years are presented they are consistently prepared however it doesn’t require prior year comparative statements.
FAR
What is the Pervasive Constraint within IFRS?
Cost vs. Benefit
FAR
Which items are considered reporting elements under IFRS?
Asset Liability Equity Income Expense
FAR
What are the criteria for recognition on IFRS financial statements?
Probable future economic benefit
Can be measured reliably
If the value or outcome cannot be measured reliably IFRS requires the use of the Cost Recovery Method.
FAR
When transitioning to IFRS what type of financial statement must be produced for the first reporting period?
A full comparative statement using IFRS.
FAR
If IFRS was implemented in June 2012 for use in the December 31 2012 financial statements what is the Date of Transition?
January 1 2011 because a full year of comparative statements is required from the previous year
FAR
For Property Plant and Equipment which election is the most efficient method for converting assets to IFRS?
The Fair Value election
FAR
Where on the financial statements are adjustments for adopting to IFRS made?
In the entity’s retained earnings or equity
FAR
How is going concern different under IFRS than from GAAP?
Going Concern is an assumption under IFRS
FAR
How are extraordinary items treated under IFRS?
IFRS doesn’t allow extraordinary items.
FAR
How is the completed contract method used under IFRS?
Completed contract method is not allowed under IFRS.
FAR
How is LIFO treated under IFRS?
IFRS does not allow LIFO.
FAR
Which financial statements are required under IFRS?
Statement of Comprehensive Income
Statement of Changes in Equity
FAR
How is the term income used in IFRS?
Income is used instead of revenue and encompasses BOTH revenue and gains.
FAR
How is the term profit used in IFRS?
In IFRS the term profit is used instead of Net Income.
FAR
How does IFRS treat gains?
They are treated the same as revenue and are not separated on the financial statements.
FAR
How does IFRS treat losses?
In IFRS losses are treated the same as expenses but they ARE separated on the financial statements.
FAR
How does refinancing of current liabilities to long-term liabilities under IFRS differ from GAAP?
Under IFRS current liabilities can only be refinanced into a non-current liability if the refinance agreement is EXECUTED prior to the balance sheet date.
GAAP requires only intent to refinance not actual execution.
FAR
How do contingent liabilities differ between GAAP and IFRS?
Under GAAP there are three classifications of contingent liabilities - Probable Reasonably Possible and Remote.
Under IFRS contingencies are uncertain future events and are classified as a provision if probable and measurable even if uncertain in timing or amount.
FAR
How are bonds recorded under IFRS?
Bonds may be recorded on the Statement of Financial Position using one of two methods
Fair Value through profit or loss
- Liability revalued at the end of each period
- Gain or Loss recognized in period
Amortized Cost
*Using Effective Interest Method
FAR
How are deferred taxes treated under IFRS?
They use the liability method - all deferred tax liabilities must be reported but only probable deferred tax assets can be reported.
They are non-current on the statement of financial position.
FAR
When can deferred tax assets and liabilities be netted under IFRS?
ONLY if they are related to the same country/taxing authority
For example China Deferred Tax Assets can’t offset Japan Deferred Tax Liabilities
FAR
Which tax rates are used for calculating deferred tax assets/liabilities under IFRS?
The enacted rate or substantially enacted tax rate.
GAAP is the enacted tax rate only
FAR
Which items are recorded on the Income Statement in IFRS?
Income Finance Costs Tax Expense Discontinued Ops Profit/Loss Non-controlling interest in Profit/Loss Net profit/loss attributable from equity
FAR
How are property plant and equipment (PP&E) recorded and valued under IFRS?
Recorded at cost
Valued using either:
Cost model - asset carried at cost less accumulated depreciation and impairment loss
Revaluation model - asset adjusted to fair value less accumulated depreciation
FAR
What are the requirements for using the revaluation model for PP&E under IFRS?
Asset must be able to be reliably measured
Must be applied to whole class of assets not just one asset
No guidance on how often assets should be revalued under IFRS
FAR
How is investment property reported under IFRS?
Initially recorded at cost
Revalued using either Fair Value model or Cost model
FAR
How is profit or loss recorded in the current period for investment property under the Fair Value model of IFRS?
Recorded on the Income Statement
Investment P/L : IS
PP&E P/L : OCI
FAR
Under IFRS how is investment property reported under the Cost Model?
Carried at Cost minus Accumulated Depreciation
Fair Value must still be disclosed in the notes to the financial statements
FAR
How are leases reported under IFRS?
Operating Leases can be recorded as Investment Property if measured at Fair Value
All other investment property must use Fair Value Model if one asset uses it
FAR
How are intangible assets valued under IFRS?
Using either the Cost Model (cost less Accumulated Depreciation and Impairment Loss)
or
the Revaluation Model (Fair Value less Accumulated Depreciation)
FAR
How is internally generated goodwill reported under IFRS?
It is not recognized.
FAR
How is amortization of intangibles handled under IFRS?
If asset has a finite life it is amortized over useful life.
If asset has indefinite life it is not amortized but is tested for impairment at the reporting date.
FAR
When must a lease be recorded as a Finance Lease under IFRS?
If the substantial risks of ownership have passed to the Lessee then the Lease must be accounted for as a Finance Lease
FAR
How are defined benefit plans recorded under IFRS?
Project-unit-credit method calculates the PV of the defined benefit obligation
FAR
How are interest expense and/or finance costs classified on an IFRS statement of cash flows?
They can be classified as either Operating or Financing
Once a classification is chosen all future costs must be classified there
FAR
How are significant non-cash transactions recorded on an IFRS statement of cash flows?
They must be included in the notes to the financial statements.
FAR
Which costs are inventoriable?
Purchases - Net of Discounts, Freight, Warehouse expenditures
FAR
When does ownership of goods transfer when shipped FOB Shipping Point?
FOB Shipping Point puts the inventory into the hands of the buyer from the loading dock
FAR
When does ownership transfer when goods are sent FOB Destination?
FOB Destination keeps the items in the seller’s inventory until it reaches the buyer
FAR
Which costs are non-inventoriable?
Sales Commissions
Interest on liabilities to vendors
Shipping expense to customers
FAR
When are discounts recorded under the gross method?
Under the gross method, discounts are recorded only when used.
FAR
Under the net method, when are discounts recorded?
Under the net method, discounts are recorded whether used or not.
Unused discounts are allocated to financing expense.
FAR
How is gross margin calculated?
Gross Margin : Sales - COGS (BI + P - EI)
FAR
Describe the periodic inventory system.
Inventory is counted at certain times throughout the period
Weighted-average cost flow method is used.
FAR
Describe the perpetual inventory system.
Inventory count continually updated
Uses a moving-average cost flow method
FAR
In periods of rising prices, under which cost flow system would ending inventory be the same under both periodic and perpetual inventory methods?
Under the FIFO system, periodic and perpetual inventory methods will both have the same ending inventory.
FAR
How is inventory turnover calculated?
COGS / Average Inventory
FAR
How is Average Day’s Sales in inventory calculated?
365 / Inventory Turnover
FAR
Under a consignment system, who holds the consigned goods in inventory?
The CONSIGNOR holds the consigned items in their inventory count. The cost includes the shipping to the consignee.
FAR
Under a consignment system, does the consignee hold consignment inventory in their own inventory?
No. Consignment goods are maintained in the inventory of the consignor, not the consignee.
FAR
What effect does overstatement or understatement of inventory have on ending retained earnings?
Misstatement of beginning inventory does NOT have an effect on ending retained earnings.
Misstatement of ENDING inventory does have an effect on retained earnings.
FAR
How does misstatement of ending inventory effect Ending Retained Earnings?
EI Over : COGS Under : ERE Over
EI Under : COGS Over : ERE Under
FAR
Which costs are included in COGS first under the FIFO (first in first out) system?
The first (oldest) inventory you have in stock is the first inventory you record for COGS purposes. If your oldest inventory on the shelf cost you $1 when you bought it, COGS is $1
This is just for inventory pricing. It has nothing to do with physically selling the oldest item on the shelf - It is purely for accounting purposes
FAR
Which costs are included in COGS under the LIFO (last in first out) system?
The last (newest) inventory you have in stock is the first inventory you record for COGS purposes. If your newest inventory on the shelf cost you $1.50 when you bought it, COGS is $1.50
FAR
How is Weighted Average Cost Per Unit calculated under a weighted average inventory system?
COGAS / Total Units : Weighted Average Cost Per Unit
FAR
How does FIFO’s COGS relate to LIFO’s in a time of changing prices?
FIFO’s relationship to COGS will be opposite LIFO’s relationship to COGS in periods of falling/rising prices.
FAR
How do FIFO and LIFO change in a period of rising prices?
FIFO has the Lowest COGS
FIFO is a cat that sees a mouse starts Low and is Rising
If COGS is Low, that means EI is High
FAR
How do FIFO and LIFO change in a period of falling prices?
FIFO has the Highest COGS
Remember: FIFO, that silly cat, got High from Catnip and is Falling off the couch
If COGS is High, that means EI is Low
FAR
Under a Lower of Cost or Market, how are the benchmarks calculated?
Market Ceiling : Net Realizable Value : Selling Price - Selling Costs
Market : Replacement Cost
Market Floor : Net Realizable Value - Normal Profit
FAR
How are Available-For-Sale securities recorded on the Balance Sheet?
At Fair value as either Current or Non-current assets.
FAR
How are Available-For-Sale security Unrealized G/L treated?
Included in OCI (Other Comprehensive Income)
FAR
How are Unrealized G/L for Available-For-Sale securities that are reclassified to Held-to-Maturity or Trading Securities treated?
HTM - Stockholder’s Equity
/ Trading Securities - Current Period.
FAR
How are Held-to-Maturity securities recorded on the Balance Sheet?
Amortized cost as Current or Non-current assets.
If reclassified as AFS - Unrealized G/L go to Stockholder’s Equity
If reclassified as Trading Securities - Unrealized G/L recognized in Current Period
FAR
How are Held-to-Maturity securities Unrealized G/L treated?
Trick question - Unrealized gains or losses are not applicable because they are HTM
FAR
How are Trading Securities recorded on the Balance Sheet?
At Fair Value as a Current Asset
Unrealized gains/losses are recorded on the Income Statement
If they are reclassified as held-to-maturity or available-for-sale- there is no effect upon transfer.
FAR
How are Trading Securities Unrealized G/L treated?
Recorded on the Income Statement
If they are reclassified as HTM or AFS - there is no effect upon transfer.
FAR
How is a Capital Lease recorded?
Capitalize at cost: Asset & Liability Recorded at Present Value of Future Lease Payments
FAR
What footnote disclosures are required for a Capital Lease?
Future minimum rental commitments
By year - for 5 years
All remaining years as a group
FAR
What are the requirements for a Capital Lease for a lessor?
Same as for lessee (Title- BPO or Substance)- PLUS:
Collectability of lease payments is predictable
No uncertainties about the lessor reimbursing the lessee for costs incurred
FAR
What are the characteristics of an Operating Lease for a lessee?
Risk of ownership does NOT pass
No asset or liability is recorded on the financial statements
Leasehold improvements - capitalized and depreciated over the lesser of lease life or leasehold improvement’s life.
FAR
What are the characteristics of an Operating Lease for a LESSOR?
Rent revenue recorded
Leased property remains an asset and depreciated by lessor
If payments fluctuate over the term of the lease- rent revenue recognized on a straight line basis
FAR
What are the characteristics of a Direct Financing Lease?
Interest Revenue (or expense for lessor) decreases with passage of time
Principal amount increases with each payment
Carrying amount of Lease decreases
FAR
How is a sale-leaseback recorded?
Any profit on the sale is deferred and amortized
Exception: If PV of lease payments is 10% or less of the asset’s FMV- the gain is recognized
If PV of lease payments is greater than 10% of FMV and the lease is operating- all of the gain is recognized except the amount of the PV of the lease payments
FAR
What are the characteristics of lease payments under an annuity due situation?
Payments begin at the start of the lease period
Think: Rent/Mortgage payments are Due at the first of the month
FAR
What are the characteristics of lease payments under an ordinary annuity situation?
Payments begin after the end of the first year
Think: An annuity that pays you at the end of each year
FAR
What are the characteristics of a Capital Lease for a lessee?
Risk of ownership passes to lessee by:
Title,
Bargain Purchase Option (BPO),
Substance - Lease is more than 75% of asset’s useful life or PV of minimum lease payments are more than 90% of fair value
FAR
Which financial statements are required for not - for - profit organizations?
Statement of Financial Position
Statement of Activities
Statement of Cash Flows
Statement of Functional Expense (Volunteer Health Organizations Only)
FAR
What are the major classifications found on a Statement of Financial Position?
Similar to Balance Sheet:
Assets
Liabilities
Net Assets
Unrestricted Assets
Permanently Restricted Assets
Temporarily Restricted Assets
