FAR1 Flashcards
FASB private sector - establishes GAAP for business sectors what are the 5 missions of FASB?
- Improve the usefulness of financial accounting
- Maintain current accounting standards
- Promptly address deficiencies in accounting standards
- Promote international convergence of accounting standards
- Improve the common understanding of the nature and purpose of information in financial reports
FASB # for new std approve
majority 4 out of 7
FASB new standard approval steps
- exposure draft
- solicit additional comments
- finalize by issuing an Accounting Standards Update (ASU)
Define EITF
Emerging issues task force 15 members
acts as filter for FASB, if 15 member consensus then no further action required by FASB - otherwise FAB becomes involved
Negative economic consequence
effect on proposed standard
- may cause earnings to decline
- thus reducing firms ability to raise capital
FAF role
Financial Accounting Foundation
- exercise oversight for FASB
- appoints members of FASB
- $ ensures funding
FASAC role
Financial accounting standards advisory counsel
a. guidance on major policy issue
b. project priorities
c. formation of task force
Qualitative Characteristics of accounting information
PRIMARY QUALITATIVE CHARACTERISTICS
- Relevance
a. predictive value
b. confirmatory value (confirms or changes previous evaluations)
c. materiality - Faithful representation
a. Completeness
b. Neutrality (without bias)
c. Free from error (no omissions)
Qualitative Characteristics of accounting information
ENHANCING QUALITATIVE CHARACTERISTICS
- Comparability (Consistency helps meet the goal)
- Verifiability
- Timeliness
- Understandability
fair value framework
The Principal Market define
The principal market is the one with the greatest volume and level of activity for the asset or liability within which the reporting entity could sell the asset or transfer the liability.
fair value framework
The Most Advantageous Market define
The most advantageous market is the one in which the reporting entity could sell the asset at a price that maximizes the amount that would be received for the asset or that minimizes the amount that would be paid to transfer the liability.
fair value measurement and gaap
The use of fair value measurement is required by a number of GAAP pronouncements.
SEC
# of commissioners
name the 4 divisions
the sec has 5 commissioners appointed by the President
Four Divisions:
1 Division of Corporate Finance - oversees compliance, examines all filings
2 Division of Enforcement - investigates and takes action when violation of securities law
3 Division of Trading and Markets - oversees secondary markets, exchanges, brokers and dealers
4 The Division of Investment Management - oversees investment advisers and investment companies
main pronouncements published by the SEC
Financial Reporting Releases (FRR) - formal pronouncements, highest-ranking authoritative source of accounting for public companies.
Staff Accounting Bulletins (SAB) - current position on technical issues
SEC
Accounting and Auditing Enforcement Releases (AAER)
These report the enforcement actions that have been taken against accountants, brokers or others. for example Worldcom
statement of financial position
Name 3 important valuations for a company
- Total OE or net assets – amount determined by current US GAAP and is found in the balance sheet;
- Market value of net identifiable assets -the amount of cash that would remain after selling all identifiable assets (including identifiable intangibles) and paying off all liabilities - firm’s “split up” or liquidation value. -assets appraised
- Total value of the firm – Its market capitalization—the total value of the firm’s outstanding stock.
what is a valuation account used for?
increase or decrease the book value of an item to a measure of current value
FV definition applied to nonfinancial assets
- highest and best use considers what is: physically possible legally permissible financially feasible - highest and best use may be: in use -- usually nonfinancial assets in exchange -- usually financial assets
When are prepaid taxes NOT a current asset?
financial income and tax income are the same
no tax expense reported
once the current tax bill is calculated, the prepaid taxes of $300,000 are transferred into a tax expense account to cover the $300,000 in current year tax expense.
Financial statements prepared on the income tax basis how should the nondeductible portion of meal & entertainment expenses be reported
included in the expense category in the determination of income. the income tax return requires full business exp info to calculate the deductible amount
Which financial statement use primarily to determine liquidity and financial flexibility
Balance sheet, statement of financial position
financial flexibility -shows the degree of leverage and ability to adapt to changing financial conditions as well as the ability to manage future cash flows when conditions change.
which statement shows the wealth position of the firm and allows an assessment of the relative risk of the enterprise.
bs
define deferred revenue, type of acct, examples
Liability account
cash received before revenue earned
prepaid rent, subscription, gift certificates, airline tickets
define accrued revenue, type of acct, examples
Asset account
revenue earned before cash received
sales on account AR, interest receivable-time has passed and you have earned interest on an account-interest accrued
define deferred expense, type of acct, examples
Asset account
cash paid before expense incurred
Prepaid insurance, supplies, PP&E
define accrued expense, type of acct, examples
Liability account
expense incurred before cash is paid
payable of: salaries, interest, taxes
downside to cash basis accounting
limited, does not provide the future economic benefits or the future economic resources available
FASB Acctng stds Codification if the sole authoritative source for GAAP and includes guidance from which sources
CAP Committee on Accounting Procedure pronouncements, APB Accounting Principles Board, FASB Financial Accounting Standards Board, SEC guidelines for publicly traded entities
define accrual
economic event occurs first
define deferral
cash activity occurs first
convert from cash NET INCOME to accrual NET INCOME
add the beginning liability balances and subtract the ending liability balances; also, subtract beginning asset balances and add ending asset balances.
convert accrual to cash
use T account to find change is AR, add or subtract revenue
dr Depreciation exp, cr Accumulated depr
accrual or deferred type entry
deferred expense. In this case the cost is deferred over a number of years, rather than a number of months
conceptual framework decision usefulness
primary characteristics
RELEVANT
pcm
predictive value (confirms or changes previous evaluations)
confirmatory value
materiality
conceptual framework decision usefulness
primary characteristics
FAITHFUL REPRESENTATION
completeness
neutrality (without bias)
Free from error (no omissions)
conceptual framework
ENHANCING CHARACTERISTICS
Comparability (consistency helps meet the goal)
Verifiability
Timeliness
Understandability
measurement methods
- Long Term Receivables
- Available for sale securities
- Equipment
- pv of future cash flows
- current market value
- historical cost or historical proceeds
identify measurement methods for each
- Warranty Obligations
- Short Term Payables
- Account Receivable
- Net Realizable Value or settlement rate
- Historical cost or Historical proceeds
- Net Realizable Value or settlement rate
measurement methods
- Bonds payable due in 10 years
- Trading Securities
- PV of future cash flows
2. Current market value
process of converting noncash resources and rights into cash and claims to cash
realization
a measure primarily concerned with cash to case cycles
earnings
cash to accrual method
USE T ACCOUNTS
if dr cash ADD
if cr cash SUBTRACT
if dr exp (non cash) ADD BACK
accrual to cash method with accounting formula
A=L+E (^ equals change)
split A as cash A and other A solve for cash A
fill in change if increase, if decrease change sign
^cash A=^L+^E-^other A
cash to accrual method with accounting formula
A=L+E (^ equals change)
split A as cash A and other A solve for cash A
fill in change if increase, if decrease change sign
^cash A=-^L-^E+^other A
Dividend transactions in the Statement of Cash Flow
OPERATING ACTIVITIES
Cash Inflows: Dividend Income
FINANCING ACTIVITIES
Cash Outflows: Dividends Paid to stockholders
define PCC
Private Company Council
Little GAAP
Issues standards for private companies for FASB approval
trade off is relevance of the information vs cost benefit
FASB EITF
Emerging Issues Task Force
Provides implementation and interpretation guidance withing GAAP
FASB std setting process
- adds project to agenda
- conducts research and issues discussion memorandum
- pubic hearing
- issues exposure draft
- modifies exposure draft
- consensus - finalizes and issues accounting stds update ASU (ASU integral part of GAAP/codification)
AICPA has substantial input into the standard setting process TRUE or FALSE
true
GAAP non-authoritative documents
FASB concepts
AICPA issued papers
IFRS
excluded from the codification
- other comprehensive basis of accounting
- cash basis accounting
- income tax basis
- regulatory accounting principles (insurance)
- governmental accounting stds
conceptual framework assumptions
assumptions = gut feeling
- Entity
- Going concern
- Unit of measurement (not inflation adjusted)
- Time period
conceptual framework
principles
- Revenue recognition
- Expense recognition (matching)
- Measurement
- Disclosure
conceptual approaches for fair value determination
- Market Approach
- Income Approach
- Cost Approach
Fair Value Determination
Market Approach
Used prices generated by real market transactions for identical or similar transactions
How much can I replace an item for
Fair Value Determination
Income Approach
Discounts future amounts to a current present value
Fair Value Determination
Cost Approach
Use current amount to replace the service value of an existing asset, theory of substitution,
less likely for a financial asset, more likely for a non financial asset
cannot use fair value option
- entities your are going to consolidate
- pensions or other employee benefits
- lease financial assets or lia
- demand deposits at financial institutions
- instruments that are components of shareholders equity
if use fair value option for held to maturity investment security then =>
treatment is like held for trading investment - unrealized gains and losses go to earnings IS
PPE may be measured and reported using fair value true or false
false
define blockage factor
a blockage factor occurs when and entity holds a sizable portion of an asset or liability relative to the trading volume of the asset or lia in the market
Fair Value Measurement Input Hierarchy
LEVEL 1
Unadjusted quoted prices at measurement date in active markets for identical items
a. liquidity discount - permitted
b. control premium - not permitted >50%
c. blockage discount - not permitted
Fair Value Measurement Input Hierarchy
LEVEL 2
Observable input either directly or indirectly, that do not meet all conditions for level 1
a. quoted prices in active markets for similar items
b. quoted priced in markets that are not active
c. observable inputs other than quoted market prices that are relevant to the item being valued
d. inputs derived from or corroborated by observable mkt data using correlation or other means
Fair Value Measurement Input Hierarchy
LEVEL 3
lowest level with least desirable inputs
- may use reporting firms internal data
eg determining fair value of closely held stock
disclosure requirements when FAIR VALUE is used on RECURRING basis
- level of fair value
- transfers into and out out each hierarchy, discuss separately
- if level 3 use a roll forward
- if level 3 description of valuation process used
- if level 3 quantitative info about unobservable inputs
- if level 3 narrative of sensitive changes to unobservable inputs
- if level 3 gains/losses for period due to unrealized gains/losses for reported items still held a measurement date
disclosure requirements when FAIR VALUE is used on NONRECURRING basis
- reasons for fair value measurement
- level of fair value hierarchy
- if level 2 or 3 description of any changes in technique
- if level 3 the effect of measurement on earnings or OCI
- if level 3 quantitative info about the unobservable inputs used
- if level 3, if “highest an best” use of nonfinancial assets differs from current use, disclose that fact and why
example of Fair Value NONRECURRING item
asset impairment
Fair Value quantitative info must be presented in tabular format true or false
true
the methods and significant assumptions used to estimate Fair Value must be disclosed in both annual and interim reports True or False
false
(disclosed) only in annual reports
When are asset and lia measured at Fair Value on Recurring Basis adjusted to Fair Value
Period after Period
When are asset and lia measured at Fair Value on Nonrecurring Basis adjusted to Fair Value
Only at the time of a particular event (eg significant modification of debt)
role of AICPA in regard to setting accounting standards and statements
No AICPA does not set accounting standards
AICPA develops, issues , and enforces Standards and statements for:
Audit & Attest Standards, Code of Professional Conduct, Compilation and Review Standards, Peer Review Standards, Tax Standards
Define SEC reg S-X
governs content of 10k financials
includes info on reporting requirements
governs the form and content of financial statements and financial statement disclosures, IS, BS, Changes in Shareholders Equity, cash flow, footnotes, qualification of accountants (independence).
Define SEC reg S-K
governs content of 10k nonfinancial
governs the form and content of nonfinancial statement disclosures; desc of business, desc of stockholder matters, MD&A, changes in and disagreements with accountants, info on directors and mgt
the securities act pf 1933 Form S-1
registration for new securities
Part 1 = prospectus
- 2 yrs BS audited, comparative
- 3 yrs IS, cash flow, SE audited, comparative
- 5 yrs of selected of selected financial info
Part 2 = cost of issuing and distributing the security
- detailed info on officers, directors
- additional fs schedules
small registrations
under a certain monetary threshold or number of purchasers—are considered to be private placements and are exempt from certain disclosures.
SEC of 1934 FILING REQUIREMENTS
Large Accelerated Filer
10K=60 days after fiscal year-end
10Q=40 days after quarter-end
SEC of 1934 FILING REQUIREMENTS
Accelerated Filer
10K=75 days after fiscal year-end
10Q=40 days after quarter-end
SEC of 1934 FILING REQUIREMENTS
Nonaccelerated Filer
10K=90 days after fiscal year-end
10Q=45 days after quarter-end
define Large Accelerated Filer
A company with worldwide market value of outstanding voting and nonvoting common equity held by nonaffiliates of $700 million or more;
define Accelerated Filer
A company with worldwide market value of outstanding voting and nonvoting common equity held by nonaffiliates that is $75 million or more but less than $700 million;
define Nonaccelerated Filer
A company with worldwide market value of outstanding voting and nonvoting common equity held by nonaffiliates less than $75 million.
10K has 4 parts
- desc,risk factors,legal, submission of matters to a vote of stockholders
- mkt price stock, MD&A, mkt risk, fs, controls & procedures
- directors, officers, accountant fees services, ownership, related party
- exhibits, signatures, certification
sec report 10Q not required to be audited - define fs reports required
Balance sheet for the quarter and prior fiscal year end;
Quarterly and year-to-date income statements for this quarter and the same period in the previous year; and
Cumulative year-to-date statements of cash flow for the current and prior fiscal years.
define economic income
The change in the net worth (fmv of net assets) of a business enterprise during an accounting period. Jan1 less Dec31
formulas for Cost of Goods Manufactured and COGS using COGManu
COGManu=COGS-BI+EI
COGS=COGManu+BI-EI
define economic income
the change in the net worth of a business enterprise during an accounting period
Items not shown on the IS
- Items included in OCI
- prior period adjustments
- cumulative effect of a change in accounting principle
define loan capital (borrowed capital)
Capital held by a business that has been borrowed, through a long-term loan or sale of stock shares. Loan capital must be repaid within a set period regardless of the financial status of the firm. NOT INCLUDED IN OE
SCF requirements
Operating
Investment
Financing
Foreign Currency Translation
NET CHANGE reconciliation
- separate schedule for:
Non cash Investing and Financing activities described exchange for other noncash items
Conversion of debt to equity (bonds to common stock)
Acquisition of assets by incurring a Mortgage, entering into a capital lease, issuing stock
SCF Net Effect (on Cash) of Foreign Currency Translation
How are transactions converted to dollar equivalent
(1) the exchange rate in effect at the date of each transaction or (2) an average exchange rate for the period, if not materially different from the specific rates in effect on the dates of the transactions. If at period end use spot rate
SCF reconciliation in change in cash formula
Net Increase (or Decrease) in Cash and Equivalents (during X2)
+ Beginning Cash and Equivalents (1/1/X2)
= Ending Cash and Equivalents (12/31/X2)
SCF Obtain LOAN to purchase land to be held as investment O I or F?
Financing
define contra equity
An owner’s or stockholders’ equity account with a debit balance instead of the normal credit balance. Examples include the owner’s drawing account, a dividend account, and the treasury stock account.
SCF formula for determining expense - accrual to cash basis
^E=^C-^L+^Other Assets
cash here only used to completed formula
SCF indirect method Add or Subtract from income
- Amortization of Premium on Bond Investment
- Amortization of Discount on Bond Investment
- Add back to Net Income
2. Subtract from Net Income
SCF indirect method Add or Subtract from income
- Amortization of Premium on Bond Payable
- Amortization of Discount on Bond Payable
- Subtract from Net Income
2. Add back to Net Income
SCF indirect method Add or Subtract from income
Undistributed income under equity method of accounting for Investments;
Subtract from Net Income
SCF Patent ^ O I or F?
Patent (intangible) requires amortization (for full amount)and is therefore OPERATING
SCF Retained Earnings O I o F?
RE contains dividends is therefore FINANCING
SCF DIRECT Method operations calculation
- Calculate CASH RECEIVED FROM CUSTOMERS
- Calculate CASH PAID TO SUPPLIERS (remember formula or “purchases” includes cash and noncash adjust for AP)
- Calculate CASH PAYMENTS TO EE
- Calculate CASH PAYMENTS TO PURCHASE PREPAID ASSETS
- Calculate INTEREST PAYMENTS
- Calculate INCOME TAX PAYMENTS
OR - Calculate OPERATING EXPENSES PAID (IS oper exp less non cash items)
leverage ratio
average total assets/average s/h equity
define liquidity/solvency ratio measures
measures the ability to meet maturing obligations
Securities Defensive-Interval Ratios
explain and define formula (also called cash availability ratio)
(Cash + (Net) Receivables + Marketable Securities) / Average Daily Cash Expenditures
Measures the quantitative relationship between highly liquid assets and the average daily use of cash in terms of the number of days that cash and assets can be quickly converted to support operating costs.
Times Preferred Dividend Earned Ratio
explain and define formula
Net Income / Annual Preferred Dividend Obligation
Measures the ability of current earnings to cover preferred dividends for a period
define successful leverage
Successful leverage is practiced by a company when it can borrow at a particular rate of interest, and then use the proceeds to earn a higher rate of return on stockholder’s equity (contributed capital investment)
Price Earnings Ratio
explain and define formula
stock price per share/earnings per share eps
(stock price per sh is future performance, eps is past performance)
Measures the price of stock relative to its earning per sh, indicated how the market values the stock when compared to other stocks
Price Earnings Ratio $2.5/$.2 = 12.5 times
interpret this ratio
The market has priced this stock at 12.5 times earnings
Debt-Equity (leverage ratios)
list examples
L/E, E/A, L/A using A = L + Equity
Return on Total Assets
explain and define formula
(Net Income + (add back) Interest Expense (net of tax effect)) / Average Total Assets
Measures the rate of return on total assets and indicates the efficiency with which invested resources (assets) are used.
Common Stock Yield
explain and define formula
Dividend per Common Share / Market Price per Common Share
Measures the rate of return (yield) per share of common stock.
Debt Ratio
explain and define formula
Total Liabilities / Total Assets
Measures the proportion of assets provided by creditors. Indicates the extent of leverage in funding the entity.
Private Company
GOODWILL
amortized on a straight line basis for 10 years, or less than 10 years if appropriate
Test for impairment only when there is a triggering event
Private Company
HEDGE ACCOUNTING
applies only to swaps for converting variable-rate debt to fixed-rate debt (a cash flow hedge) settlement value (and not FV) can be used for swap valuation however this does not include performance risk - need to make adjustment for performance risk
Private Company
VIE
do not need to be evaluated as a Variable Interest Entity
Private Company
INTANGIBLE ASSETS ACQUIRED IN A BUSINESS COMBINATION
do not need to be recognized separately from goodwill, -not required to separate customer intangibles such as customer lists and no
n-compete business)
financial statement required of an entity in liquidation
- statement of net assets in liquidation
- statement of changes in net assets in liquidation
IFRS Monitoring Board IFRS Foundation IASB Working Groups (layout in excel)
Monitoring Board - approve and oversee trustees
APPOINTS
IFRS Foundation - private sector, 22 trustees, 3 year terms, appoint, oversee, raise funds
REPORTS TO Monitoring Board, APPOINTS
IASB - Maximum 16 members, set technical agenda, approve standards, exposure drafts, and interpretations - no enforcement power
REPORTS TO IFRS Foundation, APPOINTS
Working Groups - for major agenda projects
REPORTS TO IASB
IFRS Interpretations Committee
layout in excel
IFRS Foundation APPOINTS
IFRS Interpretations Committee - 14 members, issue interpretation on the application of IFRS and develop other minor amendments
REPORTS TO IASB
IFRS Advisory Council
layout in excel
IFRS Foundation APPOINTS
IFRS Advisory Council - Approximately 40 members, advise on agenda and priorities
REPORTS TO IFRS Foundation and REPORTS TO IASB
ASAF
layout in excel
IFRS Foundation APPOINTS
Accounting Standards Advisory Forum (ASAF) - Provide standard setter input into technical projects
REPORTS TO IASB
IOSCO
authority from public capital market similar to SEC
International Organization of Securities Commission
1983 - present
IASB Framework (reference for preparers)
and
IASB Framework assumptions
true and fair
primary characteristics same as fasb
Relevance, Faithful representation
1. accrual accounting 2. going concern
accounting for bank overdrafts if no 2nd bank acct offset
US
IFRS
US - shown as a liability (not deducted from cash)
IFRS - netted from cash
Claim against shipper for goods lost in transit
is this a receivable?
yes
The firm has a current claim on another entityThe firm has a current claim on another entity
Transfers of receivables under IFRS 39
- If the entity transfers substantially all of the risks and rewards of ownership, the transfer is treated as a sale.
- If the entity retains substantially all of the risks and rewards of ownership, the transfer is treated as a secured borrowing.
- If neither conditions 1 or 2 hold, the entity accounts for the transaction as a sale if it has transferred control and as a secured borrowing if it has retained control.
Define Factor Holdback account
receivable - proceeds retained by the factor to cover estimated sales discounts, sales returns, and sales allowances.
define LISH inventory method
last in still here also know as FIFO
what inventory costs are capitalized
costs to bring inventory to sale
freight, insurance in transit, taxes, packaging
Define illusionary profits in regard to FIFO inventory
using the first-in, first-out cost flow assumption under US GAAP, the actual historical cost of inventory that is charged to the cost of goods sold during periods of rising costs is smaller than the amount computed using replacement costs. This smaller amount of costs charged to the income statement means reporting greater profit. The difference in the profit is said to be illusory.
convert EOY inventory of $3,200 with price index 1.1 to base year dollars
$3,200/1.1 = $2,909 base year cost
advantages of Dollar Value LIFO over quantity of goods LIFO
- reduces the effect of the liquidation problem
- allows companies to use FIFO internally
- reduces clerical errors
explain LIFO liquidation issue
it occurs when a company using LIFO method sells (or issues) more than it purchases.
LIFO liquidation causes distortion in net operating income and may become a reason of higher tax bill in current period. When LIFO inventory is liquidated, the old costs are matched with the current revenues and as a result, financial statements show higher income. The LIFO liquidation, therefore, causes a higher tax liability in periods of high inflation.
lower of cost or market adjustment - JE
- direct method
- allowance method
direct method DR COGS ..CR Inventory allowance method DR Holding loss ..CR Allowance to reduce inventory to lcm
use cost/sales ratio to calculate what?
COGS
if ratio 60% then 60% of sales = COGS
retail inventory method
calc EI cost
EI retail X cost/retail ratio
retail inventory method
calc cost/retail ratio
C O S T BI Purch Frt In (purch returns) (abnormal shortage) = Cost Total R E T A I L BI Purch (Purch returns) Net Markups (abnormal shortage) = Retail Total
retail inventory method
calc EI Retail
Retail total (markdowns) (sales) sales returns (ee discounts) (normal shortage) = EI RETAIL
retail inventory method
cost ratio variations
1. FIFO
2. FIFO, LCM
- FIFO excludes inventory
2. FIFO LCM excluded inventory and markdowns
if purchase inv contract cannot be modified and there is a market price decline then a loss is probable and must be recognized - what is JE
(Recoveries result in a gain but only to the extent of the previously recognized loss.)
accrue and recognize on BS DR Loss on purchase commitment CR Liability on purchase commitment if contract not executed at BS date. if inv received then record at market and recognize a loss
IFRS inventory difference compare to US
- uses lower of cost or NRV (by item)
- use same cost flow method for similar inventory
- reversal of write downs permitted (only to the extent of the previous write down)
- LIFO prohibited
40% markup on $40,000 selling price
what is cost
40,000=cost + .4(40,000)
cost = 40,000 - 16,000 = 24,000
periodic inv system what are JEs
BI 600, inv acquisition dr purchase DR Purchases 5400 ..CR AP 5400 DR AR ..CR Sales end of period JE DR EI physical 2400 DR COGS plug 3600 ..CR Purchase 5400 ..CR BI 600
cost to raze a building already owned by the firm
land or building
increases the loss on disposal of the building.
grading land parcel before building construction
land OR building
land
Excavation for construction of basement
land OR building
building
Interest capitalization year end JE
the amount capitalized cannot exceed the total interest incurred - used incurred if interest calculation higher
DR Asset under construction (construction in progress)
..CR Interest expense
Which is the most appropriate financial statement to use to determine if a company obtained financing during a year by issuing debt or equity securities?
one of the key purposes of the statement of cash flows is to disclose how a business financed its operations!.A statement of cash flows should report the cash effects during a period of an enterprise’s operations, its investing transactions, and its financing transactions.
interest capitalization - calc ave accumulated expenditures AAE based on period expenses in use SPECIFIC METHOD
if not 1st year add AAE prior yr ending balance to new year for full year expense
- calc ave interest rate on NON construction loans (rateX$ + rateX$ …)/total dollar
- interest capitalized = rateX$ construction + NON construction rate(AAE-construct loan)
* if AAE total debt then capitalize all debt not just avoidable = rateX$ construction + new ave NON construct rate X total non construct debt
interest capitalization - calc ave accumulated expenditures AAE based on period expenses in use WEIGHTED METHOD
if not 1st year add AAE prior yr ending balance to new year for full year expense
- calc ave interest rate on ALL debt (rateX$ + rateX$…)/total dollar
- interest capitalized = new rate X AAE
* if AAE total debt then capitalize all debt not just avoidable = rateX$ construction + new ave NON construct rate X total non construct debt
define natural resource
noncurrent asset that contains the cost of acquiring, exploring and developing a natural resource deposit. It does NOT include the cost of extracting the resource.
(Once extracted, the natural resource noncurrent asset is transferred to resource inventory a current asset.)
define depletion
allocation of cost from natural resource noncurrent assets to inventory
define 1. depletion rate 2. depletion for a period
- (natural resources account balance - residual value)/total estimated units
- (depletion rate) x (number of units removed in period)
JE accounting for Extraction Costs and Production Costs
costs are debited to the inventory of resource, NOT to the natural resources account. CR cash, materials, wages payable
define impairment for assets, determine if impaired
(individual or sum of group) STEP 1
CV > undiscounted cash flow UCF (cash inflow less cash outflow to obtain net inflow), (recoverable cost RC)
CV NOT recoverable
how to MEASURE impairment if assets held for SALE (program to find buyer, sale expected in 1 yr, sale probable, asset being marketed) (disposal)
STEP 2
impairment if = CV > FV LESS cost to sell (NRV)
record CV > FV LESS cost to sell, loss CF-FV LESS cost to sell, recognize GAIN CV
how to MEASURE impairment if assets held for use
STEP 2
impairment loss = CF - FV write down to FV
DR impairment loss
CR Accumulated depreciation OR asset
cannot write back up
classification of assets to be disposed of other than a sale
continue to classify asset as held for use until disposal occurs, continue to depreciate, impaired if CF > FV
impairment reversal allowed up to original impairment
IFRS impairment test
impairment when = CV > PV of future cash flows discounted at the asset’s original interest rate (value in use)
Recoverable Amount is the higher of the fair value less cost to sell OR value in use
discounting required in evaluation stage
impairment losses can be reversed (except for GW)
IFRS impairment review when and what criteria
entity must complete a review of assets EACH BS date to determine if evidence of impairment. FACTORS:
- significant financial difficulty of the issuer
- breach of contract, default or delinquency in payments
- concessions granted to the borrower because of legal or financial reasons
- bankruptcy of the borrower becomes probable
IFRS impairment steps
1a. find Recoverable Amount= the greater of the fair value less cost to sell OR value in use
1b. value in use = PV of future cash flow discounted at the asset’s original interest rate OR cash generating unit groupings
2. Compare Recoverable Amount to CV
3. Determine if there is impairment
CV > Recoverable Amount (impairment)
4. Calculate impairment CV - Recoverable Amount
IFRS how is impairment loss presented if the asset is carried at fair value
any impairment loss would be classified out of OCI and into earnings
IFRS PPE
- estimated useful life and depreciation method reviewed annually
- component depreciation required in some cases
- PPE can be revalued to fair value
- interest earned on construction fund can offset the interest costs
- investment property (at cost then later possibly FV) is specifically defined as property held to earn rental income and/or capital appreciation
IFRS PPE Fair Value Remeaurement
- remeasured to FV if FV can be reliably remeasured
- applied to the entire class or components
- increases in asset FV above original cost are recorded in a revaluation surplus acct (decreases as losses to IS)
- revaluation asset increase JE
DR asset
CR revaluation surplus acct (equity acct part of OCI) - subsequent increases gain recognized to the extent of loss, additional gain recognized in revaluation surplus
IFRS PPE proportional method accumulated depreciation
building cost $125,000
Accum depr $25,000
NBV $100,000 FV $120,000 $120,000/$100,000 = 1.20%
proportionate ratio of FV =
($125,000 X 1.2) = $150,000 - $125,000 = $25,000
($25,000 X 1.2) = $30,000 - $25,000 = $5,000
DR Building $25,000
..CR Accum depr building $5,000
..CR Revaluation Surplus building $20,000
the balance in revaluation surplus is depreciated over the remaining asset life goes to retained earning
IFRS PPE reset method accumulated depreciation
accum depr is reset to zero by closing it to the building acct, the building acct is adjusted for the revaluation DR Accum depr $25,000 ..CR Building $25,000 DR Building $20,000 ..CR Revaluation Surplus $20,000
define articulation
describes the interrelationship of the elements of the financial statements, eg info flows back and forth between the IS and the BS A=L + OE
Nongovernmental not-for -profit entity required FS
Nongovernmental not-for -profit VH&W entity required FS
NFP FS 1. Statement of financial position 2. Statement of Activities 3. Statement of Cash Flows VH&W NFP FS 1, 2, 3 PLUS 4. Statement of Functional Expenses
Total Asset Turnover
Net Sales/Average Total Assets
Dividend Yield
Dividend Per Common Share/Market Price per CS
Equity RAtio
Total Stockholders’ Equity/Total Assets
calc additional debt needed to me debt/equity = .75
current debt 420 current equity 1000
.75 = debt/1000
debt = 750
additional needed = 750 - 420 = 330
Personal Financial Statement Net Worth Calc
assets: historical cost 500, estimated current value 900
lia: historical cost 100, estimated current amount 80
income tax rate 30%
- estimated asset value - estimated lia value = 820
2a. est asset - historical asset = 400
2b. historical lia - est lia = 20 (absolute) - 2a plus 2b = 420
- multiply 420 X .30 = (126) tax expense
- 820 - 126 = net worth = 694
Employee Benefit Plans and Trusts required FS
- Statement of Net Assets available for benefits of the plan as of the end of the plan year (plan investments reported at FV)
- Statement of Changes in Net Assets available for benefits of the plan as of the end of the plan year
Liquidation Basis required FS
- Statement of Net Assets in Liquidation
2. Statement of Changes in Net Assets in Liquidation
put option
the options to SELL assets (underlying securities) at an agreed price on or before a particular date
Transfer from available-for-sale to held-to-maturity - Reporting
Transfer from available-for-sale to held-to-maturity
Premature sale of held to maturity securities are considered at maturity IF:
- the sale occurs so close to maturity that interest rate risk is virtually eliminated
- the sale occurs after at least 85% of the principal has been collected.
trading security FV use mark to market at reporting period end what is JE for unrealized loss (statement of cash flows OPER)
DR Unrealized Loss (IS)
..CR Valuation Allowance
Available for Sale (original cost $17,000) FV use mark to market at reporting period end what is JE for realized (security sold for $15,000 less $1,500 transaction costs) gain to IS (statement of cash flows INVESTING)
Prior Unrealized loss $1,700 went to OCI
DR Unrealized loss (OCI) $1,700 ..CR Security OR Contra Account $1,700 sale: DR Cash $13,500 DR Loss on Sale $3,500 ..CR Investment AFS $15,300 ..CR AOCI Reclass adj $1,700
Available for Sale securities unrealized gains and losses reported as OCI UNLESS:
the decline is considered “other than temporary” => recognize these in earnings
bond prices and interest rate RELATIONSHIP?
Bond prices and interest rate changes are inversely related. When bond prices Increase the mkt value of fixed income investments such as bonds Decreases.
acquired 50,000 sh common stock at initial offering, not significant shareholder, no other relationship with company, intends to hold investment indefinitely
TRADING, AVS, HTM
Available for Sale
circumstances when cost method (equity, no FV, no significant influence) investment value changes
- Impairment, bankruptcy (permanent decline in value)
- Liquidating Dividend distributed (return OF investment)
- must total to date income and to date dividends to calc!!
DR Cash 20
CR Investment in S (liquidated portion)
CR Dividend Income
IFRS Investments describe classifications
impairment loss on debt investment can be reversed if there is objective evidence
- Held to Maturity - debt measured at amortized cost, effective interest rate based on Estimated cash flow and Estimated life
- Fair Value through profit or loss - debt at FV and all equity at FV
IFRS OCI option
if an investor does not hold an equity investment for trading purposes
entity may elect to record gains/losses to OCI upon initial recognition of investment. Election is irrevocable.
when is prepaid tax not a current asset
tax expense not recorded AND no difference between financial statement and income tax financials. Prepaid tax an overestimation use in future years not within 1 year
- sales returns and allowance is a contra account to?
- allowance for sales returns & allowance is a contra account to?
- Allowance for sales discounts is a contra account to?
- sales
- AR
- AR
sold Oct merchandise on credit for $11000 received a 10% notes receivable. due in ONE year what are JEs for:
1. non interest bearing note
this is a current receivable recorded at face value
(If it had been due in > 1 year then long term receivable, should be recorded at Present Value)
1. DR NR 11,000
..CR Discount on NR 1,000
..CR Sales 10,000
year end adj entry
DR Discount on NR 250
..CR Interest Income 250
note due date
DR Cash 11,000
DR Discount on NR 750
..CR Interest Income 750
..CR NR 11,000sold Oct merchandise on credit for $10000 received a 10% notes receivable. due in ONE year what are JEs for:
2. interest bearing note
this is a current receivable recorded at face value
(If it had been due in > 1 year then long term receivable, should be recorded at Present Value)
2. DR NR 10,000
..CR Sales 10,000
year end adj entry
DR Interest receivable 250
..CR Interest income 250
note due date
DR Cash 11,000
..CR Interest receivable 250
..CR Interest Income 750
..CR NR 10,000sale of receivable with recourse versus sale of receivable without recourse
Sales of receivable with recourse requires the estimation and recording of a Recourse Liability as an additional credit on the seller’s books which may increase the loss if there was ome
if customer pays note to the seller of the receivable and not the purchaser of the receivable what is JE for the receivable seller
DR Dishonored notes receivable
CR Cash
define standing agreement (in investing)
investor cannot exercise significant influence over the investee and likely would use fair value to carry and report the investment.
(equity ownership never going to change)
A standstill agreement is a contract that stalls or stops the process of a hostile takeover. The target firm either offers to repurchase the shares held by the hostile bidder, usually at a large premium, or asks the bidder to limit its holdings. This act will stop the current attack and give the company time to take preventative measures against future takeovers.
select equity method accounting
- record investment at cost
- capture investees book values and fair values at date of investment
- id and allocate difference between cost and book WHAT IS JE
a. if FV > Book then IDENTIFIABLE ASSETS
b. if FV Book
CR Equity Investment amortization of FV > Book
equity investor JE for investee OCI
DR Investment in Investee
..CR Other Comprehensive Income (to accumulated AOCI in equity )
Equity investment TOOL for problem solving
PRICE PAID, FV XX
goodwill —————–>unidentifiable assets
NET FMV of ASSETS & LIA
—————————————–
Plant Assets (add these to net BV to = Net FMV)
Copyright ——————–>identifiable items
Bonds revalued to FMV
NET BV (assets - lia)
Equity Method Investment JE
Equity Method Income JE
EQUITY INVESTMENT in S (equity only) DR Equity Investment orig cost DR % S income (equity accrual) ..CR % S dividends ..CR depreciation of FMV revaluation EQUITY INCOME in S DR depreciation of FMV revaluation ..CR % S income (equity accrual)
switch from equity to Available for sale or trading…
change from equity to Fair Value
difference between FV and prior equity based carrying amount will be recognized as a gain or loss
under the equity method of accounting for investments the investor does NOT recognize prior period adjustments recognized by the investee T or F
False
if investor switches from FV to Equity method the net income of prior periods must be adjusted T or F
True
An investors’ write off (due to investee financial problems) of a portion of bargain purchase (cost
False
ratio for Days to Collect A/R (flip this (sales per day))
Ave AR/Ave Sales per day
IFRS equity method
term used for investees with significant influence
associates
IFRS equity method investments
who can apply Fair Value Options
venture capitalists
mutual funds
unit trusts (unincorporated mutual fund structure, unmanaged portfolios)
IFRS equity method investments
Equity investees and investors must use same …
accounting policies
IFRS equity method
- Reports dates for investor and associates must be…
- define impairment loss
- if investment to be sold adjust to…
- associate loss
- within 3 months
- adjust for significant transactions during this 3 mos period - carrying value less recoverable amount (FV less cost to sell)
- lower of fair value or carrying amount and reclassify as held-for-sale
- do not recognize
equity investment
equity income if FV > book
income calc less depreciation
