Financial Accounting Conceptual Framework and an Introduction to Financial Reporting

Question 1

Under FASB SFAC, what is the pervasive constraint on the accounting info that can be provided by financial reporting?

Answer 1

the benefits from the info must outweigh the cost of getting the information

Question 2

For info to be useful, it should have 2 fundamental qualitative characteristics. What are these two characteristics?

Answer 2

1 Relevance - The info should have an effect on the decision-making process

2 Faithful Representation - the info is complete, neutral and free from error

Question 3

What are the two elements of relevant info?

Answer 3

confirmatory value - It provides feedback about previous evaluations

Predictive value - It helps to estimate a future happening, especially future cash flows

Question 4

What are the 3 elements of faithful representation?

Answer 4

completeness - all info needs to be understandable

neutrality - it is free from bias

freedom from error - no errors or omissions in describing the info or selecting and applying the appropriate processes to produce information.

Question 5

What are four enhancing qualitative characteristics of useful accounting info?

Answer 5

Timely

Verifiable

Understandable

Comparable

Question 6

What are the definitions of an asset and a liability?

Answer 6

asset - a probable future economic benefit controlled by an entity an asset results from a past transactions

liability - a probable future sacrifice of an economic benefit that arises from a present obligation which resulted form a past transaction or event

Question 7

Under normal conditions, when are revenues recognized?

Answer 7

under GAAP the timing of revenues and expenses is governed by accrual accounting. According to accrual accounting, revenues are recognized when earned and when the revenue is either realized or realizable.under most conditions this is when the earnings process is substantially complete.

Question 8

Under what circumstances can revenue be recognized prior to the point of substantial completion?

Answer 8

If an entity has a long-term construction process and is applying percentage-of-completion method, revenues are recognized prior to the point of completion.

Question 9

Under what circumstances can revenue be at a point in time after the point of substantial completion?

Answer 9

If an entity is making a sale now but applying the installment sales method or the cost recovery method, revenues are recognized at a point after completion. The uncertainty of collection leads to this treatment.

Question 10

An entity makes a sale to a customer of Dec 1, year 1, for $2,000. However the customer has the right to return the merchandise at any time prior to March 1, Year 2, for a full refund. Should the revenue be recognized by the seller on Dec 1, year 1, or March 1, Year 2?

Answer 10

When the right to return is granted to a buyer, revenue recognition depends on the terms of the agreement. If several specific requirements are met, the revenue is recognized at the point of sale. Those requirements include the following:

• The price is set and not dependent on future events.
• The return of the goods is not based on some future event such as the buyer’s ability to resell the item.
• The amounts of returns can be estimated.

If these requirements are not met, revenue recognition is delayed until March 1, Year 2.

Question 11

What is the purpose of FASB ASC of GAAP?

Answer 11

the FASB codification of GAAP was developed to simplify and centralize all authoritative accounting guidance for non-governmental entities, ensuring up-to-date content that accurately represents current US GAAP. The codification replace the GAAP hierarchy with a structure that grants equal authority to all US GAAP within the codification. Likewise, anything not found within the codification is deemed nonauthoritative.

Question 12

The SEC requires form 10-K and form 10-Q to be filed within how many days of a company’s fiscal year-end and quarter-end for the following:

1. A large accelerated filer
2. An accelerated filer
3. A non accelerated filer

Answer 12

1. A large accelerated filer (float of $700 million or more) must file the Form 10-K within 60 days of fiscal year-end and the Form 10-Q within 40 days of quarter end.
2. An accelerated filer must file the Form 10-K within 75 days of fiscal year-end and the Form 10-Q within 40 days of quarter end.
3. A non-accelerated filer (float of less than $75 million) must file the Form 10-K within 90 days of fiscal year-end and the Form 10-Q within 45 days of quarter end.

Question 13

A company is required to file quarterly financial statements with the US SEC. What is the quarterly report and what must be disclosed?

Answer 13

The quarterly report is the form 10-Q requiring quarterly financial statements for the most recent 3 months in addition to the quarterly financials from the corresponding quarter of the preceding fiscal year.

These interim financial statements are not required to be audited.

Question 14

Define fair value under FASB ASC 820 Fair Value Measurement.

Answer 14

Fair value is the price received for the sale of an asset or the price paid to transfer a liability in an orderly transaction between market participants at the measurement date.

Question 15

Identify the primary users of general purpose financial reporting according to the FASB conceptual framework.

Answer 15

Existing and potential

• investors
• lenders
• other creditors