Financial Reporting Flashcards by David Galceran

Financial Reporting

What is the primary objective of accounting?

To measure income

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Financial Reporting

What is the most authoritative set of accounting pronouncements?

The FASB Codification

All announcements fall under the Codification ‘umbrella’

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Financial Reporting

What is the highest authority within the FASB codification?

FASB SFAS, APB Opinions, ARBs

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Financial Reporting

What is the 2nd highest authority tier in the FASB codification?

FASB Technical Bulletins, SOPs, Industry Guides

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Financial Reporting

What is the lowest authority in the FASB codification?

Industry practices

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Financial Reporting

Whose pronouncements are above industry practice in authority but below FASB Technical bulletins and industry guides within the FASB Codification?

Emerging Issues Task Force (EITF)

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Financial Reporting

How does managerial accounting differ from financial accounting?

Managerial Accounting has a “timeliness” focus

Managerial Accounting does not follow GAAP

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Financial Reporting

Which financial reports are required to be filed with the SEC?

Form 10K - Annual and Audited

Form 10Q - Quarterly and Reviewed

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Financial Reporting

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

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Financial Reporting

What are the two primary constraints of Financial Reporting?

Cost vs. Benefit

Materiality

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Financial Reporting

What are the secondary constraits of Financial Reporting?

Consistency - Year vs. Year

Comparability - Company vs. Company

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Financial Reporting

Describe ‘Relevance’ as a Qualitative Characteristic

Makes a difference to the user

Includes:
Predictive Value - Future Trends
Confirming Value - Past Predictions
Materiality - Could affect User Decisions

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Financial Reporting

What are the qualities of Faithful Representation?

Completeness - Nothing omitted that would impact the decision-making of a user

Neutrality - Information presented is without bias

Freedom from Error - No material errors or omissions

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Financial Reporting

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

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Financial Reporting

What is an accrual?

Earned (Revenue) or Incurred (Expense), but no Cash Receipt/Outlay yet

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Financial Reporting

What is a deferral?

Cash Receipt/Outlay, but not Earned (Revenue) or Incurred (Expense)

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Financial Reporting

What is recognition in accounting?

When an item is recorded and included in the financial statements

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Financial Reporting

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

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Financial Reporting

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

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Financial Reporting

What items are included in a Level 1 input in the fair value hierarchy?

Price quotes or market prices

For example, NYSE or NASDAQ

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Financial Reporting

What items are included in a Level 2 valuation input?

Interest rates

Prime rate

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Financial Reporting

What items are included in Level 3 inputs of the fair value hierarchy?

Unobservable inputs, such as assumptions or forecasts

Lowest priority for valuation

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Financial Reporting

What are acceptable valuation techniqures 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

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Financial Reporting

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

Financial Reporting

What are current liabilities?

Liabiities that will use current assets during the present operating cycle

Financial Reporting

What is an accrued liability?

Expense that has been incurred, but not paid

Example: rents payable

Financial Reporting

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

Financial Reporting

When are revenues recognized?

When they have been earned; i.e. company has performed

Financial Reporting

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

Financial Reporting

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

Financial Reporting

What is an operating cycle?

Average time it takes to turn materials or services into Cash

Financial Reporting

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

Financial Reporting

What is historical cost?

How much an asset cost - (net of depreciation and amortization)

Financial Reporting

What is replacement cost?

How much it would cost to reacquire an asset today (Entrance Cost)

Financial Reporting

What is a market cost?

The sale price of an asset (Exit Cost)

Financial Reporting

What is Net Realizable Value?

Sale Price of an Asset - Selling/Disposal Fee

Financial Reporting

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

Financial Reporting

When is revenue recognized in an installment sale?

Revenue recognized upon receipt of cash

Only used when cash collection is uncertain

Financial Reporting

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

Financial Reporting

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

Financial Reporting

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

Financial Reporting

How are franchise revenues recorded?

Franchiser - Startup franchise fee revenue deferred until franchisee has completed substantial performance

Franchisee – Costs are deferred until corresponding revenue is recognized

Financial Reporting

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

Financial Reporting

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

Financial Reporting

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

Includes Income (or loss) from the period plus the gain (or loss) from disposal

Financial Reporting

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

Financial Reporting

What is constant dollar accounting?

Adjusts assets to reflect a consistent level of purchasing power due to inflation

Uses the Consumer Price Index (CPI)

Financial Reporting

When are expenses recognized?

When they are incurred. Accrue if not yet paid.

Financial Reporting

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

Financial Reporting

When should impaired assets be written down to fair value and expensed?

Immediately.

Financial Reporting

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

Financial Reporting

What are business start-up costs?

One-time costs for opening a new business

Expensed as they are incurred

Financial Reporting

When is interest not expensed?

Interest on projects (software) for internal use is not expensed, but is instead capitalized

Financial Reporting

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

Financial Reporting

What items are considered cumulative accounting adjustments?

Foreign Currency Translation Adjustments

Unrealized gains on AFS Securities

Minimum Pension Liability adjustment for defined benefit plans

Financial Reporting

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

Financial Reporting

Where is comprehensive income reported?

Reported in Stockholder’s Equity on Balance Sheet or in a Statement of Income and Comprehensive Income

Note: Earnings Per Share is not required for OCI

Financial Reporting

What disclosures on accounting policies are required in financial statements?

Accounting Principles used

Basis of Consolidation

Inventory Pricing Methods

Depreciation Method

Amortization of Intangibles

Financial Reporting

What are some major risks and uncertainties that must be disclosed?

Nature of Operations

Use of Estimates & listing of Significant Estimates

Concentration vulnerability

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Financial Reporting Flashcards

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