Financial Reporting Flashcards
What is the primary objective of accounting?
To measure income
What is the most authoritative set of accounting pronouncements?
The FASB Codification
All pronouncements fall under the Codification umbrella
What are the 2 Levels of Authority within the FASB codification?
Authoritative and Non-Authoritative
How does managerial accounting differ from financial accounting?
Managerial Accounting has a timeliness focus
Managerial Accounting is not required to follow GAAP
Which financial reports are required to be filed with the SEC?
Form 10K - Annual and Audited
Form 10Q - Quarterly and Reviewed
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
What are the Primary Constraints of Financial Reporting?
Cost vs. Benefit
Materiality
What are the Secondary Constraints of Financial Reporting?
Consistency - Year vs. Year
Comparability - Company vs. Company
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
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
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
What is an accrual?
Earned (Revenue) or Incurred (Expense) but no Cash Receipt/Outlay yet
What is a deferral?
Cash Receipt/Outlay but not Earned (Revenue) or Incurred (Expense)
What is recognition in accounting?
When an item is recorded and included in the financial statements
Describe fair value with respect to an asset Pg. 2-5
1) The price you would receive if you sold the asset; ID asset/libility to be measured
2) Assumes asset is at its highest and best value
Assumes asset is sold at its most advantageous market to get the best price possible
*Use Principle Market (greatest volume) and Most Advantageous Market (maximize price)
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
What items are included in a Level 1 input in the fair value hierarchy? Pg. 2-5
Use price quotes or market prices; comparing identical assets
For example NYSE or NASDAQ
What items are included in a Level 2 valuation input? Pg. 2-5
Interest rates; comparing similar assets
Prime rate
Directly or indirectly observable
What items are included in Level 3 inputs of the fair value hierarchy? Pg. 2-5
Unobservable inputs such as assumptions or forecasts
Lowest priority for valuation
What are acceptable valuation techniques for fair value?
Pg. 2-5
MIC
Market approach - uses market transactions and prices to value the asset; compare identical or comparable assets/liabilities
Income approach - uses present value techniques to discount earnings
Cost approach - uses replacement cost to value the asset
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
What are current liabilities?
Liabilities that will use current assets during the present operating cycle
What is an accrued liability?
Expense that has been incurred but not paid
Example: rents payable
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
When are revenues recognized?
When they have been earned; i.e. company has performed
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
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
What is an operating cycle?
Average time it takes to turn materials or services into Cash
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
What is historical cost?
How much an asset cost - (net of depreciation and amortization)
What is replacement cost?
How much it would cost to reacquire an asset today (Entrance Cost)
What is a market cost?
The sale price of an asset (Exit Cost)
What is Net Realizable Value?
Sale Price of an Asset - Selling/Disposal Fee
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
When is revenue recognized in an installment sale?
Revenue recognized upon receipt of cash
Only used when cash collection is uncertain
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
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
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
How are franchise revenues recorded?
Franchisor - Startup franchise fee revenue deferred until substantial performance
Franchisee - Costs are deferred until corresponding revenue is recognized
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
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
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
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
What is constant dollar accounting?
Adjusts assets to reflect a consistent level of purchasing power due to inflation
Uses the Consumer Price Index (CPI)
When are expenses recognized? Pg. 2-7
When they are incurred. Accrue if not yet paid.
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
When should impaired assets be written down to fair value and expensed?
Immediately.
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
What are business start-up costs?
One-time costs for opening a new business
Expensed as they are incurred
When is interest not expensed?
Interest on projects (software) for internal use is not expensed but is instead capitalized
What are the major components of Comprehensive Income? Pg. 2-3
Think of Net Income + DENT
Net Income + Other Comprehensive Income (OCI):
Revenues/Expenses
Gains/Losses
Cumulative accounting adjustments
Reclassifications adjustments
Non-owner changes in equity
*All changes in equity other tan “owner” sources
What items are considered cumulative accounting adjustments?
Foreign Currency Translation Adjustments
Unrealized gains on AFS Securities
Minimum Pension Liability adjustment for defined benefit plans
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
Where is Comprehensive Income reported?
Reported in a Single or Combined Income Statement
What disclosures on accounting policies are required in financial statements?
Accounting Principles used
Basis of Consolidation
Inventory Pricing Methods
Depreciation Method
Amortization of Intangibles
What are some major risks and uncertainties that must be disclosed?
Nature of Operations
Use of Estimates and listing of Significant Estimates
Concentration vulnerability
What are the objectives of financial reporting? 6 examples
Pg. 2-1
a) Provide useful information to investors and lenders
b) Info about economic resources (Balance Sheet)
c) Changes in economic resources (Income Statement)
d) Uses accrual accouting (better than cash basis)
e) Financial performance reflected by cash flow
f) Changes in economic resource and claims not resulting from financial performance
What are the Primary Qualitative characteristics that makes the financial statements USEFUL? Pg. 2-1
Roger is PC (politically correct) but is Materialistic
1) Relevance - capable of making a difference in user’s decision
a) P Predictive value - helps predict or forcast results
b) C Confirmatory value - confirm or correct predictions
FENCE
2) F Faithful representation - info depicts what it represents
a) E Free from ERROR
b) N Neutrality
c) C Completeness
What are the Enhancing Qualitative characteristics that makes the financial statements USEFUL? Pg. 2-1
Roger is CUT like a V C Comparability U Understandability T Timeliness V Verifiability
**It enhances Relevance and Faithful representation (relates to BOTH)
When is the financial statements considered not USEFUL
Look at cost/benefit; cost shouldn’t outweigh the benefit
Define the elements that make up all financial statements Pg. 2-3
a) Assets
b) Liabilities
c) Equity
a) An economic resource that has a probable future benefit; transaction already occurred; can obtain the benefit
b) An economic obligation in which one needs to use or transfer an asset (cash); cant be avoided and trasaction occured
c) Assets left over after dividing liabilities
What are the 3 elements of equity? Pg. 2-3
Elements of last element (Important)
a) Contribution / investments by owners
b) Distributions to owners (dividends)
c) Comprehensive income (DENT)
Net Income + DENT
D Derivative cash flow hedges
E Excess adj of pension PBO and FV of plan assets at year
end (Adj for amortization)
N Net unrealized gains or losses on “avail-for-sale”
securities
T Translation adj for foreign currency
Name 4 elements of comprehensive income Pg. 2-4
a) Revenue: inflow in primary operations
b) Expenses: outflow in primary operations
c) Gains: increase in equity; not normal operations
d) Losses: decrease in equity; not normal operations
Time frame of Income Statement VS Balance Sheet
Period of time
Date in time (here are the assets, liabilities, and equity in this date)
Recognition VS Realization; Conceptual framework #21
When do you recognize? 3 items
“Booked it” in financial statements; its reported
“Realized” that it sold; occurs when entity converts goods or services into AR
*Meets the definition of element; Can be measured in monetary terms; it is RELEVANT and FAITHFUL REP (useful)
What is the physical capital maintenance concept?
Gains and losses are recognized only when assets are disposed of or liabilities are settled
Currencies Pg. 28-1
a) Transactional Currency
b) Functional Currency
c) Reporting Currency
*When to remeasure and when to translate
a) Local; currency of particular country; books and records are kept
b) Greatest economic impact on company (currency in which entity generates and expends cash)
c) Currency where enterprise prepares financial statements
- Remeasure when Transactional Currency and Functional Currency are the same => report to I/S (non-operating)
- Translate when Functional Currency and Reporting Currency are the same => report to B/S (OCI)
How to do calculate comprehensive income? Pg. 17-2
Net income + OCI (DENT) = comprehensive income
Difference between non-operating and extraordinary loss
Non-operating is unusual OR infrequent
Extraordinary loss is unusual AND infrequent
For Form 10K audit, when do you have to file? Pg. 17-13
a) Large
b) Accelerated
c) Small
For Form 10Q review, when do you have to file?
a) Large
b) Accelerated
c) Small
For 8K
a) 60 days greater than or equal to 700
b) 75 days greater than or equal to 75 but less than 700
c) 90 days greater than or equal to 75
a) 40 days
b) 40 days
c) 45 days
4 days and report all to SEC
Operating Income VS Non Operating Income Pg. 17-3
It is earned AND realizable
Interest income, dividend income, unrealized gain/loss, foreign currency transactions; unusual OR infrequent items
How do you calculate a company’s cash-basis revenue?
Fee revenue - receivable + unearned fee
In a single step income statment, how do you find total revenue? Pg. 17-3
Report all revenue and gains
Which year are fees expensed included?
At which year the work was performed
Monetary VS Non-monetary Pg. 29-1
Fixed in terms of dollars; if there is inflation your money will buy less
Not fixed in terms of dollars
If inflation:
a) A monetary ASSET results in….
b) A monetary LIABILITY results in…
If deflation:
c) A monetary ASSET results in….
d) A monetary LIABILITY results in…
*What if non-monetary?
a) Purchasing power loss
b) Purchasing power gain
c) Purchasing power gain
d) Purchasing power loss
*No gain or loss because it is moving with inflation
What are examples of monetary items? (5) Pg. 29-1 def?
What are examples of non-monetary items? (4) def?
- An asset or liability whose value is fixed in money terms
1) Cash
2) Accounts and notes receivable
3) Bond investments that are held to maturity
4) Prepaid expenses
5) Accounts, notes, and bonds payable, loans - Does not guarantee a fixed amount of moeny being received or paid
1) Inventories
2) Plant and equipment
3) Intangibles
4) Marketable securities (including bonds that may be sold prior to maturity)
For current cost accounting, how do you find the holding gain on each unit? Inflation #7
Purchase price - replacement cost
Which of the following methods includes adjustments for both specific price changes and general price-level changes? Inflation #10
Current Cost / constant dollar
What conforms to GAAP?
What is the objective of financial reporting?
The financial statements
Based on the needs of the users of the information
For the income statment, what does IFRS not recognize?
Think ON-TIDE-N-OC
Does not recognized Extraordinary gains / loss
