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Financial Reporting Flashcards

1
Q

What is the primary objective of accounting?

A

To measure income

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2
Q

What is the most authoritative set of accounting pronouncements?

A

The FASB Codification

All pronouncements fall under the Codification umbrella

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3
Q

What are the 2 Levels of Authority within the FASB codification?

A

Authoritative and Non-Authoritative

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4
Q

How does managerial accounting differ from financial accounting?

A

Managerial Accounting has a timeliness focus

Managerial Accounting is not required to follow GAAP

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5
Q

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

A

Form 10K - Annual and Audited

Form 10Q - Quarterly and Reviewed

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6
Q

What is the focus of financial reports for individual companies?

A

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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7
Q

What are the Primary Constraints of Financial Reporting?

A

Cost vs. Benefit

Materiality

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8
Q

What are the Secondary Constraints of Financial Reporting?

A

Consistency - Year vs. Year

Comparability - Company vs. Company

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9
Q

What are the Qualitative Characteristics of Financial Reporting?

A

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

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10
Q

What are the Enhancing Qualitative Characteristics of Financial Reporting?

A

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

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11
Q

How does Conservatism affect the recording of accounting transactions?

A

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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12
Q

What is an accrual?

A

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

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13
Q

What is a deferral?

A

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

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14
Q

What is recognition in accounting?

A

When an item is recorded and included in the financial statements

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15
Q

Describe fair value with respect to an asset Pg. 2-5

A

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)

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16
Q

What market assumptions are made in a fair value assessment?

A

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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17
Q

What items are included in a Level 1 input in the fair value hierarchy? Pg. 2-5

A

Use price quotes or market prices; comparing identical assets

For example NYSE or NASDAQ

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18
Q

What items are included in a Level 2 valuation input? Pg. 2-5

A

Interest rates; comparing similar assets

Prime rate

Directly or indirectly observable

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19
Q

What items are included in Level 3 inputs of the fair value hierarchy? Pg. 2-5

A

Unobservable inputs such as assumptions or forecasts

Lowest priority for valuation

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20
Q

What are acceptable valuation techniques for fair value?

Pg. 2-5

A

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

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21
Q

What are current assets?

A

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

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22
Q

What are current liabilities?

A

Liabilities that will use current assets during the present operating cycle

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23
Q

What is an accrued liability?

A

Expense that has been incurred but not paid

Example: rents payable

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24
Q

What is a deferred revenue?

A

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

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25
Q

When are revenues recognized?

A

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

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26
Q

What is a gain?

A

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

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27
Q

What is a loss?

A

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

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28
Q

What is an operating cycle?

A

Average time it takes to turn materials or services into Cash

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29
Q

What is the present value of future cash flows?

A

Valuation method - the current value of a future amount of money using a specific interest rate

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30
Q

What is historical cost?

A

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

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31
Q

What is replacement cost?

A

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

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32
Q

What is a market cost?

A

The sale price of an asset (Exit Cost)

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33
Q

What is Net Realizable Value?

A

Sale Price of an Asset - Selling/Disposal Fee

34
Q

When is royalty income recognized? How is it recognized?

A

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

35
Q

When is revenue recognized in an installment sale?

A

Revenue recognized upon receipt of cash

Only used when cash collection is uncertain

36
Q

What is deferred gross profit?

A

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

37
Q

What is the cost recovery method?

A

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

38
Q

What is subscription revenue? How is it recorded?

A

Payment has been received but performance is not complete.

As company performs revenue is recognized.

Recorded as a Deferred Revenue (Liability) on Balance Sheet

39
Q

How are franchise revenues recorded?

A

Franchisor - Startup franchise fee revenue deferred until substantial performance

Franchisee - Costs are deferred until corresponding revenue is recognized

40
Q

How do you calculate sales revenue starting from cash basis income?

A

Mnemonic: SPEAR-BAR

Sales (i.e. Customer Payments)
+ Ending Accounts Receivable
- Beginning Accounts Receivable
: Sales Revenue on an Accrual Basis

41
Q

How do you calculate COGS starting from Cash Basis?

A

Mnemonic: CRAP-I

Cash Remitted (i.e. paid)
+Increase in Accounts Payable
-Increase in Inventory
:COGS on an Accrual Basis

42
Q

How are discontinued operations reported? When are they used?

A

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

43
Q

What qualifies as an extraordinary item? How is it recorded?

A

Both unusual AND infrequent

Reported Net of Tax after Discontinued Operations

Note: Usual or Infrequent Items are reported as part of Continuing Operations

44
Q

What is constant dollar accounting?

A

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

Uses the Consumer Price Index (CPI)

45
Q

When are expenses recognized? Pg. 2-7

A

When they are incurred. Accrue if not yet paid.

46
Q

What are accrued expenses?

A

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

47
Q

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

A

Immediately.

48
Q

What major items should be classified under General & Administrative (G&A) expenses?

A

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

49
Q

What are business start-up costs?

A

One-time costs for opening a new business

Expensed as they are incurred

50
Q

When is interest not expensed?

A

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

51
Q

What are the major components of Comprehensive Income? Pg. 2-3

A

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

52
Q

What items are considered cumulative accounting adjustments?

A

Foreign Currency Translation Adjustments

Unrealized gains on AFS Securities

Minimum Pension Liability adjustment for defined benefit plans

53
Q

What is the purpose of a reclassification adjustment?

A

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

54
Q

Where is Comprehensive Income reported?

A

Reported in a Single or Combined Income Statement

55
Q

What disclosures on accounting policies are required in financial statements?

A

Accounting Principles used

Basis of Consolidation

Inventory Pricing Methods

Depreciation Method

Amortization of Intangibles

56
Q

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

A

Nature of Operations

Use of Estimates and listing of Significant Estimates

Concentration vulnerability

57
Q

What are the objectives of financial reporting? 6 examples

Pg. 2-1

A

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

58
Q

What are the Primary Qualitative characteristics that makes the financial statements USEFUL? Pg. 2-1

A

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

59
Q

What are the Enhancing Qualitative characteristics that makes the financial statements USEFUL? Pg. 2-1

A 
Roger is CUT like a V
C Comparability
U Understandability
T Timeliness
V Verifiability

**It enhances Relevance and Faithful representation (relates to BOTH)

60
Q

When is the financial statements considered not USEFUL

A

Look at cost/benefit; cost shouldn’t outweigh the benefit

61
Q

Define the elements that make up all financial statements Pg. 2-3

a) Assets
b) Liabilities
c) Equity

A

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

62
Q

What are the 3 elements of equity? Pg. 2-3

Elements of last element (Important)

A

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

63
Q

Name 4 elements of comprehensive income Pg. 2-4

A

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

64
Q

Time frame of Income Statement VS Balance Sheet

A

Period of time

Date in time (here are the assets, liabilities, and equity in this date)

65
Q

Recognition VS Realization; Conceptual framework #21

When do you recognize? 3 items

A

“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)

66
Q

What is the physical capital maintenance concept?

A

Gains and losses are recognized only when assets are disposed of or liabilities are settled

67
Q

Currencies Pg. 28-1

a) Transactional Currency
b) Functional Currency
c) Reporting Currency

*When to remeasure and when to translate

A

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)
68
Q

How to do calculate comprehensive income? Pg. 17-2

A

Net income + OCI (DENT) = comprehensive income

69
Q

Difference between non-operating and extraordinary loss

A

Non-operating is unusual OR infrequent

Extraordinary loss is unusual AND infrequent

70
Q

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

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

71
Q

Operating Income VS Non Operating Income Pg. 17-3

A

It is earned AND realizable

Interest income, dividend income, unrealized gain/loss, foreign currency transactions; unusual OR infrequent items

72
Q

How do you calculate a company’s cash-basis revenue?

A

Fee revenue - receivable + unearned fee

73
Q

In a single step income statment, how do you find total revenue? Pg. 17-3

A

Report all revenue and gains

74
Q

Which year are fees expensed included?

A

At which year the work was performed

75
Q

Monetary VS Non-monetary Pg. 29-1

A

Fixed in terms of dollars; if there is inflation your money will buy less

Not fixed in terms of dollars

76
Q

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

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

77
Q

What are examples of monetary items? (5) Pg. 29-1 def?

What are examples of non-monetary items? (4) def?

A
  • 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)
78
Q

For current cost accounting, how do you find the holding gain on each unit? Inflation #7

A

Purchase price - replacement cost

79
Q

Which of the following methods includes adjustments for both specific price changes and general price-level changes? Inflation #10

A

Current Cost / constant dollar

80
Q

What conforms to GAAP?

What is the objective of financial reporting?

A

The financial statements

Based on the needs of the users of the information

81
Q

For the income statment, what does IFRS not recognize?

A

Think ON-TIDE-N-OC

Does not recognized Extraordinary gains / loss

FAR (24 decks)

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