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Lambers FAR > Financial Reporting > Flashcards

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 RepresentationRelevance - Makes a difference to the user. Includes: Predictive Value - Future Trends, Confirming Value - Past Predictions, Materiality - Could affect User DecisionFaithful 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

A

The price you would receive if you sold the assetAssumes asset is at its highest and best valueAssumes asset is sold at its most advantageous market to get the best price possible

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16
Q

What market assumptions are made in a fair value assessment?

A

Buyer and Sellers are not Related.Buyer and Sellers are Knowledgeable.Buyer and Sellers 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?

A

Price quotes or market prices.For example: NYSE or NASDAQ

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18
Q

What items are included in a Level 2 valuation input?

A

Interest ratePrime rate

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19
Q

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

A

Unobservable inputs such as assumptions or forecastsLowest priority for valuation.

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20
Q

What are acceptable valuation techniques for fair value?

A

Market approach - uses market transactions and prices to value the asset.Income approach - uses present value discounts earningsCost approach - uses replacement cost to value the asset

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21
Q

What are current assets?

A

Cash, Inventory, 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

24
Q

What is a deferred revenue?

A

A type of current liabilityPayments that have been received but cannot be recorded as revenue yetExample: Tenant pre-pays rent. Landlord still must “perform” to earn it and is a liability until this happens.

25
Q

When are revenues recognized?

A

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

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 businessCan be operating or non-operating

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 businessCan be operating or non-operating

28
Q

What is an operating cycle?

A

Average time it takes to turn materials or services into cash

29
Q

What is the present value of future cash flows?

A

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

30
Q

What is historical cost?

A

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

31
Q

What is replacement cost?

A

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

32
Q

What is a market cost?

A

The sale price of an asset (Exit Cost)

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 earnedIf 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 cashOnly used when cash collection is uncertain

36
Q

What is deferred gross profit?

A

Gross Profit that can’t be recognized until cash is receivedD.GP = Gross Profit % X ARPay 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 assetMost 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 revenue recorded?

A

Franchiser - Startup franchise fee revenue deferred until franchisee has completed substantial performanceFranchisee - Costs are deferred until corresponding revenue is recognized

40
Q

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

A

Mnemonic: SPEAR-BARSales (i.e. Customer Payments) + Ending AR - Beginning AR = Sales Revenue on an Accrual Basis

41
Q

How do you calculate COGS starting from Cash Basis?

A

Mnemonic: CRAP-ICash Remitted (i.e. paid) + Increase in AP - 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 ItemsCompany 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 infrequentReported Net of Tax after Discontinued OperationsNote: 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 inflationUses the Consumer Price Index (CPI)

45
Q

When are expenses recognized?

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 revenue 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 suppliesNote: Sales staff salaries and portions of the building assigned to Sales should be allocated to Selling Expenses not G&A

49
Q

What are business start-up costs?

A

One-time costs for opening a new businessExpensed 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?

A

Net Income + Other Comprehensive Income (OCI): Revenue/Expense Gains/Loss Cumulative accounting adjustmentReclassifications adjustment Non-owner changes in equity

52
Q

What items are considered cumulative accounting adjustments?

A

Foreign Currency Translation AdjustmentsUnrealized gains on AFS SecuritiesMinimum 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 OCIExample: 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 Stockholder’s Equity on Balance Sheet or in a Statement if Income and Comprehensive IncomeNote: Earnings Per Share is not required for OCI

55
Q

What is disclosures on accounting policies are required in financial statements?

A

Accounting Principles used Basis of ConsolidationInventory 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

Lambers FAR (17 decks)

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