Financial Reporting Flashcards
To measure income
Financial Reporting
The FASB Codification
All pronouncements fall under the Codification umbrella
Financial Reporting
Authoritative and Non-Authoritative
Financial Reporting
Managerial Accounting has a timeliness focus
Managerial Accounting is not required to follow GAAP
Financial Reporting
Form 10K - Annual and Audited
Form 10Q - Quarterly and Reviewed
Financial Reporting
Focus is on the needs of users to help them make decisions and assessments about the company
Does not make assessments of the economy
Financial Reporting
Cost vs. Benefit
Materiality
Financial Reporting
Consistency - Year vs. Year
Comparability - Company vs. Company
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
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
Financial Reporting
When an estimate is necessary due to uncertainty conservatism chooses the best option that won’t overstate the financial position of the company
Financial Reporting
Earned (Revenue) or Incurred (Expense) but no Cash Receipt/Outlay yet
Financial Reporting
Cash Receipt/Outlay but not Earned (Revenue) or Incurred (Expense)
Financial Reporting
When an item is recorded and included in the financial statements
Financial Reporting
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
Financial Reporting
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
Financial Reporting
Price quotes or market prices
For example NYSE or NASDAQ
Financial Reporting
Interest rates
Prime rate
Financial Reporting
Unobservable inputs such as assumptions or forecasts
Lowest priority for valuation
Financial Reporting
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
Financial Reporting
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
Liabilities that will use current assets during the present operating cycle
Financial Reporting
Expense that has been incurred but not paid
Example: rents payable
Financial Reporting
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 they have been earned; i.e. company has performed
Financial Reporting
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
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
Average time it takes to turn materials or services into Cash
Financial Reporting
Valuation method - the current value of a future amount of money using a specific interest rate
Financial Reporting
How much an asset cost - (net of depreciation and amortization)
Financial Reporting
How much it would cost to reacquire an asset today (Entrance Cost)
Financial Reporting
The sale price of an asset (Exit Cost)
Financial Reporting
Sale Price of an Asset - Selling/Disposal Fee
Financial Reporting
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
Revenue recognized upon receipt of cash
Only used when cash collection is uncertain
Financial Reporting
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
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
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
Franchiser - Startup franchise fee revenue deferred until substantial performance
Franchisee - Costs are deferred until corresponding revenue is recognized
Financial Reporting
Mnemonic: SPEAR-BAR
Sales (i.e. Customer Payments)
+ Ending Accounts Receivable
- Beginning Accounts Receivable
: Sales Revenue on an Accrual Basis
Financial Reporting
Mnemonic: CRAP-I
Cash Remitted (i.e. paid)
+Increase in Accounts Payable
-Increase in Inventory
:COGS on an Accrual Basis
Financial Reporting
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
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
Adjusts assets to reflect a consistent level of purchasing power due to inflation
Uses the Consumer Price Index (CPI)
Financial Reporting
When they are incurred. Accrue if not yet paid.
Financial Reporting
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
Immediately.
Financial Reporting
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
One-time costs for opening a new business
Expensed as they are incurred
Financial Reporting
Interest on projects (software) for internal use is not expensed but is instead capitalized
Financial Reporting
Net Income + Other Comprehensive Income (OCI):
Revenues/Expenses
Gains/Losses
Cumulative accounting adjustments
Reclassifications adjustments
Non-owner changes in equity
Financial Reporting
Foreign Currency Translation Adjustments
Unrealized gains on AFS Securities
Minimum Pension Liability adjustment for defined benefit plans
Financial Reporting
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
Reported in a Single or Combined Income Statement
Financial Reporting
Accounting Principles used
Basis of Consolidation
Inventory Pricing Methods
Depreciation Method
Amortization of Intangibles
Financial Reporting
Nature of Operations
Use of Estimates and listing of Significant Estimates
Concentration vulnerability
Financial Reporting
