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CPA > Financial Reporting > Flashcards

Financial Reporting Flashcards

1
Q

FAR

What is the primary objective of accounting?

A

To measure income

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2
Q

FAR

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

FAR

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

A

Authoritative and Non-Authoritative

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4
Q

FAR

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

FAR

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

FAR

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

FAR

What are the Primary Constraints of Financial Reporting?

A

Cost vs. Benefit

Materiality

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8
Q

FAR

What are the Secondary Constraints of Financial Reporting?

A

Consistency - Year vs. Year

Comparability - Company vs. Company

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9
Q

FAR

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

FAR

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

FAR

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

FAR

What is an accrual?

A

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

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13
Q

FAR

What is a deferral?

A

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

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14
Q

FAR

What is recognition in accounting?

A

When an item is recorded and included in the financial statements

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15
Q

FAR

Describe fair value with respect to an asset

A

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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16
Q

FAR

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

FAR

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

FAR

What items are included in a Level 2 valuation input?

A

Interest rates

Prime rate

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19
Q

FAR

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

A

Unobservable inputs such as assumptions or forecasts

Lowest priority for valuation

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20
Q

FAR

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 earnings

Cost approach - uses replacement cost to value the asset

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21
Q

FAR

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

FAR

What are current liabilities?

A

Liabilities that will use current assets during the present operating cycle

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23
Q

FAR

What is an accrued liability?

A

Expense that has been incurred but not paid

Example: rents payable

24
Q

FAR

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

25
Q

FAR

When are revenues recognized?

A

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

26
Q

FAR

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

27
Q

FAR

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

28
Q

FAR

What is an operating cycle?

A

Average time it takes to turn materials or services into Cash

29
Q

FAR

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

30
Q

FAR

What is historical cost?

A

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

31
Q

FAR

What is replacement cost?

A

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

32
Q

FAR

What is a market cost?

A

The sale price of an asset (Exit Cost)

33
Q

FAR

What is Net Realizable Value?

A

Sale Price of an Asset - Selling/Disposal Fee

34
Q

FAR

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

FAR

When is revenue recognized in an installment sale?

A

Revenue recognized upon receipt of cash

Only used when cash collection is uncertain

36
Q

FAR

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

FAR

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

FAR

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

FAR

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

FAR

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

FAR

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

FAR

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

FAR

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

FAR

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

FAR

When are expenses recognized?

A

When they are incurred. Accrue if not yet paid.

46
Q

FAR

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

FAR

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

A

Immediately.

48
Q

FAR

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

FAR

What are business start-up costs?

A

One-time costs for opening a new business

Expensed as they are incurred

50
Q

FAR

When is interest not expensed?

A

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

51
Q

FAR

What are the major components of Comprehensive Income?

A

Net Income + Other Comprehensive Income (OCI):

Revenues/Expenses

Gains/Losses

Cumulative accounting adjustments

Reclassifications adjustments

Non-owner changes in equity

52
Q

FAR

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

FAR

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

FAR

Where is Comprehensive Income reported?

A

Reported in a Single or Combined Income Statement

55
Q

FAR

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

FAR

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

CPA (19 decks)

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