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CPA-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 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

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

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?

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 rates

Prime 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 forecasts

Lowest 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 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

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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

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35
Q

When is revenue recognized in an installment sale?

A

Revenue recognized upon receipt of cash

Only used when cash collection is uncertain

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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

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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

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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

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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 (represents a strategic shift and has major effect on operations and financials)

Includes Income (or loss) from the period plus the gain (or loss) from disposal

43
Q

For discontinued operations, what are the three requirements for disposal assets?

A

They must be Held for Sale - Sold - or Disposed of another way

44
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

45
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)

46
Q

When are expenses recognized?

A

When they are incurred. Accrue if not yet paid.

47
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

48
Q

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

A

Immediately.

49
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

50
Q

What are business start-up costs?

A

One-time costs for opening a new business

Expensed as they are incurred

51
Q

When is interest not expensed?

A

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

52
Q

What are the major components of Comprehensive Income?

A

Net Income + Other Comprehensive Income (OCI):Revenues/ExpensesGains/LossesCumulative accounting adjustmentsReclassifications adjustmentsNon-owner changes in equity, gross margin

53
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

54
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

55
Q

Where is Comprehensive Income reported?

A

Reported in a Single or Combined Income Statement

56
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

57
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

58
Q

Under Cash Basis Accounting how are Revenue and Expenses recognized?

A

Revenue is recognized with Cash Inflow and Expenses Recognized with Cash Outflow

59
Q

Is Cash Basis Accounting ok for Tax Returns?

A

Yes

60
Q

Is Cash Basis Accounting GAAP?

A

No - GAAP uses Accrual Accounting

61
Q

What is an advantage of Modified Cash Basis Accounting?

A

It avoids the complexities of GAAP but provides more information that Cash Basis Accounting

62
Q

Is Modified Cash Basis GAAP?

A

No - GAAP uses Accrual Accounting

63
Q

What are the 3 acceptable options for Income Tax Basis Accounting

A

Cash Basis - Accrual Basis - Hybrid Method

64
Q

What are the advantages of the Small and Medium Sized Entity Framework?

A

It simplifies reporting and disclosures for small companies - Reduces Book vs Tax differences - avoids Fair Value measurements (Historical Cost)

65
Q

What are the two options for Income Taxes under the Small and Medium Sized Entity Framework?

A

Deferred Taxes Method and Taxes Payable Method

66
Q

What are the two options for Startup Costs under the Small and Medium Sized Entity Framework?

A

Expensed or Amortized (15 years)

67
Q

How is Goodwill treated under the Small and Medium Sized Entity Framework?

A

Amortized (15 years)

68
Q

What are the required liquidation basis financial statements?

A

Statement of Net Assets in Liquidation and Statement of Changes in Net Assets in Liquidation

69
Q

What is a Development Stage Entity?

A

A company that is still in the formation stage and hasn’t yet begun principal operations or produced significant revenue

70
Q

What is the key benefit of the accounting rules for Development Stage Entities?

A

Cost savings without sacrificing financial statement usefulness

71
Q

Convert Accrual NI → Cash NI

A

A=L+E → ∆A=∆L + ∆E→

72
Q

Convert Cash NI → Accrual NI

A

∆A=∆L + ∆E→

*∆E=∆NI or ∆RE because NI=RE

73
Q

Calculate how Much cash was received? Unearned Revenue?

A

Beg Bal
Cash Collections
Rev(Sales)
Ending Balance

74
Q

Calculate how much revenue was recognized? – Accounts Rec

A

Beg Bal
Revenue (sales)
Cash Collections
Ending Bal

75
Q

Calculate how much cash was paid? - Prepaid Exp

A

Beg Bal
Cash Paid
Exp(?)
End Bal

76
Q

Calculate how much cash was paid? – How much expense recognized

A

Beg Bal
Exp
(?)Cash Paid
End Bal

77
Q

Define FV

A

the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.

78
Q

What is an orderly transactions?

A

a hypothetical transaction
• Assumed to occur at measurement date
• Assumed to occur under current market conditions
• Not assumed to occur in a forced liquidations or distressed sale

79
Q

What is the principal market?

A

market with greatest volume & level of activity for A&L

(for financial assets only)

80
Q

What is the most advantageous market?

A

can sell asset at price maximizing the amount that would be received for asset or minimizes amount that would be paid to transfer liability

  • Should not be adjusted transaction cost
  • Should be adjusted for transporting cost

(for financial assets only)

81
Q

In determining FV for nonfinancial assets, what is considered ?

A

highest and best use

82
Q

what does highest and best use consider?

A
  • What is physically possible
  • Legally permissible
  • Financially feasible
83
Q

What can highest and best use be?

A
  • In use-usually nonfinancial assets

* In exchange-usually financial assets

84
Q

Define the entrance price.

A

Amount paid to acquire an asset or received to assume a liability

85
Q

Define the exit price.

A

Amount received to sell an asset or paid to transfer a liability`

86
Q

Which instruments are not eligible for FV?

A

a. Instruments in sub that is to be consolidated
b. An interest in a VIE to be consolidated
c. Financial A&L recognized under Lease Accounting
d. Demand Deposit liabilities of financial institutions
e. Financial instruments classified as a component of shareholders equity
f. Employers and plans obligations (or assets) for pension benefits postretirement benefits and other employee oriented plans

87
Q

When can FV Option be applied?

A

a. When the item is first recognized
b. When an eligible firm commitment is established
c. Specialized accounting for an item ceases to exist
d. An investment becomes subject to the equity method of accounting
e. An event occurs that requires item to be measured at FV, such as business c combination, significant modification to debt instruments

88
Q

What are observable inputs?

A

Inputs used in pricing an asset, liability, equity based on market data from independent sources

89
Q

What are observable outputs?

A

Inputs that reflect the reporting entity’s own assumption used in pricing the asset, liability, or equity

90
Q

For A&L on a recurring basis, what are the FV disclosures?

A

i. FV measurement at reporting date
ii. Segregated into the three levels within the FV hierarchy
iii. Separately disclose and discuss transfers in and out of each level, and the reasons
iv. For levels 2 & 3 describe the valuation techniques used
v. For levels 3, reconcile beginning & ending balances, Disclose the following:
1. Gains/Losses recognized, whether reported in NI or OCI
2. Purchases, sales, issuances, settlements, disclose separately
3. Transfer in and out of level 3 disclosed separately
4. Quantitative information about unobservable inputs used

91
Q

For A&L on non-recurring basis what are the FV disclosures?

A

i. FV measurement at the reporting date & reasons for measurement
ii. Segregated into each of the three levels of FV hierarchy
iii. For levels 2 & 3, describe techniques and inputs used to measure FV & a discussion of changes in valuation techniques
iv. Describe process and quantitative information about unobservable inputs for level 3
v. For nonfinancial assets, disclose highest and best use from current used

92
Q

At the date of the B/S, disclose

A

i. Managements reason for using FV Option
ii. If FV Option is used partially:
1. List what and describe
2. Explain how group of items related to similar items
iii. Each line item in B/S that includes an item or items for which FV was chosen:
1. Info to describe how each line related to major A&L
2. Aggregate carrying amount of items included in each line item in the statement that are not eligible
iv. Difference between the aggregate FV and aggregate unpaid balance
1. Loans and LT receivable that has principle amounts where FV Option was used
2. LT debt with contractual principal amounts and for the FV option has been elected.
v. For Loans held as assets which FV option was used:
1. Aggregate Value of loans that are 90≥past due
2. Aggregate FV of loans on nonaccrual status if interest income is recognized separately from other changes in FV.
3. Difference of aggregate FV and aggregate unpaid principle balance for loans ≥90 days past due or in nonaccrual status or both
vi. For investments that would have been accounted for under the Equity Method—
1. Name of each investee & percentage of C/S
2. Accounting policies of investor regarding to investments in C/S
vii. For investments that would have been accounted for under the equity method
1. Name of each investee, and % of C/S
2. Accounting policies of investor

93
Q

At end of I/S period, disclose.

A

i. Describe how interest & dividends are measured. And where they are reported in the I/S
ii. For loans and other receivables held as assets
1. Est amount of G&L included in earnings
2. How these G&L were determined
iii. For liabilities significantly affected during the reporting period by changes in instrument specific credit risk
1. Est amount of G&L from FV changes included in earnings attributable to changes in instrument specific credit risk
2. How G&L were determined
3. Qualitative information about reasons for the changes
iv. The amount of G&L from FV changes included in earnings for the period in which line the I/S those G&L were reported

94
Q

What are the primary characteristics of the IASB Framework

A

Relevance

Faithful Representation

95
Q

For the IASB, what is Relevance?

A

1) Predictive Value
2) Confirmatory Value
3) Materiality

96
Q

For the IASB, what is Faithful Representation?

A

1) Completeness
2) Neutrality
3) Free from error

97
Q

Elements of F/S for IASB Framework

A

A) Recognition- item is recognized if it is probable that a future economic benefit associated with item will flow to or from entity and the item has a cost or value that can be reliably measured

B) Income-Includes both revenues & gains. Unlike GAAP which reports G&L. Separate from Income

C) Expense- Includes losses whereas GAAP reports them separate

D) IFRS does not have OCBOA

CPA-FAR (21 decks)

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