Financial Reporting Flashcards
What is the primary objective of accounting?
To measure income
What is the most authoritative set of accounting pronouncements?
The FASB Codification
All pronouncements fall under the Codification umbrella
What are the 2 Levels of Authority within the FASB codification?
Authoritative and Non-Authoritative
How does managerial accounting differ from financial accounting?
Managerial Accounting has a timeliness focus
Managerial Accounting is not required to follow GAAP
Which financial reports are required to be filed with the SEC?
Form 10K - Annual and Audited
Form 10Q - Quarterly and Reviewed
What is the focus of financial reports for individual companies?
Focus is on the needs of users to help them make decisions and assessments about the company
Does not make assessments of the economy
What are the Primary Constraints of Financial Reporting?
Cost vs. Benefit
Materiality
What are the Secondary Constraints of Financial Reporting?
Consistency - Year vs. Year
Comparability - Company vs. Company
What are the Qualitative Characteristics of 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
What are the Enhancing Qualitative Characteristics of 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
How does Conservatism affect the recording of accounting transactions?
When an estimate is necessary due to uncertainty conservatism chooses the best option that won’t overstate the financial position of the company
What is an accrual?
Earned (Revenue) or Incurred (Expense) but no Cash Receipt/Outlay yet
What is a deferral?
Cash Receipt/Outlay but not Earned (Revenue) or Incurred (Expense)
What is recognition in accounting?
When an item is recorded and included in the financial statements
Describe fair value with respect to an asset
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
What market assumptions are made in a fair value assessment?
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
What items are included in a Level 1 input in the fair value hierarchy?
Price quotes or market prices
For example NYSE or NASDAQ
What items are included in a Level 2 valuation input?
Interest rates
Prime rate
What items are included in Level 3 inputs of the fair value hierarchy?
Unobservable inputs such as assumptions or forecasts
Lowest priority for valuation
What are acceptable valuation techniques for fair value?
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
What are current assets?
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
What are current liabilities?
Liabilities that will use current assets during the present operating cycle
What is an accrued liability?
Expense that has been incurred but not paid
Example: rents payable
What is a deferred revenue?
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
When are revenues recognized?
When they have been earned; i.e. company has performed
What is a gain?
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
What is a loss?
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
What is an operating cycle?
Average time it takes to turn materials or services into Cash
What is the present value of future cash flows?
Valuation method - the current value of a future amount of money using a specific interest rate
What is historical cost?
How much an asset cost - (net of depreciation and amortization)
What is replacement cost?
How much it would cost to reacquire an asset today (Entrance Cost)
What is a market cost?
The sale price of an asset (Exit Cost)
What is Net Realizable Value?
Sale Price of an Asset - Selling/Disposal Fee
When is royalty income recognized? How is it recognized?
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
When is revenue recognized in an installment sale?
Revenue recognized upon receipt of cash
Only used when cash collection is uncertain
What is deferred gross profit?
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
What is the cost recovery method?
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
What is subscription revenue? How is it recorded?
Payment has been received but performance is not complete.
As company performs revenue is recognized.
Recorded as a Deferred Revenue (Liability) on Balance Sheet
How are franchise revenues recorded?
Franchisor - Startup franchise fee revenue deferred until substantial performance
Franchisee - Costs are deferred until corresponding revenue is recognized
How do you calculate sales revenue starting from cash basis income?
Mnemonic: SPEAR-BAR
Sales (i.e. Customer Payments)+ Ending Accounts Receivable- Beginning Accounts Receivable
: Sales Revenue on an Accrual Basis
How do you calculate COGS starting from Cash Basis?
Mnemonic: CRAP-I
Cash Remitted (i.e. paid)
+Increase in Accounts Payable
-Increase in Inventory
:COGS on an Accrual Basis
How are discontinued operations reported? When are they used?
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
For discontinued operations, what are the three requirements for disposal assets?
They must be Held for Sale - Sold - or Disposed of another way
What qualifies as an extraordinary item? How is it recorded?
Both unusual AND infrequent
Reported Net of Tax after Discontinued Operations
Note: Usual or Infrequent Items are reported as part of Continuing Operations
What is constant dollar accounting?
Adjusts assets to reflect a consistent level of purchasing power due to inflation
Uses the Consumer Price Index (CPI)
When are expenses recognized?
When they are incurred. Accrue if not yet paid.
What are accrued expenses?
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
When should impaired assets be written down to fair value and expensed?
Immediately.
What major items should be classified under General & Administrative (G&A) expenses?
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
What are business start-up costs?
One-time costs for opening a new business
Expensed as they are incurred
When is interest not expensed?
Interest on projects (software) for internal use is not expensed but is instead capitalized
What are the major components of Comprehensive Income?
Net Income + Other Comprehensive Income (OCI):Revenues/ExpensesGains/LossesCumulative accounting adjustmentsReclassifications adjustmentsNon-owner changes in equity, gross margin
What items are considered cumulative accounting adjustments?
Foreign Currency Translation Adjustments
Unrealized gains on AFS Securities
Minimum Pension Liability adjustment for defined benefit plans
What is the purpose of a reclassification adjustment?
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
Where is Comprehensive Income reported?
Reported in a Single or Combined Income Statement
What disclosures on accounting policies are required in financial statements?
Accounting Principles used
Basis of Consolidation
Inventory Pricing Methods
Depreciation Method
Amortization of Intangibles
What are some major risks and uncertainties that must be disclosed?
Nature of Operations
Use of Estimates and listing of Significant Estimates
Concentration vulnerability
Under Cash Basis Accounting how are Revenue and Expenses recognized?
Revenue is recognized with Cash Inflow and Expenses Recognized with Cash Outflow
Is Cash Basis Accounting ok for Tax Returns?
Yes
Is Cash Basis Accounting GAAP?
No - GAAP uses Accrual Accounting
What is an advantage of Modified Cash Basis Accounting?
It avoids the complexities of GAAP but provides more information that Cash Basis Accounting
Is Modified Cash Basis GAAP?
No - GAAP uses Accrual Accounting
What are the 3 acceptable options for Income Tax Basis Accounting
Cash Basis - Accrual Basis - Hybrid Method
What are the advantages of the Small and Medium Sized Entity Framework?
It simplifies reporting and disclosures for small companies - Reduces Book vs Tax differences - avoids Fair Value measurements (Historical Cost)
What are the two options for Income Taxes under the Small and Medium Sized Entity Framework?
Deferred Taxes Method and Taxes Payable Method
What are the two options for Startup Costs under the Small and Medium Sized Entity Framework?
Expensed or Amortized (15 years)
How is Goodwill treated under the Small and Medium Sized Entity Framework?
Amortized (15 years)
What are the required liquidation basis financial statements?
Statement of Net Assets in Liquidation and Statement of Changes in Net Assets in Liquidation
What is a Development Stage Entity?
A company that is still in the formation stage and hasn’t yet begun principal operations or produced significant revenue
What is the key benefit of the accounting rules for Development Stage Entities?
Cost savings without sacrificing financial statement usefulness
Convert Accrual NI → Cash NI
A=L+E → ∆A=∆L + ∆E→
Convert Cash NI → Accrual NI
∆A=∆L + ∆E→
*∆E=∆NI or ∆RE because NI=RE
Calculate how Much cash was received? Unearned Revenue?
Beg Bal
Cash Collections
Rev(Sales)
Ending Balance
Calculate how much revenue was recognized? – Accounts Rec
Beg Bal
Revenue (sales)
Cash Collections
Ending Bal
Calculate how much cash was paid? - Prepaid Exp
Beg Bal
Cash Paid
Exp(?)
End Bal
Calculate how much cash was paid? – How much expense recognized
Beg Bal
Exp
(?)Cash Paid
End Bal
Define FV
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.
What is an orderly transactions?
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
What is the principal market?
market with greatest volume & level of activity for A&L
(for financial assets only)
What is the most advantageous market?
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)
In determining FV for nonfinancial assets, what is considered ?
highest and best use
what does highest and best use consider?
- What is physically possible
- Legally permissible
- Financially feasible
What can highest and best use be?
- In use-usually nonfinancial assets
* In exchange-usually financial assets
Define the entrance price.
Amount paid to acquire an asset or received to assume a liability
Define the exit price.
Amount received to sell an asset or paid to transfer a liability`
Which instruments are not eligible for FV?
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
When can FV Option be applied?
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
What are observable inputs?
Inputs used in pricing an asset, liability, equity based on market data from independent sources
What are observable outputs?
Inputs that reflect the reporting entity’s own assumption used in pricing the asset, liability, or equity
For A&L on a recurring basis, what are the FV disclosures?
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
For A&L on non-recurring basis what are the FV disclosures?
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
At the date of the B/S, disclose
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
At end of I/S period, disclose.
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
What are the primary characteristics of the IASB Framework
Relevance
Faithful Representation
For the IASB, what is Relevance?
1) Predictive Value
2) Confirmatory Value
3) Materiality
For the IASB, what is Faithful Representation?
1) Completeness
2) Neutrality
3) Free from error
Elements of F/S for IASB Framework
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
