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FAR Flashcards > 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

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 is not required to follow GAAP

Managerial Accounting has a timeliness focus

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5
Q

Which financial reports are required to be filed with the SEC?

A

Form 10K - Annual and Audited

From 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 without bias
Free from Error- No material error is 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 overestimate 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

19
Q

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

A

Unobservable inputs such as assumptions or forescasts

Lowest priority for valuation

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

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

22
Q

What are current liabilities?

A

Liabilities that will use current assets during the present operating cycle

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 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

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 business

Can 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 business.

Can 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

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

30
Q

What is a historical cost?

A

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

31
Q

What is replacement cost?

A

How much 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 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

When is revenue recognized in an installment sale?

A

Revenue recognized upon receipt of cash

Only used when cash collection is uncertain

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

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

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 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

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

How are Unusual or Infrequent (formerly Extraordinary) items reported?

A

Reported Two Ways:
1. Income Statement above Income from Continuing Operations or

  1. Footnotes. Restrospective or Prospective Treatment is allowed

FAR Flashcards (16 decks)

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