Financial Statements

Question 1

Recognizing inventory losses in interim statements

Answer 1

ASC Topic 270 provides that inventory losses from market declines should be recognized in the interim statements when the decline in value occurs. A temporary market decline need not be recognized in the financial statements since no loss is expected to be incurred in the fiscal year.

Question 2

Fair value measurements

Answer 2

Fair value measurement also assumes the highest and best use of the asset.

Question 3

Earnings vs comprehensive income

Answer 3

Per SFAC 5, earnings and comprehensive income have the same broad components–revenues, expenses, gains, and losses, but are not the same because certain classes of gains and losses are included in comprehensive income but are excluded from earnings.

Question 4

Loan origination costs

Answer 4

the loan origination costs are to be added to the principal, by the lender, and any fee charged to the client is deducted from the principal by both parties in calculating the carrying amount.

Question 5

Components of Income & Retained Earning statement

Answer 5

IDEA
I - Income from Continued Operations (gross & net of tax)
D - Income from Discontinued Operations
E - Extraordinary Items
A - Cumulative Effect of Change in Accounting Principle (retained earnings)

Question 6

Fundamental Qualitative Characteristics

Answer 6

Relevance (Passing Confirms Money)
- Predictive value
- Confirming value
- Materiality
Faithful Representation (Completely neutral is free from error)
- Completeness
- Neutrality
- Freedom from error

Question 7

Discontinued operations

Answer 7

Reported as discontinued operations if it:

• has been disposed of; or
• is classified as held for sale
• the disposal must represent a strategic shift, or
• have a major effect on an entity’s operations and financial results (GEL)
• disposal of a major Geographical area
• disposal of a major Equity method investment
• disposal of a major Line of business
• 3 Calculations
• impairment loss
• loss from operations
• loss on sale

Question 8

Change in Accounting principle

Answer 8

When the effect of a change in accounting principle is inseparable from the effect of a change in accounting estimate, the reporting treatment for the overall effect is as a change in estimate. Thus, the effect is reported prospectively as a component of income from continuing operations.

Question 9

Retrospective treatment

Answer 9

Restatement of all prior periods is the retroactive accounting treatment that is applied to the correction of an error and the retrospective accounting treatment given to changes in accounting principle. However, a change in accounting principle that is inseparable from the effect of a change in accounting estimate is now treated as a change in accounting estimate.

Question 10

Disposal of component of a business

Answer 10

Once the decision has been made to dispose of a component of a business and that component meets the criteria to be classified as held for sale, the operating results of the component for the period reported on, and any gain or loss from the disposal, should be reported separately from continuing operations, net of tax.

Question 11

Usual vs infrequent (gains or losses)

Answer 11

Gains or losses that are unusual in nature or occur infrequently but not both, are presented as a component of income from continuing operations.

Question 12

Extraordinary

Answer 12

unusual AND infrequent

comes after discontinued operations

Question 13

Intangibles (patents, trademarks)

Answer 13

if purchase, record asset at cost (acquisition, legal & consulting).
if developed, R&D is expense, but capitalize legal fees associated with successful defense of asset, registration or consulting fees, design costs and other direct cost to secure the asset.
- (if unsuccessful defense, then expense and test for impairment).

Question 14

Research and development costs

Answer 14

Research and development costs are expensed whether they are incurred internally or by contract with outside firms under U.S. GAAP.

Question 15

Patents (intangible assets)

Answer 15

Once the patent is established, legal costs to successfully defend the patent should be capitalized and amortized over the lesser of the patent’s useful economic life or its legal life.

Question 16

R&D is expensed

Answer 16

R&D contracted out to a third party, preproduction prototypes and models costs, and, costs for searching for new products or new process alternatives are reported as R&D expense

Question 17

Not considered R&D

Answer 17

• Routine periodic design changes to old products or troubleshooting in production stage,
• marketing research,
• quality control testing and
• reformulation of a chemical compound

Question 18

Unearned Revenue

Answer 18

When there is an unlimited right of return, nothing should be recorded as sales revenue unless four conditions are satisfied. These conditions are the following:

• The sales price is substantially fixed (it seems like it is in this question).
• The buyer assumes all risk of loss (no information).
• The buyer has paid some form of consideration (no information).
• The amount of returns can be reasonably estimated (which they can in this question).
• Because all four conditions have not been satisfied, revenue should not be recognized until they are or until something is actually sold.

Question 19

Intangible asset vs goodwill amortization

Answer 19

Finite life intangibles are amortized over the period to be benefited. Indefinite life of goodwill is not amortized, but is instead analyzed periodically (at least annually) for impairment.

Question 20

Reversal of impairment loss is prohibited under U.S. GAAP

Answer 20

After an impairment loss is recognized, the adjusted carrying amount of the intangible asset shall be its new accounting basis. Under U.S. GAAP, subsequent reversal of intangible asset impairment losses is prohibited unless the intangible asset is held for sale.