Framework Flashcards

1
Q

Per the FASB framework an information is considered useful when it meets what two qualitative characteristics?

A

Relevance and Faithful Representation

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2
Q

How do you calculate the number of days in a company’s operating cycle when company has already calculated ICP & PCP

A

Inventory Conversion Period + Receivable Collection Period

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3
Q

What are the impacts of issuing stock options on selected ratios?

A

Answer varies on the what type of ratio. Note - When stock options are exercised, cash is received and shares of stock are issued, increasing both assets and equity. Ratios that use assets or equity in the denominator will decrease. (eg. Debt to equity, earnings per share, asset turnover)

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4
Q

What is a current liability?

A

It’s an obligation that will be settled with current assets or creation of another current liability and within a year of the operating cycle, whichever is longer. Eg. Accounts Payable, Salaries Payable, Sales tax payable, income taxes payable and dividends payable.

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5
Q

What are the 4 disclosure requirements related to risk and uncertainties an entity would have to disclose.

A

Nature of operations, Use of estimates, certain significant estimates, Current vulnerability associated with certain concentrations.

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6
Q

What is a fair value?

A

It is the price received to sell an asset or transfer a liability from an orderly transaction between market participants on a specific date. In context, market participants are buyers and sellers in the principal (or most advantageous) market for the asset or liability being sold. In addition, market participants have the following characteristics.

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7
Q

How do you calculate the average collection period for an entity’s accounts receivable?

A

First you need to calculate the A/R turnover then calculate the A/R turnover in days.

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8
Q

What are examples of current liabilities that are typically due in a year or less.

A

Notes payable, Accounts Payable, Dividends payable, Income tax payable, Accrued expenses, Unearned Revenue, Current portion of long-term debt, Other short-term debt

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9
Q

How do you calculate the price to earnings ratio? Given the market price per share of common stock

A

Price per share divided by EPS. Note To calculate Basic EPS is Net Income - Preferred dividends divided by weighted average number of common shares

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10
Q

How do you calculate the Net cash balance when reconciling bank accounts.

A

Bank Statement balance + Deposits in transit - checks outstanding plus/minus Bank errors

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11
Q

What are quick ratio and current ratio?

A

These are liquidity metrics that assess a company’s ability to meet its short-term obligations. Note- current ratio includes all current assets in the numerator; the quick ratio includes only cash, marketable securities and net account receivables in the numerator.

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12
Q

What is the debt-to-equity ratio formula?

A

Total Debt divided by Total Equity

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13
Q

What are the enhancing qualitative characteristics of Relevance & Faithful Representation?

A

Comparability, Understandability, Timeliness & Verifiability

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14
Q

What are cash and cash equivalents?

A

Cash & cash equivalents are highly liquid current assets. they include balances in savings, checking or money market accounts and negotiable paper. Other investments are cash equivalents if they are easily converted to known amounts of cash and have a maturity when purchased of three months or less.

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15
Q

How do you determine the fair value of non financial assets?

A

The fair value of a non financial asset should reflect that asset’s highest and best use because sellers will transact wherever they will receive the most consideration. That use must be physically possible, legally permissible and financially feasible. If the highest and best use for an asset differs from the current use, the former equals fair value.

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16
Q

How do you classify the monetary or non monetary accounts on computing a purchasing power gain or loss?

A

Monetary Items are Cash, AR, AP, Bonds & Nonmonetary Item are PPE, Inventory and intangibles.

17
Q

What are the changes in current and quick ratio if the ratio is greater or lessor than 1?

A
18
Q

What does other comprehensive income comprises of?

A

Derivative cash flow hedges, excess adjustment on defined benefit pension plans, unrealized gains and losses on available-for-sale debt securities and foreign currency translation adjustments

19
Q

How do you calculate dividends per share payout ratio

A

Dividends per share divided by earnings per share

20
Q

How do you calculate earning per share

A

Net Income-Preferred dividends/weighted average common shares outstanding

21
Q

What is the entry to record accrued salaries expense at the end of the year?

A

Debit Salaries Expense & Credit Accrued Salaries

22
Q

What ratio would failing to accrue salaries at the end of the year affect?

A

Failing to accrue salary expense at the year end would result in an understatement of current liabilities, which simply means current ratio and working capital will be overstated.

23
Q

What does liquidity ratios do?

A

Liquidity ratios allow users of financial statements to measure a company’s short-term ability to meet its obligations.

24
Q

What are accrued expenses?

A

These are current liabilities representing expenses that are organized on the books but have not been paid. For example salaries are recognized when employees perform services to match the cost to the related revenues generated during that period. Therefore salary expenses incurred before year end and paid the following year are accrued as current liabilities.

25
Q

What is the formula to calculate the average days sales inventory?

A

365 divided by inventory turnover.

26
Q

What is the formula to calculate inventory turnover?

A

COGS/Average Inventory.

27
Q

What happens during inflation in which an asset account balance remains constant?

A

There is a purchasing power loss, if the item is a monetary asset.

28
Q

What is materiality?

A

It is an amount capable of making a difference in the user’s decision-making process if omitted or misstated.

29
Q

How do you calculate the receivables turnover ratio?

A

A/R turnover = Net Credit sales/ Average Receivables.

Formula for Average Receivables = (Beginning receivables + Ending Receivables)/2.

30
Q

How do you calculate Comprehensive Income?

A

Net Income + Other comprehensive income = Comprehensive Income

31
Q

What is a Comprehensive Income?

A

It measures economic performance by calculating an entity’s change in equity from non owner transactions and events. This includes revenues, expenses, gains and losses.

32
Q

What are the Fair value measurement techniques?

A

It is MIC which is Market, Income, Cost.
Market - Information generated by market transactions for identical or similar items. Eg. Quoted price from stock exchange.
Income - Estimated future amounts discounted to a single, current amount. Eg. Discounted cash flow analysis.
Cost - Amount currently required to replace benefit derived from an asset. Eg. Current replacement cost. (Adjusted for obsolescence)

33
Q

What are included in other comprehensive income?

A

The abbreviation is DENT which stands for Derivative cash flow hedges, Excess adjustment of Pension PBO and FV of plan assets at year end, Net unrealized holding gains and losses on available-for-sale debt securities and Translation adjustments from foreign currency.

34
Q

What are the two required financial statements of a defined contribution retirement plan?

A

A statement of net assets available for benefits of the plan and a statement of changes in net assets available for benefits.

35
Q

What are the 3 essential characteristics an asset is defined by?

A

Probable future benefit - The item can be used to produce or be exchanged for something of value or can be used to settle an entity’s liabilities.
Entity controlled - An entity can benefit from the item and deny or regulate others’ access to that benefit.
Based on past transactions - Some event must occur to permit an entity to enjoy an item’s benefit.

36
Q

What impact does a customer’s A/R write off has on net income and total assets?

A

A write off on A/R is journaled as a debit to allowance for credit losses (which is a contra-asset account) then a credit to A/R (which is an asset account). Since these are both asset accounts that means the amount would net out resulting in no changes in net income & total assets.