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0-SFCPA-FAR > Framework & Financials (25-35%) > Flashcards

Framework & Financials (25-35%) Flashcards

1
Q

What does the balance sheet report?

A

economic resources & obligations as a specific date

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2
Q

What are some common ratios used to analyze the balance sheet?

A

current ratio - CA/CL (have enough ST resources to cover their ST liabilities?)

quick ratio - (CA-inventory)/CL (more telling version of current ratio)

debt to equity ratio - TL/SH equity (what is owed to what is owned)

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3
Q

What type of account is amortization of a discount on a note payable?

A

interest expense - contra liability to note payable liability.

as it is amortized, it is recognized on the income statement as interest expense.

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4
Q

Calculation for COGS? Calculation for Purchases?

A 
COGS = beg inv + purchases - end inv
Purchases = COGS + end inv - beg inv
\+ Beg Inv
\+ Purchases
= GAFS
- End Inv
= COGS
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5
Q

What are some common ratios used to analyze the income statement?

A

gross margin - gross profit/net sales (% of sales available for expenses & profit)

profit margin - net inc/net sales (% of sales that becomes profit)

EPS - net inc/WA com. shares OS (measures net inc on a per share basis)

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6
Q

What are OCI items?

A
  • unrealized gains/losses on AFS debt securities
  • unrecognized gains/losses from pension costs
  • foreign currency translation adjustments
  • unrealized gains/losses from certain derivative transactions
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7
Q

What is AOCI? How does it get reported?

A

Reclassification adjustments. OCI items are accumulated here until the gain is realized & then reclassified through net income & AOCI is reduced by that amount, otherwise these gains would be counted twice.

Reported in the SH Equity section of balance sheet and reported in the notes to the FS.

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8
Q

How is the Statement of Changes in Equity reported?

A
  • part of footnotes
  • separate statement
  • public companies show 3 years of comparative owner’s equity in their statement
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9
Q

What are items reported under the Operating section of the Statement of Cash Flows?

A
  • cash received from customers (AR)
  • cash paid for business expenses (AP, payroll, etc.)
  • dividend income (receiving only)
  • interest income/expenses
  • gain on sale of LT investments
  • short term investments
  • equity investments
  • amortization of bond premiums/discounts
  • DTLs
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10
Q

What are items reported under Investing section of the Statement of Cash Flows?

A
  • purchase/sale of investments
  • purchase/sale of LT assets (including fixed assets)
  • making loans (not getting a loan)
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11
Q

What are items reported under Financing section of the Statement of Cash Flows?

A
  • getting a loan (including making payments on a loan)
  • paying a dividend (paying out only)
  • issuing company stock
  • selling company stock
  • purchasing treasury stock
  • issuing bonds
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12
Q

What is the difference between Direct & Indirect Method of Cash Flow Statement?

A

Direct - each line is a direct statement showing cash paid/received (cash paid to customers/suppliers)
*Fast Gear

Indirect - starts with net income and works backwards to cash provided by operating activities, and several non-cash items such as depreciation expense or gain/loss on sale of equipment. (taking net income on accrual basis and converting it to cash basis)
*Great Walls

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13
Q

How does converting from accrual basis to cash basis work?

A
  • a change in assets means cash moved in the opposite direction
    ex: increase in inventory means less inventory sold than purchased, this is subtraction from net income
  • a change in liabilities means cash moved in the same direction
    ex: increase in payable means more accrued than paid, so this is added to net income

*ex: depreciation exp is noncash but reduces net income on accrual basis, so it is added to net income

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14
Q

What does the MD&A discuss?

A
  • operations
  • liquidity
  • capital resources
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15
Q

What are some significant accounting policies that are disclosed in the notes to the FS?

A
  • company’s revenue recognition policies
  • how a company determines what investments are cash equivalents
  • how a company prices their inventory
  • methods for amortizing intangibles
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16
Q

What are some other disclosures that should be disclosed in the notes to the FS?

A
  • price instability (discussing the effects on company’s business)
  • related party transactions
  • concentration of credit risk (business & most of supplies/customers) all operate in same industry)
  • contingent liabilities (if not probable & can be reasonably estimated)
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17
Q

What is Controlling Interest? What is Non-controlling interest?

A

CI - one entity has control of another if it owns 50% of that entity (parent company must consolidate)

NCI - ownership stake is less than 50%

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18
Q

What is a Variable Interest Entity (VIE)?

A
  • controlled by another entity, but not through voting rights
  • has a primary beneficiary
  • usually setup by controlling entity to perform specific business purpose
  • entity has less than 10% of total assets
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19
Q

In a consolidation, how are issuance costs/legal fees reported?

A
  • costs to register & issue stock to acquire another company are netted against APIC upon consolidation
  • legal/consulting fees due to consolidation are expenses as occurred
20
Q

In a consolidation, what intercompany transactions need to be eliminated?

A
  • AR/AP
  • Rev/Exps
  • Inv
  • Fixed Assets (and depreciation)
  • Notes
  • Bonds
  • Upstream & Downstream transactions between parent and subsidiary
21
Q

How are discontinued operations shown?

A
  • Income Statement, below continuing operations
  • Presented net of tax
  • Results of operations presented on one line, and then G/L on disposal of business segment is reported on a separate line
22
Q

The Consumer Price Index (CPI) is used to compute information on what basis?

A

Constant Dollar Basis (to dollars which have the same purchasing power)

23
Q

What is the number of days’ sales in average inventories ratio?

A

average inventory at cost/average sales per day at cost

beg inv + end inv /2
/
(cogs/days)

24
Q

What is the Diluted EPS?

A

Idea is to calculate what the EPS would be if all possible shares were outstanding. Stock options/convertible bonds that would significantly impact the EPS if all those shares were outstanding.

25
Q

What effects the Diluted EPS?

A

Numerator:
- convertible bonds - interest expense needs to be added to net inc (net of tax)

Denominator:

  • convertible bonds - add shares to denominator
  • should not include shares to denominator if non-dilutive (convertible bonds, stock options, warrants)
  • non-dilutive if the option price exceeds the market value.
26
Q

What is Cash Basis Accounting? What are the FS associated with?

A

Revenue is when cash is received, expenses are when cash is spent.

  • Balance Sheet
  • Statement of Cash Receipts & Disbursements
27
Q

What is Modified Cash Basis Accounting? What are the FS associated with?

A

Cash Basis plus a few elements of accrual accounting

  • capitalizing/depreciating assets
  • recognizing AR/AP
  • accruing income taxes due
  • Statement of Assets & Liabilities-Modified Cash Basis
  • Statement of Revenue, Expenses, and Retained Earnings-Modified Cash Basis
28
Q

What is Tax Basis Accounting? What are the FS associated with?

A

Focus on presenting the information based on tax rules. Range of reporting certain aspects from cash basis to full accrual.

  • Balance Sheet
  • Statement of Revenues, Expenses, and Retained Earnings-Income Tax Basis
29
Q

How & when are exit/disposal activities recorded (laying off EEs/termination benefits)?

A

Liability recognized at FV, if in distant future then it would be discounted to PV.

Liability is recognized on the “communication date.”

30
Q

What is an Asset Retirement Obligation (ARO)? What are some examples?

A

Future costs that need to be accounted for, related to certain assets that have environmental impact or are affected by other regulations, that will have significant costs to dispose of the asset.

  • closing a mine
  • decommissioning nuclear processes
  • site reclamation
31
Q

How are Asset Retirement Obligations (ARO) recorded?

A

Capitalized as an asset and a liability. Amount capitalized is the weighted PV of the future costs to retire the asset. Asset’s base is depreciated over its useful life.

ARO increases each year (accretion expense), this increases the PV of ARO to its full amount to closer it gets to being retired.

Accretion Expense = ARO balance X Discount Rate at initial measurement

32
Q

What happens to creditor & debtor when there is troubled debt restructuring (TDR)?

A

Creditor records a loss (Note Receivable went down in value)

Debtor records a gain (released from a portion of debt)

33
Q

What are bond issue cost? How are they reported?

A
  • accounting fees
  • legal fees
  • printing fees
  • underwriting fees

Deduction to bond carrying amount on BS.
Amortized over life of the bond to interest expense.

34
Q

How is interest expense calculated under the effective interest method?

A

Interest expense is directly based on BV X market interest rate

35
Q

What is the dividends per share ratio payout?

A

Dividends payout ratio = Dividends per share/EPS

36
Q

What items are considered selling expenses?

A
  • portion of rent
  • sales salaries & wages
  • advertising
  • freight-out
37
Q

What are the 5 steps behind Revenue from Contracts with Customers?

A

1) identify contract with customer
2) identify performance obligations in contract (same accounted for together? different accounted for separately?)
3) determine transaction price
4) allocate transaction price to performance obligations
5) recognize revenue when (or as) entity satisfies the performance obligation

38
Q

For contracts that include a significant financing component, how is interest income/expense recognized?

A
  • separately from the revenue from contract with customers

* can be ignored if the time between payment & performance is less than one year

39
Q

How is total compensation expense for stock options recognized & measured?

A

Recognized during the service period. Equal to FV of options expected to be exercised. FV is measured at grant date using an option pricing model (usually Black Scholes). Amortized on a SL basis over service period.

40
Q

What type of stock options are reversed & what type are not if un-exercised?

A

fixed options have no reversal

performance-based options are reversed if criteria is not met

stock awards are also reversed

41
Q

What is considered an estimate change?

A

change the estimated useful life of PPE or change depreciation methods.

requires prospective application.

42
Q

What is considered an accounting principle change?

A

changing from one GAAP principle to another - such as LIFO to FIFO.

requires retrospective application, but is not considered a restatement.

43
Q

What is considered an error correction?

A

error is discovered that affect prior year income.

requires retrospective application & restatement.

44
Q

What are the 2 primary qualitative characteristics? What are their components?

A

FARR (Faithful Representation & Relevance).

FAR (Faithful Representation):

  • Completeness
  • Neutral
  • Free from error

R (Relevance):

  • Predictive Value
  • Confirmatory Value
  • Material
45
Q

What are the 4 enhancing characteristics?

A

CUT-V

  • Comparability
  • Understandability
  • Timeliness
  • Verifiability
46
Q

What are the 3 main aspects of financial reporting?

A

1) recognition
2) measurement
3) disclosure

47
Q

What are the 6 steps to the standard setting process?

A

1) project added to agenda
2) conduct research, issue a discussion memorandum
3) hold public hearings on topic
4) evaluate research & comments from interested parties, issue exposure draft (1st version of new standard)
5) solicit add’l comments & modify exposure draft (if needed)
6) finalize new accounting guidance by vote (majority 4/7 needed), if approved, issue new standard as ASU (Accounting Standards Update)

0-SFCPA-FAR (4 decks)

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