Lecture one Flashcards
Fundamental qualitative characteristics of useful financial information
Faithful representation and relevance
financial info in general purpose financial statements
Financial information provided in general purpose financial reports should include information about the resources of the entity, the claims against the entity, and how effectively and efficiently the entity’s management and governing board have discharged their responsibilities to use the entity’s resources.
Realization concept
Revenues and gains are realized when assets are exchanged for cash or claims to cash. SFAC 5 para. 83.
matching
allocating overheard
Choice “d” is correct. Revenues and gains are realized when assets are exchanged for cash or claims to cash. SFAC 5 para. 83.
Choice “b” is incorrect. Assigning depreciation in a production department is an example of allocating overhead. There is no realization associated with the assignment.
CAREFUL The realization concept is integral to accounting for revenues and expenses and is not connected to collection of receivables.
Choice “a” is incorrect. Assignment of overhead costs to products and thus to cost of goods sold is an example of matching. There is no realization associated with this assignment.
Nature of operations and measurement of equipment
equipment should be measured at NRV
Choice “d” is incorrect. Historical cost is appropriate if operations were continuing.
Choice “b” is incorrect. Current reproduction cost (producing new and substantially identical assets, at current prices, adjusted for depreciation to date) is appropriate in optional supplemental price level financial statements.
Choice “a” is incorrect. Current replacement cost (acquiring new and substantially equivalent property at current prices, adjusted for estimated depreciation since acquisition) is appropriate in optional supplemental price level financial statements.
Enhancing Qualitative characteristics
Timeliness, understandability, comparability and verifiability are characteristics that enhance the usefulness of information that is relevant and faithfully represented.
SFAC defines the following elements of present value measurement identified by the mnemonic UVOTE:
U
The Price for Bearing Uncertainty.
V
Expectations about Timing Variations of Future Cash Flows.
O
Other Factors (e.g., Liquidity Issues and Market Imperfections).
T
Time Value of Money (the Risk-free Rate of Interest).
E
Estimate of Future Cash Flow
Rule of conservatism
the rule of conservatism states that revenues and gains should be recognized when the earnings process is complete, but that expenses and losses should be expensed immediately. Reporting inventory at the lower of cost or market requires the recording of a loss on inventory when market is lower than cost in the period the loss is sustained, rather than when the inventory is sold, consistent with the rule of conservatism.
relevarnce and faithful
Choice “c” is correct. Timeliness is a characteristic that enhances the usefulness of information that is relevant and faithfully represented.
Materiality is a component of relevance.
Predictive value is a component of relevance.
Neutrality is a component of faithful representation
periodicity
The periodicity assumption is that economic activity can be divided into meaningful time periods
monetary unit
The monetary unit assumption means that money is the common denominator for economic activity and provides an appropriate basis for accounting measurements and analysis.
Economic entity
The economic entity assumption has nothing to do with money per se. The economic entity assumption is that economic activity can be accounted for when considering an identifiable set of activities.
Replacement cost,fair value,historical cost, NRV
Choice “a” is correct. Replacement cost is defined as the amount of cash or its equivalent that would be paid to acquire or replace an asset currently. Replacement cost is an acquisition cost.
Choice “c” is incorrect. Current market value, or fair value, is the price to sell (not acquire) an asset.
Choice “b” is incorrect. Historical cost is the amount paid by a company to acquire an asset.
Choice “d” is incorrect. Net realizable value is the selling price of an asset less any disposal costs.
standards update knowledge
Choice “a” is correct. An Accounting Standards Update is issued only after a majority vote of the members of the FASB.
Choice “d” is incorrect. There is no necessity for the EITF to approve a discussion memorandum before it is disseminated to the public.
Choice “b” is incorrect. There is no necessity for an exposure draft to be modified per public opinion before issuing the discussion memorandum (a question can be raised here as to “what” discussion memorandum”). Exposure drafts are quite/most often modified before they are issued as FASB statements, but they do not have to be. Whether they are or are not modified is a function of whether the FASB thinks they should be modified, partly due to the public comments that have been received.
Choice “c” is incorrect. There is no way to rescind a new Accounting Standards Update, although, in reality, an ASU can be rescinded by the issuance of a new ASU on the same subject.
Relevance and faithful representation
Choice “a” is correct. To be relevant, information should have predictive value and/or confirming value, and must be material.
Choice “b” is incorrect. Completeness is a component of faithful representation.
Choice “c” is incorrect. Verifiability is a characteristic that enhances the usefulness of information that is both relevant and faithfully represented.
Choice “d” is incorrect. Neutrality is a component of faithful representation.
Useful info
Relevance and faithful representation are the fundamental qualitative characteristics of useful financial information.
hich of the following statements best describes an operating procedure for issuing a new International Financial Reporting Standard?
Before an exposure draft is issued for public comment, it must be approved by at least nine members of the IASB. Exposure drafts are issued for public comment.
relevance
Under the FASB and IASB conceptual frameworks, relevance is a fundamental qualitative characteristic, and materiality is a component of relevance.
FUNDAMENTAL qualitative characteristics of USEFUL financial information
Relevance and faithful representation
Relevance
Predictive value, confirming value and materiality (PCM)
Faithful representation ( reliable)
Completely neutral(free from bias) and free from error
ENHANCING qualitative characteristics
Compare to verify in time to understand . Comparability,verifiability( diff ppl can reach concensus that a particular depiction is faithfully represented,timeliness, understandability(classified, characterized and presented correctly
Discontinued operations
However, gains and losses from discontinued operations are included in the year they occur.Operating losses are included in gain/loss from discontinued operations, along with impairment losses and gains/losses on disposal.
Change in acc principle insperable from change an estimate
A change in method of accounting for demo costs is a change in accounting principle inseparable from a change in estimate. When a change in accounting principle is considered inseparable from a change in estimate, the change is handled as a change in estimate - prospectively. No cumulative effect adjustment is made.
Change in acc principle insperable from change an estimate
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.
when to report as discontinued and when to report as continuing operations
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. In this question, the component was classified as held for sale and was sold in the same year.
Extraordinary
Unussual in nature and occur infrequently
Cash basis is a gaap error
The cash basis for financial reporting is not a generally accepted accounting basis of accounting (GAAP); therefore, it is an error. Correction of an error from a prior period is a reported as prior period adjustment to retained earnings.
interest and advertising
Interest expense is classified as a separate line item on the income statement. Advertising is classified as a selling expense.
under U.S. GAAP, a material loss should be presented separately as a component of income from continuing operations when it is:
unusual in nature or occur infrequently but not both, are presented as a component of income from continuing operations.
Cumulative effect of change in acc principle is shown as
The cumulative effect of a change in accounting principle is shown as an adjustment to beginning retained earnings.
IDEA
Income from continuing operations,discontinued ops,extraordinary items, accounting changes
Depreciation is now a change in estimate plus change in method
An exception is made however, for a change in depreciation method, since a change in depreciation method is no longer considered to be a change in accounting principle. A change in depreciation method is now considered to be both a change in method and a change in estimate. These changes should now be accounted for as a change in estimate and handled prospectively. The new depreciation method should be used as of the beginning of the year of change and should start with the current book value of the underlying asset. No retroactive or retrospective calculations should be made, and no adjustment should be made to retained earnings.
Changes from cost to equity and vice versa
Per GAAP, changes involving the cost and equity methods of accounting for investments are not considered to be changes in accounting principle. A change from the cost method to the equity method requires restatement; however, a change from the equity method to the cost method does not require restatement and is accounted for prospectively.
Change in entity
Financial statements of all prior periods presented should be restated when there is a “change in entity” such as resulting from:
Changing companies in consolidated financial statements.
Consolidated financial statements vs. Previous individual financial statements.
Handled prospectivelt
A change in estimate is handled prospectively. No cumulative effect adjustment is made and no separate line item presentation is made on any financial statement. If a material change is being made, appropriate footnote disclosure is necessary.
Gen and admin
Freight in : inven, freight out: selling, insurance and salaries is gen and admin
cumulative effect
The cumulative effect of a change in accounting principle equals the difference between retained earnings at the beginning of period of the change and what retained earnings would have been if the change was applied to all affected prior periods, assuming comparative financial statements are not presented. Beginning retained earnings of the earliest year presented is adjusted for the cumulative effect of the change.
Costs to be included in discontinued
Employee relocation costs associated with the decision to dispose should be included in the loss from discontinued operations.Additional pension costs associated with the decision to dispose should be included in the loss from discontinued operations.
Impairment loss included in discontinued operation loss calculation even if fair value is estimatedl
Since the fair value of Alpha’s facilities was $300,000 less than its carrying value, there has been an impairment loss, and that loss should be recognized in Year 1. That $300,000 impairment loss plus the $1,400,000 Year 1 operating loss would be recognized in Year 1 net of tax. The total loss would be $1,700,000 x 70% (100% - 30%) or $1,190,000.
loss includes impairment loss which is based on an estimate, actual operating losses plus actual loss on sale. have to note that once impaired written down to fair ve alue. once sold the gain or loss is diffeence between amount sold less written down fair value
he Year 2 loss from discontinued operations would include both the Year 2 operating loss of $500,000 (which turned out to be a correct estimate) and the “additional” loss (on disposal) of $100,000, net of tax, for a total of $600,000 x 0.70 or $420,000.
foreign currency devaluation
Not an extraordinary
when can an entity reported as discontinued operations
The earliest period that a component of an entity can be reported in discontinued operations is when the component meets the following “held for sale” criteria:
Management commits to a plan to sell the component.
The component is available for immediate sale in its present condition.
An active program to locate a buyer has been initiated.
The sale of the component is probable and the sale is expected to be completed within one year.
The sale of the component is being actively marketed.
It is unlikely that significant change to the plan to sell will be made or that the plan will be withdrawn.
prior period adjustment
The prior period adjustment must be reported net of tax:
change in accounting estimate
A change in accounting estimate is accounted for prospectively, in current and future periods.
Charitable contributions include
Charitable contributions include amounts the company gave to recognized charities. This includes:
Under U.S. GAAP, an extraordinary gain should be reported as a direct increase to which of the following
Under U.S. GAAP, extraordinary items are reported as a component of NET INCOME, after income from continuing operations and discontinued operations. The reporting of gains/losses as extraordinary is prohibited under IFRS.
Which of the following is a cost associated with exit and disposal activities
Costs to relocate employees are costs associated with exit and disposal activities.Exit and disposal activities include benefits related to involuntary (not voluntary) employee termination.Exit and disposal activities include costs to terminate a contract that is not a capital lease. Capital lease termination costs are accounted for separately from exit and disposal activities.The cost of retiring a fixed asset is not considered an exit or disposal cost. employee termination benefit costs are a cost of disposal
liability
An entity’s commitment to an exit or disposal plan, by itself, is not enough to result in liability recognition. A liability is only recognized when all of the following criteria are met:
An obligating event has occurred.
The event results in a present obligation to transfer assets or to provide services in the future.
The entity has little or no discretion to avoid the future transfer of assets or providing of services.
Change in acc principle for IFRS
Under IFRS, when an entity records a change in accounting principle, the entity must (at a minimum) present three balance sheets (end of current period, end of prior period, and beginning of prior period) and two of each other financial statement (current period and prior period). The cumulative effect adjustment is shown as an adjustment to beginning retained earnings on the balance sheet for the beginning of the prior period, which would be January 1 of the prior year.
Discontinued operations
The planned and approved sale of a segment qualifies as a discontinued operation because a segment is a component of the entity. Segments may be functional in nature, like a major product category or service division, or they can be geographical as well. Additionally, to qualify as a discontinued operation, the sale must represent a strategic shift and must have a significant effect on its operations and financial results. A discontinued operation can also be a group of components, a business or a nonprofit activity.
Gain or loss
Selling price - NET ASSETS
Net income includes
extra. discont and net o tax
to lifo and depreciatio
prospective
direct to installment
A change from direct recognition to the installment method is a change in accounting principle inseparable from a change in accounting estimate that is treated like a change in accounting estimate, prospectively.
assets held for sale
The old building being actively marketed for sale will be valued at the lower of its book value or net realizable value (fair value less the costs to sell).
PUFER - OCI
Pension changes in funded status: due to gains/losses, prior service costs, and net transition assets or obligations.
Unrealized gains and losses: unrealized holding gains/losses on available for sale securities and unrealized holding gains and losses on debt securities transferred from the held to maturity to available for sale classification.
Foreign currency items, including translation adjustments.
The effective portion of cash flow hedges. ( note that revaluation loss on Net income not OCI)
Net income plus OCI
Comprehensive income
Net income consists of
Income from continuing operations,discontinued operations and extraordinary items. Sometimes they will give you net income and extra ordinary seperate to confuse you,but you know that extraordinary should be included in net income
Comprehensive Income
Comprehensive income is the change in equity of a business during a period from transactions and other events and circumstances from non-owner sources. It includes all changes in equity except those resulting from investments by owners and distributions to owners. SFAC 6 para 70.
Facts about comprehensive income
Choice “b” is correct. Accumulated other comprehensive income is a component of stockholders’ equity on the balance sheet.
. Comprehensive income can be reported in a separate statement of comprehensive income or in a statement of income and comprehensive income.
Comprehensive includes only NON-OWNER changes in equity. Stock transactions and dividends are not included in comprehensive income.
Choice “a” is incorrect. Comprehensive income is reported in interim financial statements and year-end financial statements.
Additional facts about comprehensive income
Comprehensive income may be shown on the face of a combined “statement of income and comprehensive income” a separate section below net income, or:
In a separate “statement of comprehensive income,” or
As a component of the “statement of changes of owners’ equity” (U.S. GAAP only).
The income tax expense or benefit allocated to components must be disclosed, either on the face of the statement or in notes to the statement.
Reclass entries in OCI
Reclassification entries may be necessary to avoid double counting an item previously reported as comprehensive income (i.e., unrealized gain), which are now reported as part of net income (i.e., realized gain).
Choice “c” is incorrect. The classification of assets as current or non-current has no bearing on reporting comprehensive income.
Choice “d” is incorrect. All items of comprehensive income must be shown net of the related tax effects, but it is not done with reclassification adjustments.
Choice “a” is incorrect. Transactions with shareholders such as paying dividends and issuing capital stock are not included in comprehensive income, thus, reclassification adjustments are not necessary to exclude them.
AOCI
Accumulated other comprehensive income is a balance sheet account and is reported in the statement of financial position . Other comprehensive income for the current year can be reported in the statement of comprehensive income. Accumulated other comprehensive income is, however, reported in the statement of financial position because it is a component of equity that includes the total of other comprehensive income for the current period and previous periods.
Disclosure
Significant estimates should be disclosed when it is reasonably possible (not probable) that the estimate will change in the near term and that the effect of the change will be material. Immaterial items are not disclosed.
related party transactions
For a related party transaction, both the amount due to the affiliate and the dollar amount of the purchases during the year must be disclosed. In disclosure questions, if you are not sure, disclose the most rather than the least.
effective tax rate
the best, most current estimate of the annual effective tax rate should be used to determine the income tax provision for the second quarter. This rate is the effective tax rate expected to be applicable for the full year as estimated at the end of the second quarter.
Recognition of loss
When the loss is probable and estimable, the expected loss must be recorded in full. This loss becomes such at the end of the fourth quarter. Therefore, the inventory must be valued on the year-end at the lower of cost or market, recognizing the loss at that time.
Income tax
When preparing interim financial statements, income tax expense is estimated each quarter using the effective tax rate expected to apply to the entire year. even if its estimated use the estimat
costs incurref for interperiod
For interim reporting purposes, costs that benefit multiple periods should be allocated equally to those periods. The $60,000 in property taxes will benefit the entire calendar year and therefore must be allocated equally to each calendar quarter:
$60,000 / 4 quarters = $15,000 per quarter
The $240,000 in equipment repairs will benefit the company from April - December and therefore should be allocated equally to each the three quarters contained in that period:
$240,000 / 3 quarters = $80,000 per quarter
Therefore, the total of these expenses to be recognized in the quarter ended September 30 is $95,000 ($15,000 allocated property taxes + $80,000 allocated equipment repairs).
Income tax expense
n order to calculate income tax expense on an interim statement, the appropriate methodology is to multiply year to date income by the effective tax rate and subtract from that the income tax expense recorded in the previous quarter. The total income for both quarters is $30,000 and the effective tax rate estimated as of the second quarter is 25%. Total tax expense is then estimated as $7,500 for both quarters, and with $1,500 already booked in the first quarter, that will leave $6,000 for the second quarter.
Choice “c” is incorrect. This choice incorrectly calculates second quarter income tax expense of $5,000 ($20,000 x 25%) and then subtracts income tax expe
How are discontinued operations and extraordinary items that occur at midyear initially reported?
To adequately capture the impact of discountinued operations and extraordinary items, both should be included (prorated) in net income and disclosed in the interim financial statement notes.
reportable segment
A reportable operating segment is one having 10% of all revenue, including revenue from unaffiliated sales and from intersegment sales:
interest
Interest accrued on a notes payable is added to the notes payable balance and next years interest is calculate based on the new balance
Foreighn currency
if financial statements for the foreign subsidiary are not in the foreign subdiaries functional currency, the financial statements are remeasured at the functional currency at balance sheet date. Balance sheet Monetary items : Current/YE rate. Non monetary item ( historical rate). Income statement : BS related weighted average. Non BS related Historical
Monetary and non monetary items
Monetary items have a right to deliver a fixed/determinable currency unit. Example , cash,AR,AP. Non -monetary is the opposite examples are PPE,INV and Prepayments
Current cost financial statements
Current cost financial statements report holding gains for goods sold during the period
and holding gains on inventory at the end of the period. They also include holding gains and losses on all other
accounts in the financial statements.
Installment sales
Earned Gross Profit = GP%*Cash Collection
Deferred Gross profit=Installment Rec*Gross profit%
Sales-Collections = AR
Make sure you know these formulas
IFRS impairment loss- one step approach
Impairment loss = Recoverable amount Carrying value
recoverable amount, which is the GREATER of :the CGU’s fair value
less costs to sell and its value in use (PV of future cash flows expected from the CGU)
