M4,M5,M6 Flashcards
(48 cards)
Restatements are required for changes in entity(of subsidiaries)
Restatements are required for changes in entity (of subsidiaries); including all prior period financial statements presented and a note disclosure. Retrospective application
What does a change from the cost method require?
A change from the cost method to the equity method requires a restatement
What does a change from the Equity Method require?
A change from the equity method to the cost method does not require restatement and is accounted for prospectively
Prospective application
When we have a change in estimate (prospective application) we are not restating prior years; the changes are implemented in the current period and continue in future periods
If a company makes a correction to the financial statements of a prior period and is not presenting comparative financial statements
Then the correction should be reported net of applicable income taxes in the current statement of retained earnings as an adjustment to the opening balance
Error Correction
A company should report a prior period adjustment for error corrections. An error correction (such as a mathematical error) is accounted for by adjusting prior period financial statements in retained earnings of the opening balance to correct the error.
Salvage Value
If an asset is determined to have salvage value; the save value is subtracted from the book value
Retrospectively
If comparative financial statements are presented and a change of reporting entity has occurred, all previous financial statements that are presented in the comparative financial statements should be restated.
Discontinued Operations & Reporting Operating Losses
if someone has a business unit that has been at a loss all year and at the end of the year ( say Nov or Dec) they sign a contract to sell the loss unit, the full year of operating losses is reported on the income statement in the loss from discontinued operations. It wouldn’t include the subsequent years losses/projected operating losses
A change from the income tax basis of accounting (Non-GAAP) to the accrual basis (GAAP) is an error correction and requires what kind of adjustment
prior-period adjustment/a.k.a. restatement of prior years financial statements
The cumulative effect of a change in accounting principle is shown as
as an adjustment to beginning retained earnings net of tax.
When a company decides to change their periodic inventory system say from FiFO to the Lifo (weight average) and the affect takes place towards the end of the year, the cumulative effect of the change is determined as of January 1, (a.k.a) the beginning of the year. The adjustment is
the adjustment is made to the BEGINNING RETAINED EARNINGS OF THE EARLIEST YEAR PRESENTED
Explain Consignment and how revenue and inventory is recorded for the company holding the inventory (consignee)
In a consignor/consignee relationship, the consignor maintains the inventory on the books. The consignee does not record the full revenue amount, but rather a commission based on the agreement with the consignor. In this case, even though two rugs have not sold, the two rugs that remain unsold are reported on the books of Oriental Rug Company (the consignor). The revenue recorded on Consign Design’s books from the sale of the four rugs is based on the agreed upon commission of 10 percent; therefore, $3,800 is the revenue recorded. The $34,200 (90 percent of the total sales) will be payable to Oriental Rug Company and will be recorded as revenue on its books.
A change from LIFO to FIFO for inventory valuation is a change in
accounting principle and a change in accounting principle is show on the retained earnings statement as an adjustment to the beginning balance of retained earnings
True or False: Shareholders have the right to use entities resources
False; governing board has the right and the financial information in a company’s reports should include claims against the entity and resources of the entity
What are the components of the fundamental qualitative characteristic relevance?
Materiality, Confirmatory Value, Predictive Value
Selling expense examples include
rent (only the part used by the sales team); sales salaries and commission, advertising, freight out
A significant loss in sales due to changes in the market would result in a write down of
The write down would occur as income from continuing operations; specifically in the unusual or infrequent items section since the loss is material and probably infrequently recurring
True or False: If a U.S. company is embarking in a foreign transactions and has accounting questions they should refer to IFRS
False: The FASB Accounting Standards Codification is the single source of U.S. GAAP. U.S. public companies are required to follow U.S. GAAP.
True or False; A company that uses U.S. GAAP and has an income tax rate of 30% and is reporting a gain on debt extinguished but has an infrequent loss due to a hurricane SHOULD NOT deduct tax from their net income
False: After calculating the Net income from continuing operations you deduct the net income by the tax rate of 30% to get your net income balance
A sale of a fixed asset is NOT a discontinued operation instead it is
A gain or loss is recognized as part of income from continuing operations. The amount of the gain or loss is equal to the difference between the proceeds from the sale and the carrying amount of the fixed asset.
If per the contract company (seller) produces a product that has customization and the company (buyer) is not ready to receive the product due to issues within the company but has paid for the product can the company recognize revenue?
Yes the company can recognize revenue because they have fulfilled the requirements of the contract and made the product according the the customers (buyer) customization (bill and hold exceptions)
If a construction company is building a standard home and doesn’t allow the customer to make changes to the look of the home can the company recognize revenue at the time of closing even if the home isn’t completed yet?
The company can actually recognize revenue once the closing takes place and not have to wait until the house is completed because the house is homogeneous and doesn’t have significant customizations
Freight in for accounting purposes
Freight in is the transportation cost associated with the delivery of goods from a supplier to the receiving entity. For accounting purposes, the recipient adds this cost to the cost of the received goods/a.k.a inventory. (COGS)
