MCQ Notes Flashcards
150% Declining Balance
- Salvage value is ignored when using a DB approach
- The formula for 150% DB depreciation is 150% of the straight-line rate multiplied by the beginning-of-the-year book value. Since the straight-line rate is 20% (100%/5 years), the DB rate is 30% (150% × 20%).
Abnormal Costs - Manufacturing Inventory
Any abnormal costs for freight, handling costs, and wasted material are required to be treated as current period charges, and not a part of inventory cost
Accelerated Filer - SEC
The maximum number of days for an accelerated filer to file a 10-K with the SEC is 75 days after the company’s fiscal year-end.
However, a large accelerated filer with $700 million of public float has a deadline of 60 days, and nonaccelerated filers have a deadline of 90 days.
Accounting Concept of Economic Entity
When a parent-subsidiary relationship exists, the financial statements of each separate entity are brought together, or consolidated.
When financial statements represent a consolidated entity, the concept of economic entity applies.
Accounting for Treasury Stock IFRS
The cost method, par value method, and constructive retirement method are all methods that may be used to account for treasury stock under IFRS.
The retained earnings method is not a method that is used to account for treasury stock.
Accounting Policies
Disclosure of accounting policies should identify and describe the accounting principles and the methods of applying them.
Information and details presented elsewhere as a part of the financial statements should not be repeated.
As an example, depreciation expense should not be disclosed in the summary of significant accounting policies. ASC Topic 235-10-50-5 specifically states that composition of plant assets should not be presented.
Accounting Standards Codification (ASC)
Accounting Standards Codification (ASC) is the single source of authoritative GAAP recognized by the FASB to be applied by nongovernmental entities.
Rules and interpretive releases of the SEC under federal securities laws are also sources of authoritative GAAP for SEC registrants.
All guidance contained in the Codification carries an equal level of authority.
Accounts Rcvbl Turnover Ratio
Accounts receivables turnover is calculated as net credit sales divided by average accounts receivable. Average accounts receivable is calculated as (beginning of year A/R plus end of year A/R) divided by 2. If an allowance for doubtful accounts is used, the net realizable value of accounts receivable should be used to calculate average accounts receivable.
Net Credit Sales
Average Accts Receivable ( net of allowance for doubtful accts)
Accumulated Comprehensive Income
The accumulated balance of other comprehensive income should be reported as a component of equity, separate from retained earnings and additional paid-in capital.
Accumulated Comprehensive Income
Accumulated other comprehensive income is reported in the stockholders’ equity section of the balance sheet.
Acquisition Method - Business Combinations
In applying the acquisition method, the acquired assets and assumed liabilities are recorded at their fair values.
Any excess of the acquisition price over the fair value of net identifiable assets is allocated to goodwill.
Acquisition-Related Costs
FASB ASC 805-10-25-21 requires that acquisition-related costs be charged to expense
Acquisition-related costs are costs the acquirer incurs to effect a business combination. Those costs include:
- finder’s fees
- advisory, legal, accounting, valuation, and other professional or consulting fees
- general administrative costs, including the costs of maintaining an internal acquisitions department
- costs of registering and issuing debt and equity securities.
The acquirer shall account for acquisition-related costs as expenses in the periods in which the costs are incurred and the services are received, with one exception. The costs to issue debt or equity securities shall be recognized in accordance with other applicable GAAP.
Aging the Receivables
The aging of receivables method of estimating uncollectible accounts is based on the theory that bad debts are a function of accounts receivable collections during the period.
The aging of receivables method emphasizes reporting accounts receivable at their net realizable value.
It is a balance-sheet approach, which stresses the collectibility (valuation) of the receivable balance.
Once the balance of the allowance account required to reduce net accounts receivable to their realizable value has been computed, bad debts expense is merely the amount needed to adjust the allowance account to the computed balance.
Allocation
SFAC 6 defines allocation as the process of assigning or distributing an amount according to a plan or formula and amortization as an allocation process for accounting for prepayments and deferrals.
Allocation is broader in scope and thus includes amortization. Specific examples of amortization include recognizing expenses for depletion, depreciation, and insurance, and recognizing earned subscription revenues.
Annuity Due vs Ordinary Annuity
An annuity due (annuity in advance) is a series of payments where the first payment is made at the beginning of the first period. The initial payment is due immediately (at the beginning of the first period).
An ordinary annuity (annuity in arrears), is which the first payment is made at the end of the first period.
ASC Topic 220, Comprehensive Income
ASC Topic 220 applies to enterprises that develop a full set of financial statements which report cash flows, results of operations, and financial position.
ASC Topic 235, Notes to Financial Statements
ASC Topic 235 requires a description of all significant accounting policies to be included as an integral part of the financial statements.
It does not require a description of every policy nor does it list which types of policies need to be disclosed
ASC Topic 270, Interim Reporting
The integral view, used for interim reporting, holds that each interim period is an integral part of an annual period, must reflect expectations for the annual period, and must utilize special accruals, deferrals, and allocations.
ASC Topic 275, Risks and Uncertainties
The nature of operations, the use of estimates in preparation of financial statements, and current vulnerability due to concentrations are all required disclosures according to ASC Topic 275, Risks and Uncertainties
Asset Impairment
A long-lived asset is considered impaired if the future cash flows expected to result from the use of the asset and its eventual disposition are less than the carrying amount of the asset.
If deemed impaired, the asset’s carrying value is reduced to fair value and a loss on impairment is recognized for the difference
An impairment occurs when the carrying amount of a long-lived asset exceeds its fair value.
However, an impairment loss is only recognized if the carrying amount of the asset is not recoverable.
The carrying value is considered not recoverable if it exceeds the sum of the expected value of the undiscounted cash flows of the asset
Asset Impairment
A long-lived asset is tested for recoverability when there are events or changes in circumstances that indicate its carrying amount may not be recoverable
Asset Retirement Obligation (ARO)
When an asset retirement obligation (ARO) is recognized, an entity should capitalize an asset retirement cost by increasing the carrying amount of the related long-lived asset by the same amount as the ARO. Subsequently, the entity should amortize the asset retirement cost to expense using a systematic and rational method over its useful life.
Asset Valuation Accounts
A valuation account is neither an asset nor a liability.
The elements of the financial statements such as assets and liabilities are described in SFAC 6.
Valuation accounts are discussed in paragraph 6.34:
“A separate item that reduces or increases the carrying amount of an asset is sometimes found in financial statements. For example, an estimate of uncollectible amounts reduces receivables to the amount expected to be collected, or a premium on a bond receivable increases the receivable to its cost or present value.
Those “valuation accounts” are part of the related assets and are neither assets in their own right nor liabilities.”
Assignment of A/R
An assignment of accounts receivable is a financing arrangement whereby the owner of the receivables (assignor) obtains a loan from the lender (assignee) by pledging the accounts receivable as collateral
Bank Overdraft Rules
Overdrafts can be offset against cash in the same bank, but if the bank has insufficient cash at the same bank, the overdrafts are reported as a current liability.
Bankruptcy Consolidation
A subsidiary should not be consolidated when it is in bankruptcy.
Consolidation of all majority-owned subsidiaries is required regardless of the industry or business of the subsidiary.
A difference in fiscal periods of a parent and a subsidiary does not of itself justify the exclusion of the subsidiary from consolidation.
Bifurcation
Bifurcation is the process of separating an embedded derivative from its host contract.
This process is necessary so that hybrid instruments can be separated into their component parts, each being accounted for using the appropriate valuation techniques.
Bond Discount
- Discount on bonds payable represents additional interest paid over the life of the bond.
- The interest paid each year is equal to the principal times the coupon rate.
- The discount is amortized over the life of the bond, which increases the amount of interest expense recognized each period.
- The total interest expense over the term of the bond is equal to the cash interest paid plus the discount.
Bond Interest
Interest expense is :
Carrying amount × Effective interest rate
Cash payment amount is :
Face amount × Stated interest rate
If the stated rate is less than the effective rate, the cash payment is less than the interest expense.
Bond Issue Costs
ASU 2015-03 requires that debt issuance costs be presented in the balance sheet as a direct deduction from the carrying amount of the related debt liability, consistent with debt discounts; the recognition and measurement guidance for debt issuance costs were not affected by the amendments.
Amortization of debt issuance costs also shall be reported as interest expense
Issue costs will no longer be reported in the balance sheet as deferred charges.
- promotion costs,
- engraving and printing
- underwriters’ commissions
all qualify as bond issuance costs
Bond Premium/Discount
Bond prices and interest rate changes are inversely related.
When bond prices increase, the market value of fixed income investments, such as bonds decreases, because now there are better opportunities on the market.
When interest rates decline, the value of bonds increases because existing bonds are now relatively more valuable.
Bonds
- Serial bonds are bond issues that mature in installments (i.e., on the same date each year over a period of years).
- Term bonds, on the other hand, are bond issues that mature on a single date.
- A debenture is a bond that is not secured by collateral.
- A sinking fund bond is a bond issue that has a provision to set aside cash to repay the bonds at the maturity date.
Book Value Per Share
Book value per share is calculated as the total owners’ ( stockholders) equity divided by the number of common shares outstanding ( treasury stock is not considered outstanding)
Capital Lease Payment Presentation
Financing activities include the repayment of debt principal ie the payment of capital lease obligations.
Thus, the cash outflow is equal to the Year 1 principal payments only.
The interest on the capital lease is classified as an operating cash outflow
Capitalized Costs - Existing Assets
A cost should be capitalized if it improves the efficiency of the asset or extends its useful life.
Capitalized Trademark Costs
The cost of a successful defense and registration fees in connection with a trademark should be capitalized.
Legal fees and other costs incurred in successfully defending a trademark suit may properly be charged to the trademark account because such a suit establishes the legal rights of the holder.
The registration fees are a part of the cost because they establish legal ownership of the trademark.
Cash Basis Method of Accounting
The cash basis method of accounting is not an allowable method under GAAP unless there is no material difference from the accrual method.
- Cash basis financial statements are sometimes provided for investors or creditors.
- Cash basis accounting results in a measure similar to net income called net operating cash flow.
- Net operating cash flow is the difference between cash receipts and cash disbursements.
- The cash basis is an acceptable method for the preparation of tax returns.
Cash Equivilents
- Treasury obligations (bills, notes, and bonds)
- Commercial paper (very short-term corporate notes)
- Money market funds
Cash Inflows PPE
Per ASC Topic 230, receipts from sales of property, plant, and equipment and other productive assets are categorized as cash flows from investing activities.
Change from Cash to Accrual in F/S
A change from an accounting principle that is not generally accepted to one that is generally accepted is a correction of an error.
The cash basis is not generally accepted.
Consequently, the change from cash to accrual basis is a correction of an error.
A correction of an error in prior years’ financial statements is reported in the year of correction by restating all prior years affected by the error.
The cumulative effect of the error on periods prior to those presented must be reflected in the carrying amounts of the assets and liabilities as of the beginning of the earliest year presented.
Change in Acctg Principle Inseparable from Change in Acctg Estimate,
FASB ASC 250-10-45-18 requires that whenever a change in accounting principle is inseparable from a change in an accounting estimate, the change should be considered as a change in estimate.
- Changes in estimates are handled prospectively.
- That is, previously reported information in previous financial statements is not adjusted, nor is a cumulative effect of the change reported.
- Prospective treatment only requires utilization of the change(s) in the current period as it effects the current period’s income.
- It is part of income from continuing operations because no special disclosure is required on the face of the income statement under the prospective approach.
Change in Valuation Technique
A change in valuation technique used to measure fair value should be reported as a change in accounting estimate.
The change is reported on a prospective basis; however, the disclosures for change in accounting estimate are not required for a change in valuation technique
Change in Valuation Technique
A change in valuation technique used to measure fair value should be reported as a change in accounting estimate.
The change is reported on a prospective basis; however, the disclosures for change in accounting estimate are not required for a change in valuation technique.
Collectibility Threshold
An entity must determine if the contract is valid and represents a substantive transaction on the basis of whether a customer has the ability and intention to pay the promised consideration in exchange for the goods or services.
The objective of this assessment (referred to as a collectibility threshold) is to prevent revenue from being recognized on contracts that lack true substance.
An entity only recognizes any consideration it receives as revenue when either:
- the entity has no remaining obligations to transfer goods or services to the customer, and substantially all of the consideration has been received by the entity and it is nonrefundable
OR
- the agreement has been terminated, and the consideration is nonrefundable.
Combined and Consolidated F/S Similar treatment
Where combined statements are prepared for a group of related companies, intercompany transactions and profit and losses should be eliminated.
The following matters should be treated in the same manner for both combined financial statements and consolidated statements:
- noncontrolling interests
- income taxes
- foreign operations
- different fiscal periods should be treated in the same manner for both combined financial statements and consolidated statements
Combined Statements
Combined statements may be used to present the financial position and the results of operations of a group of unconsolidated subsidiaries or companies under common management.
Complete Set of IFRS Financial Statements
A complete set of IFRS financial statements includes the following:
- statement of financial position
- statement of comprehensive income
- statement of changes in equity, statement of cash flows
- notes.
Completed-Contract
When a company uses the completed-contract method of accounting for construction projects, all revenue and expense recognition is deferred until the project is complete or substantially complete (ASC Topic 605).
Also, note that neither customer billings nor payments on account are used to determine the revenue recognized under the completed-contract method (or under the percentage-of-completion method)
Composite Depreciation
Composite depreciation is the term given to depreciation on a group of heterogeneous assets.
All of the assets are recorded in a single asset account and depreciated using a single accumulated depreciation account.
The depreciation rate used is an average based on the assets in the group. When an asset is retired, the asset account is credited for the original cost of the item, and the accumulated depreciation account is debited for the original cost less any residual recovery.
Composite Depreciation
- One of the underlying assumptions of the group-or-composite method is that assets in the group are regularly replaced with other assets similar to the ones being replaced.
- As an asset is retired or replaced, an entry is made to remove the original cost from the asset account, with the difference between original cost and the proceeds received being debited to accumulated depreciation.
- Thus, under normal conditions, no gain or loss is recognized on the retirement of a specific asset included in the group.
- The composite rate is applied to the balance in the asset account at the beginning of the year.
- If the balance in the asset account does not change, the group of assets will be depreciated to the estimated salvage value at the end of the composite life.
Composite Life
Total Depreciation Base
Total Depreciation
Base depreciation = total value of assets net of salvage value
total depreciation is depreciation calculated using method precscibed by asset and asset life for the year
Comprehensive Income
Per SFAC 6, comprehensive income consists not only of its basic components (revenues, expenses, gains, and losses) but also the various intermediate components or measures that result from combining the basic components (e.g., income from continuing operations).
SFAC 6 further states that over the life of an entity comprehensive income equals the net of its cash receipts and cash outlays, excluding cash invested by owners or distributed to owners.
Note that under ASC Topic 220 this statement would not hold because corrections of errors and certain changes in accounting principles are still reported in retained earnings. Thus, ASC Topic 220 does not fully implement comprehensive income as defined in SFAC 6.
Comprehensive Income
All changes in equity during a period except those resulting from investments or distributions by owners
Comprehensive Income
The purpose of reporting comprehensive income is to report a measure of overall enterprise performance by displaying all changes in equity of an enterprise that result from recognized transactions and other economic events of the period other than transactions with owners in their capacity as owners.
An enterprise should continue to display an amount for net income with equal prominence to the comprehensive income amount displayed.
Comprehensive Income
Comprehensive income is defined as the change in equity of a business during a period from transactions of nonowner sources.
Stockholders are owners of the corporation or entity; therefore, transactions between the entity and shareholder are not a component of comprehensive income.
Comprehensive Income
Comprehensive income may be reported in a separate statement or in a combined statement of income and comprehensive income
Comprehensive Income
Comprehensive income is defined in SFAC 6 as “the change in equity (net assets) of a business enterprise during a period from transactions and other events and circumstances from nonowner sources. It includes all changes in equity during a period, except those resulting from investments by owners and distributions to owners.”
Thus, comprehensive income includes not only net income but also other components of comprehensive income that are not included in net income.
Comprehensive Income
- The purpose of reporting comprehensive income is to report a measure of overall enterprise performance by displaying all changes in equity of an enterprise that result from recognized transactions and other economic events of the period other than transactions with owners in their capacity with owners.
- Comprehensive income (net income plus other comprehensive income) should be displayed in a financial statement that has the same prominence as other financial statements.
Comprehensive Income - Corrections of Errors
Corrections of errors shall continue to be reported net of tax in retained earnings as an adjustment of the beginning balance.
Comprehesive Income
- Comprehensive income is net income plus other comprehensive income
- Comprehensive income consists not only of revenues, expenses, gains, and losses, but also various intermediate components or measures that result from combining the basic components.
- Examples of intermediate components or measures are:
- gross margin
- contribution margin
- income from continuing operations
- operating income.
- Examples of intermediate components or measures are:
Consolidated Financial Statements
- An acquisition form of business combination will require the preparation of consolidated financial statements.
- In the merger and consolidation forms of business combination, only one firm will remain after the combination. Therefore, there will not be two (or more) sets of financial statements to consolidate.
Consolidated Financial Statements
The parent needs to consolidate:
- Book values
- Fair values of a subsidiary’s assets and liabilities at the date of the business combination
- Cost of its investment in the subsidiary.
Constant Dollar Balance Sheet
In a constant dollar balance sheet, nonmonetary items are restated to the current price level, while monetary items are not restated because they are already stated in current dollars.
Investment in bonds and long-term debt are monetary items since their amounts are fixed by contract in terms of number of dollars.
Consumer Price Index
- The Consumer Price Index is used to compute information on a “constant dollar” basis.
- The index is used to restate financial statement elements to dollars which have the same purchasing power.
Contingency - IFRS
A contingency is described as an event which is not recognized in the financial statements because it is not probable that an outflow will be required or the amount cannot be reasonably estimated.
Contingent Asset - IFRS
IFRS provides that a contingent asset is a possible asset that arises from past events, and is confirmed only by the occurrence of uncertain future events that are not within the control of the reporting entity. A contingent asset is not recognized, but it is disclosed in the notes to the financial statements if the economic benefits are probable.
Contingent Issue Agreements
The effect of contingent issue agreements are not included in basic earnings per share. They are included in diluted earnings per share if the contingency is met.
Convertible Debt Securities - Interest Expense
If convertible securities are deemed to be dilutive, then interest expense should be added back to net income when computing diluted earnings per share.
Correction of Prior Period Error
The correction of an error in the financial statements of a prior period is a prior period adjustment which is to be shown net of tax as an adjustment to the beginning balance of retained earnings.
Cost Approach - Fair Value
Current replacement cost adjusted for obsolescence can be used for determining fair value measurements under the cost approach.
Cost of Land
Generally, any cost involved in preparing land for its ultimate use is considered a cost of the land.
As an example, the cost assigned to the land should be the purchase price plus any costs associated with clearing the land and removal of the building (if any) less the proceeds from the sale of the building.
Cost- Benefit
The FASB conceptual framework has identified the cost-benefit constraint to the relevance of providing financial reports.
Information is not disclosed if the costs of disclosure outweigh the benefits of providing the information.
Reliability is no longer part of the conceptual framework according to SFAC 8.
Costs of Discontinued Operations
Costs of termination benefits, lease termination, and consolidating facilities or relocating employees related to a disposal activity that involves discontinued operations should be included in the results of discontinued operations.
Cumulative Effect of Change in Acctg Principle
A change in acctg principle is accounted for through retrospective application to all prior periods and not included in net income of period of change or future periods
Current Cost Accounting
Current cost accounting is a method of valuing and reporting assets, liabilities, revenues, and expenses at their current cost at the balance sheet date or at the date of their use or sale.
A holding gain is recorded as an increase in an item’s value ( replacement cost less purchase price)
Current Ratio
The current ratio is a liquidity ratio that measures a firm’s ability to discharge currently maturing obligations from existing current assets that are expected to be converted into cash within the maturing period of the claims.
Current ratio is a measure of short-term solvency; however, it is less precise than the quick ratio because a sizable amount of total current assets may be tied up in inventory, which is less liquid.
Current assets ÷ Current liabilities
DB Plan Service Cost
Per ASC Topic 715, the service cost component recognized shall be determined as the actuarial present value of benefits attributed by the pension benefit formula to employee service during the period, which is known as the projected benefit obligation.
ASC Topic 715 requires a pension liability to be recognized if the fair value of plan assets is less than the projected benefit obligation.
Debt Issurance Costs
The GASB evaluated debt issuance costs and concluded that, with the exception of prepaid insurance, the issuance costs relate to services provided in the current period and thus they should be expensed in the current period.
Defensive-Interval Ratio
- The defensive-interval ratio is a measure of time the company can survive (continue to pay operating expenses in cash) using only the quick assets (cash, marketable securities, and net accounts receivable).
- It is computed by dividing total quick assets by average daily cash expenditures.
- This is a liquidity measure, as it assesses how long a company can continue to keep up with its debts.
Deferred Tax Liability Computation
A deferred tax liability is recognized for the amount of taxes payable in future years as a result of the deferred tax consequences (as measured by the provisions of enacted tax laws) of events recognized in the financial statements in the current or preceding years.
Defined Benefit Pension Plan Discount Rate
The assumed discount rate should reflect the rates at which pension benefits could be effectively settled.
This rate is sometimes referred to as the settlement rate.
To determine the settlement rate, it is appropriate to look at rates implicit in current prices of annuity contracts that could be used to settle the obligation under the defined benefit plan.
The expected return on plan assets is not used to calculate the projected benefit obligation. The actual return on plan assets is also not used to calculate the projected benefit obligation.
Defined Benefit Pension Plan - Discount Rate
The discount rate for the projected benefit obligation is generally based on long-term debt interest rates.
It has no direct relationship to the actual or the expected rate of return on plan assets.
Defined Benefit Pension Plan - IFRS
IFRS requires the use of the projected-unit-credit method to calculate the present value of the defined benefit obligation (PV-DBO).
Definition Governmental Organization
The joint FASB/GASB definition of governmental organizations included in several AICPA Audit and Accounting Guides, including State and Local Governments (paragraph 1.01), states that an organization is a government if “a controlling majority of the members of the organization’s governing body” are appointed or approved “by officials of one or more state or local governments.”
In contrast, many nongovernmental organizations are exempt from federal taxation.
Difference Between Financial and Physical Capital Maintenance
Per SFAC 6, the major difference between financial and physical capital maintenance is related to the effects of price changes on assets held and liabilities owed during a period.
The financial capital concept is applied in current GAAP. Under this concept, the effects of the price changes described above are considered “holding gains and losses,” and are included in computing return on capital.
Comprehensive income, which is described in SFAC 5, is “the change in equity of a business enterprise during a period from transactions and other events and circumstances from nonowner sources.” It is also a measure of return on financial capital.
The concept of physical capital maintenance seeks to measure the effects of price changes that are not currently captured under GAAP (e.g., replacement costs of nonmonetary assets).
Under this concept, holding gains and losses are considered “capital maintenance adjustments” which would be included directly in equity and excluded from return on capital.
Diluted Earnings Per Share
A potentially dilutive security is a security that gives the holder the right to acquire shares of common stock through conversion or exercise, and therefore is considered in the computation of diluted earnings per share (DEPS) if dilutive.
Antidilutive securities are securities that would create an increase in DEPS if included in the calculation of diluted EPS and should not be considered when computing either basic or EPS
Diluted Earnings Per Share
Dividends on nonconvertible cumulative preferred shares should be deducted from net income whether an actual liability exists or not.
This is because cumulative preferred stock owners must receive any dividends in arrears before future dividend distributions can be made to common stockholders
Diluted Earnings Per Share
- All potential common shres that reduce current EPS must be included in the computation of diluted EPS
- Contingent Common shares that were outstanding for the full year because of the contingency are included
Direct Finance Lease
The lessor shall measure the lease receivable in a direct financing lease initially as the sum of the following amounts:
- The lease payments
- The unguaranteed residual value accruing to the benefit of the lessor
- The guaranteed residual value by the lessee or third party
Disclosure of Accounting Policies
ASC Topic 235 requires disclosure of accounting policies and states that they are essential to users and are an integral part of the financial statements
Disclosure of Accounting Policies
Disclosure of accounting policies are essential to users and an integral part of the Financial Statements
Disclosure of Accounting Policies
Disclosure of accounting policies should identify and describe the accounting principles followed by the reporting entity and methods of applying those principles.
The criteria for determining which investments are treated as cash equivalents is an example of how the entity applies accounting principles.
These disclosures should not duplicate details presented elsewhere as part of the financial statements.
Disposal of Long Lived Assets
Losses associated with long-lived assets which are to be disposed of are to be reported as a component of income from continuing operations before income taxes for entities preparing income statements.
Losses on long-lived assets to be disposed of are neither unusual nor infrequent occurrences.
These losses are not part of selling or general and administrative expenses and they are not disclosed net of tax.
Discontinued operations result from disposal of a separate business component.
Division of Corporation Finance
This division oversees the compliance with the securities acts and examines all filings made by publicly held companies. All filings go to this division.
Division of Economic and Risk Analysis
This division was created in 2009 in response to the credit market crisis.
The purpose of the division is to integrate financial economics and data analytics into the core mission of the SEC (www.sec.gov).
Division of Enforcement
When there is a violation of a securities law (except the Public Utility Holding Company Act), this division completes the investigation and takes appropriate actions. This division makes recommendations to the Justice Department concerning any punishments or potential criminal prosecution.
Division of Trading and Market
This division oversees the secondary markets, exchanges, brokers, and dealers.
Dollar Value LIFO
Dollar-value LIFO bases inventory on “dollars” in inventory rather than “units” in inventory.
Inventory layers are identified with the price index in the year in which the layer was added.
’Double extension’ and ’link-chain” are two variations of dollar-value LIFO.
Link-chain differs from double extension in that inventory values are extended at beginning of the year prices for link-chain and at base year prices for double extension. Because of this difference, link-chain is more appropriate for situations in which inventory is going through rapid technological changes.
The two variations are not alternatives and use of the link-chain method should be restricted to situations in which the double extension method is impractical.
Dollar Value Lifo
Dollar-value LIFO uses dollar-value pools which are made up of “similar” items (in terms of interchangeability, type of material, or similarity in use).
Dollar-value LIFO determines increases or decreases in ending inventory in terms of dollars of the same purchasing power.
Ending inventory is deflated to base-year cost by dividing ending inventory by the current year’s specific conversion price index.
The resulting amount is then compared with the beginning inventory which has also been stated in base-year dollars.
Dollar Value Lifo
To add an increase, a new layer, using dollar-value LIFO (last in, first out), two items are needed: the total real increase (computed using base-year costs) and the total increase in price level to date so far.
Once both of these amounts are acquired, multiply them and add the product to the beginning-year inventory total.
20X2 index = Inventory at current-year cost / Inventory at base-year cost
= $80,000 / $60,000
= 1.333
20X2 layer = 20X2 index x 20X2 layer at base-year cost
= 1.333 x $15,000
= $20,000
Dollar value LIFO inventory on December 31, 20X2
= 12/31/X1 valuation + 20X2 layer
= $46,000 + $20,000
= $66,000
Donated Property
ASC Topic 958 provides that donated property from nonowners should be recorded at fair value.
ASC Topic 360 provides that costs incurred in acquiring an asset are part of the cost of the asset.
Both the asset’s fair value and the incidental costs incurred in its acceptance should be capitalized.
Donor Restrictions
Donor restrictions are no longer listed as either temporary or permanent.
Appropriate disclosures for restrictions on donations include:
- support for a particular operating activity,
- investment for a specified term
- use in a specified period
- acquisition of long-lived assets.
Effective Tax Rate
The effective tax rate should reflect anticipated investment tax credits, foreign tax rates, percentage depletion, capital gains rates, and other available tax planning alternatives.
Elements - IASB
The IASB Framework has five elements:
- asset
- liability
- equity
- income
- expense.
Note that income includes both revenues and gains.
Elements of Financial Statements
SFAC 6, Elements of Financial Statements, contains the following definitions:
Capital maintenance concept: the recovery of cost; separation of return on capital from return of capital.
Financial capital concept: The effects of price changes on assets held and liabilities owed are recognized as “holding gains and losses” and included in return on capital.
Physical capital concept: The effect of price changes are recognized as “capital maintenance adjustments” as a separate element of equity and would not be included in return on capital.
SFAC 6 continues: “The financial capital concept is the traditional view and is generally the capital maintenance concept in present primary financial statements. Comprehensive income as defined in paragraph 70 is a return on financial capital.”
Enhancing Qualitative Characteristics of Financial Reporting
The enhancing qualitative characteristics of financial reporting are
- comparability (including consistency),
- verifiability
- timeliness
- understandability
Enhancing Qualitative Characteristics of Financial Reporting
The enhancing qualitative characteristics of financial reporting are
- comparability (including consistency)
- verifiability
- timeliness
- understandability
EPS - If Converted
The if-converted method of computing earnings per share assumes that convertible securities are converted at the beginning of the earliest period reported or, if later, at the time of issuance.
EPS Reporting
Earnings per share data shall be shown on the face of the income statement.
Earnings per share amounts must be presented for:
- (1) income from continuing operations,
and
- (2) net income.
Earnings per share data on discontinued operations must be shown either on the face of the income statement or in the footnotes.
EPS Required Disclosure
Earnings per share disclosures are required on the income statement for all public companies.
Establishing Fair Value of An Asset
- The principal market is the market in which the reporting entity would sell the asset or transfer the liability with the greatest volume and level of activity for the asset or liability.
- The most advantageous market in which the amount received would be maximized
Estimating a Fixed Asset Impairment Charge
An estimate of an impairment charge to a fixed asset can only be a faithful representation if the entity has applied impairment rules properly, disclosed the process of arriving at the impairment estimate and disclosed any uncertainties that affect the impairment estimate.
Assuming the above is true, and no other estimate is better than the derived estimate, then the estimate is comprised of the best available information.
Evaluation of Going Concern
Conditions or events to examine when evaluating an entity’s ability to continue as a going concern include the entity’s current financial condition, conditional and unconditional obligations dues, and funds necessary to maintain operations.
Exchange of Non Montetary Assets
When nonmonetary assets are exchanged with no monetary consideration involved, no gain is recognized if the transaction lacks commercial substance.
When the cash flows are not significantly different, the transaction is deemed to lack commercial substance.
Therefore, the accounting for such an exchange must be based on the recorded amount of the asset relinquished (ASC Topic 845).
Exchanges Lacking Commerical Substance
Per ASC Topic 845, exchanges that lack commercial substance are recorded at book value. Therefore, gains on these exchanges are recognized only to the extent that boot is received.
Exit Activities
- Sale or termination of a line of business
- Changes in management structure
- Relocation of business activities from one location to another
Expense Recognition
- Cash-basis net income reflects expenses paid
- Accrual-basis net income reflects expenses recognized (accrued)
- three pervasive expense recognition principles:
- Systematic and rational allocation
- Associating Cause and Effect ( sales commissions/sales revenue)
*
Extinguishment of Debt
Gains from extinguishment of debt are reported on the income statement.
Gains from extinguishment of debt are not classified as other comprehensive income.
Factoring of A/R
A factoring of accounts receivable is basically a sale of, or borrowing on, the receivables. “Factors” are intermediaries that buy receivables from companies (for a fee) and then collect payments directly from the customers
Fair Value
- ASC Topic 825 provides that the fair value option does not apply to pensions.
- The fair value option may be elected on an instrument-by-instrument basis for available-for-sale securities
Fair Value
Fair value assumes highest and best use of the asset that is physically possible, legally permissible and financially feasible
Fair Value
ASC Topic 820 requires that the fair value of an asset be based upon the price that would be received to sell the asset, which is an exit price
Fair Value - IFRS
Under IFRS, any investment may be accounted for by fair value through profit and loss providing it is traded in an active market.
Fair Value Estimate Techniques
- Market Approach
- Income Approach
- Cost Approach
Fair Value Option
- Does not apply to leases
Applies to the following:
- Firm commitments that involve financial instruments
- Warranties that can be settled by paying a third party
- Held to Maturity Investments
Fair Value Option for Valuing Financial Assets and Liabilities
- The fair value option must be applied to all interests in the same entity.
- Once the fair value option is elected, it is irrevocable
- The fair value option must be applied to all portions of the instrument
Faithful Representation
Information is faithfully represented when it is complete, neutral, and free from error and bias.
Faithful representation is a fundamental quality of decision-useful information.
Faithful representation
Completeness, neutrality, and freedom from error are characteristics of faithful representation, a fundamental qualitative characteristic
FASB Definition of Asset
Per SFAC 6, the common quality shared by all assets is “service potential” or “future economic benefit.”
Per SFAC 6, assets commonly have other distinguishing features, however they are not essential characteristics of assets.
- legally enforceable,
- tangible
- acquired at a cost.
FASB Definition Tax Position
A tax position is a position in a previously filed tax return or a position expected to be taken in a future tax return that is reflected in measuring current or deferred income tax assets and liabilities for interim or annual periods.
The term tax position also encompasses, but is not limited to:
- A decision not to file a tax return
- An allocation or a shift of income between jurisdictions
- The characterization of income or a decision to exclude reporting taxable income in a tax return
- A decision to classify a transaction, entity, or other position in a tax return as tax exempt
- An entity’s status, including its status as a pass-through entity or a tax-exempt not-for-profit entity.
Fiduciary Funds
Fiduciary funds account for resources (and any related liabilities) held by a government entity for the benefit of others (not to support the government’s programs) in a trustee capacity (trust funds). Changes in net position of trust funds are reported as additions and deductions, using the flow of economic resources measurement focus and the accrual basis of accounting.
Fiduciary funds do not report fund balance.
Fiduciary funds include
- pension trust funds
- investment trust funds
- private-purpose trust funds
- Agency/Custodial funds
Fuschia - Pippa
Fifo Inventory
In a period of rising prices, the highest balance in ending inventory will result from the FIFO inventory cost method.
This is because the cost of the highest-priced (most recent) purchases are assigned to the ending inventory
FIFO Perpetual Inventory
The FIFO perpetual inventory method will produce the same ending inventory as the FIFO periodic method.
This is due to the fact that the “first-in” units are removed first under both methods.
The only difference is that the units sold are removed immediately under the perpetual approach but only at the end of the period under the periodic approach. The flow and amounts are the same.
This is not true for any other inventory method (other than specific identification).
Finance Leases
ASC Topic 842 states that a lease shall be classified as a finance lease by the lessee if one or more of the five criteria are met. The five criteria are as follows:
- Lease transfers ownership to the lessee during lease term
- Lease contains a bargain purchase option
- Lease term is 75% or more of the economic useful life of the property
- Present value of the minimum lease payment equals 90% or more of FV of the leased property.
- Leased asset does not have an alternative use.
The term capital lease is no longer used
Financial Statement Disclosure
Financial statement disclosure of accounting policies should not duplicate details (e.g., composition of inventories or of plant assets) presented elsewhere as part of the financial statements.
Financial Statement Requirements - IFRS
The IFRS requires the presentation of prior year financial statements for comparative purposes.
Financial Stmt FV Measurements
Assumes highest and best use of asset to determine Fair Value for Financial Stmt purposes
Firm Purchase Commitments
- Firm purchase commitments, situations when a company agrees to buy a fixed amount of inventory at a future date, are not recognized as an asset or liability on the commitment date.
- They are subject to remeasurement if the price of the asset falls below the agreed-upon firm price, creating a loss contingency.
- A contingency is an existing condition, situation, or set of circumstances involving uncertainty as to possible gain (gain contingency) or loss (loss contingency) to an enterprise that will ultimately be resolved when one or more future events occur or fail to occur.
- Proper accounting for loss contingencies requires an assessment of the probability (i.e., probable, reasonably possible, remote) that a future event or events will confirm a loss or asset impairment or the incurrence of a liability as of the date of the financial statements.
Five Governmental Funds - Modified Accrual
- General
- Special Revenue
- Capital Projects
- Debt Service
- Permanent
Green St. Patricks Day Clover - GSPCD
Five Lease Classification Criteria
FASB ASC 842-10-25-2 established five criteria for classifying leases. The first set of criteria result in a finance lease for a lessee or sales-type lease for the lessor if the lease meets any of the following criteria at commencement:
- Title (ownership) transfers to the lessee by the end of the lease term.
- Lease contains a purchase option that the lessee is reasonably certain to exercise.
- The lease term is for the major part of the remaining economic life of the underlying asset. This criterion shall not be used if the lease commencement date is near the end of the asset’s economic life.
- The present value of the sum of the lease payments and any lessee guaranteed residual value not already in the lease payments equals or exceeds substantially all of the fair value of the underlying asset.
- The underlying asset is specialized and is not expected to have an alternative use to the lessor at the end of the lease term.
If one or more of these conditions are present, the lease is a finance lease. The FASB has removed the former bright-line tests but in FASB ASC 842-10-55-2 uses the former rules as benchmarks.
FOB Destination
When goods are shipped FOB destination, title does not pass to the buyer until the goods have been delivered.
