Memory Aids

Question 1

Answer 1

Question 2

Answer 2

Question 3

Answer 3

Question 4

Answer 4

Governs the form and content of financial statements and financial disclosures

Question 5

Regulation S-K

Answer 5

Governs the form and content of nonfinancial disclosures, like the MD&A

Question 6

SEC reporting requirements

Answer 6

Question 7

10-K, 10-Q, 8-K

Answer 7

Question 8

Basic accounting equation for the balance sheet (statement of financial position)

Answer 8

Question 9

Answer 9

Other basis of accounting, cash basis, modified cash basis, and income tax basis

Question 10

Other basis of accounting

Answer 10

Statements not in conformance with GAAP.

Question 11

Cash basis

Answer 11

Revenues and expenses are only recognized when cash is received or paid.

Question 12

Modified cash basis

Answer 12

Cash basis is used for regular operating activities but modifications are used for reporting items like inventory, accruing income taxes and capitalizing and depreciating fixed assets.

Question 13

Income tax basis

Answer 13

Applied to calculate income tax liability.

Question 14

Accounting changes

Answer 14

Question 15

Answer 15

Changing from one GAAP principle to another like LIFO to FIFO. This requires retrospective application but is not considered a restatement.

Question 16

Answer 16

Changes in accounting estimates occur from new information. The change is recorded in the period of change and any future periods.

A change in estimate is inseparable from a change in principle and will be accounted for as a change in estimate.

Question 17

Answer 17

Question 18

Error correction

Answer 18

A mathematical mistake, a mistake in GAAP application, or an oversight or misuse of facts when the statements were originally prepared.

A change from non-GAAP to GAAP is an error correction, not a change in principle.

Previous statements need to be revised and restated. Carrying amounts are adjusted for the cumulative effect (CE) of the error on the prior periods.

Question 19

Answer 19

Question 20

Answer 20

Level 1 inputs - most reliable since quoted prices come from identical assets and liabilities.

Level 2 inputs - observable inputs where quoted prices can be found in similar active and nonactive markets, and inputs that are not quoted prices.

Level 3 inputs - least reliable since there are no observable inputs and should be quoted based on the best available information for the circumstances.

Question 21

Answer 21

Question 22

Answer 22

Question 23

Inventory items in transit

Answer 23

FOB Shipping Point - the control of goods passes to the buyer once shipped

FOB Destination - the control of goods stays with the supplier until the items arrive at the buyer

Question 24

Weighted-average method

Answer 24

A periodic inventory system that determines the average cost at the end of the period.

Uses the lower cost of net realizable value

Question 25

FIFO

Answer 25

Use the lower cost of net realizable value

When prices are rising using FIFO, COGS is the lowest and provides the highest net income, also the highest ending inventory.

Costs are the same under both a perpetual and periodic system

Lowest COGS, highest net income, highest ending inventory.

Question 26

LIFO

Answer 26

Uses lower of cost or market

When prices are rising using LIFO, this gives the highest COGS and lowest net income, and lowest ending inventory

Under a perpetual system LIFO will have different inventory values than a period system because a cost is assigned after each sale.

Last item purchased is the first one sold.

Higher costs of sales in period of rising costs

Highest COGS, lowest net income, lowest ending inventory.

LIFO provides tax advantages because it causes lower net income.

LIFO liquidation is when the oldest layer of cost is reduced because more units were sold in the current year than purchased, which taps into the older “layers” of inventory.

Question 27

Dollar value LIFO

Answer 27

This is using LIFO ‘pools’ to track inventory by using conversion index

Question 28

FIFO - LIFO

Answer 28

Question 29

Items included in the cost of inventory

Answer 29

● Purchase returns
● Freight-in (shipping costs to get the inventory to the warehouse)
● Sales tax on acquisition
● Insurance on transit

Question 30

Items excluded in the cost of inventory

Answer 30

● Freight out- this is a selling expense
● Interest on purchase - this is financing

Question 31

Inventory errors

Answer 31

If a purchase on account is not recorded and not included in ending inventory COGS and net income are unaffected, but current assets and current liabilities are understated.

If purchases and beginning inventory are properly recorded but items are excluded from ending inventory COGS is overstated. Net income, inventory, retained earnings, working capital and current ratio are understated.

If goods are properly recorded in inventory but the purchase is left out, net income is overstated because COGS is understated. Current liabilities are understated and working capital is overstated.

Errors from transactions recorded in the wrong period may reverse in the subsequent period.

Question 32

PPE includes

Answer 32

● Buildings
● Machinery and Equipment
● Land- only asset that is NOT depreciated
● Land improvements- these have a finite life, so they are depreciable
● Natural resources- oil well, coal mine. Instead of “depreciation”, these assets
are “depleted”.

Question 33

Capitalized costs

Answer 33

Costs that are included in the the asset account and not expensed.

● Costs to get the asset ready to use

○ Usually any cost necessary to bring the asset to its intended use and location, so it would include: sales tax, testing costs, shipping costs, etc.

● Costs to extend the asset’s useful life or increase productivity

○ If a cost just maintains the asset, like an oil change, this is a regular
expense and is NOT capitalized