Module 1 Flashcards
Avoidable interest
Interest that would have been avoided had the construction project not existed
Moves interest from expense to CIP
Avoidable interest calculations
Were the contractor payments even? Divide by 2
If not even then use weighted average method
Value of asset replacement is not known and asset life is extended, not improved
Reduce Accum Depreciation
Asset is improved
Capitalize improvement
Land cost is everything prior to excavation
Legal and title
Fill dirt and swamp draining
Back property taxes (not current)
Building razing
Goodwill - the direct result of a business combination
The implied fair value of the company
Compared to
The fair value of the net assets
Goodwill indicates that you paid more and got less
Calculation to get Net assets
Assets - liabilities
How to calculate the Goodwill
Price paid for the company divided by percentage of the company acquired equals total value of the company
Take that total value of the company minus the amount of the net assets equals the goodwill
Goodwill Impairment
The fair value is less than the carrying value
It is tested on each reporting unit and reported individually for each unit
If one unit has extra carrying value, it doesn’t negate the impairment of other units
Goodwill testing time
Tests can occur at any point in the year as long as it is consistently tested at the same time every year
Other assets should be tested and any impairments recorded prior to goodwill testing
2020 FASB standard eliminates the calculation of implied goodwill fair value each year
Goodwill impairment JV
D Loss of goodwill impairment (IS)
C Goodwill (BS)
Caution- the impairment amount cant be higher than the original goodwill
Income statement vs
Balance sheet
I.S. Is the company making money?
B.S. What is the company worth?
Balance sheet left and right
Left - debits - Assets
Right - credits - liabilities and equity
Equity is owners capital
Thus they should balance
Balance sheet equation
Assets = Liabilities - Equity
Cash
Revenue
Cash - asset account debit balance
Revenue - equity account credit balance
Working capital equation
Current Assets minus current liabilities
Deferral expense and revenue
Cash now
Income statement later
Cash is collected in advance of being earned
Unexpired costs
Expired costs
Assets…. Example prepaid insurance
Expenses …. Example prepaid expense
How much was ACCRUAL basis revenue (IS now, cash later)
Cash collected this year was 25K
Begin A/R was 3K and ending was 8K
25+ending 8 - beginning 3 = 30
Remember:
3 was earned last year so subtract it
8 is earned this year so add it
DEFERRED revenue - cash to accrual basis
Cash received 400, unearned revenue last year 10, unearned revenue this year 40
400 +10 collected last year and earned this year - 40 collected this year and earned next year
Cash to Accrual - Revenue
Accrual revenue - work done (IS) now, cash later
Example - Receivable
Add what is earned now and collected later
Subtract what was earned last year and collected this year
Cash to Accrual - Revenue
Deferred revenue - cash now and IS later
Example unearned rent
Add what was collected last year and earned this year
Subtract what was collected this year because it will be earned next year
Cash to Accrual - Expense
IS now, pay later
Add incurred this year, pd next year
Subtract incurred last year, paid this year
Form 10K filing - Annual
60 days after fiscal year end
75
90
60- large accelerated filers
75- accelerated filers
90- all others
Includes disclosures, summary of financial data, MD&A and audited financials
Filing 10Q Quarterly
40 days after fiscal year end
45 days
40 Large accelerated and accelerated
45 all others
Contains unaudited financial stnts, interim period MD&A, certain disclosures
Classifications
Large accelerated
Accelerated
All others
Large Acc ..700 million or more
Acc….
All others…less than 75 million
Cash equivalents
US treasury bill
Reportable segments
10% of revenue include inter segments sales, ignore corporate headquarters
Deferred
Cash now, IS later
2 JV’s same year
Accrued
IS now, cash later
2 JVs in different years
Net income - retained earnings - stockholders equity all equal relationship
If one is impacted the others are impacted the same direction
Pension plan options
Defined contribution plan
Defined benefit plan-promises a defined retirement benefit, the employer assumes the risk so most companies don’t offer it
Pension plans
Defined contribution plan
Defined contribution plan (ex 401 K)
The employer has no liability and the employees has to direct the investments
Pension plans require two financial stnts
1 Statement Of net assets available for benefits (like a balance sheet)
Assets, liabilities, net assets
2 Statement of changes in net assets available for benefits (like IS)
Additions, deductions, net increase net assets
Research question
Codification
Advanced search
Key phrase searches the exact phrase
Financial statement primary users
Investors
Lenders
Other creditors
Objective of financial reporting
Provide information to external users useful for economic decision making
Fundamental qualitative characteristics
Relevance and faithful representation
Fundamental qualitative characteristic
Relevance
Predictive value
Confirmatory value
Materiality
Fundamental qualitative characteristics
Faithful representation
Complete
Neutral - free from bias
Free from error
Enhancing qualitative characteristics
V Cut
Make the information more “useful”
Verifiabikity
Comparability
Understandability
Timeliness
Applied in NO prescribed order SFAC 8
SFAC 8
Financial reporting objectives Business
Assets - liabilities = equity
Equity is…
The residual interest in the assets of a company
Net realizable value
Closing the company-disposing of assets and asset value is less than historical cost
Current market value
Same as fair value- price to sell (not acquire) the asset
Multi step income statement - income from continuing operations
Reports revenues and expenses separately from non operating revenues and expenses and other gains and losses
Single step Income Statement - income from continuing operations
Total expenses ( including income tax expense ) are subtracted from total revenues … thus it’s a “single step”
Multi step better for calculating financial ratios
Classified balance sheet
Distinguishes current and non-current assets and liabilities
5 steps to revenue recognition
- Identify the contract
- Identify the performance obligations
- Determine the transaction price
- Allocate the price to the obligations
- Recognize revenue as each performance obligation is met
Rules of contracts (5)
- Approved by all parties
- Contain parties rights
3 . payment terms - Have commercial substance
- Be probable that the entity will collect all that is owed
Contract costs
When are they assets or expenses?
Assets if the entity expects to recover them and are directly related to a contract
Expenses is they are borne whether or not the contract is obtained
Repurchase agreements
Contract in which an entity sells and asset and has a promise or option to later repurchase the asset
Repurchase agreement types
Forward - obligation to repurchase
Call option- right to repurchase at entity’s option
Put - right to repurchase at customer’s option
Bill and Hold agreements
Revenue recognized prior to customer receiving product
There has to be a substantive reason for holding the product, it must be separately identified and ready for transfer to the customer
Right to return - booking revenue
If the customer has a right to return
1. Book the sale revenue
2. A refund liability
3. And an asset related to the subsequent product recovery
Long term construction
Percentage of completion
Recognize revenue over the term of the construction project
4 step process
Long term construction
Completed contract
Recognize revenue on the completed project
This does not match revenue and expenses over the term
Long term construction losses
Under both contract types/ losses are recognized immediately
Discontinued operations accounting
- Gain/loss on current operations
- Gain/loss on sale
- Impairment loss
Reported after continuing operations
Shown net of tax in the year incurred
Accounting changes - change in estimate
Prospective or Retrospective
Prospective - change in the current period and future, no prior period adjustment (this was not an error)
Example: fixed asset life adjustment
Change in fixed asset depreciation METHOD
Prospective or Retrospective?
Its a change in principle, but it’s treated according to change in estimate rules
So it’s Prospective
Change in accounting principle
Prospective or Retrospective
Retrospective- a change in principle
Affects retained earnings
Adjust beginning retained earnings, net of tax, in the statement of retained earnings
If adjusting inventory only look at the balance sheet balances for the ending year given
Exceptions to change in principle- retrospective entries
When it is impractical to estimate the change to retained earnings for restatement then it is treated prospective
Ex: inventory method change TO LIFO to anything else and fixed asset methods
Accounting changes - error corrections
Reporting
Reported net of tax in the statement of retained earnings
Statement of Comprehensive Income
Comprehensive income is:
All changes in owners equity other than transactions with owners
Net income (net income already includes the tax rate) plus other comprehensive income equals comprehensive income
OTHER comprehensive income definition
Revenues, expenses, gains, losses included in comprehensive income but excluded from Net Income under GAAP…. Five sources of it are PUFI
Other comprehensive income
PUFI
These are items excluded under net income per GAAP
P-pension adjustment
U - unrealized gains/losses on Available for Sale (not trading) securities and hedges
F - foreign currency translation. Items
I - instrument specific credit risk
*apply the tax rate to these items- tax effect must be disclosed in the stmt or the notes
Accumulated other comprehensive income is the sum of…
The sum of all other comprehensive income components (PUFI)
This is an owners equity item
Reporting - statement of comprehensive income
GAAP allows for 1 statement
Stmt of Income and Comprehensive Income
Or 2 statement
Stmt of Income immediately followed by Stmt of Comprehensive Income
The JV to accrue revenue -
Record a receivable
JV to accrue expenses
Income statement now, pay later
Record accrued liability, accounts payable, or wages payable
Adjusting journal entries
When an entry was recorded to a revenue/expense account that should have been an asset/liability account
- Must be recorded by the end of the fiscal year
- Never involve the cash account
- Will hit one income stmt acct and one balance sheet acct
Costs and Unexpired Costs
Costs are expenses in this period
Unexpired costs are costs that expire in future periods- example fixed assets and depreciation method
Module 1.2
Unexpired costs are assets
Expired Costs are expenses
When unexpired (asset) goes to expired (expense) then it goes balance sheet to income stmt
Example: inventory to cost of good sold
Net book value of fixed asset to depreciation expense
Gross concept and net concept
Gross concept definition
This is normal operating activity
Revenue and expenses - reported at gross (all transactions)
Gross concept and net concept
Net concept definition
This is non-operating activity
Gains and losses - reported NET
Ex: the sale of property, you don’t report the sale price, you report the net of the transaction or the gain/loss
This includes sale of non-inventory, write downs, write offs
Payment on a contract
Receivable, asset, liability?
Receivable if terms met and only waiting on payment (only waiting on passage of time)
Asset arrangement net, but waiting on something other than the passage of time
Liability the customer pays before the task is met
Accounting change of estimate examples
Change fixed asset life
Adj year end accrual of salaries
Write down obsolete inventory
Nonrecurring IRS adj
Settlement of litigation
Changes of accounting principle that apply here - depreciation- change from LIFO
Contract modification
A contract modification is a change in price or scope or both
Current assets include
Cash minus any income in sinking funds
A/R minus any allow for doubtful
Inventory
Investments in trading securities
Liabilities include
Deposits received from customers
Unearned rents
