Module 9A: Basic Theory and Financial Reporting Flashcards
ISAB Framework: Income
Increases in economic benefits during the accounting period in the form of inflows or enhancements of assets or decreases of liabilities that result in increases in equity, other than those relating to contributions from equity participants.
ISAB Framework: Assets
An asset is a resource controlled by the entity as a result of past events and from which future economic benefits are expected to flow to the entity.
ISAB Framework: Liability
A liability is a present obligation of the entity arising from past events the settlement of which is expected to result in an outflow from the entity of resources embodying economic benefits.
ISAB Framework: Equity
Equity is the residual interest in the assets of the entity after deducting all its liabilities.
ISAB Framework: Expenses
Expenses are decreases in economic benefits during the accounting period in the form of outflows or depletion of assets or incurrence of liabilities that result in decreases of equity, other than those relating to distributions to equity participants.
ISAB Framework for the Preparation and Presentation of Financial Statement, qualitative characteristics for Faithful Representation
Complete, neutral, and free from error
Installment Sales
Revenue is recognized as cash is collected. Thus, revenue recognition takes place at the point of cash collection rather than the point of sale. Installment sales accounting can only be used where “collection of the sale price is not reasonably assured” (ASC Topic 605)
Cost Recovery Method
Similar to installment sales method in that gross profit on the sale is deferred. The difference is that no profit is recognized until the cumulative receipts exceed the cost of the asset sold. The cost recovery method is used when the uncertainty of collection is so great that even use of the installment method is precluded.
ISAB Framework for the Preparation and Presentation of Financial Statement, qualitative characteristics for Relevance
Predictive Value - requires that information be used to predict future outcomes
and
Confirmatory Value - requires that information either confirms or changes prior evaluations.
Franchise Agreements
ASC Topic 952 provides that the initial franchise fee be recognized as revenue by the franchisor only upon substantial performance of their initial service obligation. The amount and timing or revenue recognized depends upon whether the contract contains bargain purchase agreements, tangible property, and whether the continuing franchise fees are reasonable in relation to future service obligations. Direct Franchise costs are deferred until the related revenue is recognized.
Qualitative Characteristics: Relevance
Relevant information is capable of making a difference in a user’s decision. Financial information is relevant if it has predictive value, confirmatory value, or both. An item is material if omitting it or misstating it could influence a user’s decision. Therefore, the materiality threshold relates to the qualitative characteristic of relevance.
Qualitative Characteristics: Relevance - Predictive Value
Requires that information be used to predict future outcomes
Qualitative Characteristics: Relevance - Confirmatory Value
Requires that information either confirms or changes prior evaluations.
Qualitative Characteristics: Faithful Representation
Information depicts what it purports to represent. A faithful representation should be complete, neutral, and free from error.
Qualitative Characteristics: Faithful Representation - Completeness
Completeness requires that information is presented or depicted in a way that users can understand the item being depicted.
Qualitative Characteristics: Faithful Representation - Neutrality
Neutrality requires that the item is depicted without bias either favorably or unfavorably to users.
Qualitative Characteristics: Faithful Representation - Free From Error
Free from error means that there are no errors or omissions in the the information reported.
Enhancing Qualitative Characterisitics
The enhancing qualitative characteristics of accounting information are comparability, verifiability, timeliness, and understandability.
Economic Entity Assumption
Economic activity can be identified with a particular unit of accountability. Note: However, you can define the entity at a higher level (e.g. Parent) or lower level (e.g Subsidiary)
Going Concern Assumption
The business enterprise will have a long life. The going concern assumption does not apply if liquidation of the business appears imminent. Note. The fair value of an asset irrelevant if we are going concern and we need this asset in our operations, this is another reason to use historical cost instead of fair value.
Monetary Unit Assumption
Money (the U.S. dollar is the common denominator of economic activity and provides an appropriate basis for accounting measurement and analysis.
Periodicity Assumption
The economic activities of an enterprise can be divided into artificial time periods. We report financial information periodically to apprise users of performance and economic status.
Historical Cost Principle
GAAP requires that most assets and liabilities be accounted for and reported on the basis of acquisition price because it is the most reliable valuation.
Matching Principle
Expenses are to be matched to the revenues whenever it is reasonable and practicable to do so.
Revenue Recognition Principle
Revenue is generally recognized when (1) realized or realizable and (2) earned. Revenues are realizable when assets received or held are readily convertible into cash or claims to cash. Revenues are consider earned when the entity has substantially accomplished what it must do to be entitled to the benefits represented by the revenues.
Exceptions to the Revenue Recognition Principle
(1) during production (e.g. percentage of completion accounting for construction) and (2) upon receipt of cash (installment sales method or cost-recovery of accounting); additional exceptions are (3) multiple-deliverable revenue arrangements and (4) milestone method of recognition on research and development contracts.
Private Entity
A private company is, “an entity other than a public business entity, a not-for-profit entity, or an employee benefit plan within the scope of Topics 960 through 965 on plan accounting.”
Current (replacement) Cost
Some inventories are reported at their current (replacement) cost, which is the amount of cash, or its equivalent that would have to be paid if the same or an equivalent asset were acquired currently.
The following five items are to be used as a guide to determine if there should be differential guidance between public and private companies:
1) Recognition and measurement
2) Disclosures
3) Display
4) Effective Date
5) Transition method
Change in Reporting Entities
When there is a change in reporting entity, the change is retrospectively applied to the financial statements of all prior periods presented. Previously issued interim statements are also presented on a retrospective basis.
Three Criteria for a prior period adjustment:
1) the effect of the adjustment is material to income from continuing operation;.
2) the adjustment can be identified with a prior period; and
3) the amount of the adjustment could not be estimated in prior periods.
Private Company Decision Making Framework: Guide to determine if there should be differential guidance between public and private companies
1) Recognition and measurement
2) Disclosures
3) Display
4) Effective date
5) Transition Method
Deferred Cost
A cost which has been paid in advance of its use in the business and is, therefore, an asset which will provide future benefits such as the prepayment of insurance premiums.
