new current Flashcards
1
Q
What is a current asset?
A
Cash plus other assets that are expected to be sold or converted to cash during the current operating cycle
Includes: Demand deposits, cash equivalents, accounts receivable, inventory, pre-paids, and short-term investments
2
Q
What is a current liability?
A
A liability expected to be paid within 12 months or less
3
Q
How is the Quick Ratio calculated?
A
(Cash + A/R + Trading Securities) / Current Liabilities
4
Q
How is the Current Ratio calculated?
A
Currents Assets / Current Liabilities
5
Q
How is Working Capital calculated?
A
Currents Assets - Current Liabilities
6
Q
How is A/R Turnover calculated?
A
Credit Sales / Average A/R
7
Q
How is Inventory Turnover calculated?
A
COGS / Average Inventory
8
Q
How is Day Sales in Inventory calculated?
A
365 / Inventory Turnover
9
Q
How is Days to Collect A/R calculated?
A
Average A/R / Average Sales per Day
10
Q
How are gain contingencies recorded?
A
They are NOT accrued due to Conservatism
11
Q
When are loss contingencies recorded?
A
If Probable - they are accrued (if estimable) and disclosed
If Reasonably Possible - they are disclosed
If Remote - don’t accrue or disclose
12
Q
What is the primary objective of accounting?
A
To measure income
13
Q
What is the most authoritative set of accounting pronouncements?
A
The FASB Codification
All pronouncements fall under the Codification umbrella
14
Q
What are the 2 Levels of Authority within the FASB codification?
A
Authoritative and Non-Authoritative
15
Q
How does managerial accounting differ from financial accounting?
A
Managerial Accounting has a timeliness focus
Managerial Accounting is not required to follow GAAP
16
Q
Which financial reports are required to be filed with the SEC?
A
Form 10K - Annual and Audited
Form 10Q - Quarterly and Reviewed
17
Q
What is the focus of financial reports for individual companies?
A
Focus is on the needs of users to help them make decisions and assessments about the company
Does not make assessments of the economy
18
Q
What are the Primary Constraints of Financial Reporting?
A
Cost vs. Benefit
Materiality
19
Q
What are the Secondary Constraints of Financial Reporting?
A
Consistency - Year vs. Year
Comparability - Company vs. Company
20
Q
What are the Qualitative Characteristics of Financial Reporting?
A
Relevance & Faithful Representation
Relevance - Makes a difference to the user
Includes:
Predictive Value - Future Trends
Confirming Value - Past Predictions
Materiality - Could affect User Decisions
Faithful Representation
Includes:
Completeness - Nothing omitted that would impact the decision-making of a user
Neutrality - Information is presented is without bias
Free from Error - No material errors or omissions
21
Q
What are the Enhancing Qualitative Characteristics of Financial Reporting?
A
Comparability Verifiability Timeliness and Understandability
Comparability - Allows users to compare different items among various periods
Verifiability - Different people would reach a similar conclusion on the information presented
Timeliness - Information is made available early enough to impact the decision making of users
Understandability - Information is easy to understand
22
Q
How does Conservatism affect the recording of accounting transactions?
A
When an estimate is necessary due to uncertainty conservatism chooses the best option that won’t overstate the financial position of the company
23
Q
What is an accrual?
A
Earned (Revenue) or Incurred (Expense) but no Cash Receipt/Outlay yet
24
Q
What is a deferral?
A
Cash Receipt/Outlay but not Earned (Revenue) or Incurred (Expense)
25
What is recognition in accounting?
When an item is recorded and included in the financial statements
26
Describe fair value with respect to an asset
The price you would receive if you sold the asset
Assumes asset is at its highest and best value
Assumes asset is sold at its most advantageous market to get the best price possible
27
What market assumptions are made in a fair value assessment?
Buyer and Seller are not Related
Buyer and Seller are Knowledgeable
Buyer and Seller are able to transact - i.e. This isn't a hypothetical transaction for Fair Value measurement purposes. The buyer actually does have the $10M to purchase the asset you're trying to value at $10M
Buyer and Seller are both motivated to buy/sell
28
What items are included in a Level 1 input in the fair value hierarchy?
Price quotes or market prices
For example NYSE or NASDAQ
29
What items are included in a Level 2 valuation input?
Interest rates
Prime rate
30
What items are included in Level 3 inputs of the fair value hierarchy?
Unobservable inputs such as assumptions or forecasts
Lowest priority for valuation
31
What are acceptable valuation techniques for fair value?
Market approach - uses market transactions and prices to value the asset
Income approach - uses present value discounts earnings
Cost approach - uses replacement cost to value the asset
32
What are current assets?
Cash
Inventory or Assets expected to be converted or consumed during a business' operating cycle
Deferred Gross Profit on Installment Sales (Contra Asset)
Receivables expected to be collected in 12 months or less
33
What are current liabilities?
Liabilities that will use current assets during the present operating cycle
34
What is an accrued liability?
Expense that has been incurred but not paid
Example: rents payable
35
What is a deferred revenue?
A type of current liability
Payments that have been received but cannot be recorded as revenue yet
Example: Tenant pre-pays rent - Landlord still must perform to earn it and is a liability until this happens
36
When are revenues recognized?
When they have been earned; i.e. company has performed
37
What is a gain?
Increase in equity from an activity or event that is not central to the main activities of the business
Can be operating or non-operating
38
What is a loss?
Decrease in equity from an activity or event that is not central to the main activities of the business
Can be operating or non-operating
39
What is an operating cycle?
Average time it takes to turn materials or services into Cash
40
What is the present value of future cash flows?
Valuation method - the current value of a future amount of money using a specific interest rate
41
What is historical cost?
How much an asset cost - (net of depreciation and amortization)
42
What is replacement cost?
How much it would cost to reacquire an asset today (Entrance Cost)
43
What is a market cost?
The sale price of an asset (Exit Cost)
44
What is Net Realizable Value?
Sale Price of an Asset - Selling/Disposal Fee
45
When is royalty income recognized? How is it recognized?
Recognized when earned
If the royalty % is applied against net sales then subtract the estimated return amount from the gross sales first and then apply the royalty rate
46
When is revenue recognized in an installment sale?
Revenue recognized upon receipt of cash
Only used when cash collection is uncertain
47
What is deferred gross profit?
Gross Profit that can't be recognized until cash is received
D.GP : Gross Profit % x Accounts Receivable
Pay attention to the year if GP% varies
48
What is the cost recovery method?
No revenue recognized until all costs are recovered from purchase of the asset
Most conservative method of revenue recognition when collection of sale price is uncertain
49
What is subscription revenue? How is it recorded?
Payment has been received but performance is not complete.
As company performs revenue is recognized.
Recorded as a Deferred Revenue (Liability) on Balance Sheet
50
How are franchise revenues recorded?
Franchisor - Startup franchise fee revenue deferred until substantial performance
Franchisee - Costs are deferred until corresponding revenue is recognized
51
How do you calculate sales revenue starting from cash basis income?
Mnemonic: SPEAR-BAR
Sales (i.e. Customer Payments)
+ Ending Accounts Receivable
- Beginning Accounts Receivable
: Sales Revenue on an Accrual Basis
52
How do you calculate COGS starting from Cash Basis?
Mnemonic: CRAP-I
Cash Remitted (i.e. paid)
+Increase in Accounts Payable
-Increase in Inventory
:COGS on an Accrual Basis
53
How are discontinued operations reported? When are they used?
Reported Net of Tax after Continuing Operations but before Extraordinary Items
Company decides to cease operating a segment of its business
Includes Income (or loss) from the period plus the gain (or loss) from disposal
54
What qualifies as an extraordinary item? How is it recorded?
Both unusual AND infrequent
Reported Net of Tax after Discontinued Operations
Note: Usual *or* Infrequent Items are reported as part of Continuing Operations
55
What is constant dollar accounting?
Adjusts assets to reflect a consistent level of purchasing power due to inflation
Uses the Consumer Price Index (CPI)
56
When are expenses recognized?
When they are incurred. Accrue if not yet paid.
57
What are accrued expenses?
Those incurred but not paid.
Product costs - Expenses should be matched with associated revenues as they are recognized (sales commission on a used car sale)
Period costs - Expenses amortized and recognized with the passage of time
58
When should impaired assets be written down to fair value and expensed?
Immediately.
59
What major items should be classified under General & Administrative (G&A) expenses?
Office staff salaries
Office/building rent
Office supplies
Note: Sales staff salaries and portions of the building assigned to Sales should be allocated to Selling Expense not G&A
60
What are business start-up costs?
One-time costs for opening a new business
Expensed as they are incurred
61
When is interest *not* expensed?
Interest on projects (software) for internal use is not expensed but is instead capitalized
62
What are the major components of Comprehensive Income?
Net Income + Other Comprehensive Income (OCI):
Revenues/Expenses
Gains/Losses
Cumulative accounting adjustments
Reclassifications adjustments
Non-owner changes in equity
63
What items are considered cumulative accounting adjustments?
Foreign Currency Translation Adjustments
Unrealized gains on AFS Securities
Minimum Pension Liability adjustment for defined benefit plans
64
What is the purpose of a reclassification adjustment?
Avoids double counting items that were included in both Net Income and OCI
Example: AFS Securities previously included in OCI are now sold at a loss and reported on the Income Statement
65
Where is Comprehensive Income reported?
Reported in a Single or Combined Income Statement
66
What disclosures on accounting policies are required in financial statements?
Accounting Principles used
Basis of Consolidation
Inventory Pricing Methods
Depreciation Method
Amortization of Intangibles
67
What are some major risks and uncertainties that must be disclosed?
Nature of Operations
Use of Estimates and listing of Significant Estimates
Concentration vulnerability
68
Which Personal Financial Statements are required?
Statement of Financial Condition & Statement of Changes in Net Worth
69
How are assets and liabilities valued in a Personal Financial Statement?
Estimated current value
70
How are estimated taxes that would be paid if all assets were converted into cash and all liabilities paid presented on a Personal Financial Statement?
Presented on Statement of Financial Condition between Liabilities and Net Worth
71
What is the general presentation on a statement of financial condition?
Assets
- Liabilities
- Estimated taxes on assets sold
: Net Worth
72
How is life insurance presented on a Personal Financial Statement?
Only shown if there is cash surrender value
It is shown net of loans against the policy
73
How are business interests shown on a Personal Financial Statement?
Business Interests that constitute a large percentage of total assets should be separated from other investments
74
What is the discreet view in an Interim Financial Statement?
Interim period is a separate accounting period - not GAAP
Same accounting principles used for annual reporting should be used.
75
What is the integral view in an Interim Financial Statement?
Interim period is a part of the annual period - GAAP
Gross profit method may be used to estimate COGS and inventory
Temporary declines in inventory aren't recognized
76
How are discontinued operations & extraordinary items reported in Interim Financial Statements?
Aren't prorated
Fully recognized in Interim Period as incurred
If it occurs in Q3 - it's recognized in Q3
77
How are cumulative gains and losses reported in Interim Financials?
Reported as if they occurred in the first quarter
78
How is inventory valuation handled in Interim Financials?
If inventory experiences a decline in value during an interim period - the loss is recognized in the interim period
If the loss is expected to be only temporary - no loss is recognized
79
What is one of the primary problems with interim reporting?
The matching principle gets messed up - Expenses incurred in one period may benefit future periods
80
For whom is Segment Reporting required?
Publicly traded companies
81
What factors cause a segment to be significant and therefore to be reported separately?
Revenue of segment is 10% or more of total
Profit is 10% or more of total
Segment assets are 10% or more of total
75% Test - All segment revenues must equal 75% of total external revenues
82
What is the disclosure requirement regarding sales of 10% or more for one customer?
If 10% or more of enterprise revenue comes from one customer - the segment making the sales must be disclosed
83
How are Research and Development costs recorded?
They are expensed in the period incurred and are not capitalized.
84
Which expenditures are included in the cost of a building?
All expenditures to get the building into working condition are ready for use
85
Which expenditures are included in the cost of land?
All expenditures to get the land ready for its intended use:
Title & County Fees
Clearing of Land - Dirt work etc.
Demolition and removal of old buildings (minus any scrap or salvage)
Note: capitalized land costs are not depreciated
86
In an exchange of non-monetary assets how much gain is recognized if no additional cash is exchanged when there is no significant difference in resulting cash flows?
If the cash flows from the assets exchanged are not significantly different no gain or loss is recognized on a non-monetary exchange as it lacks commercial substance.
The new asset is recorded at the book value of the asset given up.
The only gain that can be recognized is any boot (cash) received.
87
In an exchange of non-monetary assets what gain is recognized if resulting cash flows are significantly different?
If resulting cash flows are significantly different then the transaction has commercial substance and a gain/loss is recorded on the exchange.
The new asset is recorded at the FAIR VALUE of the assets given up unless the asset acquired has a fair value that is easier to determine.
88
How is donated property recorded by the donee?
Recorded at Fair Value + costs associated with getting the property into working condition for its designed purpose
Exam Tip - Think of a charity holding afair and then donating the property which is then recorded atfair value
89
How is donation of property recorded by the donor?
Recorded at Fair Value of asset given up.
Gain or Loss is recorded.
90
How is double-declining balance (DDB) depreciation calculated?
1 / (Useful Life x 2 x Book Value)
Ignore salvage value.
91
How is Sum of Year's Digits (SYD) depreciation calculated?
(Cost - Salvage Value) x (Remaining Useful Life / SYD) : Depreciation expense
For example the depreciation factor for the third year of a 10-year asset would be:
: 8 / (10+9+8+7+6+5+4+3+2+1) : 8/55 : 14.5%
Remaining useful life : 8 SYD : 55
92
How is straight line depreciation calculated?
(Cost - Salvage Value) / Useful life : depreciation expense
93
When is an asset considered to be impaired? How is impairment loss calculated?
When the un-discounted future cash flows are less than the carrying value of the asset.
Carrying Value - Fair Value : Impairment Loss
Note: impaired assets that recover their value can't be written back up once written down
94
How are legal fees to defend a patent amortized?
If the patent is SUCCESSFULLY defended the legal fees are amortized over the patent's economic life.
If unsuccessful they are expensed immediately.
95
What are the two steps for testing goodwill impairment?
Compare the CV to the FV. If FV is greater than CV no impairment exists you're done.
If impairment appears to exist the assets and liabilities should be compared to the total value of the reporting unit. The difference is Goodwill. Compare this amount to the CV of the Goodwill and write it down accordingly.
96
How are costs for developing software recorded?
Expenses prior to technological feasibility are expensed as R&D.
After technological feasibility but prior to production costs are capitalized.
Expenses incurred during production are charged to inventory.
Expenses incurred training on internal use software are expensed.
97
What expenditures are included in the cost of equipment?
All expenditures to get the asset into working condition and ready for use:
```
Purchase price + liabilities assumed
Shipping
Taxes
Insurance
Installation
Testing
Legal fees
Construction loan interest
```
Any alterations to existing facilities or equipment necessary for the new purchase and installation that extend the life or increase the efficiency of these assets are capitalized.
98
Which costs are inventoriable?
Purchases - Net of Discounts, Freight, Warehouse expenditures
99
When does ownership of goods transfer when shipped FOB Shipping Point?
FOB Shipping Point puts the inventory into the hands of the buyer from the loading dock
100
When does ownership transfer when goods are sent FOB Destination?
FOB Destination keeps the items in the seller's inventory until it reaches the buyer
101
Which costs are non-inventoriable?
Sales Commissions
Interest on liabilities to vendors
Shipping expense to customers
102
When are discounts recorded under the gross method?
Under the gross method, discounts are recorded only when used.
103
Under the net method, when are discounts recorded?
Under the net method, discounts are recorded whether used or not.
Unused discounts are allocated to financing expense.
104
How is gross margin calculated?
Gross Margin : Sales - COGS (BI + P - EI)
105
Describe the periodic inventory system.
Inventory is counted at certain times throughout the period
Weighted-average cost flow method is used.
106
Describe the perpetual inventory system.
Inventory count continually updated
Uses a moving-average cost flow method
107
In periods of rising prices, under which cost flow system would ending inventory be the same under both periodic and perpetual inventory methods?
Under the FIFO system, periodic and perpetual inventory methods will both have the same ending inventory.
108
How is inventory turnover calculated?
COGS / Average Inventory
109
How is Average Day's Sales in inventory calculated?
365 / Inventory Turnover
110
Under a consignment system, who holds the consigned goods in inventory?
The CONSIGNOR holds the consigned items in their inventory count. The cost includes the shipping to the consignee.
111
Under a consignment system, does the consignee hold consignment inventory in their own inventory?
No. Consignment goods are maintained in the inventory of the consignor, not the consignee.
112
What effect does overstatement or understatement of inventory have on ending retained earnings?
Misstatement of beginning inventory does NOT have an effect on ending retained earnings.
Misstatement of ENDING inventory does have an effect on retained earnings.
113
How does misstatement of ending inventory effect Ending Retained Earnings?
EI Over : COGS Under : ERE Over
EI Under : COGS Over : ERE Under
114
Which costs are included in COGS first under the FIFO (first in first out) system?
The first (oldest) inventory you have in stock is the first inventory you record for COGS purposes. If your oldest inventory on the shelf cost you $1 when you bought it, COGS is $1
This is just for inventory pricing. It has nothing to do with physically selling the oldest item on the shelf - It is purely for accounting purposes
115
Which costs are included in COGS under the LIFO (last in first out) system?
The last (newest) inventory you have in stock is the first inventory you record for COGS purposes. If your newest inventory on the shelf cost you $1.50 when you bought it, COGS is $1.50
116
How is Weighted Average Cost Per Unit calculated under a weighted average inventory system?
COGAS / Total Units : Weighted Average Cost Per Unit
117
How does FIFO's COGS relate to LIFO's in a time of changing prices?
FIFO's relationship to COGS will be opposite LIFO's relationship to COGS in periods of falling/rising prices.
118
How do FIFO and LIFO change in a period of rising prices?
FIFO has the Lowest COGS
FIFO is a cat that sees a mouse starts Low and is Rising
If COGS is Low, that means EI is High
119
How do FIFO and LIFO change in a period of falling prices?
FIFO has the Highest COGS
Remember: FIFO, that silly cat, got High from Catnip and is Falling off the couch
If COGS is High, that means EI is Low
120
Under a Lower of Cost or Market, how are the benchmarks calculated?
Market Ceiling : Net Realizable Value : Selling Price - Selling Costs
Market : Replacement Cost
Market Floor : Net Realizable Value - Normal Profit
