Ninja FAR Flashcards
1
Q
What is the primary objective of accounting?
A
To measure income
2
Q
What is the most authoritative set of accounting pronouncements?
A
The FASB Codification
All pronouncements fall under the Codification umbrella
3
Q
What are the 2 Levels of Authority within the FASB codification?
A
Authoritative and Non-Authoritative
4
Q
How does managerial accounting differ from financial accounting?
A
Managerial Accounting has a timeliness focus
Managerial Accounting is not required to follow GAAP
5
Q
Which financial reports are required to be filed with the SEC?
A
Form 10K - Annual and Audited
Form 10Q - Quarterly and Reviewed
6
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
7
Q
What are the Primary Constraints of Financial Reporting?
A
Cost vs. Benefit
Materiality
8
Q
What are the Secondary Constraints of Financial Reporting?
A
Consistency - Year vs. Year
Comparability - Company vs. Company
9
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
10
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
11
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
12
Q
What is an accrual?
A
Earned (Revenue) or Incurred (Expense) but no Cash Receipt/Outlay yet
13
Q
What is a deferral?
A
Cash Receipt/Outlay but not Earned (Revenue) or Incurred (Expense)
14
Q
What is recognition in accounting?
A
When an item is recorded and included in the financial statements
15
Q
Describe fair value with respect to an asset
A
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
16
Q
What market assumptions are made in a fair value assessment?
A
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
17
Q
What items are included in a Level 1 input in the fair value hierarchy?
A
Price quotes or market prices
For example NYSE or NASDAQ
18
Q
What items are included in a Level 2 valuation input?
A
Interest rates
Prime rate
19
Q
What items are included in Level 3 inputs of the fair value hierarchy?
A
Unobservable inputs such as assumptions or forecasts
Lowest priority for valuation
20
Q
What are acceptable valuation techniques for fair value?
A
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
21
Q
What are current assets?
A
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
22
Q
What are current liabilities?
A
Liabilities that will use current assets during the present operating cycle
23
Q
What is an accrued liability?
A
Expense that has been incurred but not paid
Example: rents payable
24
Q
What is a deferred revenue?
A
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
25
When are revenues recognized?
When they have been earned; i.e. company has performed
26
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
27
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
28
What is an operating cycle?
Average time it takes to turn materials or services into Cash
29
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
30
What is historical cost?
How much an asset cost - (net of depreciation and amortization)
31
What is replacement cost?
How much it would cost to reacquire an asset today (Entrance Cost)
32
What is a market cost?
The sale price of an asset (Exit Cost)
33
What is Net Realizable Value?
Sale Price of an Asset - Selling/Disposal Fee
34
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
35
When is revenue recognized in an installment sale?
Revenue recognized upon receipt of cash
Only used when cash collection is uncertain
36
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
37
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
38
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
39
How are franchise revenues recorded?
Franchisor - Startup franchise fee revenue deferred until substantial performance
Franchisee - Costs are deferred until corresponding revenue is recognized
40
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
41
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
42
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 (represents a strategic shift and has major effect on operations and financials)
Includes Income (or loss) from the period plus the gain (or loss) from disposal
43
For discontinued operations, what are the three requirements for disposal assets?
They must be Held for Sale - Sold - or Disposed of another way
44
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
45
What is constant dollar accounting?
Adjusts assets to reflect a consistent level of purchasing power due to inflation
Uses the Consumer Price Index (CPI)
46
When are expenses recognized?
When they are incurred. Accrue if not yet paid.
47
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
48
When should impaired assets be written down to fair value and expensed?
Immediately.
49
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
50
What are business start-up costs?
One-time costs for opening a new business
Expensed as they are incurred
51
When is interest *not* expensed?
Interest on projects (software) for internal use is not expensed but is instead capitalized
52
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
53
What items are considered cumulative accounting adjustments?
Foreign Currency Translation Adjustments
Unrealized gains on AFS Securities
Minimum Pension Liability adjustment for defined benefit plans
54
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
55
Where is Comprehensive Income reported?
Reported in a Single or Combined Income Statement
56
What disclosures on accounting policies are required in financial statements?
Accounting Principles used
Basis of Consolidation
Inventory Pricing Methods
Depreciation Method
Amortization of Intangibles
57
What are some major risks and uncertainties that must be disclosed?
Nature of Operations
Use of Estimates and listing of Significant Estimates
Concentration vulnerability
58
Under Cash Basis Accounting how are Revenue and Expenses recognized?
Revenue is recognized with Cash Inflow and Expenses Recognized with Cash Outflow
59
Is Cash Basis Accounting ok for Tax Returns?
Yes
60
Is Cash Basis Accounting GAAP?
No - GAAP uses Accrual Accounting
61
What is an advantage of Modified Cash Basis Accounting?
It avoids the complexities of GAAP but provides more information that Cash Basis Accounting
62
Is Modified Cash Basis GAAP?
No - GAAP uses Accrual Accounting
63
What are the 3 acceptable options for Income Tax Basis Accounting
Cash Basis - Accrual Basis - Hybrid Method
64
What are the advantages of the Small and Medium Sized Entity Framework?
It simplifies reporting and disclosures for small companies - Reduces Book vs Tax differences - avoids Fair Value measurements (Historical Cost)
65
What are the two options for Income Taxes under the Small and Medium Sized Entity Framework?
Deferred Taxes Method and Taxes Payable Method
66
What are the two options for Startup Costs under the Small and Medium Sized Entity Framework?
Expensed or Amortized (15 years)
67
How is Goodwill treated under the Small and Medium Sized Entity Framework?
Amortized (15 years)
68
What are the required liquidation basis financial statements?
Statement of Net Assets in Liquidation and Statement of Changes in Net Assets in Liquidation
69
What is a Development Stage Entity?
A company that is still in the formation stage and hasn't yet begun principal operations or produced significant revenue
70
What is the key benefit of the accounting rules for Development Stage Entities?
Cost savings without sacrificing financial statement usefulness
71
# Answer
What is the primary objective of accounting?
To measure income
72
# Answer
What is the most authoritative set of accounting pronouncements?
The FASB Codification
All pronouncements fall under the Codification umbrella
73
# Answer
What are the 2 Levels of Authority within the FASB codification?
Authoritative and Non-Authoritative
74
# Answer
How does managerial accounting differ from financial accounting?
Managerial Accounting has a timeliness focus
Managerial Accounting is not required to follow GAAP
75
# Answer
Which financial reports are required to be filed with the SEC?
Form 10K - Annual and Audited
Form 10Q - Quarterly and Reviewed
76
# Answer
What is the focus of financial reports for individual companies?
Focus is on the needs of users to help them make decisions and assessments about the company
Does not make assessments of the economy
77
# Answer
What are the Primary Constraints of Financial Reporting?
Cost vs. Benefit
Materiality
78
# Answer
What are the Secondary Constraints of Financial Reporting?
Consistency - Year vs. Year
Comparability - Company vs. Company
79
# Answer
What are the Qualitative Characteristics of Financial Reporting?
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
80
# Answer
What are the Enhancing Qualitative Characteristics of Financial Reporting?
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
81
# Answer
How does Conservatism affect the recording of accounting transactions?
When an estimate is necessary due to uncertainty conservatism chooses the best option that won't overstate the financial position of the company
82
# Answer
What is an accrual?
Earned (Revenue) or Incurred (Expense) but no Cash Receipt/Outlay yet
83
# Answer
What is a deferral?
Cash Receipt/Outlay but not Earned (Revenue) or Incurred (Expense)
84
# Answer
What is recognition in accounting?
When an item is recorded and included in the financial statements
85
# Answer
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
86
# Answer
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
87
# Answer
What items are included in a Level 1 input in the fair value hierarchy?
Price quotes or market prices
For example NYSE or NASDAQ
88
# Answer
What items are included in a Level 2 valuation input?
Interest rates
Prime rate
89
# Answer
What items are included in Level 3 inputs of the fair value hierarchy?
Unobservable inputs such as assumptions or forecasts
Lowest priority for valuation
90
# Answer
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
91
# Answer
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
92
# Answer
What are current liabilities?
Liabilities that will use current assets during the present operating cycle
93
# Answer
What is an accrued liability?
Expense that has been incurred but not paid
Example: rents payable
94
# Answer
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
95
# Answer
When are revenues recognized?
When they have been earned; i.e. company has performed
96
# Answer
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
97
# Answer
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
98
# Answer
What is an operating cycle?
Average time it takes to turn materials or services into Cash
99
# Answer
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
100
# Answer
What is historical cost?
How much an asset cost - (net of depreciation and amortization)
101
# Answer
What is replacement cost?
How much it would cost to reacquire an asset today (Entrance Cost)
102
# Answer
What is a market cost?
The sale price of an asset (Exit Cost)
103
# Answer
What is Net Realizable Value?
Sale Price of an Asset - Selling/Disposal Fee
104
# Answer
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
105
# Answer
When is revenue recognized in an installment sale?
Revenue recognized upon receipt of cash
Only used when cash collection is uncertain
106
# Answer
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
107
# Answer
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
108
# Answer
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
109
# Answer
How are franchise revenues recorded?
Franchisor - Startup franchise fee revenue deferred until substantial performance
Franchisee - Costs are deferred until corresponding revenue is recognized
110
# Answer
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
111
# Answer
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
112
# Answer
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 (represents a strategic shift and has major effect on operations and financials)
Includes Income (or loss) from the period plus the gain (or loss) from disposal
113
# Answer
For discontinued operations, what are the three requirements for disposal assets?
They must be Held for Sale - Sold - or Disposed of another way
114
# Answer
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
115
# Answer
What is constant dollar accounting?
Adjusts assets to reflect a consistent level of purchasing power due to inflation
Uses the Consumer Price Index (CPI)
116
# Answer
When are expenses recognized?
When they are incurred. Accrue if not yet paid.
117
# Answer
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
118
# Answer
When should impaired assets be written down to fair value and expensed?
Immediately.
119
# Answer
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
120
# Answer
What are business start-up costs?
One-time costs for opening a new business
Expensed as they are incurred
121
# Answer
When is interest *not* expensed?
Interest on projects (software) for internal use is not expensed but is instead capitalized
122
# Answer
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
123
# Answer
What items are considered cumulative accounting adjustments?
Foreign Currency Translation Adjustments
Unrealized gains on AFS Securities
Minimum Pension Liability adjustment for defined benefit plans
124
# Answer
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
125
# Answer
Where is Comprehensive Income reported?
Reported in a Single or Combined Income Statement
126
# Answer
What disclosures on accounting policies are required in financial statements?
Accounting Principles used
Basis of Consolidation
Inventory Pricing Methods
Depreciation Method
Amortization of Intangibles
127
# Answer
What are some major risks and uncertainties that must be disclosed?
Nature of Operations
Use of Estimates and listing of Significant Estimates
Concentration vulnerability
128
# Answer
Under Cash Basis Accounting how are Revenue and Expenses recognized?
Revenue is recognized with Cash Inflow and Expenses Recognized with Cash Outflow
129
# Answer
Is Cash Basis Accounting ok for Tax Returns?
Yes
130
# Answer
Is Cash Basis Accounting GAAP?
No - GAAP uses Accrual Accounting
131
# Answer
What is an advantage of Modified Cash Basis Accounting?
It avoids the complexities of GAAP but provides more information that Cash Basis Accounting
132
# Answer
Is Modified Cash Basis GAAP?
No - GAAP uses Accrual Accounting
133
# Answer
What are the 3 acceptable options for Income Tax Basis Accounting
Cash Basis - Accrual Basis - Hybrid Method
134
# Answer
What are the advantages of the Small and Medium Sized Entity Framework?
It simplifies reporting and disclosures for small companies - Reduces Book vs Tax differences - avoids Fair Value measurements (Historical Cost)
135
# Answer
What are the two options for Income Taxes under the Small and Medium Sized Entity Framework?
Deferred Taxes Method and Taxes Payable Method
136
# Answer
What are the two options for Startup Costs under the Small and Medium Sized Entity Framework?
Expensed or Amortized (15 years)
137
# Answer
How is Goodwill treated under the Small and Medium Sized Entity Framework?
Amortized (15 years)
138
# Answer
What are the required liquidation basis financial statements?
Statement of Net Assets in Liquidation and Statement of Changes in Net Assets in Liquidation
139
# Answer
What is a Development Stage Entity?
A company that is still in the formation stage and hasn't yet begun principal operations or produced significant revenue
140
# Answer
What is the key benefit of the accounting rules for Development Stage Entities?
Cost savings without sacrificing financial statement usefulness
141
# Answer
What is the primary objective of accounting?
To measure income
142
# Answer
What is the most authoritative set of accounting pronouncements?
The FASB Codification
All pronouncements fall under the Codification umbrella
143
# Answer
What are the 2 Levels of Authority within the FASB codification?
Authoritative and Non-Authoritative
144
# Answer
How does managerial accounting differ from financial accounting?
Managerial Accounting has a timeliness focus
Managerial Accounting is not required to follow GAAP
145
# Answer
Which financial reports are required to be filed with the SEC?
Form 10K - Annual and Audited
Form 10Q - Quarterly and Reviewed
146
# Answer
What is the focus of financial reports for individual companies?
Focus is on the needs of users to help them make decisions and assessments about the company
Does not make assessments of the economy
147
# Answer
What are the Primary Constraints of Financial Reporting?
Cost vs. Benefit
Materiality
148
# Answer
What are the Secondary Constraints of Financial Reporting?
Consistency - Year vs. Year
Comparability - Company vs. Company
149
# Answer
What are the Qualitative Characteristics of Financial Reporting?
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
150
# Answer
What are the Enhancing Qualitative Characteristics of Financial Reporting?
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
151
# Answer
How does Conservatism affect the recording of accounting transactions?
When an estimate is necessary due to uncertainty conservatism chooses the best option that won't overstate the financial position of the company
152
# Answer
What is an accrual?
Earned (Revenue) or Incurred (Expense) but no Cash Receipt/Outlay yet
153
# Answer
What is a deferral?
Cash Receipt/Outlay but not Earned (Revenue) or Incurred (Expense)
154
# Answer
What is recognition in accounting?
When an item is recorded and included in the financial statements
155
# Answer
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
156
# Answer
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
157
# Answer
What items are included in a Level 1 input in the fair value hierarchy?
Price quotes or market prices
For example NYSE or NASDAQ
158
# Answer
What items are included in a Level 2 valuation input?
Interest rates
Prime rate
159
# Answer
What items are included in Level 3 inputs of the fair value hierarchy?
Unobservable inputs such as assumptions or forecasts
Lowest priority for valuation
160
# Answer
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
161
# Answer
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
162
# Answer
What are current liabilities?
Liabilities that will use current assets during the present operating cycle
163
# Answer
What is an accrued liability?
Expense that has been incurred but not paid
Example: rents payable
164
# Answer
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
165
# Answer
When are revenues recognized?
When they have been earned; i.e. company has performed
166
# Answer
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
167
# Answer
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
168
# Answer
What is an operating cycle?
Average time it takes to turn materials or services into Cash
169
# Answer
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
170
# Answer
What is historical cost?
How much an asset cost - (net of depreciation and amortization)
171
# Answer
What is replacement cost?
How much it would cost to reacquire an asset today (Entrance Cost)
172
# Answer
What is a market cost?
The sale price of an asset (Exit Cost)
173
# Answer
What is Net Realizable Value?
Sale Price of an Asset - Selling/Disposal Fee
174
# Answer
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
175
# Answer
When is revenue recognized in an installment sale?
Revenue recognized upon receipt of cash
Only used when cash collection is uncertain
176
# Answer
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
177
# Answer
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
178
# Answer
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
179
# Answer
How are franchise revenues recorded?
Franchisor - Startup franchise fee revenue deferred until substantial performance
Franchisee - Costs are deferred until corresponding revenue is recognized
180
# Answer
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
181
# Answer
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
182
# Answer
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 (represents a strategic shift and has major effect on operations and financials)
Includes Income (or loss) from the period plus the gain (or loss) from disposal
183
# Answer
For discontinued operations, what are the three requirements for disposal assets?
They must be Held for Sale - Sold - or Disposed of another way
184
# Answer
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
185
# Answer
What is constant dollar accounting?
Adjusts assets to reflect a consistent level of purchasing power due to inflation
Uses the Consumer Price Index (CPI)
186
# Answer
When are expenses recognized?
When they are incurred. Accrue if not yet paid.
187
# Answer
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
188
# Answer
When should impaired assets be written down to fair value and expensed?
Immediately.
189
# Answer
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
190
# Answer
What are business start-up costs?
One-time costs for opening a new business
Expensed as they are incurred
191
# Answer
When is interest *not* expensed?
Interest on projects (software) for internal use is not expensed but is instead capitalized
192
# Answer
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
193
# Answer
What items are considered cumulative accounting adjustments?
Foreign Currency Translation Adjustments
Unrealized gains on AFS Securities
Minimum Pension Liability adjustment for defined benefit plans
194
# Answer
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
195
# Answer
Where is Comprehensive Income reported?
Reported in a Single or Combined Income Statement
196
# Answer
What disclosures on accounting policies are required in financial statements?
Accounting Principles used
Basis of Consolidation
Inventory Pricing Methods
Depreciation Method
Amortization of Intangibles
197
# Answer
What are some major risks and uncertainties that must be disclosed?
Nature of Operations
Use of Estimates and listing of Significant Estimates
Concentration vulnerability
198
# Answer
Under Cash Basis Accounting how are Revenue and Expenses recognized?
Revenue is recognized with Cash Inflow and Expenses Recognized with Cash Outflow
199
# Answer
Is Cash Basis Accounting ok for Tax Returns?
Yes
200
# Answer
Is Cash Basis Accounting GAAP?
No - GAAP uses Accrual Accounting
201
# Answer
What is an advantage of Modified Cash Basis Accounting?
It avoids the complexities of GAAP but provides more information that Cash Basis Accounting
202
# Answer
Is Modified Cash Basis GAAP?
No - GAAP uses Accrual Accounting
203
# Answer
What are the 3 acceptable options for Income Tax Basis Accounting
Cash Basis - Accrual Basis - Hybrid Method
204
# Answer
What are the advantages of the Small and Medium Sized Entity Framework?
It simplifies reporting and disclosures for small companies - Reduces Book vs Tax differences - avoids Fair Value measurements (Historical Cost)
205
# Answer
What are the two options for Income Taxes under the Small and Medium Sized Entity Framework?
Deferred Taxes Method and Taxes Payable Method
206
# Answer
What are the two options for Startup Costs under the Small and Medium Sized Entity Framework?
Expensed or Amortized (15 years)
207
# Answer
How is Goodwill treated under the Small and Medium Sized Entity Framework?
Amortized (15 years)
208
# Answer
What are the required liquidation basis financial statements?
Statement of Net Assets in Liquidation and Statement of Changes in Net Assets in Liquidation
209
# Answer
What is a Development Stage Entity?
A company that is still in the formation stage and hasn't yet begun principal operations or produced significant revenue
210
# Answer
What is the key benefit of the accounting rules for Development Stage Entities?
Cost savings without sacrificing financial statement usefulness
211
What is the primary objective of accounting?
To measure income
212
What is the most authoritative set of accounting pronouncements?
The FASB Codification
All pronouncements fall under the Codification umbrella
213
What are the 2 Levels of Authority within the FASB codification?
Authoritative and Non-Authoritative
214
How does managerial accounting differ from financial accounting?
Managerial Accounting has a timeliness focus
Managerial Accounting is not required to follow GAAP
215
Which financial reports are required to be filed with the SEC?
Form 10K - Annual and Audited
Form 10Q - Quarterly and Reviewed
216
What is the focus of financial reports for individual companies?
Focus is on the needs of users to help them make decisions and assessments about the company
Does not make assessments of the economy
217
What are the Primary Constraints of Financial Reporting?
Cost vs. Benefit
Materiality
218
What are the Secondary Constraints of Financial Reporting?
Consistency - Year vs. Year
Comparability - Company vs. Company
219
What are the Qualitative Characteristics of Financial Reporting?
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
220
What are the Enhancing Qualitative Characteristics of Financial Reporting?
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
221
How does Conservatism affect the recording of accounting transactions?
When an estimate is necessary due to uncertainty conservatism chooses the best option that won't overstate the financial position of the company
222
What is an accrual?
Earned (Revenue) or Incurred (Expense) but no Cash Receipt/Outlay yet
223
What is a deferral?
Cash Receipt/Outlay but not Earned (Revenue) or Incurred (Expense)
224
What is recognition in accounting?
When an item is recorded and included in the financial statements
225
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
226
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
227
What items are included in a Level 1 input in the fair value hierarchy?
Price quotes or market prices
For example NYSE or NASDAQ
228
What items are included in a Level 2 valuation input?
Interest rates
Prime rate
229
What items are included in Level 3 inputs of the fair value hierarchy?
Unobservable inputs such as assumptions or forecasts
Lowest priority for valuation
230
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
231
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
232
What are current liabilities?
Liabilities that will use current assets during the present operating cycle
233
What is an accrued liability?
Expense that has been incurred but not paid
Example: rents payable
234
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
235
When are revenues recognized?
When they have been earned; i.e. company has performed
236
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
237
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
238
What is an operating cycle?
Average time it takes to turn materials or services into Cash
239
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
240
What is historical cost?
How much an asset cost - (net of depreciation and amortization)
241
What is replacement cost?
How much it would cost to reacquire an asset today (Entrance Cost)
242
What is a market cost?
The sale price of an asset (Exit Cost)
243
What is Net Realizable Value?
Sale Price of an Asset - Selling/Disposal Fee
244
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
245
When is revenue recognized in an installment sale?
Revenue recognized upon receipt of cash
Only used when cash collection is uncertain
246
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
247
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
248
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
249
How are franchise revenues recorded?
Franchisor - Startup franchise fee revenue deferred until substantial performance
Franchisee - Costs are deferred until corresponding revenue is recognized
250
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
251
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
252
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 (represents a strategic shift and has major effect on operations and financials)
Includes Income (or loss) from the period plus the gain (or loss) from disposal
253
For discontinued operations, what are the three requirements for disposal assets?
They must be Held for Sale - Sold - or Disposed of another way
254
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
255
What is constant dollar accounting?
Adjusts assets to reflect a consistent level of purchasing power due to inflation
Uses the Consumer Price Index (CPI)
256
When are expenses recognized?
When they are incurred. Accrue if not yet paid.
257
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
258
When should impaired assets be written down to fair value and expensed?
Immediately.
259
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
260
What are business start-up costs?
One-time costs for opening a new business
Expensed as they are incurred
261
When is interest *not* expensed?
Interest on projects (software) for internal use is not expensed but is instead capitalized
262
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
263
What items are considered cumulative accounting adjustments?
Foreign Currency Translation Adjustments
Unrealized gains on AFS Securities
Minimum Pension Liability adjustment for defined benefit plans
264
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
265
Where is Comprehensive Income reported?
Reported in a Single or Combined Income Statement
266
What disclosures on accounting policies are required in financial statements?
Accounting Principles used
Basis of Consolidation
Inventory Pricing Methods
Depreciation Method
Amortization of Intangibles
267
What are some major risks and uncertainties that must be disclosed?
Nature of Operations
Use of Estimates and listing of Significant Estimates
Concentration vulnerability
268
Under Cash Basis Accounting how are Revenue and Expenses recognized?
Revenue is recognized with Cash Inflow and Expenses Recognized with Cash Outflow
269
Is Cash Basis Accounting ok for Tax Returns?
Yes
270
Is Cash Basis Accounting GAAP?
No - GAAP uses Accrual Accounting
271
What is an advantage of Modified Cash Basis Accounting?
It avoids the complexities of GAAP but provides more information that Cash Basis Accounting
272
Is Modified Cash Basis GAAP?
No - GAAP uses Accrual Accounting
273
What are the 3 acceptable options for Income Tax Basis Accounting
Cash Basis - Accrual Basis - Hybrid Method
274
What are the advantages of the Small and Medium Sized Entity Framework?
It simplifies reporting and disclosures for small companies - Reduces Book vs Tax differences - avoids Fair Value measurements (Historical Cost)
275
What are the two options for Income Taxes under the Small and Medium Sized Entity Framework?
Deferred Taxes Method and Taxes Payable Method
276
What are the two options for Startup Costs under the Small and Medium Sized Entity Framework?
Expensed or Amortized (15 years)
277
How is Goodwill treated under the Small and Medium Sized Entity Framework?
Amortized (15 years)
278
What are the required liquidation basis financial statements?
Statement of Net Assets in Liquidation and Statement of Changes in Net Assets in Liquidation
279
What is a Development Stage Entity?
A company that is still in the formation stage and hasn't yet begun principal operations or produced significant revenue
280
What is the key benefit of the accounting rules for Development Stage Entities?
Cost savings without sacrificing financial statement usefulness
