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Accounting 501 > Pre-Midterm > Flashcards

Pre-Midterm Flashcards

1
Q

What’s the difference between US and CAD GAAP?

A 
USA = rule based 
CAD = principal based
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2
Q

What are the two acceptable accounting standards under Canadian GAAP?

A

CAD GAAP:

  • IFRS
  • ASPE
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3
Q

What does IFRS stand for?

A

International Financial Reporting Standards

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4
Q

What does ASPE stand for?

A

Accounting Standards for Private Enterprise

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5
Q

Where is IFRS used?

A

All over the world except the USA

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6
Q

Who gets to use ASPE?

A

Private companies.

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7
Q

Who has to use IFRS?

A

Publicly traded companies.

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8
Q

If a publicly traded company is dual listed in the USA and Canada, which accounting standards do they use and does it matter where their operations are?

A

Doesn’t matter where they’re based if they operate in both countries and are dual listed they can choose either USA GAAP, or IFRS, whichever works best for them and their industry.

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9
Q

What are the contents of the financial statements for ASPE?

A

ASPE contents:

  • Income Statement
  • Statement of Retained Earnings
  • Balance Sheet
  • Cashflow Statement
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10
Q

What are the contents of the financial statements under IFRS?

A

IFRS:

  • Statement of Profit and Loss
  • Statement of Other Comprehensive Income
  • Statement of Changes in Equity (Statement of Shareholder Equity, etc.)
  • Statement of Financial Position
  • Statement of Cash Flows
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11
Q

What else accompanies the financial statements for publicly traded companies?

A

Annual Report:

  • Financial Statements
  • Management’s Discussion and Analysis
  • Notes to the Financial Statements
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12
Q

What’s the correct order of preparation for financial statements?

A
  1. Income Statement/ St. of Profit & Loss & OCI.
  2. St. of Retained Earnings/St. of Changes in Equity
  3. Balance Sheet/ St. of Financial Position *& at same time* Statement of Cash Flows/Cash Flow St.
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13
Q

What’s in the Income Statement/ St. of Profit & Loss & OCI?

A

Income Statement/St. of Profit & Loss & OCI:

Revenues & Gains
(Expenses & Losses)
_________________
=Net Income
(and for IFRS:)
+ OCI (losses)
_________________
Comprehensive Income (loss)

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14
Q

What’s in the Statement of Retained Earnings?

A

Statement of Retained Earnings:

Opening Retained Earnings
+Net Income (loss)
-Dividends Declared
_________________
=Closing Retained Earnings (deficit)

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15
Q

What’s in the Statement of Changes in Equity?

A

Statement of Changes in Equity:

Opening Share Capital
+Shares Issued
-Shares Reacquired
________________
=Closing Share Capital

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16
Q

What’s on the Balance Sheet?

A

Balance Sheet:
(assets = liabilities + shareholder equity)

a) Cash & Equivalents
+ Current/ Liquid Assets
+ Non-Current/Non-Liquid Assets
____________________
=Total Assets

b)Current Liabilities
+Non-Current Liabilities
____________________
=Total Liabilities

c)Share Capital
+ Retained Earnings
__________________
=Total Shareholder’s Equity

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17
Q

What’s in the Statement of Cash Flows?

A

Statement of Cash Flows:

Cash From Operations
+Cash from Investments (cash out)
+Cash from Borrowing
________________
=Net Change in Cash
+ Opening Cash
________________
= Total Cash

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18
Q

What’s in the Notes to the Financial Statements?

A

Notes to the Financial Statements:

  • summary and reasons for significant accounting practices
  • Cross referencing of some details from the statements
  • Other things management finds important
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19
Q

What’s in the MD&A? (Management Discussion & Analysis)

A

MD&A:

  • Recap of year
  • Risks faced that year and in the future
  • Future prospects
  • Details of operating results for the year
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20
Q

How do we define an asset?

A

Assets:

  • resource currently controlled by the entity
  • entity expects future economic benefit from asset
  • entity became responsible for the item through a past transaction or event
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21
Q

Define “current”.

A

Current:

Will be used up/sold /repaid within 12 months of statement date, or within one operating cycle if those are >12mo.

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22
Q

How do we define a liability?

A

Liabilities:

  • present obligation of the entity
  • responsibility is unavoidable
  • entity became responsible through a past event
  • must be settled through outflow of otherwise useful resources
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23
Q

Share Capital - which number do we use?

A

Share Capital:

  • original price when purchased directly from company
  • not market value
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24
Q

What’s an operating cycle?

A

Operating Cycle:

  • the time from purchase of inputs to receipt of payment
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25
Q

What does “going concern” mean?

A

Going Concern:

-company will survive the next 12 months.

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26
Q

Which types of businesses can be publicly traded?

A

Publicly traded:

  • Public corporations
  • Certain partnerships (USA)
  • Certain not-for-profits (USA)
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27
Q

What are the types of corporation?

A

Types of Corp:

  • For Profit
  • Not For Profit
  • Private
  • Public
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28
Q

What makes not-for-profit reporting different than for-profit reporting?

A

Not-for-Profit Reporting:

  • don’t use the terms “profit”, “shareholder equity” or “income”
  • use terms like “reserves”, “excess of revenues over expenses”
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29
Q

What are some benefits of a private corp. over a public one?

A

Private Corp. Benefits:

  • Faster decision making
  • Lower need for disclosure/transparency
  • Less pressure
  • Less prone to speculation by shareholders
  • Get to use ASPE
  • Audited less
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30
Q

What are some benefits of public corps. over private ones?

A

Public Corp. Benefits:

  • ability to raise capital by selling shares publicly
  • branding
  • Can get credit without having to sign personal guarantees/ greater access to credit
  • May have access to more talent
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31
Q

Why GAAP?

A

GAAP Because:

  • accountability
  • auditability
  • comparability
  • framework
  • precedence for field of accounting
  • response to fraud that caused The Great Depression
  • transparency
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32
Q

What’s an impairment loss?

A

Impairment Loss:

  • asset that is being written off prior to it being fully depreciated.
  • used for bad assets
  • often reported on statements during a “big bath”
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33
Q

What is treasury stock?

A

Treasury Stock:
- shares that have been reacquired to give to employees, etc.

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34
Q

What is paid-in capital?

A

Paid-in Capital:
- original purchase revenues from shares being sold by the company

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35
Q

How does goodwill work?

A

Goodwill:

  • have to acquire it, can’t just create it for the balance sheet
  • includes: top talent, customer loyalty, synergies.
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36
Q

What does synergy mean?

A

Synergy:
1+1=3
ie: lower overhead because you can get rid of duplicated departments, vertical integration, etc.

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37
Q

What’s Fair Value?

A

Fair Value:

  • matches standards
  • must be disclosed
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38
Q

What kinds of things fall under Accrued Expenses and Other Liabilities

A

AE&OL:

  • generally estimates
  • things like outstanding payroll (can’t know exact $ for sure in advance)
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39
Q

Name some external users of financial statements.

A

External stmt. users:
-future employees
-customers
-unions
-regulators (TSX/etc.)
-CRA
-shareholders/ investors
-creditors
-credit rating agencies
-competitors and allies
*these uses fall under Financial Accounting

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40
Q

Name some internal users of financial statements

A

Internal financial stmt. users:
-senior management
-finance
-HR
-marketing
*generally these uses fall under Managerial Accounting

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41
Q

What are the 2 fundamental qualitative characteristics of financial statements?

A

Fundamental Qualitative Characteristics:

  • Relevance
  • Faithful Representation
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42
Q

Which qualities make something relevant?

A

Relevance:

  • Materiality
  • Confirmatory / Predictive value
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43
Q

Which qualities make something faithfully represented?

A

Faithful Representation:

  • Complete
  • Neutral
  • Free from (material) errors
  • Process is disclosed
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44
Q

What are the enhancing qualitative characteristics of financial statements?

A

Enhancing Qualitative Characteristics:

  • Comparable
  • Verifiable
  • Understandable
  • Timely
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45
Q

What are the basic things that people examining the financial statements are looking to ascertain?

A

Financial statements should tell us:

  • how well the entity is doing economically
  • $ owed
  • $ available to pay out liabilities
  • resource management quality
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46
Q

What’s Cash Basis accounting?

A

Cash Basis:

  • revenue recognized when it’s received
  • expenses recognized when they’re paid
  • this is only allowed for farms and fisheries under CAD GAAP
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47
Q

What’s the Accrual Basis of accounting?

A

Accrual Basis:

  • revenues recognized when earned
  • expenses recognized when incurred
  • this is acceptable under GAAP
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48
Q

How do we show gift cards redemption on the financial statements?

A

Gift Card Redemption by Customers:
- decreases liabilities

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49
Q

How do we show prepaid expenses on the financial statements?

A

Prepaid Expenses:
- increase assets of the business that paid

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50
Q

What does management bias tend to do to share price?

A

Management Bias:

  • too few report $0/share
  • too few 4s reported (because they get rounded down)
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51
Q

What’s a good estimator of materiality?

A

Materiality:

>5% Net Income

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52
Q

What is the economic benefit of prepaid insurance?

A

The economic benefit of prepaid expenses in general is the fact that they’re prepaid.

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53
Q

How do we prepare financial statements if a company is not a going concern?

A

If a company isn’t a going concern, we prepare everything as current, and all at liquidation value.

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54
Q

In the last year of an asset’s useful life, is it current or non-current?

A

In the last year of an asset’s useful life it still does not become current if it wasn’t originally, unless there is guaranteed disposal for $$ in place.

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55
Q

What often accompanies non-current assets (on the other side of the accounting equation)?

A

Generally non-current assets are accompanied by non-current liabilities.

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56
Q

What’s the definition of equity?

A

The definition of equity is actually just

assets - liabilities = equity

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57
Q

What’s the template approach to accounting?

A

Template:

Assets = Liabilities + Shareholder Equity

  • a number of accounts under each one
  • template has a number of standard accounts on it
  • basically like a bunch of journal entries
  • each line must balance
  • every R.E. entry has an R, E, or DD to explain it in a final column
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58
Q

In the template approach, what do R, E, and DD in the final column mean?

A

Template Approach-

Retained Earnings Explanations:

R = Revenue

E = Expense

DD = Dividends Declared

*these are all temporary accounts

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59
Q

Does issuing shares affect Revenue?

A

Issuing shares does not affect revenue.

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60
Q

How does issuing shares get entered?

A

Issuing shares:

^ Cash

^ Common Shares

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61
Q

When do we record loan interest?

A

We record loan interest when it gets paid.

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62
Q

When something affects cash and we can’t figure out what else it affects, what’s a solid bet?

A

When something affects cash and we can’t figure out what else, Retained Earnings are a solid bet.

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63
Q

How does buying equipment affect our journal entries?

A

Buying equipment:

v Cash (Asset)

^ Equipment (Asset)

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64
Q

How does selling goods get entered?

A

Selling goods:

^ Cash/ ^ Accounts Receivable

^ Revenue (Retained Earnings - S.E.)

v Inventory

^ COGS (= ^ Expenses = v Retained Earnings)

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65
Q

How do we show that some prepaid insurance is being depreciated?

A

Depreciating Prepaid Insurance:

v Prepaid Insurance

(CR Prepaid Insurance)

^ Expense (= v Retained Earnings = v S.E.)

(DR Insurance Expense)

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66
Q

How do we show that interest has been accrued on a loan?

A

Interest on a loan:

^ Liabilities

(CR Interest Payable)

^ Expenses (=v S.E.)

(DR Interest Expense)

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67
Q

What are some limitations of the template approach?

A

Limitations of the template approach:

  • have to limit the number of accounts
  • b/c ^ limited data mining for management
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68
Q

Are the following generally net inflows or outflows?

  • Cash from Operations
  • Cash from Investing
  • Cash from Financing
A

Generally:

  • Cash from Operations - net inflow
  • Cash from Investing - net outflow
  • Cash from Financing - net inflow
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69
Q

Who’s the father of accounting?

A

Luca Pacioli is the father of accounting.

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70
Q

In what year was double entry accounting invented?

A

Double entry accounting was invented by Luca Pacioli in 1494.

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71
Q

Do the following accounts normally have a debit or credit balance?

  • Assets
  • Liabilities
  • Shareholder Equity
A

Normal balances:

  • Assets => Dr. balance
  • Liabilities => Cr. balance
  • Shareholder Equity => Cr. balance

*the normal balance is whichever Dr/Cr increases the account.

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72
Q

Do the following accounts normally have a debit or credit balance?

  • Revenue
  • Expense
  • Dividends Declared
A

Normal balances:

Revenue => CR balance

Expenses => DR balance

Dividends Declared => DR balance

*the normal balance is whichever (DR/ CR) increases the account

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73
Q

What do we need to know in order to assess depreciation on an asset?

A

To assess depreciation we need to know:

  • the pattern in which the economic benefit is consumed
  • the asset’s cost
  • estimated residual market value at the end of it’s life
  • length of estimated useful life
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74
Q

How do we show depreciation?

A

We show depreciation as follows:

v Equipment (Asset)

(CR Accumulated Depreciation contra asset account)

^ Expenses (= v R.E. = v S.E.)

(DR Depreciation Expense - Contra R.E. acct.)

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75
Q

What are the steps in the accounting cycle?

A

Steps in the accounting cycle:

  1. Analyze transactions & events.
  2. Journalize same.
  3. Post journal entries to ledger.
  4. Unadjusted trial balance.
  5. Adjusting journal entries.
  6. Adjusted trial balance.
  7. Financial statements.
  8. Closing journal entries.
  9. Post-closing trial balance.
76
Q

What does a basic journal entry look like?

A

Basic Journal Entry:

  • 3 -4 columns: date &/or entry #, DR/CR (name of account), amount (might have separate columns for DR vs CR amounts)
  • CRs are indented (all three columns)
77
Q

What’s the acronym to remember what’s affected by debits?

A

Dividends

Expenses

bASSET hound

Increase

T

78
Q

What’s the acronym to remember which accounts are increased by credits?

A

C-R-E-D-I-T

C

Revenue

Equity

Debts (= liabilities)

Increase

T

79
Q

What does the General Ledger look like?

A
  • summary of Journal
  • T accounts
  • DR on left, CR on right
80
Q

What does the General Ledger do?

A

The General Ledger allows us to find the closing balance of each account (DR-CR)

81
Q

What should the normal balance be for each account?

A

The closing balance should be whichever increases the account.

82
Q

What are some mistakes that a Trial Balance might miss?

A

Some things that the trial balance could miss include:

  • DR/CR correct but in wrong accounts
  • Same incorrect amount in both the DR and the CR
  • Complete omission of a journal entry
83
Q

What are the three tricks to use if your trial balance doesn’t balance?

A

If the Trial Balance doesn’t balance, try:

Total DR - Total CR = X

  • find X in the entries
  • X/2 –> was DR/CR of this amount swapped?
  • X/9 –> if this divides evenly, there’s a transposition error.
84
Q

What are considered gains / losses?

A

Things that are abnormal, like selling off old furniture after an office move.

85
Q

How do we know a transaction / event has occurred?

A

A transaction/event has occured if:

  • Meets the definition of an element of the financial statements
  • Measurable
  • Settlement is probable
86
Q

What are the two types of adjusting entries?

A

The two types of adjusting entries are:

Accruals

Deferrals

87
Q

What is an accrual (adjusting entry)?

A

Accruals:

Recognizing an event before the cash changes hands.

88
Q

What is a deferral (adjusting entries)?

A

Deferrals:

Recognizing an event after payment occurs.

e.g. using up prepaid insurance

89
Q

At what stage of the accounting process do we recognize depreciation?

A

We recognize depreciation in Step 5: Adjusting Journal Entries.

90
Q

How would we show that we are using up some unearned revenue? (i.e. we have now earned some of it)

A

Using up unearned revenue:

DR Unearned Revenue

CR Sales Revenue

91
Q

How do we adjust for wages left owing at period end?

A

Wages outstanding:

DR Wages Expense

CR Wages Payable

92
Q

How do we adjust for an entity being owed interest on a loan it advanced to someone?

A

Outstanding interest owed TO the entity:

DR Interest Receivable

CR Interest Revenue

93
Q

How do we adjust for depreciation?

A

Adjusting for depreciation:

DR Depreciation Expense

CR Accumulated Depreciation

(both are contra accounts)

94
Q

How do we adjust for outstanding interest on a loan the entity took out from somewhere else?

A

Adjusting for interest the entity owes:

DR Interest Expense

CR Interest Payable

95
Q

Do we use the cash account for adjusting entries?

A

NEVER use the Cash account for adjusting entries.

96
Q

What kind of transaction triggers an adjusting entry?

A

There often is no transaction to trigger adjusting entries… we have to keep track of what needs to be adjusted each period.

97
Q

Why do we do adjusting entries?

A

Adjusting entries

  • enhance comparability
  • tie expenses and incomes to the correct period
98
Q

When are adjusting entries done?

A

Adjusting entries are done at the end of the period.

99
Q

Which two account types are always involved in adjusting entries?

A

Adjusting entries always involve:

  • one Statement of Financial Position/Balance Sheet account
  • one Statement of Profit and Loss/ Income Statment account
100
Q

How do we simplify the accounts for Step 7: Financial Statements?

A

When we generate the financial statments, we group similar accounts together from the Adjusted Trial Balance, and we show assets net of their depreciation (starting and accumulated depreciation values go into the Notes).

101
Q

When in an accounting period are closing entries done?

A

Closing entries are done at the end of the period.

102
Q

What do we close in Step 8: Closing Entries?

A

In Step 8: Closing Entries, we

  • close/reset all temporary accounts to zero
  • bring Retained Earnings up to date by zero-ing Net Income and Dividends Declared
103
Q

What are the entries we use to close the temporary accounts?

A

To close the temporary accounts:

  • DR Revenue accounts, CR Income Summary
  • DR Income Summary, CR all Expense accounts
  • DR Income Summary, CR Retained Earnings
  • DR Retained Earnings, CR Dividends Declared
104
Q

Is a revenue a DR or CR for the Income Summary account?

A

Revenue is a CR for the Income Summary account.

105
Q

When is the Income Summary account opened and closed?

A

The Income Summary account is opened and closed on the last day of the fiscal year.

106
Q

What does the Income Summary account determine?

A

The Income Summary account determines net income.

107
Q

What does the Income Summary account get closed to?

A

The Income Summary account gets closed to Retained Earnings.

108
Q

What do Revenue accounts get closed to?

A

Revenue accounts get closed to the Income Summary account.

109
Q

What do Expense accounts get closed to?

A

Expense accounts get closed to the Income Summary account.

110
Q

What does the Dividends Declared account get closed to?

A

Dividends Declared gets closed to Retained Earnings.

111
Q

What happens in Step 9: Post-Closing Trial Balance?

A

Post-Closing Trial Balance:

  • makes sure temporary accounts have been zeroed
  • makes sure closing Retained Earnings matches the Statement of Retained Earnings / Statement of Changes in Equity
112
Q

What do we do if we have a negative balance in an account?

A

If we have a negative balance in an account, we need to zero that account and move the negative over to an opposite account.

113
Q

What’s the definition of revenue?

A

An inflow of economic benefits that arises from ordinary business activities.

114
Q

How is revenue evaluated? (two words)

A

Revenue is evaluated by:

Quantity

Quality

115
Q

What are we looking for when we look at the quantity of revenue a business generates?

A

When we look at revenue quantity:

  • Overall amount
  • Trends
116
Q

What factors make up revenue quality?

A

Factors in revenue quality:

  • What’s driving the revenues
  • Are cash flow and net income moving together?
117
Q

When we talk about revenue quality, and cash flow/net income, what are the three things we may see and what do they mean?

A

Cash flow’s movement with net income:

  • Cash Flow from Operations > Net Income = high quality
  • Cash Flow from Ops < Net Income = low quality
    • CFO & NI not moving together = low quality
118
Q

Does ASPE use earnings- based or contract based revenue recognition?

A

ASPE uses earnings based revenue recognition.

119
Q

Does IFRS use earnings based or contract based revenue recognition?

A

IFRS uses contract based revenue recognition.

120
Q

When is revenue recognized under earnings-based revenue recognition?

A

Earnings based revenue recognition:

  • Performance is achieved
  • Consideration is reasonably assured to be:
    • Measurable
    • Collectable
121
Q

When can we say that goods have been sold?

A

Goods have been sold when:

  • significant risks and rewards of ownership are transferred
  • No significant acts left to perform
    • Seller not managing goods anymore
122
Q

When looking at long term contracts, what are the two main ways to recognize revenue from them?

A

Long term contracts & revenue recognition:

  • % of completion method
  • completed contract method
123
Q

When looking at a long term contract with multiple parts, how do we recognize revenue?

A

For long term contracts with multiple parts & revenue recognition, use the % of completion method.

124
Q

How do we recognize revenue for long term contracts with a single part under earnings-based revenue recognition?

A

Under earnings based revenue recognition on a single performance long term contract, we use the completed contract method.

125
Q

What makes consideration measurable?

A

Consideration is measurable when:

  • price must be fixed/determinable
126
Q

What makes consideration collectable?

A

Consideration is considered collectable when:

  • customer has the intention to pay
    • customer has the ability to pay
127
Q

What is the acronym for revenue recognition?

A

The acronym for revenue recognition is RCMP:

R - recognize

C - Collectable

M - Measurable

P - Performance Achieved

128
Q

Who uses the contract based approach to revenue recognition?

A

IFRS and USA GAAP use the contract based approach to revenue recognition.

129
Q

What is the definition of a contract?

A

A contract is:

  • an agreement between 2+ parties that creates a combination of rights and requirements
130
Q

Does a contract have to be written to be recognized?

A

A contract can be:

  • Oral
  • Written
    • Implied by ordinary business practices
131
Q

Is a contract an asset or a liability?

A

A contract is:

  • an asset if rights> obligations
    • a liability if obligations > rights
132
Q

When do we recognize revenue under the contract based approach?

A

Under the contract based approach, we recognize revenue when there is a(n):

  • increase in contract assets/rights
  • decrease in contract liabilities/performance obligations
133
Q

What do our journal entries look like when an entity provides goods/services under a contract, on account?

A

Goods or services provided on account:

DR Accounts Receivable

CR Sales/Service Revenue

for sale of goods:

DR COGS

CR Inventory

134
Q

What does the journal entry look like when a company sends an invoice?

A

We do not make a journal entry when a company sends an invoice.

135
Q

What does our journal entry look like when a customer pays down their account?

A

When a customer pays down their account:

DR Cash

CR Accounts Receivable

136
Q

Why is the Contract Based Approach considered to be better than the Earnings Based Approach to revenue recognition?

A

Contract based approach is considered superior because it’s easier to identify a contract than it is to decide when a revenue should be recognized.

137
Q

What are the five steps to the Contract Based Approach to revenue recognition?

A

The five steps to the Contract Based Approach:

  1. ID contract.
  2. ID separate performance obligations.
  3. Determine overall transaction price.
  4. Allocate transaction price to separate performance obligations.
  5. Recognize revenue as the performance obligations are met.
138
Q

How do we identify a contract?

A

ID a contract:

  • Exists
  • Enforceable
  • Explicit (Rights/Restrictions/ Performance Obligations ID’d)
  • Commercial substance
  • Collectable
139
Q

What do we mean when we say something has commercial substance?

A

Something has commercial substance when future cash flows will be altered in any of the following ways:

  • risk
  • timing
  • amount
140
Q

How do we identify the separate performance obligations in a contract?

A

ID separate p.o.s:

  • Distinct goods or services
  • Customer can benefit from the discrete unit
    • Unit is separable from other parts of the contract
141
Q

When should we not separate out performance obligations from a contract?

A

We don’t separate p.o.s when it doesn’t increase faithful representation.

142
Q

When we determine overall transaction price of a contract, are taxes and rebates/ coupons included?

A

When determining overall transaction price of a contract:

  • Taxes are NOT included
  • Rebates, coupons, incentives, etc. MUST be included
143
Q

What are the methods for allocating transaction price to parts of a contract?

A

We allocate transaction price to separate performance obligations by either:

  • Percentage of Completion
  • Completed Contract
144
Q

What are some key indicators that control of goods or services has been transfered?

A

Clues that control of goods or services has been transferred when the customer has:

  • Physical possession
  • Legal title
  • Risks and rewards of ownership
  • Accepted the goods/services
  • Obligation to pay
145
Q

How do we do the journal entry if the entity is paid at the start of the month for services at the end of the month?

A

Paid at start of month for end of month services:

DR Cash, CR Unearned Revenue

then when obligation performed:

DR Unearned Revenue, CR Service Revenue

146
Q

What are some complications with revenue recognition?

A

Complications with revenue recognition:

  • Channel stuffing
  • Multi-element arrangements
  • Long term contracts
  • Principal-agent arrangements
  • Breakage
  • Rights of return
  • Warranties
  • Gift card liability
  • Customer loyalty provision
147
Q

What is channel stuffing and how is it done?

A

Channel stuffing is moving profits into the current reporting period by over-providing product to distribution channels around period end. Done by offering discounts, extending credit terms, offering greater right of return (and not properly estimating increased return percentage)

148
Q

Is channel stuffing illegal?

A

Channel stuffing is not illegal if everything is:

  • properly accounted for
    • disclosed fully
149
Q

How can channel stuffing be a detriment to the company doing it?

A

Channel stuffing is bad for the entity because it eats up the next period’s profits.

150
Q

What is a multi-element arrangement?

A

A multi-element arrangement is when products and services are bundled together at a discounted price. Generally different parts of the bundle earn revenue at different times.

151
Q

How do we recognize the revenue from multi-element arrangements?

A

To recognize the revenue from multi-element arrangements:

  • apply criteria separately to each part
    • component value = (item stand-alone price/all combined stand alone prices)*bundle price
152
Q

Describe long-term contracts.

A

A long term contract is where we have several performance obligations achieved in stages.

153
Q

What are the ways we can recognize revenue in a long-term contract?

A

To recognize revenue in a long-term contract:

  • Percentage of Completion
    • Output
    • Input
  • Completed Contract
154
Q

What is the Percentage of Completion, Input method of recognizing revenue?

A

Percentage of Completion, Input method of recognizing revenue is:

  • based on the costs and efforts expended.
  • for long term contracts
155
Q

What is the Percentage of Completion, Output method?

A

Percentage of Completion, Output method is:

  • based on the results achieved under the contract.
  • for long term contracts
156
Q

What is the Completed Contract method of revenue recognition?

A

The completed contract method of revenue recognition:

  • for long-term contracts
  • OK with ASPE but not IFRS
    • revenues and expenses are deferred until contract completion.
157
Q

What are Principal-Agent Arrangements?

A

Principal-Agent Arrangements:

  • Sale is facilitated by a third party (Agent)
  • Principal actually provides the goods/services
  • Agent receives consideration
  • Principal establishes price
  • Agent has no inventory risk
    *
158
Q

What is the Right of Return?

A

Right of Return:

  • Purchaser (generally a distributor or retailer) has the right to return unsold product for a refund.
159
Q

How do we record a sale with the Right of Return?

A

Recording a sale with Right of Return:

  • Delivery Date:
    • DR AR, CR Refund Liability (estimate), CR Sales Rev.
    • DR COGS, CR Inv.
  • Payment Date:
    • DR $, CR AR
  • Return Date:
    • DR Ref. Liab., CR $
160
Q

What are the two kinds of warranties?

A

Two kinds of warranties:

  • Assurance Warranty
  • Service Warranty
161
Q

What is an Assurance Warranty?

A

Assurance Warranty:

  • included for “free”
  • not a separate performance obligation
162
Q

What is a service warranty?

A

Service Warranty:

  • Paid for separately
  • Separate performance obligation
163
Q

What are the entries to recognize revenue in transactions with retainers, advance payments, etc.?

A

Unearned Revenue recognition:

  • Prepayment Date:
    • DR Cash, CR Unearned Revenue
  • Performance Date:
    • DR Unearned Revenue, CR Sales/Service Revenue
164
Q

How do we recognize revenue with gift cards?

A

Gift Cards:

  • Sale of card:
    • DR Cash, CR Unearned Revenue
  • Redemption:
    • DR Unearned Revenue, CR Sales / Service Revenue
    • DR COGS, CR Inventory
165
Q

What is Breakage?

A

Breakage is the portion of gift cards that will never get used. Has to be estimated based on at least 3 years experience.

166
Q

What is the standard estimate for breakage?

A

Breakage is generally estimated at between 10% - 15%.

167
Q

How do we calculate the dollar value of breakage to recognize?

A

Breakage $ value:

= (value redeemed that period-total outstanding value)*%breakage

168
Q

What does the word Provision indicate?

A

Provision:

  • significant degree of estimation
  • uncertainty in timing of settlement
169
Q

What kinds of things fall under the Customer Loyalty Provision heading?

A

Customer Loyalty Provision:

  • generally points-based programs
  • can be company-specific or third party (Air Miles)
170
Q

How do we recognize revenues surrounding company-specific Customer Loyalty Provisions?

A

Company-specific Customer Loyalty Provision:

  • Separate performance obligation
  • portion of transaction price allocated to points
  • Stand-alone price of points = stand-alone price of reward*% chance of use
  • Point redemption moves $ from liability to asset
171
Q

How do we recognize revenues with third party customer loyalty programs?

A

3rd party customer loyalty programs:

  • Points are a separate performance obligation
  • Portion of transaction price allocated to points
  • Standalone price of points = entity’s cost of purchasing them + commission
  • Performance obligation satisfied when entity purchases the points.
172
Q

When should we recognize an expense?

A

We recognize expenses when the economic benefits are consumed.

173
Q

What do expenses become when the consumption of their economic benefit is deferred?

A

If consumption is deferred, we get an asset until we can recognize the expense.

174
Q

What is the matching principal?

A

Matching Principal:

Recognizing expenses at the same time as the revenues they generate.

175
Q

What are the two ways to prepare an Income Statement / Statement of Profit and Loss?

A

2 ways to do Income Statement/ Statement of Profit and Loss:

  1. Single Step
  2. Multi Step
176
Q

How do we create a single step Income Statement/ SofP&L?

A

Single step Income Statement/ St. of P & L:

  • all revenues
  • - expenses including tax
  • NI
177
Q

What are the steps in a multi-step Income St. / St. of P & L?

A

Multi-step Income St. / St. of P & L:

  1. Sales Revenue
  2. Gross Profit/ Gross Margin
  3. Profit from Operations
  4. Profit Before Income Tax
  5. Net Income (Loss)
178
Q

How do we calculate gross profit/ gross margin?

A

Gross profit/ gross margin =

Sales Revenue - COGS

179
Q

How do we find the Gross Profit Margin Percentage?

A

Gross Profit Margin Percentage =

Gross Profit / Net Sales Revenue

180
Q

How do we find Profit from Operations / Operating Income?

A

Profit from Operations/ Operating Income =

Gross Profit - Operating Expenses

or for service companies:

Revenues - Operating Expenses

181
Q

What are operating expenses?

A

Operating expenses:

  • ads
  • depreciation
  • rent
  • wages
182
Q

How do we find Profit Before Income Tax?

A

Profit Before Income Tax =

Profit from non-operating activities

+

Profit from Operations

183
Q

What’s the final step of a multi-step St. of Income/ P & L?

A

Final step:

Net Income =

Profit Before Income Tax - Income Tax

184
Q

What are the two ways of presenting expenses?

A

Expenses can be presented by:

  • Function
  • Nature
185
Q

What do we mean by grouping expenses by function?

A

Grouping expenses by function:

  • eg. Cost of Sales, Admin, Distribution
  • *GAAP: notes have to contain info on the nature of expenses
186
Q

How do we decide how to present expenses in the financial statements?

A

We must adhere to the fundamental qualitative characteristic of Relevance to decide whether to group expenses by function or nature.

187
Q

How do we find Total Comprehensive Income?

A

Total Comprehensive Income =

Net Income + Other Comprehensive Income

Accounting 501 (3 decks)

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