Principles Flashcards
From Accrual to Cash
^Cash = ^L + ^E - ^OA
From Cash to Accrual
^E = ^A - ^L
Relevance
- Predictive Value
- Confirmatory Value
- Materiality
Faithful Representation
- Completeness
- Neutrality
- Free From Error
Enhancing Qualitative Charactertistics
- Comparability
- Verifiability
- Timeliness
- Understandability
Replacement Cost
- Amount required to be paid currently for an asset you already have
- Entry Price
Historical Cost
- Original cost of an asset
- Entry Price
Net Realizable Value
- Equals estimated selling price less cost to complete & sell
- Exit Price
Measurement Basis for firm that is liquidating
Net Realizable Value
Discounted Cash Flows - Risk Adjusted Rate
Multiply Cash flow by its present value factor
Discounted Cash Flows - Risk Free Rate - Weighted Average
- Multiply total cash flows by probability then by present value factor
- Add if there are multiple years
Principal vs most advantageous market
If there is a principal market use that one, but if there isn’t, then use the most advantageous market
Market Participants
- Independent
- Acting on own interest
- Knowledgeable
- Able & willing
FV assumes highest & best use
- Physically possible
- Legally allowed
- Financially possible
FV Measurement Techniques
- Market Approach: Uses prices and other information generated by market transactions involving assets & liabilities that are identical or comparable
- Income Approach: Converts future amounts into a single present amount.
- Cost Approach: Uses amount that would currently be required to replace an asset. Replacement cost
Things that are Eligible for FV
- Firm commitment that would otherwise not be recognized at inception and only involves financial instruments; or a written loan commitment
- Insurance or warranty contract that can be settled by a 3rd party
Things that are NOT eligible for FV
- An investment in a subsidiary that is to be consolidated
- An interest in a variable interest entity that is to be consolidated
- Employers’ and plans’ obligations (or assets) for pension benefits, other postretirement benefits, postemployment benefits, and other employee-oriented plans
- assets and liabilities recognized under lease accounting
- Demand deposit liabilities of financial institutions
- Financial instruments classified as stockholder’s equity
FV differentiation
- Recurring: measured at FV period after period; like equity securities
- Nonrecurring: measured at FV when certain conditions are met; like an impairment of an asset
IFRS for SME - Cost or Equity Method with significant influence
Can use both while GAAP only allows equity method with significant influence
Accounts Receivable under Cash accounting
Don’t net allowances against accounts receivable
Accounts Receivable & unearned fees
Unearned fees are debited in A/R
What is current cost income?
Sales Revenue minus expenses on a current basis
Realized holding gains & losses
Difference between current & historical cost
Disclosure for Concentrations
- Information about shared activity, region, or economic characteristics of the group
- Amount of accounting loss that the entity would incur as a result of the concentrated party’s failure to perform according to the terms of the contract
- Information regarding entity’s policy of requiring collateral.
Effect Net Income has on retained earnings and equity
If you record a loss on the income statement and decrease net income, remember Net Income is included in the retained earnings formula so it decreases therefore decreasing equity.
