Random Flashcards
According to ASC Topic 815, hybrid instruments must be accounted for
At fair value if an election is made not to bifurcate the hybrid instrument
When a firm elects not to bifurcate a hybrid financial instrument, changes in fair value should be recognized:
Prospective basis
In current/future earnings
Example:
- A bond payable with an interest rate based on the S & P 500 Index.
- An equity instrument with a call option, allowing the issuing company to buy back the stock.
What rates can be used to translate the cash flow statement?
- Historical
2. Weighted average
Components of other comprehensive income
- Unrealized gains or losses in AFS securities
- Unrealized gains or losses in pension costs
- Foreign currency translation adjustments
- Unrealized gains or losses from certain derivative transactions
effective portion of forecasted transaction goes to OCI
ineffective portion goes to current income
How are the following treated/recorded:
- Increase in the unrealized excess of cost over market value of marketable equity securities classified as trading-type securities
- Gain on remeasuring a foreign subsidiary’s f/s from the functional local currency into the functional currency
- Purchase of R&D services
Income from continuing operations
With separate disclosure either on the face of the statement or in the notes
Where does this go in the financials:
The accumulated amount of the unrealized excess of cost over market value of AFS marketable equity securities
Separate component of SE
Where does this go in the financials:
A loss on translating a foreign subsidiary’s f/s from the functional local currency into the reporting currency during this period
OCI
Extraordinary Items
Both:
- Unusual
- Infrequent
Extraordinary items should be shown net of taxes in a separate section in the income statement.
Fair Value Hedge:
Gain or loss on hedged item/instrument
example: Fair Value option is elected for AFS securities
Included in net income
Cash Flow Hedge:
Gain or loss on hedged item/instrument
Ineffective portion in net income
Effective portion in OCI
Common permanent tax differences
- Tax exempt interest
- Fines and penalties
- Life insurance on key employees when firm is beneficiary: proceeds from such a policy are not taxable but are a gain for the books
- Dividends received deduction
DTL or DTA?
Revenue recognized earlier in books than for tax
(AR, unrealized gain on trading securities)
DTL
DTL or DTA?
Expenses recognized earlier in books than for tax (prepaid expenses, depreciation)
DTL
DTL or DTA?
Revenue recognized later for books than tax
(unearned revenue)
DTA
DTL or DTA?
Expenses recognized earlier for books than tax
(accrued expense, bad debt expense, warranties)
DTA
DTL or DTA?
Deferred tax benefit
DTA
Gains from remeasuring a foreign subsidiary’s financial statements from the local currency, which is not the functional currency, into the parent company’s currency should be reported as a
Part of continuing operations
Freight in
Transportation to consignees
Warehousing
Incorporated into the inventory calc
Both are inventoriable costs of bringing goods to the point of sale
Freight out
Part of SG&A
Excluded from the cost of goods sold computation since the cost of delivering goods from the point of sale to the customers is a noninventoriable selling expense
For IFRS reporting, if the functional currency is the same as the presentation currency, any translation gains or losses are generally reported as
A gain or loss on the statement of income.
Under the equity method, goodwill is considered
Any excess paid over the FV of the net assets
Significant influence = Investments between 20% and 50% of the outstanding stock
Should be accounted for under the equity method
Items included in the net assets available for benefits of a defined benefit pension plan trust include:
- The net change in the fair value of each significant class of investments
- Contributions
- Benefits paid
Budgetary Comparison Schedule (CAFR) should include
- General
- Major special revenue fund types
For which annual budgets have been legally adopted
Unrealized holding gains and losses on trading securities
Included in income
Unrealized holding gains and losses that result from a debt security being transferred into the held-to-maturity category from the available-for-sale category
Accumulated OCI
Amortized over the remaining holding period
Foreign currency translation adjustments
OCI
The difference between the
accumulated benefit obligation
and the
fair value of pension plan assets
Accumulated benefit obligation and the fair value of plan assets is no longer used to determine pension liability
Do not include to arrive at pension cost
Represents the unfunded accumulated benefit obligation which could require recognition of an additional minimum liability
Reserved for Encumbrances account of a governmental fund type is increased when
A purchase order is approved
When goods or services are ordered (PO approved): Appropriations are encumbered, or restricted from use, in the amount of the estimated purchase cost
Encumbrances xx
Reserved for Encumbrances xx
The entry to record the purchase of treasury stock under the par value method is
Treasury stock (par)
Additional paid-in capital *
Retained earnings (plug)
Cash (cost)
The treasury stock account reduces total stockholders’ equity, as do the debits to the other SE accounts
Any financial or physical variable that has either observable changes or objectively verifiable changes qualifies as an
Underlying
ASC 815
An underlying is commonly a specified price or rate such as a stock price, interest rate, currency rate, commodity price, or a related index. However, any physical or financial variable with observable changes or objectively verifiable changes qualifies as an underlying
Accounting treatment for equity investments
Financial reporting % owned
FV or amortized cost 20
Equity or fair value method 20-50
Consolidated or equity 51-100
Cash payments to suppliers
Cash payments to suppliers
+ Increase in AP
– Increase in inventory
= Cost of Goods Sold
In a statement of cash flows (indirect approach),
a decrease in prepaid expenses should be
Added to net income
When prepaid expenses decrease, reported expenses exceed cash paid. The decrease in prepaid expenses must therefore be added to net income.
Indirect approach:
Net income adjusted for changes in current assets (other than cash) and in current liabilities.
Noncash events removed from net income to complete the conversion of net income from an accrual basis to a cash basis.
An employer sponsoring a defined benefit pension plan is subject to the pension liability recognition requirement. A pension liability must be recorded equal to the unfunded
Projected benefit obligation
less the fair value of plan assets
A stock dividend of less than 20-25% is recorded
- On the date of declaration
- At the FV of the shares to be issued
Charged to retained earnings
Credited to the stock dividend distributable and PIC
Change in accounting principle
Retrospective application to all prior periods
unless it is impracticable to do so
Calculation for percentage of completion method
Current year’s profit =
(Costs to date/Total expected cost)
× Expected profit − Profit recognized in previous periods
Based on this formula, only income previously recognized is required in the calculation. Progress billings to date is an accumulation of amounts billed, and the balance in the account does not normally coincide with the costs incurred to date.
Costs of internally developed software after the development stage may be
Capitalized and amortized over the asset’s economic life
According to ASC Topic 820:
The fair value of an asset should be based upon
The price that would be received to sell the asset
Entry to record the budget amounts in the government
Estimated Revenues xx
Appropriations xx
Budgetary Fund Balance xx
Appropriations represent maximum spending authority
Acid-test ratio
Quick assets divided by current liabilities
Quick assets =
- Cash
- Temporary investments in Marketable equity securities
- Net receivables
Measures the ability to pay current liabilities from cash and near-cash items.
Underlyings are
- Exchange rates
- Commodity prices
- Insurance index
Characteristic of a derivative instrument
A corporation declared a dividend, a portion of which was liquidating. How would this declaration affect each RE and APIC?
Decreases both
A liquidating dividend represents a return of capital to stockholders because the dividend declared exceeds the corporation’s retained earnings. When a corporation declares a liquidating dividend, the following journal entry is made:
Retained earnings (balance) Additional paid-in capital (plug) Dividends payable (dividend amount)
Return on common stockholder’s equity
(NOI - preferred dividends) / (average stockholder’s equity available to cs)**
**this is essentially common stock + RE
ASC Topic 450 requires that an estimated loss from a contingency be accrued by a charge to income and the recording of a liability if the loss is both
- Probable
- Reasonably estimable
Loss contingencies that do not meet one or both of these criteria, but that are at least reasonably possible should be disclosed, but not accrued.
The four foreign currency hedges are
(1) an unrecognized firm commitment
(2) available-for-sale securities
(3) foreign currency denominated forecasted transactions
(4) net investments in foreign operations.
Qualitative characteristics of faithful representation
- Neutrality
- Completeness
- Free from error
A stock dividend has what effect on SE?
No effect.
Stockholders merely receive more shares of stock.
The journal entry to record a small stock dividend (less than 20-25%) transfers an amount equal to the fair value of the stock to be issued from retained earnings to paid-in capital. Therefore, one part of stockholders’ equity decreases while another part increases. The journal entry below summarizes the net effect of the entries to record a stock dividend.
Example: 10% dividend, $1 par, $30 FV:
Dr: Retained earnings (10,000 × $30) 300,000
Cr. Common stock (10,000 × $1) 10,000
Cr. Paid-in capital 290,000
In a period of rising prices, the use of which of the following inventory cost flow methods would result in the highest cost of goods sold?
LIFO
A company changes from the double-declining balance method of depreciation for previously recorded assets to the straight-line method. According to ASC Topic 250, the effect of the change should be reported separately as a(n)
Component of income from continuing operations on a prospective basis.
ASC Topic 250 requires changes in depreciation method to be treated as a change in estimate and handled on a prospective basis.
Net Realizable Value
ceiling
Selling less disposal costs
Market value is the replacement cost subject to an upper limit (ceiling) and a lower limit (floor).
Floor
NRV less a normal profit margin
NRV = selling less disposal costs
Market value is the replacement cost subject to an upper limit (ceiling) and a lower limit (floor).
NFPs should prepare the following FS
- Statement of financial position (assets, liabilities, net assets)
- Statement of activities
- Cash flow
Voluntary Health and Welfare organizations also need to prepare a Statement of Functional Expenses
Change from
LIFO to FIFO
Completed contract to % of completion
Change in principle
Retrospective
Change from Straight-line to DDB
Change in estimate
Prospective
Change from Non-GAAP to GAAP
Error correction
Retrospective: beginning balance of earliest period adjusted
Derivative instruments are characterized as having one or more
- Notional amounts
2. Underlying
