Rogers Section 1 & 2 Conceptual Framework and IFRS & Cash and Cash Equivalents

Question 1

on whom do the objectives of financial reporting focus on?

Answer 1

the users of financial statements

Question 2

What are the objectives of financial reporting?

Answer 2

1. ) provide useful information to decision makers
2. ) inform users of an entity’s economic resources and claims against the entity
3. ) report the changes in economic resources and claims
4. ) accrual accounting- financial performance
5. ) cash flow report- financial performance
6. ) changes in economic resources and claims not resulting from financial performance

Question 3

What are the primary qualitative characteristics that makes financial statement information useful?

Answer 3

must have both relevance and faithful representation

Question 4

what are the components of relevance?

Answer 4

predictive value and confirmatory value; also materiality

Question 5

what is materiality?

Answer 5

capable of making a difference in the user’s decision making process if omitted or misstated (auditor’s judgement). Considered an entity-specific aspect of relevance that applies at the individual entity level

Question 6

What are the components of faithful representation

Answer 6

Free from error, neutrality, completeness

Question 7

What are the enhancing qualitative characteristics?

Answer 7

relate to relevance and faithful representation:

1. ) Comparability
2. ) Understandability
3. ) Timeliness
4. ) Verifiability

Question 8

what is the pervasive constraint that overrides the usefulness of info for the financial statements?

Answer 8

Cost/benefit

Question 9

What is meant by the cost/benefit restraint

Answer 9

cost of obtaining and presenting the information shouldn’t exceed the benefit (financial statements)

Question 10

What does a full set of financial statements include?

Answer 10

Statement of Position/Balance Sheet, Statement of Earnings Financial and Comprehensive Income/Income Statement, Statement of Cash Flows, Statement of Changes in OE

Question 11

Financial Statement elements must be, what?

Answer 11

useful

Question 12

What are the 10 key elements that make up all the financial statements?

Answer 12

assets, liabilities, equity, investments by owners, distributions to owners, comprehensive income, revenue, expenses, gains, and losses

Question 13

What are assets?

Answer 13

an economic resource that has a probable future benefit, one can obtain the benefit, and the transaction creating the benefit has already occurred

Question 14

What are liabilities?

Answer 14

an economic obligation in which one needs to use or transfer an asset, it can’t be avoided and the transaction has already occurred

Question 15

what is equity or net assets?

Answer 15

assets left over after deducting liabilities

Question 16

Equity consists of 3 elements. What are they?

Answer 16

contributions/investments by owners, distributions to owners (dividends), and comprehensive income

Question 17

What is comprehensive income and what is included in it?

Answer 17

Comprehensive income is all changes in equity other than “owner” sources. These items affect Comp. Income but not net income. The items are DENT:

1. )Derivative cash flow hedges
2. )Excess adjustment of Pension PBO and FV of plan assets at year end
3. )Net unrealized gains or losses on “available for sale” securities
4. ) Translation adjustments for foreign currency

Question 18

what concept is used when deciding what will be included in income- comprehensive or net income?

Answer 18

capital maintenance concept

Question 19

What is physical capital maintenance concept?

Answer 19

only recognize an event when an asset is sold or a liability is settled (measures the effect of price changes in nominal or constant dollars)

Question 20

what is financial capital maintenance concept?

Answer 20

recognize an event as a change in the value of an asset or liability occurs (recognize holding gains and losses-current GAAP)

Question 21

when do we emphasize physical and financial capital maintenance?

Answer 21

physical capital approach-fixed assets (not adjusted to market value)

financial capital approach-marketable securities (reported at market value)

*market values of fixed assets are difficult to verify and adjustments based on mngmt estimates is subject to biases. Active market for investment securities provides numbers that are verifiable and not subject to management bias

Question 22

what four elements does comprehensive income consist of?

Answer 22

revenues, expenses, gains, losses

Question 23

what are the accounting rules and concepts that go along with the 10 key elements?

Answer 23

consistency, conservatism, cost/benefit, matching, allocation, full disclosure, recognition, realization

Question 24

define consistency

Answer 24

same principle each year

Question 25

define conservatism

Answer 25

considering all risks inherent in the business (accruing a contingent loss)

Question 26

define matching

Answer 26

recognize a cost as an expense in the same period as the benefit (usually a revenue) is recognized

Question 27

define allocation

Answer 27

spreading a cost over more than one period

Question 28

define full disclosure

Answer 28

providing all useful information in the financial statements

Question 29

define recognition

Answer 29

booking an item in the financial statements. Recording it.

Question 30

define realization

Answer 30

converting non-cash resources into cash or a claim to cash; realized it and got the money

Question 31

when do you recognize a financial statement element and how do you measure it?

Answer 31

Recognize when: 1.) meets the definition of an element (asset,liability) 2.) element is capable of being measured in monetary terms 3.) the item is relevant and faithful representation

Measure it: Historical cost, replacement cost, FMV, NRV, PV

Question 32

historical cost

Answer 32

amount you paid for it (PP&E)

Question 33

replacement cost

Answer 33

what is would cost to replace an item (inventory)

Question 34

Fair Market Value

Answer 34

the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date

Question 35

Net Realizable Value

Answer 35

amount expected to be converted into A/R

Question 36

Present Value

Answer 36

discounted cash flows due to the time value of money (Notes/Receivable, Bonds/Payable, Leases)

Question 37

What items need to be recognized at Fair Value?

Answer 37

1. ) Derivatives
2. ) Impairment losses
3. ) Investments in marketable debt or equity securities that are classified as either trading securities or available for sale

Question 38

where are unrealized gains and losses on trading securities listed in the financial statements?

Answer 38

income statement

Question 39

where are unrealized gains and losses on available for sale securities recognized?

Answer 39

other comprehensive income

Question 40

what is an impairment loss?

Answer 40

reduction in the carrying value of an asset to its fair value in the period of the impairment. Compare Carrying Value to Fair Value.

Question 41

Which items do not qualify for the fair value election ie they cannot be valued at FV?

Answer 41

1. ) pension plan, post retirement, and other post-employment benefits
2. ) leases
3. ) financial instruments that are components of equity
4. ) share based payments and stock options

Question 42

what is a financial instrument?

Answer 42

cash, evidence of an ownership interest in an entity, or a contract that both:

a. ) imposes on one entity a contractual obligation that either:
1. ) to delivery cash or another financial instrument to a second entity
2. ) to exchange other financial instruments on potentially unfavorable terms with the second entity

b. ) conveys to that second entity a contractual right either:
1. ) to receive cash or another financial instrument from the first entity
2. ) to exchange other financial instruments on potentially favorable terms with the first entity

Question 43

provide examples of financial assets and liabilities that would qualify for the fair value election.

Answer 43

most investments- AFS would be reported at FV with unrealized gains or losses being reported on the income statement rather than as a component of comprehensive income

HTM- reported at FV and any adjustments from the amortized cost would be reported in income

Investments accounted for under the equity method would be reported at FV with increases or decreases reported in income.

Firm commitments involving financial instruments such as forward exchange contracts to purchase or sell a foreign currency.

Question 44

explain election dates

Answer 44

firm can assign FV reporting to a qualifying financial instrument when acquired or in other limited circumstances (election dates) once elected the FV option is permanent and can only be changed on a subsequent election date.

Question 45

what happens when FV can’t be determined

Answer 45

if nothing is in the authoritative literature then “the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date” is used.

Question 46

exit price

Answer 46

price that would be received to sell the asset or paid to transfer the liability

Question 47

entry price

Answer 47

the price that would be paid to acquire the asset or received to assume the liability

Question 48

when measuring an item at FV, the entity will apply one of 3 valuation techniques. What are they?

Answer 48

market approach, income approach, cost approach

Question 49

list the steps used to apply fair value measurement

Answer 49

1. ) Identify the asset or liability
2. ) Determine the principal or most advantageous market (highest and best use)
3. ) Determine the valuation premise (in- use or in-exchange)
4. ) Determine the appropriate valuation technique (market, income, or cost approach)
5. ) Obtain inputs for valuation (level 1,2,&3)
6. ) Calculate the FV of the asset

Question 50

Under accrual accounting, when are revenue/gains recognized?

Answer 50

when earned and realizable/realized

Question 51

In accrual accounting when are expenses/losses recognized?

Answer 51

when incurred.

Question 52

Risks and Uncertainties require disclosure of…

Answer 52

nature of operations, use of estimates, certain significant estimates, current vulnerability associated with certain concerntrations

Question 53

what are the two constraints under IASB?

Answer 53

cost/benefit and the going concern assumption

Question 54

what are the 5 elements of financial reporting under IASB?

Answer 54

3 elements of financial position- assets, liabilities, and equity
2 elements of performance- income and expenses

Question 55

what are the valuation techniques to measure or estimate at FV?

Answer 55

MIC (market, income, cost)

Question 56

where in the financial statements should companies disclose its concentration of credit risks?

Answer 56

in the notes to the financial statements.

• this is because concentration of credit risks is a special risk

Question 57

what are the statements of financial accounting concepts intended to establish?

Answer 57

the objectives and concepts for use in developing standards of financial accounting and reporting

Question 58

during a period in which an enterprise is under the direction of a particular management, its financial statements will directly provide information on?

Answer 58

directly about enterprise performance and indirectly about management performance

Question 59

FASB’s conceptual framework explains both financial and physical capital maintenance concepts. Which capital maintenance concept is applied to currently reported net income, and which is applied to comprehensive income?

Answer 59

currently reported net income- physical capital
comprehensive income- financial capital

***Under the physical capital maintenance concept, gains and losses are recognized only when assets are disposed of or liabilities are settled. Both net income and comprehensive income apply the financial capital maintenance approach under which holding gains and losses are recognized.

Question 60

an entities’ revenue may result from….

Answer 60

A decrease in an asset from primary operations will result in an expense. Increases or decreases in assets or liabilities from incidental transactions result in gains and losses. An increase in an asset or a decrease in a liability from primary operations will result in revenue.

Question 61

According to the FASB conceptual framework, comprehensive income includes which of the following?

Answer 61

Comprehensive income includes all changes to equity other than owner-related items. A loss on discontinued operations reduces net income, which is a component of comprehensive income. An investment by owners is an owner-related transaction, and is not included in comprehensive income.

Question 62

According to the FASB conceptual framework, which of the following statements conforms to the realization concept?

Answer 62

Realization is the conversion of an item or service into cash or a claim to cash as would be the case when equipment is sold for a note receivable. Realization occurs at the time that an entity converts goods or services into accounts receivable, and not necessarily when the receivable is collected.

Question 63

FASB Interpretations of Statements of Financial Accounting Standards have the same authority as the FASB

Answer 63

statements of financial accounting standards

*Due to the large volume of pronouncements, it became necessary to determine which pronouncements would have a higher level of authority for circumstances where there appeared to be conflicts between published standards. A hierarchy has been established which includes 4 types of pronouncements at the highest level of authority. In order of authority, these include FASB Statements of Financial Accounting Standards, FASB Interpretations, AICPA Accounting Principles Board Opinions, and AICPA Accounting Research Bulletins.

Question 64

According to the FASB conceptual framework, which of the following situations violates the concept of neutrality?

Answer 64

something that displays a bias like management’s estimate of something

**The concept of neutrality, which is an ingredient of faithful representation, indicates that the information in the financial statements is free from bias. This would not be the case when information is based on management’s estimate of market value, which would be influenced by management’s perceptions.

Question 65

what are the 4 elements of comprehensive income

Answer 65

revenues- inflows from an entity’s primary operations
expenses- outflows due to an entity’s primary operations
gains- increases in equity from incidental transactions
losses- decreases in equity from incidental transactions

Question 66

Which of the following items is not subject to the application of intra-period income tax allocation?

Answer 66

Only items listed on the income statement before the Provision for income tax (T, for Tax, in Roger Mnemonic ON-TIDE-N-OC) are not subject to the application of intra-period income tax allocation. Items listed after the Provision for income tax are subject to the application of intra-period income tax allocation. Operating income (the first O in Roger Mnemonic ON-TIDE-N-OC) is listed before the Provision for income tax on the income statement. Income from continuing operations, Discontinued operations, and Extraordinary gains and losses are all listed after the Provision for income tax on the income statement (Roger Mnemonic ON-TIDE-N-OC).

Question 67

To meet the disclosure requirements related to risks and uncertainties, an entity will disclose which of the following?

I. The legal form of entity
II. The use of estimates
III. Concentrations of risk

Answer 67

II and III only

Question 68

Which of the following is not an appropriate method for recognizing expenses?

Answer 68

The appropriate methods for recognizing expenses include cause and effect, such as charging inventory to cost of goods sold; systematic and rational allocation, such as depreciation of property and equipment; and immediate recognition, such as recognizing salaries expense as it is incurred. Although some costs are deferred, it is not a method of expense recognition. Deferred costs may be recognized under the cause and effect approach, for example, or may be systematically and rationally allocated.

Question 69

the balance sheet reports the effect of transactions at a …

Answer 69

point in time

Question 70

what does the balance sheet consist of

Answer 70

assets, liabilities, and stockholders equity

Question 71

what are current assets?

Answer 71

assets that will be used up or converted into cash within one year or the operating cycle, whichever is longer. ex: cash, temporary trading securities, a/r, n/r, inventories, and prepaid expenses

Question 72

what are current liabilities

Answer 72

liabilities that will be settled within one year or the operating cycle, whichever is longer; a/p, accrued expenses, dividends payable, income taxes payable, current portion of long term debt

Question 73

what is a cash equivalent?

Answer 73

a security that is easily converted into cash with an original maturity of 90 days or less. It is both easily convertible into a known amount of cash (highly liquid) and original maturity of 3 months or less from the date of purchase…ex: treasury bills, commercial paper, and money market funds

Question 74

give some examples of cash and cash equivalents

Answer 74

coin and currency on hand (petty cash), money market accounts, unmailed checks, savings accounts, cds with an original maturity of 3 months or less, negotiable paper (bank checks, travelers checks, money orders)

Question 75

what items are excluded from cash?

Answer 75

1. )compensating balances- legally restricted deposits that are either a current asset or a non-current asset, but not considered part of cash
2. )postdated checks or nsf-these are receivables
3. )overdraft protection-if in same bank net them; if positive show as cash if negative then show as liability; if in different banks show the positive as an asset and the negative as a current liability
4. ) restricted cash
5. ) postage stamps-supplies/prepaid expense

Question 76

multiple step income statement

Answer 76

ON the TIDE N OC

operating, non-operating, taxes, income from continuing operations, income from discontinuing operations, extraordinary loss, net income, other comprehensive income (DENT), Comprehensive Income

Question 77

Under IFRS what is a current asset?

Answer 77

entity expects to realize the asset in 12 months or in the normal operating cycle or the entity is holding the asset for trading

Question 78

under IFRS, what is a current liability

Answer 78

entity expects to settle the liability in 12 months or in the normal operating cycle or the entity is holding the liability for trading purposes

Question 79

what is a financial instrument under IFRS?

Answer 79

any contract that gives results in a financial asset of one entity and a financial liability or equity instrument of another entity

Question 80

Under IFRS when is a financial asset measured at amortized cost instead of FV?

Answer 80

1. ) when the entity’s business model is to hold the asset to collect scheduled cash flows
2. ) the terms of the instrument call for cash flows that are exclusively payments of principal and interest on specified dates

Question 81

Bank Reconciliation- Bank Statement Calculation

Answer 81

+ Deposits in transit
-Outstanding Checks
+/- Errors made by bank

Question 82

Bank Reconciliation-Checkbook Balance

Answer 82

+Amounts collected by bank
-Unrecorded bank charges
+/- Errors made in recording transactions

Question 83

if a check has not been mailed then…

Answer 83

it is considered to not have been written and is added back to the checkbook balance

Question 84

if an account is overdrawn it may not be offset by..

Answer 84

against accounts with positive balances unless it is at the same bank. if not the overdraft is reported as a liability

Question 85

a cash equivalent can easily be converted into cash within how many days?

Answer 85

90

Question 86

both compensating balances and restricted cash should be

Answer 86

disclosed in the notes on the financial statements

Question 87

a postdated check from a customer would be considered a..

Answer 87

receivable

Question 88

is cash in a bond sinking fund a cash equivalent?

Answer 88

no, it is an investment

Question 89

what is the formula for adj. cash balance?

Answer 89

Adjusted cash balance = Book balance before adjustments + amounts credited by the bank not reflected in the book balance – unrecorded bank charges +/- errors made in recording transactions.

Question 90

what is the formula for a bank reconciliation?

Answer 90

Book Balance = Bank Statement Balance + Deposit in transits – Outstanding checks +/- bank errors.

Question 91

under IFRS, when may financial liabilities be measured at fair value?

Answer 91

when it will result in more relevant information

-Under IFRS, financial liabilities are generally measured at amortized cost. They may be measured at fair value, however, when it will result in more relevant information. IFRS does not provide for the election of a fair value option.

Question 92

When preparing a draft of its 20X0 balance sheet, Mont, Inc. reported net assets totaling $875,000. Included in the asset section of the balance sheet were the following:

Treasury stock of Mont, Inc. at cost, which approximates market
value on December 31 $24,000
Idle machinery $11,200
Cash surrender value of life insurance on corporate executives $13,700
Allowance for decline in market value of securities available for sale $8,400

At what amount should Mont’s net assets be reported in the December 31, 20X0, balance sheet?

Answer 92

Although idle machinery would be reclassified out of property, plant, and equipment and into some other asset category, it is still properly reported as an asset. The cash surrender value of the life insurance policies is also properly reported as an asset. The allowance for decline in market value of noncurrent equity securities is a contra asset account, reducing the investment in securities available for sale and is also appropriately included in the calculation of net assets.

Treasury stock is reported as a reduction of stockholders’ equity and should be excluded from assets. As a result, net assets will be reduced by $24,000 for the treasury stock, resulting in a balance of $851,000.

Question 93

.
The following trial balance of Mint Corp. at December 31, 20X1, has been adjusted except for income tax expense.

TRIAL BALANCE
December 31, 20X1
Dr. Cr.
Cash $600,000
Accounts receivable, net $3,500,000
Cost in excess of billings on long-term contracts $1,600,000
Billings in excess of costs on long-term contracts $700,000
Prepaid taxes $450,000
Property, plant, and equipment, net $1,480,000
Note payable - noncurrent $1,620,000
Common stock $750,000
Additional paid-in capital $2,000,000
Retained earnings - Unappropriated $900,000
Retained earnings - restricted for note payable $160,000
Earnings from long-term contracts $6,680,000
Costs and expenses $5,180,000
$12,810,000 $12,810,000

Other financial data for the year ended December 31, 20X1, are:
Mint uses the percentage-of-completion method to account for long-term construction contracts for financial statement and income tax purposes. All receivables on these contracts are considered to be collectible within 12 months.
During 20X1, estimated tax payments of $450,000 were charged to prepaid taxes. Mint has not recorded income tax expenses. There were no temporary or permanent differences, and Mint’s tax rate is 30%.
In Mint’s December 31, 20X1, balance sheet, what amount should be reported as total retained earnings?

Answer 93

Net income consists of earnings from long-term contracts of $6,680,000 and costs and expenses of $5,180,000 giving a pretax amount of $1,500,000. At 30%, taxes will be $450,000 reducing net income to $1,050,000. This will be added to the beginning balance of unappropriated retained earnings of $900,000, to give ending unappropriated retained earnings of $1,950,000. Retained earnings that are restricted are still considered part of retained earnings. As a result, total retained earnings will be $1,950,000 + $160,000, or $2,110,000

Question 94

retained earnings that are restricted are still considered part of retained earnings. T/F?

Answer 94

true

Question 95

cost in excess of billings

Answer 95

paid out more money then you have been paid for; is an asset account because it is money that is owed to you for work that was completed but not billed to or collected yet

Question 96

billings in excess of cost

Answer 96

money not earned yet; liability account; billed for or paid to do but have not completed or done yet

Question 97

Mare Co.’s December 31, 20X3, balance sheet reported the following current assets:

Cash $70,000
Accounts receivable $120,000
Inventories $60,000
Total $250,000

An analysis of the accounts disclosed that accounts receivable consisted of the following:

Trade accounts $96,000
Allowance for uncollectible accounts ($2,000)
Selling price of Mare’s unsold goods
out on consignment, at 130% of cost,
not included in Mare’s ending inventory $26,000
Total $120,000

At December 31, 20X3, the total of Mare’s current assets is

Answer 97

Accounts receivable properly includes trade accounts of $96,000 and the allowance for uncollectible accounts of $2,000 for a net amount of $94,000. The inventory on consignment should be included in inventory at cost. Since the $26,000 represents 130% of Mare’s cost, the cost would be $20,000, which would be added to inventory giving a total of $80,000. Total current assets would consist of cash of $70,000, net accounts receivable of $94,000, and inventory of $80,000 for a total of $244,000.

Question 98

Which of the following statements is correct regarding the provision for income taxes in the financial statements of a sole proprietorship?

Answer 98

no provision for income taxes

A sole proprietorship is not a taxable entity. Tax is included in the personal tax return of the proprietor. As a result, a sole proprietorship will have no provision for income taxes.