Standard Setting, Income Statements, and Reporting Requirements

Question 1

According to the FASB/IASB Conceptual Framework, useful information must exhibit characteristics of:

Answer 1

Faithful Representation and Relevance

Question 2

What rule must govern reporting of gain contingencies?

Answer 2

Conservatism.

Definition: A gain contingency is an uncertain situation that will be resolved in the future, possibly resulting in a gain. The accounting standards DO NOT ALLOW the recognition of a gain contingency prior to settlement of the underlying event. Doing so might result in the excessively early recognition of revenue (which violates the conservatism principle). Instead, one must wait for the underlying uncertainty to be settled before a gain can be recognized.

Question 3

What is Realization according to the FASB Conceptual Framework?

Answer 3

Process of converting non-cash resources and rights into Cash, or Claims for Cash.

EG: Depreciated equipment was sold in exchange for a note receivable.

Question 4

When is Net Realizable Value (as opposed to historical cost) an appropriate method of fin. stat. disclosure?

Answer 4

When there is a decision to end operations quickly (Within 3 months) and dispose of assets.

Question 5

What are factors that ENHANCE the usefulness of information that is already Relevant + Faithfully Repp’ed?

(The 4 Enhancing Qualitative Characteristics)

Answer 5

Timeliness
Understandability
Comparability
Verifiability

Question 6

What is SFAC #7 and what are the 5 Elements of Present Value (establish vals. of assets and liabs. using cash flow info)?

Hint: UVOTE

Answer 6

SFAC #7 is a framework for accountants to employ when using future cash flows as a measurement basis for assets and liabs, especially when complex factors are involves.

5 Elements that Govern:
U - Uncertainty (and price for bearing it)
V - Variations (expectations on timing variations of future cash flows)
O - Other Factors, eg liquidity issues and market imperfections
T - Time Val. of Money (and Risk-free Rate of Interest)
E - Estimate of Future Cash Flow

Question 7

What does the Rule of Conservatism state?

Answer 7

Revs & Gains should be recognized when the earning process is complete,

BUT, expenses and losses should be expensed IMMEDIATELY.

Requires accrual of “probable” loss but not “possible”.

Contingent gains may not be accrued.

Question 8

Replacement Cost def.?

Answer 8

Amount of cash or equivalent required to replace an asset currently – Replacement cost is an ACQUISITION cost (not a selling/pricing mechanism)

Question 9

Current Market value def.?

hint: current market value = Fair Value

Answer 9

Price at which to SELL (not acquire) an Asset

Question 10

Net Realizable Value def.?

Answer 10

Selling Price of an Asset

(LESS)

Disposal costs

Question 11

Historical Cost def.?

Answer 11

Amount paid by company to acquire an asset

Question 12

Aspects of Relevance?
Aspects of Faithful Rep?

(SFAC #8: conceptual framework for fin reporting - Ch. 3, qualitative characteristics of useful financial info.)

(HINT - these are enhanced by the 4 “enhancing qualitative characteristics”)

Answer 12

Relevance:
Info should have - 
1) Predictive (future) value
2) confirming value
3) Be Material

Faithful Rep (reliable):

1) Completeness
2) Neutrality
3) Freedom from Error

Question 13

Underlying/fundamental Financial Statement Assumptions about Preparation and Presentation:

IASB and GAAP

Answer 13

IASB:
-Going Concern

GAAP:

• Monetary Unit
• Historical Cost
• Periodicity

Question 14

IASB Standard-Setting Process

Answer 14

1) Publish a discussion paper, tho not strictly requ’d
2) Receive/review comments; IASB staff prepare an Exposure Draft
3) Public comment required on Exposure Draft
4) At least 9 members of IASB approve exposure draft for issuance
5) IASB analyzes comments; drafts the IFRS (Int’l Financial Reporting Standard)
6) The IFRS must now be approved by at least 9 members of IASB

Question 15

How should we treat a change in accounting principle?

+change in depreciation, change in estimate change in entity, errors correction TREATMENTS.

Answer 15

If it is indistinguishable from Change in Estimate - we only treat it Prospectively – as a COMPONENT of income from continuing operations

Other facts:
Change in Depreciation method = Change in Estimate (SEE above)
***
If it is a true “Change in Accounting Principle,” we should adjust retained earnings beginning at EARLIEST period presented..

Restatement Times:
Change in Accounting ENTITY = Restate (retrospective application)
Errors Correction = Restate

Question 16

Cash basis OR tax basis changed to GAAP basis in a question means WHAT…

Answer 16

Change from Cash Basis to GAAP basis is an ERROR CORRECTION .. therefore retrospective re-statement is necessary.

ANYTHING THAT WASN’T GAAP BASIS BEFORE, IS AN ERROR.

Question 17

when are impairments on soon-to-be disposed of goods recognized?

Answer 17

Immediately.

Question 18

How to solve for “Income from Continuing Operations”

Answer 18

1) Net Credits over Debits
(EG 600K-420K = 180K)

2) ^^ times “Net of Tax” rate (aka 100% - TR%)

= Income from Continuing Ops.!

Question 19

What can a “Change in Entity” (eg prior period restatement) result from?

Answer 19

1) Changing companies in a consolidated Financial Statement

2) Consolidated financial statements vs. previous individual financial statements

Question 20

How should the correction of an error in the financial statement be reported?

Answer 20

Net of Tax, adjustment to Retained Earnings Opening Balance

Question 21

Examples of selling expenses?

Cost of inventory expenses?

Answer 21

1) Advertising
2) Freight Out
3) Sales Salaries
4) Warranties

1) Freight in = inventory expense

Question 22

When are separate disclosures needed on income statements?

Answer 22

When an event is infrequent, OR unusual, or both.

Reported at separate component, income from continuing operations

Question 23

What items are included in Other Comprehensive Income?

PUFE / R

Answer 23

• Pension Adjustments
• Unrealized Gains/Losses on AVAIL FOR SALE securities (not trading securities, etc.)
• Foreign Currency Items
• Effective portion of cash flow hedges

REVALUATION SURPLUS - IFRS ONLY!

Question 24

What are some of the Exit and Disposal costs?

Answer 24

1) Involuntary employee termination benefits
2) Costs to terminate any contract that is NOT a capital lease
3) Other costs, incl. “Consolidation costs” or costs of relocating employees.

Question 25

Does IFRS permit for extraordinary gains/losses?

Answer 25

No.

Question 26

What is the single-step income statement?

Answer 26

Sales of goods, services, interest income, rental income, gains on sales, Other Income

(NO: Purch. discounts, recovery of accounts written off)

Question 27

What is “Comprehensive Income”?

Answer 27

Sum of “Net Income” and “Other Comprehensive Income”

Question 28

What is the purpose of reporting comprehensive income?

Answer 28

To summarize all changes in equity from non-owner sources.

Comprehensive income represents all changes in stockholder’s equity that come from NON-OWNER sources. (and incl. NI + OCI items.)

Comprehensive income would NOT include:

• investments by stockholders (aka owners)
• distributions of dividends to stockholders (Owners)

Question 29

Related Party Disclosures: GAAP & IFRS

Answer 29

GAAP: Loans to Officers only

IFRS: Loans to officers, as well as Consolidated Officer’s Salaries (AKA salaries in both components)

Question 30

What should the interim-period tax expense use as basis of calculation?

Answer 30

EFFECTIVE TAX RATE at the rate you estimate for the year, overall.

Question 31

What is a reportable operating segment?

Answer 31

10% or more of revenue from sales, as defined by

Segment Rev/Combined Rev. (NOT consolidated.)

Question 32

Financial vs. Physical Capital Maintenance?

Answer 32

Financial capital concept: Price changes are called “holding gains and losses”

Physical capital concept: “Capital Maintenance Adjustments” included directly in equity, not included in Return on Capital

Question 33

FASB rule on assets:

Answer 33

Assets provide future benefits

Question 34

What are common General & Administrative expenses?

Answer 34

A general and administrative expense (G&A) refers to expenditures related to the day-to-day operations of a business. General and administrative expenses pertain to operation expenses rather that to expenses that can be directly related to the production of any goods or services, including rent, utilities, insurance and managerial salaries. In the company’s income statement, these expenses generally appear under operating expenses.

• building rent
• consultant fees
• depreciation on office equipment
• insurance
• supplies
• subscriptions
• utilities
• Salary and benefits attributable to corporate management & Legal Staff

(Investopedia)

Question 35

What is INVOLVED in Income from Continuing Operations?

Answer 35

After-tax net income!

Listed BEFORE:

1) discontinued operations
2) extraordinary items
3) the cumulative effect of changes in accounting principle

Question 36

Where do you report unrealized losses/gains resulting from changes in market val. on Available for Sale investments?

Answer 36

Component of OCI in Shareholder’s Equity

Question 37

Is a change in estimate a component of income from continuing operations?

Answer 37

Yes

Question 38

IFRS Change in Accounting Principle Reporting Requirements?

Answer 38

1) At minimum 3 balance sheets presented – end of current period, end prior period, beg. of prior period)

For changes in account principle, adjust RE at EARLIEST balance sheet possible (1/1 of prior year for calendar year basis.)

Question 39

What is true about inventory at year-end?

Answer 39

Must be valued at Lower of Cost or Market, and recognized at YE only

Question 40

Capture impact of mid-year discontinued operations?

Answer 40

1) Include in Net Income, and disclose in notes to INTERIM financial statements.

Question 41

For SEC, filing 10-K and 10-Q? (in Days)

Answer 41

10-k = 75 days
10-q = 40 days

Question 42

What is the effective income tax rate?

Answer 42

The effective tax rate is the average rate at which an individual or corporation is taxed.
The effective tax rate for individuals is the average rate at which their earned income is taxed.
The effective tax rate for a corporation is the average rate at which its pre-tax profits are taxed.

For corporations, the effective tax rate is computed by dividing total tax expenses by the firm’s earnings before taxes.

** Effective TR = Total Tax Exp / Firm Earnings Before Taxes

***Effective income tax rate should include anticipated foreign tax rates, tax planning alternatives, anticipated tax credits, capital gains rates, foreign tax credits

(Investopedia)

Question 43

Market price decline recognition?

Answer 43

Declines recognized in period incurred

Later, if they “Turn around,” they should be recognized as gains ONLY to extent of previous losses.

Question 44

Rule About Reporting a Segment

Answer 44

To be significant enough to report on, a segment must be at least 10% of:

1) Combined revenues (whether interseg. or affiliated) – NOT consolidated!!
2) Operating Profit (of all segments not having Loss)
3) Identifiable assets

Question 45

What is the “Reporting Sufficiency” (and not segment size) threshold?

Answer 45

This test requires that reportable segments, for EXTERNAL sales only, comprise a class making up 75% of the sales of the entity.

It is supposed to only include reportable segments per segment size test, but will incorporate other companies (starting with largest) in order to approach the 75% mark.

Question 46

How to do the 10% of reported Profit or Loss test

Answer 46

1) Take Net Incomes of everyone with INCOME (No one with losses) and add.
2) Take 10% of this
3) See who’s Absolute Value of Profit or Loss (when considering net incomes) exceeds the threshold. CAN include person who was at a net loss for the year.