Topic 1 Flashcards
Establish objectives and concepts used as a framework for developing accounting standards
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Single source of US GAAP and the place to research accounting guidance
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Provide information that is useful in investment/credit decisions – information about economic resources, claims against the entity, and financial performance
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Needs of the users of financial statements
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Investors and creditors
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Underlie the 6 components of the conceptual framework
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For information to be useful, it must be relevant and represented faithfully
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Information capable of making a difference in a user’s decision. Components include:
- Predictive Value
- Confirmatory Value
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Information that improves a decision maker’s ability to predict
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Information that enables users to confirm or change expectations
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Information that is complete, neutral, and free from error
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Includes all information needed by a user to understand the item. Includes descriptions, amounts and explanations.
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Financial information that is free from bias
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- Identify potentially useful items
- Identify information about those items that is most relevant if represented faithfully
- Determine if information is available and can be represented faithfully
- If not, start over at #2 with next most relevant item
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Characteristics that enhance the usefulness of information
- Very desirable but not required
- Include comparability, verifiability, timeliness and understandability
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- Ability of users to compare information about 2 or more entities or to compare information about 1 entity among 2 or more periods
- Allows users to understand similarities and differences
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Based on direct or indirect evidence, knowledgeable and independent people could reach consensus that the information is represented faithfully
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Making information available in time for users to make decisions
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Presenting information clearly and concisely
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Pervasive constraint where the benefits of financial reporting methods must outweigh the costs
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- Assets
- Liabilities
- Equity
- Revenues
- Expenses
- Gains
- Losses
- Investments by owners
- Distributions to owners
- Comprehensive income
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Probable future economic benefits resulting from past transactions
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Probable future sacrifices of economic benefits resulting from past transactions
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Residual interest in assets after deducting liabilities
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Inflows or increases to assets from delivering goods or services or settling liabilities
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Outflows or decreases to assets or increases to liabilities from delivering goods or services or conducting main operations
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Increases in equity from transactions not related to revenue or investments
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Decreases to equity from transactions not related to expense or distributions
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Increases to equity resulting from transfers of assets, receipt of services or reductions of liabilities in exchange for ownership interests
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Decreases in equity resulting from transferring assets, delivering services or incurring liabilities in exchange for decreasing ownership interests
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Change in equity from all sources except investments by owners and distributions to owners
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The process of recording a financial statement item
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Earnings are measured by the change in assets and liabilities during a period
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Earnings are a measure of an organization’s effectiveness in using inputs to sell outputs
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Recognition establishes when an element should be recorded and measurement dictates the amount
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- It meets the definition of an element
- It can be reliably measured
- It is relevant
- It is reliable
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- Historical cost
- Current cost
- Fair market value
- Net realizable value
- Present value
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Recognizing revenues and expenses that are directly related to each other at the same time
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- Revenues are recognized when earned and expenses are recognized when incurred
- Example:
- Advertising recorded as a prepaid asset if it has been paid for but not been run; recorded as expense if the advertising has run even it has not been paid for
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Include:
-Changes in accounting principle (Retrospective Application)
-Changes in accounting estimate (Prospective Application)
-Changes in reporting entity (Retrospective Application)
Exclude:
-Correction of an error (Restatement)
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The change in COGS and inventory related to a change from weighted average costing to FIFO
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The change in the bonus amount due to management based on changing net income because of the change from weighted average costing to FIFO
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- Cumulative effect of changes shown in beginning asset and liability balances
- Beginning retained earnings is adjusted based on the changes
- The activity and ending balances for each period shown is adjusted to reflect the effects of the changes in those specific periods
- If the cumulative effect is calculable but the period-specific effects are not, the cumulative effect is used to adjust the beginning balances for assets and liabilities with an offset to beginning retained earnings
- If determining the cumulative effect is impracticable, the change is applied prospectively
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It is impracticable if one of these is met:
1.Company made reasonable efforts but could not calculate the impact
2.Retrospective application requires assumptions about management intentions in a prior period that cannot be independently verified
3.Retrospective application requires significant estimates and it is not possible to obtain objective estimates
Example - Change to LIFO; it is impractical to estimate prior year LIFO layers
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Only allowed if there are new pronouncements or if the company is changing to an alternative principle that is preferable
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- Nature of the change
- Description of the prior period items
- Reason for the change
- Why the new method is preferable
- Method used to apply the change
- Impact of the change on Income from Continuing Operations, Net Income, and EPS
- Cumulative effect of the change on retained earnings as of the earliest period presented
- If retrospective application is impracticable - why and a description of the method used to account for the change
- Description of indirect effects
- Indirect effects recognized in the current period and the per share amounts
- Unless impracticable, the amount of indirect effects of the change and the per share amounts for each prior period presented
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- Accounted for on a prospective basis, impacting current and future periods only
- A change in estimate resulting from a change in principle is accounted for as a change in estimate
- An example is changing useful lives for depreciation
- All disclosures rel
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- A change in the structure of an organization
- Examples are changes in subsidiaries or changes in the use of the equity method for an investment
- Applied retrospectively for all periods presented
- Previously issued interim statements are also reported o
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- Nature of the change
- Reason for the change
- Net Income, OCI and per share amounts
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Accounted for as a prior period adjustment through restatement
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- Income from Continuing Operations
- Discontinued Operations
- Extraordinary Items
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To enable users to analyze future cash flows
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A program planned and controlled by management that materially changes either the scope of business or the way in which business is conducted
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Should provide extensive disclosure about the nature and effects of the restructuring
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Assets must comprise a component with operations and cash flows that are clearly distinguished from the rest of the entity
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Need both:
- Operations and cash flow will be eliminated
- No significant involvement after disposal
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For prior periods, remove these discontinued operations amount from their income statement lines and net into one number reported as Income (Loss) From Discontinued Operations:
- Revenue
- COGS
- Operating expense
- Income tax
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There are 2 reporting options:
- At the bottom of the income statement to get from NI to CI (preferred method)
- In a separate statement immediately following income statement (must start with NI)
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- Unrealized gains/losses on AFS securities
- Unrealized gains/losses on foreign exchange
- Reclassification adjustments of previously reported unrecognized gains/losses to realized gains/losses
- Adjustments to correct the funded status of pension plans
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3 reporting options
- In equity on the balance sheet
- In the statement of equity
- In the footnotes
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Financial statement that shows balances in assets, liabilities and equity as of a certain date
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Assets expected to be realized within one year
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Liabilities expected to be satisfied using current assets or other current liabilities within one year
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Events after the balance sheet date but prior to financial statement issuance(SEC filers) or availability for issuance (non SEC filers)
- Applies to interim and annual statements
- 2 types - recognized and non-recognized
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Subsequent events are recognized in the financial statements if the condition existed as of the balance sheet date
- Example - warranty claims or bad debts
- Settlements that occur after the balance sheet date but before issuance should be recognized
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Condition did not exist as of the balance sheet date.
- Example is a fire one week after year end
- Not recognized in financial statements until event occurs
- If major, event should be disclosed
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- Operating Activities
- Investing Activities
- Financing Activities
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Investments with original maturities of 3 months or less that are readily convertible to cash and so close to maturity that there is little risk due to changing interest rates
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Treasury bills, commercial paper, money market funds, and certificates of deposit
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Purchases of cash equivalents do not represent cash outflows or inflows, so they are not reported in the statement of cash flows
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Enable users of the financial statements to evaluate:
- Ability to generate positive cash flow
- Ability to pay liabilities and dividends
- Difference between income and the change in cash
- Cash and noncash investing and financing
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Purchasing or selling fixed assets or investments, lending and collecting on loans
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Equity and debt transactions such as borrowing money, repaying loans, issuing equity, share buybacks, paying dividends
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There are 2 methods to preparing a cash flow statement - the direct method and indirect method
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Operating Activities section:
- Cash received from customers
- Cash paid to suppliers
- Cash paid for operating expenses
- Cash paid for interest
- Cash paid for income taxes
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Net Sales + Beginning A/R - Ending A/R - A/R Write Offs
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COGS + Ending Inventory + Beginning A/P - Depreciation & Amortization - Beginning Inventory - Ending A/P
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Operating Expenses + Ending Prepaids + Beginning Accruals - Depreciation & Amortization - Beginning Prepaids - Ending Accruals
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Interest Income + Beginning Interest Receivable - Ending Interest Receivable
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Interest Expense + Beginning Interest Payable - Ending Interest Payable
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Tax Expense + Beginning Taxes Payable - Ending Taxes Payable
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There are different treatments depending on the phase of the lease you are in
- At inception cash used by investing activities increases due to the purchase of the fixed asset and cash provided by financing activities increases as the entire purchase is financed
- For ongoing payments the reduction in the capital lease obligation is reported as cash used by financing activities as payments are made
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Companies with at least $10 million in assets and 500 shareholders and securities on an exchange or OTC market must register
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Company with registered securities
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Describes the requirements for SEC financial statements
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- Annual report (Form 10-K)
- Quarterly report (Form 10-Q)
- Information statements (Form 8-K)
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- Less detail than 10-K
- Reviewed (not audited) quarterly financial statements
- Each year has three 10-Q’s and one 10-K.
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- Issued when there are material events
- Must be within 4 business days of the event
- Examples are mergers/acquisitions, change of directors or upper management, change in operations, change in auditors
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SEC requires 2 years for the balance sheet and 3 years for the income statement and statement of cash flows
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Reporting financial results that cover a period of less than 12 months (e.g. quarterly)
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Provide timely information
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Each interim period must stand alone with no exceptions to year-end reporting
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- Gross profit method is allowable
- LIFO layer liquidations use estimated replacement cost if they will be replaced by year-end
- Temporary declines in market value are not recognized
- Planned variances should not be recognized if they will be absorbed by year-end
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Use current estimated annual tax rate to calculate including all available tax planning alternatives, foreign tax rates and tax credits plus differences in rates used in prior quarters
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Should be retrospectively applied to the first day of the year, impacting current quarter retained earnings (not income) if it is the 2nd, 3rd or 4th quarter
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Spread to later interim periods and to other annual periods if not run immediately
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No differences for interim reporting
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Recognized in the interim period incurred, not spread to other periods
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Part of a business generating revenue and expense that has discrete financial information evaluated by those who make decisions on how to run the business
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- Segment for which financial information needs to be disclosed
- There are 3 tests - Only need to meet 1
1. Segment revenue is 10% of total revenue
2. Profit or loss is 10% of total profit or loss
3. Segment assets are 10% of total assets
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Only shown in segments if they are used internally by the chief operating decision maker (CODM) to evaluate the segment
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- At least 75% of revenue must be covered by segment reporting
- Keep adding segments below 10% until you get to 75% or 10 segments
- 10 is the maximum number of segments
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- Aggregation done before the 10% tests
- Similar segments can be added together if they have similar:
1. Products or services
2. Production processes
3. Type of customer
4. Distribution methods
5. Regulations
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- Description of segment
- Any aggregation
- Revenue by segment
- Intersegment revenue by segment
- Interest revenue and expense by segment
- Depreciation and amortization by segment
- Unusual or extraordinary items by segment
- Equity method investments by segment
- Tax expense by segment
- Noncash items by segment
- Differences in measurement between segments
- Reconciliation from segment totals to consolidated totals
- Restatements of segment information
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If not part of segment disclosures:
- External revenue for each product line
- Domestic/foreign split for revenue and assets
- Material revenue or assets by country
- Basis for determining country revenue
- Customers that are 10% or more of revenue
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- Investments
- Derivatives
- Asset Impairments
- Asset Retirement Obligations
- Goodwill
- Business Combinations
- Troubled Debt Restructurings
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- Identify the asset or liability
- Determine th eprinciple or most advantageous market
- Determine whether value is based on usage or sale
- Determine the valuation technique
- Obtain relevant inputs
- Calculate fair value
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The most active market
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- Independent
- Knowledgeable
- Able to buy/sell
- Willing to buy/sell
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If the highest and best use is to use the asset with other assets, valuation is based on the sale price of the asset considering other assets to be used with it
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If the highest and best use is to sell the asset on a stand-alone basis, the valuation is based on the amount to be received if the asset were sold by itself
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- Market Approach
- Income Approach
- Cost Approach
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- Uses prices of similar assets or liabilities observable in a market
- Examples are commodity or stock exchanges
- Market valuation is considered Level 1 or Level 2
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- Uses the present value of future cash flows or income
- Income valuation is considered Level 3
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- Uses replacement cost less obsolescence
- Cost valuation is considered Level 3
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Accounted for as a change in estimate
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- Based on unobservable inputs, like a company’s own assumptions or forecasts
- Considered the least reliable evidence of fair value
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Cash, ownership of another entity, or rights to receive cash
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An obligation to pay cash
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- Firm commitments of financial instruments
- All financial assets
- Loan commitments
- Nonfinancial insurance contracts with a 3rd party
- Warranty with a 3rd party
- Host financial instrument that is an embedded nonfinancial derivative separated from a nonfinancial hybrid instrument
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- Pensions
- Share based payments
- Stock options
- Post-employment benefits
- Disposal activities
- Financial instruments reported as equity
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Must be elected on the date an item is first recognized, on the date a firm commitment is entered into, or the date financial assets cease to qualify for fair value reporting
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Applied to all claims and obligations for contract
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Gains and losses for changes in fair value are reported in earnings
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2 options:
- Fair value and non-fair value items are reported on the same line with fair value items parenthetically disclosed
- Two separate lines for fair value and non-fair value
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- Valuation method and inputs used
- Fair value at reporting date
- Amount of Level 1, Level 2 and Level 3
- Amount of transfers between Level 1 and Level 2 and why
- Fair value of Level 3 and Level 3 gains/losses in realized and unrealized
- Description of where Level 3 gains/losses are on the income statement or statement of OCI
- Level 3 purchases, sales, and settlements
- Transfers out of Level 3 and why
- Gains/losses in earnings from unrealized and where those are in the income statement
- Valuation techniques used for Level 2 and Level 3 with inputs used and the reason for any changes
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- Valuation method and inputs used
- Fair value and reasons for fair value
- Amount of Level 1, Level 2, and Level 3
- Valuation techniques for Level 2 and Level 3 with inputs used and the reason for any changes
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- To estimate fair value
- To estimate the difference between sets of future cash flows
- To capture elements that would make up a market price
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- Estimate of future cash flow
- Expectations of potential variation
- Time value of money
- Premium for inherent uncertainty
- Liquidity and market imperfections
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- Uses all expectations about possible cash flows instead of the most likely cash flow amount
- Only the time value of money is included in the discount rate
- The other 4 elements impact the estimated cash flow amount; allows present value to be measured w
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The value at some date in the future if an amount earns interest for a period of time
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The value today of some future specified amount if a specified interest rate were earned
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The cumulative future value at the end of all periods if the same amount is deposited at the end of every period if interest is earned
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The value today of a series of payments deposited at the end of each period and earning interest
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- Single sum with payment now - FV of $1
- Single sum with future payment - PV of $1
- Series of payments with payment now - FV of annuity
- Series of payments with future payment - PV of annuity
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- Interest earned on interest
- It often refers to the number of times interest on interest is calculated
- For example, “compounded monthly” means interest is added to the principal each month and interest for the next month is calculated on the new princip
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Factor x Payment
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(Future Value or Present Value) / Factor
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(Future Value or Present Value) / Payment
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Recorded at face value, not discounted
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- FMV of goods/services received
- FMV of note
- Discount using incremental borrowing rate
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Costs incurred directly due to obtaining/giving a loan should be capitalized and amortized over the life of the loan
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- Total amount of notes
2. Amount of payments due by year for 5 years
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Revenue is recognized, but cash has not yet been received
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Expenses have been incurred, but have not yet been paid
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Revenue is not recognized because it has not yet been earned, but cash has been received
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Expenses have not been recognized because they have not yet been incurred, but cash has been paid
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Revenues recorded when cash is received and expenses recorded when cash is paid
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Journal entries must adjust balances from their current amounts to the correct amounts
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Collections \+ Ending A/R \+ A/R write offs - Beginning A/R = Sales
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Collections from other revenue \+ Beginning unearned revenue \+ Ending revenue receivable - Ending unearned revenue - Beginning revenue receivable = Other revenue
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Payments for purchases \+ Beginning inventory \+ Ending A/P - Ending inventory - Beginning A/P =COGS
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Payments for expenses \+ Beginning prepaid expenses \+ Ending accrued expenses payable - Ending prepaid expenses - Beginning accrued expenses payable = Expenses
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- Used only when collection of the sales price is not reasonably assured
- Revenue is recognized when cash is collected
- Gross profit is deferred to future periods and only recognized in proportion to collections
- Deferred gross profit is a contra-asset rep
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- Revenue and profit are recognized during the construction period based on 2 things:
1. Total estimated profit, which is total estimated revenue minus total estimated cost
2. Percent complete based on costs incurred to date compared to total estimated cos
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Profit Recognized in the Current Year = [(Actual Cost Incurred / Total Expected Cost) x Total Expected Profit] - Profit Previously Recognized
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Always recognized when the company estimates a loss
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Recognized as revenue by the franchiser only when substantial performance of the original service obligation is complete
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Deferred until the related revenue is recognized
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Need all 4:
- Sale is made
- Buyer’s investments demonstrate a commitment to pay for the property
- The seller’s receivable is not subject to subordination
- Risks and rewards have transferred to buyer without substantial continuing involvement of seller
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Payments received are recorded as liabilities until a sale is complete or the deal is canceled
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Seller recognizes only a portion of the profit at the time of sale and defers the remaining to future periods
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- Exist when an entity sells multiple products or services to the same customer that are to be delivered at different times
- E.g. Sale of a car with an extended warranty
- 2 requirements to recognize revenue on each element separately:
1. The delivered item
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Revenue associated with a substantive milestone is recognized upon completion of that milestone
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An uncertain event with 3 criteria:
- Payment is commensurate with the level of effort required to meet the milestone or the value created by completing the milestone
- Relates only to past performance
- Is reasonable compared to all other milestones
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- Description of the arrangement
- Description of each milestone and related consideration
- Determination of whether each milestone is substantive
- Factors considered in deciding if milestones are substantive
- Revenue recognized during the period under this method
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Recognize revenue when all 4 are met:
- Persuasive evidence of an arrangement exists (i.e. a contract)
- Delivery has occurred
- The fee is fixed or determinable
- Collectibility is probable
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Delivery has not occurred if there are undelivered elements essential to the functionality of the delivered item (i.e. the delivered item does not work as intended until later items are delivered)
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Collectibility is not probable if the amount related to the delivered items is subject to refund or adjustment if undelivered elements are not delivered or if payment terms are longer than one year
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Price charged when the item is sold separately or price established by management if the item is not yet sold separately provided that it is probable it will be sold separately in the future and the price will not change
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VSOE is required to determine the amount of revenue to allocate to each element of the transaction
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Defer revenue until one of the following things happen:
- VSOE is established
- All elements have been delivered
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- If post contract support (PCS) is the only undelivered element, recognize the entire fee ratably over the PCS period.
- If services that don’t require significant customization, modification or production are the only undelivered element, recognize the entire fee over the period the services are performed
- If the entire arrangement is a subscription, recognize the entire fee ratably
- If the only undelivered elements are additional copies of software that has already been delivered, recognize revenue on a copy-by-copy basis
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Includes: -Unrestricted cash -Imprest funds (petty cash) -Cash equivalents Excludes: -Cash that cannot be taken out of a foreign country for a certain time period (restricted cash) -Cash designated for special uses (special funds) -Unreimbursed expense vouchers
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- Investments with original maturities of 3 months or less that are readily convertible to cash and close to maturity so the risk of interest rate changes is reduced
- They include treasury bills, commercial paper, money market funds, and certificates of de
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Bank errors do not require adjustment in the company’s books, but errors by the company do require adjustment
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2 Methods:
- If discounts taken are consistent year-to-year, recognize as expense when payment is received
- If discounts taken are not consistent year -to-year, a receivables reserve can be established for the estimated amount of discounts, or sales can be recorded net of estimated discounts
- If discounts are not taken by the customer, the discount not taken is recognized as income
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2 Methods:
- Direct write-off - not acceptable for GAAP unless amounts are immaterial
- No expense is recognized until the receivable is written off - Allowance method - estimates the amount of A/R that is uncollectible at the time the receivable is recorded and sets up the Allowance for Bad Debts account, which is a contra asset account
- Bad debts are written off against the reserve, not against income
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- Can be done either based on a percentage of sales or a percentage of the A/R balance
- When based on sales, the amount in the allowance account continues to build as sales happen - It only gets reduced by write-offs
- When based on the A/R balance, the am
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Accounts Receivable - Allowance for Bad Debts
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Net A/R does not change when receivables are written off because both A/R and the allowance are reduced
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- Sales of various types of financial instruments
- These sales are accounted for as either a sale or a loan collateralized by the financial instrument that was “sold”
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- Results in de-recognition of asset by seller and recognition of asset by buyer
- To be accounted for as a sale, there are 5 conditions (need all):
1. The seller must give up control of the asset
2. The asset is untouchable by the seller or its creditors,
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Cash and other assets received less liabilities incurred
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- The interest is proportionate ownership of an entire asset
- All cash flows from the asset are divided proportionately based on shares of ownership
- Each participant has equal priority in the event of bankruptcy
- No participant is able to use the asset for collateral or to sell the asset unless all participants agree
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- Allocate cost among participating interests based on relative fair values
- Reduce the asset value by the cost associated with the interests sold (remaining asset is original carrying value less cost of interests sold)
- Recognize assets obtained and liabilities incurred as part of the sale at fair value
- Record the gain or loss on the sale in income in the period the sale occurred
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- If an asset transfer does not meet the criteria to be reported as a sale, it gets reported as debt by the seller and a loan receivable by the buyer
- The asset that was transferred remains on the transferor’s balance sheet, but is shown as a pledged asset
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If the transferee has control of the asset, the transferee should record the asset at fair value and an associated liability for the obligation to return the asset
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- Sales of accounts receivable at a discount so cash can be collected upon the sale of the receivable
- These sales transfer title to the A/R from the seller to the buyer
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The seller of the receivable has to repay the buyer if the end customer does not pay off the receivable
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The buyer of the receivable retains all risk of collection
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If actual experience differs from the estimate booked at the time a receivable is factored, those changes are Changes in Accounting Estimate impacting the current period income or expense, not prior periods
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Agreement where assets are sold to a lender with the requirement that the assets are later repurchased by the seller
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Transaction where a group of financial institutions buys a portion of a loan or loan portfolio
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A check that can be bought or sold
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- Can only be accounted for separately as an asset or liability if it is contractually separated from the financial asset
- Servicing contracts are usually assets because the income from servicing is typically higher than the cost - income is “more than ade
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Measured based on the typical cost to service in the market
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- Separate lines for fair value items and amortized items; or
- Combine fair value items and amortized items but parenthetically show the fair value items
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- Management’s basis for determining categories
- Description of risks
- Hedging instruments used to offset fair value changes
- Amount of contractual service fees, late fees and other fees
- Qualitative and quantitative information used to determine fair value
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- Beginning balance
- Ending balance
- Additions
- Disposals
- Changes in fair value assumptions
- Changes in fair value
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- Beginning balance
- Ending balance
- Additions
- Disposals
- Amortization
- Valuation allowance
- Changes in balance
- Description of changes
- Estimate of beginning and endin fair value
- Activity for valuation allowance
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- Obligations that will be satisfied using current assets or by creating other current liabilities
- Examples:
1. A/P
2. Notes payable
3. Dividends payable
4. Accrued liabilities
5. Advances to customers
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Future events are likely to occur
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Collection of receivables, warranty claims, premiums offered to customers (i.e. coupons), litigation
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- Recorded based on history
- For example, history shows 2% of all products require warranty repairs or 1% of sales are ultimately uncollectible, so it is probable at the time of sale that a warranty obligation and bad debt exist and they are reasonably est
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If actual losses are different than estimated, it results in a loss recovery if the loss was less than recorded or incremental expense if it was more than recorded
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Accruals for employee vacation, sick pay, and personal days are required if the benefit is based on services already rendered, the benefits vest or accumulate, and payment is probable and reasonably estimable
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- Vacation is earned by employees at a rate of 1 day per month
- Unused vacation can be carried over to subsequent years
- An accrual of 1 day per month should be recorded for each employee at the end of each month because the service has already been render
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Can be elected for commitments only involving financial instruments that otherwise would not be recognized until settlement
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Can be either debt or equity securities
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- Securities held by a company are reported as assets
- There are three categories:
1. Trading
2. Held-to-maturity
3. Available-for-sale
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- Classification for both debt and equity that the holder intends to sell in order to realize a profit
- Carried at FMV with changes (i.e. unrealized gains/losses) reported in income
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- Classification for both debt and equity that do not qualify as trading or held-to-maturity
- Carried at FMV with changes (i.e. unrealized gains/losses) reported in OCI
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Ownership interests or rights to obtain or dispose of ownership interests
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Contra-asset account that may be used to record the fair value adjustments to investments rather than increasing or decreasing the investment account directly.
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- Equals the difference between the current carrying value of the investment and its current market value
- It is “unrealized” because the investment is still owned and has not yet been sold
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- Equals the difference between the sales price of the investment and the cost to purchase the securities
- It is “realized” because this represents the actual gain or loss once the investment is sold
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Recorded at fair value with the unrealized gain/loss accounted for using the most conservative accounting method
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Unrealized gains/losses get recognized immediately
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Unrealized gains and losses get recorded as OCI
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Unrealized gains and losses stay in OCI, but the OCI amount gets amortized over remaining life of debt
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- HTM and AFS securities need to be reviewed for impairment in each reporting period
- If fair value is less than the carrying value and that decline in value is “other than temporary,” a loss equal to the amount of the decline is recognized in income and
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- Record the proportionate share of the investee’s net assets on the investor’s books in the investment account
- Changes in the investee’s net assets (and consequently the investor’s investment account) are recognized in income
- Used when the investor has
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- Significant influence is presumed for investments of 20% or more, but it is possible to have an investment that large where the investor does not hold significant influence
- It is also possible to have an investment of less than 20% where the investor d
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- Occurs when an investor acquires significant influence on an investment that previously did not grant significant influence
- Typically, this is when an investor buys additional stock
- The change requires retroactive adjustment of investment, income, an
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- Amount = Cost Basis of Stock * [Market Value of Stock Rights / (Market Value of Stock Rights + Market Value of Stock)]
- When stock rights are issued, the entry is to increase the investment in stock rights for the value based on the formula above and dec
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- Reported as a non-current asset unless the investor plans to cash in the policy within 12 months
- As insurance premiums are paid, the cash surrender value of the policy is increased, as calculated by the insurance company
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Record as inventory when title transfers.
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- Title passes to the buyer when it leaves the vendor.
- Should be included in the buyer’s inventory during shipment.
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- Title passes to the buyer when the buyer receives it.
- Should be included in the seller’s inventory during shipment.
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- Situation where one party becomes a sales agent for the owner of the inventory.
- Unsold items remain in the owner’s inventory, not the sales agent’s inventory even if the inventory is physically held by the sales agent.
- Revenue is recognized by the owne
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Since overhead cannot be specifically attributed to individual units of inventory, it is allocated to inventory on a systemic and rational basis.
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The hours or units expected under normal circumstances after reducing capacity for planned maintenance.
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Expensed as incurred.
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Expensed as incurred.
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Real-time tracking of inventory units and cost.
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Always taken against purchases.
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Formula: COGS = Beginning Inventory + Purchases - Ending Inventory
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At the lower of cost or market.
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Once written down, no recovery is allowed if market values increase. Recovery only occurs when inventory is sold.
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- Record inventory at market, forcing loss to COGS
2. Record inventory at cost and record write down separately
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3 types of inventory are not valued at LCM.
- Precious metals
- Commodity products
- Group purchases bundled together
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-Valued at market if quoted market prices exist and the goods are interchangable (e.g. a pound of sugar).
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-Used for purchases of many different items that will be bundled together and sold as units where the cost of each unit is not known but the total, cumulative selling price for all units taken together is known (e.g. costs of real estate that will be sub-
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Cost flow method that averages the cost of all units based on how many units are purchased at each cost.
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Cost flow method that averages only the unit cost without considering the quantity purchased.
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- Method of calculating a LIFO index where the ending inventory is valued at both end of year prices and base year prices to arrive at the percentage change for the year as compared to the earliest year in the index.
- Formula: Index = Ending Inventory at Y
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Formula: LIFO Layer Value = Inventory at Base Year Price x Price Index in Effect When Layer Was Added
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- Method of calculating a single, cumulative LIFO index by sampling 50% - 75% of the items in a pool and valuing the sampled items by both the beginning of year and end of year prices.
- The index for the current year is multiplied by the prior year’s cumul
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When costs are increasing, FIFO results in higher inventory and lower COGS than LIFO.
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When costs are decreasing, FIFO results in lower inventory and higher COGS than LIFO.
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Formula: Gross Margin Percentage on Sales = Gross Margin Percentage on Cost / (1 + Gross Margin Percentage on Cost)
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Formula: Gross Margin Percentage on Cost = Gross Margin Percentage on Sales / (1 - Gross Margin Percentage on Sales)
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- Gross profit
- Standard cost
- Direct cost
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Market value declines below contract value are recorded as losses.
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When title transfers.
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- Tangible items that will have a useful life of more than 12 months
- Items like land, buildings and equipment
- Valued at historical cost except for held for sale assets and impairments
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To record as an asset on the balance sheet
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Costs to acquire and prepare the asset for use, including freight, installation, taxes, fees, interest, etc.
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Include labor and overhead
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Record at FMV by debiting fixed assets and crediting income
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If there are costs associated with disposing of the asset at the end of its useful life, the liability should be recorded as a debit to the asset and a credit to the liability account at present value
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The rate on debt specific to the asset under construction or the weighted average rate on other borrowings if less than 100% of specific debt was incurred
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Need all 3:
- Costs have been incurred
- Activities to complete the asset are in process
- Interest cost is being incurred
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Any funds earning interest revenue cannot be offset against interest expense
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- Swap of assets with a 3rd party
- Recorded at FMV if the exchange has commercial substance and is not related to inventory sales
- If the FMV of the asset given cannot be determined, FMV of the asset received is used for both assets
- If the FMV of neither
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Always recognized
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Only recognized if FMV is determinable or boot is received
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Extra cash given in a non-monetary exchange
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- If the FMV of the asset given is known, boot is added to the capitalized cost of the asset received, not added to the loss
- If the FMV of the asset given is not known, but FMV of the asset received is known, boot is added to the loss
- If the transact
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Need all 3:
- FMV is higher than NBV given up
- Boot is received
- Exchange lacks commercial substance
- Earnings process is complete for boot portion but not exchange portion resulting in partial gain
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(Boot Received / Total FMV Received) x Total Gain
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When buying a group of assets for one price, allocate the cost to each asset based on the relative FMVs
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Match the expense of fixed assets with the periods in which the revenues/benefits are realized
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Asset Cost - Salvage Value
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The same amount of depreciation expense is booked each year for the asset until salvage value is reached
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Depreciation Base / Useful Life
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(1 / Useful Life) x 2 x NBV
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- Accelerated deprecation method where depreciation is higher in early years than straight-line. To get the denominator, add up all the numbers up to the useful life.
- For example, if the useful life is 6 years, the denominator is 21 (= 6+5+4+3+2+1)
- In
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Based on activity or units produced
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(Activity In The Period/Total Estimated Activity) x Depreciation Base
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Used when assets lose more value early in life (e.g. a car), are used more when they are new or become more expensive to maintain as they get older
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Beginning Cost + Cost Added - Ending Value Counted
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Uses the average life for several similar assets
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Annual Straight-Line Depreciation / Asset Cost
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Depreciation Rate / Annual Straight-Line Depreciation
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Depreciation is recorded up until the date of disposal
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- Reported at the lower of carrying value or FMV less cost to sell
- This pulls forward some or all of the loss prior to actual sale
- 1 of 3 exceptions to reporting fixed assets at historical cost
- Previous write downs can be reversed if FMV recovers
- HFS a
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