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FAR > U.S. GAAP Concepts & Framework > Flashcards

U.S. GAAP Concepts & Framework Flashcards

1
Q

What is the primary objective of accounting?

A

To measure income

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2
Q

What are the underlying assumptions of financial accounting?

A

Economic entity - a specific economic entity can be distinguished from other entities and from its owners

Going concern - the business is not expected to liquidate in near future

Unit-of-measure - the purchasing power of the currency is assumed to be constant

Periodicity - accounting info should be provided on a periodic, timely basis

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3
Q

What are the basic accounting principles?

A

Historical cost

Revenue recognition

Matching

Objectivity

Materiality

Consistency

Full disclosure

Conservatism

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4
Q

What is the most authoritative set of accounting pronouncements?

A

The FASB Codification

All announcements fall under the Codification ‘umbrella’

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5
Q

What is the highest authority within the FASB codification?

A

FASB SFAS (Statements of Financial Accounting Standards), APB (Accounting Principles Board) Opinions, ARBs (Accounting Research Bulletins)

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6
Q

What is the 2nd highest authority tier in the FASB codification?

A

FASB Technical Bulletins, Statements of Position (SOPs), Industry Guides

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7
Q

What is the lowest authority in the FASB codification?

A

Industry practices

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8
Q

Whose pronouncements are above industry practice in authority but below FASB Technical bulletins and industry guides within the FASB Codification?

A

Emerging Issues Task Force (EITF)

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9
Q

How does managerial accounting differ from financial accounting?

A

Managerial Accounting has a “timeliness” focus

Managerial Accounting does not follow GAAP

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10
Q

Which financial reports are required to be filed with the SEC?

A

Form 10K - Annual and Audited

Form 10Q - Quarterly and Reviewed

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11
Q

What is the focus of financial reports for individual companies?

A

Focus is on the needs of users to help them make decisions and assessments about the company

Does not make assessments of the economy

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12
Q

What are the two primary constraints of Financial Reporting?

A

Cost vs. Benefit

Materiality

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13
Q

What are the secondary constraints of Financial Reporting?

A

Consistency - Year vs. Year

Comparability - Company vs. Company

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14
Q

What are the fundamental qualitative characteristics of useful financial reporting?

A

Relevance

Faithful representation

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15
Q

What are the enhancing qualitative characteristics of useful financial reporting?

A

Comparability

Verifiability

Timeliness

Understandability

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16
Q

Describe ‘Relevance’ as a Qualitative Characteristic

A

Makes a difference to the user

Includes:
Predictive Value - Future Trends
Confirming Value - Past Predictions
Materiality - Could affect User Decisions

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17
Q

What are the qualities of Faithful Representation?

A

Completeness - Nothing omitted that would impact the decision-making of a user

Neutrality - Information presented is without bias

Freedom from Error - No material errors or omissions

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18
Q

How does conservatism affect the recording of accounting transactions?

A

When an estimate is necessary due to uncertainty, conservatism chooses the best option that won’t overstate the financial position of the company

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19
Q

How should accounting policies be reported?

A

All significant policies should be disclosed, though no specific format is required

Separate note or “Summary of Significant Accounting Policies” before notes is preferred

Should include unusual application of acceptable principles

Should not duplicate details from elsewhere in financial statements

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20
Q

What disclosures on accounting policies are required in financial statements?

A

Accounting Principles used

Basis of Consolidation

Inventory Pricing Methods

Depreciation Method

Amortization of Intangibles

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21
Q

What is an accrual?

A

Earned (Revenue) or Incurred (Expense), but no Cash Receipt/Outlay yet

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22
Q

What is a deferral?

A

Cash Receipt/Outlay, but not Earned (Revenue) or Incurred (Expense)

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23
Q

What is recognition in accounting?

A

When an item is recorded and included in the financial statements

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24
Q

Describe fair value with respect to an asset

A

The price you would receive if you sold the asset (exit price)

Assumes asset is at its highest and best value with sufficient exposure to market

Assumes asset is sold at its most advantageous market - principal market - to get the best price possible, and acquired for the highest and best use of the asset (only for nonfinancial assets)

Excludes adjustments for transaction costs

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25
Q

What is considered in determining the highest and best use of an asset for fair value purposes?

A

Whether it is

  • physically possible
  • legally permissible
  • financially feasible
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26
Q

What market assumptions are made in a fair value assessment?

A

Buyer and Seller are not Related

Buyer and Seller are Knowledgeable

Buyer and Seller are able to transact – i.e. This isn’t a hypothetical transaction for Fair Value measurement purposes. The buyer actually does have the $10M to purchase the asset you’re trying to value at $10M

Buyer and Seller are both motivated to buy/sell

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27
Q

What are the two kinds of inputs for valuation techniques?

A

Observable - reflect the assumptions which would be used based on data from sources independent of the reporting entity

Unobservable - the entity’s assumptions about the assumptions mentioned above

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28
Q

What items are included in a Level 1 input in the fair value hierarchy?

A

Price quotes or market prices

For example, NYSE or NASDAQ

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29
Q

What items are included in a Level 2 valuation input?

A

Observable inputs besides quoted prices for the item

Interest rates, prime rate, quoted prices for similar assets (or even for identical items in nonactive markets)

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30
Q

What items are included in Level 3 inputs of the fair value hierarchy?

A

Unobservable inputs, such as assumptions or forecasts

Lowest priority for valuation

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31
Q

What are acceptable valuation techniques for fair value?

A

Market approach - uses market transactions and prices to value the asset

Income approach - uses present value, discounts earnings

Cost approach - uses replacement cost to value the asset

32
Q

What is the fair value option?

A

Decision to measure eligible items at FV, though it is not required

Decision is irrevocable and must be applied to entire instrument

33
Q

What are current assets?

A

Cash

Inventory or Assets expected to be converted or consumed during a business’ operating cycle

Deferred Gross Profit on Installment Sales (Contra Asset)

Receivables expected to be collected in 12 months or less

34
Q

What are current liabilities?

A

Liabiities that will use current assets during the present operating cycle

35
Q

What are valuation accounts?

A

Reductions or increases in an asset or liability account from its carrying amount

Part of the related asset or liability - neither an asset nor a liability in itself

36
Q

What is an accrued liability?

A

Expense that has been incurred, but not paid

Example: rents payable

37
Q

What is a deferred revenue?

A

A type of current liability

Payments that have been received but cannot be recorded as revenue yet

Example: Tenant pre-pays rent – Landlord still must “perform” to earn it and is a liability until this happens

38
Q

When are revenues recognized?

A

When they have been earned; i.e. company has performed

39
Q

What is a gain?

A

Increase in equity from an activity or event that is not central to the main activities of the business

Can be operating or non-operating

40
Q

What is a loss?

A

Decrease in equity from an activity or event that is not central to the main activities of the business

Can be operating or non-operating

41
Q

What is an operating cycle?

A

Average time it takes to turn materials or services into Cash

42
Q

What is the present value of future cash flows?

A

Valuation method - the current value of a future amount of money using a specific interest rate

43
Q

What is historical cost?

A

How much an asset cost - (net of depreciation and amortization)

44
Q

What is replacement cost?

A

How much it would cost to reacquire an asset today (Entrance Cost)

45
Q

What is a market cost?

A

The sale price of an asset (Exit Cost)

46
Q

What is Net Realizable Value?

A

Sale Price of an Asset - Selling/Disposal Fee

47
Q

What does it mean for an account to be price-level adjusted?

A

Adjusted for changes in the dollar’s purchasing power

48
Q

When is revenue recognized in an installment sale?

A

Revenue recognized upon receipt of cash

Only used when cash collection is uncertain

49
Q

What is deferred gross profit?

A

Gross Profit that can’t be recognized until cash is received

D.GP = Gross Profit % x Accounts Receivable

Pay attention to the year if GP% varies

50
Q

What is the cost recovery method?

A

No profit is recognized until all costs are recovered from purchase of the asset

Most conservative method of revenue recognition when collection of sale price is uncertain

51
Q

How are franchise revenues recorded?

A

Franchiser - Startup franchise fee revenue deferred until franchisee has completed substantial performance

Franchisee – Costs are deferred until corresponding revenue is recognized

52
Q

How are discontinued operations reported? When are they used?

A

Reported Net of Tax after Continuing Operations, but before Extraordinary Items

Company decides to cease operating a segment of its business

Includes Income (or loss) from the period plus the gain (or loss) from disposal

53
Q

What qualifies as an extraordinary item? How is it recorded?

A

Both unusual AND infrequent

Reported Net of Tax after Discontinued Operations

Note: Usual or Infrequent Items are reported as part of Continuing Operations

54
Q

What is constant dollar accounting?

A

Adjusts assets to reflect a consistent level of purchasing power due to inflation

Uses the Consumer Price Index (CPI)

55
Q

When are expenses recognized?

A

When they are incurred. Accrue if not yet paid.

56
Q

What are accrued expenses?

A

Those incurred but not paid.

Product costs - Expenses should be matched with associated revenues as they are recognized (sales commission on a used car sale)

Period costs - Expenses amortized and recognized with the passage of time

57
Q

When should impaired assets be written down to fair value and expensed?

A

Immediately.

58
Q

What major items should be classified under General & Administrative (G&A) expenses?

A

Office staff salaries

Office/building rent

Office supplies

Note: Sales staff salaries and portions of the building assigned to Sales should be allocated to Selling Expense, not G&A

59
Q

What are business start-up costs?

A

One-time costs for opening a new business

Expensed as they are incurred

60
Q

When is interest not expensed?

A

Interest on projects (software) for internal use is not expensed, but is instead capitalized

61
Q

What are the major components of comprehensive income?

A

Net Income + Other Comprehensive Income (OCI):

Revenues/Expenses

Gains/Losses

Cumulative accounting adjustments

Reclassifications adjustments

Non-owner changes in equity

62
Q

Where is comprehensive income reported?

A

Reported in Stockholder’s Equity on Balance Sheet or in a Statement of Income and Comprehensive Income

Note: Earnings Per Share is not required for OCI

63
Q

What are some major risks and uncertainties that must be disclosed?

A

Nature of Operations

Use of Estimates & listing of Significant Estimates

Concentration vulnerability

64
Q

What items are considered cumulative accounting adjustments?

A

Foreign Currency Translation Adjustments

Unrealized gains on AFS Securities

Minimum Pension Liability adjustment for defined benefit plans

65
Q

What is the purpose of a reclassification adjustment?

A

Avoids double counting items that were included in both Net Income and OCI

Example: AFS Securities previously included in OCI are now sold at a loss and reported on the Income Statement

66
Q

What is capital maintenance?

A

Principle that income is recognized only after capital has been maintained

Amount of capital at end of period must equal or exceed beginning-of-period amount

Financial capital maintenance (used in present financial statements) measures capital as a cash amount
-Physical capital maintenance measures physical productive capacity

67
Q

What is realization?

A

The process of converting non-cash resources and rights into money

“Realized” and “unrealized” refer to gains or losses on assets sold and unsold, respectively

68
Q

How many levels of authoritative GAAP are there?

A

One – two levels total, one of which is authoritative (FASB Codification), the other of which is nonauthoritative (all other literature)

69
Q

What else does the FASB Codification include guidance on?

A

SEC content

70
Q

Is collecting cash on a receivable an instance of realization?

A

No

Realization involves conversion from noncash assets to cash OR CLAIMS TO CASH – so receivables are already deemed to be cash assets

71
Q

How do financial statements provide information on management?

A

Indirectly – info on company’s economic activities directly

72
Q

What is the role of the Statements of Financial Accounting Concepts (SFACs)?

A

To give concepts for the further development of GAAP

Does not itself establish GAAP

73
Q

What assets are not permitted to be revalued at FV?

A

Financial instruments classified by the user as equity

74
Q

When are deferred tax liabilities counted as current?

A

If they are expected to “reverse” within the year

“Reversal” for DTLs involves the company paying the liability

75
Q

What is required for a new FASB Standard to be issued?

A

Majority vote of FASB board members

FAR (26 decks)

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