1_FAR_Complete_Set.txt

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1_FAR_Complete_Set.txt
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2011-06-30 12:04:57
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FAR review
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CPA FAR review flashcards
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  1. How are changes in accounting principle applied?
    Retrospectively - all prior periods much be adjusted, if practicable. If a cumulative adjustment is made, it gets adjusted to the opening balance of retained earnings.
  2. Would a change from Completed Contract to Percentage of Completion be a change in accounting principle, or a change of estimate? How would it be applied?
    A change of principle. Applied retrospectively.
  3. Would a change from LIFO to FIFO be a change in accounting principle or a change of estimate? How would this change be applied?
    A change in accounting principle. Applied retrospectively.
  4. How is a change in accounting estimate applied?
    A change in accounting estimate is applied prospectively (going forward). No backwards adjustment is made.
  5. Would a change from straight line depreciation to double declining balance be a change in accounting principle, or a change in estimate? How would this change be applied?
    Change in depreciation method would be a change in accounting estimate. It is applied prospectively.
  6. How is a correction of an accounting error made?
    Cumulative effect of error gets adjusted to the beginning balances of assets and liabilities in the earliest period presented in the comparative statements. The correction of the error must be included in the footnotes.
  7. What are the requirements for a prior period adjustment?
    Effect is Material Is identifiable in Prior Period Couldn't be estimated in Prior Periods
  8. How is a change from a non-GAAP accounting method to a GAAP method recorded?
    It is treated as a correction of an accounting error. Cumulative effect of error gets adjusted to the beginning balances of assets and liabilities in the earliest period presented in the comparative statements Correction of the error must be included in the footnotes
  9. How does an inventory error effect the financial statements?
    Effect on Ending Inventory = Effect on Net Income If one is overstated, both overstated. If one is understated, both understated. Misstating inventory corrects itself after TWO periods.
  10. How is a change in entity recorded?
    Applied retrospectively. All prior periods presented for comparative purposes must reflect the change Footnote disclosures must be made Changing to Consolidated F/S
  11. What is a serial bond?
    Any bond that matures in installments
  12. What is a term bond?
    Any bond that matures on a single date
  13. What is a debenture bond?
    A bond not secured by any collateral
  14. What is a sinking fund bond?
    Cash is held in a sinking fund for repayment of bond at maturit 5 years of requirements and maturity details should be disclosed
  15. What is the formula to calculate proceeds of a bond sale?
    Present Value of the principal payment at maturity + Present Value of Interest Payments made = Market Value of Bond Proceeds
  16. How is the present value of a bond calculated?
    Step 1: PV of $1 @ Yield Rate (not Stated Rate) x Bond Face Value PLUS Step 2: PV of an Ordinary Annuity of $1 for Term @Yield x (Stated Rate x Face)
  17. Which costs are included in bond issuance costs? How are they recorded?
    Include Engraving, Printing, Legal, Underwriter, Registration Debited to a deferred charge account and amortized over life of Bond using S/L Bond Proceeds �Bond Issuance Costs = Net Bond Proceeds Time of amortization begins when issued
  18. How are bonds reported when classified as trading securities?
    Reported at FMV with unreleased gains and losses being included in earnings
  19. How are bonds amortized under the interest method?
    Both discount and premium amortization amounts increase each year
  20. Describe the book value method when converting from bonds to stocks?
    No gain or loss recognized APIC is the plug for the difference between the Bond�s Book Value and the Par Value of the Common Stock
  21. What is the stated rate for a bond?
    Rate on the face of the bond
  22. What is the market rate on a bond?
    Rate equivalent that bonds are sold for based on current market sale price versus future cash flows to be received.
  23. What happens when the bond's market rate is greater than the stated rate?
    Bond will need to sell at a discount in order for buyers to be interested. The difference in market rate vs. the stated is made up by the buyer purchasing the bond for less than par value
  24. What happens when a bond's market rate is less than the stated rate?
    Bond will need to sell at a premium in order for buyers to be interested. The difference in market rate vs. the stated is made up by the buyer purchasing the bond for more than par value
  25. How does accrued interest on a bond affect the purchase price?
    The total cash that seller receives will be MORE than they normally would (set aside any considerations for premium or discount, they are irrelevant for this point). Basically, the purchaser of the bonds must give the bond issuer the amount of accrued interest up front.
  26. When does interest expense start accruing on a bond?
    When the bonds are issued
  27. How is an interest payment on a bond calculated?
    Cash for payment = Stated rate x Face amount
  28. What amount of interest is expensed on a bond interest payment?
    Interest expense = effective yield x carrying value Any difference between expense and cash payment is applied as amortization against premium/discount
  29. What are convertible bonds? Which recording method is used?
    Bonds that can be converted to stock Book value method used if no gain or loss Market value method used if there is a gain or loss
  30. How is the retirement of bonds recorded?
    Gain or Loss is Ordinary Extraordinary if both unusual and infrequent
  31. When is a gain recognized in a debt restructuring?
    If terms are modified, and future payments are now less than the carrying amount of the debt, then a Gain is recognized
  32. What is the gain recognized under a settlement of debt?
    Gain recognized: Difference between cash paid and carrying amount of debt Difference between non-cash asset given and re-valued at FMV and debt carrying amount
  33. For a creditor, how is a loan impairment recorded?
    If future cash flows discounted at loan�s Effective Interest Rate are less than Carrying Value: Effective Rate calculated using original rate, not modified rate
  34. What items are included in operating activities on the Statement of Cash Flows?
    Cash received from Customers, Interest & Dividends, Trading Securities Cash paid to Vendors, Suppliers, Interest, Taxes, Trading Securities
  35. What items are included in investing activities on a Statement of Cash Flows?
    Cash received: Sale of PP&E, Sale of Investments, Loan Principle Cash paid: Loans, Acquisitions, AFS or HTM Securities, Taxes, Trading Securities
  36. What items are included in Financing Activities in a Statement of Cash Flows?
    Cash received: Issuance of Stock, Issuance of Debt Cash paid: Dividends
  37. What is the direct method for a Statement of Cash Flows?
    Preferred method Starts with Net Income, then works back to ending cash If used, indirect method must also be shown
  38. What is the indirect method for a Statement of Cash Flows?
    Starts with Income from Continuing Operations Adjusts for changes in accounts like A/R, A/P, Inventory and non-cash revenues, expenses, gains, losses
  39. When is the fair value method used for recording interest in a separate company?
    Ownership 20% Accounted for as purchase If amount paid is less than fair value, results in a gain in current period
  40. When is the equity method used when purchasing another company's stock? How is it recorded?
    Ownership 20% to 50% Gives "significant influence" Excess of purchase price paid ver par is considered goodwill Dividends received from the investee reduce the investment account and are not income
  41. When are companies required to file consolidated financials? How is it recorded?
    Ownership of other company is greater than 50% Investment account is eliminated Only parent company prepares consolidated statements, not subsidiary. Acquired assets/liabilities are recorded at FV on acquisition date. Eliminating entries for intercompany sales of inventory & PPE, also intercompany investments
  42. When is consolidation not required?
    Ownership less than 50% OR Majority owner does not "control" - ie bankruptcy or foreign bureaucracy
  43. What occurs under a step acquisition?
    Acquirer held previous shares accounted for under Fair Value Method or Equity Method, and are now re-valued to Fair Value Results in a Gain or Loss in current period
  44. What is the difference between an acquisition and a merger?
    Acquired companies continue to exist as a legal entity � their books are just consolidated with the parent company in the parent�s financial statements Merged companies cease to exist and only the parent remains
  45. How are acquisition costs recorded in a merger?
    Expensed in period incurred � i.e. NOT capitalized: Accounting, Legal, Valuation, Consulting, Professional Netted against stock proceeds: Stock registration and issuance costs
  46. What is a current asset?
    Cash plus other assets that will are expected to be sold or converted to cash during the current operating cycle Includes: Demand deposits, cash equivalents, accounts receivable, inventory, prepaids, and short-term investments
  47. What is a current liability?
    A liability expected to be paid within 12 months or less
  48. How is the Quick Ratio calculated?
    (Cash + A/R + Trading Securities) / Current Liabilities
  49. How is the Current Ratio calculated?
    Currents Assets / Current Liabilities
  50. How is Working Capital calculated?
    Currents Assets - Current Liabilities
  51. How is A/R Turnover calculated?
    Credit Sales / Average AR
  52. How is Inventory Turnover calculated?
    COGS / Average Inventory
  53. How is # of Days Sales in Inventory calculated?
    365 / Inventory Turnover
  54. How is Days to Collect AR calculated?
    Average AR / Average Sales per Day
  55. How are gain contingencies recorded?
    They are NOT accrued due to Conservatism
  56. When are loss contingencies recorded?
    If Probable - they are accrued (if estimable) and disclosed If Reasonable Possible - they are disclosed If they are Remote - don't accrue or disclose
  57. What is a "temporary difference" related to deferred taxes?
    GAAP says to recognize a revenue/expense in one period and tax laws say to recognize it in another Example: Dividends from a subsidiary accounted for using the Equity Method; tax income, but not book income
  58. What is a deferred tax asset?
    Deduction will reduce future income taxes expense.
  59. What is a deferred tax liability?
    Income will be taxable in a future period and will increase future tax expense
  60. Which period's tax rate is used to calculate a deferred tax asset or liability?
    The FUTURE enacted tax rate, not the current one. It is never discounted to present value.
  61. What valuation allowance is used with respect to a deferred tax asset?
    If it is �probable� that not all of a Deferred Tax Asset (debit) will be realized, then the Deferred Tax Asset account must be written down (credit) to reflect this
  62. What affect do "permanent differences" have on deferred income taxes?
    They have no tax impact. When calculating the total differences between book and tax income, subtract the permanent differences from the total before applying a future enacted tax rate
  63. What is deferred income tax expense?
    The sum of Net Changes in Deferred Tax Assets and Deferred Tax Liabilities GAAP Method for calculating is the �Asset and Liability Approach� Note: IFRS uses the "Liability approach" only.
  64. How are deferred tax assets classified as "current" or "non-current" on the balance sheet?
    �Current� Deferred Tax Assets and Liabilities will impact income tax expense within 12 months or less. All current amounts are netted and reported as a single amount on the Balance Sheet �Non-Current� Deferred Tax Assets and Liabilities will impact income tax expense within 12 months or more. All non-current amounts are netted and reported as a single amount on the Balance Sheet
  65. How are derivatives recorded?
    At cost when acquired, re-valued to fair value each period on B/S.
  66. How are unrealized gains/losses on trading securities recorded?
    Recorded on income statement
  67. How are gains and losses on Available for Sale securities recorded?
    They are included in Other Comprehensive Income.
  68. What is a Fair Value Hedge? How is it recorded?
    Fair Value Hedge offsets exposure to changes in the value of a recognized asset/liability or of an unrecognized commitment Initially recorded on Balance Sheet at Fair Value Gains/Losses recorded on Income Statement
  69. What is a Cash Flow Hedge? How is it recorded?
    Cash flow hedges protect from exposure to fluctuations in cash flows. Initially recorded on Balance Sheet at Fair Value Gains/Losses going to OCI Example: Futures contract on grain purchases
  70. Where are gains and losses on foreign currency hedges recorded?
    In Other Comprehensive Income (OCI)
  71. What disclosures are required for derivative transactions?
    Objectives and Strategies Context to help investor understand the instrument Risk Management Policies Complete List of Hedged Instruments
  72. How do transactions denominated in in a currency other than a company's functional currency affect the income statement?
    Fluctuations in that currency cause a gain or loss that must be recognized on the income statement as Income from Continuing Operations
  73. For the balance sheet, which date's translation rate is used to report assets and liabilities?
    The current translation rate as of the balance sheet date is used to report assets and liabilities.
  74. Which date's currency translation rate is used for the reporting of revenue and expense transactions in a foreign currency?
    Use the weighted average exchange rate for the current year.
  75. If the functional currency is the reporting currency, which exchange rate is used on the foreign currency financial statements?
    Foreign Currency Financial Statements are remeasured into the Reporting Currency (Dollar) using the weighted-average exchange rate
  76. Where are remeasurement gains and losses due to foreign currency translation reported?
    On the income statement as Other Income.
  77. What is the primary objective of accounting?
    To measure income
  78. What is the most authoritative set of accounting pronouncements?
    The FASB Codification All announcements fall under the Codification "umbrella"
  79. What is the highest authority within the FASB codification?
    FASB SFAS, APB Opinions, ARBs
  80. What is the 2nd highest authority tier in the FASB codification?
    FASB Technical Bulletins, SOPs, Industry Guides
  81. What is the lowest authority in the FASB codification?
    Industry practices
  82. Whose pronouncements are above industry practice in authority but below FASB Technical bulletins and industry guides within the FASB Codification?
    Emerging Issues Task Force (EITF)
  83. How does managerial accounting differ from financial accounting?
    Managerial Accounting has a �timeliness� focus Managerial Accounting does not follow GAAP
  84. Which financial reports are required to be filed with the SEC?
    10K - Annual and Audited 10Q - Quarterly and Reviewed
  85. What is the focus of financial reports for individual companies?
    Focus is on the needs of users to help them make decisions and assessments about the company Does not make assessments of the economy
  86. What are the two primary constraints underlying all reporting qualities?
    Cost vs. Benefit Materiality
  87. What are the secondary constraints underlying all reporting qualities?
    Consistency Comparability
  88. Describe "relevance" as an accounting quality
    Makes a difference in the eyes of the user Includes: Timeliness � must be available Predictive Value � Forward looking: helps user to predict future trends Feedback Value � Backward looking: helps user to assess past predictions
  89. Which aspect of relevance means that information must be available when it is useful?
    Timeliness
  90. Which aspect of relevance means information must be forward looking and help to predict future trends?
    Predictive value
  91. Which aspect of relevance is backward-looking and helps users to assess past predictions?
    Feedback value
  92. What are the qualities of reliable accounting information?
    Neutral - no bias Verifiable - Normal users would arrive at common conclusions about the status of the company Faithfully represents true condition of company
  93. Financial Reporting
    • How does conservatism affect the recording of accounting transactions?
    • When an estimate is necessary due to uncertainty, conservatism chooses the best option that won�t overstate the financial position of the company
  94. What is an accrual?
    Earned (Revenue) or Incurred (Expense), but no Cash Receipt/Outlay yet
  95. What is a deferral?
    Cash Receipt/Outlay, but not Earned (Revenue) or Incurred (Expense)
  96. What is recognition in accounting?
    When an item is recorded and included in the financial statements
  97. Describe fair value with respect to an asset
    The price you would receive if you sold the asset Assumes asset is at its highest and best value Assumes asset is sold at its most advantageous market to get the best price possible
  98. What market assumptions are made in a fair value assessment?
    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 � they 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
  99. What items are included in a Level 1 input in the fair value hierarchy?
    Price quotes or market prices For example, NYSE or NASDAQ
  100. What items are included in a Level 2 valuation input?
    Interest rates Prime rates Mid level valuation
  101. What items are included in Level 3 inputs of the fair value hierarchy?
    Unobservable inputs, such as assumptions or forecasts Lowest priority for valuation
  102. What are acceptable valuation techniqures for fair value?
    Market approach - uses market transactions and prices to value the asset Income approach - uses present value to discount earnings Cost approach - uses replacement cost to value the asset
  103. What are current assets?
    Inventory or Assets expected to be converted or consumed during one business operating cycle Deferred Gross Profit on Installment Sales (Contra Asset) Receivables expected to be collected in 12 months or less
  104. What are current liabilities?
    Liabiities that will use current assets during the present operating cycle
  105. What is an accrued liability?
    Expense that has been incurred, but not paid Example: rent payable or payroll taxes
  106. What is a deferred revenue?
    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
  107. When are revenues recognized?
    When they have been earned, ie. company has performed
  108. What is a gain?
    Increase in equity from an activity or event that is not central to the main activities of the business Can be operating Can be non-operating
  109. What is a loss?
    Decrease in equity from an activity or event that is not central to the main activities of the business Can be operating Can be non-operating
  110. What is an operating cycle?
    Average time it takes to turn materials or services into Cash
  111. What is the present value of future cash flows?
    Valuation method - the current value of a future amount of money using a specific interest rate
  112. What is historical cost?
    How much an asset cost net of depreciation or amortization
  113. What is replacement cost?
    How much it would cost to reacquire an asset today (Entrance Cost)
  114. What is a market valuation?
    How much you could sell an asset for today (Exit Cost)
  115. What is Net Realizable Value?
    How much you can sell an asset for net of selling or disposal costs
  116. When is royalty income recognized? How is it recognized?
    Recognized when the company has completed its obligations in regards to the revenues � i.e. when earned If the royalty % is applied against net sales, then subtract the estimated return amount from the gross sales first and then apply the royalty rate
  117. When is revenue recognized in an installment sale?
    Revenue recognized upon receipt of cash instead of when product is sold Can only be used when it is uncertain whether the sale price will actually be collected
  118. What is deferred gross profit in an installment sale?
    Gross Profit that can�t be recognized until cash is received D.GP = GP% x AR AR=(D.GP/GP%) Pay attention to the year if GP% varies
  119. What is the cost recovery method?
    No revenue recognized until all costs are recovered from purchase of the asset Most conservative method of revenue recognition when collection of sale price is uncertain
  120. What is subscription revenue? How is it recorded?
    Payment for a service or product to be delivered over time. Payment has been received, but performance is not complete. Most conservative method of revenue recognition when collection of sale price is uncertain Recorded as a Deferred Revenue (Liability) on Balance Sheet
  121. How are franchise revenues recorded?
    Franchiser - Startup franchise fee revenue deferred until franchiser has completed substantial performance Franchisee � Costs are deferred until corresponding revenue is recognized
  122. How do you calculate sales revenue starting from cash basis income?
    Mnemonic: SPEAR-BAR Customer Payments (Cash basis income) + Ending Accounts Receivable � Beginning Accounts Receivable = Sales Revenue � Accrual Basis
  123. How do you calculate COGS starting from Cash Basis?
    Mnemonic: CRAP-I Cash Remitted (paid) (Cash basis money paid for inventory) +Increase in Accounts Payable �Increase in Inventory =COGS � Accrual Basis
  124. How are discontinued operations reported? When are they used?
    Reported Net of Tax after Continuing Operations, but before Extraordinary Items Company decides to cease operating once segment of its business Includes Income (loss) from the period plus the gain or loss from disposal of the component
  125. What qualifies as an extraordinary item? How is it recorded?
    Both unusual and infrequent 30 Reported Net of Tax after Discontinued Operations to arrive at Net Income Note: Usual *or* Infrequent Items are reported as part of Continuing Operations
  126. What is constant dollar accounting?
    Adjusts assets to reflect a consistent level of purchasing power due to inflation Uses the Consumer Price Index (CPI)
  127. When are expenses recognized?
    When they are incurred.
  128. What are accrued expenses?
    Those incurred but not paid. Product costs - Expenses should be matched with associated revenues as they are recognized (sales person earns a commission on used car sale) Period costs - Systematic Allocation - Expenses should be recognized with the passage of time (amortization)
  129. When should impaired assets be written down to fair value and expensed?
    Immediately.
  130. What major items should be classified under General & Administrative expenses?
    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
  131. What are business start-up costs, and how should be be reported?
    One-time costs associated with opening a new business Expensed as they are incurred
  132. When is interest *not* expensed?
    Interest on projects (software) for internal use is not expensed, but is instead capitalized
  133. What are the major components of comprehensive income?
    Net Income + Other Comprehensive Income (OCI): Revenues/Expenses Gains/Losses Cumulative accounting adjustments Reclassifications adjustments Non-owner changes in equity
  134. What items are considered cumulative accounting adjustments?
    Foreign Currency Translation Adjustments Unrealized gains on AFS Securities Minimum Pension Liability adjustment for defined benefit plans
  135. What is the purpose of a reclassification adjustment?
    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
  136. Where is comprehensive income reported?
    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
  137. What disclosures on accounting policies are required in financial statements?
    Accounting Principles used Basis of Consolidation Inventory Pricing Methods Depreciation Method Amortization of Intangibles
  138. What are some major risks and uncertainties that must be disclosed?
    Nature of Operations Use of Estimates & listing of Significant Estimates Concentration vulnerability
  139. What expenditures are included in the cost of equipment?
    All expenditures to get the asset into "working condition" and ready for use: Purchase price + liabilities assumed Shipping Taxes Insurance Installation Testing Legal fees Construction loan interest Any alterations to existing facilities or equipment necessary for installation and/or that extend the life or increase the efficiency of existing assets
  140. How are Research and Development costs recorded?
    They are expensed in the period incurred and are not capitalized.
  141. Which expenditures are included in the cost of a building?
    All expenditures to get the building into "working condition" are ready for use are included in the building's cost.
  142. Which expenditures are included in the cost of land?
    All expenditures to get the land ready for its intended use: Title & County Fees Clearing of Land - Dirt work, etc Demolition and removal of old buildings (minus any scrap or salvage) Note: capitalized land costs are not depreciated
  143. In an exchange of non-monetary assets, how much gain is recognized if no additional cash is exchanged when there is no significant difference in resulting cash flows?
    If the cash flows from the assets exchanged are not significantly different, no gain or loss is recognized on a non-monetary exchange, as it lacks commercial substance. The new asset is recorded at the book value of the asset given up. The only gain that can be recognized is any boot (cash) received.
  144. In an exchange of non-monetary assets, what gain is recognized if resulting cash flows are significantly different?
    If resulting cash flows are significantly different, then the transaction has commercial substance and a gain/loss is recorded on the exchange. The new asset is recorded at the FAIR VALUE of the assets given up, unless the asset acquired has a fair value that is easier to determine.
  145. How is donated property recorded by the done?
    Recorded at Fair Value + costs associated with getting the property into working condition for it�s designed purpose Exam Tip - Think of a charity holding a �fair� and then donating the property which is then recorded at �fair value�
  146. How is donation of property recorded by the donor?
    Recorded at Fair Value of asset given up. Gain or Loss is recorded.
  147. How is double-declining balance (DDB) depreciation calculated?
    1 / (Useful Life x 2 x Book Value) Ignore salvage value.
  148. How is Sum of Year's Digits (SYD) depreciation calculated?
    (Cost - Salvage Value) x (Remaining Useful Life / SYD) = Depreciation expense For example, the depreciation factor for the third year of a 10-year asset would be: = 8 / (10+9+8+7+6+5+4+3+2+1) = 8/55 = 14.5% Remaining useful life = 8, SYD = 55
  149. How is straight line depreciation calculated?
    (Cost - Salvage Value) / Useful life = depreciation expense
  150. When is an asset considered to be impaired? How is impairment loss calculated?
    When the undiscounted future cash flows are less than the carrying value of the asset. Carrying Value - Fair Value = Impairment Loss Note: impaired assets that recover their value can't be written back up once written down
  151. How are legal fees to defend a patent amortized?
    If the patent is SUCCESSFULLY defended, the legal fees are amortized over the patent's economic life. If unsuccessful, they are expensed immediately.
  152. What are the two steps for testing goodwill impairment?
    Compare the CV to the FV. If FV is greater than CV, no impairment exists, you�re done. If impairment appears to exist, the assets and liabilities should be compared to the total value of the reporting unit. The difference is Goodwill. Compare this amount to the CV of the Goodwill and write it down accordingly.
  153. How are costs for developing software recorded?
    Expenses prior to technological feasibility are expensed as R&D. After technological feasibility, but prior to production, costs are capitalized. Expenses during production are charged to inventory. Expenses incurred training on internal use software are expensed.
  154. What is the primary objective of governmental accounting?
    To provide information that is useful and benefits a wide range of users including: Costs of services provided Sufficiency of revenues to cover costs Financial position of entity
  155. What are the three major types of funds in governmental accounting?
    Governmental Proprietary Fiduciary
  156. Which two accounting bases are used in governmental accounting?
    Accrual basis - current economic resources focus (revenues recognized when earned) Modified accrual basis - current financial resources focus (revenues recognized when available and measurable)
  157. What is a budget appropriation?
    The highest amount allowed for a particular expenditure under a budget.
  158. What is an encumbrance?
    Records purchase and reserves it for the encumbrance.
  159. What is the opening budgetary entry?
    Dr Estimated Revenues Control Cr Appropriations Control Dr/Cr Budgetary Fund Balance (plug)
  160. What is the closing budgetary entry?
    Dr Appropriations Control Dr/Cr Budgetary Fund Balance (plug) Cr Estimated Revenues Control
  161. Governmental Accounting
    • What are the types of governmental funds?
    • General fund Special revenue fund Permanent Fund Capital Projects Fund Debt Service Fund
  162. What is a general fund?
    The "operating" fund of the governmental unit Records Significant Revenues: Taxes, Tickets, Fines, Licenses Records Significant Expenditures: Police, Education, Fire Dept
  163. What is a special revenue fund?
    Restricted for a specific purpose such as street repair.
  164. What is a permanent fund?
    Legally restricted fund, where only earnings cas be used to fund programs. Principal in a permanent fund remains intact.
  165. What is a capital projects fund?
    Used to acquire and build facilities.
  166. What is a debt service fund?
    Handles repayment of long-term debt and related interest.
  167. Which fund statements are issued in governmental accounting?
    Balance Sheet Statement of Revenues, Expenditures, and Changes in Fund Balance
  168. When is revenue recorded in governmental accounting?
    When it is BOTH available and measurable, regardless of when it is spent.
  169. What is derived tax revenue?
    Money collected from people "doing" things: Sales tax (buying cars) or income tax (people working)
  170. What is imposed tax revenue?
    Tax assessed just because things "exist" Example: registration tax on a car (even if it's never driven), real estate taxes Recorded as a revenue when BUDGETED. Estimated uncollectible property tax revenues don't offset revenues!
  171. What are the types of proprietary funds?
    Internal Service Funds - to serve the needs of other governmental unites (ie. motor pool) Enterprise Funds - provide goods or services to external users (ie. post office)
  172. What are the proprietary fund financial statements in governmental accounting?
    Statement of Net Assets Statement of Revenues, Expenses, and Changes in Net Assets Statement of Cash Flows
  173. What are the types of fiduciary funds?
    Agency Fund - government acts as an "agent" or custodian Pension Trust Fund - government is a trustee for a pension plan Investment Trust Fund - government is a trustee over a series of investments Private Purpose Trust - trust that benefits various individuals and entities
  174. How are assets and liabilities ordered in a governmental Statement of Net Assets?
    Ordered by liquidity Current and non-current
  175. How are capital assets shown on a governmental Statement of Net Assets?
    They are shown net of debt Asset Cost - Accumulated Depreciation - Asset liabilities = Net assets
  176. How is infrastructure reported on a governmental Statement of Net Assets?
    Modified approach: Reported at cost, no accumulated depreciation
  177. How is a Statement of Net Assets divided?
    Into Governmental Activities and Business Activities
  178. How are activities presented in a Statement of Activities?
    They are divided by function If the activities of a component are distinguishable from the rest of the governmental entity, then discreet presentation is required If the activities of the component cannot be identified and separated from the rest of the governmental activities, then blended presentation is warranted. Component units are reported in the entity-wide F/S and not the fund F/S.
  179. Which organization's standards are the most authoritative in the hierarchy of international accounting?
    The International Accounting Standards Board (IASB)
  180. Where is the first place management should look for guidance on international recognition and accounting policies?
    The International Financial Reporting Standards (IFRS) issued by the IASB
  181. Which framework helps to develop standards for international accounting?
    The IASB Framework * The framework is NOT a standard itself * The framework does not supersede any standard's authority
  182. What is the objective of the IFRS framework?
    To provide users with information on international accounting.
  183. Which assumptions are followed within the IRFS framework?
    The entity is a going concern (IFRS cannot be used if NOT a going concern) Entity uses the ACCRUAL basis of accounting.
  184. What are the qualitative characteristics of accounting information wtihin IFRS?
    Understandability - Easy to use and understand Relevance - helps make decisions, predictive value, and MATERIALITY under IFRS Reliability - Faithful representation, substance over form, neutrality, prudence, completeness Comparability - Must be comparable to information from PY
  185. Which aspects of RELEVANCE in IFRS differ from GAAP?
    Under IFRS, a confirmatory role is played by information (as opposed to feedback value in GAAP) Materiality falls under relevance for IFRS, versus being "primary constraint" in GAAP
  186. How does RELIABILITY differ under IFRS from GAAP?
    Both have neutrality and faithful representation/representational faithfulness. GAAP also has verifiability, as opposed to "substance over form," completeness, and prudence within IFRS. Note, PRUDENCE, or exercising caution, replaces "conservatism" in GAAP.
  187. How does comparability differ under GAAP versus IFRS?
    Comparative information from prior year is required under IFRS. GAAP requires that if multiple years are presented, they are consistently prepared, however it doesn't require prior year comparative statements.
  188. What are the constraints within IFRS?
    Timeliness Cost vs. Benefit Fair presentation of the company - IFRS can be overridden if it misrepresents the true financial condition of the company, but it must be disclosed.
  189. Which items are considered reporting "elements" under IFRS?
    Asset Liability Equity Income Expense
  190. What are the criteria for recognition on IFRS financial statements?
    Probable future economic benefit Can be measured reliably If the value or outcome cannot be measured reliably, IFRS requires the use of the Cost Recovery Method. This is similar to GAAP where recovery of the sale price isn't certain and the CRM is the most conservative approach.
  191. When transitioning to IFRS, what type of financial statement must be produced for the first reporting period?
    A full comparative statement using IFRS.
  192. If IFRS is implemented in June of a calendar year fiscal year entity, what is the Date of Transition?
    January 1 of the PRIOR calendar year, because a full year of comparative statements is required from the previous year.
  193. For Property, Plant and Equipment, which election is the most efficient method for converting assets to IFRS?
    The Fair Value election
  194. Where on the financial statements are adjustments for adopting to IFRS made?
    In the entity's retained earnings or equity
  195. How is going concern different under IFRS than from GAAP?
    Going concern is an ASSUMPTION under IFRS, and IFRS cannot be used if the entity is not a going concern.
  196. How are extraordinary items treated under IFRS?
    IFRS doesn't allow extraordinary items.
  197. How is the completed contract method used under IFRS?
    Completed contract method is not allowed under IFRS.
  198. How is LIFO treated under IFRS?
    IFRS does not allow LIFO.
  199. Which financial statements are required under IFRS?
    Statement of Comprehensive Income Statement of Changes in Equity
  200. How is the term "income" used in IFRS?
    "Income" is used instead of revenue, and encompasses BOTH revenue and gains.
  201. How is the term "profit" used in IFRS?
    In IFRS, the term "profit" is used instead of Net Income.
  202. How does IFRS treat gains?
    They are treated the same as revenue and are not separated on the financial statements.
  203. How does IFRS treat losses?
    In IFRS, losses are treated the same as expenses, but they ARE separated on the financial statements.
  204. How does refinancing of current liabilities to long-term liabilities differ under IFRS from GAAP?
    Under IFRS, current liabilities can only be refinanced into a non-current liability if the refinance agreement is EXECUTED prior to the balance sheet date. GAAP requires only *intent* to refinance, not actual execution.
  205. How do contingent liabilities differ between GAAP and IFRS?
    Under GAAP, there are three classifications of contingent liabilities - Probably, Reasonably Possible, and Remote. Under IFRS, contingencies are "uncertain future events", and are classified as a provision if probably AND measurable, even if uncertain in timing or amount.
  206. How are bonds recorded under IFRS?
    Bonds may be recorded on the Statement of Financial Position using one of two methods Fair Value through profit or loss *Liability revalued at the end of each period *Gain or Loss recognized in period Amortized Cost *Using Effective Interest Method
  207. How are deferred taxes treated under IFRS?
    They use the "liability method" - all deferred tax liabilities must be reported, but only "probable" deferred tax assets can be reported. They are non-current on the statement of financial position.
  208. When can deferred tax assets and liabilities be netted under IFRS?
    ONLY if they are related to the same country/taxing authority For example, China Deferred Tax Assets can�t offset Japan Deferred Tax Liabilities
  209. Which tax rates are used for calculating deferred tax assets/liabilities under IFRS?
    The enacted rate or substantially enacted tax rate. (GAAP is the enacted tax rate only)
  210. Which items are recorded on the Income Statement in IFRS?
    Income Finance Costs Tax Expense Discontinued Ops Profit/Loss Non-controlling interest in Profit/Loss Net profit/loss attributable from equity
  211. How are property, plant and equipment recorded and valued under IFRS?
    Recorded at cost Valued using either: Cost model - asset carried at cost less accum. deprec. and impairment loss Revaluation model - asset adjusted to fair value less a/d
  212. What are the requirements for using the revaluation model for PP&E under IFRS?
    Asset must be able to be reliably measured Must be applied to whole class of assets, not just one asset No guidance onhose often assets should be revalued under IFRS
  213. How is investment property reported under IFRS?
    Initially recorded at cost Revalued using either Fair Value model or Cost model
  214. How is profit or loss recorded in the current period for investment property under the Fair Value model of IFRS?
    Recorded on the Incoem Statement Investment P/L = IS PP&E P/L = OCI
  215. Under IFRS, how is investment property reported under the Cost Model?
    Carried at Cost minus Accumulated Depreciation Fair Value must still be disclosed in the notes to the financial statements
  216. How are leases reported under IFRS?
    Operating Leases can be recorded as Investment Property if measured at Fair Value All other investment property must use Fair Value Model if one asset uses it
  217. How are intangible assets valued under IFRS?
    Using either the Cost Model (cost less A/D and impairment loss) or the Revaluation Model (Fair Value less A/D)
  218. How is internally generated goodwill reported under IFRS?
    It is not recognized.
  219. How is amortization of intangibles handled under IFRS?
    If asset has a finite life, it is amortized over useful life. If asset has indefinite life, it is not amortized, but is tested for impairment at the reporting date.
  220. When must a lease be recorded as a Finance Lease under IFRS?
    If the substantial risks of ownership have passed to the Lessee, then the Lease must be accounted for as a Finance Lease
  221. How are defined benefit plan recorded under IFRS?
    Project-unit-credit method calculates the PV of the defined benefit obligation
  222. How are interest expense and/or finance costs classified on an IFRS statement of cash flows?
    They can be classified as either Operating or Financing Once a classification is chosen, all future costs must be classified there
  223. How are significant non-cash transactions recorded on an IFRS statement of cash flows?
    They must be included in the notes to the financial statements.
  224. Which costs are inventoriable?
    Purchases - net of discounts Freight - FOB Shipping point costs go to buyer, FOB Destination costs charged to seller Warehouse expenditures
  225. When does ownership of goods transfer when shipped FOB Shipping Point?
    FOB Shipping Point puts the inventory into the hands of the buyer from the loading dock
  226. When does ownership transfer when goods are sent FOB Destination?
    FOB Destination keeps the items in the seller�s inventory until it reaches the buyer
  227. Which costs are non-inventoriable?
    Sales Commissions Interst on liabilities to vendors Shipping expense to customers
  228. When are discounts recorded under the gross method?
    Under the gross method, discounts are recorded only when used.
  229. Under the net method, when are discounts recorded?
    Under the net method, discounts are recorded dwhether used or not. Unused discounts are allocated to financing expense.
  230. How is gross margin calculated?
    Gross Margin = Sales � COGS (BI + P � EI)
  231. Describe the periodic inventory system.
    Inventory is counted at certain times throughout the period Weighted-average cost flow method is used.
  232. Describe the perpetual inventory system.
    Inventory count continually updated Uses a moving-average cost flow method
  233. In periods of rising prices, under which cost flow system would ending inventory be the same under both a periodic and a perpetual inventory method?
    Under the FIFO system, periodic and perpetual inventory methods will both have the same ending inventory.
  234. How is inventory turnover calculated?
    COGS / Average inventory
  235. How is Average Day's Sales in inventory calculated?
    365 / Inventory Turnover
  236. Under a consignment system, who holds the consigned goods in inventory?
    The CONSIGNOR holds the consigned items in their inventory count. The cost includes the shipping to the consignee.
  237. Under a consignment system, does the consignee hold consignment inventory in their own inventory?
    No. Consignment goods are maintained in the inventory of the consignor, not the consignee.
  238. What effect does overstatement or understatement of inventory have on ending retained earnings?
    Misstatement of beginning inventory does NOT have an effect on ending retained earnings. Misstatement of ENDING inventory does have an effect on retained earnings.
  239. How does misstatement of ending inventory effect Ending Retained Earnings?
    EI Over = COGS Under = ERE Over EI Under = COGS Over = ERE Under
  240. Which costs are included in COGS first under the FIFO (First in first out) system?
    The first (oldest) inventory you have in stock is the first inventory you record for COGS purposes. If your oldest inventory on the shelf cost you $1 when you bought it, COGS is $1 This is just for inventory pricing. It has nothing to do with physically selling the oldest item on the shelf - It is purely for accounting purposes
  241. Which costs are included in COGS under the LIFO system?
    The last (newest) inventory you have in stock is the first inventory you record for COGS purposes. If your newest inventory on the shelf cost you $1.50 when you bought it, COGS is $1.50
  242. How is Weighted Average Cost Per Unit calculated under a weighted average inventory system?
    (Cost of Goods Available for Sale (COGAS = BI + Purchases)) /Total Units = Weighted Average Cost Per Unit
  243. How does FIFO's COGS relate to LIFO's in a time of changing prices?
    FIFO's relationship to COGS will be opposite LIFO's relationship to COGS in periods of falling/rising prices.
  244. How do FIFO and LIFO change in a period of rising prices?
    FIFO has the Lowest COGS FIFO is a cat that sees a mouse�starts Low and is Rising If COGS is Low, that means EI is High
  245. How do FIFO and LIFO change in a period of falling prices?
    FIFO has the Highest COGS Remember: FIFO, that silly cat, got High from Catnip and is Falling off the couch If COGS is High, that means EI is Low
  246. Under a Lower of Cost or Market, how are the benchmarks calculated?
    Ceiling = Net Realizable Value = Selling Price - Selling Costs Replacement Cost Floor = Net Realizable Value - Normal Profit
  247. How are trading securities recorded?
    On the balance sheet at Fair Value, as current assets Unrealized gains/losses are recorded on the Income Statement If they are reclassified as held-to-maturity or available-for-sale, there is no effect upon transfer.
  248. How are Available-For-Sale securities recorded?
    On the balance sheet, at fair value as either current or non-current assets. Unrealized gains/losses are included in OCI (Other Comprehensive Income) If reclassified as held-to-maturity, unrealized G/L go to Stockholder's Equity If reclassified as trading securities, unrealized G/L recognized in current period.
  249. How are held-to-maturity securities recorded?
    On the balance sheet at amortized cost as current or non-current assets. Unrealized gains or losses are not applicable. If reclassified as available-for-sale, unrealized G/L go to Stockholder's Equity If reclassified as trading securities, unrealized G/L recognized in current period
  250. What are the characteristics of a capital lease for a lessee?
    Risk of ownership passes to lessee by: Title Bargain Purchase Option (BPO) Substance: Lease is more than 75% of asset's useful life or PV of minimum lease payments are more than 90% of fair value
  251. How is a capital lease recorded?
    Capitalize at cost: Asset & Liability Recorded at Present Value of Future Lease Payments Discount Rate = Lesser of Implicit Rate in the Lease or Market Rate
  252. What footnote disclosures are required for a capital lease?
    Future minimum rental commitments By year � for 5 years All remaining years as a group
  253. What are the requirements for a capital lease for a lessor?
    Same as for lessee (Title, BPO or Substance), PLUS: Collectibility of lease payments is predictable No uncertainties about the lessor reimbursing the lessee for costs incurred
  254. What are the characteristics of an operating lease for a lessee?
    Risk of ownership does NOT pass No asset or liability is recorded on the financial statements Leasehold improvements - capitalized and depreciated over the lesser of lease life or leasehold improvement's life.
  255. What are the characteristics of an operating lease for a LESSOR?
    Rent revenue recorded Leased property remains an asset and depreciated by lessor If payments fluctuate over the term of the lease, rent revenue recognized on a straight line basis
  256. What are the characteristics of a direct financing lease?
    Interest Revenue (or expense for lessor) decreases with passage of time Principal amount increases with each payment Carrying amount of Lease decreases
  257. How is a sale-leaseback recorded?
    Any profit on the sale is deferred and amortized Exception: If PV of lease payments is 10% or less of the asset�s FMV, the gain is recognized If PV of lease payments is greater than 10% of FMV and the lease is operating, all of the gain is recognized except the amount of the PV of the lease payments
  258. What are the characteristics of lease payments under an annuity due situation?
    Payments begin at the start of the lease period Think: Rent/Mortgage payments are Due at the first of the month
  259. What are the characteristics of lease payments under an ordinary annuity situation?
    Payments begin after the end of the first year Think: An annuity that pays you at the end of each year
  260. Which financial statements are required for not-for-profit organizations?
    Statement of Financial Position Statement of Activities Statement of Cash Flows Statement of Functional Expenses (Voluntary Health and Welfare Orgs only)
  261. What are the major classifications found on a Statement of Financial Position?
    Similar to Balance Sheet: Assets Liabilities Net Assets Unrestricted Permanently Restricted Assets Temporarily Restricted Assets
  262. What are the major classifications in a Statement of Activities?
    Similar to an Income Statement, organization-wide: Revenues Expenses - ONLY deducted from Unrestricted Revenues Gains and Losses Changes in Net Asset classes Unrestricted Permanently Restricted Temporarily Restricted
  263. What are the characteristics of a Statement of Cash Flows for not-for-profits? What are the major classifications?
    Both direct and indirect methods are ok Operating Activities - Unrestricted Revenues and Unrestricted Expenses Investing Activities Financing Activities - Endowments and restricted contibutions
  264. Which organizations are required to present a Statement of Functional Expenses?
    Voluntary Health and Welfare Organizations
  265. Which statements are required for non-governmental hospitals?
    Balance Sheet Statement of Operations Statement of Changes in Net Assets Statement of Cash Flows Financial Statement Notes
  266. Which basis of accounting is used for revenues and net assets?
    Accrual basis of accounting is used Only external parties can restrict the use of assets (permanent or temporary) Assets earmarked internally by management are still classified as unrestricted
  267. What are the characteristics of unrestricted assets or revenue?
    No restrictions or conditions placed on entity in order to use the resources Note: assets earmarked internally by management are still unrestricted
  268. When are revenues on contributions recognized?
    Revenues on contributions are recognized in the year received, not the year the contribution is spent and are recorded at Fair Value on the date received
  269. When are services rendered considered contributions?
    If the organization would have otherwise paid for them or They increase the value of a non-monetary asset
  270. Is hospital charity care revenue?
    NO. It is disclosed in the notes to the financial statements only.
  271. How are unconditional pledges to contribute recorded?
    Classified as revenue in the current year only - multi-year future contributions fall under Temporarily Restricted.
  272. Which revenues are expenses deducted from?
    Expenses ONLY deducted from Unrestricted Revenues, not Temp or Permanently Restricted Revenues/Assets
  273. What are the characteristics of temporarily restricted assets/revenue?
    Use is restricted to a future time, which could then convert to unrestricted - Class: Temp. Restricted Revenue Unrestricted contributions promised (including multi-year contributions), but not yet received are actually restricted by �time� and are therefore classified as Temporarily Restricted Assets - Multi-year contributions are recorded at the present value of the future contributions
  274. What are the characteristics of an endowment?
    Use of investment is restricted, but income from investment could be either restricted or unrestricted Must be under control of receiving entity (Quasi Endowment) in order to be recorded in unrestricted net assets Otherwise, a memo entry is recorded
  275. When is the donation of an art collection on recognized as a contribution or asset?
    Not recognized as assets or contribution revenue if they are held of display or education � or their sale results in the purchase of similar items
  276. When both Temporarily Restricted Assets and Unrestricted Assets are available for use, which assets are used first?
    Temporarily restricted assets are used before Unrestricted assets.
  277. How is a refundable advance recorded by a not for profit?
    Classified as a Liability Promise to contribute assets pending on certain conditions being met Becomes unconditional once the possibility that it won�t happen is remote
  278. How are investments recorded and valued in not-for-profit accounting?
    Fair Value is mostly used Exception - Equity method used when significant influence exists
  279. How are scholarships recorded?
    As a reduction of revenue, netted against college's tuition
  280. How is depreciation expense recorded by a not-for-profit?
    Depreciation expense is allocated proportionately to various functions
  281. At what value should assets contributed to a partnership be recorded? What value for liabilities assumed by the partnership?
    Fair Value for assets contributed. Present value of remaining cash flows for liabilities assumed.
  282. How are capital contributions with a mortgage attached recorded in a partnership for financial statement purposes?
    Unlike in Regulation where the partner�s tax basis is reduced by the amount of the mortgage that the other partners absorb, calculating the capital balance when property contributed has a mortgage results in the FV of the Asset being netted against the Liability Example: If you contribute a $100,000 building with a 20,000 loan, your capital account is increased by $80,000, instead of allocating the liability to the other partners according to their ownership %.
  283. If no goodwill is recorded upon admission of a new partner, which method is used for recording the new partner's interest?
    The bonus method: Old Partnership Equity + New Partner Contribution = New Partnership Equity x New Partner % = New Partner Equity Amount New Partner Contribution - New Partner Equity Amount = Bonus to Prior Partners using same allocation as P/L
  284. If goodwill is recorded upon admission of a new partner, how is the partner's interest recorded?
    Using the goodwill method: New Contribution / New Equity % = Partnership Value Implied Value of Partnership - Capital Accounts of all partners = Goodwill to Old Partners Under the Goodwill Method, the new Partner is paying an amount for a certain percentage stake in the partnership. For instance if they pay $1000 for a 25% stake, then it is assumed that the Partnership is worth $4,000 ($1,000/25%)
  285. What is a Projected Benefit Obligation (PBO)?
    Calculation of obligation based on FUTURE compensation levels
  286. What is an Accumulated Benefit Obligation?
    PV of Pension Benefits accrued based on PRESENT compensation levels
  287. How is Pension Expense calculated?
    Service Cost + Interest - Actual Return on Plan Assets + Unexpected Losses or (-) Gains + Amortization of Prior Service Cost = Pension Expense
  288. How is interest cost on a pension calculated?
    Beginning PBO x Interest Rate Increase of PBO due to time
  289. How is actual return on plan assets calculated?
    Ending Value - Beginning Value NET OF CONTRIBUTIONS
  290. What amount is recorded on the Balance Sheet for a pension plan?
    Amount recorded = Fair Value of Plan Assets - PBO Overfunded = Non-current asset Underfunded = Non-current liability
  291. Where are gains and losses related to a pension plan recorded?
    In OCI, Net of tax
  292. What financial statement disclosures are required for pensions?
    Pension Funding Policies Types of Assets Held 5 Year Benefits to be paid 5 Year Benefits in aggregate thereafter Estimated Pension Contribution for next period
  293. What are vested benefits?
    Benefits owed to employee regardless of continuance of employment via the Full Eligibiligity Date
  294. Which personal financial statements are required?
    Statement of Financial Condition Statement of Changes in Net Worth
  295. How are assets and liabilities valued in a personal financial statement?
    Estimated current value
  296. How are estimated taxes that would be paid if all assets were converted into cash and all liabilities paid presented on a personal financial statement?
    Presented on Statement of Financial Condition between Liabilities and Net Worth
  297. What is the general presentation on a statement of financial condition?
    Assets - Liabilities - Estimated taxes on assets sold = Net Worth
  298. How is life insurance presented on a personal financial statement?
    Only shown if there is cash surrender value It is shown net of loans against the policy
  299. How are business interests shown on a personal financial statement?
    Business Interests that constitute a large percentage of total assets should be separated from other investments
  300. What is the discreet view in an interim financial statement?
    Interim period is a separate accounting period - not GAAP Same accounting principles used for annual reporting should be used.
  301. What is the integral view in an interim financial statement?
    Interim period is a part of the annual period - GAAP Gross profit method may be used to estimate COGS and inventory Temporary declines in inventory aren't recognized
  302. How are discontinued operations & extraordinary items reported in interim financial statements?
    Aren�t prorated Fully recognized in Interim Period as incurred If it occurs in Q3, it�s recognized in Q3
  303. How are cumulative gains and losses reported in interim financials?
    Reported as if they occurred in the first quarter
  304. How is inventory valuation handled in interim financials?
    If inventory experiences a decline in value during an interim period, the loss is recognized in the interim period If the loss is expected to be only temporary, no loss is recognized
  305. What is one of the primary problems with interim reporting?
    The matching principle gets messed up � Expenses incurred in one period may benefit future periods
  306. For whom is segment reporting required?
    Publicly traded companies
  307. What factors cause a segment to be significant, and therefore to be reported separately?
    Revenue of segment is 10% or more of total Profit is 10% or more of total Segment assets are 10% or more of total 75% Test - All segment revenues must equal 75% of total external revenues
  308. What is the disclosure requirement regarding sales of 10% or more for one customer?
    If 10% or more of enterprise revenue comes from one customer, the segment making the sales must be disclosed
  309. When common stock and preferred stock are issued in a lump sump purchae, how is APIC allocated?
    APIC for each is allocated by its respective % of the total FMV of the shares x the proceeds.
  310. When is APIC recorded on a stock subscription?
    APIC increases on date subscription is recorded � not on the date paid for or issued
  311. To what extent is retained earnings restricted if legally restricted due to Treasury Stock?
    It will be restricted to the extent of the balance in the Treasury Stock account.
  312. When are dividends in arrear recorded for cumulative preferred stock?
    They are not accrued until declared.
  313. When are dividends in arrears included as a disclosure and not an accrual in the financial statements?
    If a year passes and no Cumulative Preferred Stock is declared, then the dividends in arrears are included as a disclosure � not an accrual in the F/S.
  314. What is the gain or loss when a non-monetary asset is distributed to a shareholder?
    The gain or loss is the difference between the FMV of the asset distributed at the date of distribution and its carry amount on the company�s books
  315. What is the effect on retained earnings when a non-monetary asset is distributed to a shareholder?
    The effect on Retained Earnings is the Carrying Amount of the asset RE will be debited when the dividend is declared for the FMV of the asset, which is more (or less) than the carrying amount Gain/Loss recorded when the asset is distributed will offset the original effect of the debt to RE and will be a wash. The net effect of the entry is that RE will decrease by the CV of the asset
  316. When is Retained Earnings debited for FMV of Stock for a stock dividend?
    When Stock Dividend is less than 25% of Common Stock outstanding
  317. When is Retained Earnings debited for Par Value for a stock dividend?
    When Stock Dividend is greater than 25% of common stock outstanding
  318. What is the effect of a stock dividend or a stock split on total shareholder equity?
    Stock dividends and stock splits both have no effect on Total Shareholder Equity
  319. What is the affect on APIC from a stock split?
    Stock splits only affect par value - APIC remains the same.
  320. When in compensation expense recorded at the time of grant for a stock option?
    Compensation expense is recorded at the time of grant if options are exercisable immediately They are based on past service. Expense recognized = FV Stock Option x # of Shares
  321. What interest rate is used to discount stock options?
    The risk-free interest rate
  322. What date is used as the measurement date for share-based payments classified as liabilities?
    The settlement date.
  323. How are compensatin costs for share-based payments classified as liabilities measured?
    Compensation costs for share-based payments classified as liabilities are measured by the change in the fair value of the instrument for each reporting period
  324. What the the net increase to shareholder equity in a reorganization where a company pays cash and issues stock to satisfy unsecured creditors?
    Net increse to SHE = Gain on settlement of debt + Credit to SHE from stock issuance
  325. What is the primary purpose of a quasi-reorganization?
    To eliminate a deficit balance in RE by restating its assets to Fair Value It does not directly protect a company from its creditors
  326. How is return on Common Stockholders Equity calculated?
    (Net Income - P/S Dividends) / Average Common Stockholders Equity
  327. How is book value per share of common stock calculated?
    Total Common Stock - Total Preferred Stock - P/S Dividends in Arrears - P/S Liquidation Premium =Total Book Value per share of c/s = Total / Shares outstanding
  328. How is the dividend per share payout ratio calculated?
    Dividends per share / earnings per share
  329. How is basic Earnings Per Share (EPS) calculated?
    (Net Income � Preferred Dividends) / Average C/S Outstanding Note � If cumulative, subtract the P/S dividend regardless of whether or not they�re declared.
  330. For EPS purposes, which date is used for calculation purposes when a stock split or stock dividend has occurred?
    For EPS purposes, treat C/S stock splits or stock dividends as if they occurred at the beginning of the year, regardless of when actually issued during the year
  331. For which areas is EPS required to be shown?
    EPS is only required to be shown for Income from Continuing Ops and Net Income. All others (disc ops, extraordinary items) can be shown on the F/S or in the notes
  332. When do stock options increase share outstanding?
    Only if they are dilutive. Their exercise price is LESS than the market value If not, you ignore them in the calculation
  333. How is EPS calculated when convertible bonds are taken into consideration?
    (Net Income + Bond Interest net of taxes) / (Average Common Stock Shares + convertible equivalents) Bond interest is added back because if converted, there would be no bond interest expense Contingent Issue Agreements are included in Diluted EPS if contingency is met
  334. What is the formula for comprehensive income?
    Net Income+ OCI
  335. This is a component of equity that includes the total of OCI for the period and previous periods?
    accumulated OCI
  336. Where is the amount of income tax expense or benefit allocated to each component of OCI disclosed?
    either on the face of the statement or in the notes to the financials
  337. What is other comprehensive income comprised of?
    PUFE- Pension changes in funded status- Unrealized gains and losses- Foreign currency items- Effective portion of cash flow hedges
  338. What does net income include?
    - income from continuing ops- discontinued ops- extraordinary items
  339. This is the change in equity of a business enterprise during a period from transactions and other events and circumstances from nonowner sources?
    comprehensive income
  340. How do you calculate net unrealized holding gain using the reclassification adjustment?
    Unrealized holding gains arising during period- Reclassification adjustments for gain included in net income
  341. What 3 formats must be used to present comprehensive income?
    - below total for net income in a statement that reports results of operations- in a separate statement of comprehensive income that begins w/ net income- in a statement of changes in equity
  342. This is required as part of the statement of owners' equity?
    the separate presentation of accumulated OCI
  343. Where may the accumulated balances by component of OCI be shown?
    • - on balance sheet
    • - in statement of changes in equity
    • - in notes to financials
  344. How do you calculate accumulated OCI?
    beginning balance + OCI
  345. What is the order format for OCI as a component within the statement of owner's equity?
    • - total
    • - comprehensive income (optional)
    • - retained earnings
    • - accumulated OCI (required)
    • - common stock
  346. This includes those items in comprehensive income that are excluded from net income?
    • OCI
    • Who has the power to establish GAAP?
    • SEC
  347. What are the 5 elements of present value measurement?
    • - estimate of future cash flow
    • - expectations of timing variations of future cash flows
    • - time value of money
    • - price for bearing uncertainty
    • - other factors including liquidity and market imperfections
  348. What are the 2 pervasive constraints of financial accounting?
    • - cost and benefits
    • - materiality
  349. What are the subcategories of reliability?
    • - neutrality
    • - representational faithfulness
    • - verifiability

    Nobody Relies on Financials unless Verified
  350. This clarifies GAAP by addressing issues that may be conflicting or ambiguous and may establish GAAP?
    FASB Interpretations
  351. This provides a common foundation and basic reasoning on which to consider the merits of the alternatives and a coherent system of interrelated objectives and fundamentals? However, they do not establish GAAP?
    SFAC (Concepts)
  352. What are the subcategories of relevance?
    • - Predictive Value
    • - Feedback Value
    • - Timeliness
  353. This means that info is free from bias and free from outside influences?
    neutrality
  354. What are the 3 objectives of financial reporting?
    • - info useful in investment and credit decisions
    • - info useful in assessing future cash flow prospects
    • - info useful in assessing an enterprises resources, the debt and equity claims to those resources and the changes in them
  355. What 3 bodies of the accounting profession have determined GAAP since 1939?
    • - Committee on Accounting Procedure
    • - Accounting Principles Board
    • - FASB
  356. This means that the same results from information could be duplicated w/ the same measurement techniques which is the primary concern for auditors of financials?
    verifiability
  357. This is derived from and based on the objectives of financial reporting?
    GAAP
  358. This is agreement between financial reporting and the resources or events represented?
    representational faithfulness
  359. This assumes that money is an appropriate basis by which to measure economic activity?
    monetary unit assumption
  360. Six Most Authoritatie GAAP Prouncements
    • 1. B- Accounting Research Bulletins
    • 2. O- Accounting Principles Board Opionions
    • 3. S- FASB Statements of Financial Accounting Standards
    • 4. S- FASB Staff Positions
    • 5. I- FASB Interpretations
    • 6. I- FASB Statement Implementation Issues
  361. Primary Qualities of Decision Usefulness
    • 1. Relevance
    • 2. Reliabilty
  362. Secondary Qualities of Decision Usefulness
    • 1. Comparability
    • 2. Consistency
  363. Relevance
    • 1. Predictive Value
    • 2. Feedback Value
    • 3. Timeliness
  364. Reliability
    • 1. Neutrality
    • 2. Representational Faithfulness
    • 3. Verfiability
  365. Fundamental Assumptions
    • 1. Entity Assumption
    • 2. Going Concern Assumption
    • 3. Monetary Unit Assumption (inflation are not reflecte in the financial statement)
    • 4. Periodicity Assumption
    • 5. Historical Cost Principle (General Rule)
    • 6. Revenue Recognition Principle
  366. Revenue Recognition Principle
    • 1. Earned
    • 2. Realized or Realizable
  367. Matching Principle
    All expenses incurred to generate a specigic amount of revenue in a period are matched against that revenue.
  368. Conservatism Principle
    The Method that is least likely to overstate assets and understate liabilities

    • 1. defer estimate gains until realized
    • 2. record probable estimated losses immediately
  369. Uses of the Income Statement
    • 1. Determining Profitability
    • 2. Value for investment purposes
    • 3. credit worthiness
  370. Reported on Income Statement
    • 1. Income from Continuing Operations- Gross of Tax
    • 2. Income from Discontinued Operations- Net of Tax
    • 3. Extraordinary Items- Net of Tax
  371. Reported on Statement of Retained Earnings
    Cumulative Effect of Change in Accounting Principle- Net of Tax

    -change from one acceptable method of accounting to another
  372. Line Items above ___________ are shown gross
    "income from continuing operations"
  373. Held for Sale
    • 1. Plan to Sell
    • 2. Available
    • 3. Active Buyer
    • 4. Probable (within one year)
    • 5. Actively Marketed
    • 6. Unlikely will be withdrawn
  374. Components of Comprehensive Income
    • 1. Net Income
    • 2. Other Comprehensive Income (PUFE adjustments)
  375. Components of Net Income
    1. Income of continuing Operations
    2. Discountinued Operations
    3. Extraordinary Items
  376. Other Comprehensive Income
    • 1. Pension Changes in Funded Status
    • 2. Unrealized Gains and Losses
    • 3. Foreign Currency Items
    • 4. Effectiv Portion of Cash Flow Hedges
  377. Segment Profit Formula
    • Revenues
    • Less: Directly traceable coasts
    • Less: Reasonably allocated costs
    • Operating Profit
  378. Valuation Techniques
    • 1. The Market Approach
    • 2. The Income Approach
    • 3. The Cost Approach
  379. The Market Approach
    Uses prices and other relevant information from market transactions involving identical or comporable assets or liabilities to measure fair value
  380. The Income Approach
    converts future amounts, incluiding cash flows or earnings, to a single discounted amount to measure fair value.
  381. The Cost Approach
    uses current replacemtn cost to measuer the fair value of assets
  382. Level 1 Inputs
    • highest priority
    • quoted prices in active markets for identical assets or liabilities
  383. Level 2 Inputs
    • 1. Inputs other than quoted market prices (Ebay)
    • 2. Observable
  384. Level 3 Inputs
    • 1. Subjective
    • 2. Unobservable inputs for the asset or liability

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