Shared Flashcard Set

Details

FAR
CPA Exam FAR
340
Accounting
Undergraduate 1
06/07/2016

Additional Accounting Flashcards

 


 

Cards

Term
How are changes in accounting principle applied?
Definition
Retrospective Application:
Prior Periods adjusted
Retained Earnings adjusted
Completed Contract to % Completion
Ex: LIFO to FIFO
Term
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?
Definition
A change of principle.

Applied retrospectively.
Term
Would a change from LIFO to FIFO be a change in accounting principle or a change of estimate?

How would this change be applied?
Definition
A change in accounting principle.

Applied retrospectively.
Term
How is a change in accounting estimate applied?
Definition
A change in accounting estimate is applied prospectively (going forward).

No backwards adjustment is made.
Term
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?
Definition
Change in depreciation method would be a change in accounting estimate.

It is applied prospectively.
Term
How is a correction of an accounting error made?
Definition
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.
Term
What are the requirements for a prior period adjustment?
Definition
Effect is Material

Is identifiable in Prior Period

Couldn't be estimated in Prior Periods
Term
How is a change from a non-GAAP accounting method to a GAAP method recorded?
Definition
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
Term
How does an inventory error effect the financial statements?
Definition
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.
Term
How is a change in entity recorded?
Definition
Applied retrospectively.

All prior periods presented for comparative purposes must reflect the change

Footnote disclosures must be made

Changing to Consolidated Statements
Term
What is a serial bond?
Definition
Any bond that matures in installments
Term
What is a term bond?
Definition
Any bond that matures on a single date
Term
What is a debenture bond?
Definition
A bond not secured by any collateral
Term
What is a sinking fund bond?
Definition
Cash is held in a sinking fund for repayment of bond at maturity

5 years of requirements and maturity details should be disclosed
Term
What is the formula to calculate proceeds of a bond sale?
Definition
Present Value of the principal payment at maturity
+ Present Value of Interest Payments made
: Market Value of Bond Proceeds
Term
How is the present value of a bond calculated?
Definition
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)
Term
Which costs are included in bond issuance costs? How are they recorded?
Definition
Include Engraving; Printing; Legal; Underwriter; Registration

New Way: Subtracted from Carrying Amount of the Bond
Old Way: Amortized
Treatment: Retrospective Treatment to all prior periods presented
Effect: Increases Effective Interest Rate
Term
How are bonds reported when classified as trading securities?
Definition
Reported at FMV with unrealized gains and losses being included in earnings
Term
How are bonds amortized under the interest method?
Definition
Both discount and premium amortization amounts increase each year
Term
Describe the book value method when converting from bonds to stocks.
Definition
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
Term
What is the stated rate for a bond?
Definition
Rate on the face of the bond
Term
What is the market rate on a bond?
Definition
Rate that bonds are currently selling for
Term
What happens when the bond's market rate is greater than the stated rate?
Definition
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
Term
What happens when a bond's market rate is less than the stated rate?
Definition
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
Term
How does accrued interest on a bond affect the purchase price?
Definition
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.
Term
When does interest expense start accruing on a bond?
Definition
When the bonds are issued
Term
How is an interest payment on a bond calculated?
Definition
Cash for payment : Stated rate x Face amount
Term
What amount of interest is expensed on a bond interest payment?
Definition
Interest expense : effective yield x carrying value

Any difference between expense and cash payment is applied as amortization against premium/discount
Term
What are convertible bonds? Which recording method is used?
Definition
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
Term
How is the retirement of bonds recorded?
Definition
Gain or Loss is Ordinary

Extraordinary if both unusual and infrequent
Term
When is a gain recognized in a debt restructuring?
Definition
If terms are modified; and future payments are now less than the carrying amount of the debt; then a Gain is recognized
Term
What is the gain recognized under a settlement of debt?
Definition
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
Term
For a creditor; how is a loan impairment recorded?
Definition
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
Term
When is the fair value method used for recording interest in a separate company?
Definition
20% Ownership or Less

Accounted for as a purchase

If amount paid is less than fair value; results in a gain in current period
Term
When is the equity method used when purchasing another company's stock? How is it recorded?
Definition
Ownership 21% to 50%

Gives significant influence

Purchase Price - Par Value : Goodwill

Dividends received from the investee reduce the investment account and are not income
Term
When are companies required to file consolidated financials? How is it recorded?
Definition
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 Fair Value on acquisition date.

Eliminating entries for inter-company sales of inventory & PPE; also inter-company investments
Term
When is consolidation not required?
Definition
Ownership less than 50%

OR

Majority owner does not control - i.e. bankruptcy or foreign bureaucracy
Term
What occurs under a step acquisition?
Definition
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
Term
What is the difference between an acquisition and a merger?
Definition
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
Term
How are acquisition costs recorded in a merger?
Definition
Expensed in period incurred - i.e. NOT capitalized:
Accounting; Legal; Valuation; Consulting; Professional

Netted against stock proceeds:
Stock registration and issuance costs
Term
What is a current asset?
Definition
Cash plus other assets that are expected to be sold or converted to cash during the current operating cycle

Includes: Demand deposits, cash equivalents, accounts receivable, inventory, pre-paids, and short-term investments
Term
What is a current liability?
Definition
A liability expected to be paid within 12 months or less
Term
How is the Quick Ratio calculated?
Definition
(Cash + A/R + Trading Securities) / Current Liabilities
Term
How is the Current Ratio calculated?
Definition
Currents Assets / Current Liabilities
Term
How is Working Capital calculated?
Definition
Currents Assets - Current Liabilities
Term
How is A/R Turnover calculated?
Definition
Credit Sales / Average A/R
Term
How is Inventory Turnover calculated?
Definition
COGS / Average Inventory
Term
How is Day Sales in Inventory calculated?
Definition
365 / Inventory Turnover
Term
How is Days to Collect A/R calculated?
Definition
Average A/R / Average Sales per Day
Term
How are gain contingencies recorded?
Definition
They are NOT accrued due to Conservatism
Term
When are loss contingencies recorded?
Definition
If Probable - they are accrued (if estimable) and disclosed

If Reasonably Possible - they are disclosed

If Remote - don't accrue or disclose
Term
What is a temporary difference related to deferred taxes?
Definition
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
Term
What is a deferred tax asset?
Definition
Deduction will reduce future income taxes expense.
Term
What is a deferred tax liability?
Definition
Income will be taxable in a future period and will increase future tax expense
Term
Which period's tax rate is used to calculate a deferred tax asset or liability?
Definition
The FUTURE enacted tax rate not the current one.

It is never discounted to present value.
Term
What valuation allowance is used with respect to a deferred tax asset?
Definition
If it isprobable 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
Term
What effect do permanent differences have on deferred income taxes?
Definition
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
Term
What is deferred income tax expense?
Definition
The sum of Net Changes in Deferred Tax Assets and Deferred Tax Liabilities

GAAP Method for calculating is theAsset and Liability Approach

Note: IFRS uses the Liability approach only
Term
How are deferred tax assets classified as current or non-current on the balance sheet?
Definition
Current Deferred Tax Assets and Liabilities will impact income tax expense within 12 months. 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 12 months or more fromt he Balance Sheet Date. All non-current amounts are netted and reported as a single amount on the Balance Sheet
Term
How are derivatives recorded?
Definition
At cost when acquired re-valued to fair value each period on Balance Sheet.
Term
How are unrealized gains/losses on trading securities recorded?
Definition
Recorded on income statement
Term
How are gains and losses on Available for Sale (AFS) securities recorded?
Definition
They are included in Other Comprehensive Income.
Term
What is a Fair Value Hedge? How is it recorded?
Definition
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
Term
What is a Cash Flow Hedge? How is it recorded?
Definition
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: A cereal company enters into a futures contract on grain purchases to offset the risk that grain will go up in price.
Term
Where are gains and losses on foreign currency hedges recorded?
Definition
In Other Comprehensive Income (OCI)
Term
What disclosures are required for derivative transactions?
Definition
Objectives and Strategies

Context to help investor understand the instrument

Risk Management Policies

Complete List of Hedged Instruments
Term
How do transactions denominated in in a currency other than a company's functional currency affect the income statement?
Definition
Fluctuations in that currency cause a gain or loss that must be recognized on the income statement as Income from Continuing Operations
Term
What causes a Foreign Currency Transaction G/L?
Definition
A change in exchange rates between the functional currency and the transaction currency
Term
Where are Foreign Currency Transaction G/L recorded?
Definition
Income Statement
Term
Where are Foreign Currency Translation G/L recorded?
Definition
OCI
Term
If the Functional Currency equals the Local Currency - what rate is used for translating Assets and Liabilities?
Definition
Current Rate as of the Balance Sheet Date
Term
If the Functional Currency equals the Local Currency - what rate is used for translating Revenues and Expenses?
Definition
Weighted Average Exchange Rate for the year
Term
If the Functional Currency equals the Reporting Currency - what Exchangee Rate is used??
Definition
Use Weighted Average - Historical Exchange Rates (Inventory and Pre-paid Assets and Property Plant and Equipment) and Current Exchange Rates (Monetary Assets and Liabilities and Inventory @ Market and Trading Securities and Deferred Taxes)
Term
What is the primary objective of accounting?
Definition
To measure income
Term
What is the most authoritative set of accounting pronouncements?
Definition
The FASB Codification

All pronouncements fall under the Codification umbrella
Term
What are the 2 Levels of Authority within the FASB codification?
Definition
Authoritative and Non-Authoritative
Term
How does managerial accounting differ from financial accounting?
Definition
Managerial Accounting has a timeliness focus

Managerial Accounting is not required to follow GAAP
Term
Which financial reports are required to be filed with the SEC?
Definition
Form 10K - Annual and Audited
Form 10Q - Quarterly and Reviewed
Term
What is the focus of financial reports for individual companies?
Definition
Focus is on the needs of users to help them make decisions and assessments about the company

Does not make assessments of the economy
Term
What are the Primary Constraints of Financial Reporting?
Definition
Cost vs. Benefit

Materiality
Term
What are the Secondary Constraints of Financial Reporting?
Definition
Consistency - Year vs. Year

Comparability - Company vs. Company
Term
What are the Qualitative Characteristics of Financial Reporting?
Definition
Relevance & Faithful Representation

Relevance - Makes a difference to the user
Includes:
Predictive Value - Future Trends
Confirming Value - Past Predictions
Materiality - Could affect User Decisions

Faithful Representation
Includes:
Completeness - Nothing omitted that would impact the decision-making of a user
Neutrality - Information is presented is without bias
Free from Error - No material errors or omissions
Term
What are the Enhancing Qualitative Characteristics of Financial Reporting?
Definition
Comparability Verifiability Timeliness and Understandability

Comparability - Allows users to compare different items among various periods
Verifiability - Different people would reach a similar conclusion on the information presented
Timeliness - Information is made available early enough to impact the decision making of users
Understandability - Information is easy to understand
Term
How does Conservatism affect the recording of accounting transactions?
Definition
When an estimate is necessary due to uncertainty conservatism chooses the best option that won't overstate the financial position of the company
Term
What is an accrual?
Definition
Earned (Revenue) or Incurred (Expense) but no Cash Receipt/Outlay yet
Term
What is a deferral?
Definition
Cash Receipt/Outlay but not Earned (Revenue) or Incurred (Expense)
Term
What is recognition in accounting?
Definition
When an item is recorded and included in the financial statements
Term
Describe fair value with respect to an asset
Definition
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
Term
What market assumptions are made in a fair value assessment?
Definition
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
Term
What items are included in a Level 1 input in the fair value hierarchy?
Definition
Price quotes or market prices

For example NYSE or NASDAQ
Term
What items are included in a Level 2 valuation input?
Definition
Interest rates

Prime rate
Term
What items are included in Level 3 inputs of the fair value hierarchy?
Definition
Unobservable inputs such as assumptions or forecasts

Lowest priority for valuation
Term
What are acceptable valuation techniques for fair value?
Definition
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
Term
What are current assets?
Definition
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
Term
What are current liabilities?
Definition
Liabilities that will use current assets during the present operating cycle
Term
What is an accrued liability?
Definition
Expense that has been incurred but not paid

Example: rents payable
Term
What is a deferred revenue?
Definition
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
Term
When are revenues recognized?
Definition
When they have been earned; i.e. company has performed
Term
What is a gain?
Definition
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
Term
What is a loss?
Definition
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
Term
What is an operating cycle?
Definition
Average time it takes to turn materials or services into Cash
Term
What is the present value of future cash flows?
Definition
Valuation method - the current value of a future amount of money using a specific interest rate
Term
What is historical cost?
Definition
How much an asset cost - (net of depreciation and amortization)
Term
What is replacement cost?
Definition
How much it would cost to reacquire an asset today (Entrance Cost)
Term
What is a market cost?
Definition
The sale price of an asset (Exit Cost)
Term
What is Net Realizable Value?
Definition
Sale Price of an Asset - Selling/Disposal Fee
Term
When is royalty income recognized? How is it recognized?
Definition
Recognized 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
Term
When is revenue recognized in an installment sale?
Definition
Revenue recognized upon receipt of cash

Only used when cash collection is uncertain
Term
What is deferred gross profit?
Definition
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
Term
What is the cost recovery method?
Definition
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
Term
What is subscription revenue? How is it recorded?
Definition
Payment has been received but performance is not complete.

As company performs revenue is recognized.

Recorded as a Deferred Revenue (Liability) on Balance Sheet
Term
How are franchise revenues recorded?
Definition
Franchisor - Startup franchise fee revenue deferred until substantial performance

Franchisee - Costs are deferred until corresponding revenue is recognized
Term
How do you calculate sales revenue starting from cash basis income?
Definition
Mnemonic: SPEAR-BAR

Sales (i.e. Customer Payments)
+ Ending Accounts Receivable
- Beginning Accounts Receivable
: Sales Revenue on an Accrual Basis
Term
How do you calculate COGS starting from Cash Basis?
Definition
Mnemonic: CRAP-I

Cash Remitted (i.e. paid)
+Increase in Accounts Payable
-Increase in Inventory
:COGS on an Accrual Basis
Term
How are discontinued operations reported? When are they used?
Definition
Reported Net of Tax after Continuing Operations

Company decides to cease operating a segment of its business (represents a strategic shift and has major effect on operations and financials)

Includes Income (or loss) from the period plus the gain (or loss) from disposal
Term
For discontinued operations, what are the three requirements for disposal assets?
Definition
They must be Held for Sale - Sold - or Disposed of another way
Term
How are Unusual or Infrequent (formerly Extraordinary) items reported?
Definition
Reported Two Ways: 1. Income Statement above Income from Continuing Operations or 2. Footnotes. Retrospective OR Prospective Treatment is allowed.
Term
What is constant dollar accounting?
Definition
Adjusts assets to reflect a consistent level of purchasing power due to inflation

Uses the Consumer Price Index (CPI)
Term
When are expenses recognized?
Definition
When they are incurred. Accrue if not yet paid.
Term
What are accrued expenses?
Definition
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
Term
When should impaired assets be written down to fair value and expensed?
Definition
Immediately.
Term
What major items should be classified under General & Administrative (G&A) expenses?
Definition
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
Term
What are business start-up costs?
Definition
One-time costs for opening a new business

Expensed as they are incurred
Term
When is interest *not* expensed?
Definition
Interest on projects (software) for internal use is not expensed but is instead capitalized
Term
What are the major components of Comprehensive Income?
Definition
Net Income + Other Comprehensive Income (OCI):

Revenues/Expenses

Gains/Losses

Cumulative accounting adjustments

Reclassifications adjustments

Non-owner changes in equity
Term
What items are considered cumulative accounting adjustments?
Definition
Foreign Currency Translation Adjustments

Unrealized gains on AFS Securities

Minimum Pension Liability adjustment for defined benefit plans
Term
What is the purpose of a reclassification adjustment?
Definition
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
Term
Where is Comprehensive Income reported?
Definition
Reported in a Single or Combined Income Statement
Term
What disclosures on accounting policies are required in financial statements?
Definition
Accounting Principles used

Basis of Consolidation

Inventory Pricing Methods

Depreciation Method

Amortization of Intangibles
Term
What are some major risks and uncertainties that must be disclosed?
Definition
Nature of Operations

Use of Estimates and listing of Significant Estimates

Concentration vulnerability
Term
Under Cash Basis Accounting how are Revenue and Expenses recognized?
Definition
Revenue is recognized with Cash Inflow and Expenses Recognized with Cash Outflow
Term
Is Cash Basis Accounting ok for Tax Returns?
Definition
Yes
Term
Is Cash Basis Accounting GAAP?
Definition
No - GAAP uses Accrual Accounting
Term
What is an advantage of Modified Cash Basis Accounting?
Definition
It avoids the complexities of GAAP but provides more information that Cash Basis Accounting
Term
Is Modified Cash Basis GAAP?
Definition
No - GAAP uses Accrual Accounting
Term
What are the 3 acceptable options for Income Tax Basis Accounting
Definition
Cash Basis - Accrual Basis - Hybrid Method
Term
What are the advantages of the Small and Medium Sized Entity Framework?
Definition
It simplifies reporting and disclosures for small companies - Reduces Book vs Tax differences - avoids Fair Value measurements (Historical Cost)
Term
What are the two options for Income Taxes under the Small and Medium Sized Entity Framework?
Definition
Deferred Taxes Method and Taxes Payable Method
Term
What are the two options for Startup Costs under the Small and Medium Sized Entity Framework?
Definition
Expensed or Amortized (15 years)
Term
How is Goodwill treated under the Small and Medium Sized Entity Framework?
Definition
Amortized (15 years)
Term
What are the required liquidation basis financial statements?
Definition
Statement of Net Assets in Liquidation and Statement of Changes in Net Assets in Liquidation
Term
What is a Development Stage Entity?
Definition
A company that is still in the formation stage and hasn't yet begun principal operations or produced significant revenue
Term
What is the key benefit of the accounting rules for Development Stage Entities?
Definition
Cost savings without sacrificing financial statement usefulness
Term
How are Research and Development costs recorded?
Definition
They are expensed in the period incurred and are not capitalized.
Term
Which expenditures are included in the cost of a building?
Definition
All expenditures to get the building into working condition are ready for use
Term
Which expenditures are included in the cost of land?
Definition
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
Term
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?
Definition
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.
Term
In an exchange of non-monetary assets what gain is recognized if resulting cash flows are significantly different?
Definition
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.
Term
How is donated property recorded by the donee?
Definition
Recorded at Fair Value + costs associated with getting the property into working condition for its designed purpose

Exam Tip - Think of a charity holding afair and then donating the property which is then recorded atfair value
Term
How is donation of property recorded by the donor?
Definition
Recorded at Fair Value of asset given up.

Gain or Loss is recorded.
Term
How is double-declining balance (DDB) depreciation calculated?
Definition
(1 / Useful Life) x 2 x Book Value

Ignore salvage value.
Term
How is Sum of Year's Digits (SYD) depreciation calculated?
Definition
(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
Term
How is straight line depreciation calculated?
Definition
(Cost - Salvage Value) / Useful life : depreciation expense
Term
When is an asset considered to be impaired? How is impairment loss calculated?
Definition
When the un-discounted 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
Term
How are legal fees to defend a patent amortized?
Definition
If the patent is SUCCESSFULLY defended the legal fees are amortized over the patent's economic life.

If unsuccessful they are expensed immediately.
Term
What are the two steps for testing goodwill impairment?
Definition
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.
Term
How are costs for developing software recorded?
Definition
Expenses prior to technological feasibility are expensed as R&D.

After technological feasibility but prior to production costs are capitalized.

Expenses incurred during production are charged to inventory.

Expenses incurred training on internal use software are expensed.
Term
What expenditures are included in the cost of equipment?
Definition
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 the new purchase and installation that extend the life or increase the efficiency of these assets are capitalized.
Term
What are the three major types of funds in governmental accounting?
Definition
Governmental, Proprietary, Fiduciary
Term
Which two accounting bases are used in governmental accounting?
Definition
Accrual basis - current economic resources focus (revenues recognized when earned)

Modified accrual basis - current financial resources focus (revenues recognized when available and measurable)
Term
What is a budget appropriation?
Definition
The highest amount allowed for a particular expenditure under a budget.
Term
What is an encumbrance?
Definition
Records purchase and reserves it for the encumbrance.
Term
What is the opening budgetary entry?
Definition
Dr Estimated Revenues Control
Cr Appropriations Control
Dr/Cr Budgetary Fund Balance (plug)
Term
What is the closing budgetary entry?
Definition
Dr Appropriations Control
Dr/Cr Budgetary Fund Balance (plug)
Cr Estimated Revenues Control
Term
What are the types of governmental funds?
Definition
General Fund
Special Revenue Fund
Permanent Fund
Capital Projects Fund
Debt Service Fund
Term
What is a General Fund?
Definition
The operating fund of the governmental unit

Records Significant Revenues: Taxes; Tickets; Fines; Licenses

Records Significant Expenditures: Police; Education; Fire Dept
Term
What is a Special Revenue Fund?
Definition
Restricted for a specific purpose such as street repair.
Term
What is a Permanent Fund?
Definition
Legally restricted fund; where only earnings can be used to fund programs.

Principal remains intact.
Term
What is a Capital Projects Fund?
Definition
Used to acquire and build facilities.
Term
What is a Debt Service Fund?
Definition
Handles repayment of long-term debt and related interest.
Term
Which fund statements are issued in Governmental Accounting?
Definition
Balance Sheet

Statement of Revenues; Expenditures; and Changes in Fund Balance
Term
When is Revenue recorded in Governmental Accounting?
Definition
When it is BOTH available and measurable; regardless of when it is spent.
Term
What is Derived Tax Revenue?
Definition
Money collected from people doing things:

Sales tax (buying cars) or income tax (people working)
Term
What is Imposed Tax Revenue?
Definition
Tax assessed just because things exist

Example: property tax on a car (even if it's never driven); real estate tax

Recorded as a revenue when BUDGETED.

Estimated uncollectible property tax revenues don't offset revenues; so don't net them.
Term
What are the types of Proprietary Funds?
Definition
Internal Service Funds - to serve the needs of other governmental units (i.e. motor pool)

Enterprise Funds - provide goods or services to external users (i.e. post office)
Term
What are the Fund Balance Types?
Definition
Restricted - Restricted by Contributor
Committed - Restricted by Government
Assigned - Intended for a purpose
Unassigned - Available to be spent
Non-spendable - Not in a spendable state
Term
What are the types of Fiduciary Funds?
Definition
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
Term
How are Assets & Liabilities presented on the Statement of Net Position?
Definition
Assets (Current & Non-Current)
Deferred Outflows of Resources
Liabilities (Current & Non-Current)
Deferred Inflows of Resources
Term
How are Capital Assets shown on a governmental Statement of Net Position?
Definition
They are shown net of debt

Asset Cost - Accumulated Depreciation - Asset Liabilities : Net Assets
Term
How is infrastructure reported on a governmental Statement of Net Position?
Definition
Modified approach:

Reported at cost; no accumulated depreciation
Term
How is a Statement of Net Position divided?
Definition
Into Governmental Activities and Business Activities
Term
How are activities presented in a Statement of Activities?
Definition
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 Financial Statements and not the Fund Financial Statements.
Term
What is the primary objective of governmental accounting?
Definition
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
Term
What Financial Statements are required for Defined Benefit Pension plans?
Definition
Statement of Fiduciary Net Position and Statement of Changes in Fiduciary Net Position
Term
What are the components of the Statement of Fiduciary Net Position for Defined Benefit Pension Plans?
Definition
Assets; Deferred Outfows; Liabilities; Deferred Inflows; Fiduciary Net Position
Term
What are the components of the Statement of Changes in Fiduciary Net Position for Defined Benefit Pension plans?
Definition
Additions (Contributions and Net Investment Income) - Deductions (Benefits Payments and Admin Expense) : Net Change in Fiduciary Net Position
Term
What should be included in the Financial Statement notes for Defined Benefit Pension Plans?
Definition
Types of Benefits; Plan Member Classes; Board Information; Investment Policies and FV Determination
Term
Which organization's standards are the most authoritative in the hierarchy of international accounting?
Definition
The International Accounting Standards Board (IASB)
Term
Where is the first place management should look for guidance on international recognition and accounting policies?
Definition
The International Financial Reporting Standards (IFRS) issued by the IASB
Term
Which framework helps to develop standards for international accounting?
Definition
The IASB Framework

* The framework is NOT a standard itself
* The framework does not supersede any standard's authority
Term
What is the objective of the IFRS framework?
Definition
To provide users with information on international accounting.
Term
What basis of accounting is allowed under IFRS?
Definition
Only the Accrual Basis of Accounting is allowed under IFRS.
Term
What are the Qualitative Characteristics of accounting information within IFRS?
Definition
Relevance & Faithful Representation

Relevance - Makes a difference to the user
Includes:
Predictive Value - Future Trends
Confirming Value - Past Predictions

Faithful Representation
Includes:
Completeness - Nothing omitted that would impact the decision-making of a user
Neutrality - Information is presented is without bias
Free from Error - No material errors or omissions
Term
What are the Enhancing Characteristics of IFRS?
Definition
Comparability - Allows users to compare different items among various periods
Verifiability - Different people would reach a similar conclusion on the information presented
Timeliness - Information is made available early enough to impact the decision making of users
Understandability - Information is easy to understand
Term
How does comparability differ under GAAP versus IFRS?
Definition
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.
Term
What is the Pervasive Constraint within IFRS?
Definition
Cost vs. Benefit
Term
Which items are considered reporting elements under IFRS?
Definition
Asset
Liability
Equity
Income
Expense
Term
What are the criteria for recognition on IFRS financial statements?
Definition
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.
Term
When transitioning to IFRS what type of financial statement must be produced for the first reporting period?
Definition
A full comparative statement using IFRS.
Term
If IFRS was implemented in June 2012 for use in the December 31 2012 financial statements what is the Date of Transition?
Definition
January 1 2011 because a full year of comparative statements is required from the previous year
Term
For Property Plant and Equipment which election is the most efficient method for converting assets to IFRS?
Definition
The Fair Value election
Term
Where on the financial statements are adjustments for adopting to IFRS made?
Definition
In the entity's retained earnings or equity
Term
How is the completed contract method used under IFRS?
Definition
Completed contract method is not allowed under IFRS.
Term
How is LIFO treated under IFRS?
Definition
IFRS does not allow LIFO.
Term
Which financial statements are required under IFRS?
Definition
Statement of Comprehensive Income

Statement of Changes in Equity
Term
How is the term income used in IFRS?
Definition
Income is used instead of revenue and encompasses BOTH revenue and gains.
Term
How is the term profit used in IFRS?
Definition
In IFRS the term profit is used instead of Net Income.
Term
How does IFRS treat gains?
Definition
They are treated the same as revenue and are not separated on the financial statements.
Term
How does IFRS treat losses?
Definition
In IFRS losses are treated the same as expenses but they ARE separated on the financial statements.
Term
How does refinancing of current liabilities to long-term liabilities under IFRS differ from GAAP?
Definition
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.
Term
How do contingent liabilities differ between GAAP and IFRS?
Definition
Under GAAP there are three classifications of contingent liabilities - Probable Reasonably Possible and Remote.

Under IFRS contingencies are uncertain future events and are classified as a provision if probable and measurable even if uncertain in timing or amount.
Term
How are Financial Assets recorded under IFRS?
Definition
Recorded on the Statement of Financial Position using one of three methods

1. Amortized Cost 2. Fair Value through OCI or 3. Fair Value through Profit or Loss
Term
How are deferred taxes treated under IFRS?
Definition
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.
Term
When can deferred tax assets and liabilities be netted under IFRS?
Definition
ONLY if they are related to the same country/taxing authority


For example China Deferred Tax Assets can't offset Japan Deferred Tax Liabilities
Term
Which tax rates are used for calculating deferred tax assets/liabilities under IFRS?
Definition
The enacted rate or substantially enacted tax rate.

(GAAP is the enacted tax rate only)
Term
Which items are recorded on the Income Statement in IFRS?
Definition
Income
Finance Costs
Tax Expense
Discontinued Ops
Profit/Loss
Non-controlling interest in Profit/Loss
Net profit/loss attributable from equity
Term
How are property plant and equipment (PP&E) recorded and valued under IFRS?
Definition
Recorded at cost

Valued using either:

Cost model - asset carried at cost less accumulated depreciation and impairment loss

Revaluation model - asset adjusted to fair value less accumulated depreciation
Term
What are the requirements for using the revaluation model for PP&E under IFRS?
Definition
Asset must be able to be reliably measured

Must be applied to whole class of assets not just one asset

No guidance on how often assets should be revalued under IFRS
Term
How is investment property reported under IFRS?
Definition
Initially recorded at cost

Revalued using either Fair Value model or Cost model
Term
How is profit or loss recorded in the current period for investment property under the Fair Value model of IFRS?
Definition
Recorded on the Income Statement

Investment P/L : IS

PP&E P/L : OCI
Term
Under IFRS how is investment property reported under the Cost Model?
Definition
Carried at Cost minus Accumulated Depreciation

Fair Value must still be disclosed in the notes to the financial statements
Term
How are leases reported under IFRS?
Definition
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
Term
How are intangible assets valued under IFRS?
Definition
Using either the Cost Model (cost less Accumulated Depreciation and Impairment Loss)

or

the Revaluation Model (Fair Value less Accumulated Depreciation)
Term
How is internally generated goodwill reported under IFRS?
Definition
It is not recognized.
Term
How is amortization of intangibles handled under IFRS?
Definition
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.
Term
When must a lease be recorded as a Finance Lease under IFRS?
Definition
If the substantial risks of ownership have passed to the Lessee then the Lease must be accounted for as a Finance Lease
Term
How are defined benefit plans recorded under IFRS?
Definition
Project-unit-credit method calculates the PV of the defined benefit obligation
Term
How are interest expense and/or finance costs classified on an IFRS statement of cash flows?
Definition
They can be classified as either Operating or Financing

Once a classification is chosen all future costs must be classified there
Term
How are significant non-cash transactions recorded on an IFRS statement of cash flows?
Definition
They must be included in the notes to the financial statements.
Term
How are Investments in Subsidiaries Valued?
Definition
Investments in Subsidiaries under IFRS are valued three ways: 1. Cost 2. Fair Value 3. Equity Method
Term
Which costs are inventoriable?
Definition
Purchases - Net of Discounts, Freight, Warehouse expenditures
Term
When does ownership of goods transfer when shipped FOB Shipping Point?
Definition
FOB Shipping Point puts the inventory into the hands of the buyer from the loading dock
Term
When does ownership transfer when goods are sent FOB Destination?
Definition
FOB Destination keeps the items in the seller's inventory until it reaches the buyer
Term
Which costs are non-inventoriable?
Definition
Sales Commissions

Interest on liabilities to vendors

Shipping expense to customers
Term
When are discounts recorded under the gross method?
Definition
Under the gross method, discounts are recorded only when used.
Term
Under the net method, when are discounts recorded?
Definition
Under the net method, discounts are recorded whether used or not.

Unused discounts are allocated to financing expense.
Term
How is gross margin calculated?
Definition
Gross Margin : Sales - COGS (BI + P - EI)
Term
Describe the periodic inventory system.
Definition
Inventory is counted at certain times throughout the period

Weighted-average cost flow method is used.
Term
Describe the perpetual inventory system.
Definition
Inventory count continually updated

Uses a moving-average cost flow method
Term
In periods of rising prices, under which cost flow system would ending inventory be the same under both periodic and perpetual inventory methods?
Definition
Under the FIFO system, periodic and perpetual inventory methods will both have the same ending inventory.
Term
How is inventory turnover calculated?
Definition
COGS / Average Inventory
Term
How is Average Day's Sales in inventory calculated?
Definition
365 / Inventory Turnover
Term
Under a consignment system, who holds the consigned goods in inventory?
Definition
The CONSIGNOR holds the consigned items in their inventory count. The cost includes the shipping to the consignee.
Term
Under a consignment system, does the consignee hold consignment inventory in their own inventory?
Definition
No. Consignment goods are maintained in the inventory of the consignor, not the consignee.
Term
What effect does overstatement or understatement of inventory have on ending retained earnings?
Definition
Misstatement of beginning inventory does NOT have an effect on ending retained earnings.

Misstatement of ENDING inventory does have an effect on retained earnings.
Term
How does misstatement of ending inventory effect Ending Retained Earnings?
Definition
EI Over : COGS Under : ERE Over

EI Under : COGS Over : ERE Under
Term
Which costs are included in COGS first under the FIFO (first in first out) system?
Definition
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
Term
Which costs are included in COGS under the LIFO (last in first out) system?
Definition
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
Term
How is Weighted Average Cost Per Unit calculated under a weighted average inventory system?
Definition
COGAS / Total Units : Weighted Average Cost Per Unit
Term
How does FIFO's COGS relate to LIFO's in a time of changing prices?
Definition
FIFO's relationship to COGS will be opposite LIFO's relationship to COGS in periods of falling/rising prices.
Term
How do FIFO and LIFO change in a period of rising prices?
Definition
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
Term
How do FIFO and LIFO change in a period of falling prices?
Definition
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
Term
Under a Lower of Cost or Market, how are the benchmarks calculated?
Definition
Market Ceiling : Net Realizable Value : Selling Price - Selling Costs

Market : Replacement Cost

Market Floor : Net Realizable Value - Normal Profit
Term
How are Available-For-Sale securities recorded on the Balance Sheet?
Definition
At Fair value as either Current or Non-current assets.
Term
How are Available-For-Sale security Unrealized G/L treated?
Definition
Included in OCI (Other Comprehensive Income)
Term
How are Unrealized G/L for Available-For-Sale securities that are reclassified to Held-to-Maturity or Trading Securities treated?
Definition
HTM - Stockholder's Equity
/ Trading Securities - Current Period.
Term
How are Held-to-Maturity securities recorded on the Balance Sheet?
Definition
Amortized cost as Current or Non-current assets.

If reclassified as AFS - Unrealized G/L go to Stockholder's Equity

If reclassified as Trading Securities - Unrealized G/L recognized in Current Period
Term
How are Held-to-Maturity securities Unrealized G/L treated?
Definition
Trick question - Unrealized gains or losses are not applicable because they are HTM
Term
How are Trading Securities recorded on the Balance Sheet?
Definition
At Fair Value as a Current Asset

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.
Term
How are Trading Securities Unrealized G/L treated?
Definition
Recorded on the Income Statement

If they are reclassified as HTM or AFS - there is no effect upon transfer.
Term
How is a Capital Lease recorded?
Definition
Capitalize at cost: Asset & Liability Recorded at Present Value of Future Lease Payments
Term
What footnote disclosures are required for a Capital Lease?
Definition
Future minimum rental commitments

By year - for 5 years

All remaining years as a group
Term
What are the requirements for a Capital Lease for a lessor?
Definition
Same as for lessee (Title- BPO or Substance)- PLUS:

Collectability of lease payments is predictable

No uncertainties about the lessor reimbursing the lessee for costs incurred
Term
What are the characteristics of an Operating Lease for a lessee?
Definition
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.
Term
What are the characteristics of an Operating Lease for a LESSOR?
Definition
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
Term
What are the characteristics of a Direct Financing Lease?
Definition
Interest Revenue (or expense for lessor) decreases with passage of time

Principal amount increases with each payment

Carrying amount of Lease decreases
Term
How is a sale-leaseback recorded?
Definition
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
Term
What are the characteristics of lease payments under an annuity due situation?
Definition
Payments begin at the start of the lease period

Think: Rent/Mortgage payments are Due at the first of the month
Term
What are the characteristics of lease payments under an ordinary annuity situation?
Definition
Payments begin after the end of the first year

Think: An annuity that pays you at the end of each year
Term
What are the characteristics of a Capital Lease for a lessee?
Definition
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
Term
Which financial statements are required for not - for - profit organizations?
Definition
Statement of Financial Position

Statement of Activities

Statement of Cash Flows

Statement of Functional Expense (Volunteer Health Organizations Only)
Term
What are the major classifications found on a Statement of Financial Position?
Definition
Similar to Balance Sheet:

Assets
Liabilities
Net Assets
Unrestricted Assets
Permanently Restricted Assets
Temporarily Restricted Assets
Term
What are the major classifications in a Statement of Activities?
Definition
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
Term
What are the characteristics of a Statement of Cash Flows for not - for - profits? What are the major classifications?
Definition
Both direct and indirect methods are OK

Operating Activities - Unrestricted Revenues and Unrestricted Expenses

Investing Activities

Financing Activities - Endowments and restricted contributions
Term
Which organizations are required to present a Statement of Functional Expenses?
Definition
Volunteer Health Organizations
Term
Which statements are required for non - governmental hospitals?
Definition
Balance Sheet
Statement of Operations
Statement of Changes in Net Assets
Statement of Cash Flows
Financial Statement Notes
Term
Which basis of accounting is used for revenues and net assets?
Definition
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
Term
What are the characteristics of unrestricted assets or revenue?
Definition
No restrictions or conditions placed on entity in order to use the resources

Note: assets earmarked internally by management are still unrestricted
Term
When are revenues on contributions recognized?
Definition
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
Term
When are services rendered considered contributions?
Definition
If the organization would have otherwise paid for them

or

They increase the value of a non - monetary asset
Term
Is hospital charity care revenue?
Definition
NO.

It is disclosed in the notes to the financial statements only.
Term
How are unconditional pledges to contribute recorded?
Definition
Classified as revenue in the current year only - multi - year future contributions fall under Temporarily Restricted.
Term
Which revenues are expenses deducted from?
Definition
Expenses ONLY deducted from Unrestricted Revenues - not Temporary or Permanently Restricted Revenues/Assets
Term
What are the characteristics of temporarily restricted assets/revenue?
Definition
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
Term
What are the characteristics of an endowment?
Definition
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
Term
When is the donation of an art collection recognized as a contribution or asset?
Definition
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
Term
When both Temporarily Restricted Assets and Unrestricted Assets are available for use - which assets are used first?
Definition
Temporarily restricted assets are used before Unrestricted assets.
Term
How is a refundable advance recorded by a not for profit?
Definition
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
Term
How are investments recorded and valued in not - for - profit accounting?
Definition
Fair Value is mostly used

Exception - Equity method used when significant influence exists
Term
How are scholarships recorded?
Definition
As a reduction of revenue - netted against college's tuition
Term
How is depreciation expense recorded by a not - for - profit?
Definition
Depreciation expense is allocated proportionately to various functions
Term
How are capital contributions with a mortgage attached recorded in a partnership for financial statement purposes?
Definition
Calculating the capital balance when property contributed has a mortgage results in the FV of the Asset being netted against the Liability
Term
If no goodwill is recorded upon admission of a new partner - which method is used for recording the new partner's interest?
Definition
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
Term
If goodwill is recorded upon admission of a new partner - how is the partner's interest recorded?
Definition
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%)
Term
At what value should assets contributed to a partnership be recorded? What value for liabilities assumed by the partnership?
Definition
Fair Value for assets contributed.

Present value of remaining cash flows for liabilities assumed.
Term
Which Personal Financial Statements are required?
Definition
Required: Statement of Financial Condition (Statement of Changes in Net Worth is optional)
Term
How are assets and liabilities valued in a Personal Financial Statement?
Definition
Estimated current value
Term
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?
Definition
Presented on Statement of Financial Condition between Liabilities and Net Worth
Term
What is the general presentation on a statement of financial condition?
Definition
Assets
- Liabilities
- Estimated taxes on assets sold
: Net Worth
Term
How is life insurance presented on a Personal Financial Statement?
Definition
Only shown if there is cash surrender value

It is shown net of loans against the policy
Term
How are business interests shown on a Personal Financial Statement?
Definition
Business Interests that constitute a large percentage of total assets should be separated from other investments
Term
What is the discreet view in an Interim Financial Statement?
Definition
Interim period is a separate accounting period - not GAAP

Same accounting principles used for annual reporting should be used.
Term
What is the integral view in an Interim Financial Statement?
Definition
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
Term
How are discontinued operations & extraordinary items reported in Interim Financial Statements?
Definition
Aren't prorated

Fully recognized in Interim Period as incurred

If it occurs in Q3 - it's recognized in Q3
Term
How are cumulative gains and losses reported in Interim Financials?
Definition
Reported as if they occurred in the first quarter
Term
How is inventory valuation handled in Interim Financials?
Definition
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
Term
What is one of the primary problems with interim reporting?
Definition
The matching principle gets messed up - Expenses incurred in one period may benefit future periods
Term
For whom is Segment Reporting required?
Definition
Publicly traded companies
Term
What factors cause a segment to be significant and therefore to be reported separately?
Definition
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
Term
What is the disclosure requirement regarding sales of 10% or more for one customer?
Definition
If 10% or more of enterprise revenue comes from one customer - the segment making the sales must be disclosed
Term
What items are included in operating activities on the Statement of Cash Flows?
Definition
Cash received from Customers- Interest & Dividends- Trading Securities

Cash paid to Vendors- Suppliers- Interest- Taxes- Trading Securities
Term
What items are included in investing activities on a Statement of Cash Flows?
Definition
Cash received: Sale of PP&E- Sale of Investments- Loan Principle

Cash paid: Loans- Acquisitions- AFS or HTM Securities- Taxes- Trading Securities
Term
What items are included in Financing Activities in a Statement of Cash Flows?
Definition
Cash received: Issuance of Stock- Issuance of Debt

Cash paid: Dividends
Term
What is the direct method for a Statement of Cash Flows?
Definition
Starts with Income from Continuing Operations

Adjusts for changes in accounts like A/R- A/P- Inventory and non-cash revenues- expenses- gains- losses

If used- the Indirect Method must also be shown
Term
What is the Indirect Method for a Statement of Cash Flows?
Definition
Starts with Net Income

Adjusts for changes in accounts like A/R- A/P- Inventory and non-cash revenues- expenses- gains- losses
Term
When common stock and preferred stock are issued in a lump sump purchase- how is APIC allocated?
Definition
APIC for each is allocated by its respective % of the total FMV of the shares x the proceeds.
Term
When is APIC recorded on a stock subscription?
Definition
APIC increases on date subscription is recorded - not on the date paid for or issued
Term
To what extent is retained earnings restricted if legally restricted due to Treasury Stock?
Definition
It will be restricted to the extent of the balance in the Treasury Stock account.
Term
When are dividends in arrear recorded for cumulative preferred stock?
Definition
They are not accrued until declared.
Term
When are dividends in arrears included as a disclosure and not an accrual in the financial statements?
Definition
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 Financial Statements.
Term
What is the gain or loss when a non-monetary asset is distributed to a shareholder?
Definition
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
Term
What is the effect on retained earnings when a non-monetary asset is distributed to a shareholder?
Definition
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
Term
When is Retained Earnings debited for FMV of Stock for a stock dividend?
Definition
When Stock Dividend is less than 25% of Common Stock outstanding
Term
When is Retained Earnings debited for Par Value for a stock dividend?
Definition
When Stock Dividend is greater than 25% of common stock outstanding
Term
What is the effect of a stock dividend or a stock split on total shareholder equity?
Definition
Stock dividends and stock splits both have no effect on Total Shareholder Equity
Term
What is the affect on APIC from a stock split?
Definition
Stock splits only affect par value - APIC remains the same.
Term
When is compensation expense recorded at the time of grant for a stock option?
Definition
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
Term
What interest rate is used to discount stock options?
Definition
The risk-free interest rate
Term
What date is used as the measurement date for share-based payments classified as liabilities?
Definition
The settlement date.
Term
How are compensation costs for share-based payments classified as liabilities measured?
Definition
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
Term
What is the net increase to shareholder equity in a reorganization where a company pays cash and issues stock to satisfy unsecured creditors?
Definition
Net increase to SHE : Gain on settlement of debt + Credit to SHE from stock issuance
Term
What is the primary purpose of a quasi-reorganization?
Definition
To eliminate a deficit balance in RE by restating its assets to Fair Value

It does not directly protect a company from its creditors
Term
How is return on Common Stockholder's Equity calculated?
Definition
(Net Income - P/S Dividends) / Average Common Stockholders Equity

Note: Average CSE : Common Stock + RE
Term
How is book value per share of common stock calculated?
Definition
Total Shareholder Equity
- Total Preferred Stock
- P/S Dividends in Arrears
- P/S Liquidation Premium
:Total Book Value

Book Value per Share : Total Book Value / Shares outstanding
Term
How is the dividend per share payout ratio calculated?
Definition
Dividends per share / earnings per share
Term
How is basic Earnings Per Share (EPS) calculated?
Definition
(Net Income - Preferred Dividends) / Average C/S Outstanding

Note - If cumulative- subtract the P/S dividend regardless of whether or not they're declared.
Term
For EPS purposes- which date is used for calculation purposes when a stock split or stock dividend has occurred?
Definition
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
Term
For which areas is EPS required to be shown?
Definition
EPS is only required to be shown for Income from Continuing Operations and Net Income.

All others (discontinued operations- extraordinary items) can be shown on the Financial Statements or in the notes
Term
When do stock options increase share outstanding?
Definition
Only if they are dilutive.

Their exercise price is LESS than the market value

If not- you ignore them in the calculation
Term
How is EPS calculated when convertible bonds are taken into consideration?
Definition
[Net Income + Bond Interest (Net of Tax)] / (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
Supporting users have an ad free experience!