FAR

What are the guidelines for interim reporting?

-Use same accounting principles that were used in the most recent annual report. -Allocate expenses to the interim period benefited. -Revenues are recognized in the period in which they are earned and realized/realizable. -A total for comprehensive income in condensed financial statements of interim periods.

What are the 3 rules for recording journal entries?

1. Adjusting journal entries must be recorded by the end of the entity's fiscal year, before the preparation of financial statements. 2. Adjusting journal entries never involve the cash amount. 3. All adjusting entries will hit one income statement account and one balance sheet account.

What 4 situations require adjusting journal entries in order to properly present financial statements on the accrual basis?

1. Cash is received before the performance obligation is met (deferred revenues). 2. Cash is paid before the expense is incurred (prepaid expenses). 3. Cash is received after the performance obligation has been met (receivables). 4. Cash is paid after the expense has been incurred (accrued expenses).

Describe the computational steps required in "discounting a note."

1. Compute maturity value (remember to include interest at maturity). 2. Compute the "discount" (remember to use maturity value). 3. Get proceeds by subtracting discount from maturity value. 4. Compute interest income as the difference between proceeds and face of the note.

Describe the hierarchy of fair value inputs. Which inputs have the highest priority?

1. Level 1 inputs (highest priority): Quoted prices in active markets for identical assets or liabilities. 2. Level 2 inputs: Inputs other than quoted market prices that are directly or indirectly observable for an asset or liability. 3. Level 3 inputs: Unobservable inputs for the asset or liability that reflect the entities' assumptions and are based on the best available information.

Describe the valuation techniques that can be used to measure the fair value of an asset or liability.

1. Market approach - Uses prices and other relevant information from market transactions involving identical or comparable assets or liabilities to measure fair value. 2. Income approach - Converts future amounts, including cash flows or earnings, to a single discounted amount to measure the fair value of assets or liabilities. 3. Cost approach - Uses current replacement cost to measure the fair value of assets.

Name the three elements of faithful representation.

1. Neutrality 2. Completeness 3. Freedom from error

What conditions must be present for a disposal to be reported in discontinued operations?

A disposal of a component, group of components, business activity, or nonprofit activity is reported in discontinued operations if the disposal represents a strategic shift that has or will have a major effect on an entity's operations and financial results.

How do we account for subsequent increases in the fair value of a discontinued component?

A gain is recognized for the subsequent increase in fair value minus costs to sell (but not in excess of the previously recognized cumulative loss). The gain is reported in the period of increase.

How do control and revenue recognition differ when an entity acts as a principal versus when it acts as an agent?

A principal has control over the good/service prior to the transfer, and revenue equal to expected gross consideration will be recognized. An agent does not have control, and revenue equal to the agent's fee/commission will be recognized.

Describe refund liabilities and when it is appropriate to book them.

A refund liability represents the amount of money an entity does not expect to be entitled to receive. Refund liabilities should be recognized in situation in which customers have a right to return and the entity anticipates having to return a portion of the consideration already received from customers.

During periods of rising prices, the use of LIFO versus FIFO has what effect on the valuation of ending inventory and reported net income?

Both ending inventory and net income will be lower when LIFO is used during a period of rising prices. Lifo = Lowest

Name the pervasive constraint on the information provided in financial reporting.

COST CONSTRAINT: The benefits of reporting financial information must be greater than the costs of obtaining and presenting the information.

List the 10 elements of financial statements according to SFAC No. 6.

CREG and LALEID Comprehensive Income Revenues Expenses Gains and Losses Assets Liabilities Equity (of Net Assets) Investments by Owners Distributions to Owners

How is fixed-asset carrying value computed under US GAAP?

Carrying Value = Historical cost - Accumulated depreciation - Impairment

Define comprehensive income.

Change in equity (net assets) that results from transactions and other events and circumstances from non-owner sources.

What are the special exceptions to the general rule for the reporting of changes in an accounting principle? How are these exceptions reported?

Changes where it is impracticable to estimate the cumulative effect adjustment, i.e. a change to LIFO from another method of inventory pricing under US GAAP or a change in depreciation methods. Such exceptions are accounted for prospectively, like a change in accounting estimate.

What is the 75% test for identifying reportable segments?

Combined external (consolidated) revenue of all reportable segments must be at least 75% of the total consolidated revenue of the entity. The practical limit is 10 segments, but this is not a precise limit.

Describe an inventory consignment arrangement. Also, how are the consigned goods carried on the parties' balance sheets?

Consignor gives goods to consignee for sale to 3rd parties. Title to the goods remains with the consignor; therefore the consigned items stay on the balance sheet of the consignor.

Name the expense that Inventory turns into as it expires.

Cost of goods sold

How is the current ratio computed?

Current assets/Current liabilities

What is the journal entry to record the earning of deferred revenue?

DEBIT: Deferred revenue xx CREDIT: Revenue xx

Name 2 methods of accounting for the write-off of uncollectible accounts.

Direct Write-Off: DEBIT: Bad debt expense xx CREDIT: Accounts receivable xx Weaknesses: Bad debts are not matched to sales, and accounts receivable are overstated. Not GAAP. Allowance Method: DEBIT: Allowance for uncollectible accounts xx CREDIT: Accounts receivable xx Strengths: Matches bad debts with credit sales. Accounts receivable fairly stated. Required by GAAP.

Notes receivable may be discounted "with" or "without" recourse. What is the difference?

Discounting With Recourse: The holder remains contingently liable. Discounting Without Recourse: The holder assumes no further liability after discounting.

Name the 5 elements of present value measurement per SFAC No. 7.

EVTUO - Estimate of future cash flow - expectations about timing Variations of future cash flows - Time value of money (the risk-free rate of interest) - the price for bearing Uncertainty - Other factors (liquidity issues and market imperfections)

Describe the Form 10-Q. What level of assurance must be provided with the financial statements submitted in this form?

Filed QUARTERLY by US registered companies. Includes UNAUDITED financial statements, interim MD&A, and certain disclosures.

Describe the accounting treatment for forwards and call options related to repurchase agreements.

Forward or Call Option: - Repurchase price < Original price (lease) - Repurchase price ≥ Original selling price (financing arrangement)

Are gains and losses on the disposal of assets shown on a "gross basis" or on the "net basis"?

Gains and losses are reported at their net amounts (proceeds less NBV)

Identify the contents of the Summary of Significant Accounting Policies note to the financial statements.

Identify and describe: - Measurement bases used in preparing the financial statements - Specific accounting principles and methods used

When is a warranty considered a separate performance obligation within a contract?

If a customer has the option to purchase a warranty separately or if the warranty provides a service that is beyond the assurance that the product will comply with agreed-upon specifications, the warranty will be treated as a separate performance obligation. A portion of the overall transaction price should then be allocated to the warranty obligation.

Distinguish between the treatment of costs incurred in obtaining a contract as assets or as expenses.

If an entity expects to recover these costs through the performance of the contract, the entity will treat them as assets. If the costs are incurred regardless of whether the contract is obtained, they are treated as expenses.

For long-term construction-type contracts, when are losses recognized?

Immediately when discovered, regardless of the method used for revenue recognition.

Under U.S. GAAP, how is market calculated in the lower of cost or market method?

In the lower of cost or market method, "market" generally means current replacement cost, provided the current replacement cost does not exceed the market ceiling or fall below the market floor. - Ceiling: Net realizable value (estimated net selling price less completion and disposal costs). - Floor: Net realizable value minus normal profit margin.

Name the expense that Unexpired (prepaid) cost of insurance turns into as it expires.

Insurance Expense

When are losses on firm purchase commitments recognized?

Losses are recognized in the period in which the price declines. DEBIT: Estimated loss on purchase commitment xx CREDIT: Estimated liability on purchase commitment xx

What criteria must be met in order to recognize revenue on a contract?

- All the parties have approved the contract and are committed to performing their obligations. - The rights of each party are identified. - Payment terms can be identified. - Future cash flows are expected to change as a result of the contract (commercial substance). - It is probable that the entity will collect substantially all of the consideration.

Define 'cash and cash equivalents.

- Cash includes both currency and demand deposits with banks and/or other financial institutions. - Cash equivalents include short-term, highly liquid investments that are both readily convertible to cash and so near their maturity when acquired by the entity (90 days or less from the date of purchase) that they represent insignificant risk of changes in value.

Name the enhancing qualitative characteristics of financial information.

- Comparability - Verifiability - Timeliness - Understandability

In liquidating a partnership, what is the order of preference?

- Creditors - Loans and advances to partners - Capital accounts of partners Remember that all losses must be provided for before disposal; that is, maximum potential losses before distribution of cash.

How is a change in accounting principle reported?

- Cumulative effect of change is included in the retained earnings statement as an adjustment of the beginning retained earnings balance of the earliest year presented. -Prior period financial statements are restated, if presented.

What are the general guidelines for OCBOA financial statement presentation?

- Different titles from accrual basis financial statements. - Required financial statements are the equivalent of the accrual basis balance sheet and income statement. - Financial statements should explain changes in equity accounts. - A statement of cash flows is not required. - Disclosures should be similar to GAAP financial statement disclosures.

Identify 2 methods of revenue recognition for long-term construction-type contract under US GAAP

- Percentage-of-completion - Completed-contract

Name several cost flow methods for inventory.

- Specific identification - FIFO - LIFO (unit and dollar value) - Averaging - Weighted average (associated w/ periodic) - Weighted average (associated w/ perpetual)

List some disclosure requirements for comprehensive income.

- Tax effects of each component included in "other comprehensive income" - Changes in the accumulated balances of components of "other comprehensive income" - Total accumulated other comprehensive income - Reclassification adjustments between other comprehensive income and net income

What is the Private Company Council?

- The Financial Accounting Foundation (FAF) created the Private Company Council (PCC) to improve standard setting for privately held companies in the U.S. - The goal of the PCC is to establish alternatives to U.S. GAAP, where appropriate, to make private company financial statements more relevant, less complex, and cost beneficial. - Accounting alternatives for private companies are incorporated into the relevant sections of the ASC.

Describe the bonus method of withdrawal of a partner.

- The difference between the balance of the withdrawing partner's capital account and the amount that person is paid is the amount of the bonus. - The bonus is allocated among the remaining partners' capital accounts in accordance with their remaining profit and loss ratios.

Identify indicators of a consignment arrangement.

- The entity controls the product until a specified event occurs (such as a sale to a customer). - The dealer/distributor does not have an unconditional obligation to pay the entity for the product. - The entity has the authorization to require the return of the product or transfer the product to another party.

What criteria must be met in order for a performance obligation to be considered distinct?

- The promise to transfer the good/service is separately identifiable from other goods or services in the contract. - The customer can benefit from the good/service independently or when combined with the customer's own available resources.

What criteria must be met in order for a customer to obtain control in a bill-and-hold arrangement?

- There must be a substantive reason for the arrangement. - The product is separately identified as belonging to the customer. - The product is ready (in its current condition) for transfer to the customer. - The entity (seller) cannot use the product or direct it to another customer.

What are the characteristics of an operating segment?

- the nature of the products and services; - the nature of the production processes; - the type or class of customer for the products and services; - the methods used to distribute the products or provide the services; and - if applicable, the nature of the regulatory environment (banking, insurance, or public utilities).

Describe the 10% test for identifying reportable segments.

Must only meet one of the below: - Revenue: Reported revenue, including both sales to external customers and inter-segment sales or transfers, is 10% or more of the combined revenue, internal and external, of all operating segments. - Reported profit or loss: The absolute amount of its reported profit or loss is 10% or more of the treated, in absolute amount, of: - The combined reported profit of all operating segments that did not report a loss. - The combined reported loss of all operating segments that did report a loss. - Assets: Assets are 10% or more of the combined assets of all operating segments.

How is net realizable value calculated in the lower of cost and net realizable value method?

Net realizable value is the selling price less completion and disposal costs.

Describe the bonus method of creating a new partnership interest with an investment of additional capital

New partner's capital account - ( A + B + C) x C's percentage ownership. Excess of new partner's contribution over capital interest received is a bonus to the old partners. Excess of capital interest received over new partner's contribution is a bonus to the new partner.

Explain the difference between periodic and perpetual inventory methods.

Periodic: - The quantity of inventory is determined only by physical count. - Ending inventory is physically counted and priced. Perpetual: - Inventory is updated for each purchase and for each sale. - Keeps a running total of inventory balances.

Using the allowance method, give the 2 journal entries to provide for and then write off an uncollectible account.

Provide for: DEBIT: Bad debt expense xx CREDIT: Allowance for uncollectible accounts xx Write-Off: DEBIT: Allowance for uncollectible accounts xx CREDIT: Accounts receivable xx

Describe the accounting treatment for put options related to repurchase agreements

Put Option: - Repurchase price < Original selling price - Customer has a significant economic incentive to exercise the right (lease) - Customer does not have significant economic incentive (sale with a right of return) - Repurchase price ≥ Original selling price - Repurchase price > Expected market value of the asset (financing arrangement) - Repurchase price ≤ Expected market value of the asset and customer does not have significant economic incentive to exercise the right (sale with a right of return)

Name the fundamental qualitative characteristics of useful financial information.

Relevance and faithful representation.

How are error corrections reported?

Reported as prior period adjustments to retained earnings and all comparative financial statements presented are restated.

Describe how revenue recognition differs when performance is satisfied over time versus at one point in time.

Revenue is recognized based on measuring progress toward completion using either output or input methods when the performance obligation is satisfied over time. In order to recognize the revenue when performance is satisfied at a point in time, the customer must obtain control of the asset.

List the steps associated with the five-step approach to revenue recognition.

Step 1: Identify the contract with the customer. Step 2: Identify the separate performance obligations in the contract. Step 3: Determine the transaction price. Step 4: Allocate the transaction price to the separate performance obligations. Step 5: Recognize revenue when or as the entity satisfies each performance obligation.

Name the single source of authoritative nongovernmental U.S. GAAP.

The FASB Accounting Standards Codification (ASC)

Describe the goodwill method of withdrawal of a partner.

The partners may elect to record the implied goodwill in the partnership based on the payment to the withdrawing partner. The amount of the implied goodwill is allocated to all of the partners in accordance with their profit and loss ratios. After allocating goodwill, the balance in the withdrawing partner's capital account should equal the final distribution to the withdrawing partner.

What factors should be accounted for when determining the transaction price?

The price should take into account (if applicable): - Variable consideration - Significant financing - Noncash considerations - Consideration payable to the customer

Describe the exact method of creating a new partnership interest with an investment of additional capital.

The purchase price equals the book value of the capital account purchased. - No adjustment to the existing partners' capital accounts. - No goodwill or bonus.

Define the transaction price when recognizing revenue.

The transaction price is the amount of consideration an entity expects to receive in exchange for transferring goods/services to a customer.

State the formula for recognizing the gain/loss on long-term construction-type contracts under the percentage-of-completion method.

Total cost to date/Total estimated cost of contract x Total estimated cost of contract - Gross profit recognized to date

What income tax rate is used in interim financial reporting?

Use best estimate of effective tax rate to be applicable for full year on quarterly statements.

When does the title to goods pass for FOB destination?

When received by the buyer.

When does the title to goods pass for Cosigned goods?

When sold to a third party by consignee.

What is the difference between factoring with recourse and without recourse?

With Recourse: The factor may return the account to the company if it proves to be uncollectible. Potential liability and risk of loss remains with the company. Without Recourse: The factor assumes the risk of loss if the account is uncollectible.

Define working capital.

Working capital = Current assets - Current liabilities

How is the quick ratio computed?

(Cash & cash equivalents + ST marketable securities + Receivables (net)) / Current liabilities

How does a "multiple-step" income statement differ from a "single-step" income statement?

- A multiple-step income statement reports operating revenues and expenses separately from non-operating revenues and expenses and other gains and losses. - On a single-step income statement's presentation of income from continuing operations, total expenses are subtracted from total revenues without separation between operating and non-operating revenues and expenses.

Describe the goodwill method of creating a new partnership interest with an investment of additional capital.

- Goodwill is recognized based on the total value of the partnership implied by the new partner's contribution. - Goodwill is shared by the existing partners using the agreed profit/loss ratio.

What are the US GAAP disclosure requirements for risks and uncertainties?

- Nature of operations. - Use of estimates in preparing the financial statements. - Significant estimates. - Current vulnerability due to certain concentrations.

According to SFAC No. 5, what should a full set of financial statements include?

- Statement of Financial Position (the Balance Sheet) - Statement of Earnings (the Income Statement) - Statement of Comprehensive Income - Statement of Changes in Owners' Equity

Name 2 quantitative thresholds used in identifying reportable operating segments.

1. 10% "size" test 2. 75% "reporting sufficiency" test

Name the 3 types of accounting changes

1. Change in accounting principle 2. Change in accounting estimate 3. Change in accounting entity

In creating a new partnership interest with an investment of additional capital, what 3 methods can be used?

1. Exact method 2. Bonus method 3. Goodwill method

Name the 4 required disclosures for segments of an enterprise.

1. Operating segments 2. Products and services 3. Geographic areas 4. Major customers

Name 2 methods for estimating uncollectible accounts.

1. Percentage of accounts receivable at year-end. 2. Aging of accounts receivable at year-end.

Name the three elements of relevance.

1. Predictive Value 2. Confirming Value 3. Materiality

List 2 formats acceptable for reporting comprehensive income.

1. Statement of comprehensive income (single-statement approach). 2. Statement of income followed by separate statement of comprehensive income (two-statement approach).

Describe the expected cash flow approach for present value computations.

Considers a range of possible cash flows and assigns a (subjective) probability to each cash flow in the range to determine the weighted average, or "expected," future cash flow.

Name the expense that Net book value of fixed assets turns into as it expires.

Depreciation Expense

Who are the primary users of general purpose financial reports?

Existing and potential: - Investors - Lenders - Other creditors

Define fair value.

Fair value is the price to sell an asset or transfer a liability in an orderly transaction between market participants at the measurement date.

Describe the Form 10-K. What level of assurance must be provided with the financial statements submitted in this form?

Filed ANNUALLY by US registered companies. Includes a summary of financial data, MD&A, and AUDITED financial statements prepared using US GAAP.

Describe how allocation works when a contract contains more than one performance obligation.

For contracts with more than one performance obligation, the overall contract transaction price should be allocated among each obligation based on the stand-alone selling price expected for satisfying each unique obligation (along with applying any discounts and/or variable consideration).

What are the disclosure requirements for reportable operating segments?

For each reportable segment, the entity must report: - Identifying factors - Products or services - Profit or loss details - Asset details - Measurement criteria - Reconciliations

Identify 4 items included in other comprehensive income.

PUFI Pension adjustments Unrealized gains and losses on available-for-sale debt securities and hedges Foreign currency translation adjustments and gain/losses on certain foreign currency transaction Instrument-specific credit risk for liabilities (using FV) and their changes in FV

How is a change in an accounting estimate reported?

Prospectively

What is meant by a "classified" balance sheet?

A classified balance sheet distinguishes current and non-current assets and liabilities

Define a cosign arrangement.

A consignment arrangement exists when a dealer/distributor is tasked by an entity with selling the entity's products to customers.

When does the title to goods pass for FOB shipping point?

When given to a common carrier.

Under US GAAP, how is a change in the accounting entity reported?

All current and prior period financial statements presented are restated.

Name the expense that Unexpired cost of patents turns into as it expires.

Amortization Expense

What is a subsequent event and what are the 2 categories of subsequent events?

An event or transaction that occurs after the balance sheet date but before the financial statements are issued or are available to be issued. 1. Recognized subsequent events - Provide additional information about conditions that existed at the balance sheet date. 2. Nonrecognized subsequent events - Provide information about conditions that occurred after the balance sheet date and did not exist on the balance sheet date.

The gain (loss) from discontinued operations can consist of...

An impairment loss, a gain (loss) from actual operations, and a gain (loss) on disposal.

At what value should non-interest-bearing promissory notes be recorded?

At the present value of all future payments required by the note. The payments should be discounted at the market interest rate.