AFC 1 - FAR

What is included in the Owners' equity?

1. Contributed capital 2. Preferred stocks 3. Treasury stocks 4. Retained earnings 5. Non-controlling interest 6. Accumulated OCI

Name some of the liquidity ratios

1. Current ratio 2. Quick ratio Quick ratio = (Cash + Marketable securities + receivables)/CL 3. Cash ratio = (Cash + marketable securities)/CL

Name some of the solvency ratios

1. LT debt to equity = Long-term debt/Total Equity 2. Total Debt to equity = Total Debt/Total equity 3. Debt ratio = Total Debt/Total Assets 4. Financial leverage = (TA)/TE

How are intangible assets that are created internally treated under US GAAP?

Under US GAAP, intangible assets that are created internally, such as research and development costs, are expensed as incurred, except for certain legal costs.

How are inventories reported under US GAAP?

Under US GAAP, inventories are reported at the LCM, or the lower of cost or market.

How are PP&E reported under US GAAP?

Under US GAAP, only the cost model is allowed.

What are costs that are excluded from inventory?

- Abnormal waste of material - Labor - overhead - storage cost - Admin overhead cost - Selling cost

Which of the following statement about non-recurring items is least accurate? 1. Gains from extraordinary items are reported net of taxes at the bottom of the income statement before the net income 2. Unusual or infrequent items are reported before taxes above the net income from continuing operations 3. A change in accounting principle is reported in the income statement net of taxes after extraordinary items and before the net income

...

Which of the following transactions would MOST likely be reported below income from continuing operations, net of tax? 1. Gains or losses from the sale of equipment used in a firm's manufacturing operations 2. A change from the accelerated method of depreciation to the straight-line method 3. The operating income of a physically and operationally distinct division that is currently for sale but not yet sold.

...

What are the four characteristics that enhance relevance and faithful representation?

1. Comparability 2. Verifiability 3. Timeliness 4. Understandability

When is an asset impaired?

An asset is impaired if its carrying value > the recoverable amount

Describe the steps in the financial statement analysis framework

1. State the objective and context 2. Gather data 3. Process data 4. Analyze and interpret the data 5. Report the conclusion and recommendations 6. Update the analysis

What are the characteristics of a coherent financial reporting framework?

1. Transparency 2. Comprehensiveness 3. Consistency

ABC Corporation began the year with 10 million shares outstanding. Six months later, it issued another 2.75 million shares. By the ninth month, it retired 1 million of its shares. What was ABC's weighted average number of shares outstanding over this last year?

11,125,000

What are the revenue recognition methods for long-term contracts?

2 methods: 1. Percentage-of-completion: recognizes revenue in proportion to costs incurred. 2. Completed-contract: recognizes revenue only when the contract is complete.

What are the revenue recognition methods for installment sales?

3 methods: 1. Normal revenue recognition - if sales collectibility is reasonably assured 2. Installment sales method - if collectibility cannot be reasonably estimated 3. Cost recovery method if collectibility is highly uncertain

What is an operating cycle?

An operating cycle is the time it takes to produce or purchase inventory, sell the products, and collect the cash

ABC has 160,000 shares of common stock authorized. There are 92,000 shares issued and 84,000 shares outstanding. How many shares of treasury stocks does ABC own? A. 8,000 B. 68,000 C. 76,000 D, 16,000

A Treasury stock = Issued shares - Outstanding shares

What is a prior-period adjustment?

A change from an incorrect accounting method to one that is acceptable under GAAP or IFRS or the correction of an accounting error made in the previous financial statements is reported as a prior-period adjustment.

What is a change in accounting estimate?

A change in accounting estimate is the result of the a change in management's judgment, usually due to new information. For example, management may change the estimated useful life of an asset because new information indicates the asset has a longer or shorter life than originally expected.

What changes in accounting standards that require restrospective application?

A change in accounting principle requires restrospective application.

What is a contra account?

A contra account is used to reduce the value of its controlling account.

When is a deferred tax liability created?

A deferred tax liability created when the income tax expense (Income statement) is greater than the taxes payable (tax return) due to temporary differences.

What is the result when a firm using a revenue recognition method that is aggressive?

A firm using a revenue recognition method that is aggressive will inflate current period at a minimum and perhaps inflate overall earnings.

What is a vertical common-size income statement?

A vertical common-size income statement expresses each category of the income statement as a percentage of revenue.

Changing in accounting estimate: A. is reported prospectively B. requires restatement of all prior-period statements presented in the current financial statements C. is reported by adjusting the beginning balance of retained earnings for the cumulative effects of the change

A. A change in accounting ESTIMATE is reported prospectively. No restatement or prior period statements is necessary

According to the FASB, when is the revenue recognized in the Income Statement?

According to the FASB, revenue is recognized in the Income statement when: a. realized or realizable b. earned

How are accounts receivable reported?

Account receivable are reported at NET REALIZABLE VALUE, which is based on estimated bad debt expense.

What does the accumulated OCI include?

Accumulated OCI includes all changes in stockholders' equity except for transactions recognized in the income statement (net income) and transactions with shareholders, such as issuing stocks, reacquiring stocks, and paying dividends.

Which of the following methods of accounting for inventory will result in the most current estimates for ending inventory during a deflationary period? (a) Specific identification method (b) Average cost method (c) FIFO

Actually, in this case, it would make no difference if the period were inflationary or deflationary. The accounting method that will produce the most recent estimates for inventory is FIFO. With FIFO, the first units bought are the first units that are sold. Therefore, what is recorded in ending inventory is only the cost of the most recent units that were bought, but which have not yet been sold. The correct answer is c. Your answer was correct!

What is restrospective application?

All of the prior period financial statements currently presented are restated to reflect the change. Retrospective application enhances the comparability of the financial statements over time

How are dividends paid to the firm's shareholders reported under US GAAP?

As financing activities

True/false Under US GAAPs, the auditor does not have to express an opinion on the firm's internal controls.

False. Under US GAAPs, the auditor must express an opinion on the firm's internal controls.

How to treat any income or loss from discontinued operation?

Any income or loss from discontinued operations is reported separately in the income statement, NET OF TAX, after income from continuing operations.

What methods are used for revenue recognition for contracts that extend beyond one accounting period?

The percentage of completion method and the completed contract method are used for contracts that extend beyond one accounting period.

What is an extraordinary item under US GAAP?

Under US GAAP, an extraordinary item is a material transaction or event that is both unusual and infrequent in occurrence.

A the beginning of the year, ABC purchased a new piece of equipment to be used in its manufacturing operations. The cost of the equipment was $25,000. The equipment is expected to be used for 4 years and then sold for $4,000. Depreciation expense to be reported for the second year using the double-declining-balance method is closet to: A. $5,250 B. $6.250 C. $7,000

B. $6.250 Year 1: (2/4)(25,000 - 0) = 12,500 Year 2 (2/4)x(25,000 - 12,500) = 6.250

Which of these steps is least likely to be a part of the financial statement analysis framework? A. State the purpose and context of the analysi B. Determine whether the company's securities are suitable for the client C. Adjust the financial statement data and compare the company to its industry peers.

B. Determine whether the company's securities are suitable for the client.

Calculate the ABC's diluted EPS with the following given information: - 100,000 common shares outstanding from the beginning of the year. - Earnings of $125,000 - 1,000 of 7%, $1,000 par bond convertible into 25 shares each, outstanding as of the beginning of the year - tax rate is 40%

Basic EPS = ($125,000)/100,000 = $1.25 Check if convertible bonds are dilutive Numerator impact = 1,000 x $1,000 x 7% x (1-40%) = $42,000 Denominator impact = 1,000 x 25 = 25,000 shares per share impact = $42,000/25,000 = $1.68 Since 1.68 > 1.25, the bonds are antidilutive. Thus dilutive EPS = basic EPS = 1.25

What is the calculation formula for basic EPS?

Basic EPS = (Net Income - Preferred Div)/Weighted-average of outstanding common shares

What is the calculation formula for basic EPS?

Basic EPS = (Net Income - Preferred dividends)/Weighted average number of outstanding common shares.

Which of the following would least likely increase pre-tax income? A. Decreasing the bad debt expense estimate B. Increasing the useful life of an intangible asset C. Decreasing the residual value of a depreciable tangible asset.

C. Decreasing the residual (salvage value) of a depreciable long-live asset will result in higher depreciation expense, and thus lower pre-tax income

Which principle requires that COGS be recognized in the same period in which the sale of related inventory is recorded? A. Going concern B. Certainty C. Matching

C. Matching The matching principle requires that the expenses incurred to generate the revenue be recognized in the same accounting period as the revenue

Which of the following statements about the FASB conceptual framework, as compared to the IASB conceptual framework, is most accurate? A. The FASB framework allows for upward revaluation of tangible, long-lived assets B. The FASB framework and IASB framework are now fully converged. C. The FASB framework lists revenue, expenses, gains and losses and comprehensive income related to financial performance.

C. The FASB framework lists

After an audit has been completed, it is determined that beginning inventory was overstated by $7,000 and ending inventory was understated by $2,000. If the tax rate is 35%, what is the likely impact on net income? (a) Net income is overstated by $3,250. (b) Net income is understated by $5,850. (c) Net income is overstated by $5,000. (d) Net income is understated by $9,000.

COGS = BI + Purchase - EI Assume that Bi = 20,000 Purchases = 40,000 EI = 10,000 COGS = 20,000 + 40,000 -10,000 = 50,000 If BI overstated by 7,000 and EI understated by 2,000 then COGS = 13,000 + 40,000 -12,000 = 41,000 Therefore COGS is overstated by 9,000 and NI is understated by 9,000

What is the principle of accrual accounting?

The principle of accrual accounting requires that revenue is recorded when the firm earns it and expenses are recorded as the firm incurs them, regardless of whether cash has actually been paid.

What is the correct order of current assets in terms of liquidity order?

Cash - Investment securities - Accounts receivable - Inventories - Prepaid items

What cash flows that dividends paid to shareholders should be classified?

Cash flows from financing activities

How is accumulated OCI different with Comprehensive income?

Comprehensive income is an income measure over a period of time and it includes net income and other OCI for the period. Accumulated OCI does not included net income but is a component of stockholders' equity at a point in time

ABC Corp. has a current ratio of 2.1. Which of the following events would cause the current ratio to drop? (a) Using cash to pay off a portion of accounts payable (b) An increase in taxes payable and an equal increase in cash (c) An increase in depreciation expense (d) An increase in prepaid expenses

Current ratio = CA/CL = 2.1:1 = 2.1 Option A: Add 0.5 to both side 2.6/1.5 = 1.73 Option B: Deduct 0.5 from both sides 1.6/0.5 = 3.2 The correct answer is b. Your answer was incorrect!

If an auditor finds that a company's financial statements have made a specific exceptions to applicable accounting principles, she is most likely to issue a: A. A disclaimer of opinion B. Dissenting opinion C. Cautionary note D. qualified opinion

D. Qualified opinion

What is the formula for DDB depreciation method?

DDB depreciation = (2/useful life)(cost - accumulated depreciation)

When are deferred tax liabilities created?

DTL are created when the amount of income tax expense recognized in the income statement is greater than the Income tax payable.

When do deferred tax liabilities occur?

Deferred tax liabilities occur when: 1. Revenues or gains are recognized in the income statement before they are included on the tax return due to temporary differences. 2. Expenses or losses are tax deductible before they are recognized in the income statement

Where is the starting point under the Direct Method of presenting the cash flow statement?

Direct = Revenue

What is the difference between an economic goodwill and an accounting goodwill?

Economic goodwill derives from the expected future performance of the firm, while accounting goodwill is the result of the past acquisitions

How are interest and dividends received be classified under IFRS?

Either Operating or investing activities

How are dividends paid to the firm's shareholders reported under IFRS?

Either operating or financing activities

Which of the following is not a situation in which a company can report any cumulative effects of an accounting change by retroactively restating prior year's financial statements? (a) A change to or from the full cost method of accounting in cases involving natural resources (b) A change from the LIFO method of accounting to some other form of inventory accounting (c) A change from the double declining method of depreciation to the straight-line method

Explanation: A change in depreciation methods would only impact the financial statements moving forward; there would be no retroactive adjustments. The correct answer is c

Which of the following represents cash flow from operating activities? (a) Collection of accounts receivable (b) Using cash to buy some new equipment (c) Payment of dividends (d) Prepayment of a portion of the bonds outstanding

Explanation: Accounts receivable are generated from normal operations. Hence, their collection is deemed to be part of operating cash flows. The correct answer is a. Your answer was correct!

Which of the following statements is untrue with respect to measuring the life of an asset (assuming that it is being depreciated using a straight-line depreciation method)? (a) The number of depreciable years left in an asset can be measured by dividing the amount of the net fixed asset by the annual depreciation expense. (b) Accumulated depreciation can be measured by multiplying the average age of the fixed asset by the annual depreciation expense. (c) If there is still a lot of accumulated depreciation left on the books, it is an indication that there is still a lot of useful life left in the asset.

Explanation: Accumulated depreciation is a backward looking measure. In other words, if accumulated depreciation is high, it implies that a lot of depreciation has been recorded - a sign that the asset is old and that it does not have many useful years left. The correct answer is c. Your answer was correct!

If an analyst observes that an auditor has attached an unqualified opinion to the issuer's financial statements, it may be implied that: (a) there are certain items that are questionable. (b) the financial statements are free from any material errors and are in accordance with GAAP. (c) the scope of the audit was too narrow to be approved.

Explanation: An unqualified opinion is the cleanest and most reassuring confirmation of a company's financial statements. The correct answer is b. Your answer was correct!

Which of the following statements is (are) true with respect to the deferred tax liability (asset) that is created under the liability method of accounting for income taxes? I. Deferred tax asset is simply the extra income taxes that will be paid in the future once timing differences reverse. II. The value of a deferred tax liability or asset is simply equal to the undiscounted value of all future taxes that are expected to be paid or credited once the timing differences are reversed. III. The current period's income tax expense is determined only after the figure for the current period's deferred tax liability or asset has been calculated. IV. Income tax expense for the period will be higher than the actual taxes owed if the deferred tax liability at the beginning of the period was higher than the deferred tax liability at the end of the period. (a) I, II and IV only (b) II and III only (c) II and IV only

Explanation: Choice I is incorrect because it is the deferred tax liability that is simply the extra income taxes that will be paid in the future due to the reversal of timing differences. Choice IV is incorrect because the income tax expense for the period will be higher than the actual taxes owed if the deferred tax liability at the beginning of the period was lower than the deferred tax liability at the end of the period. In particular: income tax expense = taxes owed + ending deferred tax liability - beginning deferred tax liability The correct answer is b.

Which of the following statements is (are) true with respect to the effects that issuing convertible bonds and convertible preferred shares will have on certain financial ratios? I. When convertible preferred shares are converted into common stock, the debt-to-equity ratio will drop. II. When convertible bonds are converted, the interest coverage ratio will decrease. III. When convertible bonds are converted, the earnings per share of the company will decrease. IV. Even without conversion, convertible preferred shares will reduce the earnings per share of a company. (a) I, II and III only (b) II only (c) III and IV only

Explanation: Choice I is incorrect because preferred shares are already considered equity; therefore, when they are converted to common shares, the equity figure should remain the same. Choice II is incorrect because as the bonds are converted, the firm's interest payments will drop. Consequently, the interest coverage ratio will increase. Choice III is correct because after the conversion, earnings will have to be split up among many more shares, thus reducing the earnings per share. Choice IV is correct because when calculating earnings per share, preferred dividends are deducted from net income; this will reduce the earnings that are available to the common shareholders. The correct answer is c. Your answer was correct!

Which of the following statements is (are) true with respect to the impact that the capitalization of interest will have on certain financial ratios? I. Interest coverage ratios will increase. II. Accounting income will increase relative to cash flow. III. Current ratio will increase. IV. Asset turnover ratios will increase. (a) II and IV only (b) II, III and IV only (c) I and II onl

Explanation: Choice III is incorrect because capitalized interest will be a part of long-term assets rather than current assets. Choice IV is not correct because capitalized interest will inflate asset values, causing the asset turnover ratio to actually drop. The correct answer is c. Your answer was incorrect!

Which of the following circumstances is a violation of income recognition principles? (a) For long-term projects, a company may realize as profit an amount that is equal to a pro rata proportion of the total profit that is expected over the project's life. (b) Even if the goods have been transferred to the buyer, it is possible to hold off the realization of revenue if there is a strong likelihood that the customer will end up not paying for it. (c) For goods that are sold with warranties, it is acceptable to realize any expenses that may arise in the year in which the products are returned.

Explanation: Companies that sell goods with a high probability of being returned must create a loss provision in their financial statements in the year in which the goods are sold, not in the year in which they are returned. The correct answer is c. Your answer was incorrect!

Which of the following methods of accounting for inventory will result in the lowest net income during a deflationary period? (a) LIFO (b) FIFO (c) Average cost

Explanation: FIFO assumes that the first batch of inventory bought is usually the batch that is first sold. Thus, in a deflationary period, the earlier batches of inventory will cost more than the later batches. As these higher priced batches are sold, their costs will be reflected in the income statement, thus lowering the net income figure relative to the other inventory accounting methods. The correct answer is b. Your answer was correct!

Which of the following statements is (are) true with respect to the impact that an inflationary period will have on the measurement of economic depreciation? I. During a period of low inflation, the accumulated depreciation will fall short of representing the true cost associated with replacing the asset. II. Accounting net income figures will tend to underestimate the firm's true economic net income. III. The units-of-production method of depreciation may be used in order to more fairly align accounting depreciation with economic depreciation. IV. To better reflect inflation into asset prices, a higher salvage value should be used in the depreciation calculations. (a) IV only (b) I, III and IV only (c) I only

Explanation: Note that choice I is correct because even a period of low inflation indicates that the true cost of replacing the asset is higher than that which is indicated by accumulated depreciation. Choice II is incorrect because economic depreciation will actually be higher than accounting depreciation; therefore, economic profit will be lower than accounting profit, meaning that accounting profit will overestimate economic profit. Choice III is not acceptable because the statement is inconclusive. Instead, it is the accelerated method of depreciation that will more effectively align accounting depreciation with economic depreciation. Choice IV is incorrect because a high salvage value will result in lower annual depreciation expenses, but this is contrary to better reflecting inflation in depreciation figures. The correct answer is c. Your answer was incorrect!

All of the following statements are true with respect to the effects of changing interest rates on the market value of debt and on financial statements and ratios, except: (a) companies must disclose the fair market value of their debt in the footnotes. (b) only when interest rates drop and the value of the outstanding debt increases would the firm be required to revalue the book value of its debt. (c) if the company were to buy back its bonds at a discount to its book value, then it would have to record an extraordinary gain. (d) financial ratios will not be impacted by changes in market interest rates.

Explanation: The book value of the debt would not be impacted by what is prevailing in the markets. Thus, even as the market value of a firm's bond fluctuates by the hour, it will have no impact on the debt's book value. The correct answer is b. Your answer was incorrect!

A company issues some shares in order to finance the purchase of more production facilities. If the company presently has a debt-to-equity ratio of 0.7:1, what is likely to happen to this ratio as a result of this transaction? (a) The debt-to-equity ratio will drop. (b) The debt-to-equity ratio will rise. (c) The debt-to-equity ratio will not be affected.

Explanation: This transaction will increase the assets of the company and its equity by the same amount. Hence, with a constant debt and an increasing equity, the debt-to-equity ratio should drop. The correct answer is a. Your answer was correct!

When computing cash flow from operations using the indirect method, which of the following items must be deducted from reported net income? (a) Increase in prepaid expenses (b) An increase in dividends (c) Increase in wages payable (d) An increase in capital expenditures

Explanation: To compute cash flow from operations using the indirect method, we start from net income and adjust it by non-cash income statement items and by changes in working capital. Therefore, capital expenditures and dividends have no bearing on cash flow from operations. Instead, any increase in working capital would be a drain on cash flow, while a decrease would be an addition to cash. Thus, an increase in prepaid expenses (a current asset item) must be deducted from net income in order to compute CFO. The correct answer is a. Your answer was correct!

Which one of the following conditions would not constitute the realization of revenue? (a) The resulting sales and expenses associated with the good being sold can be measured fairly accurately. (b) The selling company has substantially fulfilled its obligations to produce and deliver the goods. (c) The customer has paid for a full year's worth of products with the first shipment going out immediately.

Explanation: When a customer pays in advance for goods and services to be received at a later date, it does not constitute revenue to the selling firm. In fact, this advance payment becomes a liability to the firm until it performs its task as required by the buyer-seller agreement. Only then can the company realize revenue. The correct answer is c. Your answer was correct!

Under which of the following conditions would the value of an asset be considered impaired? (a) When the sum of the undiscounted cash flows expected to be generated from the use and disposal of the asset becomes less than its book value. (b) When the sum of the discounted cash flows expected to be generated from the use and disposal of the asset becomes less than its book value. (c) When the fair market value of the assets becomes less than its book value.

Explanation: While an asset becomes impaired once the sum of the undiscounted cash flows expected from the use and disposal of the asset becomes less than its book value, the actual amount of the write-down will be equal to the difference between the book value of the asset and its current fair market value. The correct answer is a. Your answer was incorrect!

What inventory cost method is permitted under both US GAAP and IFRS?

FIFO and average cost methods are permitted under both IFRS and US GAAP

True or False Amortized cost is equal to the issue price minus any principal payment, plus any amortized premium or minus any amortized discount

False Amortized cost is equal to the issue price minus any principal payment, plus any amortized discount, and minus any amortized premium

True or False Only US GAAP requires firms to separately report their currents assets and non-current assets and current and non-current liabilities

False Both IFRS and US GAAP

True or false Deferred tax assets are amounts of income tax payable in future periods as a result of taxable temporary differences.

False Deferred tax liabilities are amounts of income tax payable in future periods as a result of taxable temporary differences.

True or False Indirect Method of Presenting Operating CF Cash collections from customers Cash paid to suppliers Cash paid for operating expenses Cash paid for interest Cash paid for taxes Operating cash flows

False Direct Method begins with cash flows from customers and then deducts cash outflows for purchases, operating expenses, interests and taxes

True or false Goodwill is amortized and must be tested for impairment at least annually

False Goodwill is NOT amortized and must be tested for impairment at least annually.

True or false If impaired, goodwill is reduced and a loss is recognized in the income statement and affect cash flow.

False If impaired, goodwill is reduced and a loss is recognized in the income statement. The impairment loss does not affect the cash flow

True or false Not enough working capital may indicate solvency problems.

False Not enough working capital may indicate liquidity problems

True or False Both IFRS and US GAAP allow firms to choose to use a liquidity-based format if the presentation is more relevant and reliable

False Only under IFRS

True or false Sources of cash are negative numbers (cash inflows) and uses of cash are positive numbers (Cash outflows)

False Sources of cash are positive numbers (cash inflows) and uses of cash are negative numbers (Cash outflows)

True or False The balance sheet elements (assets, liabilities, and equities) should be interpreted as market value or intrinsic value

False The balance sheet elements should NOT be interpreted as market value or intrinsic value

True/False The cost recovery method is more aggressive than the installment method.

False The installment method is more aggressive than the cost recovery method.

True or False The unrealized gains and losses of trading securities are not reported in the Income statement, but are reported in the OCI as part of the shareholders' equity.

False The unrealized gains and losses of trading securities are RECOGNIZED in the income statement.

True or fasle Under the revaluation mode, PP&E is tested for impairment.

False Under the cost model, PP&E must be tested for impairment

True or False If net realizable value (under IFRS) or market (under US GAAP) is less than the inventory's carrying value, the inventory is written down and a loss is recognized in the income statement under US GAAP only.

False. It net realizable value (under IFRS) or market (under US GAAP) is less than the inventory's carrying value, the inventory is written down and a loss is recognized in the income statement under both IFRS and US GAAP

True or false If there is a subsequent recovery in the inventory value, the inventory can be written back up under both IFRS and US GAAP

False. If there is a subsequent recovery in the inventory value, the inventory can be written back up under IFRS only. No write-up is allowed under US GAAP.

RSI Corp. recently published the following financial data: 1. Sales $ 975,000 2. Total Assets $1,325,000 3. Total Liabilities $ 780,000 4. Interest expense $ 62,000 5. Pretax income $ 217,000 6. Net income $ 142,000 What is RSI's financial leverage ratio?

Financial leverage ratio = Total Asset/Total Equities = Total Assets/ (Total Assets - Total liabilities ) = 1 - (TA/TL) 2.43

What is goodwill?

Goodwill is the excess of purchase price over the fair value of the identifiable net assets acquired in a business acquisition

What kind of investment is reported at amortized cost?

Held-to-maturity investments

What are financial assets that are measured at amortized cost?

Held-to-maturity securities are reported at amortized cost Amortized cost is equal the original issue price minus any principal payments plus any amortized discounts minus any amortized premium minus any impairment loss. Notes: Amortized cost + Amortized discount - Amortized premium

What is the main difference between identifiable intangible assets and unidentifiable intangible assets?

Identifiable intangible assets = can be acquired separately aor are the result of rights or priviledges conveyed to their owners, i.e. patents, trademarks, copyrights. Unidentifiable intangible assets = cannot be acquired separately and may have unlimited life, i.e. goodwill

Which of the following inventory valuation method is required by the accounting standard-setting bodies? A. Lower of cost or net realizable value B. Weighted Average cost C. FIFO D. LIFO

Inventories are required to value at the lower of cost or net realizable value (or market under US GAAP). FIFO and average costs are two of the inventory cost flow assumptions among which a firm has a choice.

How to treat if an asset is impaired?

If impaired, the asset is written down to its recoverable value and a loss is recognized in the income statement

Where is the starting point under the Indirect Method of presenting the cash flow statement?

Indirect = Net Income

What method of presenting the cash flow statement is used by most firms?

Indirect method.

How are interests paid to lenders reported under US GAAP?

Interest paid is reported in operating activities

How are interest and dividends received from investments reported under US GAAP?

Interest received and dividends received from investments are also reported as operating activities under US GAAP

How is internally generated goodwill treated?

Internally generated goodwill is expensed as incurred

What is the main purpose when investors examine a firm's income statement?

Investors examine a firm's income statement for valuation purposes.

What inventory cost method is permitted under US GAAP but is prohibited under IFRS?

LIFO

In inflationary period, what costing method that results in the lowest COGS?

LIFO > WA > FIFO

Fill in the blank LIFO and FIFO are both permitted under _____, but LIFO is prohibited under IFRS

LIFO and FIFO are both permitted under US GAAP; LIFO is prohibited under IFRS

What inventory method that is most popular in the US?

LIFO is more popular in the US because of its income tax benefits.

What is the numerator of the calculation formula for Diluted EPS?

NI - pfd. dvd + conv. pfd. dvd + conv. debt int. (1-tax rate)

What is the calculation of net profit margin?

Net profit margin = net profit / revenue

When should we use the net revenue reporting?

Net revenue reporting should be used when the firm is acting essentially as a selling agent and does not stock inventory, take credit risk, or have control over supplier and price.

How to treat a write-up in the inventory value under US GAAP?

No write-up is allowed under US GAAP. The company simply reports higher profit when the inventory is sold

What is the non-controlling interest?

Non-controlling interest (or the minority interest) is the minority shareholders' pro-rata share of the net assets (equity) of a subsidiary that is not wholly owned by the parent.

What is the exception in expressing expenses as a percentage of revenue?

One exception is income tax expense. Tax expense is more meaningful when expressed as a percentage of pretax income

RSI Corp. recently published the following financial data: Sales $ 975,000 Total Assets $ 1,325,000 Total Liabilities $ 780,000 Interest Expense $ 62,000 Pretax Income $ 217,000 Net Income $142,000 What is RSI's operating profit margin? (a) 28.6% (b) 14.6% (c) 22.2%

Operating profit margin = EBIT/Sales = (Pretax Income + Interest Expense)/Sales = (217,000 + 62,000)/975,000 = 28.6%

What are components of OCI?

Other Comprehensive Income includes: 1. Gain or loss of Foreign currency translation 2. Unrealized gains/losses from cash flow hedging activities 3. Unrealized gains/losses from available-for-sale securities 4. Adjustments for minimum pension liability

At the beginning of the year, ABC purchased all 500,000 shares of XYZ company for $15 per share. Just before the acquisition date, XYZ reported net assets of $6 million. ABC determined the fair value of XYZ's property and equipment was $1 million higher than reported by XYZ. What amount of goodwill should ABC report as a result of its acquisiton of XYZ?

Purchase price = 500,000 x $15 = $7,500,000 Fair value of the assets = net assets + premium = 6,000,000 + 1,000,000 = 7,000,000 Good will = Purchase price - Fair value = 500,000

What are the two fundamental characteristics that make financial information useful?

Relevance Faithful representation

Given the following information, how many shares should be used in computing diluted EPS? - 300,000 shares outstanding (common) - 100,000 warrants exercisable at $50 per share - average share price is $55 - Year-end share price is $60

Since the exercisable price is less than the year-end share price then the warrants are dilutive. Using the treasury stock method to determine the denominator impact as follows: (AMP - EP)/AMP x N = (55 - 50)/(55) x 100,000 = 9,091 shares So the total shares that should be used in computing diluted EPS is 309,091 shares.

On January 1st, 2002, ABC Corp. entered into a contract to build a new shopping mall. Management estimated that the total cost of the project would be as follows: 2002 2003 2004 2005 Costs $2.5M $1.5M $3.7M $0.9M ABC plans to bill its client $2.5 million per year. How much in pretax income should ABC report for 2003 if it employs the percentage of completion method? (a) $0.350 million (b) $1.000 million (c) $0.244 million (d) $0.762 million

Since the percentage of completion method is used, we need to calculate the projected profit margin Total cost = 8.6 Total revenue = 2.5 x 4 = 10 Revenue for year 2003 = 1.5*8.6/10 = 1.744 Profit margin = (10-8.6)/10 = 1.4 Net Income = Revenue x projected profit margin = 1.744 * 1.4 = 0.244 The correct answer is c. Your answer was incorrect!

What is used by manufacturing firms and involves assigning pre-determined amounts of materials, labor, and overhead to goods produced?

Standard costs

What is Deferred Tax Assets (DTA)?

Taxes payable > income tax expense recognized in the IS

In 2015, its first year of operations, Gupta Company generated service revenues totaling $60,000, all taxable in 2015. Gupta Company offers a warranty on its service. No warranty claims were made in 2015, but Gupta estimates that in 2016 warranty costs of $10,000 will be incurred for claims relating to 2015 service revenues. How much is the Deferred Tax Assets? How to book it?

The $10,000 estimated warranty expense is reported in the 2015 financial statements as required by GAAP. For tax purposes, however, assume that the IRS does not allow any tax deduction until the actual warranty services are performed. Also assume that the income tax rate is 40% and that Gupta Company had no expenses in 2015 other than warranty costs and income taxes. Income taxes payable as of the end of 2015 is $24,000 because Gupta is required to report $60,000 in revenues to the IRS but is not allowed to take any warranty deduction until 2016. What about the warranty deduction Gupta expects to take in 2016? Gupta can expect this deduction to lower the 2016 tax bill by $4,000. This $4,000 is called a deferred tax asset and represents the expected benefit of a tax deduction for an expense item that has already been incurred and reported to the shareholders but is not yet deductible according to IRS rules. In effect, Gupta is paying taxes this year in anticipation of lower taxes next year—a prepayment of taxes. The journal entry to record all the tax-related information for Gupta for 2015 is as follows: Db Income tax expense 20,000 Db Deferred Tax Assets 4,000 Cr Income tax payable 24,000 Total income tax expense of $20,000 is the difference between the current tax expense and the deferred tax benefit. The 2015 income statement for Gupta Company is as follows: Revenue 60,000 Warranty expense 10,000 ------------------------ ----- Income before taxes 50,000 Income tax expense: Current 24,000 Deferred benefit (4,000) 20,000 Net Income 30,000

How many shares should be used in calculating ABC's diluted EPS? - 50,000 common shares outstanding from the beginning of the year - Warrants outstanding all year on 50,000 shares, exercisable at $20 per share - Stock is selling at year end for $25 - the average price of the company stock for the year was $15

The average market price which is $15 is less than the exercisable price which is $20. Therefore the warrants in this case in antidilutive. The denominator consists of only the common stock for basic EPS or 50,000 shares

How does a common-size format standardize the balance sheet?

The common-size format standardizes the balance sheet by eliminating the effects of size.

ABC Corp. has a current ratio of 1.9:1. Which of the following activities would cause this ratio to decrease? (a) Obtaining a short-term debt in order to boost cash positions (b) Using cash to acquire some inventories (c) Using cash to pay down some wages payable (d) Return some inventory with a corresponding reduction in amount owed to the suppliers

The correct answer is a. Your answer was incorrect!

Which of the following statements is (are) consistent with the way that inventory valuation methods influence financial statements during periods of rising prices? I. Relative to LIFO, FIFO will produce values for ending inventory that are more reflective of current economic conditions. II. Relative to FIFO, LIFO will produce more attractive financial ratios for the company. III. Relative to LIFO, FIFO will result in a lower after-tax cash flow from operations. IV. Relative to FIFO, LIFO will result in a greater value for the firm. (a) II and III only (b) I, III and IV only (c) II, III and IV only

The correct answer is b Explanation: Choice II is incorrect because by using the FIFO method, the income level and the ending inventory level are increased, thus resulting in more favorable financial ratios. Also, because the FIFO method will result in a higher income, taxes will become higher; thus, after-tax cash flow from operations will be lower. Consequently, with LIFO producing the higher after-tax cash flow, the value of the firm will be higher under LIFO than under the FIFO scenario.

Which of the following statements is (are) true with respect to the treatment of accounting changes? I. If the accounting change only applies to transactions after the change has been made, then there is no need to adjust current financial statements. II. If only an estimate is changed in the accounting process, then only a footnote disclosure need be made. III. If a company changes among acceptable accounting principles and applies the change retroactively, then the cumulative impact must be reported on the balance sheet as a deduction from retained earnings. IV. When an accounting change is applied retroactively, it will have an impact on reported net income and, thus, taxes. (a) II, III and IV only (b) I and II only (c) I and IV only

The correct answer is b. Explanation: Choice III is incorrect because if a company changes among acceptable accounting principles and applies the change retroactively, then the cumulative impact must be reported on the income statement under the header: cumulative effect of the accounting change on prior periods. Choice IV is incorrect because such an accounting change is not taxable. Consequently, only reported net income will be affected, not taxes.

Which of the following is likely to result when a company engages in off-balance-sheet types of financing? (a) The leverage risk for the firm will decrease. (b) The leverage ratios will seem less burdensome. (c) The degree of financial leverage will decrease. (d) The degree of operating leverage will decrease

The correct answer is b. Explanation: While it is possible to manipulate accounting data by engaging in off-balance-sheet types of financing, it is not possible to alter the economic risks that the firm faces. Therefore, while leverage ratios, determined by the combination of accounting figures, may seem to improve, the other economic measures of risk will remain unchanged.

For the period that just ended, ABC Corporation reported a net income of $13,000,000. At the end of the previous period, ABC had 750,000 shares outstanding; it issued an additional 100,000 shares at the end of the ninth month of this year. In addition, ABC has 5% preferred shares ($100 par) outstanding with a total par value of $5,000,000. These preferred shares are convertible into 5.5 shares of common stock. What is ABC's diluted earnings per share? (a) $12.14 (b) $12.38 (c) $15.75

The correct answer is b. Your answer was correct! Basic EPS = [13,000,000 - (5,000,000 x 5%)]/775,000 = $16.45 Diluted EPS Number of preferred convertible shares = $5,000,000/$100 = 50,000 shares Converted shares = $50,000 x 5.5 shares = 275,000 common shares Once converted, preferred dividends are no longer be paid Diluted EPS = 13,000/(775,000 + 275,000) = $12.38 Since diluted EPS < Basic EPS, these preferred shares are dilutive.

Which of the following methods of accounting for inventory will result in higher estimates for the cost of goods sold during an inflationary period? (a) Average cost method (b) FIFO (c) LIFO

The correct answer is c. Explanation: LIFO assumes that the last batch of inventory bought is the first batch that was sold. During an inflationary period, these latter batches will cost more relative to the batches that were bought earlier. When the most recent batches (higher costing) of inventory are recorded as being sold, their higher (and recent) costs are recorded as cost of goods sold.

XYZ Corp. has a debt to equity ratio of 42%. If net income is $200,000 and assets are reported as $1.8 million, what is the ROE? (a) 9.8% (b) 11.7% (c) 15.8% (d) 17.4%

The correct answer is c. Your answer was correct!

A company has a profit margin of 12% and a return on assets of 18%. What must be this company's asset turnover ratio? (a) 6.0 (b) 0.7 (c) 1.5

The correct answer is c. Your answer was incorrect! Asset turnover = Sales/Assets = (Sales/NI) x (NI/Assets) = 1/(NI/Sales) x ROA = ROA/Profit margin = 0.18/0.12 = 1.5

Suppose that a manufacturer sells $100,000 worth of goods that originally cost the firm $80,000. Furthermore, the purchase agreement stipulates that the customer will make payments in two equal installments. Which of the following statements is inaccurate with respect to the company's profitability? (a) Under the cost recovery method, the year two profit will be $20,000. (b) Under the installment method, year two profit will be $10,000. (c) Under the accrual method, the year two profit will be zero. (d) Under the cost recovery method, the year two profit will be $10,000.

The correct answer is d Explanation: Exam testers will attempt to stump candidates on a question by excluding a variable many candidates would assume is always given. In this case, the time period is missing. However, you can still answer this question by using the information given, because the period is irrelevant. With the cost recovery method of income recognition, the earlier revenues are only used to cover costs. Therefore, the first $50,000 payment is put towards $80,000 worth of expenses, yielding a net income of zero. The second payment of $50,000 is put towards the remaining expenses ($30,000), yielding a net income of $20,000, not $10,000. Under the installment method, the company would record sales of $50,000 once the first payment is received, as well as expenses of $40,000 ($80,000/2), and a net profit of $10,000. After the second payment is received, the company would record sales of $50,000, expenses of $40,000, and a net profit of $10,000. Under the accrual method, profits would have been recognized at the time of sale, even though cash was not yet received.

Which of the following situations would result in pretax income being lower than taxable income? (a) Company uses FIFO method for reporting purposes and one of the other methods for taxation purposes. (b) The revenue recognition method used for reporting purposes is more aggressive than the method that is used for tax reporting purposes. (c) During the year after the goods are sold, actual warranty expenses are incurred. (d) The assets have reached the latter stages of their useful life, and the firm uses the straight line method of depreciation for reporting purposes.

The correct answer is d Explanation: Toward the latter stages of an asset's useful life, most of its cost would have already been depreciated according to tax guidelines. Therefore, with little depreciation expense left for tax purposes, taxable income will be higher. However, with straight line, the amount of depreciation that's reported on financial statements is constant every year. Therefore, pretax income will remain constant as taxable income increases. During inflationary periods, FIFO should always result in the lowest cost and thus the highest pretax income. For taxation purposes, warranty expenses are only recognized in the year in which they actually result in a cost. Thus, when warranty costs are incurred, taxable income will be lower than pretax income.

Upon review, it is found that ABC Corp. understated its ending inventory by $3,000 and overestimated its beginning inventory by $2,000. What is the likely impact on net income if the company tax rate is 30%? (a) Net income is overstated by $700. (b) Net income is understated by $700. (c) Net income is overstated by $3,500. (d) Net income is understated by $3,500.

The correct answer is d.

On March 31st, ABC Corp. announced that it had reached an agreement to sell its XYZ subsidiary. However, the closing transaction did not take place until September 30th of that same year. XYZ had a total net income of $22,000 for the quarter ending March 31st, and a total net income of $84,000 for the nine months ending September 30th. If the gain (net of taxes) on the sale was $327,000, how much should ABC report as its earnings from discontinued operations for the year ending December 31st? (a) $327,000 (b) $62,000 (c) $411,000 (d) $389,000

The correct answer is d. Explanation: XYZ only became regarded as a discontinued operation after March 31st. Therefore, all results before that date would be regarded as part of normal operations. However, all figures after that date would constitute earnings from discontinued operations. While total net income for the year from XYZ was $84,000, $22,000 of that was while XYZ was part of normal operations. Thus, the difference [$84,000-$22,000 = $62,000] constitutes earnings from discontinued operations. Furthermore, the entire gain on the sale is grouped the same way. Therefore, the total earnings from discontinued operations is: $62,000 + $327,000 = $389,000.

Fill in the blank The current/non-current format is known as a ______ balance sheet and is useful in evaluating liquidity

The current/non-current format is known as a classified balance sheet and is useful in evaluating liquidity

Fill in the blank The date when a company develop a formal plan for disposing of an operation is referred to as the ________, and the time between the _______ period and the actual disposal date is referred to as the ________.

The date when a company develops a formal plan for disposing of an operation is referred to as the measurement date, and the time between the measurement period and the actual disposal date is referred to as the phaseout period.

What are the criteria in order to use the gross revenue reporting under US GAAP?

The firm must: 1. Be the primary obligor under the contract 2. Bear the inventory risk and credit risk 3. Be able to choose its supplier 4. Have reasonable latitude to establish the price

What is prepared at the end of the accounting period to show the balances in each account?

The initial trial balance

What does the statement of changes in equity report?

The statement of changes in equity reports the amount and sources of changes in the equity owners' investments in the firm

What does the statement of changes in stockholders' equity summarize?

The statement of changes in stockholders' equity summarizes all transactions that increases or decrease the equity accounts for the period.

How does the treasury stock method work?

The treasury stock method assumes that the funds received by the company from the exercise of the options would be used to hypothetically purchase shares of the company's common shares in the market at the average market price. The net increase in the number of shares outstanding (the adjustment to the denominator) is the number of shares created by exercising the option less the number of shares hypothetically repurchased with the proceeds of exercise.

Fill in the blank There is a/an ______ relationship between changes in assets and changes in cash flows. In other words, a/an ______ in an asset account is a ___ of cash, and a/an ______ in an asset account is a ___ source of cash

There is an inverse relationship between changes in assets and changes in cash flows. In other words, an increase in an asset account is a use of cash, and a decrease in an asset account is a source of cash

What are the adjustments made to indirect method of presenting Operating CF?

These adjustments include eliminating noncash expenses (e.g. depreciation and amortization), nonoperating items (e.g. gains or losses), and changes in the balance sheet accounts resulting from accrual accounting events

How are incomes from the acquisition of debt and equity investments reported in the statement of cash flows?

They are reported as an operating activity.

Selected data from ABC's balance sheet at the end of the year 2013 as follows: Investment in Beta, at FV $150,000 Deferred taxes $ 86,000 Common stock, $1 par $550,000 Preferred stock, $100 par $175,000 Retained Earnings, $893,000 Accumulated OCI $46,000 Original cost of the investment in BEta company is $120,000. Assuming the investment is classified as available-for-sale, calculate the total owners' equity at year end

Total stockholders' equity = Common stock + Preferred stock + Retained Earnings + Accumulated OCI $30,000 unrealized gain from the investment in Beta is already included in the accumulated OCI

True/False The percentage-of-completion method is more aggressive than the completed-contract method

True

Where do items on the cash flow statement come from?

Two sources: 1. Income statement items 2. Changes in balance sheet accounts

How are PP&Es reported under IFRS?

Under IFRS, PP&E can be reported using the cost method or the revaluation model

How is an investment property reported under IFRS?

Under IFRS, an investment property can be either reported at amortized cost or fair value

How are inventories reported under IFRS?

Under IFRS, inventories are reported at the lower of cost or net realizable value

Under IFRS, when the firm must expense its intangible assets' costs?

Under IFRS, the firm must expense costs incurred during the research stage, but can capitalize costs incurred during the development stage.

How are taxes reported under US GAAP?

Under US GAAP, all taxes paid are reported as operating activities, even taxes related to investing and financing transasctions.

How is revenue recognized in a barter transaction under US GAAP?

Under US GAAP, revenue from a barter transaction can be recognized at a fair value only if the firm has historically received cash payments for such goods and services and can use the historical experience to determine the fair value.

What method should be used for revenue recognition under US GAAP if the outcome of the long-term project cannot be reliably estimated?

Under US GAAP, the completed-contract method is used when the outcome of the project cannot be reliably estimated. Accordingly, revenue, expense and profit ar

What is the definition of investment property under US GAAP?

Under US GAAP, there is no specific definition for an investment property

How is PP&E reported under the cost model?

Under the cost model, PP&E other than land is reported at amortized cost. Amortized cost = Historical cost - accumulated depreciation, and impairment losses

How is PP&E reported under the revaluation model?

Under the revaluation model, PP&E is reported at fair value less any accumulated depreciation. Changes in fair value are reflected in the statement of shareholders' equity and my be recognized in the income statement

How are unusual or infrequent items reported in the income statements?

Unusual or infrequent items are reported BEFORE tax and above the income from continuing operations.

When is Form DEF-14A used?

When a company prepares a proxy statement for its shareholders prior to the annual meeting or other shareholder vote.

How are DTA created?

When expenses or losses are recognized in the IS before they are tax deductible or when the revenue or gains are taxable before they are recognized in the IS or from unused tax losses

Fill in the blank When receivables are written off, gross receivable _____ and the allowance account is _____

When receivables are written off, both gross receivables and allowance account are reduced.

When will auditors issue a disclaimer of opinion?

When the auditor is unable to express an opinion

What method should be used under FASB when the outcome of a long-term contract can be reliably estimated?

When the outcome of a long-term contract can be reliably estimated, the percentage of completion method is used under both IFRS and US GAAP

The correct order to present current assets is: a. Cash, accounts receivable, prepaid items, inventories. b. Cash, accounts receivable, inventories, prepaid items. c. Cash, inventories, accounts receivable, prepaid items. d. Cash, inventories, prepaid items, accounts receivable

b. In order of liquidity

Which of the following statements is (are) true with respect to the classification of dividends and interest when constructing a statement of changes in cash flow? I. Under IAS GAAP, dividends received may only be classified as cash flow from operations. II. Interest received can only be treated as cash flow from operations under U.S. GAAP. III. Interest paid can only be treated as cash flow from financing when using IAS GAAP. IV. Dividends paid may be treated as part of cash flow from operations when using IAS GAAP. (a) I and IV only (b) II and IV only (c) I and III only (d) I, II and III only

xplanation: Choice I is incorrect because under IAS GAAP, dividends received may either be classified as cash flow from operations or as cash flow from investing activities. Choice III is incorrect because interest paid can either be treated as cash flow from financing or as cash flow from operations when using IAS GAAP. The correct answer is b. Your answer was correct!

How are extraordinary items reported in the income statement under US GAAP?

Extraordinary items are reported separately in the income statement, NET OF TAX, after the income from continuing operations.

What are the two primary standard-setting bodies in the world?

FABS - Financial Accounting Standards Board IASB - International Accounting Standards Board

What does FASB do?

FASB sets forth the Generally Accepted Accounting Principles (GAAPs)

True/False A change in accounting principle is applied prospectively and does not require the restatement of prior financial statements.

False A change in accounting estimate is applied prospectively and does not require the restatement of prior financial statements.

True/False Information required in Form 10-K is similar to that which a firm typically provides in its annual report to shareholders and vice versa, an annual report is a substitute for the required Form 10-K filing.

False A firm's annual report is not a substitute for the required 10-K's filing

True/false Amortization is the allocation for the cost of all intangible assets

False Amortization is the allocation of the cost of an intangible asset over its useful life.

True/False Comprehensive Income includes all changes in equity

False Comprehensive income is a more inclusive measure that includes all changes in equity except for owner contribution and distribution. Comprehensive income = Net income + OCI

True/False Both DDB and straight-line depreciation methods use residual value in their calculation

False DDB does not explicitly use the asset's residual value in the calculation, but the depreciation ends once the estimated residual value has been reached.

True/False If the statements are NOT presented fairly in the auditor's opinion, the auditor will issue a disclaimer of opinion

False The auditor will issue an adverse opinion if the statements are NOT presented fairly in the auditor's opinion.

True/False The role of financial reporting is to use the data from financial statements to support economic decisions.

False The role of financial reporting is to provide a variety of users with useful information about a company's performance and financial position

True/False The role of financial statement analysis is to provide a variety of users with full information about a company's performance and financial position

False The role of financial statement analysis is to use the data from the financial statements to support economic decisions.

True/False Under US GAAP, a firm that changes to LIFO from another inventory cost method applies the change retrospectively.

False Under US GAAP, a firm that changes to LIFO from another inventory cost method does not apply the change retrospetively, but instead uses the carrying value of inventory as the first LIFO layer.

True/False Under US GAAPs, the income statement cannot be combined with "other comprehensive income"

False Under US GAAPs, the income statement and the statement of comprehensive income can be presented separately. Presentation is similar under US GAAP except that firms can choose to report comprehensive income in the statement of shareholders' equity

True/False FASB allows most upward revaluation of most assets

False FASB does not allow upward revaluation of most assets

What do financing cash flows result?

Financing cash flows are those resulting from issuance or retirement of the firm's debt and equity securities and include dividends paid to stockholders.

Under the installment method for installment sales, how profit is recognized?

First, we need to calculate the total expected profit as a percentage of sales. For example, if total sales is $1,000 and the cost is $800, the expected profit as a percentage of sales is 20% Then, profit is equal to the cash collected during the period multiplied by the total expected profit as a percentage of sales

What is the equivalent SEC 10-K form for foreign issuers, not Canadian companies, in the US market?

Form 40-F for Canadian companies Form 20-F for foreign companies

What form should a company file when it must disclose the material events including the significant asset acquisitions and disposals, changes in management or corporate governance? A. Form 8-K B. Form 10-K C. Form 144 D. Form DEF-14A

Form 8-K Companies must file this form to disclose material events including significant asset acquisition and disposals, changes in management or corporate governance, or matters related to its accountants, financial statements, or the markets in which its securities trade

When is Form S-1 used?

Form S-1: Registration statement filed prior to the sale of new securities to the public.

What is a gross profit?

Gross profit is the amount that remains after the direct costs of producing a product or service are subtracted from revenue

What is the calculation of gross profit margin?

Gross profit margin = Gross profit / Revenue

What does IASB do?

IASB sets forth the International Financial Reporting Standards (IFRS)

How are extraordinary items reported under IFRS?

IFRS does not allow extraordinary items to be separated from operating results in the income statement.

What is a non-controlling interest?

If a firm has a controlling interest in a subsidiary, the pro rata share of the subsidiary's income NOT owned by the parents is reported in in the parents' income statement as the Noncontrolling Interest (or minority interest)

What a firm should report if it receives cash before revenue recognition is complete?

If a firm receives cash before revenue recognition is complete, the firm reports it as unearned revenue.

In long term contracts, how is the treatment for an expected loss under IFRS?

If a loss is expected in long-term contracts, the loss must be recognized immediately under IFRS and US GAAP

In long term contracts, how is the treatment for an expected loss under US GAAP?

If a loss is expected in long-term contracts, the loss must be recognized immediately under IFRS and US GAAP

What is an adjusted trial balance?

If any adjusting entries are needed, they will recorded and reflected in an adjusted trial balance.

In installment sales, what method is used when the collectibility is highly uncertain?

If collectibility is highly uncertain, the cost recovery method is used.

How to treat dividends if preferred dividends are cumulative?

If preferred dividends are cumulative, the full amount of dividends on preferred stock for the period, whether declared or not, should be deducted from income in arriving at the earnings or loss balance related to the common stock.

What happens to the DDB depreciation method if the asset is expected to have NO residual value?

If the asset is expected to have NO residual value, the DDB method will never fully depreciate it. It typically changes to straight-line at some point if the asset's life.

When is the treasury stock method used?

If the options or warrants are dilutive, use the treasury stock method to calculate the number of shares used in the denominator.

Where can we find the important information about accounting methods, estimates, and assumptions?

Important information about the accounting methods, estimates, and assumptions is disclosed in the footnotes to the financial statements and supplementary schedules.

What inventory method that results lower income taxes in an inflationary period?

In an inflationary period, LIFO results higher COGS. Higher COGS results in lower taxable income and, therefore, lower income taxes.

When does the straight-line method result in lower depreciation expenses as compared to the accelerated method?

In the early years of an asset's life, the straight-line method will result in lower depreciation expense as compared to an accelerated method.

What depreciation method that results higher expense and lower net income in the later years of the asset's life?

In the later years of the asset's life, the straight-line depreciation results higher expense and lower net income compared to accelerated methods.

What are intangible assets that are not amortized?

Intangible assets with indefinite lives (e.g. goodwill) are not amortized. They must be tested for impairment at least annually.

Whose is responsibility of internal control?

Internal controls are the responsibility of the management.

Under IFRS, how is revenue reported if the firm cannot reliably measure the outcome of the project?

Under IFRS, if the firm cannot reliably measure the outcome of the project, revenue is recognized to the extent of the contract's costs, costs are expensed when incurred and profit is recognized only at completion

How is revenue recognized in a barter transaction under IFRS?

Under IFRS, revenue from barter transactions must be based on the fair value of revenue from similar non-barter transactions with unrelated parties

Under IFRS, what can be combined with the "Other Comprehensive Income"?

Under IFRS, the income statement can be combined with "Other Comprehensive Income" and presented as a single statement of comprehensive income.

What method should be used under IFRS when the outcome of a long-term contract can be reliably estimated?

When the outcome of a long-term contract can be reliably estimated, the percentage of completion method is used under both IFRS and US GAAP

Can the income statement and the statement of comprehensive income be presented separately?

Yes.

What is a change in accounting principle?

A change in accounting principle refers to a change from one GAAP or IFRS method to another (e.g. a change in inventory accounting from LIFO to FIFO)

What is a general ledger?

A general ledger sort the entries in the general journal by account

What is a general journal?

A listing of all the journal entries in order of their dates is called the general journal

What is a multi-step format Income statement?

A multi-step format includes gross profit, revenues minus COGS

How many parts in the Standard auditor's opinion?

Three parts: 1. Whereas the fin. stmts are prepared by the mgmt. and are its responsibilities, the auditors have performed an independent review. 2. GAAPs were followed, thus providing reasonable assurance that the financial statements contain no material errors. 3. The auditor is satisfied that the statements were prepared in accordance with the GAAPs and that the principles chosen and estimates made are reasonable. The auditor's report must also contain additional explanation when accounting methods have not been used consistently between periods.

True/False Prior-period adjustments usually involve errors or new accounting standards and affect cash flows

Prior-period adjustments usually involve errors or new accounting standards and do not typically affect cash flows.

How is profit recognized under the cost recovery method in installment sales?

Profit is recognized only when cash collected exceeds costs incurred.

When are proxy statements issued to shareholders?

Proxy statements are issued to shareholders when there are matters that require a shareholder vote.

In the Financial Statement Analysis framework, what steps results graphs and common-size balance sheets and ratios?

Step 3: Process data Make and appropriate adjustments to the financial statements. Calculate ratios. Prepare exhibits such as graphs and common-size balance sheet

In the Financial Statement Analysis framework, what steps results the answers to the questions in the first step?

Step 4: Analyze and interpret the data Use the data to answer the questions stated in the first step. Decide what conclusion or recommendations the information supports

When are stock options and warrants dilutive?

Stock options and warrants are dilutive only when their excercise prices are less than the average market price of the stock over the year.

What is the calculation formula for straight-line depreciation method?

Straight-line depreciation = (Cost - Residual Value)/Useful life

What is an operating profit?

Subtracting operating expenses, such as selling, general and administrative expenses, from Gross Profit results Operating Profit or Operating Income

What are the four criteria to determine whether revenue should be recognized by the SEC?

The SEC provides additional guidance by listing 4 criteria to determine whether revenue should be recognized as follows: 1. Evidence of an arrangement between the buyer and seller 2. The product has been delivered or the service has been rendered 3. The price is determined or determinable 4. The seller is reasonably sure of collecting money

What does the Statement of Comprehensive Income report?

The Statement of Comprehensive Income reports all changes in equity except for shareholder transactions (e.g. issuing stock, repurchasing stock, and paying dividends)

Under US GAAP, what should a firm treat revenue if it does not have any historical cash payment for similar barter transactions?

The revenue is recorded at the carrying value of the assets surrendered.

True or False Stock dividends or stock splits are two ways of doing the same thing

True A 50% stock dividend and a 3-for-2 stock splits both result in 3 new shares for every two old shares.