CPA Exam - FAR

Give examples of costs to be capitalized as land

-Acquisition price -Closing costs, such as real estate broker commissions, legal fees, escrow fees, title guarantee insurance -Any mortgages, liens, or encumbrances on the land which the buyer assumes -Preparation costs, such as surveying costs, leveling costs, tree removal -Cost of razing an existing building, in getting land into condition for intended use -Less: Proceeds from sale of assets on land Note: Excavating costs for a building and cost of improvements with a definite life are not included in land.

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.

How is 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 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 three rules for recording adjusting 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 account. 3. All adjusting entries will hit one income statement account and one balance sheet account.

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

Name the expense that each of the following unexpired costs turn into as they expire: 1. Inventory 2. Unexpired (prepaid) cost of insurance 3. Net book value of fixed assets 4. Unexpired cost of patents

1. Cost of goods sold 2. Insurance expense 3. Depreciation expense 4. Amortization expense

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

1. Level 1 inputs- 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. Level 1 has highest priority.

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.

Give some examples of capitalizable costs for: 1. Acquisition of equipment 2. Acquisition of building

1. Purchase price, freight-in, installation, testing, taxes, less any cash discounts allowed 2. Purchase price, deferred maintenance, alterations, improvements, architect's fees *if equipment or building is constructed by company, capitalized cost could include construction period interest.

When does the title to goods pass for each of the following? 1. FOB destination 2. FOB shipping point 3. Consigned goods

1. When received by buyer 2. When given to a common carrier 3. When sold to a third party by consignee

Name two quantitative thresholds used in identifying reportable operating segments.

10 percent "size" test, 75 percent "reporting sufficiency" test

What is meant by a "classified" balance sheet

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

Define a consignment arrangement

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

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 increases in fear 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 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 situations 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.

Name the three types of accounting changes

Change in accounting principle, change in accounting estimate, and change in accounting entity

Define comprehensive income

Change in equity (net assets) that results from transactions and other events and circumstances from NONOWNER sources

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

Changes where is is impracticable to estimate the cumulative effect adjust (change TO LIFO or change in depreciation methods). Such exceptions are accounted for prospectively, like a change in accounting estimate

What is the 75 percent test for identifying reportable segments?

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

Name the enhancing qualitative characteristics of financial information.

Comparability, verifiability, timeliness, and understandability

List the 10 elements of financial statements according to SFAC #6

Comprehensive income Revenues Expenses Gains Losses Assets Liabilities Equity (of Net Assets) Investments by Owners Distributions to Owners

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

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 third parties. Title to the good remains with the consignor; therefore the consigned items stay on the balance sheet of the consignor.

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.

Define working capital

Current assets - current liabilities

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 Credit: revenue

Name two methods of accounting for the write-off of uncollectible accounts

Direct Write Off: Weakness is bad debts are not matched to sales and accounts receivable are overstated. NOT GAAP. Allowance method: 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 five elements of present value measurement per SFAC #7.

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 & Market imperfections)

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

Exact method, bonus method, goodwill method

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 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)

Describe the Form 10-K and the Form 10-Q. What level of assurance must be provided with the financial statements submitted in these forms?

Form 10-K: Filed annually by US registered companies. Includes a summer of financial data, MD&A, and audited financial statements prepared using US GAAP. Form 10-Q: 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) - Repurpose 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 net book value)

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.

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

Historical cost - accumulated depreciation - impairment

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 o 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 expenses

If an entity 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 Floor- Net realizable value minus normal profit margin

For capitalizing interest, when does the capitalization period begin?

It begins when three conditions are met: - Expenditures for the asset have been made - Activities that are necessary to get the asset ready for its intended use are in progress - interest cost is being incurred Ends when the asset is substantially complete and ready for its intended use

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; Credit- Estimated liability on purchase commitment

How is the quick ratio computed?

(Cash/ Cash equivalents + Short-term marketable securities + Receivables (net)) / Current liabilities

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) * Total estimated gross profit - Gross profit recognized to date

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

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 - 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.

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.

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.

What are the disclosure requirements for reportable operating segments?

- Identifying factors - Products or services - Profit or loss details - Asset details - Measurement criteria - Reconciliations

What are the U.S. 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 conditions.

Name the three elements of faithful representation

- Neutrality - Completeness - Freedom from error

State two rule concerning capitalizing interest

- Only capitalize interest on money actually spent, not on amount borrowed. - The amount of capitalized interest is the lower of: 1) actual interest cost incurred; or 2) computed capitalized interest (avoidable interest)

Name the three elements of relevance

- Predictive value - Confirming value - Materiality

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

- Statement of Financial Position (balance sheet) - Statement of Earnings (the income statement) - Statement of Comprehensive Income - Statement of Cash Flows - Statement of Changes in Owners' Equity

List some disclosure requirements for comprehensive income.

- Tax effects of each component included in current "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.

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 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 is the Private Company Council?

- The financial account foundation (FAF) created the Private Company Council (PCC) to improve standard setting for privately held companies in the US. - The goal of the PCC is to establish alternatives to US 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.

What are the characteristics of an operating segment?

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

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

- The promise to transfer the good/service separately - 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 the transfer to the customer - The entity (seller) cannot use the product or direct it to another customer.

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

Net realizable value is the net 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 accounting = (A + B +C ) * C's percentage ownership. Excess of the 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 bonus to the new partner.

Name the four required disclosures for segments of an enterprise.

Operating segments, products and services, geographic area, major customers

Describe the proper accounting for ordinary versus extraordinary repairs

Ordinary repairs are expensed as repair and maintenance. They do not increase the life or utility of the asset. Extraordinary repairs either increase the life or utility of the asset. If the extraordinary repair increases the life of the asset, it is recorded by reducing accumulated depreciation. If the extraordinary repair increases the utility of the asset it is capitalized to the fixed asset account.

Identify four items included in other comprehensive income

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

Name two methods for estimating uncollectible accounts

Percentage of accounts receivable at year end, aging of accounts receivable at year end

Identify two methods of revenue recognition for long-term construction-type contracts under U.S. GAAP and IFRS.

Percentage of completion and completed contract

Explain the difference between periodic and perpetual inventory system

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.

How is a change in accounting estimate reported?

Prospectively

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

Provide for: Debit Bad Debt Expense & Credit Allowance for uncollectible accounts Write Off: Debit Allowance for uncollectible accounts & Credit Accounts Receivable

Describe the accounting treatment for put option related to repurchase agreements

Put Option - Repurchase price < Original selling price * customer has significant economic incentive to exercise the right (lease) * customer does not have significant economic incentive (sale with 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 doe snot have a significant economic incentive to exercise the right (sale with 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 a 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 revenue when performance is satisfied at a point in time, the customer must obtain control of the asset.

Describe the 10 percent test for identifying reportable segments

Revenue: reported revenue, including both sales to external customers and inter segment sales or transfers, is 10 percent 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 percent or more of the greater, in the 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 percent or more of the combined assets of all operating segments **ONLY NEED TO MEET ONE OF THE ABOVE**

Name several cost flows methods for inventory

Specific identification, FIFO, LIFO, Weighted average (associated with periodic), moving average (associated with perpetual)

List the two formats acceptable for reporting comprehensive income.

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

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 separate performance obligations. Step 5: Recognize revenue when or as the entity satisfies each performance obligation.

Name the most common depreciation methods. Give the basic formula for calculating each method

Straight line: (Cost -Salvage) / Useful Life Sum-of-the-Years' Digits: Sum of years = n(n+1)/2 (Cost - Salvage)*(Years Remaining)/(Sum of Years) Double-Declining Balance: 2 * Straight-line rate * Net book value of asset (*no salvage deduction, depreciate down to salvage) Units of Production: (Cost - Salvage) / Estimated hours * Actual hours for period

Name the single source of authoritative nongovernmental US GAAP

The FASB Accounting Standards Codification (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.

Describe the goodwill method of withdrawal of a partner.

The partners may elect to record the implied goodwill of the partnership based on the patent to the withdrawing partner. The amount 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 counted 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.

What income tax rate is used in interim financial reporting?

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

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.

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

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

Under U.S. GAAP, how is a change in the accounting entity reported?

All current and prior period financial statements presented are restated

What is a subsequent event and what are the two 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 an ddid 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.