CPA FAR Giant Combo

List the three conditions that must be met in order for assets to be classified as a "collectible."

1. Held for public exhibition, education, or research rather than financial gain; 2. Protected, kept unencumbered, cared for, and preserved; 3. Subject to a policy that requires proceeds from sales of collection items to be used to acquire other items for collections.

Identify the general acquiree-related elements that must be recognized and measured by the acquirer in a business combination.

1. Identifiable assets acquired; 2. Liabilities assumed; 3. Noncontrolling interest, if any.

List the five elements (or steps) involved in applying the acquisition method of accounting to a business combination.

1. Identify the acquirer; 2. Determine the acquisition date and measurement period; 3. Determine the cost of the acquisition; 4. Recognize and measure the identifiable assets acquired, liabilities assumed, and any noncontrolling interest in the acquired entity; 5. Recognize and measure Goodwill or a gain from a bargain purchase.

What method is used to record a merger/consolidation?

Acquisition Method.

When is an implied time restriction recognized?

An implied time restriction can be recognized on donated long-lived depreciable assets.

Using the indirect method for reporting cash flows from operations, should an increase in accounts payable be added to or subtracted from accrual based net income?

An increase in accounts payable should be added

What financial statement is required for Voluntary Health and Welfare organizations only?

Statement of Functional Expenses.

What is the designation of the investee in a business combination?

Subsidiary company.

Define "endowments".

Contributions to the organization from third parties for which the principal (corpus) must "remain intact in perpetuity."

How is the exchange of share-based employee awards treated in a business combination?

If the exchange is required: 1. The portion of the value of the replacement awards that relates to precombination services is part of the cost of the acquired business; 2. The portion of the value of the replacement awards that relates to post-combination services is expensed. If the exchange is voluntary, the value of the replacement awards is expensed.

Where is the cash effect on foreign currency translation reported?

It is reported as a separate part of the reconciliation of the change in cash and cash equivalents during the period.

What is the net asset category where expenses are recognized?

Unrestricted net assets.

What accounting transaction is required when cost of the Investment is > fair market value of net assets acquired (Acquisition method)?

What accounting transaction is required when cost of the Investment is > fair market value of net assets acquired (Acquisition method)?

When a business combination is effected through an exchange of equity interest, what are five factors to consider that indicate which entity is the acquirer?

Which combining entity/entities 1. Issued new equity interest; 2. Owners have the larger portion of the voting rights; 3. Owners can select or remove a voting majority of the governing body; 4. Former management dominates that of the combined entity; 5. Paid a premium over the precombination fair value of the equity interest of the other combining entities.

Describe the reporting requirement when expenses are paid out of temporarily restricted net assets.

"Net assets released from restrictions" is reported as a decrease in the revenue section of temporarily restricted net assets and as an increase in the revenue section of unrestricted net assets.

Name the two formats permitted for the statement of cash flows

1, Indirect. 2, Direct

List the four broad categories of not-for-profit organizations.

1. Hospitals and other health care entities; 2. Colleges and Universities; 3. Voluntary Health and Welfare Organizations; 4. Other not-for-profit organizations.

When provisional amounts for a business combination are reported in financial statements, what must be disclosed about those amounts?

1. Identification of the items (assets, liabilities, equity or consideration) for which accounting is not complete; 2. The reasons why the accounting is not finalized; 3. The nature and amounts of any measurement period adjustments made to the provisional amounts during the reporting period.

What is reported on the Statement of Cash Flows?

1. Information about the cash receipts and cash payments for an entity; 2. The difference between net income and net operating cash flows; 3. Information about investing and financing activities which do not involve cash inflows or outflows

List the business combinations for which the acquisition method of accounting does not apply.

1. Joint ventures; 2. Entities under common control; 3. Between not-for-profit organizations; 4. For-profit entity acquired by a not-for-profit organization; 5. Acquisition of assets that do not constitute a business.

List the two sub-classifications of expenditures for supporting services within a not-for-profit organization.

1. Management and General; 2. Fund Raising.

List the three legal forms of business combinations.

1. Merger; 2. Consolidation; and 3. Acquisition.

List the two broad classifications for expenditures within a not-for-profit organization

1. Program Services; 2. Supporting Services.

What is a majority-owned subsidiary that is not consolidated called and how is it accounted for?

A majority-owned subsidiary that is not consolidated is an "unconsolidated subsidiary" and would be accounted for as an investment asset by the parent, using either fair value or the equity method of accounting.

Define/describe a "legal consolidation".

A new entity is formed to combine (consolidate) two or more preexisting entities.

What method is used by a parent company to carry "investment in subsidiary" on its books?

Cost, Equity or other method.

Describe the requirements of the acquisition when a business combination is carried out in stages (or steps).

Equity interest in the acquiree which is acquired by the acquirer prior to the business combination is remeasured to fair value at the date of the combination (acquisition date). Any difference between the precombination carrying value and the acquisition date fair value is recognized as a gain or loss in income of the period of the combination. The fair value of the precombination investment is included as part of the cost of the investment value (i.e., cost of the investment in the acquiree) to the acquirer.

For the purposes of applying the acquisition method to a business combination, what may constitute a "business?

A business may be: 1. A group of assets or a group of net assets (that constitute a business); 2. A separate legal entity (that is a business).

Define "term endowments".

Gifts and bequests from third parties which are to be retained and invested for a period of time or until a specific event occurs, but after the criterion has been met, the full amount can be spent.

When are contribution of services recognized?

Recognized if the services require special skills, the person providing the services possess those skills, and the services would have been purchased if not obtained by donation.

When are conditional promises to give recognized?

Recognized when the conditions are substantially met or the likelihood of the conditions not being met is remote.

What is the indirect method on the statement of cash flows?

Reconciles net income to cash flows from operating activities

Define/describe a "legal acquisition".

One entity acquires controlling interest of another entity, but both continue to exist and operate as separate legal entities.

Define/describe a "legal merger".

One entity acquires either a group of assets constituting a business or a controlling interest of another entity and "collapses" the acquired assets/entity into the acquiring company.

Describe how income is determined at the date of a combination.

Only acquirer's operating results up to the date of combination enter into determination of "consolidated" net income.

Name the four major sections in the direct method cash flow statement

Operating cash flows; Investing cash flows; Financing cash flows. Reconciliation of net income and net operating cash flows.

What is the cash flow category for dividends paid?

The category is Financing

What is the cash flow category for purchases of trading securities?

The category is Operating

Where are non-cash investing and financing activities reported?

They are reported on the face of the Statement of Cash Flows or as a separate disclosure

What is the cash flow category for interest paid and received?

This category is Operating Activities.

Formula for determining change in cash

change in cash = change in liabilities + change in equity - change in other assets

List the three categories of a not-for-profit organization's Net Assets.

1. Unrestricted; 2. Temporarily Restricted; 3. Permanently Restricted.

Describe the nature of contingent consideration in a business combination.

Contingent consideration is either: 1. An obligation of the acquirer to transfer additional assets or equity to the former owners of the acquired business if future conditions are met; or 2. A right of the acquirer to a return of previously transferred consideration if future conditions are met. Contingent consideration is recognized at fair value as of the acquisition date as part of the cost of the acquiree.

Identify at least three items acquired in a business combination for which the acquirer has to make a decision as to the classification or designation of the item.

1. Investments, as to whether held-to-maturity, held-for-trading, or available for sale; 2. Derivative instruments, as to whether used for hedging or speculation; 3. Embedded derivatives, as to whether they will be separated from the host instrument or not; 4. Long-term assets, as to whether they will be used or held for sale.

Under what conditions will a bargain purchase be recognized in a business combination?

A bargain purchase is recognized when the fair value of the total investment in an acquiree (both the investment of the acquirer and that of any noncontrolling interest) is less than the fair value of the acquiree's net assets.

What may be acquired in a business combination?

A business entity either acquires a group of net assets that constitutes a business or acquires equity interest in an entity.

What type of not-for-profits consist predominantly of publicly funded hospitals and universities, although museums, parks, and landmarks can fall into this category as well?

"Public" (governmental affiliated) not-for-profits.

In which periods does an acquirer have to disclose information about a business combination in its financial statements?

In the reporting period in which the combination occurs and in each reporting period that includes the measurement period.

What accounting transaction is required when cost of the investment is < fair market value of net assets acquired (acquisition method)?

Recognize gain for bargain purchase amount.

What value is used to record donated capital assets?

Fair market value at the date of donation.

List the elements that make up the cost of an acquired business.

Fair value of: 1. Assets transferred; 2. Liabilities incurred; 3. Equity interest issued.; 4. Contingent consideration obligations of the acquirer; 5. Required share-based employee awards for precombination services.

What authoritative body has jurisdiction over private not-for-profit organizations?

Financial Accounting Standards Board (FASB).

When is a Statement of Cash Flows required?

For all business enterprises that report both financial position (Balance Sheet) and results of operations (Income Statement) for a period.

Under what conditions will Goodwill be recognized in a business combination?

Goodwill is recognized when the fair value of the total investment in an acquiree (both the investment of the acquirer and that of any noncontrolling interest) is greater than the fair value of the acquiree's net assets.

What is the cash flow category for principal payments on short-term and long-term loans (from financial institutions or dealers) made to acquire plant assets?

The category is Financing

What is the cash flow category for principal payments on short-term and long-term loans from financial institutions made to acquire inventory for resale?

The category is Financing

What is the cash flow category for collections of principal amounts on loans made to other entities?

The category is Investing

What is the cash flow category for loans made to other entities?

The category is Investing

What is the cash flow category for purchases of securities available for sale?

The category is Investing

What is the cash flow category for principal payments on short-term and long-term loans from suppliers made to acquire inventory for resale?

The category is Operating

What is the purpose of the operating section of the statement of cash flows under the indirect method?

The purpose is to adjust accrual net income to net cash flow from operating activities.

What is the only legal form of business combination requiring consolidated statements?

Business Combination resulting from a legal acquisition.

Using the indirect method for reporting cash flows from operations, should an increase in accounts receivable be added to or subtracted from accrual based net income?

An increase in accounts receivable should be subtracted

Describe how income is determined for subsequent years of a combination.

Acquirer's and Acquiree's operating results enter into determination of consolidated net income.

Describe how income is determined at the end of the year for a combination.

Acquirer's operating results for the year plus acquiree's operating results after the combination enter into the determination of consolidated income for the year of combination.

What is the method that is required to be used in accounting for most business combinations?

Acquisition method.

List the journal entry by the investor to record a merger/consolidation using the acquisition method.

DR: Assets acquired (at FMV) CR: Liabilities assumed (at FMV) CR: Cash/Other Consideration Paid (Cost)

List the primary mean of accomplishing a business combination.

The acquisition by one entity of the common stock of another entity to gain control of the investee.

Define "measurement period".

The period after the acquisition date during which the acquirer may adjust any provisional amounts recorded at the acquisition date. It provides the acquirer reasonable time to obtain information needed to identify and measure accounts and amounts that existed as of the acquisition date. It ends when the acquirer obtains that information or determines that no additional information is available, but in no case should it exceed one year.

What information must be disclosed about Goodwill recognized in a business combination?

1. A quantitative description of the factors that make up the Goodwill; 2. The amount of Goodwill expected to be deductible for tax purposes; 3. The amount of Goodwill assigned to each reportable segment; 4. During the measurement period, a reconciliation of the beginning and ending balance in Goodwill.

How should assets and liabilities arising from contingencies be measured and reported subsequent to a business combination?

1. If the contingency is a liability, measure and report at the higher of: Its acquisition-date fair value; or the amount that would be recognized if the requirements of FASB #5 were followed. 2. If the contingency is an asset, measure and report at the lower of: Its acquisition-date fair value; or The best estimate of its future settlement amount.

Identify at least five items acquired in a business combination that would be measured at something other than fair value.

1. Income tax items, use FASB #109 and other guidelines; 2. Acquiree's employee benefit liability/asset, use various related GAAP; 3. Indemnification assets, use the same measurement basis as indemnified item; 4. Reacquisition rights, use unamortized balance; 5. Share-based employee awards, use FASB #123R; 6. Long-term assets held for sale, use FASB #144.

Identify the most significant general information about a business combination that must be disclosed.

1. Name and description of the acquired business; 2. The acquisition date; 3. The percentage voting interest acquired (if relevant); 4. How the acquirer gained control of the acquired business; 5. The primary reason for the business combination.

List the required categories for the Statement of Cash Flows

1. Net cash inflow or outflow from Operating Activities; 2. Net cash inflow or outflow from Investing Activities; 3. Net cash inflow or outflow from Financing Activities; 4. Effects of Foreign Currency Translation; 5. Reconciliation of net cash inflows/outflows with the reported change in cash and cash equivalents on the Balance Sheet; 6. Non-cash Investing and Financing Activities.

What are some examples of cash outflows classified as Investing Activities?

1. Purchase of long-term assets; 2. Lending to others; 3. Investment in debt and equity securities held to maturity and available for sale); 4. Purchase of productive assets (not inventory).

What assets or liabilities recognized in a business combination require "specialized" post-combination accounting treatments?

1. Reacquired rights asset; 2. Assets and liabilities arising from contingencies; 3. Indemnification assets; 4. Contingent consideration as asset or liability (or equity).

Using the indirect method for reporting cash flows from operations, should a decrease in inventory be added to or subtracted from accrual based net income?

A decrease in inventory should be added

Using the indirect method for reporting cash flows from operations, should a decrease in unearned revenue be added to or subtracted from accrual based net income?

A decrease in unearned revenue should be subtracted.

Identify the legal forms of business combination that will not require preparation of consolidated financial statements.

A legal merger or a legal consolidation will not require preparation of consolidated financial statements. Only a legal acquisition will require preparation of consolidated financial statements.

What is the basic purpose of the statement of cash flows?

The basic purpose is to provide information about the cash receipts and cash payments for an entity to help investors, creditors, and others.

When are consolidated statements required?

Under two major circumstances: 1. When a firm is the primary beneficiary of a variable-interest entity (VIE), the VIE must be consolidated with the primary beneficiary; 2. When a firm has a majority owned (>50% of voting stock) subsidiary, the subsidiary must be consolidated with its parent unless the parent lacks actual effective operating or financial control.

What is the direct method on the statement of cash flows?

This method presents actual inflows and outflows from cash operations. Must also disclose the indirect method (reconciliation of net income to cash flows from operations) as a supporting schedule

What is the journal entry by an investor to record an acquisition?

DR: Investment in Subsidiary CR Cash/Other Consideration (Cost)

Define "parent company" as it relates to business combinations.

Designation of the Investor in a business combination.

What are some examples of cash outflows classified as Financing Activities?

1. Repurchase of own stock; 2. Paying back lenders (principal only); 3. Payment of dividends

What are some examples of cash inflows classified as Investing Activities?

1. Sale of long-term assets; 2. Collection of loan principal; 3. Disposal of held to maturity (HTM) and available for sale (AFS) debt and equity securities; 4. Sale of productive assets (not inventory)

What are some examples of cash inflows classified as Financing Activities?

1. Sale of own stock; 2. Proceeds from borrowing

List the three financial statements that are required for all private not-for-profit organizations.

1. Statement of Financial Position; 2. Statement of Activity; 3. Statement of Cash Flows.

List two types of temporary restrictions.

1. Time restrictions; 2. Purpose restrictions.

List the characteristics of a contributions.

1. Unconditional; 2. Voluntarily made; 3. Nonreciprocal; 4. Not made by an owner.

What is the journal entry to record receipt of $100,000 in pledges when it is estimated that 20% of the pledges will be uncollectible?

DR: Pledges Receivable $100,000 CR: Est. Uncollectible Pledges $20,000 CR: Contribution (Revenue) $80,000

How should contingent consideration be measured and reported subsequent to a business combination?

Contingent consideration should be measured and reported at fair value until settled. 1. If changes are of fair value as it existed at acquisition date, the change is an adjustment to the cost of the investment; 2. If changes result from events after the acquisition date: (1) Changes in contingent assets or liabilities are recognized in earnings in the period of change; (2) Changes in contingent equity is an adjustment to equity accounts; not an earnings item.

Describe the general revenue recognition rule for contributions.

In general, contributions are recognized as revenue in the period when the contribution is made, regardless of whether they are received in cash or not.

How are special event revenue and direct costs reported?

Reported at their gross amounts. Costs to promote the event are reported as part of fund-raising.

Where is a Subsidiary reported?

Reported in consolidated statements, unless the parent lacks effective control.

Define "acquisition date".

The date on which the acquirer obtains control of another business (i.e., group of assets that constitute a business or a separate legal entity). It usually is also the "closing date" for the combination.

What values are compared to determine if there is Goodwill or a bargain purchase in a business combination?

The fair value of the total investment in the acquiree (including the acquirer's consideration transferred and the noncontrolling interest in the acquiree), and the fair value of the net assets (assets - liabilities) of the acquiree.

What is the purpose of the operating section of the statement of cash flows under the direct method?

The purpose is to show all cash inflows and outflows for operating activities

What is the reporting basis of the statement of cash flows?

The reporting basis is cash and cash equivalents.

Under what circumstance is fair value not used to measure assets and liabilities transferred in a business combination?

When the assets and liabilities are transferred to the acquiree but remain under the control of the acquirer because the acquirer obtained control of the acquiree (which holds the transferred asset or liability). In such a case, the asset or liability should be transferred at carrying value, not fair value.