FAR (2)

Reclassification adjustments must be shown in the financial statement that discloses comprehensive income:

To avoid double counting in comprehensive income items (i.e., unrealized gains), which are now reported as part of net income (i.e., realized gain).

Purpose of information presented in notes to the FS?

To provide disclosures required by GAAP

Purpose of reporting comprehensive income?

To summarize changes in equity from non-owner sources.

Form 10-K: describe and filing deadlines

US registered companies Audited Filing deadline: -60 days for large accelerated filers -75 days for accelerated filers -90 days for all other registrants.

Name the 5 elements of PV (or economic value) measurement per SFAC No. 7:

UVOTE is used to establish the value of assets or liabilities using cash flow information. -bearing of *UNCERTAINTY* -timeliness of *VARIATIONS* -*OTHER* factors (liquidity issues) -*TIME VALUE* of money -*ESTIMATED* future cash flows

What components are reported for an entity's reportable segments under IFRS and GAAP.

Under IFRS and GAAP: --Segment profit or loss --Segment assets Under IFRS only: --Segment liabilities Segment cash flow is not reported under either.

When should a company recognize goodwill in its balance sheet at which of the following points?

When it has been created from a business acquisition.

When are computer software costs expensed as R&D?

When it's going to be SOLD, LEASED, LICENSED. Then, expense those costs incurred up until tech feasibility is established.

On December 30, Devlin Co. sold goods to Jensen Co. for $10,000, under an arrangement in which (1) Jensen has an unlimited right of return and (2) Jensen's obligation to pay Devlin is contingent upon Jensen's reselling the goods. Past experience has shown that Jensen ordinarily resells 60% of goods and returns the other 40%. What amount should Devlin include in sales revenue for this transaction on its December 31 income statement?

When there is an unlimited right of return, nothing should be recorded as sales revenue unless four conditions are satisfied. These conditions are the following: The sales price is substantially fixed (it seems like it is in this question). The buyer assumes all risk of loss (no information). The buyer has paid some form of consideration (no information). The amount of returns can be reasonably estimated (which they can in this question). Because all four conditions have not been satisfied, revenue should not be recognized until they are or until something is actually sold.

Computer software development costs:

expense costs --> TECH FEASIBILITY ESTABLISHED --> capitalize --> RELEASED FOR SALE

What are the exceptions to reporting change in accounting principle?

"To LIFO" and change in depreciation method ~change in estimate --These are done PROSPECTIVELY. No prior period adj.

I. Project Costs: $100,000 Likelihood That Effort Will Result in Future Benefits: Prob II. Project Costs: $ 50,000 Likelihood That Effort Will Result in Future Benefits: --Reasonably possible. What should be reported as R&D expenses in its IS for the year?

$150,000 Under U.S. GAAP, unless the tangible assets associated with the research and development (R&D) expenses have alternative future uses or the work is undertaken on behalf of others under a contractual agreement, the costs associated with the R&D expenses are direct charged as an expense on the income statement.

A company began developing computer software to be sold as a separate product on January 1, Year 1. During the planning, coding, and testing phases, the company incurred $1,300,000 of costs. On June 30, Year 1, the product was determined to be technologically feasible. The company began producing product masters of the software and incurred an additional $750,000 of costs from July 1, Year 1, through September 30, Year 1. After the software was available for release on October 1, Year 1, the company incurred an additional $275,000 of costs relating to maintenance and customer support. What amount of software-related costs should be capitalized?

$750,000 Expense--> Tech Feas--> Capitalize until software reeased for sale. Date of tech feas: June 30 Date released for sale: October 1 All costs incurred in this date range are capitalized. Any costs incurred before or after October are expensed.

Accounting for installment sales: (4 steps)

(1) GP= sales - COGS (2) GP % of sales (3) Earned (Realized) GP = cash collections(+w/o) * GP% (4) Deferred GP = End Install Rec * GP% **GP = Earned GP + Deferred GP

Name the enhancing qualitative characteristics of financial information.

*"Compare and Verify in Time to Understand"* -Comparability (consistency helps achieve this) -Verifiability -Timeliness -Understandability

Name the elements of financial statements per SFAC No. 6:

*"REGL ALE needs ID"* Revenue, Expenses, Gains, and Losses Assets, Liabs, Equity Investment by owners and Distribution by owners

Component of Other Comprehensive Income (OCI):

*P*ension adj. *U*nrealized gain and losses (Avail-For-Sale secs only) *F*oreign currency items *E*ffective portion cash flow hedges *R*evaluation *surplus* (IFRS only)—from revaluation of intangible and fixed assets.

How should you account for the effect of a change in accounting estimate?

*Prospectively* In the period of change and future periods if the change affects both. It does not affect "prior periods," nor "RE."

According to the FASB conceptual framework, certain assets are reported in financial statements at the amount of cash or its equivalent that would have to be paid if the same or equivalent assets were acquired currently. What is the name of the reporting concept?

*REPLACEMENT COST* (Replacement cost is an acquisition cost.)

How do you report cumulative effect of change in accounting principle?

-*Noncomparative FS presented:* difference between beg RE in *PERIOD OF CHANGE* and what RE would have been. -*Comparative FS presented:* difference between beg RE in 1ST PERIOD PRESENTED and what RE would have been.

What is the difference between recognition and realization?

-*Recognition* is the process of recording an item in the financial statements of an entity - *Realization* is the process of converting noncash resources and rights into money. (Not connected to collection on receivables)

How is Comprehensive Income (CI) reported?

-AOCI is component of stockholder's equity on BS. -CI can be reported in a separate statement of comp. income or in a statement of income and comprehensive income. -CI is reported in interim financial statements and year-end financial statements.

What costs and loss amounts should be included in losses from discontinuing operations?

-All operating losses from year of discontinuation -Employee relocation costs assoc. with decision to dispose -Add'l pension costs associated with decision to dispose

Examples of accounting policies described in the summary of significant accounting policies:

-Basis of consolidation -Depreciation methods -Amortizing of intangibles -Inventory pricing -Accounting for recognition of profit on LT construction Ks -Recognition of revenue from franchising or leasing ops.

NOT included in summary of significant accounting policies:

-Composition of accts and amts in dollars of acct balances. -Details relating to changes in acctg principles -Dates of maturity and amts of LT debt -Yearly computation of depreciation, depletion, and amortization.

Form 10-Q

-Filed quarterly -unaudited -Filing deadline (at end of fiscal Q): -40 days for large accelerated filers -45 days for all others

Regulation S-X

-Includes unaudited FS -Interim FS include: -2 BS (most recent fiscal Q and end of last year) - 3 IS (most recent fiscal Q, pd b/t last yr and end of most recent Q, corresponding periods of the preceding fiscal year) - 1 Cash Flow (pd b/t end of last year and end of most recent Q)

Exit and disposal costs:

-Involuntary employee termination benefits -Costs to terminate a contract (that is NOT a capital lease) -Other costs (costs to consolidate facilities; relocate emps)

Where is AOCI reported?

-It is a BS account that is reported in the statement of financial position (BS). -It is a component of equity that includes the total of other comprehensive income for the current period and previous periods.

Disclosure of risks and uncertainties under GAAP:

-Nature of Ops (major products or svcs and principal mets) -Use of Estimates in prep of FS -Certain Sig. Estimates when reasonably possible that the estimate will change in the near term, even if the effect of the change will be immaterial. -Concentrations when it is reasonably possible that a concentration could cause a severe impact in the near term.

Lore Co. changed from the cash basis of accounting to the accrual basis of accounting during the current year. The cumulative effect of this change should be reported in Lore's current year financial statements as a:

-Prior period adj. resulting from the correction of an error. -(non-GAAP to GAAP is correction of error)

How are error corrections accounted for?

-Prior period adjustment (restatement). *-Comparative FS presented (2):* -If year present, correct the info -If no year present, adjust beginning RE of earliest year presented. *-Comparative FS NOT presented:* -Report as adj. of the opening balance of RE (net of tax)

Per U.S. GAAP, how should you account for accounting changes that result in financial statements that are, in effect, the statements of a different reporting entity?

-The FS of *all* prior periods presented should be restated due to a "change in entity" such as resulting from: -Changing companies in consolidated FS. -Consolidated FS vs. Previous individual FS.

Under IFRS, when an entity records a change in accounting principles, what are the minimum reporting requirements and how is the cumulative effect of the change reported?

-The entity must present at least 3 BS (end of current period, end of prior period, and beginning of prior period) and 2 of each other FS (current period and prior period). -Cumulative effect shown as an adjustment to beginning RE on the BS for the beginning of the prior period.

Gains and losses are reported using:

-the net concept. proceeds - net book value

Bard Co., a calendar-year corporation, reported income before income tax expense of $10,000 and income tax expense of $1,500 in its interim income statement forQ1. Bard had income before income tax expense of $20,000 for Q2 and an estimated effective annual rate of 25%. What amount should Bard report as income tax expense in its interim income statement for Q2?

1) (Year to date income * effective tax rate) - income tax recorded in previous quarter. 2) $10,000 + $20,000 = $30,000 * 25% = $7,500 3) $7500 - $1500 paid previously = $6000 for Q2.

The FASB's due process for setting accounting standards includes:

1) Proposed amendments to the ASC are issued for public comment (by holding public forums) based on an Exposure Draft (majority vote required to issue exposure draft). 2) At the end of the comment period, FASB will analyze all comment letters and position papers. When the board members of the FASB are satisfied that all reasonable alternatives have been considered, the FASB staff will prepare an Accounting Standards Update for approval by the board (majority vote is required).

BASE for payables:

Beginning balance +Expenses -Paid= Ending balance

BASE for receivables:

Beginning balance +Revenue -Collections= Ending balance

Percentage of Completion-- Current Asset and Current Liability

CA: accum. costs + est. earnings > billings (all to date) CL: accum. costs + est. earnings < billings (all to date)

Completed Contract--Current Asset and Current Liability

CA: accum. costs to date > billings to date CA: accum. costs to date < billings todate

Formula for comprehensive income?

CI= (This year's) NI + OCI --Exclude all owner transactions (e.g. div and stock issuance)

What is the proper treatment of the cost of equipment used in research and development activities that will have alternative future uses?

Capitalized and depreciated over its estimated useful life, NOT the term of the R&D project.

What are the 3 accounting changes and how do you account for them?

Change in acctg estimate: PROSPECTIVE Change in acctg principle: RETROSPECTIVE Exceptions: "To LIFO" and change in depr= PROSPECTIVE Change in acctg entity: RETROSEPCTIVE

Presentation of comp income:

Comprehensive income may be shown on the face of a combined "statement of income and comprehensive income" a separate section below net income, or: -In a separate "statement of comprehensive income," or -As a component of the "statement of changes of owners' equity" (U.S. GAAP only). The income tax expense or benefit allocated to components must be disclosed, either on the face of the statement or in notes to the statement.

Conceptually, interim financial statements can be described as emphasizing which of the enhancing qualitative characteristics?

Emphasizes TIMELINESS by providing fin. info based on actual performance to date and estimates prior to year end.

How do you handle the cumulative effect of a change in accounting estimate:

A change in estimate is handled PROSPECTIVELY. No cumulative effect adjustment is made and no separate line item presentation is made on any financial statement. If a material change is being made, appropriate footnote disclosure is necessary.

What is deferred revenue?

A liability until the service is performed. (aka unearned rev). --Reduced as service is performed. IF repairs made EVENLY throughout period of time, use halfway point to established reduction.

What document is typically issued as part of the due-process activities of the Financial Accounting Standards Board (FASB) for amending the FASB Accounting Standards Codification?

A proposed accounting standards update

Under IFRS and US GAAP, which of the following would be included in income from continuing operations on the IS? I. A large loss from a foreign currency transaction. II. A union strike that shuts down operations for 3 months. III. A foreign govt takes possession of a co.'s only plant. IV. Damage to a factory due to an earthquake in an area that had not previously experienced earthquakes.

All four would be included in income from continuing ops under both IFRS and GAAP.

What are the criteria for Liability recognition with exit and disposal activities:

All of the following criteria must be met: -An obligating event has occurred (profits < budget) -The event results in a present obligation to transfer assets or to provide services in the future. -The entity has little or no discretion to avoid the future transfer of assets or providing of services.

UVW Broadcast Co. entered into a contract to exchange unsold advertising time for travel and lodging services with Hotel Co. As of June 30, advertising commercials of $10,000 were used. However, travel and lodging services were not provided. How should UVW account for advertising in its June 30 financial statements?

An asset and revenue for $10,000 is recognized. Revenues should be recognized in the period in which they were earned and realized or realizable. Expenses are recognized when an entity's economic benefits are used up in delivering or producing goods, rendering services, or other activities that constitute its ongoing major or central operations. UVW provided advertising services but did not yet benefit from the travel or lodging

What best describes an operating procedure for issuing a new International Financial Reporting Standard?

An exposure draft is issued after approval by at least 9 members of the IASB.

How should the effect of a change in accounting principle that is inseparable from the effect of a change in accounting estimate be reported?

As a change in estimate. Thus, report PROSPECTIVELY as a component of income from continuing ops.

Adam Corp. uses IFRS and had the following infrequent trxns during Yr 1: -$190,000 gain on reacquisition and retirement of bonds. The material event is also considered unusual for Adam Corp. -A $260,000 gain on the disposal of a component of a business. Adam continues similar operations at another location. -A $90,000 loss on the abandonment of equipment. In its Year 1 IS, what amount should Adam report as total infrequent net gains that are *not considered extraordinary*?

IFRS prohibits reporting of gains and losses as extraordinary. All would be reported on IS. 190,000 + 260,000 + (90,000) = 360,000 net G reported on IS

IFRS treatment of research and development vs. GAAP.

IFRS-Research costs are always expensed. Development costs are expensed unless ALL of following five criteria met, then they are capitalized: -Technical feasibility has been established. -The company intends to complete the asset. -The company has the ability to sell or use the asset. -Sufficient resources are avail. to complete the development and sell / use the asset. -The asset will generate future economic benefits. GAAP-all research and development costs are expensed.

How to convert from Cash-Basis to Accrual-Basis

INCOME: 1. Add change in Curr. Assets (incl. direction of change) 2. Subtract change in Curr. Liabs (incl. direction of change) 3. Subtract change in write-offs EXPENSES: 1. Subtract change in Curr. Assets (incl. direction of change) 2. Add change in Curr. Liabs (incl. direction of change)

Disclosed in the summary of significant accounting policies:

Measurement bases used in prepping FS Acctg principles and methods Criteria Policies Pricing

Monetary unit assumption:

Money is the common denominator of economic activity and provides an appropriate basis for accounting measurement and analysis.

Standard Co. spent $10,000,000 on its new software package that is to be used only for internal use. The amount spent is for costs after the preliminary project stage. The economic life of the product is expected to be three years. The equipment on which the package is to be used is being depreciated over five years. What amount of expense should Standard report on its income statement for the first full year under U.S. GAAP?

For software developed internally, costs incurred in the preliminary project stage are expensed under U.S. GAAP. In this question, the costs AFTER the preliminary project stage are capitalized and depreciated over the economic life of the product (3 years). Depreciation expense is thus $3,333,333.

Which statements are required to include audited FS?

Form 10-K Form 40-F Form 20-F

Startup costs:

GAAP requires that start-up costs, including organizational costs, be expensed as incurred, w/o/e.

Under U.S. GAAP, the effect of a material transaction that is infrequent in occurrence but NOT unusual in nature should be presented separately as a component of income from continuing operations when the transaction results in a:

Gain or Loss

What types of entities are required to report on business segments?

Only publicly traded enterprises

On April 30, Deer Corp. approved a plan to dispose of a component of its business. The decision represents a major strategic shift for Deer and will have a significant effect on its operations and financial results. For the period January 1 through April 30, the component had revenues of $500,000 and expenses of $800,000. The assets of the component were sold on October 15 at a loss. In its income statement for the year ended December 31, how should Deer report the component's operations from January 1 to April 30?

-$300,000 should be reported as a (L) from ops of a component and included in (L) from disco. ops. -*Once the decision has been made* to dispose of a component of a biz and that component meets the criteria to be classified as held for sale, the op results of the component for the period reported on and any G(L) from the disposal, should be reported separately from continuing ops, net of tax. In this case, the component was classified as held for sale and was sold in the same year.

Percentage of completion method: gross profit/loss (4 steps)

1. GP of completed k: k price - estimated total cost 2. % complete: Total cost to date / total est. cost 3. GP earned to date: 1 * 2 4. GP current year: PTD at current FYE - beg PTD

Under IFRS, what are the 3 disclosure requirements related to the correction of a material prior period error?

1. Nature of the error. 2. The amount of the correction at the beginning of the earliest period presented. 3. The impact of the correction on basic and diluted EPS for each period presented.

What is true of assets held for sale?

1. Will be valued at the lower of its book value or NRV (fair value - costs to sell). 2. It will be reclassified as an "asset held for sale." 3. If the company expects that the sale of the old asset will be completed in less than a year, it will be classified as a current asset. 4. Assets held for sale are *no longer depreciated.*

Quantitative Thresholds for reportable segments:

10% "Size" Test (combined) --Revenue OR --Reported Profit or Loss OR --Assets 75% "Reporting Sufficiency" Test -- If after 10% test, the reported segments don't make up 75% of external (consolidated) revenue, add next segment, EVEN IF IT DOESN'T MEET 10% TEST.

An XBRL financial statement exhibit is required to be submitted with which SEC filings?

10-Q; 40-F; 10-K; 20-F; 6-K

The single source of authoritative nongovernmental US GAAP:

FASB Accounting Standards Codification (ACS)

Cuthbert Industrials, Inc. prepares three-year comparative financial statements. In Year 3, Cuthbert discovered an error in the previously issued financial statements for Year 1. The error affects the financial statements that were issued in Years 1 and 2. How should the company report the error?

FS for Years 1 and 2 should be restated. The carrying amounts of the As and Ls for these years will be corrected in each year's FS and shown as restated in the 3 year comparative FS. As of the beginning of Year 3, the cum. effect of the error will have been corrected and reflected in the carrying amounts of the affected assets and liabilities.

What is true regarding the comparison of managerial to financial accounting?

Financial (external) acctg: Public companies must follow GAAP Managerial (internal) acctg: GAAP need not be followed

What is financial capital?

Financial capital: --The traditional view. --An element of both "currently reported NI" and "comprehensive income"

Due to a decline in market price in the second quarter, Petal Co. incurred an inventory loss. The market price is expected to return to previous levels by the end of the year. At the end of the year the decline had not reversed. When should the loss be reported in Petal's interim income statements?

In the fourth quarter only. -When the loss is probable and estimable, the expected loss must be recorded in full. This loss becomes such at the end of the fourth quarter. Therefore, the inventory must be valued on the year-end at the lower of cost or market, recognizing the loss at that time.

How are discontinued operations that occur at midyear initially reported?

Included in NI and disclosed in the notes to interim FS.

On Jan. 16, Tree Co. paid $60,000 in property taxes on its factory for the current calendar year. On Apr. 2, Tree paid $240,000 for unanticipated major repairs to its factory equipment. The repairs will benefit ops for the rest of the calendar year. What amount of these expenses should Tree include in its 3rd quarter interim FS for the 3 months ended Sept. 30?

Interim rptg purposes: costs benefitting multiple periods ALLOCATED equally to those periods. 1) Prpty taxes: $60,000 / 4 quarters = $15,000 per quarter 2) Equipment repairs benefit qtrs 2-4. $240,000 / 3 quarters = $80,000 per quarter 3) $80,000 + $15,000 = $95,000 recognized in the quarter ended September 30 (end of 3rd quarter).

General and Admin Expense components:

Legal fees Audit fees Acctg fees Officer salaries Insurance Office rent (if used by any of these depts)

Is it appropriate to recognize revenue prior to sale of merchandise under installment sale or cost recovery method?

No. Both methods delay revenue recognition by recognizing revenue as cash is collected .

Selling Expense components:

Office rent (if used by sales dept) Freight out Advertising Sales salaries and commissions

What are General and Admin expenses?

Officers salaries Acctg Legal Insurance Pretty Tax

Timber Co., was evaluating the likelihood of collecting various accounts receivable currently on its books. This evaluation resulted in the decision to change from the direct recognition method to the installment method for recognizing receivables. The accounting treatment for this change is best characterized as:

PROSPECTIVE. A change from direct recognition to the installment method is a change in accounting principle INSEPARABLE from a change in accounting estimate that is treated like a change in accounting estimate, prospectively.

A corp. issues quarterly interim financial statements and uses the LCM method to value its inventory in its annual financial statements. How should the corporation should value its inventory in its interim financial statements?

Permanent declines in inventory market value should be reflected in interim financial statements in the period incurred.

Essential characteristic of an asset?

Probable future economic benefits.

According to the FASB and IASB conceptual frameworks, the objective of general purpose financial reporting is to:

Provide financial information that is useful to *primary users* in making decisions about providing resources to the reporting entity.

Revaluation Model: Revaluation Gain

Report in OCI --UNLESS revaluation gain reverses previous loss. THEN, report on IS to extent that they reverse the previous loss.

Revaluation Model: Revaluation Loss

Report on IS --UNLESS revaluation loss reverses previous revaluation gain. THEN recognize in OCI, reduces revaluation surplus in AOCI.

Patent amortized over:

SHORTER OF: remaining legal life or estimated life

Legal costs associated with patents treatment:

Successful: capitalized as part of patent over lesser of remaining economic life or legal life. Unsuccessful: expensed immediately

For interim financial reporting, a company's income tax provision should be determined using the:

The best, most current estimate of the annual effective tax rate. For example: If for the second quarter, it is the effective tax rate expected to be applicable for the full year as estimated at the end of the second quarter.

Which of the following is an example of activities that would typically be excluded in research and development costs under U.S. GAAP?

The franchisor should report revenue from initial franchise fees when all material conditions of the sale have been "substantially performed." Macklin Co. will recognize the entire initial fee in the current year. Otherwise, recognize $0.

The premium on a three-year insurance policy expiring on December 31, Year 3 was paid in total on January 2, Year 1. If the company has a six-month operating cycle, then on December 31, Year 1, the prepaid insurance reported as a current asset would be for:

The minimum operating cycle for purposes of reporting a "prepaid" current asset is one year (or 12 months).

If both an asset group in a company and goodwill in one of its reporting units have to be tested for impairment, which of the following statements is correct regarding impairment testing and impairment losses?

The other asset group should be tested for an impairment loss before goodwill is tested.

Wren Co. sells equipment on installment contracts. Which of the following statements best justifies Wren's use of the cost recovery method of revenue recognition to account for these installment sales?

There is no reasonable basis for estimating collectibility.

Completed contract method: gross profit/loss

contract price - total costs Don't recognize profit unless k completed, recognize loss immediately. Recorded billings have nothing to do with it.

What is the conservatism principle?

Use the method that is least likely to overstate assets (and revs/gains) and understate liabilities (and expenses/losses). I.E., gains shouldn't be recognized until realized; losses should be recognized immediately.

In general, an enterprise preparing interim financial statements should:

Use the same accounting principles followed in preparing its latest annual financial statements; unless a change in accounting principle is adopted in the current year.

According to FASB, an entity's revenue may result from:

a decrease in liabilities from a primary (major) operations.

Under U.S. GAAP, items that are both unusual and infrequent are reported as:

a separate component of income from continuing operations (pretax).

Interim financial reporting should be viewed as:

reporting for an integral part of an annual period.