CPA FAR 4.3
Sum of Years Digits Depreciation
(cost - salvage)* remaining life/sum of years digits
Quantitative Thresholds for Reportable Segments
- 10% Size Test - revenue, profits and losses, assets - 75% Reporting Sufficiency Test if total external revenue reported by operating segments is less than 75% of entity's external revenue, we must add operating segments to reportable segments classification
R&D Costs include:
- depreciation of assets used in R&D exclude: - engineering - follow up - patent costs - routine efforts / testing - marketing research
Intangible assets amortization
Are amortized over the lesser of remaining useful economic life or legal life
Held to maturity impairment
loss is recorded when amortized cost exceeds present value of principle and interest expected to be collected
Most advantageous market
market with the best price for the asset or liability after considering transaction costs
Fair Value Option F4
may choose to record assets and liabilities at fair value excludes: investments in subsidiaries, pension benefit plans, leases, deposit liabilities
Accounts Receivable Turnover Ratio
net credit sales/average net accounts receivable
Comprehensive Income
net income + other comprehensive income Excludes owner transactions!
Return on Assets (ROA)
net income/average total assets
Asset Turnover Ratio
net sales/average total assets
Nonmonetary Transactions - Lacking Commercial Substance (Gains)
no cash received - no gain less than 25% paid in cash - no gain recognized less than 25% received in cash - book some gain more than 25% paid or received in cash - both sides book gain / loss
Restoration of impairment
not permitted, unless asset it held for disposal (never possible for goodwill)
what depreciation method disregards salvage value
only double declining depreciation disregards salvage value
debt securities reported at fair value
only trading securities and available for sale
OCI into AOCI
other comprehensive income becomes accumulated other comprehensive income and is presented on the balance sheet --> must be its own line item (can't be on both - reconcile!)
Relevance of financial information
predictive value confirmatory value materiality
Total Debt Ratio
total liabilities/total assets
Debt to Equity Ratio
total liabilities/total equity
Goodwill calculation
FV of subsidiary - FV of subsidiary assets
Non controllable interest (NCI) calculation
FV of subsidiary - acquisition cost
Equity Securities
Fair Value Through Net Income (FVTNI) Method (TS rules) CF from operations reported at FV all G/L on Income statement
Discontinued Operations consist of
Impairment loss G/L from actual operations G/L on disposal (disposals must have major economic shift in financials)
Filing Deadline for Form 10-K
Large accel= 60 (>700m equity) accel= 45. (>75m equity) everyone else= 90 (<75m equity)
Filing Deadline for Form 10-Q
Large accelerated: 40 days Accelerated: 40 days All others: 45 days
Hierarchy of valuation inputs
Level 1: identical assets / liabilities in active markets Level 2: similar assets / liab. in active markets OR identical assets / liab. in inactive markets Level 3: unobservable inputs, mgmt assumptions
consignment
asking a third party to sell your products inventory stays on books of consignor revenue is recognized when consignee sells the goods
Lack Commercial Substance
cash flows and economic positions do not change
what is a change in estimate
changes in lives of fixed assets write downs of obsolete inventory adjustment of year end accruals
Enhancing Qualitative Characteristics of financial information
comparability verifiability timeliness understandability
faithful presentation of financial information
complete neutral free from error
Inventory Turnover Ratio
cost of goods sold/average inventory
full set of financial statements
-Statement of Financial Position (the balance sheet) -Statement of Earnings (the income statement) -Statement of Comprehensive Income -Statement of Cash Flows -Statement of Changes in Owners' Equity
Impairment test; assets with indefinite lives
1 step difference between BV and FV (DCF) is loss
Completion over time method
1. Anticipated G.P 2. Costs incurred to date / Total estimated expenses --> Take percentage * G.P. take into account how much has been recorded last year and subtract that G.P.
Lower of cost or NRV
1. Find NRV 2. Take lower of NRV or cost
Lower of Cost or Market
1. Find Replacement cost 2. Find Market Ceiling (NRV) 3. Find Market Floor (NRV-Profit) Find middle of those 3 and compare to cost - take the lower of the 2
Impairment test; assets with finite lives
2 steps Recoverability test: if BV exceeds FV (undiscounted CF), loss exists difference between BV and FV (DCF) is the loss
Audit Requirements
3 years of income statement, changes in owner equity, cash flows 2 years of balance sheets
Trading Securities
CF from operations reported at FV all G/L on Income statement
Internally created intangible assets (marketing / sales expenses)
Cannot be capitalized. must be expensed as incurred
Converting Cash Basis Revenue to Accrual Basis Revenue
Cash Basis Revenue + Ending A/R - Beginning A/R - Ending unearned rev. + Beginning unearned rev. Accrual Basis Revenue
Dividend payout ratio
Cash Dividends/Net Income
Operating Cash Flow Ratio
Cash Flows from Operating Activities / Current Liabilities
Converting Cash Paid for Operating Expenses to Accrual Basis Operating Expenses
Cash Paid for operating exp. + Ending Accrued liabilities - Beginning Accrued Liabilities - Ending Prepaid Expenses + Beginning Prepaid Expenses = Accrual Basis Operating Expenses
Available for sale debt securities
Cash flow from investments reported at FV realized G/L on income statement unrealized G/L in equity - OCI
Held to maturity debt securities
Cash flow from investments reported at amortized cost (not FV, distracter!) no unrealized G/L
Converting Cash Paid for Purchases to COGS
Cash paid for purchases + Ending AP - Beginning AP - Ending Inventory + Beginning Inventory = COGS
Dividend Received - Fair Value Method
Considered income, does not affect investment account
Consolidation - Equity
Consists of parent Equity + NCI (if existing)
Accounts Payable Turnover Ratio
Cost of Goods Sold / Average Accounts Payable
Right to repurchase
Credit financial liability (not revenue) for as long as repurchase option exists Must increase financial liability and interest expense during the year (difference between sell price and repurchase price) if option lapses, get rid of liability, credit revenue
Dividend Received - Equity Method
Decreases investment Account, does not affect investment income account or dividend revenue
Financial Instrument Disclosure
Disclose both BV and FV Disclose Concentration and Credit Risk in notes to Financial Statements Disclosure of market risk is not required
times interest earned ratio
EBIT/Interest expense
Return on Sales
EBIT/Sales
Days Payable Outstanding Ratio
Ending Accounts Payable / (COGS / 365)
Days in Inventory Ratio
Ending Inventory / (COGS/365)
Days Sales in Accounts Receivable Ratio
Ending accounts receivable (net) / (Sales (net) / 365)
Non-financial assets, highest and best use
FV is determined based on highest and best use highest and best use in N/A for financial assets and liabilities
Return on Equity (ROE)
Net Income/Average Total Equity
DuPont Return on Assets
Net Profit Margin x Total Asset Turnover
subsequent events
Occurs after the fiscal year-end but before the statements are issued.
Ordinary Repairs - Depreciation
Ordinary repairs and maintenance are not depreciated, but expensed at time Including painting halls, replacing windows etc.
other comprehensive income consists of:
PUFI -pension adjustments: G/L from benefit pension plans -unrealized G/L from available for sale debt securities and hedges -foreign currency items -insturment specific credit risk
Principal vs. Agent
Principal: revenue = sales price paid by customer, COGS = cost of item to company Agent: records as revenue only the commission it receives on the transaction (which is rev - exp), marks COGS as 0
changes in accounting estimates; affect F/S
Prospective
capitalization of R&D costs
R&D costs are always expensed as incurred, unless: 1. the assets have alternative future uses (definitely, not likely) 2. or R&D was conducted on behalf of others 3. technological feasibility has been achieved
Liquidating Dividends
Reduce amount of investment account for both Fair Value and Equity Method
Qualitative Characteristics of useful financial information
Relevance Faithful Presentation
Form 8-K
The "special events report" filed with the SEC whenever certain significant corporate events such as changes in control, legal proceedings, and changes of auditor occur.
Equity Multiplier
Total Assets/Total Equity
FIFO perpetual vs. periodic
Will always result in the same ending inventory and COGS all other inventory methods result in different ending inventories when comparing perpetual & periodic
capitalization of start up costs
all start up costs are to be expensed as incurred
Compute COGS
beginning inventory + purchases - ending inventory
Cash Conversion Cycle
days sales in AR + days in inventory - days of payables outstanding
declining balance depreciation method
declining rate (1.5 or 2) over useful life --> gives % multiply % by yearly NBV to get annual AD
remaining footnotes include
discontinued operations., related party transactions, material information disclose concentration risk
Bill-and-Hold Arrangements
entity bills a customer for a product but the entity retains physical possession of the product until a point in time in the future. buyer is not yet ready to take delivery but does take title and accepts billing. product must be ready for delivery and seller cannot use product
Form 20-F and 40-F
filed annually by foreign private issuers Form 40-F is filed by specific Canadian companies registered with SEC Form 20-F is filed by other non US registrants
Form 6-K
filed semi-annually by foreign private issuers; similar to 10-Q
commercial substance
future cash flows and economic positions change as a result of the transaction gains and losses are always recorded
Recognized Subsequent Events
if condition existed at BS date and additional information is given after BS date, make a journal entry + disclose
Net income consists of:
income from continuing operations discontinued operations
perpetual inventory system
inventory count is updated with each purchase / sale of inventory --> actual COGS is determined as sale occurs when this count is compared to physical count, inventory shortages can be identified
successful legal defense of intangible assets
is capitalized if it was not successful, we expense it
evaluate subsequent events through
issuance date (public companies) date they are available to be issued (private companies)
Nonrecognized Subsequent Events
provide information about conditions that occurred after the balance sheet date and did not exist on the balance sheet date -> disclose
Summary of Significant Accounting Policies
provides the entity's portfolio of GAAP methods used in preparing its financial statements (depreciation method, inventory pricing) does not include details, balances
periodic inventory system
quantity of inventory is only determined by physical count, at least annually costs of inventory sold and and inventory shortages cannot be easily distinguished
Reconciliation: Sales sub ledger to general ledger
reconciliation process should be done monthly subledger has all details, general ledger has one big number, the details must add up to general ledger #
Correction of Errors
record as an adjustment to beginning retained earnings if period is not presented otherwise just correct affected year
Discontinued Operations are reported:
reported separately from continuing operations in the income statement, net of tax
changes in accounting entity; affect F/S
retrospective
changes in accounting principle; affect F/S
retrospective net of tax adjustment in year change was made
Fair Value
the amount that a business could sell an asset for, or the amount that a business could pay to settle a liability does not include transaction cost, but may include transportation
Form 10-K
the annual report that publicly traded companies must file with the SEC
Principle market
the market with the greatest volume or level of activity for the asset or liability
Form 10Q
the quarterly report that publicly traded companies must file with the SEC - unaudited