FAR REVIEW NEW-
Without Recourse
-The factor assumes the risk of loss if the account is uncollectible. -Means the sale is final and if the buyer unable to collect all of the accounts receivable , it has no recourse against the seller.
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 - means that the factor has an option to re-sell any uncollectible receivable back to the seller
1. settlement of litigation 2. Non-recognized subsequent event
2 Category of subsequent events
- Percentage of accounts receivable at year-end - Aging of accounts receivable at year-end
2 methods for estimating uncollectible accounts
Direct method and allowance method
2 methods of accounting for the write-off of uncollectible accounts
-neutrality -Completeness -Freedom from error
3 elements of faithful presentation
-Predict value -Confirming value -materiality value
3 elements of relevance
-Change in a accounting principle -Change in accounting estimate -Change in accounting entity
3 types of accounting changes
consignment arrangement exist when a dealer/distributor is tasked by entity with selling entity products to customers. Indicators - entity controls the product until a specified event occurs (sales to customer) -the dealer/distributor does not have unconditional obligation - the entity has authorization to require the return of the product or transfer the product to another party.
Define consignment arrangement? and indicators
Working capital= Currentasset- current liabilities
Define working capital
-The Price for Bearing Uncertainty. -Expectations about Timing Variations of Future Cash Flows. -Other Factors (e.g., Liquidity Issues and Market Imperfections). -Time Value of Money (the Risk-free Rate of Interest). -Estimate of Future Cash Flow.
Defined SFAC#7 ( FASB statement of Financial Accounting Concept #7
-Revenue- reported revenue including both sales of external and intersegment sales or transfers is 10% or more of combined revenue. - Reported Profit and Loss- the absolute amount of its reported profit and loss is 10% or more greater . - Asset- asset are 10% or more of the combined assets of all operating segment
Describe the 10% test for identifying reportable segments
-tax affect 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 adjustment between other comprehensive income and net income
Disclosure requirements for Comprehensive Income
- A principal has control over goods/service prior to transfer, and revenue equal to expected gross consideration will be recognized. - An agent does not have control, and revenue equal to agents fess/commission will be recognized.
How do control and revenue recognition differ when an entity acts as a principal versus when it acts an agent?
A gain is recognized for the subsequent increase in fair value minus cost to sell (but not in excess of the previously recognized cumulative loss). the gain is reported in the period of increase
How do we account for subsequent increase in the fair value of discontinued component?
Prospectively
How is a change in accounting estimate reported?
-Cumulative effect of change is include in the retained earnings statement as an adjustment of the beginning retained earnings balance of the earlies year presented. - prior period financial statement are restated, if presented.
How is a change in accounting principle reported?
-Pension adjustment -Unrealized gains and losses on available-for sale debt securities -Foreign currency translation adjustment and gains/ losses on foreign currency transaction that are designated as economic hedges of a net investment in foreign entity. -instrument -Specific credit Risk for liabilities (using FV) and their changes in FV -Effective portions of cash flow hedges
Identify 5 items included in OCI
- Measurement bases used in preparing the financial statements -Specific accounting principle and method used.
Identify the significant accounting policy note to the financial statements.
Comprehensive Income Revenues Expenses Gains Losses Asset Liabilities Equity (of net asset) Investment by Owners Distribution to Owners
List 10 elements of finacial statement according to SFAC No.6
Relevance and Faithful presentation
Name the fundamental qualitative characteristic of useful financial information.
FASB
Name the single source of authoritative nongovernmental US GAAP
The holder remains contingently liable.
Notes receivable may be discounted "with" " recourse.
The holder assumes no further liability after discounting
Notes receivable may be discounted "without" " recourse.
b. accrued liabilities-understated, RE-NO affect Since the unrecorded liability affects work-in-process inventory (rather than cost of sales/retained earnings), there is no effect on retained earnings, but accrued liabilities (and inventory) are understated
On Dec.31, special insurance cost, incurred but unpaid, were not recorded. If these insurance cost were related to work-in-process, what is the effect of the omission on accrued liabilities and retained earnings in the Dec 31 balance sheet? a. accrued liabilities-NO affect, RE-Overstated b. accrued liabilities-understated, RE-NO affect c. accrued liabilities-understated, RE-Overstated d. accrued liabilities-NO affect, RE-NO affect
- 10 % size test -75% reporting sufficiency test
Two quantitative threshold used in identifying reportable operating segments.
- Percentage-of-completion -Completed-contract
Two revenue recognition method
All current and prior period financial statements presented are restated.
Under US GAAP , how is change in accounting entity reported?
Cost approach
Used current replacement cost to measure the fair value of assets.
Market approach
Uses prices and other relevant information from market transactions involving identical or comparable assets or liabilities to measure fair value
-Nature of Operations -Use of estimates in preparing the financial statements - significant estimates -Current vulnerability due to certain concentrations
What are US GAAP disclosure requirements for Risk and Uncertainties?
- Identify factors -product and services -profit and loss - Assets details -measurement criteria -reconciliations
What are disclosure requirements for reportable operating segments?
1. Adjusting JE must be recorded by the end of entity;s fiscal year, before the preparation of FS 2. AJE never involved the cash account 3. All AJE will hit one income statement account and one balance sheet account.
What are the 3 rules for recording adjusting journal entries?
-Combined external (consolidated) revenue of all reportable segment must be at least 75% of the total consolidated revenue of the entity. -Practical limit is 10 segments, but is not precise limit
What are the 75% test for identifying reportable segments?
- The nature of the products and services - The nature of the production and process -the type or class of customer for the products services - the methods used to distributed the products or provided service
What are the characteristic of an operating segment?
- Level 1 Input - Level 2 input - level 3 input - Level 1 input have the highest priority
What are the hierarch of fair value inputs. What inputs have the highest priority?
-Changes where it is impracticable to estimate the cumulative effect adjustment e.g a change to LIFO from another method of inventory pricing under US GAAP or a change in depreciation methods. - Such exceptions are accounted for prospectively, like a change in accounting estimates.
What are the special exemptions to the general rule for the reporting of changes in accounting principle? How are these exception reported?
1. Recognized subsequent event- Provide additional information about conditions that existed at the balance sheet 2. Non-recognized subsequent events- Provide information about conditions that occurred after the balance sheet date and did not exist on the balance sheet date.
What are the two categories of subsequent events?
- market approach - income approach -cost approach
What are the valuation techniques can be used to measure fair value of an asset or liability?
- The promise to transfer goods/ services is separately identifiable from goods or services in the contract. - The customer can be benefit from the goods / services independently or when combined with customer own available resiurces.
What criteria must be met in order for a performance obligation be considered distinct?
DR: Deferred Revenue XXX CR: Revenue XXX
What is JE to record the earning of deferred revenue?
- Financial Accounting Foundation (FAF) created Private Company Council (PCC) to improve standard setting for privately held companies in the US.
What is Private Company Council?
-An event or transaction that occurs after the balance sheet date but before the financial statements are issued or are available to be issued.
What is subsequent events ?
distinguishes current and non-current asset and liabilities
What meant by classified balance sheet?
When sold to a third party by consignee
When does the title to goods pass for Consignment goods?
When received by buyer
When does the title to goods pass for FOB Destination?
When given to common carrier
When does the title to goods pass for FOB Shipping point?
a. capitalizing inventory
Which of the following common modification used to prepare modified cash basis financial statements? a. capitalizing inventory b. matching expenses to related revenues c. recognizing revenues when earned d. recognizing expenses based on the methods and principles used to prepare the tax return
c. risk tolerance of management
Which of the following is not defined in FASB statements of financial accounting concept #7 as one of the five elements of present value (or economic value) measurement used to established the value of assets or liabilities using cash flow information? a. timing variations of future cash flow b. time value of money c. risk tolerance of management d. estimate of future cash flow
d. Form 6-k Form 6-K is filed semiannually by foreign private issuers and contains unaudited financial statements. Form 10-Q, which is filed quarterly by U.S. registered companies, also contains unaudited financial statements.
Which of the following is not required to include audited financial statements? a. Form 10-K b. Form 20-F c. Form 40-F d. Form 6-k
c. Form 10-Q Form 10-Q is the quarterly report filed by U.S. registered companies that contains unaudited financial statements prepared using U.S. GAAP, interim period MD&A, and certain disclosures.
Which of the following reports would a company file to meet the US securities and exchange commissions requirements for unaudited, interim financial statements reviewed by an independent accountant? a. Form 10-K b. 14Aproxy statement c. Form 10-Q d. Form S-1
d. Benefits are received by the buyer as the seller performs.
Which of the following situation would require that seller recognized revenue overtime rather than point in time ? a. The buyer has legal title to the asset b. Rewards and risk of ownership remain with seller c. physical possession of the asset has transferred to the buyer d. benefits are received by the buyer as the seller performs.
Creditors, lenders and investors
Who are the primary user of general purpose financial reports?
Sales /Average working capital Average working capital = ( yr-1 Current asset - Current liabilities) + (Yr.2 Current asset-current liabilities)/2
Working capital turn over is calculated as
Multi-Step Income Statement
_________ income statement reports operating revenues and expenses separately from non operating revenues and expenses and other gains and losses.
D. Statement of financial position
accumulated OIC is reported in which of the following financial statement? a. the income statement b. the statement of comprehensive income c. the statement of cash flow d. the statement of financial position
-Includes both currency and demand deposit with banks and/ or other financial institution. - includes short-term, highly liquid investment that are both readily convertible to cash and so near their maturity when acquired by the entity (90 days or less from the purchase date)that they represent insignificant risk of change in value
cash an cash equivalents
total cost to date/total estimated cost of contract X total estimated gross profit- Gross profit recognized to date
formula for recognizing the gain/loss on long-term construction type contracts the percentage-of-completion method.
-Comparability -Verifiability -timeless - understability
name the enhancing qualitative characteristic of financial position
a. capitalized and amortized
new process costing software - this software will need to be replace in 5-years a. capitalized and amortized b capitalized and depreciatenew process costing software - this software will need to be replace in 5-years a. capitalized and amortized b capitalized and depreciate
Level 1 Inputs
quoted prices in active markets for identical assets
level 3 inputs
unobservable inputs for the asset or liability; reflect the reporting entity's assumptions and should be based on the best available information
- There must be a substantive reason for arrangement -Product is separately identified as belonging to the customer - The product is ready for transfer to the customer -the entity )seller) cannot use the product or direct it to another customer
what criteria must be met in order for a customer to obtain control in a bill-and-hold arrangement?
Reported as prior period adjustments to retained earnings and all comparative financial statement presented are restated .
How are error of correction reported?
Current ratio= current asset/current liabilities
Current ratio computation
Allowance method
DR: Allowance for uncollectible accounts CR: Account Receivable Strength: Matched bad debt with credit sales. Account receivable fairly stated. REQUIRED GAAP
Direct Method
DR: Bad debt Expense CR: Accounts Receivable Weaknesses: Bad Debt are not match to sales, and accounts receivable are overstated. NOT GAAP
Change in equity (net asset) that result from transactions and other events and circumstances from nonowner sources.
Define comprehensive income?
Income Approach
Converts future amounts, including cash flows or earnings, to a single discounted amount to measure the fair value of assets or liabilities.
c. Exclude operating losses from the date the decision to dispose of the segment was made until the end of the year1. Ace's loss on discontinued operations should not exclude operating losses from the date the decision to dispose of the segment was made until the end of Year 1. All Year 1 operating losses should be included.
A segment of Ace inc. was discontinued during year1. Aces loss from discontinued operations should not: a. Include operating losses of the current period up to the date the decision to dispose of the segment was made b. include additional pensions cost associated with the decision to dispose. c. Exclude operating losses from the date the decision to dispose of the segment was made until the end of the year1. d. include employee relocation cost associated with the decision to dispose
b. replacement cost
According to FASB conceptual framework, certain assets are reported in financial statement 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? a. historical cost b. replacement cost d. net realizable value c. current market value
Statement of Position (balance sheet) Statement of Earnings (IS) Statement of Comprehensive Income Statement of Cash flow Statement of Changes in ownership Equity
According to SFAC No.5, what should a full set of financial position?
Provide for: DR: Bad debt Expense CR: Allowance for uncollectible accounts Write off: DR: Allowance for uncollectible accounts CR: Accounts receivable
Allowance method Journal entries to provide for and to write off an uncollectible
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.
At the present value (PV) of all payments required by the note . The payments should be discounted at the Market interest rate.
At what value should non-interest bearing promissory note be recorded?
Average working capital = ( yr-1 Current asset - Current liabilities) + (Yr.2 Current asset-current liabilities)/2
Average working capital calculated as
c. Retrospective adjustment on the retained earnings statement, with separate disclosure. A change in the composition of the elements of cost such as changing from the individual item approach to the aggregate approach in applying the lower of FIFO cost or market to inventories (LCM is covered in F4) is an example of a change in accounting principle. The cumulative effect of the change in accounting principle should now be shown on the retained earnings statement as an adjustment to the beginning balance of retained earnings, in what is called retrospective application.
Brigghton Co. Change from the individual item approach to the aggregate approach in applying the lower of FIFO cost or market to inventories. The cumulative effect of this change should be reported in Brightons financial statement as a: a. component of income after continuing operations, with separate disclosure b. component of income from continuing operations, with separate disclosure c. Retrospective adjustment on the retained earnings statement, with separate disclosure. d. Component of income from continuing operations, without separate disclosure
a. Yr. $(600,000) Yr.4 $850,000 The Year 3 operating losses would be reported in the Year 3 income statement. The Year 4 operating losses and the gain on disposal would be netted and reported in the Year 4 income statement. Each amount would be reported in the period it occurred.
During Jan. Yr.3 Doe Corp. agreed to sell the asset and product line of its Hart division. The decision represent a major strategic shift for Doe and will have a significant affect on its operations and financial result. The sale was completed on Jan. 15, yr.4 and resulted in a gain of disposal of $900,000. Harts operating losses were $(600,000) for year 3 and $50,000 for the period Jan.1 through 15, yr.4. Disregarding income taxes, what amount of net gain (loss) should be reported in Does comparative year 4 and year 3 income statement? a. Yr. $(600,000) Yr.4 $850,000 b.Yr. $(650,000) Yr.4 $900,000 c. Yr. $(250,000) Yr.4 0 d. Yr. 0 Yr.4 $250,000
a. the discount rate farmer Joe use in determining the discounted cash flow value of his corn inventory. A Level 3 input is an unobservable input which reflects the reporting entity's assumptions. An assumed discount rate would be considered a Level 3 input.
Farmer Joe is trying to determine the fair value of his corn inventory. Which of the following would be considered a level 3 input in this process? a. the discount rate farmer Joe use in determining the discounted cash flow value of his corn inventory. b. A quoted price for a bushel of corn at the Delaware exchange (an exchange to which farmer has access but which rarely buy corn)
Form 10-K
Filed annually by US registered companies. Includes a summary of financial data, MD&A, and audited financial statements prepared using US GAAP.
Form 10-Q Quarterly Report
Filed quarterly by US registered companies. Includes unaudited financial statements, Interim MD&A, and certain disclosures
Immediately when discovered, regardless of the method used for revenue recognition.
For long term construction type contract, when are losses recognized?
b. $262,500 When a company decides to sell a component or division of the business that qualifies for discontinued operations treatment, all impacts to net income are reported as discontinued operations. This includes total revenues and expenses from operations for the year, as well as the gain or loss resulting from the sale of the division. In this case, the company adds the Year 5 operating loss of $240,000 and the loss from disposal of $135,000 for a pretax total loss of $375,000. Discontinued operations are reported net of tax, resulting in a total net of tax loss of $262,500 [$375,000 × (1 ‒ 30%)].
For the eight months ended Aug.31 year 5, the carpet division of a flooring company, which is considered a major line of business, had an operating loss of $115,000 from operations. On Sept. 1, year 5, the board of directors voted to discontinued the division operations. On Dec.31, Year 5, the division was sold for a pretax loss of $135,000. The division operating loss for year 5 was $240,000. The company income tax rate is 30% . what amount should be the loss should the company report as discontinued operations in Dec. 31, year 5, income statement? a. $260,000 b. $262,500 c. $182,000 d. $168,000
b. I and II For entities that do not file financial statements with the Securities and Exchange Commission, the subsequent event evaluation period runs through the date the financial statements are available to be issued, and that date is defined as the date when the financial statements are in a form and format that comply with GAAP and by which all approvals for issuance have been obtained. It is not necessary that the financial statements have actually been issued.
For the purpose of determining the period over which subsequent events must be evaluated, financial statements are considered to be "available to be issued: when: I. The financial statements are in a form and format that comply with GAAP. II. All approvals necessary for the issuance of the financial statements have been received III. The financial statement have been widely distributed to financial statement users. a. I only b. I and II c. II only d. I,II and III
- Operating segments - products and services -geographic areas -major customers
Four required disclosure for segment of an enterprise
c. current ratio - no affect Quick ratio- Decrease The current ratio is computed as current assets divided by current liabilities. Cash and inventory are both current assets. Using cash to buy inventory does not affect total current assets, nor does it affect total current liabilities. Thus, the current ratio is not affected by the use of cash to buy inventory. The quick ratio is computed as [cash + cash equivalents + marketable securities + net receivables] divided by current liabilities. Using cash to buy inventory would reduce the numerator (because cash is included in the numerator but inventory is not) and would not affect the denominator. Since the numerator is decreasing but the denominator is not affected, the quick ratio would decrease. Thus, using $100 of cash to buy $100 of inventory would not affect the current ratio but would decrease the quick ratio.
If at end of year 2, Hutton used $100 of cash to buy $100 of inventory , what would be the effect on the following ratios (relative to the ratios computed based on the balances currently shown on Hutton's Inc. financial statement) a. current ratio - decrease Quick ratio- Decrease b. current ratio - increase Quick ratio- no affect c. current ratio - no affect Quick ratio- Decrease d. current ratio - no affect Quick ratio- no affect
b. $76,000 Interest expense is reported on a cash basis in the Statement of Cash Flows, and on the accrual basis in the Income Statement. Convert from cash basis to accrual basis: Cash basis interest expense 70,000+23,000=93,000 93,000-17,000=76,000 Accrual basis interest expense The decrease in prepaid interest is added when calculating accrual basis interest expense because a decrease in prepaid interest DR: increases interest expense: CR: Prepaid interest The decrease in interest payable is subtracted when calculating accrual basis interest expense because a decrease in interest payable implies that cash interest payments exceeded accrual basis interest expense.
In its cash flow statement for the current year, Ness Co. reported cash paid for interest of $70,000. Ness did not capitalized any interest during the current year. Decrease occured in several balnce sheet accounts as follow: Accrued interest payable $17,000 Prepaid Interest $23,000 In its income statement for the current year, what amount should Ness report as interest expenses? a. $110,000 b. $76,000 c.$30,000 $64,000
single-step income statement
Income statements presentation of income from continuing operations, total expenses are subtracted from total revenues without separation between operating and nonoperating revenues and expense.
level 2 inputs
Inputs other than quoted market prices that are directly or indirectly observable for an asset or liability
COGS/ average inventory
Inventory turn over calculated as
Fair Value
Is the exit price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants in the principal (or most advantageous) market at the measurement date.
a. as an adjustment to the beginning year 2 inventory balance with an offsetting adjustment to beginning year 2 retained earnings. -If comparative financial statement are p[resented, the cumulative effect of change in accounting principle is presented net of tax as an adjustment to beginning retained earnings in the statement of stockholders equity.
On January 1, Year 3, a company changed its inventory costing method from LIFO to FIFO. The company's year 3 financial statements contain comparative information for year 2. How should the company present the year 1 effect of the change in accounting principle in its year 3 comparative financial statements? a. as an adjustment to the beginning year 2 inventory balance with an offsetting adjustment to beginning year 2 retained earnings. b. as an extraordinary item in the year 2 income statement c. as note disclosure only d. as part of income from continuing operations in the year 2 income statement.
d. $95,000 For interim reporting purposes, costs that benefit multiple periods should be allocated equally to those periods. The $60,000 in property taxes will benefit the entire calendar year and therefore must be allocated equally to each calendar quarter: $60,000 / 4 quarters = $15,000 per quarter The $240,000 in equipment repairs will benefit the company from April - December and therefore should be allocated equally to each the three quarters contained in that period: $240,000 / 3 quarters = $80,000 per quarter Therefore, the total of these expenses to be recognized in the quarter ended September 30 is $95,000 ($15,000 allocated property taxes + $80,000 allocated equipment repairs).
On January 16, Tree Co. paid $60,000 in property taxes on its factory FOR THE CURRENT YEAR. On April 2, Tree paid $240,000 for unanticipated major repairs to its factory equipment. The repairs will be benefited operations for remainder of the calendar year. What amount of these expenses should Tree include in its third quarter interim financial statements for three months ended september 30? a. $15,000 b. $75,000 c.$0 d. $95,000
Quick ratio=cash and cash equivalents + ST marketable securities + receivable (net)/ current liabilities
Quick ratio computation
Defined as the amount of cash or its equivalents that would be paid to acquire or replace an asset currently. Replacement cost is acquisition cost.
Replacement cost
a.$84,000 Under accrual accounting, the $10,000 increase in accounts receivable coincides with a $10,000 increase in revenue. If the company had used the cash basis, this revenue would not have affected the income statement until the company was actually paid. So in converting from accrual to cash basis accounting, this $10,000 would be removed. Under accrual accounting, the $6,000 decrease in accounts payable will coincide with a $6,000 cash payment. If the company had used the cash basis, this cash payment would hit the income statement as an expense in the period in which it was paid (which would be this period). So in converting from accrual to cash basis accounting, this $6,000 would be treated as an expense. $100,000 [accrual-basis income] - $10,000 [not revenue under the cash basis] - $6,000 [expense under the cash basis] = $84,000 [cash-basis income].
Savor Co. Had $100,000 iun accural basis pretax income for the year. At year end, accounts receivable had increased by $10,000 and accounts payable had decreased by $6,000 from their prior year-end balances . Under the cash basis of accounting , what amount of pretax income should Savor report of the year? a.$84,000 b.$96,000 c.$104,000 d.$116,000
a. total cost incurred to date to total estimated cost total cost to date/total estimated cost of contract
The calculation of the income recognized in the third year of a five-year construction contract accounted for using the percentage-of-completion method includes the ratio of: a. total cost incurred to date to total estimated cost b. cost incurred in year 3 total estimated costs. c. total cost incurred to date to total billings d. costs incurred in year.3 to total billings
c. as a component of income from continuing operations, in the period of change and future periods if the change affect both. A change in accounting principle that is inseparable from a change in accounting estimates should now be reported as a change in estimate and thus as a component of income from continuing operations, in the period of change and future periods if the change effect both.
The effect of a change in accounting principle that is inseparable from the effect of a change in accounting estimate should be reported: a. as a correction of an error b. as a separate disclosure after income from continuing operations, in the period of change and future periods if the change affect both. c. as a component of income from continuing operations, in the period of change and future periods if the change affect both. d. by restating the financial statement of all prior periods presented
-an impairment loss - gain/(loss) from actual operations -gain/(loss) on disposal
The gain (loss) from discontinued operations can consist of
