Recon: Conceptual Framework: General Purpose FS - For Profit
Permitted treatment for accounting errors*** is_____
"retroactive restatement" of the prior period amount. An entity should correct material prior period errors retrospectively in the first set of financial statements authorized for issue after the discovery. >>note this is NOT an adjustment to beginning retained earnings, but a correction of the prior period account that was misstated.
For unusual or infrequent Items, there are two options for reporting:
1)Income Statement (above Income from Continuing Operations) 2)Footnotes to Financial Statements Unusual or infrequent Items get Retrospective OR Prospective treatment in the financial statements.
Cost of goods sold (COGS)
= Beginning inventory + Cost of goods purchased + Direct manufacturing cost - Ending inventory.
Discontinued Operations
>.Discontinued operations refers to the operations of a component of an entity that has been disposed of or is still operating, but is the subject of a formal plan for disposal. >> A component of an entity is a segment, reporting unit, or asset group (not a part of a line of business) whose operations and cash flows are clearly distinguished from the rest of the entity, operationally as well as for financial reporting purposes.
How to report equity securities that have a readily determinable fair value ?
>>Equity Securities are NOT Debt Securities - Equity securities -> FVTNI As per ASC 321, any equity securities that have a readily determinable fair value should be valued at their fair value on the balance sheet date and any changes in the fair value are reported in the statement of income (fair value through net income FVTNI).
Under IFRS 1, a first-time adopter must do which of the following?
>>In the year of transition to IFRS, an entity must present provide supplementary explanations necessary for understanding the transition to IFRS. >>IFRS 1 does not** require a first-time adopter to publish interim financial reports in advance of an entity's first IFRS financial statements.
How to calculate the weighted average number of common stock outstanding?
>>To calculate the weighted average number of common stock outstanding, shares sold to the public during the year must be prorated for the portion of the year they were outstanding as the funds received from issuance are only available for "productive use" by the corporation from that point on, not the entire year. Stock dividends, stock splits are retroactively adjusted, as though they have been outstanding and included at full amount for the current year, from the time of issue. >>Treasury stock REDUCES outstanding, again has to be prorated for the portion of the year they were repurchased.
A majority-owned subsidiary should not be consolidated if :
>control does not rest with the majority owner, for example, if the subsidiary is in legal reorganization** or in bankruptcy** or operates under foreign exchange restrictions***, controls, or other governmentally imposed uncertainties so severe that they cast significant doubt on the parent's ability to control the subsidiary. Consolidation of majority-owned subsidiaries is required even if they have "nonhomogeneous" operations, control is likely to be temporary (unless parent is a broker dealer), or there is a difference in fiscal periods.
A first time adopter of International Financial Reporting Standards (IFRS)
A first time adopter of International Financial Reporting Standards (IFRS) will need to apply IFRS 1, First time adoption of International Financial Reporting Standards. The overriding principle of IFRS 1 is full retrospective application of all IFRS standards. All the adjustments should be recognized directly in retained earnings, or, if appropriate in another category of equity.
dividend in arrears
A preferred stock dividend is in arrears if the dividend has not been paid for the year and the preferred stock is cumulative. >By definition, dividends in arrears have not yet been declared. Dividend income is a component of income from continuing operations.
What is a specific constraints** of F/S?
A specific constraint in terms of the usefulness of information in financial statements pertains to the cost-benefit relationship. In determining the kind and amount of information to be provided, the cost of obtaining the information must be considered. Information is valuable only to the extent that the cost of procuring and analyzing it is less than the benefits derived from its use. (cost < benefit)
substantial doubt about en entity's ability to continue as a going concern
A substantial doubt about en entity's ability to continue as a going concern is raised when certain conditions and events indicate that it is improbable for the entity to meet its obligations as they become due within 1 year after the date the financial statements are issued. Although the warehouse gets damaged by flood, it was insured. The entity is well protected against any financial adversity because of the insurance and, thus, this event is the least likely of all the given events to raise substantial doubts. Default on a loan agreement, Loss of a significant customer or supplier and Negative cash flows from operating activities are strong indicators of going concern doubt.
After tax net loss on sale of division
Account as: Loss - any Gain recognized from tax Benefit = Net Loss
Upon first-time adoption of IFRS, an entity may elect to use fair value as deemed cost for:
Assets carried at cost (e.g., property, plant, and equipment) may be carried at their fair value** at the "opening IFRS"*** balance sheet date. Fair value becomes the "deemed cost" going forward under the IFRS cost model.
GASB Concepts Statement No. 4's definition of assets
Assets must provide present service capacity and be controlled by the government.
How are amendments*** incorporated into the FASB Accounting Standards Codification?
By releasing an accounting standards update** >>The release of an Accounting Standards Update marks the incorporation of amendments into the FASB Accounting Standards Codification.
An entity's cash purchases and sales of investments considered as cash equivalents are generally part of the entity's __________ activities, and details of those transactions need not*** be reported in a statement of cash flows.
Cash management
What is "cash surrender value of life insurance"?
Cash surrender value is the amount an insurance company pays to the policyholder in the event the policy is surrendered before maturity. >>The portion of the premium that increases the cash value is accumulated as a non-current asset on the balance sheet and the rest of the premium is recognized as life insurance expense.
What is the purpose of reporting comprehensive income?
Changes of income from non-owner** sources
Comparability vs. Consistency
Comparability and consistency are related but not the same. >>Comparability enables users to identify and understand similarities in, and differences among, items. >>Consistency refers to the use of the same methods for the same items, either from period to period within an entity or in a single period across entities.
The nature of consolidated financial statements
Consolidated financial statements are prepared to present the financial position and operating results of the two separate organizations (i.e., parent company and subsidiary) as if only a single entity existed. Although the companies may legally be separate, the control of all decision making is now held by a single party, which indicates that only one economic entity exists. Reliability pertains to whether accounting information represents what it purports to represent, and is coupled with an assurance for the user that it involves the magnitude of an omission or misstatement of accounting information that, in light of the surrounding circumstances, makes it probable that the judgment of a reasonable person relying on the information would have been changed or influenced by the omission or misstatement.
Under both U.S. GAAP and IFRS, the primary basis of accounting for inventory is
Cost >Inventory is measured at cost. The cost of inventory includes all direct expenditures to ready inventory for sale, but excludes selling and storage costs. Inventory is carried at the lower of cost or market with any write-downs of inventory to the lower of cost or market creating a new cost basis; however, under IFRS, previously recognized impairment losses can be reversed, up to the amount of the original impairment loss, when the reasons for the impairment no longer exist.
What is a credit risk?
Credit risk is the possibility that a loss may occur from the failure of another party to perform according to the terms of a contract.
________________ is (are) an economic benefit(s)***owned by a firm that is (are) reasonably expected to be converted into cash or consumed during the entity's operating cycle or one year, whichever is longer.
Current assets
Current assets include:
Current assets are economic benefits owned by a firm that are reasonably expected to be converted into cash or consumed during the entity's operating cycle or one year, whichever is longer. Current assets include: cash available for current operations; temporary investments in marketable securities; trade accounts and notes receivable, receivables from officers, employees, affiliates, and other >>Exclude: deposits received from customer _. The deposits received from customers and unearned rent are liabilities.
Prepaid expenses
Current assets on FS
Non-current
DTA and DTL
How to record purchase discounts?
Deduct from COGS
Dividends declared by a subsie to a Parent
Dividends paid by the acquiree, to the acquirer must be completely eliminated in a consolidation of financial statements since an entity cannot pay dividends to itself.
Outstanding C/S
Exclude the presence of T/S (only account for T/S sold) T/S sold increase the APIC of C/S --> Stock sold/issued and stock splits**-> Increase in C/S outstanding
Which of the following is not included in the FASB Accounting Standards Codification?
FASB Statements of Financial Accounting Concepts
FASB Accounting Standards Codification includes
FASB Statements, Technical Bulletins, and Interpretations
The IASB Conceptual Framework addresses which of the following concepts of capital?
Financial and physical capital >Under a financial concept of capital, such as invested money or invested purchasing power, capital is synonymous with the net assets or equity of the entity** >Under a physical concept of capital, such as operating capability, capital is regarded as the productive capacity of the entity based on.**
Sale under a consolidated perspective
From a consolidated perspective, the sale to the affiliated company did not occur.
Gain on disposal of a business segment will be reported:
Gain on disposal of business segments will be reported as discontinued operations and foreign currency translation gains will be reported in other comprehensive income.
Which of the following is NOT *** within the scope of the GASB mission for standard-setting?
Goals and objectives of state and local governmental services
Goodwill in a business consolidation
Goodwill is the excess of the investment cost, plus the fair value of any noncontrolling interest, over the fair value of the identifiable net assets (INA) acquired.
Gross profit formula:
Gross Profit = Net sales - COGS
IFRS vs GAAP
IFRS has less prescriptive standard financial statement presentation layouts than US GAAP. Both US GAAP and IFRS require that the financial statements be prepared on the accrual basis** of accounting (with the exception of the cash flow statement) except for rare circumstances. Under IFRS, entities may present expenses based on either function or nature** while as under US GAAP, SEC registrants are required to present by function. IFRS prohibits the presentation of extraordinary** items in the income statement.
The Revised Uniform Partnership Act (RUPA) requires which of the following?
If no profit and loss sharing arrangement is specified in the partnership agreement, the RUPA requires that profits and losses be shared equally.
Discontinued Operation Rules
In case of discontinued operations once the plan is approved for disposal, the income or loss from operations from the beginning of the period to the date on which the decision was made is reported as a gain or loss from operations of a discontinued segment
How to report the machine's cost in the consolidated B/S?
In the consolidated balance sheet, the machine's cost must be based upon the original cost*** of the machine to the initial buyer*** Consolidated statements should not include gain or loss on transactions among the companies in the group. Any intercompany profit or loss on assets remaining within the group should be eliminated. Therefore, the carrying amount of the equipment should be reported at the cost of the equipment to the purchasing affiliate less the entire gain recorded by the selling affiliate.
period in which a component of an entity either has been disposed of or is classified as held for sale
In the period in which a component of an entity either has been disposed of or is classified as held for sale, the income statement of a business enterprise for current and prior periods shall report the results of operations of the component in discontinued operations in the period(s) in which they occur***. Estimated future operating losses are included in the income statement in the future, when they are incurred.***
Discontinued Loss Reported Periods
In the period in which a component of an entity either has been disposed of or is classified as held for sale, the income statement of a business enterprise for current and prior periods shall report the results of operations of the component in discontinued operations in the period(s) in which they occur.
Information is faithfully represented if
Information is faithfully represented if it represents what it purports to represent and is complete, neutral, and free from error.
AFS Securities measurement:
Investments in debt securities that are classified as available for sale (AFS) securities are valued at the fair market value (FMV) on the balance sheet date. If fair value option is not elected, their unrealized gain or loss is reported in the statement of comprehensive income.
According to GASB Concepts Statement No. 2, measures of service accomplishments focus on which of the following?
Measures of service accomplishments will focus on the outputs and outcomes. Measures of service efforts might include financial as well as nonfinancial information applied to a specific service. Measures that relate service efforts to service accomplishments may consider efficiency assessments or cost-outcome evaluations that report costs per unit of outcome or result.
According to the FASB's conceptual framework, asset valuation accounts are
Neither assets or liabilities ex: AFDA, Premium on B/P >>A separate item that reduces or increases the carrying amount of an asset is sometimes found in financial statements. For example, an estimate of uncollectible amounts reduces receivables to the amount expected to be collected, or a premium on a bond receivable increases the receivable to its cost or present value. Those 'valuation accounts' are part of the related asset or liability and do not stand on their own.***
In the single step income statement, the Total revenues =
Net sales + Other revenues & gains
As discussed in GASB Concepts Statement No. 3, note disclosures are considered essential*** for governmental financial reporting because of which of the following?
Notes add descriptions and detail that have a clear and demonstrable relationship to the financial statements*** -> Essential to the FS
liabilities that the partnership assumes are recorded at??
PV not BV!!
Under IFRS, which of the following items is considered investment property?
Part of a building held to earn rentals >>Under IFRS, investment property is separately defined as an asset held to earn rent or for capital appreciation (or both) and may include property held for lessees under a finance/operating lease. Part of a building held to earn rentals is considered investment property. Land or building held for use and land held for sale in the ordinary course of business would not be considered investment property. (k co land trong IFRS)
Predictive vs. conformity value
Predictive, or confirmatory, value is the trait that allows financial information to make a difference. Information has predictive value if it can be useful in predicting*** future outcomes*** by users. Confirmatory value provides feedback (confirms or changes) about previous assessments.
The GASB's primary goal** for the SEA Concepts Statements is which of the following?
Provide fundamental*** reporting characteristics to help preparers develop consistent reporting The SEA Concepts Statements are focused on a reporting framework***, not the specifics to include in a SEA report. The GASB hopes the SEA Concepts Statements and the Voluntary Reporting Guidelines will help preparers develop comparable reports that improve the usefulness of SEA reports. The GASB has not established specific reporting or measurement standards for SEA reports. Identification of the appropriate performance data is a management function, not a role for the GASB.
Relevance vs Faithful Representation
Relevance: 1)Predictive value 2)Confirmatory value 3)Materiality Faithful Representation: 1)Freedom from error 2)Neutrality 3)Completeness Enhanced if it is comparable, verifiable, timely, and understandable. Consistency assists in comparability.
Which of the following is a generally accepted accounting principle that illustrates the practice of conservatism*** during a particular reporting period?
Reporting inventory at the lower of cost or market value
Under GASB Concepts Statement No. 4, the common denominator for defining elements*** of financial statements is which of the following?
Resources (what kind is included in the F/S) Resources are the common denominator in these definitions in order to provide a structure for classifying the elements that support a government's service delivery to the citizenry. A resource is an item that can be used to provide those services. Assets are resources with present service capacity that the government presently controls. Liabilities are present obligations to sacrifice resources that the government has little or no discretion to avoid.
a significant issue for service efforts and accomplishments (SEA) reporting for governmental entities?
SEA reporting helps bring performance results information to citizens to help with their assessment, program selection, and implementation.
included in the FASB Accounting Standards Codification?
SEC
Minimum reporting requirement for a company that is preparing its first IFRS financial statements?
THREE statements of Financial Position >two statements of profit or loss and other comprehensive income >two separate statements of profit or loss (if presented), >two statements of cash flows, and >two statements of changes in equity and related notes. The Statement of Retained Earnings is only a US GAAP statement.
Which of the following consists primarily of national accounting standard-setters and regional bodies with an interest in financial reporting*** and are selected by the Trustees?
The Accounting Standards Advisory Forum
The FASB's due process for setting accounting standards*** includes which of the following procedures?
The FASB can seek information about accounting and reporting issues by holding public forums, usually based on an exposure draft.***
Accounting for insurance expense for a life insurance policy
The amount that a company should recognize as insurance expense for a life insurance policy that it owns is the annual premium less (1) the increase in cash surrender value and (2) any dividends received.
Advocate groups are part of one of three categories of primary users of government financial reports as identified by GASB Concept Statement No. 1:
The citizenry to which the government is accountable, Legislative and oversight bodies who represent the citizenry, and The investors and creditors who lend or participate in the lending process.
Under IFRS, what are the required classifications of the Statement of Financial Position?
The classified Statement of Financial Position only requires the classifications of current and non-current**. Asset and liabilities are both divided into these two classifications.
IFRS financial statements would be considered an entity's 'first IFRS financial statements' if The entity presented its most recent previous financial statements:
The entity presenting its most recent previous financial statements in accordance with national requirements, using some individual IFRS to account for items for which national requirements do not exist, is one of the criteria that would qualify an entity's financial statements as the entity's "first set" as defined by IFRS 1
When to recognize impairment loss?
The impairment loss should be recognized in the period in which a sale at a loss is arranged; such a sale is evidence that the asset is impaired.
investment in the nonvoting preferred stock
The investment in the nonvoting preferred stock*** must be accounted under the cost method because investor does not** have the ability to significantly influence the financial and operating policies of the investee by virtue of the preferred stock investment.
Land for held exception as current asset:
The land held for resale is reported as a current asset if sold for cash prior to the date the financial statements were issued.
What are the Statements of Financial Accounting Concepts*** intended to establish?
The objectives and concepts for use in developing standards of financial accounting and reporting.
What is the operating cycle?
The operating cycle of an enterprise is the average period of time between the expenditure of cash for goods and services and the date those goods and services are converted into cash. Thus, it is the average length of time from cash expenditure, to inventory, to sale, to accounts receivable, and back to cash. A one-year time*** period is to be used as a basis for the segregation of current assets in cases where there are several operating cycles occurring within a year
purchase of life insurance account:
The purchase of life insurance on an officer can be a form of investment when it builds up a cash value (cash surrender value). >Total insurance premium = Insurance Expense + Cash Surrender Valye
Which is a true statement related to the initial adoption of financial statements prepared under IFRS 1?
The starting point for IFRS 1 is a IFRS statement of financial position prepared at the date of transition to IFRS.
Cost of goods manufactured # Cost of Sales/COGS
Think of Cost of Goods "Manufactured" as "Purchases" and do the formula from there
Treasure stocks account effect:
Treasury stock is the corporation's common or preferred stock that has been reacquired by purchase, by settlement of an obligation to the corporation, or through donation. The cost method views the purchase and subsequent disposition of stock as one transaction. The treasury stock is recorded (debited), carried, and reissued at the acquisition cost. If the stock is reissued at a price in excess of the acquisition cost, such as in this situation, the excess is credited to an appropriately titled paid-in capital account. There are no gains or losses reported in the income statement for these transactions.
Not included in Net Income (I/S)
UNrealized holding gain for AFS debt securities is included in other comprehensive income, not the income statement. The PRIOR period adjustment is reported as an adjustment to the beginning balance of RI-retained earnings, net of their income tax effect, not in the income statement
How to report revaluation surplus
Under IFRS, revaluation is a permitted accounting policy if fair value can be reliably measured. If an item of PP&E is revalued, the entire class to which the asset belongs must also be revalued. Revaluation adjustments decreasing the carrying amount are recognized as loss. Revaluation adjustments increasing the carrying amount are recognized in other comprehensive income and accumulated in equity as "revaluation surplus." To the extent that the increase reverses a previous revaluation decrease, the increase should be recognized as profit
How to account for consolidated retained earnings under a business consolidation?
Under the acquisition method, consolidated retained earnings are comprised solely of the parent's*** R/E-retained earnings at the balance sheet date since the subsidiary's owners' equity accounts are eliminated in the process of consolidation.
Treasury Stock
When treasury stock is acquired, total stockholders' equity decreases by the cost of the treasury shares, regardless of the method used to account for the treasury stock.
Recognition vs Matching vs Realization vs Allocation
_Recognition (F/S) is the process of formally recording or incorporating an item in the financial statements of an entity. _Allocation is the accounting process of assigning or distributing an amount according to a plan or formula. _Matching (rev and exp) is the recognition of revenues and related expenses in the same accounting period. _Realization $$ is the process of converting noncash resources into money.
Investments
__________ are assets that are held for control, appreciation, regular income, or a combination of the these.
The IASB Conceptual Framework uses which basis of accounting for assessing the entity's past and future performance?
accrual standard
The starting point in IFRS 1 is when?
an opening IFRS statement of financial position prepared at the date of transition to IFRS. The date of transition to IFRS is defined as the beginning of the earliest period for which an entity presents full comparative information under IFRS in its first IFRS financial statements. For entities that present one year of comparative information in their financial reports, the date of transition is the first day of the comparative period.
The purpose of the IASB Conceptual Framework includes____
assisting, among others, the Board in the development of future IFRS, preparers of financial statements in applying IFRS, and auditors in forming an opinion on whether financial statements comply with IFRS.
Enhancing** qualitative characteristics include
comparability, verifiability, timeliness, and understandability. These characteristics enhance the usefulness of information that is relevant and faithfully represented.
Components of faithful representation are
complete, neutral, and free from error.
multiple-step IS format
emphasizes a functional or object classification of each statement item, and sets forth various intermediate levels of income.
Information is relevant if
it is capable of making a difference in a decision by helping users to form predictions about the outcomes of past, present, and future events or to confirm or correct prior expectations. __Components of relevance are predictive value, confirmatory value, or both.***
How to report the payment related to the licensing requirement ?
noncurrent asset
Loss on discontinued operations
part of CI (because it is a part of NI)
Fundamental** qualitative** characteristics of information
relevance and faithful representation
Gain on the involuntary conversion:
reported as a separate component of income from continuing operations.
The primary objective of financial reporting is to_____
satisfy the informational needs of users which include existing and potential investors, lenders and creditors so that they can use the information to make economic decisions.**** (whether to invest or not)
An entity is required to display the accumulated balance of other comprehensive income in where?
separately from retained earnings, capital stock, and additional paidin capital in the stockholders' equity section of a statement of financial position (balance sheet) --> AOCI is reported in Equity in BS
Concepts Statement No. 3 describes the importance of
the GASB's independence for establishing communication principles in the reporting standards to support governments' credibility** and enhance comparability** among external financial statements.
related party transactions disclosure
the dollar amount of purchases** during the year and the amounts due from or to the affiliate*** at the balance sheet date
If an entity recognized or reversed any impairment losses for the first time in preparing its opening IFRS statement of financial position________________
the entity is required to provide the disclosures that IFRS would have required if the entity had recognized those impairment losses or reversals in the period beginning with the date of transition to IFRS.
By definition, "realization" means
the process of converting a non-cash resource** or right into cash** --> Non-cash to cash $$$
How to account for unusual or infrequent Item:
there are two options for reporting: 1)Income Statement (above Income from Continuing Operations 2)Footnotes to Financial Statements
How to report discontinued operation revenue:
total revenues include results from discontinued operations which should be disclosed after income from continuing operations, net of taxes and cumulative change in income due to change in depreciation method which should be disclosed as part of non-operating income
Governmental financial reporting should provide information to assist users in which situation(s)?
used in making social and political decisions. Because interperiod equity is important, financial reporting should help users assess whether current-year revenues are sufficient to provide current services or whether future taxpayers are assuming the burden of previously provided services.
