Quiz 2 (FAR)

Depending on factors specific to the asset or liability, level 2 inputs may need to be adjusted when applied to the asset or liability for?

factors such as condition, location, and the level of activity in the relevant market

Special journals use what formatting?

flush left formatting for debits and indenting right for credits.

When a quoted price for the transfer of an identical or similar liability is not available, and the identical liability is held by another party as an asset, how should the liability be measured?

from the perspective of the party that hold the item as an asset

When a quoted price for the transfer of an identical or similar shareholders equity instrument is not available, and the identical liability is held by another party as an asset, how should the instrument be measured?

from the perspective of the party that holds the item as an asset

Financial Asset or Liability

has contractual cash flow (EX: Receivables and Bonds)

What are examples of other instances where practical expedient is allowed?

in the valuation of benefit plans or for private company's measurement of share based payments.

Financing inflows

issuing debt and equity securities

The total owners equity of most publicly traded firms is significantly:

less than the market value of the firm because investors place a higher value on firms that include the investors' expectations of future earnings. Firms are usually worth much more than the sum of their individual net assets, even at market value

The balance sheet

provides information useful in assessing the entity's financial strengths and weaknesses, especially risk, and the allocation of assets

Investing Cash Outflows

purchases of plant assets and investments

Unobservable inputs should reflect the entity's assumptions about what market participants would assume and

should be developed based on the best information available in the circumstances, which might include the entity's own data

where are prior period adjustments reported

statement of retained earnings

The determination of fair value of a LIABILITY should consider

the effect of the reporting entity's credit risk (credit standing) on the fair value of the liability in each period for which the liability is measured at fair value; a third party enhancement should NOT be considered.

Quoted prices should not be adjusted because

the entity holds a sizable position in the asset or liability relative to the trading volume in the market (Blockage Factor)

The determination of fv of a NON-financial asset assumes:

the highest and best use of the asset by market participants even if the intended use of the asset by the reporting entity is different.

The determination of FV of a LIABILITY assumes that:

the liability is transferred to a market participant at the MEASUREMENT date; it is not settled or canceled.

What is reported on the statement of comprehensive income?

-net income (or loss) -Unrealized gains and losses on investments in securities available for sale -Adjustments in the calculation of the pension cost -Foreign currency translation adjustments -Deferrals of certain gains or losses on hedge accounting

When multiple valuation techniques are used,

-the different results should be evaluated and weighted -professional judgement will be required to select the fair value from within the range of alternative values that is most representative in the circumstances

An entity that holds financial assets and financial liabilities and manages those instruments on the basis of their net risk exposure may measure the fair value of those financial assets and financial liabilities at:

-the price that would be RECEIVED to sell a NET asset position for a particular risk -the price that would be PAID to transfer a NET liability position for a particular risk.

income statement (profit and loss statement, statement of earnings, statement of net income)

Measures the performance of the firm for the period and is dated for the entire period (e.g. For the year ended December 31, 20XX

In level 1: Blockage discounts are

Not permitted

Principal Market

the market with the greatest volume or level of activity for the asset or liability within which the reporting entity could sell the asset or transfer the liability

Counterparty

the party to whom the obligation is due

The changes in stockholders equity arise from what?

the purchase and sale of shares of the entities stock, the changes in comprehensive income, and the payment of dividends.

Notes and supplementary schedules are an integral part of the financial statements. What are their functions on the statements?

To supplement information of the financial statements and present information not captured on the statements

What are the three important valuations for a firm?

Total OE or net assets Market value of net identifiable assets Total value of the firm

Which of the following defines equity as it relates to a business entity?

Total assets less total liabilities

A firm may elect to use the fair value option for an eligible financial liability when it first recognizes the liability.

True

A firm may elect to use the fair value option for an eligible firm commitment when it enters into the contract that establishes the firm commitment.

True

A primary purpose of disclosures required under the fair value option is to facilitate comparisons by the user of financial statements.

True

A subsidiary that is to be consolidated with its parent may elect the fair value option for eligible assets and liabilities on its books.

True

Discounting a future stream of cash flows to its current value would be an example of the income approach to determining fair value.

True

For each item measured under the fair value option that provides interest or dividend income, how those items of income are measured and where they are reported in the income statement must be disclosed.

True

For items measured at fair value on a recurring basis, the reporting entity must disclose the level within the fair value hierarchy in which the fair value measurements fall.

True

Historical cost , market value, and present value are all measurement attributes presented on the balance sheet.

True

Level 2 in the fair value hierarchy is based on observable inputs.

True

Valuation techniques used to determine fair value should use observable inputs to the greatest extent possible

True

fair value application can be for a financial asset or liability or a NON-financial asset or liability.

True

Only the portion to be extinguished within one year of the balance sheet should be classified as current for what two liabilities?

Unearned revenues and warranty liabilities

Which of the following is a level three input to valuation techniques used to measure the fair value of an asset?

Unobservable inputs for the asset

What items appear to be income items but are not reflected in net income?

Unrealized gains and losses on investments in securities available for sale, certain pension cost adjustments, and foreign currency translation adjustments.

a post closing trial balance should include only

balance sheet accounts

Assets are presented in order of

decreasing liquidity. The most liquid asset (such as cash) are shown first and less liquid assets are shown last (such as PPE)

What are prior period adjustments?

effect of corrections of errors affecting prior year net income

Goodwill

equals the excess of the purchase price paid for another business over the market value of its net assets; The difference between a firms market capitalization and the market value of net identifiable assets

In level 2, if significant unobservable inputs are used to adjust observable inputs,

the resulting measurement may be categorized in level 3

retained earnings

total net income to date less total dividends to date

The highest and best use for NON-Financial ASSETS must take into account

what is physically possible, legally permissible, and financially feasible at the measurement date.

Are the entry price and the exit price the same thing?

Conceptually they are different

What are examples of attributes?

Condition, Location, restriction on asset use or sale

Property, plant, and equipment may be measured and reported using fair value.

False

The valuation technique(s) used to measure fair value can be changed every reporting period.

False

Valuation techniques should be

Consistently applied

The liability to the counterparty is assumed to

Continue after the hypothetical transaction

financing cash flows

cash flows related to the liabilities and owner's equity section of the balance sheet

A partial listing of a company's accounts is presented below: Revenues. $80,000 Operating expenses. 50,000 Foreign currency translation adjustment gain, net of tax. 4,000 Income tax expense 10,000 What amount should the company report as net income?

$20,000; Net income is revenues less expenses, or $80,000 - 50,000 - 10,000 = $20,000. The foreign currency translation adjustment is part of comprehensive income.

In Dart Co.'s year two single-step Income Statement, as prepared by Dart's controller, the section titled "Revenues" consisted of the following: Sales$250,000 Purchase discounts3,000 Recovery of accounts written off10,000 Total revenues$263,000 In its year two single-step Income Statement, what amount should Dart report as total revenues?

$250,000

A company owns a financial asset that has no principal market. The financial asset is actively traded in four markets and the company has the ability to transact in all four of these markets. The following are the quoted prices for the financial asset in each of the four markets: MarketQuoted Price A. $20,000 B. 25,000 C. 30,000 D. 35,000 What is the fair value of the financial asset?

$35,000

A company has an equity investment with a historical cost of $500,000 that is traded in an active market. At December 31, year 1, the quoted price for an identical investment was $400,000 and the quoted price for a similar investment was $430,000. Using the company's internal present value of cash flows model, the company arrived at a value of $410,000. What amount is the value of the investment on December 31, year 1?

$400,000; An equity security is valued using Level 1 prices whenever those prices are available. The quoted price for an identical security is Level 1 and therefore is the most robust fair value for this security.

Marco has an investment that is traded in two different markets, Front market and Side market. Marco has equal access to each market. In order to determine the fair value of its investment, Marco has obtained the following per share information for the securities as of the close of business December 31, the end of its fiscal year: Front Market. Side Market Selling Price $52/sh $50/sh Transaction Cost. $ 6/sh. $ 1/sh If Front market is the principal market for the security for Marco, using the market approach, which one of the following would be the per share amount used for measuring the investment at fair value?

$52; Since Front market is the principal market, fair value would be based on the price at which Marco could sell the investment in that market, or $52/sh. The market selling price would not be adjusted for the related direct transaction cost.

Bixby Company is in its first year of operations. Bixby estimates its annual warranty expense at 2% of net annual sales. Bixby provides its customers with a three-year warranty plan. Expected warranty expense is shown below: YearExpected warranty expensePresent value discounted at 8%Year 1$40,000$37,037Year 2 10,000 8,573Year 3 10,000 7,938Total$60,000$53,548 The current borrowing rate for Bixby is 8%. Bixby can contract with a third party to provide the warranty work. The cost for a contract to settle the warranties is $57,000. If Bixby elects the fair value option to report warranty obligations, at what amount will the warranty liability be recorded on the balance sheet?

$57,000; ASC Topic 825 provides that a company can elect the fair value option to record its warranties if the warranty liability can be satisfied by contracting with a third party

Rogo Corp.'s trial balance reflected the following account balances at December 31, year 1: -Accounts receivable (net) $16,000 -Short-term investments $5,000 -Accumulated depreciation on equipment and furniture $15,000 -Cash $11,000 -Inventory of merchandise $30,000 -Equipment and furniture $25,000 -Patent $4,000 -Prepaid expenses $1,000 -Land held for future business $18,000 In Rogo Corp.'s December 31, year 1 balance sheet, the current assets total is

$63,000; Accounts receivable (net) $16,000 + Short-term investments $5,000 + Cash $11,000 + Inventory of merchandise $30,000 + Prepaid expenses $1,000= Total $63,000

Crossroads Co. chooses to report a financial asset at its fair value. The asset trades in two different markets; however, neither market is the principal market for the financial asset. In the first market, sales proceeds are $76, which is net of transaction costs of $6. In the second market, sales proceeds are $80, which is net of transaction costs of $1. What amount should Crossroads report as the fair value of the asset?

$81

When preparing a draft of its year 2 balance sheet, Mont, Inc. reported net assets totaling $875,000. Included in the asset section of the balance sheet were the following: Treasury stock of Mont, Inc. at cost $24,000 Idle machinery 11,200 Cash surrender value of life insurance on corporate executives 13,700 At what amount should Mont's net assets be reported in the December 31, year 2 balance sheet?

$851,000; idle machinery ($11,200) and cash surrender value of life insurance ($13,700) are both assets. The only item listed which should not be included in the asset section of the balance sheet is the treasury stock ($24,000). Although the treasury stock account has a debit balance, it is not an asset; instead, it is reported as a contra equity account. Therefore, the $24,000 must be excluded from the asset section, reducing the net asset amount to $851,000 ($875,000 − $24,000).

Fair Value Hierarchy: Level 2

(Observable and Similar) Inputs other than quoted prices included in Level 1 that are observable for the asset or liability either directly or indirectly through corroboration with observable data

Fair Value Hierarchy: Level 1

(most robust and observable) (Observable and Identical) inputs are unadjusted quoted prices in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date. (Highest level)

What disclosures are required for only the recurring basis?

- A table showing transfers into each level and transfers out of each level disclosed and discussed separately with the amounts of any transfers between level 1 and 2, the reasons for such transfers, and the policy for determining when those transfers occur disclosed separately -For fair value measurements in level 3, a reconciliation of the beginning and ending balances, separately presenting changes during the period -For fair value measurements in level 3, a description of the valuation process used, quantitative information about the unobservable inputs used, and a narrative description of the sensitivity of the fair value measurement to changes in unobservable inputs -The amounts of gains or losses for the period that are attributable to the change in unrealized gains or losses relating to assets and liabilities still held a the reporting date and a description of where those unrealized amounts are reported in the income statement.

What types of comparisons are fair value option disclosures intended to facilitate?

-Between entities that choose different measurement methods for similar assets and liabilities -Between assets and liabilities in the financial statements of an entity that selects different measurement for similar assets and liabilities

For each period for which an Income Statement is presented, the following must be disclosed about items for which the fair value option has been elected:

-For each line item in the Statement of Financial Position (Balance Sheet), the amount of gains and losses from fair value changes included in earnings for the period and in which line in the Income Statement those gains/losses are reported -A description of how interest and dividends are measured and where they are reported in the Income Statement -For loans and other receivables held as assets:The estimated amount of gains and losses included in earnings for the period attributable to changes in instrument-specific credit risk, and how those gains and losses were determined. -For liabilities with fair values that have been significantly affected during the reporting period by changes in the instrument-specific credit risk:The estimated amount of gains and losses from fair value changes included in earnings that are attributable to changes in the instrument-specific credit risk; How the gains and losses were determined; Qualitative information about the reasons for those changes

If an entity elects the fair value option at the time an investment becomes subject to the equity method of accounting or when it ceases to consolidate a subsidiary, it must disclose:

-Information about the nature of the event, and -Where the effect on earnings shows in the Income Statement.

As of each date for which a Statement of Financial Position (Balance Sheet) is presented, what must be disclosed?

-Management's reasons for electing a fair value option for each eligible item or group of similar eligible items If the fair value option is elected for some, but not all, eligible items within a group of similar eligible items a description of those similar items and the reasons for partial election, and information to enable users to understand how the group of similar items relates to individual line items on the Statement of Financial Position -For each line item in the Statement of Financial Position that includes an item or items for which the fair value option has been elected: Information to enable users to understand how each line item in the statement relates to major categories of assets and liabilities, and the aggregate carrying amount of items included in each line item in the statement that are not eligible for the fair value option, if any -The difference between the aggregate fair value and the aggregate unpaid principal balance of: Loans and long-term receivables that have contractual principal amounts and for which the fair value option is used, and Long-term-debt instruments that have contractual principal amounts and for which the fair value option has been elected -For loans held as assets for which the fair value option has been elected: The aggregate fair value of loans that are 90 days or more past due; If the entity's policy is to recognize interest income separately from other changes in fair value, the aggregate fair value of loans in nonaccrual status (i.e., loans for which interest income is not accrued); The difference between the aggregate fair value and the aggregate unpaid principal balance for loans that are 90 days or more past due, are in nonaccrual status, or both -For investments that would have been accounted for under the equity method if the entity had not chosen to apply the fair value option, the information required by ASC 323, The Equity Method of Accounting for Investments, including:The name of each investee and the percentage ownership of its common stock; The accounting policies of the investor with respect to investments in common stock

What are the special disclosures required for fair value measurements (on a recurring basis) that are based on unobservable inputs (i.e., Level 3 inputs)?

-Narrative description of the uncertainty of fair value to changes in unobservable inputs -Unrealized gains/losses for the period and where reported

What would happen if an entity was required or permitted to measure an asset or liability initially at fair value and the transaction price (entry price) and exit price differ at initial recognition?

-The asset or liability would be recorded at fair value -The difference between the entry price and exit price (FV) would be recognized in earnings as a loss or gain in the period of initial recognition

What disclosures are required for both recurring and nonrecurring basis?

-The fair value measurement at the reporting date -Segregated into each of the three levels within the fair value hierarchy -For levels 2 and 3, a description of the valuation techniques and inputs used to measure fair value and a discussion of changes in valuation techniques during these periods -For nonfinancial assets disclose if highest and best use differs from current use and why

What disclosures are required for only the nonrecurring basis?

-The reasons for the measurement and if the measurement estimate is at a date that is not at the end of the reporting period, the entity must disclose the date for the measurement -For fair value measurements in Level 3, unobservable inputs, a description of the valuation process used and quantitative information about the unobservable inputs used

On a recurring basis for fair value measurements in level 3 it is required to disclose a reconciliation of beginning and ending balances, separately presenting changes during the period attributable to what?

-Total gains or losses recognized, showing separately those included in earnings and those included in other comprehensive income, and the line item(s) in which they are recognized in the respective statements -Purchases, sales, issuances, and settlements, disclosed separately -Transfer in and/or out of Level 3 disclosed separately, the reasons for such transfers

The premium on a three-year insurance policy expiring on December 31, 20X4 was paid in total on January 2, 20X2. If the company has a six-month operating cycle, then on December 31, 20X2, the prepaid insurance reported as a current asset would be for:

12 Months; At the end of 20X2, two years of coverage remains. The cost of coverage for 20X3 is a current asset because it will be consumed within a year of the 20X2 Balance Sheet. The definition of a current asset uses the period "operating cycle or one year, whichever is longer." An operating cycle of any length, not exceeding one year, would yield the same answer to this question. The fact that the operating cycle is only six months versus, for example eight months, has no effect on the classification of the prepaid insurance into a current component (to expire within a year of the 20X2 Balance Sheet) and a long-term component (the portion to expire after 20X3).

What type of system was established by the FASB for the presentation of cash flows in the statement of cash flows?

A Classification System

The determination of fair value may be for:

A Stand-alone Asset or Liability A Group of Assets or Liabilities

What format is required to present the quantitative disclosures required above?

A Tabular Format

Examples of cash equivalents

A U.S. treasury obligation purchased when there are three months or less remaining to maturity

A change in valuation techniques used to measure fair value should be reported as

A change in accounting estimate reported on a prospective basis.

Which one of the following can be measured at fair value at the option of the reporting entity?

A debt investment classified as held-to-maturity

Alternative Investments

A diverse asset class that typically includes hedge funds, private equity, real estate, venture capital funds, common collective funds, offshore funds, and commodities. It provides an alternative to traditional investments, such as debt and equity securities.

What kind of transaction is used to sell the asset or transfer the liability in fv?

A hypothetical transaction (Orderly Transaction)

In which one of the following circumstances is the entry price to acquire an asset least likely to represent fair value of the asset?

A significant amount of raw material inventory is acquired for cash from a bankrupt supplier.

Current Liabilities

Accounts payable, accrued liabilities, unearned revenue, income tax payable, notes payable, current portion of long-term debt (the portion due within one year of the balance sheet date).

Examples of current liabilities

Accounts payable, wages payable, income tax payable, unearned revenues, warranty liabilities, and the current portion of long-term debt

Which of the following accounts is a contra account?

Accumulated depreciation, equipment

contra account

An account with a balance that is opposite, or "contra," to that of its related accounts in terms of debit and credit. Can be debit or credit balances and can be considered valuation accounts or merely accumulations of items such as depreciation and amortization over time. (Subtracted)

In the following example: Investments in marketable sec. $30,000 Valuation allowance $4,000 Market Value $34,000 Where the investments are listed at cost and market value is listed at market value. Valuation allowance is:

An adjunct or contra account and can be a valuation account because it decreases or increases the net book value of the investment to current market value. The account is a contra if the market value is less than original cost and is an adjunct if the market value exceeds original cost.

Blockage factor

An illiquidity discount that occurs when an investor sells a large amount of stock relative to its trading volume (assuming it is not large enough to constitute a controlling ownership).

Accounting Cycle Steps

Analyze relevant source documents (e.g., sales invoices) and record journal entries in a journal Post (distribute) the information from the journal to the accounts in the ledger, on a periodic basis. Only after posting, the account balances are updated. Record adjusting journal entries at the end of the accounting period. These journal entries are also posted to the accounts. Prepare trial balances. Prepare the income statement, balance sheet, and statement of cash flows. Close the temporary account balances (revenues, expenses, gains, losses) setting them to zero, and transfer the net income amount to retained earnings.

Under all valuation techniques, the valuation must take into account:

Appropriate risk adjustments, including a risk premium for uncertainty

Cash equivalents are short term investments that:

Are convertible into a known and fixed amount of cash; and Have an original maturity to the purchaser of three months or less.

the balance sheet would be correct dated

As of a date

current assets

Assets that are in the form of cash or will be converted into cash or consumed within one year or the operating cycle of the business, whichever is longer.

Fair Value determination should consider the _________ of the specific asset or liability being measured.

Attributes

Which of the following items is eligible for the fair value election under ASC Topic 825?

Available-for-sale investments

In analyzing a company's financial statements, which financial statement would a potential investor primarily use to assess the company's liquidity and financial flexibility?

Balance sheet

In the following example: Bonds payable $100,000 Bond premium $3,000 Net bond liability $103,000 Where bonds payable is listed at face value and net bond liability is listed at net carrying value. What are the accounts?

Bond premium and discount are adjunct and contra accounts respectively but are not valuation accounts because the net bond liability is generally not equal to market value.

Which of the following statements concerning the determination of fair value at the date an asset is acquired or a liability is assumed is/are correct? I. The exit price is conceptually different than the entry price. II. The entry price and the exit price may be different amounts at the date an asset or liability is initially recognized.

Both

Assume the current ratio exceeds 1. What is the effect on the current ratio of paying an account payable?

Both CA (cash) and CL (accts pay) decrease by the same amount. The ratio increases because the denominator falls by a greater percentage.

In determining the fair value of an asset or liability, would the fair value of the asset or the fair value of the liability be determined using an entry price or an exit price?

Both would use the exit price

When an entity uses the fair value option for eligible financial assets and liabilities, which one of the following is not an expected outcome of the disclosures required of that entity? A) Users being able to understand management's reasons for using the fair value option B) Users being able to understand how changes in fair value affect net income C) Replace the kind and amount of information that would have been provided if the fair value option had not been used with information related to fair value D) Users being able to understand the difference between fair value and cash flows

C

Which one of the following is not a required disclosure in annual financial reports for an entity that uses fair value measurement? A) The level of the fair value hierarchy within which fair value measurements fall B) The valuation techniques used to measure fair value C) Combined disclosures about fair value measurements required by all pronouncements D) A discussion of any change from the prior period in valuation techniques used to measure fair value

C; Combined disclosures about fair value measurements required by all pronouncements are not required, but are encouraged.

List current assets in order of liquidity

Cash cash equivalents short-term investments accounts receivable other receivables inventories prepaids

investing cash flows

Cash flows related to the acquisition and disposal of long term assets and investments (other than cash equivalents and trading securities; these are operating)

operating

Cash flows related to transactions that flow through the income statement

Examples of current assets

Cash, Accounts receivables, short term investments, inventory, and prepaid assets

Which of the following would be reported as an investing activity in a company's statement of cash flows?

Collection of a note receivable from a related party.

Which of the following would be reported as an operating activity in a company's statement of cash flows?

Collection of an overdue account receivable from a customer; Collection of a tax refund from the government.

Which of the following would be reported as a financing activity in a company's statement of cash flows?

Collection of proceeds from a note payable.

What are the two different types of owners equity?

Contributed capital and retained earnings

For a corporation, give examples of stockholder equity listed in order of permanence

Contributed capital would be shown first and retained earnings are typically shown last

Income Approach

Converts future amounts to a single present amount. (EX: discounting future cash flows)

When the fair value of an asset is determined as the amount that currently would be required to replace the service capacity of the asset, which one of the following valuation techniques has been used?

Cost Approach

Balance sheet presentation reflects the classification of assets and liabilities. What is the classification criteria used for each and what is it affected by?

Current assets, current liabilities, long term assets, and long term liabilities; they are affected by the firms operating cycle

How should unearned rent that has already been paid by tenants for the next eight months of occupancy be reported in a landlord's financial statements?

Current liability; Unearned rent is a liability to the landlord. The landlord would have debited cash and credited unearned revenue when the cash was received from the tenants. Since the rent is for eight months, the liability would be classified as current.

Magazine subscriptions collected in advance are reported as

Deferred revenue in the liability section of the balance sheet.

Statement of Cash Flows

Describes the major changes in cash by meaningful category (Dated for the period ended Dec. 31, 20XX) (3rd of the 3 major fin. statements required to be reported).

NON- Financial Asset or Liability

Do not have contractual cash flows. (Ex: Intangibles, PPE)

When determining fair value the requirements apply to instruments classified in shareholders equity that are measured at fair value. What is an example of this?

Equity interest issued as consideration in a business combination

Which one of the following is not a purpose of the fair value framework as set forth in ASC 820, "Fair Value Measurement"?

Establish new measurement requirements for financial instruments.

Market value, a type of current value

Examples include investments in marketable securities (stocks and bonds) for which the holding firm does not have significant influence and does not intend to hold to maturity (in the case of bonds). Fair value, often used synonymously with market value, is the selling price for assets and amount currently required to retire a liability. These are exit values rather than entry values.

Adjusting entries are prepared after the financial statements are completed

FALSE

If an entity chooses to make reversing entries, all adjusting entries are reversed

FALSE

Is an investment in stocks of another company a cash equivalent if it is expected to be sold within two months of the balance sheet?

FALSE

Merchandise inventory and prepaid assets are included in the numerators of both the current ratio and the quick acid test ration

FALSE

adjusting entries typically involve adjusting the cash account

FALSE

The collection of an account receivable is an increase in total assets and an increase in owners equity

FALSE; Collecting receivables results in an increase in one asset account (cash) and a decrease in another asset account (accounts receivable) leaving total assets unchanged

The income statement includes all items of revenue and expense, gain and loss for a period (T/F)

FALSE; almost all

Assume the eligible date for electing the FV option is January 2, 20X1 and Carrying value of the asset is $100,00 and the fair value is $110,000. What would be your entry?

FV> CV (Difference)= $10,000 Entry on January 1, 20X1: DR: Investment in equity investee $10,000 CR: Unrealized Gain-FV Option $10,000

Recurring Basis

Fair Value is determined and applied to an item period after period

Nonrecurring Basis

Fair value is determined and applied only when certain conditions or situations occur

A change in valuation technique(s) used to measure fair value would be treated as a change in accounting principle.

False

A firm may elect at the beginning of each of its fiscal years to use the fair value option for eligible financial assets and financial liabilities.

False

Fair value measurements categorized as Level 1 of the fair value hierarchy require the greatest amount of disclosure.

False

Financial liabilities arising from a lease contract obligation can be measured and reported at fair value.

False

If other pronouncements require the use of fair value measurement and related disclosures, those disclosure requirements are superseded by fair value option disclosures.

False

In the fair value hierarchy, level 1 inputs are the only acceptable inputs for fair value determination under GAAP.

False

In the fair value hierarchy, level 1 inputs may need to be adjusted for the blockage factor.

False

Most fair value disclosures must be provided only in annual reports.

False

Multiple valuation approaches will always be required to determine fair value.

False

Required disclosures under the fair value option must be made only in annual financial statements.

False

A firm may not use the fair value option for investment in common stock which gives the investor significant influence over the investee

Fase

Adjustments to Quoted Price

Generally result in fair value measurement categorized in a lower level of the fair value hierarchy

For many firms, what is the largest intangible in terms of dollar amount?

Goodwill

What is an example of an asset not reported on the balance sheet?

Goodwill

Reporting accounts receivable at net realizable value is a departure from the accounting principle of:

Historical Cost

In the balance sheet, what is the measurement basis for owners equity?

Historical Value of cash inflows and residual valuation

In the balance sheet, what is the measurement basis for PP&E and intangibles?

Historical cost and depreciation/amortized historical cost

What are the different kinds of measurement bases?

Historical cost or other historical value Depreciated, amortized, or depleted historical cost Market value, a type of current value net realizable value present value aggregate of more than one valuation basis

In which of the following circumstances, if any, would an auditor be concerned as to whether or not the price paid to acquire an asset was the fair value of the asset? I. The asset was acquired from the acquiring firm's majority shareholder. II. The asset was acquired in an active exchange market.

I Only

Which of the following are observable inputs used for fair value measurements? I. Bank prime rate.II. Default rates on loans.III. Financial forecasts.

I and II only

What is the prescribed order presented on the balance sheet?

I: Assets II: Liabilities III: Owners Equity

What is the articulation between the balance sheet and statement of cash flows?

IF the statement of cash flows employs a pure cash definition of funds, the first asset listed on the balance sheet will be cash. IF the statement of cash flows employs a broader definition of funds (Cash and Cash Equivalents), the first asset listed on the balance sheet will be Cash and Cash Equivalents.

Which of the following statements concerning inputs used in ascertaining fair value is/are correct? I. Only observable inputs can be used. II. Inputs that incorporate the entity's assumptions may be used.

II only

What causes the difference between total owners equity and the market value of net identifiable assets?

Identifiable assets and liabilities with market values different from their book values

Under what circumstances may the obligation for warranties be recorded at fair value?

If the warranty obligation can be settled by contracting with a third party

When must the methods and significant assumptions used to estimate fair value (of items for which the fair value option has been elected) be disclosed?

In annual reports only

The highest and best use of an asset may be:

In use or in exchange

Giaconda, Inc. acquires an asset for which it will measure the fair value by discounting future cash flows of the asset. Which of the following terms best describes this fair value measurement approach?

Income Approach

Valuation techniques for fair value that include the Black-Scholes-Merton formula, a binomial model, or discounted cash flows are examples of which valuation technique?

Income Approach

market-corroborated inputs

Inputs that are derived principally from or corroborated by observable market data by correlation or other means.

Unobservable inputs

Inputs that reflect the reporting entity's own assumptions used in pricing the asset, liability, or equity item that are developed based on the best information available in the circumstances.

Observable inputs

Inputs used in pricing an asset, liability, or equity item that are developed based on market data obtained from sources independent of the reporting entity

When valuing certain financial instruments, a company that has elected the fair value measurement option must apply the accounting measurement based on which of the following criteria?

Instrument-by-instrument basis

Each of the following would be considered a Level 2 observable input that could be used to determine an asset or liability's fair value, except

Internally generated cash flow projections for a related asset or liability.

What is not a cash equivalent?

Investments in stocks are not because they have no maturity value and are not convertible into a specific unchanging amount of cash.

A company's year-end comparative statement of financial position reflects the following changes from the prior year: cash increased by $40,000, total liabilities increased by $32,000, and all other assets decreased by $65,000. Which of the following statements is correct regarding the current-year change in the company's stockholders' equity?

It decreased by $57,000; Using the accounting equation, A = L + E, you can solve for the change in equity. The net change in assets is a decrease of $25,000 ($40,000 increase − $65,000 decrease) and an in increase in liabilities of $32,000. Substituting in the changes into the accounting equation $25,000 decrease in assets (a decrease in equity) and $32,000 increase in liabilities (also a decrease in equity) results in a total decrease in equity of $57,000.

Why are retained earnings shown last in stockholders equity?

It is thought to be less permanent due to the fact that dividends are a distribution of earnings

What is the all-inclusive approach for the income statement?

It means that the income statement includes ALMOST all revenues, expenses, gains, and losses and they are included in the calculation of net income.

Total value of the firm

Its market capitalization—that is, the total value of the firm's outstanding stock. For publicly traded firms, this value can be found on Internet financial sites.

On January 15, 2008, Able Co. made a significant investment in the debt securities of Baker Co., which it intends to hold until the debt matures. Able's fiscal year-end is December 31. If Able Co. intends to measure and report its investment in Baker Co. debt securities at fair value as permitted by ASC 820 on which one of the following dates must Able elect to implement the fair value option?

January 15, 2008

According to ASC Topic 820, a stock market quotation from the New York Stock Exchange is considered what level of valuation input for determining fair value measurement?

Level 1

Huskie Co. Holds an investment in a bond of Shephard co. that is not publicly traded. To determine the fair value of the bond, Huskie uses the fair value of a similar bond that is traded on an exchange and adjusts that price for characteristics in shephards bond. What level in the fair value hierarchy should huskie classify this valuation?

Level 2

When market participants apply a premium or discount related to a characteristic of an asset or liability being valued, an entity should apply the premium or discount in measuring fair value in which hierarchy levels?

Level 2 and 3

The current ratio is frequently used as a measure of what?

Liquidity

Examples of non-current assets

Long term investments, plant assets, certain deferred charges and intangible assets

List non-current assets in order of liquidity

Long-term investments property, plant and equipment intangibles "other" assets (including long-term prepaids)

In the balance sheet, what is the measurement basis for inventory?

Lower of cost or market

Huskie Co. Holds an investment in a bond of Shephard Co. that is not publicly traded. To determine the fair value of the bond, Huskie uses the fair value of a similar bond that is traded on an exchange and adjusts that price for characteristics in Shephard's bond. What type of valuation approach is huskie using?

Market Approach

In the balance sheet, what is the measurement basis for investments in marketable securities?

Market Value

Liabilities are presented in order of

Maturity. Current Liabilities are presented first and then long term liabilities are presented

Valuation techniques used to measure fair value should

Maximize the use of observable inputs and minimize the use of unobservable inputs

To appear more liquid and less risky in the short run, firms would rather report:

More Current Assets and less current liabilities. (there is great incentive to move current liabilities to the noncurrent category.)

If net asset value (NAV) is used as a practical expedient to determine FV:

NAV is not reported within the fair value hierarchy but rather is separately disclosed in the footnotes of the financial statements.

A company performing its long-lived asset impairment testing is reviewing the fair value of equipment. Each of the following valuation techniques may be appropriate for measuring the fair value of the equipment except the

Net realizable value approach.

Cash is the only account for which the following are the same:

Nominal value Market value Realizable value Present value Future value

Andro Co. has a $10 million note payable that is due three months after year end. The note payable was refinanced when long-term bonds were issued one month after year end for $11 million. The December 31 financial statements were issued two months after year end. How should Andro classify and disclose the note?

Noncurrent liability and a note disclosure is required; The $10 million note payable has been refinanced with $11 million of long-term bonds before the financial statements are issued, so the liability can be classified as long-term and a footnote disclosure is required to describe the refinancing.

Which of the following statements concerning the fair value hierarchy used in ascertaining fair value is/are correct? I. Quoted market prices should be adjusted for a "blockage factor" when a firm holds a sizable portion of the asset being valued. II. Quoted market prices in markets that are not active, because there are few relevant transactions, cannot be used.

None

In level 1: Control premiums are

Not permitted

Noncurrent liabilities

Notes payable, bonds payable, lease liabilities, pension liabilities, postretirement healthcare liabilities, deferred taxes. (Although this item can appear in all four possible classifications (i.e., CA, NCA, CL, and NCL), the NCL category is by far the largest.)

What are the two types of inputs?

Observable and unobservable

When is goodwill recognized in the balance sheet of the purchaser?

Only when all or a controlling interest of a firm is purchased by another

Cash Flows are classified into what three categories?

Operating, Investing, and Financing

Depreciated, amortized, or depleted historical cost

Other accounts reflect the remaining portion of a fixed unchanging historical amount. In some cases, the original cost or other relevant amount is maintained in one account, with a contra or adjunct account being subtracted from or added to that account for the purpose of reporting net book value (carrying value). Examples include property, plant and equipment; intangibles; natural resources.

Owner's Equity is present in order of

Permanence

In level 1: Liquidity Discounts are

Permitted

Which of the following is a deferred cost that should be amortized over the periods estimated to be benefited?

Prepayment of 3-year insurance premiums on machinery

In the balance sheet, what is the measurement basis for liabilities?

Present Value

statement of stockholders' equity

Presents the changes in the owners equity (contributed capital, additional paid in capital, and retained earnings) over a period of time- the same period as the income statement (for the year ended Dec. 31, 20XX).

The market approach valuation technique for measuring fair value requires which of the following?

Prices and other relevant information of transaction from identical or comparable assets

What is not included in the income statement?

Prior period adjustments

Fair Value Hierarchy

Prioritizes or ranks the inputs to valuation techniques used to measure fair value into three levels

Which of the following items would best enable Driver Co. to determine whether the fair value of its investment in Favre Corp. is properly stated in the balance sheet?

Quoted market prices on a stock exchange for an identical asset.

Level 2 inputs include

Quoted prices for similar assets or liabilities in active markets Quoted prices for identical or similar assets or liabilities in markets that are not active (few relevant transactions, prices are not current or vary substantially, or for which little information is publicly available) Inputs, other than quoted prices, that are observable for the assets or liabilities being valued (interest rates, yield curves, implied volatilities, and credit spreads) Inputs that are derived principally from or corroborated by observable market data by correlation or other means (market corroborated inputs)

What provides the most reliable evidence for fair value and should be used to measure fair value when available?

Quoted prices in an active market from Level 1 of the hierarchy

Operating Inflows

Receipts from customers and interest

(FAIR VALUE OPTION) List the items that entities may elect to measure and report at fair value.

Recognized financial assets or financial liabilities (some exceptions) Firm commitments Written loan commitments Rights and obligations under insurance contracts and warranties Other financial instruments embedded in non-financial derivative instruments

Statement of Comprehensive Income

Reports all non-owner changes in equity over a period of time. (e.g. for the year ended Dec. 31, 20XX)

Aggregate of more than one valuation basis

Retained earnings-net income reflects all measurement bases through revenue and expense recognition.

Historical cost or other historical value

Some accounts are measured and reported at a fixed, unchanging historical amount. Examples include land, some investments, cash, prepaids, many current liabilities, contributed capital accounts, and treasury stock.

Advantages of special journals

Special journals simplify the recording of journal entries because each recording affects the same accounts each time. Your check register is an example; it is a cash receipts/payments journal. Each entry you make always affects cash, and you need only write into the register the other item affected (e.g., utility bill). The number of postings also is reduced because only the sum of the changes in the special journal accounts for the period need to be posted to the respective accounts. Separation of duties for improved internal control is fostered with the use of special journals. Only particular individuals may be authorized to access the sales journal for example, but not the cash receipts journal, or the general journal.

An account balance of $10,000 may represent different attributes, depending on the account.

TRUE

Could a firm with an operating cycle of three years in duration report as current a liability due two years from the balance sheet date?

TRUE

Prior period adjustments are shown in the Retained Earnings Statement.

TRUE

The balance sheet is dated differently from the income statement and the statement of cash flows.

TRUE

The total amount included in cash or in cash equivalents in the statement of cash flows must be the same title and groups of accounts used in the statement of financial position.

TRUE

What determines which approach is appropriate to measure FV?

The Circumstances which include: -The Availability of sufficient data for the respective approaches -Maximizing the use of relevant observable inputs and minimizing the use of unobservable inputs

An investment company's portfolio of private placement securities is recorded at fair value and valued using a matrix pricing model. The matrix pricing model uses current pricing spreads on similar securities to determine the fair value of the private placement securities. Which of the following valuation techniques is being used?

The Market Approach

The meaning of the dollar amount of an item listed in the balance sheet depends on what?

The account being measured

What two presentation formats are used for the balance sheet?

The accounting format or the report format

Market value of net identifiable assets

The amount of cash that would remain after selling all identifiable assets (including identifiable intangibles) and paying off all liabilities. This amount is also called the firm's "split up" or liquidation value. To determine this amount, the firm must have its assets appraised;

The current portion of long term debt is classified as current. What amount is this?

The amount of debt previously classified as long term that is now due within one year of the balance sheet date.

The different measurement bases fo balance sheet valuation make it difficult to interpret and compare totals for assets and liabilities across firms. What are measurement bases?

The attribute of an account being measured and reported

Operating cycle

The average time required to purchase or produce inventory, sell the inventory, and then collect cash from the resulting receivables to purchasing inventory all over again. For most firms the operating cycle is significantly less than one year. For firms in some industries such as construction, the operating cycle is longer than one year.

In some cases, the entry price and exit price are not the same. What is the result of this?

The entry price would not be fair value at the date of initial recognition of an asset or liability.

Control Account

The general ledger account that is supported by a subsidiary ledger. They report the aggregate balance of several subsidiary accounts; used for any account that consists of many individual accounts (inventory, plant assets such as PP&E, and accounts payable)

Present value

The present value of a future cash flow is its discounted value. This is the primary measurement basis for noncurrent debt (mainly bonds and long-term notes). The present value is the measure of current sacrifice when extinguishing the debt at the balance sheet date.

Entry Price (transaction price)

The price paid to acquire the asset or the price received to assume the liability.

What is exit price (fair value)?

The price that would be received to sell an asset or paid to transfer a liability

The accounts receivable (AR) control account balance (in the general ledger) is

The sum of the subsidiary AR account balances. For example, a firm has 100 subsidiary AR accounts, each one for a different customer. The sum of the 100 subsidiary AR balances equals the balance in the control AR account balance, which is reported on the balance sheet.

Explain the report format

The three categories of accounts are listed from top to bottom with assets always shown first (Most popular format)

Debt disclosures

These are perhaps the most important items found in the balance sheet, dollar for dollar. They indicate a quantifiable financial risk faced by the firm in the future.

Net realizable value

This is another type of current value but one that is less in amount than the historical value. Net realizable value is the amount the firm expects to receive from the sale or collection of the item. Examples include accounts receivable and inventories.

Total OE or net assets

This is the amount determined by current U.S. GAAP and is found in the balance sheet

How is the value of many assets derived?

Through use (exceptions are investments and receivables)

What is the purpose of the statement of cash flows?

To explain the change in cash and cash equivalents that has occurred during the past accounting year.

Disclosures required when the fair value option is elected are intended to accomplish what objective?

To sufficiently enable users of financial statements to understand management's reasons for electing or partially electing the fair value option.

For each line item in the balance sheet which contains items measured under the fair value option, the amount of gains and losses from fair value changes included in the income statement must disclosed.

True

For items measured at fair value on a nonrecurring basis, the reporting entity must disclose the fair value measurements at the reporting date and the reasons for the measurements.

True

If, at acquisition of an asset or liability, the exit price of the item is different than the transaction price, a gain or loss should be recognized.

True

In the fair value hierarchy, level 1 inputs are derived from unadjusted quoted prices in active markets.

True

In the fair value hierarchy, level 3 inputs should be developed based on what market participants would assume.

True

Inputs used in determining fair value include assumptions about the risk inherent in using a particular valuation technique.

True

Management's reasons for electing the fair value option must be disclosed for each elected eligible item.

True

Most reported account balances on the balance sheet do not represent current market value. (T/F)

True

Required disclosures about the use of the fair value option must be made for both the balance sheet and the income statement.

True

The METHODS and significant ASSUMPTIONS used to estimate fair value must be disclosed only in annual reports.

True

The retained earnings account is NOT closed at the end of the accounting period

True

Unobservable inputs used in determining fair value are based on the reporting entity's own assumptions using the best information available

True

How would the proceeds received from the advance sale of nonrefundable tickets for a theatrical performance be reported in the seller's financial statements before the performance?

Unearned revenue for the entire proceeds

Fair Value Hierarchy: Level 3

Unobservable inputs, Lowest level, only used to determine fair value to the extent observable inputs are not available

What are the items in other comprehensive income?

Unrealized gains and losses on investments in securities available for sale, certain pension cost adjustments, foreign currency translation adjustments, and unrealized gains and losses on certain hedging activities

Inputs

Various assumptions that market participants would use in determining fair value, including assumptions about the risk inherent in using a particular valuation technique, as well as the risk inherent in using various inputs (data, assumptions, etc.) with each valuation technique.

Measurement

What amount is recorded on the financial statement

Recognition

What is recorded on the Financial Statement

Control Premium

When market participants apply a premium or discount related to a characteristic of an asset or liability being valued

What do disclosure requirements depend on?

Whether fair value is used on a recurring basis or a nonrecurring basis

Can the operation cycle of a business be longer than one year?

Yes

The assumed transaction establishes

a basis for estimating the price to sell the asset or transfer the liability

In the following example: PP&E. $40,000 Accumulated depreciation ($5,000) Net Book Value $35,000 Where PP&E is listed at cost and net book value is an undepreciated cost. Accumulated depreciation is:

a contra account to PP&E; However, accumulated depreciation is not a valuation account because net book value is not equal to market value.

In the following example: Accounts Receivable. $60,000 Allowance for doubtful acc. ($8,000) Net Book Value $52,000 Where AR is listed at sales value and net book value is net realizable value. Allowance for uncollectible accounts is:

a contra account to accounts receivable and is a valuation account bc net accounts receivable is an approximation to net realizable value, a measurement of current value.

Construction in process is an inventory account that is listed as what on the balance sheet?

a current asset

What does the adjusting entry to accrue a revenue include?

a debit to a receivable account and a credit to a revenue account

The advance collection of five month's rent on Nov. 1 was recorded as an increase to rental revenue. on 12/31 what will be the adjusting entry include?

a debit to rental revenue

What is required for recognition of all items on the balance sheet?

a transaction or event

valuation account

account used to increase or decrease the book value of an item to a measure of current value

Not all contra or adjunct accounts are valuation accounts, but:

all valuation accounts are contras or adjuncts

What approach does the income statement use?

all-inclusive approach

performing a service on account results in

an increase in total assets and an increase in owners equity

How are Prior period adjustments treated (in the statement of retained earnings)

as adjustments to the beginning balance of retained earnings in the year the error is discovered

What does the balance sheet (Statement of financial position) report?

assets, liabilities, stockholders equity; Financial position on a certain date (e.g. December 31, 20XX)

When a valuation technique uses unobservable inputs to determine fair value subsequent to initial recognition and fair value at initial recognition is the transaction price (Entry Price), the valuation technique should

be calibrated (adjusted) at initial recognition so that the results of the valuation technique equals the transaction price

Transaction costs do NOT measure:

characteristics of the asset or liability

Long term assets and liabilities

classified by exclusion. All assets that do not meet the criteria necessary to be classified as current are classified as long term. likewise all liabilities that do not meet the criteria necessary to be classified as current are classified as long term liabilities.

Reporting entities are encouraged but not required to

combine the fair value information disclosures under the ASC with fair value information disclosures required by other accounting pronouncements

contributed capital

common stock, preferred stock, contributed capital in excess of par), treasury stock (a contra account)

Auditors Opinion presents

conclusions on conformity with GAAP

the creation of another current liability refers to

current liabilities that are continuously refinanced (rolled over) by replacing them with other current liabilities due later (but within one year of the balance sheet date) must still be classified as current, even though no current asset will be used to extinguish them in the year after the balance sheet date

the adjusting entry to accrue an expense

debit to an expense account and a credit to a liability account

adjunct account

has a balance that is the same as that of the associated account in terms of debit and credit. can have a debit or credit balance. (Added)

What is recorded in special journals?

high volume similar transactions; They facilitate the review and control of similar transactions (all sales, all cash receipts, etc.)

The reporting entity should not

ignore information available about market participants' assumptions and should adjust its own data if information indicated that market participants would use different assumptions

Current Liabilites

liabilities that are due in the upcoming year or in the operating cycle of the business whichever is longer and that will be met through the transfer of a current asset or the creation of another current liability. Both criteria must be met in order for a liability to be classified as current.

examples of long term liabilities

long-term notes payable, mortgage payable, bonds payable

In the balance sheet, what is the measurement basis for receivables?

net realizable value

Should the balance sheet be prepared before the income statement?

no, it doesnt matter the order in which financial statements are prepared

Adjusting entries include

one income statement account and one balance sheet account

Operating outflows

payments to suppliers, employees, and taxing authorities

Investing Cash inflows

proceeds from the sale of plant assets and investments

Refinancing includes

replacing the liabilities with a new liability that is due one year from the balance sheet date entering into an irrevocable agreement to do so with a capable creditor issuing stock to extinguish debt

Financing Outflows

retirement of debt and equity securities and dividend payments

Companies that use NAV as a practical expedient must disclose

sufficient information so that financial statement users understand the nature and risk of the investments and information about the terms and conditions in which the company can redeem its investments

The balance sheet does not report all assets of the firm, only:

the assets acquired through a transaction

Explain the Accounting Format

the assets are shown on the left side of the page and the liabilities and owners equity are shown on the right side. This format emphasizes the balance sheet equation: A= L + OE

Assets and liabilities are acquired at different times and are not affected in the same way by inflation and specific price level changes. What does this cause?

the recorded value of these accounts to be different from their current or real value and makes comparisons difficult

What is a chart of accounts for control and subsidiary accounts used for?

typically assigns account numbers to accounts for use in computerized information systems. For example, assets may be assigned numbers 100-199, liabilities 200-250, etc. Cash might be assigned the number 100, with AR control assigned number 104. Each account in the AR subsidiary ledger then could be numbered 104-1, 104-2, etc.

What criteria must alternative investments meet to use NAV as a practical expedient?

-Does not have readily determinable fair value -the investments meet the criteria for an investment company as stipulated in ASC 940-10-15-2 or does not meet the criteria to be an investment company but follows industry practices and issues financial statements consistent with the measurement principles for an investment company

What are the requirements that entities must adhere to if they elect to use the fair value measurement?

-The fair value option may be applied on an instrument-by-instrument basis, with limited exceptions -The fair value option is irrevocable unless and until a new election date for the specific item occurs. -The fair value option is applied only to an entire instrument and NOT to only specific risks, specific cash flows, or portions of an instrument. -If the fair value option is elected for held-to-maturity securities, those securities will be treated and reported as trading securities.

The transaction price (Entry Price) might not be fair value if

-The transaction is between related parties -The transaction takes place when the seller is under duress (in a liquidation sale) -The unit of account for the transaction price is different from the unit of account that would be used to measure the asset or liability at fair value -The market in which the transaction price takes place is different from the principal market (or most advantageous market)

What is an orderly transaction (Hypothetical Transaction)?

-Transaction that occurs at the measurement date -under current market conditions -is not a forced liquidation or distress sale.

For which of the following circumstances is the guidance for determining fair value as provided in the fair value framework presented in ASC 820, "Fair Value Measurement," least likely to apply? Determination of the fair value to be assigned to land acquired in a business combination Determination of the fair value of a bond liability for applying the fair value option Determination of the fair value of legal services received in exchange for an entity's common stock Determination of the fair value of a production facility when assessing whether or not an impairment loss has occurred

Determination of the fair value of legal services received in exchange for an entity's common stock

What are some examples of a stand alone asset/liability?

Financial instruments or a non-financial operating asset

Sometimes the unit of account for the entry price (transaction price) is different than the unit of account for the exit price (FV). Give an example of this.

If the asset or liability measured at fair value is part of a business in a business combination, there are unstated rights associated with an asset that are measured separately, or the quoted price includes transaction costs such as with oil.

Which of the following is a benefit of the fair value framework with respect to fair value measurement and fair value reporting?

Increased Consistency Increased Comparability

For purposes of the fair value definition, Market participants are buyers and sellers of the asset or liability that are:

Independent of the reporting entity Acting in the economic best interest Knowledgeable of the asset or liability and the transaction involved Able and willing but not compelled to transact for the asset or liability

Alternative investments that are reported at NAV as a practical expedient are NOT categorized in the FV Hierarchy but are:

Separately reported in the footnotes with disclosures that indicate that NAV is being used and these disclosures must reconcile to the amounts reported on the balance sheet.

In Use

maximum value to market participants would occur through its use in combination with other assets as a group

An entity can apply the fair value option to an eligible item only on the date when one of the following events occurs (an election date):

- When the item is first recognized - when an eligible firm commitment is established - specialized accounting for an item ceases to exist -an investment becomes subject to equity method accounting (but is not consolidated) or to VIE that is no longer consolidated - An event that requires the item to be measured at fair value, such as a business combination or significant modifications to debt instruments.

What is an ASCs that require or permit measurements that are similar to fair value but that are not intended to measure fair value?

-Accounting principles that permit measurements that are determined using vendor specific objective evidence of fair value -Accounting principles that address fair value measurement fo purposes of inventory pricing

Entities may NOT use fair value to measure and report the following financial assets and financial liabilities:

-An investment in a subsidiary that is to be consolidated -An interest in a variable interest entity that is to be consolidated -Employers' and plans' obligations (or assets) for pension benefits, other postretirement benefits, postemployment benefits, and other employee-oriented plans -Financial assets and liabilities recognized under lease accounting -Demand deposit liabilities of financial institutions -Financial instruments that are classified by the issuer as a component of shareholders' equity

Which of the following is an accepted valuation technique for fair value estimates?

The Cost Approach, the market approach, and the income approach.

Which of the following statements is true regarding the fair value option for valuing financial assets and liabilities?

The fair value option must be applied to all interests in the same entity

In fair value what kind of price is used?

an exit price due to different markets

Non-performance risk relating to the liability is assumed to

be the same after the hypothetical transaction as before the transaction

Transaction costs and transportation costs are only used to

determine the most advantageous market

The determination of fair value for a particular asset or liability (or Equity item) may be:

either a stand alone asset or liability or a group of assets/liabilities.

The guidance of ASC 820 does NOT apply to

-accounting principles that address share-based payment transactions -ASCs that require or permit measurements that are similar to fair value but that are not intended to measure fair value -Accounting principles that address fair value measurements for purposes of lease classifications or measurements -ASCs that permit practicability exceptions to fair value measurements

What kind of costs would be used to adjust fair value for measurement purposes?

Costs incurred to transport the asset or liability to its principal or most advantageous market (the location characteristics of an asset.)

All financial assets and financial liabilities must be measured and reported at fair value.

FALSE

An employer's prepaid pension asset account can be measured and reported at fair value.

False

What are transaction costs?

Incremental direct costs to sell the asset or transfer the liability (E.g., Commissions)

To account for a restriction that prevents the transfer of a shareholder equity instrument, a separate input or an adjustment

Should NOT be made in measuring FV.

A separate input or an adjustment to other inputs to account for restrictions that prevents the transfer of liabilities:

Should not be made in measuring FV

The hypothetical transaction to sell the asset or transfer the liability is assumed to occur in which market?

The Principal Market

Is there an exception to the requirement that fair value of qualified financial assets and financial liabilities be measured separately?

Yes, when a reporting entity manages risk associated with a portfolio of financial instruments on a NET exposure, rather than on a gross exposure basis

What are some examples of a group of Assets/Liabilities?

a reporting unit or business

Transaction costs and transportation costs are NOT used to

in determining the fair value of an asset or liability in the most advantageous market.

The concept of highest and best use does NOT apply to:

measuring fair value of financial assets or liabilities

The FV Measurement for Shareholders Equity asssumes

the instrument is transferred to market participants at the MEASUREMENT date and is measured from the perspective of a market participant that holds the instrument as an asset

What is the major purpose of ASC 820 (the Fair Value Framework)?

Provides a framework for how to measure fair value to: -achieve increased consistency and comparability in fair value measurements and -expanded disclosure when fair value measurements are used.

In some cases, a single valuation method will be appropriate and in other cases, a multiple valuation approach will be appropriate. Give an example of when to use multiple valuation techniques.

When valuing an entire business

Most Advantageous Market

The market that maximizes the price received for an asset or minimizes the price to transfer a liability

In the absence of a Principal Market, the hypothetical transaction to sell the asset or transfer the liability is assumed to occur in which market?

The most advantageous market for the asset or liability after taking into account transaction costs and transportation costs

What is Fair Value?

The price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants AT THE MEASUREMENT DATE.

Cost Approach

Uses the amount that currently would be required to replace the service capacity of an asset, adjusting for obsolescence. (EX: Current replacement cost)

Which of the following is an appropriate income approach for developing fair value measurements?

Using present value techniques to discount cash flows

In some cases, a single valuation method will be appropriate and in other cases, a multiple valuation approach will be appropriate. Give an example of when to use a single valuation technique.

Using quoted prices in an active market for identical asset or liabilities

Which of the following is an appropriate market approach for determining fair value measurements?

Using relevant information from recent transactions

Which of the following is an appropriate cost approach for determining fair value measurements?

Using the current replacement cost of the asset

What is Fair Value used for?

To measure and report financial statement items as required or permitted by a number of GAAP Pronouncements (ASCs)

What are the objectives of ASC 820?

To provide the following: 1. A definition of fair value for GAAP purposes 2. A framework for measuring (determining fair value for accounting purposes 3. A set of required disclosures about fair value measurement when it is used.

In determining the fair value of an asset in the most advantageous market, the market-based exit price should be adjusted for

Transportation Cost

A change in valuation technique or its application is appropriate if the change will result in a more representative fair value. Give examples of this and how they are treated if fair value changes as a result.

If new markets develop, new information becomes available, previous information is no longer available, or valuation techniques improve. If fair value changes as a result, changes are treated as changes in accounting estimates.

In determining the fair value of a nonfinancial asset, assessing the highest and best use of the asset must take into account all but which one of the following? What is physically possible What is financially feasible How the reporting entity would use the asset What is legally permissible

How the reporting entity would use the asset

Since Fair Value is a market based measurement, what does it focus on?

It focuses on HOW to measure Fair Value, not when.

What are the three valuation techniques/ approaches in determining fair value for GAAP Purposes?

Market approach, income approach, and cost approach

In Exchange

Maximum value to market participants would occur principally on a STAND- ALONE basis (i.e. the price that would be received in a current transaction to sell the single asset.)

pervasive applicability

Other than the listed exceptions, the content of ASC 820 must be followed when fair value measurement is used, either as required or permitted by other pronouncements

In many cases, the entry price and the exit price will be equal at the date of initial recognition. What is the result of this?

The entry and exit price would constitute the fair value of the asset or liability at that date.

The fair value option may be applied on an instrument-by-instrument basis, with limited exceptions. What are the exceptions?

The fair value option may be elected for a single eligible item without electing it for other identical items if -multiple advances are made to one borrower as part of a single contract and the individual advances lose their identity, the fair value option must be applied to all advances under the contract -the fair value option is applied to an investment that would otherwise be accounted for under the equity method of accounting, it must be applied to all of the investor's financial interests, both equity and debt, in that entity -the fair value option is applied to an eligible insurance/reinsurance contract, it must be applied to all claims/obligations and features/coverages under the contract.

(T/F) As a result of the joint efforts of the IASB and the FASB, there are no significant differences between US GAAP and IFRS related to the meaning of Fair Value, it measurement, or required disclosures.

True

(T/F) Fair Value is a market based measurement, not an entity specific measurement.

True

T/F Even when there is no observable market to provide pricing information about the sale of an asset or the transfer of a liability at the measurement date, a fair value measurement assumes that a transaction takes place at that date.

True

Practical Expedient Exception

Used to measure the Fair Value of an investment that does not have a quoted market price but reports a net asset value per share (NAV), these investments are often referred to as Alternative investments.

Market approach

Uses prices and other relevant information generated by market transactions involving assets or liabilities that are identical or comparable to those being valued