FAR 1

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Fair value is based on an exit price. (true or false?)

TRUE

Completeness: Information is complete if it...

includes all data necessary to be faithfully representative.

Expenses are related to...

the company's primary business operations.

An adjunct account is ________ whereas a contra is _______________.

1. added 2. subtracted

Probable is the threshold associated with contingencies and is broadly interpreted to mean greater than...

70% or 80% probably that the event will occur.

an entry price and an exit price are...

different

ΔA =

ΔL + ΔE

current assets examples:

1. Cash, accounts receivable, 2. short-term investments, 2. inventory, and 3. prepaid assets

Areas—The highest level in the Codification is the area, of which there are nine, each with a specific numeric identifier:

1. General principles (100) 2. Presentation (200) (does not address recognition or measurement) 3. Assets (300) 4. Liabilities (400) 5. Equity (500) 6. Revenue (600) 7. Expenses (700) 8. Broad transactions (800) (transactions involving more than one area such as interest, and subsequent events) 9. Industry (900) (special industry accounting)

Paragraph numbers do not change over time. New paragraphs will use a...

letter extension.

If you are asked to change from cash to accrual, you can still use the accounting equation formula, but the signs would be...

opposite those used in the conversion from accrual to cash.

Balance Sheet Accounts Owners' Equity (also referred to as Shareholders', Stockholders', or Shareowners' Equity) items are shown in order of....

permanence.

Codification: Paragraph - Entities are encouraged to use...

purely verbal references to Topic levels within the Codification for the footnotes to their financial statements because FASB standard numbers are no longer used. For example, to refer to requirements concerning interest capitalization, the footnote would refer to "as required by the Interest Topic of the FASB Accounting Standards Codification."

If guidance for a transaction or event is not specified in the Codification, authoritative GAAP for similar transactions or events should be considered before considering nonauthoritative GAAP. Sources of nonauthoritative guidance include widely recognized and prevalent practices, FASB Concepts Statements, AICPA Issues Papers, IFRS, and others. There is no implied hierarchy for these sources. The guidance for similar transactions or events is not followed if...

that guidance either... 1. prohibits the application of the guidance to the particular transaction or event, or 2. indicates that the accounting treatment not be applied by analogy.

Accrual basis accounting recognizes and reports the economic activities of the firm in the period that...

the activity was incurred, regardless of when the cash activity takes place. In essence, cash can precede or follow an economic transaction. The economic transaction is one that generates revenue or expense.

codification: For SEC guidance, the same section numbering system is used with the addition of...

the letter S preceding the section number.

The Codification provides four different ways for researching an issue:

1. Browse the structure (illustrated above) in the menu provided. 2. Search by key word(s); this mode allows narrowing of a search both by related term and by major area within the Codification structure. 3. Enter the specific Codification location (using the numerical system within the Codification); this is designed for users who know their topic and section of interest. 4. Search by previous GAAP standard number (e.g., by FAS 13).

Variable-Interest Entity Assessment—Each entity that is considered for consolidation must first be evaluated to determine if it is a variable-interest entity (VIE) and, if it is, which other entity is its primary beneficiary. A VIE is a legal entity, which by design either:

1. Cannot finance its activities without additional subordinated financial support (i.e., its expected losses exceed its total equity investment at risk), or 2. Its equity holders, as a group, do not have the direct or indirect ability to make decisions about the VIE's activities.

Effects on Cash of Foreign Currency Translation Foreign currency transactions that occur during the period and affect cash flow should be converted to their dollar equivalent using...

(1) the exchange rate in effect at the date of each transaction or (2) an average exchange rate for the period, if not materially different from the specific rates in effect on the dates of the transactions.

non-current liabilities include:

1. Notes payable, 2. bonds payable, 3. lease liabilities, 4. pension liabilities, 5. post-retirement healthcare liabilities, 6. 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.)

The Codification does not include accounting guidance related to:

1. Other Comprehensive basis of accounting 2. Cash basis accounting 3. Income tax basis accounting 4. Regulatory accounting principles (e.g., insurance) 5. Governmental accounting standards

Comprehensive income does not include the following:

1. Retrospective effects of changes in accounting principle 2. Prior-period adjustments *These are both reported as adjustments to retained earnings. Therefore, comprehensive income accounts for most but not all nonowner changes in owners' equity.

The IASB issued IFRS for SMEs in 2009. The IFRS for SMEs pronouncement is a modification and simplification of the full IFRS and is designed to be used primarily by private companies. Although simplified, it is still based on the IFRS conceptual framework. As set forth in IFRS for SMEs, the objectives of financial statements of small or medium sized entities are:

1. To provide information about the financial position, performance and cash flows of an entity that is useful for economic decision-making by a broad range of users who are not in a position to demand reports tailored to meet their particular information needs (i.e., general-purpose financial statements for external users); and 2. To show the results of the stewardship of management — that is, the accountability of management for the resources entrusted to it.

Not all contra or adjunct accounts are valuation accounts, but all _____________ are _________________.

1. valuation accounts 2. contras or adjuncts

A contra account has a balance opposite that of the associated account in terms of debit and credit. Contras can be debit or credit balances, and can be considered (two things they can be)

1. valuation accounts or 2. merely accumulations of items such as depreciation and amortization over time

Structurally, a VIE may be a...

1. legal trust, 2. partnership, 3. joint venture, 4. limited company or 5. corporation.

Using Cash Flow Information and Present Value in Accounting Measurements:

1. measurement issues 2. present value measure 3. capture economic differences 4. two approaches (traditional and expected cash flow approach)

Cash Flows from Financing Activities - outflows

1. repurchase own (treasury) stock 2. paying back lenders (principal only) 3. payment of dividends

IASB - Elements of Financial Statements Income includes both...

1. revenues (arising from ordinary activities) and 2. gains.

It is often said that U.S. GAAP employs a __________ approach. In other words, the standards are usually explicit as to precise rules that must be followed for recognition, measurement, and financial statement presentation. IFRS, in contrast, is considered a ____________ approach because it attempts to set general principles for recognition, measurement, and reporting and allows professional judgment in applying these principles.

1. rules-based 2. principles-based

Cash Flows from Investing Activities - inflows:

1. sale of long term assets 2. collection of loan principal 3. Disposal of debt and equity securities (of others, e.g., held-to-maturity or available-for-sale classifications) 4. Sale of other productive assets (e.g., patent or equipment; but not Inventory)

When the SEC determines that a firm has reported in such a way that GAAP has been violated, it....

1. sends a deficiency letter to the firm. 2. If not resolved, the SEC can then stop the trading of the firm's securities. 3. If warranted the Department of Justice becomes involved and criminal charges for violations of the securities laws are filed.

Cash equivalents example (ST):

A US treasury obligation purchased when there are three months or less remaining to maturity is a cash equivalent. Investments in stocks are not cash equivalents because they have no maturity value and are not convertible into a specific unchanging amount of cash.

Disclosures—There are several disclosure requirements for both

(1) disposals that meet the criteria for a discontinued operation and (2) individually significant disposals that do not meet these criteria.

IASB - Elements of Financial Statements In the IASB Framework, there are only two underlying assumptions:

(1) that the financial statements are prepared on the accrual basis and (2) that the entity is a going concern. The meaning is the same as in the FASB Framework.

The fair value definition focuses on...

*how* to measure fair value not *when* to measure fair value.

non-current assets include:

1. Long-term investments, 2. property, plant and equipment, 3. intangibles, 4. "other" assets (including long-term prepaids)

It is ______ that causes comprehensive income to differ from net income. Because...

1. OCI 2. "Other" comprehensive income items are not currently recognized in net income. They are recorded directly as increases or decreases in owners' equity.

The Codification does not include guidance for non-GAAP matters including:

1. Other Comprehensive Basis of Accounting 2. Cash Basis 3. Income Tax Basis 4. Regulatory Accounting Principles

IFRS - Income Statement Example of nature of expense presentation in an income statement: (ordering)

1. revenue 2. other income 3. less: a. change in inventories of finished goods and work in progress b. raw materials and consumables used c. employee benefits expenses d. depreciation and amortization expense e. other expenses f. total expenses 4. Profits before tax

GAAP does not require interim reports. However, the SEC requires that registrants file the _________ report for each quarter. Also, quarterly reports are provided as supplemental information within the annual report.

10-Q

Think of OCI as a separate but parallel "income" track, along with net income. "Net income is to retained earnings as OCI is to...

AOCI."

amortized cost (example)

Buildings and equipment are reported at historical cost less accumulated depreciation.

subsequent events (def)

Events or transactions that have a material effect on the financial statements.

nominal dollars example

Financial statement amounts are measured in nominal dollars. If a firm purchased equipment and paid $10,000, that transaction is measured and reported in nominal dollars at $10,000. Price level changes are ignored

specific price change example

If the price of crude oil increased from $17 to $18 per barrel, then the specific price level of oil increased 5.9% ($18 - $17)/$17

The offering process is diagrammed:

Issuer → Underwriter → Dealer → Public

Net realizable value (example)

Lower cost or market for inventory valuation uses NRV.

A consolidated balance sheet can always be prepared immediately following a legal acquisition. (true or false?)

TRUE

measurement base (def)

The attribute of an account being measured and reported

An inventory loss (decline in inventory value below cost) is incurred in quarter 2 but is expected to be recovered by year-end. However, it was not actually recovered by the end of the year. In what interim periods is the loss recognized?

The loss is recognized in quarter 4 because it was expected to be temporary as of the end of quarter 2 and no loss was recognized then.

The International Organization of Securities Commissions (IOSCO) is...

a global cooperative body made up of national securities regulatory agencies.

The consolidating process is carried out on a consolidating worksheet, not on the books of any entity. The basic information for the worksheet comes from the...

account balances of the separate entities

Example A new accounting principle is adopted in quarter 3. The beginning retained earnings balance for quarter 3 is...

adjusted to reflect the new method up to that point, and quarter1 and 2 statements are retrospectively adjusted to reflect the new principle.

U.S. GAAP - Basic and diluted EPS are not allowed for alternative earnings measures. IFRS - Basic and diluted EPS can be shown on...

alternative earnings measures.

The quarterly report is intended to provide investors with...

an update since the last annual report.

Related Situations—The recognition and disclosure requirements for subsequent events apply to both ________________ financial statements but do not apply to subsequent events or transactions that are governed by other applicable GAAP.

annual and interim

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

appropriate risk adjustments, including a risk premium for uncertainty.

There is no stated limit on the number of reportable segments, but as a practical matter, if the number reaches ten, then the firm should...

assess whether adding more segments is worth the cost.

Predictive value — Information has predictive value if it...

assists capital providers in forming expectations about future events.

Cash flow per share is specifically prohibited from being disclosed unless it is...

based on contractual amounts

Subsequent events occur after the date of the financial statements but...

before the statements are issued or are available to be issued.

Unless a parent lacks effective control of a subsidiary, the subsidiary's financial statements must be...

consolidated with parent's financial statements for public reporting.

The method a parent uses to carry an investment in a subsidiary on its books (cost, equity, or other) will affect only the...

consolidating process (entries).

The consolidating process is carried out on a ____________________, not on the books of any entity.

consolidating worksheet

Accrual accounting much more fully reflects the ________________________ of transactions.

economic substance

Diluted EPS (DEPS): Reflects the ___________________________________________________ that is possible given the firm's outstanding securities at the balance sheet date.

maximum dilution or lowest value of EPS

BEPS and DEPS for the first two amounts must be shown with equal prominence. The terms basic EPS and diluted EPS are...

not required terms. Earnings per share, and earnings per share-assuming dilution, are also acceptable.

Disclosure is required only for ____________ segments.

reportable

the appropriate separate company books as a result of actual completion of the in-transit transaction.

fair value The principal market is the one with...

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

IFRS—Footnotes Footnotes Footnotes concerning financial statement items should be disclosed in the order of...

those financial statement items, which, in turn, should be cross-referenced to any related footnote.

errors are

unintentional

Losses do not provide...

value or benefit to the firm.

Penn, Inc., a manufacturing company, owns 75% of the common stock of Sell, Inc., an investment company. Sell owns 60% of the common stock of Vane, Inc., an insurance company. In Penn's consolidated financial statements, should consolidation accounting or equity method accounting be used for Sell and Vane? Consolidation used for Sell and equity method used for Vane. Consolidation used for both Sell and Vane. Equity method used for Sell and consolidation used for Vane. Equity method used for both Sell and Vane.

Consolidation used for both Sell and Vane. *If one looked just at Penn's interest in Vane's result of 45% (75% × 60%), one might say that the equity method would be appropriate. However, because Sell owns 60% of Vane, it controls Vane and would need to consolidate Vane. Because Penn owns 75% of Sell, it controls Vane and would need to consolidate Sell, which consolidated Vane. Thus, all three would be consolidated, making this response correct.

_________________________ are expenses that are directly associated and, therefore, matched with revenue. Other expenses are allocated based on the time period of benefit provided. Depreciation and amortization are examples. Such expenses are not directly matched with revenues. Still other expenses are recognized in the period incurred when there is no determinable relationship between expenditures and revenues. Advertising costs are an example.

Cost of goods sold and sales commissions

According to the FASB's conceptual framework comprehensive income excludes changes in equity resulting from which of the following? Loss from discontinued operations Prior-period error correction Dividends paid to stockholders Unrealized loss on debt securities classified as available-for-sale

Dividends paid to stockholders. *Comprehensive income includes all changes in equity during a period except those resulting from investments by owners and distributions to owners. Dividends paid to stockholders is a change in equity resulting from a distribution to owners, so it is excluded from comprehensive income.

An important thing to remember is that PCS is not common stock at the balance sheet date. They are assumed to be exercised (stock options and warrants) or converted (convertible preferred stock and bonds) as of the beginning of the year (or date of issuance if later). Upon assumed exercise or conversion, the numerator and denominator effects are computed, and are considered for incorporation into...

EPS.

The SEC's EDGAR (___________________________) database facilitates the collections, validations, and indexing of financial statement information. The purpose of EDGAR is to increase the efficiency of the securities markets by providing timely and accessible data. (hint - what is the EDGAR acronym?)

Electronic Data Gathering, Analysis and Retrieval System

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. (true or false?)

FALSE

The related party footnote must disclose the names of all related parties and affiliates (true or false?)

FALSE

There are international standards for preparing personal financial statements (true or false?)

FALSE

U.S. and International GAAP require disclosure of the amount of dividends proposed or declared before the statements were authorized for issue. (true or false?)

FALSE

Under IFRS for SMEs, an entity must account for an investment in an investee over which it has significant influence using the equity method of accounting. (true or false?)

FALSE

The Office of the Chief Accountant has oversight of the...

FASB and AICPA and is the voice of the SEC regarding standard-setting issues.

Does GAAP use the physical capital maintenance concept or the financial capital maintenance concept?

FINANCIAL

__________________ replaces reliability as a primary qualitative characteristic.

Faithful representation

Intraperiod tax allocation and discontinued operations disclosure. A loss on discontinued operations before tax is $12,000, and the associated tax rate is 30%. The disclosure in the income statement below continuing operations would appear as:

Less discontinued operations, net of $3,600 tax savings........$8,400

other disclosures If net asset value (NAV) is used as a practical expedient to determine fair value, NAV is not reported within the fair value hierarchy but rather is separately disclosed in the footnotes of the financial statements. Alternative investments that are reported at NAV as a practical expedient are _____________ in the fair value hierarchy (Level 1, 2, or 3) 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.

NOT categorized

BEPS = (Net Income Available to Common)/(Weighted Average Common Shares Outstanding) *to get net income available to common you take... (hint, equation)

Net Income − Preferred Stock Dividend

CF Operating activities come from adjustments to reconcile net income to net cash flows and through analyzing the change in current asset and liability accounts. operating CF (equation) =

Net income − increase in inventory − decrease in accounts payable

The _________________________ is the most important office for standard setting. This office houses the technical expertise on accounting principles, auditing standards and financial disclosure requirements. This office also issues position papers for the SEC to consider and is the link between the SEC and the accounting profession. The Office of the Chief Accountant has oversight of the FASB and AICPA and is the voice of the SEC regarding standard-setting issues.

Office of the Chief Accountant of the SEC

_______________________ will be the primary beneficiary of a VIE.

Only one entity (e.g., sponsor), if any,

Reconciliation of Change in Cash The net change in Cash is the amount that must be exactly explained by the cash flows associated with...

Operating, Investing, and Financing Activities plus or minus the impact of foreign currency translation.

DEPS - Effect ______ into BEPS

PCS

Advantages of special journals ________________ 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.

Separation of duties

What is the purpose of reporting comprehensive income? To report changes in equity due to transactions with owners To report a measure of overall enterprise performance To replace net income with a better measure To combine income from continuing operations with income from discontinued operations and extraordinary items

To report a measure of overall enterprise performance *The purpose of reporting comprehensive income is to report a measure of overall enterprise performance by displaying all changes in equity of an enterprise that result from recognized transactions and other economic events of the period other than transactions with owners in their capacity as owners. An enterprise should continue to display an amount for net income with equal prominence to the comprehensive income amount displayed.

economic income (def)

The change in the net worth of a business enterprise during an accounting period.

specific price change (def)

The change in the price of a specific good or service over a period of time.

Balance Sheet Factors Limiting the Interpretation of Balance Sheet Information: The value of many assets is derived primarily through use (exceptions are investments, receivables); this value may differ considerably from...

book value and market value. How does the user really interpret book value when book value and market value are different?

Nonmonetary items — The specific price of nonmonetary items...

can change. The value of an item of inventory purchased for $300 can change before it is sold. The item of inventory does not command a fixed value.

Monetary items — The specific price of monetary items...

cannot change. A $50 bill is always "worth" $50. An account receivable recorded at $3,000 is a monetary item because the claim the creditor has on the debtor is fixed at $3,000.

The reason for weighting the shares is that shares outstanding a longer portion of the year represent...

capital investment that has been working longer for the firm than shares outstanding a shorter portion of the year.

Equity Method Adjustments Under the equity method, only _________________ received from the investee cause a cash flow. The adjustments to net income to get cash flow would be:

cash dividends

The OCI items above are disclosed in the statement of comprehensive income discussed in a later lesson. The different income amounts for a period are related as follows: net income + OCI =

comprehensive income

The FASB's Statements of Financial Accounting Concepts, as amended, comprise the conceptual framework for financial accounting. The framework does not constitute GAAP but rather provides.... The conceptual framework is a "constitution" for developing specific GAAP.

consistent direction for the development of specific GAAP.

Where the substance of the relationship indicates that an entity controls an SPE, the SPE should be...

consolidated by the controlling entity.

Because the entities are under common economic control, GAAP requires...

consolidated financial statements.

Permanent declines in inventory are those not expected to reverse in the current year are recognized as losses in the interim periods in which they occur. Later recoveries are recognized as gains to the extent of previous losses only. The inventory may not be marked up above...

cost.

The amount of preferred stock dividends subtracted in the numerator of BEPS depends on whether the preferred stock is cumulative or not, and if not, on the amount declared in the period. *Study Tip* Most preferred stock is...

cumulative.

Losses represent...

decreases in equity or net assets from peripheral or incidental transactions.

Expenses represent...

decreases in net assets or incurred liabilities through the provision of goods or services.

During inflation, the purchasing power of an asset having a fixed unchangeable value ...

decreases.

Cost Accounting Variances—Purchase price variances, and volume variances expected to be absorbed by the end of the current year are...

deferred (not recognized in earnings) for the interim period.

Consolidation After Acquisition When the subsidiary's assets are written up to fair value (in the investment elimination entry, for example) it is as though the parent and noncontrolling interest, if any, paid more for the assets than the subsidiary paid for them. Therefore, additional ___________________ must be taken.

depreciation or amortization

Consolidation After Acquisition Fair Value of Subsidiary's Identifiable Assets/Liabilities Different than Book Value— When the fair value of the subsidiary's identifiable assets and/or liabilities are different than the book value at the date of acquisition, __________________ must be recognized on the worksheet for any amount of Identifiable Assets recognized by the Investment elimination (above).

depreciation/amortization

IFRS - Income Statement IFRS requires firms to analyze expenses either by (a) function or (b) nature of the expense. If a firm uses the functional system, the firm must...

disclose the additional information on the nature of expenses. This disclosure is usually in the notes. In the U.S. GAAP there is no such requirement although SEC registrants must report expenses by function.

IFRS - Income Statement U.S. GAAP allows alternative measures of performance to be reported on the face of the income statement. Examples include...

earnings before interest, taxes, depreciation and amortization. Such reporting in the income statement is not included in the illustrative examples that are part of IAS 1, Presentation of Financial Statements.

eliminated (deferred) again as part of the elimination of intercompany profit in ending inventory of that period.

The Statements of Financial Accounting Concepts (SFAC) were issued to... The SFAC provide the theory behind accounting and reporting and provide guidance when no GAAP exists. The SFAC are not included as GAAP.

establish a framework from which financial accounting and reporting standards could be developed.

estimate cost of goods sold from purchase information. The estimated cost of goods sold then is used to estimate ending inventory for the quarter without having to count inventory. Footnote disclosure of the use of this method is required.

The objective of present value, when used in accounting measurements at initial recognition and fresh-start measurements, is to...

estimate fair value

fair value The assumed transaction establishes a basis for...

estimating the price to sell the asset or transfer the liability.

*Subsequent Events—Conditions Did Not Exist at the Balance Sheet Date* example A firm completes a large issuance of bonds early in 20X5, before the issuance of the 20X4 statements. The 20X4 statements should...

footnote disclose the relevant information about the issuance, but recognition is postponed until the 20X5 statements

IASB - Elements of Financial Statements Assumptions The IASB Framework does discuss economic entity, monetary unit, and periodicity as underlying concepts for the preparation of financial statements but not as...

formal assumptions. Along with going concern, these three assumptions comprise the four FASB Framework assumptions.

Neutral: Information is neutral when it is...

free from any bias intended to attain a prespecified result, or to encourage or discourage certain behavior.

IFRS - Income Statement Reporting by expense __________ is more prevalent in IFRS financial reports.

function

economic income Net income for the period would include...

all changes in FV of assets and liabilities during the period.

Which one of the following is not necessarily a post-combination characteristic of a legal acquisition? The combining firms remain separate legal entities. A parent-subsidiary relationship exists. The acquiring firm owns 100% of the voting stock of the acquired firm. The combining firms are under common economic control.

The acquiring firm owns 100% of the voting stock of the acquired firm. *The acquiring firm in a legal acquisition does not have to own 100% of the voting stock of the acquired firm. In a legal acquisition, the acquiring firm need only acquire greater than 50% (50% + 1 share) of the acquired firm to obtaining a controlling interest. Both firms continue to exist and operate as separate legal entities, the acquiring firm as the parent and the acquired firm as a subsidiary.

Balance Sheet Total assets =

Total liabilities + Owners' equity

Single-Step Format The single-step format involves a presentation of income from continuing operations that is largely based on...

a single comparison. Total revenues and gains are compared with total expenses and losses in the single-step format.

The consolidating process is primarily concerned with adjusting and eliminating those balances to develop information that would report the separate entities as though they were...

a single entity

Only dilutive PCS are incorporated into DEPS. This means when we add the numerator effect of a PCS to the numerator of BEPS, and the denominator effect to the denominator of BEPS, the result is a _________ EPS number.

lower

Special Journals Similar to the control-subsidiary account distinction for ledger accounts, firms may use special journals, and a general journal. ______________________ are recorded in special journals (e.g., the sales journal) with very infrequent transactions being recorded in the general journal. Special journals facilitate the review and control of similar transactions (all sales, all cash receipts etc.).

High volume similar transactions

Adjustments to quoted prices generally result in a fair value measurement categorized in a...

lower level of the fair value hierarchy (i.e., Level 2 or 3).

inventory's measurement basis is...

lower of cost or market

The Dilution/Antidilution Method when there is more than one PCS The process is to enter the PCS with the _________ N/D into DEPS first. Then compare the next _______ N/D with the resulting DEPS. Continue to add PCS into DEPS until a PCS is encountered with a higher N/D than the previous DEPS figure, or until all PCS are entered. Use income from continuing operations as the control number.

lowest

The concept of capital maintenance is related to the unit of measure assumption. Capital is said to be maintained when the firm has positive earnings for the year, assuming no changes in price levels. When a firm has income, it has recognized revenue sufficient to replace all the resources used in generating that revenue (return of capital), and has resources left over in addition (income, which is return oncapital). That income could be distributed as dividends without eroding the net assets (capital) existing at the beginning of the year. GAAP is based on the concept of "financial" capital maintenance. As long as dividends do not exceed earnings, and earnings is not negative, financial capital has been...

maintained.

Financial statements provide highly aggregated information. For a firm that conducts activities in several different lines of business, users would benefit from disclosures that provide more disaggregated information. To that end, GAAP requires, under certain circumstances, that information be provided by...

major business segment.

Voting Interest Assessment If an entity being considered for consolidation (e.g., an investee) is not a variable-interest entity, it would be assessed to determine whether an investor has...

majority ownership of its voting securities and, if so, that nothing prevents the investor from exercising his or her control of the operating and financial activities of the investee.

A firm may not use the fair value option for investment in common stock which gives the investor significant influence over the investee. (true or false?)

FALSE

Adjusting entries are always required in the preparation of consolidated statements immediately following a business combination. (true or false?)

FALSE

All entities that can use U.S. GAAP can elect to use IFRS for SMEs. (true or false?)

FALSE

Any difference between the fair value of a subsidiary's asset and the book value of that asset is recognized on the books of the parent. (true or false?)

FALSE

Any of the major sections of the Statement of Cash Flows may be presented using either the direct or the indirect method. (true or false?)

FALSE

Both losses and expenses cause income to decrease and cause a benefit for the firm. (true or false?)

FALSE

Development stage companies have the same disclosure requirements as other companies (true or false?)

FALSE

Entities that are required to file financial statements with the Securities Exchange Commission (SEC) may elect to use IFRS for SMEs. (true or false?)

FALSE

Financial liabilities arising from a lease contract obligation can be measured and reported at fair value. (true or false?)

FALSE

If a parent carries an investment in a subsidiary using the equity method, the parent will recognize a cash dividend received from the subsidiary as a dividend income. (true or false?)

FALSE

If an investor firm owns 80% of the voting stock of another company which is in bankruptcy, the investor firm is likely to have effective control of the investee. (true or false?)

FALSE

If goodwill is recognized on the consolidating worksheet, it must be amortized on the consolidating worksheet. (true or false?)

FALSE

If on the consolidating worksheet an asset is written down to a fair value that is less than book value, an additional amount of depreciation expense will be recognized on the consolidating worksheet. (true or false?)

FALSE

If the parent uses the cost method to account for its investment in a subsidiary, the carrying value of the investment account on the parent's books will reflect changes in the subsidiary's shareholders' equity. (true or false?)

FALSE

In the indirect method of presenting Cash Flows from Operating Activities, the amounts paid for interest and dividends are presented on the face of the Statement of Cash Flows. (true or false?)

FALSE

Miscellaneous revenues and expenses appear below income from continuing operations in the income statement. (true or false?)

FALSE

The U.S. Framework identifies accrual accounting as a basic assumption (true or false)

FALSE

The fair value of a liability is based on the amount that would be paid to settle the liability. (true or false?)

FALSE

The fair value of a nonfinancial asset is based on its highest and best use by the reporting entity. (true or false?)

FALSE

The fair value of an asset is based on the price that would be paid to acquire the asset (true or false?)

FALSE

The methods and significant assumptions used to estimate fair value must be disclosed in both annual and interim reports. (true or false?)

FALSE

The purpose of the codification is to make the accounting standards uniform. (true or false?)

FALSE

Although the SEC can prescribe accounting standards, it has delegated that task to the private sector (currently the _________). However, the SEC maintains the enforcement power for all publicly traded companies to assure compliance with U.S. GAAP.

FASB

what transactions is included in the operating activities section of a cash flow statement prepared using the indirect method?

Gain on sale of plant assets. *The gain on the sale of a plant asset is a noncash item that is used to reconcile net income to cash flows from operations.

contingent liabilities / subsequent events ______ contingencies are not recognized, although it could be argued that the conditions giving rise to the _____ existed before the balance sheet date.

Gain, gain

The SEC is a member of the _________________________ (IOSCO), which consists of more than 100 securities regulatory agencies or exchanges across the globe.

International Organization of Securities Commissions

The purpose of segment reporting is to assist the financial statement users' understanding of the entity's performance. Because segment reporting provides disaggregated information, it contains...

predictive value and confirmatory value to the financial statement user.

Relevance (primary characteristic) — Information is relevant if it makes a difference to decision makers in their role as capital providers. Information is relevant when it has...

predictive value, confirmatory value, or both.

Comparison of the Direct/Indirect Method of Determining Cash Flows from Operating Activities 5. The direct method is...

preferred (by the FASB).

International Financial Reporting Standards (IFRS) — Issued by the International Accounting Standards Board (IASB), do not contain a concept comparable to "other comprehensive basis of accounting" (OCBOA), nor do they address the issue of personal financial statements. Therefore, there are no international standards for...

preparing financial statements under either of these bases of accounting.

liabilities' measurement basis is...

present value

IFRS - Income Statement Specific Items to be Reported in the IFRS Income Statement—The following items are required to be reported on the face of the statement of comprehensive income (under either option above), subject to materiality constraints and the nature of the business. Material items should be...

presented separately either on the face of the income statement or in the footnotes.

Balance sheet: All assets and liabilities of the discontinued operation for all comparative periods are...

presented separately on the balance sheet. These assets and liabilities cannot be presented as a net single amount; rather the gross amount of assets and liabilities must be shown.

previous losses only.

Cash Flows from Operating Activities—Noncash Items Gain/loss example Example During 20X2, equipment with a cost of $75,000 and accumulated depreciation of $50,000 was sold for $20,000. calc of loss:

price = 20,000 less: 25,000 book value (75 cost - 50 A/D) = (5,000) loss. *In the determination of cash flows from operations, the $5,000 loss should be added back to net income because the loss is not a cash outflow.

An alternative concept of capital maintenance is physical capital maintenance. This concept holds that earnings cannot be recognized until the firm has provided for the physical capital used up during the period. To measure the capital used up, changes in...

price level must be considered.

Substantial doubt means that it is _____________ that the entity will be unable to meet its obligations.

probable

profit or loss for the period. It appears as a subtotal in the single statement option above or as the bottom line in the income statement under the two-statement option. As another example, the term turnover is used for sales by some firms in their IFRS income statements, even though IFRS uses the term Revenue. This is usually a cultural difference, as British companies refer to Revenue as Turnover.

prohibit this practice.

The Foreign Corrupt Practices Act of 1977...

prohibits bribes of foreign governmental or political officials for the purpose of securing contracts or business. It requires publicly held companies to maintain an adequate system of internal control.

A company with a complex capital structure is...

required to disclose the Basic Earnings per Share and the Diluted Earnings per Share. This is called dual EPS reporting.

The International Organization of Securities Commissions (IOSCO) is a global cooperative body made up of national securities regulatory agencies. The IOSCO is the recognized international standard setter for ________________.

securities markets

IASB - Elements of Financial Statements Offsetting in financial statements is not allowed unless...

the procedure reflects the underlying substance of related events or transactions, or where permitted by an accounting standard.

U.S. GAAP-IFRS Differences The international standard for segment reporting conforms in most respects with the corresponding U.S. standard adopted several years before the IASB's standard. One important difference is that, for reportable segments, the international standard requires disclosure of total liabilities if that information is provided to the firm's chief operating decision maker. Liabilities are also included in...

the reconciliations of segment information with total firm data.

Financial statement users wishing to compute EPS for intermediate subtotals such as income before discontinued operations may do so with...

the required disclosures.

The definitions of current assets and liabilities for IFRS are worded slightly differently from those definitions under U.S. GAAP, but...

the result of their application will generally yield the same results.

Fair Value Hierarchy—The fair value hierarchy (provided in ASC 820) prioritizes or ranks the inputs to valuation techniques used to measure fair value into three levels: level 3 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, the valuation technique should be calibrated (adjusted) at initial recognition so that...

the results of the valuation technique equals the transaction price.

Special Journals Similar to the control-subsidiary account distinction for ledger accounts, firms may use special journals, and a general journal. High volume similar transactions are recorded in special journals (e.g., the sales journal) with very infrequent transactions being recorded in the general journal. Special journals facilitate...

the review and control of similar transactions (all sales, all cash receipts etc.).

An adjunct account has a balance that is ___________ as that of the associated account in terms of debit and credit. An adjunct can have either a debit or a credit balance.

the same

The PCC Framework provides direction to evaluate the trade-off between...

user-relevance and cost-benefit for private companies. To help identify information needs of users of public company financial statements versus users of private company financial statements, the Framework outlines five factors that differentiate the needs of the financial statement users. These factors can help identify opportunities to reduce the complexity and costs of preparing financial statements for private companies.

Cash Flows from Investing Activities The items that make up Cash Flow from Investing Activities are presented ___________________ whether the direct or indirect approach is used to present Cash Flow from Operating Activities.

in the same manner, regardless of

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

The Dilution/Antidilution Method when there is more than one PCS The previous examples have used only one PCS. What happens if there are two or more? Which one is entered into BEPS first? The solution is to...

incorporate the PCS into DEPS in order of most dilutive first, then the next dilutive PCS and so forth. The PCS with the most dilutive potential is the one with the lowest ratio of numerator effect/denominator effect (N/D).

Present value of future cash flows is not used to measure...

inventory.

subsequent events Public entities or any entities that widely distribute their financial statements use the...

issued date.

An entity that is determined to be the primary beneficiary of a VIE and, therefore, consolidates its financial statements, must assess whether...

it continues to be the primary beneficiary on an ongoing basis.

IFRS establishes that an entity may control a special-purpose entity (SPE), even when...

it owns little or none of the SPE's equity

The accrual basis of accounting is preferred over the cash basis of accounting because...

it reflects a better association of revenues and expenses with the appropriate accounting period.

Identifiable assets and liabilities with _______________________________________ cause the difference between total OE and the market value of net identifiable assets. Examples include investments and natural resources.

market values different from their book values

Fair value is a ___________ measurement, not an entity-specific measurement.

market-based

The cost constraint on GAAP limits recognition and disclosure if the cost of providing the information exceeds its benefit. Firms may not omit disclosures if they are...

material and mandated by GAAP.

GAAP requires that unusual or infrequent items be separately reported if...

material, as 1. a component of income from continuing operations or alternatively, 2. disclosed in notes to financial statements. Note that there is no longer a category for "extraordinary items" at the bottom of the income statement. Any unusual or infrequent items (such as an impairment loss) is show as a component of income from continuing operations.

Balance Sheet Accounts Liabilities are shown in order of...

maturity. Current liabilities are presented first and then long-term liabilities are presented.

It should be noted that overly conservative estimates can be...

misleading and cause over reporting in subsequent periods.

Cash Flow from Operating Activities—Accrual Reconciliation The indirect method of presenting cash flow from operating activities is a reconciliation of...

net income (accrual basis) to cash generated by operations (cash basis).

All items reported for discontinued operations are...

net of tax (after tax).

OCI items are typically reported...

net of tax. Alternatively, firms may report each item on a pretax basis with the net aggregate income tax effect reported as a separate item.

receivables' measurement basis is...

net realizable value

Net realizable value (NRV) —This value is used to approximate the liquidation value or selling price. It is the...

net value to be received after the costs of sale are deducted from the current market value

Consolidated financial statements are required when...

one entity has effective control over another entity.

The difference between a firm's market capitalization and the market value of net identifiable assets is goodwill—an amount that cannot be identified with any individual recorded asset. However, goodwill is recorded for accounting purposes only when...

one firm purchases all or a controlling interest of another firm.

Cumulative means that if a year's preferred dividend is not paid (skipped), no other dividends may be paid before the skipped dividends (dividends in arrears) are paid. Regardless of whether dividends are declared on cumulative preferred stock, ______________________________ is subtracted from the numerator of BEPS because no common dividends can be paid on these earnings before the preferred dividends are declared. This also means that in a year in which dividends in arrears from a previous year are paid in addition to the current year dividend, still only one year is subtracted from the current-year BEPS numerator because BEPS in the previous year has already been reduced by the skipped dividends.

one full year's dividends

Under GAAP, business segments are identified by employing a management approach. That is, segments are identified in the same manner that management segments the company for purposes of making ___________________. These segments are referred to as operating segments.

operating decisions

Options are antidilutive when the...

option price exceeds the market price. In the above example, if the average market price were $25, the three steps would produce a negative number, causing DEPS to increase. The easy way to remember this is that no one would exercise such a stock option and pay more than market price.

IASB - Elements of Financial Statements Expenses result from...

ordinary activities.

If the fair value option is elected for held-to-maturity securities, those securities will be treated and reported as trading securities. Gains and losses resulting from change in fair value will not be reported in...

other comprehensive income

Cash Flows from Operating Activities—Direct Method The Net Cash Flow from Operating Activities can be...

positive or negative

Impracticability Exception However, the impracticability exception for annual periods does not apply to...

prechange interim periods in the year the change was made. When it is impracticable to apply the retrospective method to prechange interim periods of the same fiscal year, then the change is made as of the beginning of the subsequent fiscal year.

IASB - Elements of Financial Statements Liabilities—Currently, the IASB Framework definition is as follows (para. 49 b): "A liability is a...

present obligation of the entity arising from past events, the settlement of which is expected to result in an outflow from the entity of resources embodying future benefits."

When a full set of general-purpose financial statements is presented, comprehensive income and its components should be displayed in a financial statement that...

has the same prominence as other financial statements.

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).

IASB - Elements of Financial Statements Losses are usually reported...

separately from expenses.

The ___________________ is another name for the balance sheet.

statement of financial position

Accounting income For many assets and liabilities, changes in market value are not recognized until...

substantiated by a transaction between willing parties.

Statement of Changes in Equity Horizontal Format After all the remaining accounts are entered, the totals of each account (to the left of each account schedule) add to...

total OE

PCC - goodwill The private entity must complete impairment testing when a _____________ occurs. When that event occurs, the private entity must apply the impairment test following the guidance for a public entity. That is, the private entity has the option to apply the prestep qualitative assessment prior to the quantitative assessment. The measurements under the quantitative two steps are applied in the same manner as required under ASC 350.

triggering event

IFRS - Income Statement The *nature* of expense reporting focuses on the...

type of expense. Examples include changes in inventories of finished goods and work in progress, raw materials and consumables used, employee benefit expense, depreciation and amortization expense.

If your current-period dividends declared are non-cumulative preferred...

use amount declared in the EPS numerator

If your current-period dividends are NOT declared and are non-cumulative preferred...

use none in the EPS numerator

NPV (example)

used in many capital budgeting decisions

fair value (example)

used to value trading and available-for-sale securities.

Valuation Technique/Approach Selection In some cases, a single valuation technique will be appropriate (examples)

using quoted prices in an active market for identical assets or liabilities

Value-in-use and entity-specific measurements attempt to capture the...

value of an asset or liability in the context of a particular entity. An entity-specific measurement substitutes the entity's assumptions for those that marketplace participants would make.

The activities of and decision-making in a VIE are governed largely by the agreement that establishes the entity and generally resides with the...

variable-interest holders; nonsponsor equity owners may play little role in the operation of the entity.

An unconsolidated subsidiary would be reported as an _________________ by the parent.

"Investment" asset

Reporting Within the Balance Sheet—The use of "adjunct" accounts signified with a ____ symbol.

(+)

objective of financial reporting: Decision Usefulness primary & enhancing qualitative characteristics:

*PRIMARY* *1. relevance* a. Predictive value b. Confirmatory value c. materiality *2. Faithful Representation* a. completeness b. Neutrality c. Free from error *ENHANCING* 1. comparability 2. verifiability 3. timeliness 4. understandability

Intercompany Items—Intercompany transactions and balances (i.e., between the companies being combined) are eliminated, including:

1. Inter-company receivables and payables 2. Inter-company revenues and expenses 3. Inter-company gains and losses 4. Inter-company ownership and related equity—The carrying value of an investment in a company to be combined is eliminated against an equal amount of equity of that company; thus, there are no differences (between the debit and credit) to be allocated.

The primary types of intercompany transactions and related intercompany balances are:

1. Receivable/payables 2. Revenues/expenses 3. Inventory 4. Fixed assets 5. Bonds

The IFRS standards-setting due process is similar to the FASB's and entails six stages:

1. Set agenda. 2. Plan project. 3. Develop and publish a discussion paper. 4. Develop and publish an exposure draft. 5. Develop and publish a standard. 6. Address unanticipated issues after the standard is issued.

general prices (def)

A market basket of items that the typical consumer purchases.

Current assets (def)

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.

constant dollars example

If equipment is purchased for $10,000 when the general price level index is 100, the constant dollar measurement for that equipment when the general price level index is 120 at a later date is $12,000 ($10,000 × 120/100). If the price of equipment had kept pace with inflation, the firm would have to spend $12,000 now to obtain the equipment it purchased for $10,000 on a previous date. In the adjustment ratio above (120/100), the numerator is the price level for the date on which the constant dollar measurement is desired. The denominator is the price level in effect on the date the transaction occurred. Constant dollar adjustments allow comparisons of dollar amounts for transactions occurring on different dates. The effect of inflation is stripped away leaving "real" dollar measurements.

accounting income (def)

Revenues less expenses plus gains less losses.

Adjust for EPS—If a stock dividend or split occurs between the balance sheet date and issuance of the balance sheet...

all share amounts are adjusted for EPS purposes.

Throughout the accounting cycle, U.S. GAAP is applied primarily at the two journal entry steps (1 and 3), and in preparing the financial statements and note disclosures. Otherwise, the cycle is...

largely mechanical and usually not performed manually.

in Europe, the European Union (EU) Parliament has established its own modifications and enhancements to...

IFRS, even though IFRS has already been adopted for all EU member states for publicly traded entities.

Which of the following is not an acceptable option of reporting other comprehensive income and its components? I. In a separate statement of comprehensive income II. In a statement of earnings and comprehensive income III. In a statement of changes in stockholders' equity

III. In a statement of changes in stockholders' equity

US GAAP vs IFRS Assets—For an expenditure in one interim period to be capitalized (and thus result in some expensing in a later interim period), the expenditure must meet the definition of an asset in the first interim period. Allocations of expenditures to more than one interim period as expense are not allowed, unless an asset...

exists at the end of the interim period. The balance sheet view prevails here rather than matching.

External Financial Report—The general-purpose external financial report (also called the annual report) is prepared by applying Generally Accepted Accounting Principles (GAAP). The general-purpose external financial report has the following key components:

1. Income Statement 2. Statement of Comprehensive Income 3. Balance Sheet 4. Statement of Changes in Owners' Equity 5. Statement of Cash Flows 6. Footnote Disclosures and supplementary schedules 7. Auditor's Opinion

1. widely recognized and prevalent practices, 2. FASB Concepts Statements, 2. AICPA Issues Papers, 3. IFRS, and 4. others. **There is no implied hierarchy for these sources.

Current liabilities (examples)

1. Accounts payable, 2. wages payable, 3. income tax payable, 4. unearned revenues, and 4. warranty liability (For the last two items, only the portion to be extinguished within one year of the balance sheet would be classified as current.) Also, the current portion of long-term debt is classified as current; it is the amount of debt previously classified as long-term that is now due within one year of the balance sheet date.

The purpose of the Statement of Cash Flows is to explain the change in cash and cash equivalents that has occurred during the past accounting year. Cash equivalents are short-term investments that:

1. Are convertible into a known and fixed amount of cash; and 2. Have an original maturity to the purchaser of three months or less.

superseded guidance examples:

1. pooling of interests and 2. pension transition obligations.

GAAP — The composition of GAAP includes...

1. principles, 2. methods, and 3. procedures that are generally accepted by the accounting profession.

Codification: Paragraphs - The actual accounting standard material is provided in paragraphs within _____________ or ____________. For example, 310-40-35-2 is paragraph 2, Troubled-Debt Restructuring, within the General subsection within the Subsequent Measurement section within the Troubled-Debt Restructurings by Creditors subtopic within the Receivables topic, which is within the Asset area.

1. sections or subsections

The presentation format for a balance sheet is typically one of two formats:

1. the account format or 2. the report format.

The following formula is used to adjust service revenue from the cash basis to the accrual basis:

Cash fees collected + End. AR − Beg. AR + Beg. unearned fees − End. unearned fees = Accrual basis service revenue

Current liabilities (def)

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.

An ASU is a separate document posted on the FASB website and incorporated in the Codification. The ASU will...

(1) summarize the key aspects of the update, (2) detail how the Codification will change, and (3) explain the basis for the update. ASUs are not authoritative—ASUs are a vehicle to update the codification and are not permanent in their own right, but a way to amend the codification. When changes to the codification happen, the FASB updates the Codification and issues the ASU simultaneously.

long-term assets & long-term liabilities (examples)

*Assets* 1. Long-term investments, 2. plant assets, 3. certain deferred charges, and 4. intangible assets are *Liabilities* 1. Notes and bonds payable and 2. mortgages payable

Definition of a Security Section 2.1 of the 1933 Act defines a security as:

"Any note, stock, treasury stock, bond, debenture, evidence of indebtedness, certificate of interest, or participation in any profit-sharing agreement, collateral trust certificate, reorganization certificate or subscription, transferable share, investment contract, voting trust certificate, certificate of deposit for a security, fractional undivided interest in oil, gas, or other mineral rights, or in general, any interest or instrument commonly known as a security, or any certificate of interest or participation in, temporary or interim certificate for, receipt of, guarantee of, or warrant or right to subscribe to or to purchase any of the foregoing."

There are three important valuations for a firm: 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.

management's going concern assessment There is uncertainty regarding the entity's ability to meet maturing obligations if there is _________________ that the entity cannot meet its obligations as they become due.

"substantial doubt"

If a majority-owned subsidiary is not consolidated because the investor lacks effective control (for one of the reasons given above), the subsidiary is an...

"unconsolidated subsidiary."

Examples of monetary items

1. Cash, 2. most receivables, 3. accounts payable, 4. all liabilities payable in fixed dollar amounts, and 5. certain investments in debt securities.

The standard applies only to the following defined set of four concentrations, rather than all possible concentrations:

1. Concentrations in the volume of business with a particular customer, supplier, lender, grantor, or contributor. The loss of the relationship is an example of an event that could cause a severe impact. The standard states that it is always at least reasonably possible to lose such a customer, grantor or contributor although the impact may not be severe. 2. Concentrations in revenue from specific products, services, or fund-raising sources. A price or demand change could cause a severe impact. 3. Concentrations in specific sources (suppliers) of services, materials, labor, licenses or other rights used in operations. Losses of a key supplier or a patent are examples of events that could cause a severe impact. 4. Concentrations in the market or geographic area of operations. The standard states that it is always at least reasonably possible that operations located outside the firm's home country will be disrupted in the near term.

Effective control may be lacking due to:

1. Foreign subsidiary being largely controlled by the foreign government through: a. Prohibition on paying dividends b. Control of day-to-day operations 2. Domestic subsidiary in bankruptcy and under the control of the courts.

U.S. GAAP requires that any noncontrolling interest be measured at full fair value, including the goodwill attributable to the noncontrolling interest. IFRS gives the acquirer a choice between two options for measuring noncontrolling interest in the acquiree; those options are to measure noncontrolling interest using either:

1. Full fair value of the NCI, including goodwill attributable to noncontrolling interest, or 2. Proportional share of the fair value, excluding goodwill attributable to the noncontrolling interest.

IFRS - A liability is classified current if it meets one of the following criteria:

1. It is expected to be settled in the entity's normal operating cycle; 2. It is held primarily for the purpose of being traded; 3. It is due to be settled within 12 months after the reporting period; or 4. The entity does not have an unconditional right to defer settlement of the liability for at least 12 months after the reporting period. 5. All liabilities not meeting any one of the above criteria are classified as noncurrent, being the default classification.

IFRS—Footnotes Footnotes The summary of significant accounting policies should include:

1. Judgments and key assumptions made in applying those policies; 2. Measurement bases used for recognition (e.g., historical cost, fair value); and 3. Information enabling an assessment of the estimation uncertainty that could result in a material adjustment to the balances of assets and liabilities, which are point estimates in many cases.

IFRS interim report The footnotes should include information about the following, if material:

1. Statement of accounting policies 2. Cyclical revenues and expenses 3. Unusual items 4. Changes in estimates 5. Changes in debt and equity securities 6. Dividends paid 7. Segment information 8. Subsequent events 9. Contingencies 10. Changes in composition of consolidated enterprises.

Identification of Reportable Segments—Quantitative Tests—A reportable segment is one that meets one or more of the following three quantitative tests:

1. The operating segment's revenue from all sources (internal and external) is 10% or more of the combined (internal and external) revenues of all of the company's reported operating segments. 2. The operating segment's operating profit or loss (absolute value) is 10% or more of the greater of the following two amounts (absolute value). Operating profit is pretax. a. The combined operating profit of all operating segments that did not report an operating loss b. The combined loss of all operating segments that did report an operating loss 3. The operating segment's identifiable assets are 10% or more of the combined assets of all operating segments. *Each of the three criteria uses 10% or more as the cutoff percentage. The 10% cutoff is an example of a GAAP-imposed materiality threshold.

Operating segments must have three characteristics:

1. The segment is involved in revenue producing and expense incurring activities. 2. The operating results of the segment are reviewed by the company's chief operating decision maker on a regular basis. 3. There is discrete financial information available for the segment.

There are three important valuations for a firm:

1. Total OE or net assets—This is the amount determined by current U.S. GAAP and is found in the balance sheet; 2. 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; 3. 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.

Statement of Stockholders' Equity — The statement of stockholders' equity (sometimes referred to as shareholders' equity) presents the changes in the owners' equity over a period of time —the same time period as the income statement. Like the income statement, this statement is dates for the year ended (e.g., December 31, 20xX). This statement presents the changes in...

1. contributed capital, 2. additional paid-in capital, and 3. retained earnings. These changes arise from the purchase and sale of shares of the entities stock, the changes in comprehensive income, and the payment of dividends.

IFRS - Income Statement The *function* of expense reporting focuses on the activity to which the expense relates. Examples include:

1. cost of sales, 2. distribution costs, and 3. administrative expenses.

At any interim period, the financial statements would present the _____________ results as well as the ______________ for the prior year.

1. cumulative 2. comparative

1. current and 2. non-current. **IFRS specifies a minimum listing of accounts that must be presented whereas U.S. GAAP does not have such specification, although SEC registrants must follow SEC guidelines that require specific line items.

The net effect of the alternative valuations of NCI is in the amount of goodwill recognized. Under the full fair value approach, the goodwill attributable to the NCI is... Under the proportional share of fair value approach, only _________________ is recognized; no goodwill is derived for or allocated to NCI

1. derived and allocated to NCI. 2. the goodwill paid for by the acquirer

Under the accrual basis, revenues are recognized when... Expenses are recognized when....

1. earned, regardless of the period of cash collection. 2. incurred, regardless of the period of cash payment.

IFRS—Footnotes Footnotes Disclosures for the Effect of Changing Prices The international accounting experience with reporting the effects of changing prices is similar to that of the United States. Initially entities were required to disclose the impact of changing prices on their results of operations and financial position. Firms could apply either...

1. general price level adjustments (inflation), or 2. current replacement cost (specific prices). These requirements were withdrawn as inflation became less of a problem, although they are encouraged.

Presentation of Comprehensive Income under U.S. GAAP is aligned with IFRS. Both U.S. GAAP and IFRS required that comprehensive income is presented either...

1. in a separate statement or 2. in the statement of income.

IASB Framework In September 2010 the first phase of the joint convergence project was completed. As such, the _________________________ discussed in previous FASB Conceptual Framework lessons apply to the IASB framework as well. The two constraints (____________________________) also are included in Phase (a). The material from Phase (a) is not repeated here. Please refer back to the FASB Conceptual Framework lessons.

1. objectives, qualitative characteristics, and constraints sections 2. materiality and cost effectiveness

Once the stock is issued, it may be traded.... (hint, two ways)

1. over the counter by dealers or 2. on an organized exchange.

IFRS pronouncements address... The same is true with U.S. GAAP, albeit in considerably more detail.

1. recognition, 2. measurement, 3. presentation, and 4. disclosure matters related to transactions and events (items) that affect the entity and are therefore reported in the financial statements.

That is, accounting income reflects...

1. recorded transactions, 2. events, and 3. adjustments.

Revenue Recognition Principle—This principle addresses three important issues related to revenues:

1. revenue defined 2. revenue recognition 3. revenue measurement

Cash Flows from Financing Activities - inflows

1. sale of own stock 2. proceeds from borrowing (bonds, notes, etc)

1. sole proprietorships, 2. partnerships or 3. small, closely held corporations when the entity does not have loan covenants or other requirements that mandate the preparation of GAAP-based financial statements. There are over 2.8 million partnerships and over 20 million sole proprietorships in the United States. Many of these nonpublic businesses use another comprehensive basis of accounting.

Characteristics of Financial Statements under IFRS for SMEs Unlike OCBOA, IFRS for SMEs is based on _________________, just as is standard U.S. GAAP. However, IFRS for SMEs is both less complicated and less voluminous than U.S. GAAP.

1. the accrual basis of accounting

Consolidated financial statements are justified only when the controlling financial interest of the firms being consolidated rests directly or indirectly with one of the firms (a "parent") to be included in the consolidation. There are circumstances when ____________________ ________________________, but bringing together (combining) the financial statements of two or more related firms would be more meaningful than their separate financial statements.

1. there is not a parent company, or 2. when a parent does not have effective control of subsidiaries

According to SFAC 7, the objective of using present value in an accounting measurement is...

1. to capture, to the extent possible, the economic difference between sets of future cash flows. 2. The objective of present value, when used in accounting measurements at initial recognition and fresh-start measurements, is to estimate fair value. *Stated differently, present value should attempt to capture the elements that taken together would comprise a market price, if one existed, that is fair value.

The risks and rewards associated with the VIE are largely attributable to the _______________, not the ______________ who may bear little risk and receive only a small rate of return.

1. variable-interest holders 2. equity owners

Codification: Industry - __________ holds industry topics and contains only the guidance that is not otherwise applicable in the other eight areas. For consistency, the topics within the industry area are structured the same way as in the other areas. Agriculture is industry topic 905 for example. Within that topic, the receivables subtopic is listed and numbered as Agriculture —Receivables: 905-310.

Area 900

Financial accounting is, like most types of accounting, a service activity. The provision of information is accomplished through the issuance of a...

General Purpose External Financial Report. That is, the financial report issued by business enterprises, is a general-purpose one intended for all external users. External users of financial reports do not have access to the internal records of businesses and thus are dependent on the information in the report. The report is a "general-purpose" report because it is designed to meet the information needs of a broad class of users (mainly investors and creditors), rather than a predefined specific use report.

Equity Method Adjustments example Assume ABC Company owns 40% of XYZ Company and appropriately accounts for its investment using the equity method. During 20X2, XYZ had net income of $100,000 and paid cash dividends of $30,000. calc revenue not received as cash:

NI 100,000 x 0.4 = 40,000 less: cash divid (30,000) x 0.4 = (12,000) ABC revenue not received as cash = 28,000. In the determination of cash flows from operations, $28,000 should be subtracted from net income.

Do Codification paragraph numbers change over time?

Mend Co. purchased a three-month U.S. Treasury bill. Mend's policy is to treat all highly liquid investments with an original maturity of three months or less when purchased as cash equivalents. How should this purchase be reported in Mend's Statement of Cash Flows?

Not reported. **The reporting basis of the Statement of Cash Flows is cash and cash equivalents. The purchase of a cash equivalent has no effect on the total of cash and cash equivalents. Such purchases increase cash equivalents and decrease cash by the same amount. Thus, the total of cash and cash equivalents is unaffected. This Treasury bill meets the definition of a cash equivalent. The Statement of Cash Flows reports changes in the fund defined as cash and cash equivalents. Thus, the purchase of this Treasury bill is not reported in the Statement of Cash Flows.

treasury stock method step 2 The firm has 2,000 stock options outstanding the entire year. The exercise price is $30. The average market price of common stock for the period is $40. Assume exercise of the options. Shares issued on exercise = 2,000

Purchase treasury shares with the proceeds from exercise: 2,000($30)/$40 = number of treasury shares purchased = (1,500) Incremental shares = denominator effect = 500

Fair Value Hierarchy—The fair value hierarchy (provided in ASC 820) prioritizes or ranks the inputs to valuation techniques used to measure fair value into three levels: Level 1—Inputs in this, the highest level, are unadjusted quoted prices in active markets for assets or liabilities (or equity items) identical to those being valued that the entity can obtain at the measurement date. _______________________________ provide the most reliable evidence of fair value and, except in unusual circumstances, should be used to measure fair value when available.

Quoted prices in an active market

Noncumulative preferred stock (def)

Receives dividends only if declared. Skipped dividends are never paid.

Measurement Bases for Balance Sheet Valuation Aggregate of more than one valuation basis _________________ reflects all measurement bases through revenue and expense recognition.

Retained earnings-net income

Capital loans from owners would not be a component of the statement of changes in owners' equity. (true or false?)

TRUE

Cash balances reported in a foreign currency at year-end should be converted to the dollar equivalent cash using the exchange rate in effect at year-end. (true or false?)

TRUE

The fair value of the noncontrolling interest at the date of a business combination enters into the determination of any goodwill. (true or false?)

TRUE

The income tax expense account reflects the tax effect only on those items above income from continuing operations. (true or false?)

TRUE

The requirements of ASC 820, "Fair Value Measurement," do not apply to inventory pricing (true or false?)

TRUE

To provide guidance in accounting for specific transactions, events or conditions is not a purpose of the IASB Framework. (true or false?)

TRUE

Sale By Subsidiary to Parent—Intercompany fixed asset by subsidiary to parent: Parent Owns Less than 100% of the Subsidiary Worksheet without income statement—If the elimination occurs on a consolidating worksheet that does not include an income statement (i.e., only a balance sheet is provided), the eliminations would be allocated on the worksheet between the parent and the noncontrolling shareholders' interest in proportion to their respective ownership percentages. The eliminating entries each year, assuming a gain, would be:

The debit to retained earnings of S replaces a debit to gain because there is only a balance sheet. Otherwise, the purpose and effect of each debit and credit is the same as previously described.

DOP Example If the previously recognized estimated loss was $40,000 and the actual loss in the year of disposal was $30,000, then in the year of disposal a $10,000 gain is recognized and reported in the DOP section of the income statement.

The disposal loss or gain is a separate line item in the DOP section of the income statement in addition to the separate operating income of the component during the period. Alternatively, the two amounts can be netted with footnote disclosure showing them both. The assets are separated from the others in the BS when disposal takes place after the decision to eliminate the component.

Private companies are not required to apply the criteria for determining whether there is a variable interest in certain leasing arrangements. If this exemption is elected it should be applied to...

all the leasing arrangements that meet the above conditions.

Under which of the following methods of carrying a subsidiary on its books, if any, will the carrying value of the investment normally change following a combination? *Cost Method* I *Equity Method* Yes Yes Yes No No Yes No No

answer: No Yes *If the parent uses the equity method to carry on its books the investment in a subsidiary, the carrying value of the investment will change as the equity of the subsidiary changes. However, if the parent uses the cost method, the carrying value on its books normally will not change.

IFRS requires more detailed note disclosures for various statements of financial position items, compared with U.S. GAAP. Under IFRS, the financial statements themselves are quite clean, meaning typical U.S. GAAP parenthetical disclosures such as wording "net of depreciation," "net of allowance for uncollectibles," and "at lower of cost or market" do not...

appear on IFRS financial statements but are disclosed in the notes to the financial statements.

An SCF is not required for...

certain investment-type entities (e.g., employee benefit plan entities).

Valuation techniques used to measure fair value should be...

consistently applied.

current income.

Typically, the ordering of the statement of financial position items for U.S. GAAP balance sheets starts with.... Since IFRS does not have any recommended format, many countries use their customary formats, including presenting the items in reverse order, reporting noncurrent items before current items. In addition, within categories, the ordering may be the opposite of U.S. GAAP ordering, that is, from less liquid to more liquid, but this is simply a local format and not one required by IFRS.

current items.

Only __________ PCS are incorporated into DEPS.

dilutive

Using Cash Flow Information and Present Value in Accounting Measurements The risk and uncertainty is incorporated into either the...

discount rate or the cash flows—not both!

Net present value — This is the value determined from...

discounting the expected future cash flows.

Earnings Per Share (EPS) is reported under the ______________ view. Each quarterly EPS amount reflects only the events of that quarter. The assumptions and computations leading to the quarterly EPS amount reflect the circumstances within each interim period separately, rather than estimations of year-end circumstances. For example, shares issued in the third quarter affect reported EPS for the third and fourth quarter only, not the first two quarters.

discrete

A company with a complex capital structure is required to disclose the Basic Earnings per Share and the Diluted Earnings per Share. This is called...

dual EPS reporting.

IFRS Financial statements should present _____ the financial position, financial performance and cash flows of an entity.

fairly

The economic transaction is one that...

generates revenue or expense.

owner's equity measurement basis is...

historical value of cash inflows and residual valuation

Summary of significant accounting policies This summary must include information about all significant accounting policies but is not required in ____________ if the policies have not changed.

interim statements

The Statement of Changes in Equity effectively expands the OE section of the balance sheet by...

listing all the changes in those accounts, explaining how the beginning balance increased or decreased in deriving the ending balance. Reporting investments by owners and distributions to owners are important aspects of this disclosure. The statement is dated like the Income Statement and Statement of Cash Flows—for a period.

A dilutive PCS means that DEPS is ________ than BEPS as a result of assumed conversion or exercise of the PCS.

lower

Nature of Operations Different types of businesses have different risks. Knowledge of the firm's (1) products and services, (2) geographical locations and (3) principal markets will assist users in assessing risks concerning the firm's operations. For example, identification of competition and vulnerability to technological change are aided with this knowledge. Financial statements and notes are required to include a description of the major products or services of the firm, and its principal markets and their locations. If the firm operates in more than one type of business, the relative importance of the operations in each business is disclosed, along with the basis of this determination (based on assets, revenues, or earnings for example). These disclosures are not required to be on a quantified basis; relative importance can be described in such terms as...

major, intermediate, minor, and other similar ways.

Control and subsidiary accounts are used for any account that consists of...

many individual accounts. Inventory, plant assets (property, plant, and equipment) and accounts payable are examples.

investment in marketable securities' measurement basis is...

market value

Both IFRS and U.S. accounting standards require a classified statement of financial position (commonly called a balance sheet in the United States) to be reported. Each IFRS statement of financial position must present two classifications: current and noncurrent. (The definitions of these terms are presented later in this lesson.) IFRS specifies a _______________________________ whereas U.S. GAAP does not have such specification, although SEC registrants must follow SEC guidelines that require specific line items.

minimum listing of accounts that must be presented

Discontinued Operations and IFRS IFRS identifies a component of an entity similarly to U.S. GAAP. The main difference is that U.S. GAAP has...

more disclosure requirements than IFRS

Effects on Cash of Foreign Currency Translation Changes in cash caused by changes in exchange rates must be shown "as part of the...

reconciliation of the change in cash and cash equivalents during the period."

treasury stock method explanation The purpose of assuming the purchase of treasury stock is to...

reduce the total dilution from exercise. Otherwise, the denominator effect would be 2,000, not 500. There is no numerator effect.

revaluation surplus and is reported in other comprehensive income. This surplus is a fifth OCI item, in addition to the four under U.S. standards. The revaluation surplus can never be reclassified to affect net income. Once a firm has chosen to revalue assets, those revaluations cannot affect net income. See the lesson on fixed assets for more discussion of IFRS revaluation of fixed assets.

Temporary declines in inventory are those expected to...

reverse by year's end

Balance Sheet The balance sheet provides information useful in assessing the entity's financial strengths and weaknesses, especially...

risk (relative proportion of debt to equity, for example), and the allocation of assets.

International Reporting Requirements—Neither U.S. nor international standards require interim financial statements. Depending on the country, securities regulators, governments or stock markets may require interim reports, however. In the U.S., quarterly reports are required for publicly traded firms. In other countries, _______________ reporting is more common.

semi-annual

International standards encourage publicly traded firms to provide ______________ reports at a minimum. Firms are required to use the same accounting policies for interim reporting as they do for annual reports if they provide interim reports.

semi-annual

Entity Assumption — We assume there is a...

separate accounting entity for each business organization.

IASB - Elements of Financial Statements Difference — The IASB Framework expense element includes losses whereas the FASB Framework treats expenses and losses as...

separate elements.

IASB - Elements of Financial Statements The Framework does not provide specific guidance on how to measure whether future benefits are "probable" although...

several international accounting standards include specific guidance pertaining to the relevant standard.

For interim periods after an accounting principle change, the effect of the principle change on income from continuing operations and net income, and related per share amounts are...

shown.

SCF acronym

statement of cash flows

disclosure refers to...

the additional information contained in the notes to financial statements.

Full Disclosure Principle — Financial statements should present all information needed by an informed reader to make an economic decision. This principle is sometimes referred to as....

the adequate disclosure principle.

purchasing power (def)

the amount of goods and services that can be obtained by transferring the asset to another party.

Revenues are related to...

the company's primary business operations.

Expense Recognition Principle — This principle addresses when to recognize expenses and is sometimes referred to as...

the matching principle.

contra/adjunct/valuation account example 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.

Free from error: Information is free from error if...

there are no omissions or errors.

If your current-period dividends are NOT declared and are cumulative preferred...

use 1 full year's dividends in the EPS numerator

current replacement cost (example)

used in inventory valuation

The PCC Framework is used to determine...

whether, and in what circumstances, private companies should have guidance for alternative recognition, measurement, disclosure, display, effective date, and transition reporting under U.S. GAAP. The differences between private companies and public companies are a driving force in determining whether alternative GAAP is warranted.

Δcash + Δother assets =

ΔL + ΔE

The Codification does not change GAAP but rather...

provides accounting standards in a newly structured electronic form. The Codification is a compilation and reorganization of existing GAAP before the Codification, with updates being added as they are promulgated. The individual accounting-standard form of presentation is not used in the Codification. Rather, material is organized by major area and topic. Basis for conclusions, appendices and other ancillary content are included in the Codification only if the material is considered essential to the understanding and application of GAAP.

SEC Guidance Authoritative GAAP includes... The Codification includes relevant portions of SEC content but does not contain the entire text of relevant SEC rules, regulations, interpretive releases and staff guidance. For example, the Codification does not include SEC content related to Management's Discussion and Analysis and other items appearing outside the financial statements. The Codification does not replace or affect guidance issued by the SEC and is provided on a convenience basis.

relevant SEC rules and interpretative releases (applicable only to publicly traded firms).

codification: Subsections—In some cases, a section is divided into subsections to facilitate...

the exposition. These are not numbered.

The Codification does not change GAAP but rather provides accounting standards in a newly structured electronic form. The Codification is a compilation and reorganization of existing GAAP before the Codification, with updates being added as they are promulgated. The individual accounting-standard form of presentation is not used in the Codification. Rather, material is organized by major area and topic. Basis for conclusions, appendices and other ancillary content are included in the Codification only if...

the material is considered essential to the understanding and application of GAAP.

When the economic event occurs, first you create an...

accrual account. (You are accruing the cash owed or to be paid as an asset or liability.)

ASUs are not...

authoritative—ASUs are a vehicle to update the codification and are not permanent in their own right, but a way to amend the codification. When changes to the codification happen, the FASB updates the Codification and issues the ASU simultaneously.

ASUs are designated...

chronologically by year. For example, ASU 2014-12 refers to the twelfth ASU issued by the FASB in 2014.

Balance Sheet Accounts Assets are presented in order of...

decreasing liquidity. The most liquid assets (such as cash) are shown first, and less liquid assets are shown last (such as property, plant, and equipment).

Codification: Paragraphs follow a __________ structure allowing lower level paragraphs to be associated with higher-level paragraphs within a group, similar to threads in an online discussion group. Greater-than symbols (>, >>, >>>) are used for nesting paragraphs.

hierarchical

Accounting and financial reporting practices not included in the Codification are...

non-authoritative

The statement of comprehensive income reports all ___________ changes in equity over a period of time—the same time period as the income statement.

non-owner

All guidance in the Codification carries the __________ of authority (one level of GAAP). There is no longer a hierarchy of GAAP.

same level

The presentation format for a balance sheet is typically one of two formats: the account format (def)

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.

The presentation format for a balance sheet is typically one of two formats: the report format (def)

the most popular form, the three categories of accounts are listed from top to bottom, as in a report, with assets always shown first.

Consolidated Income Statement/Retained Earnings Statement/Cash Flow Statement Under the acquisition method of accounting for the combination, the operating results of the acquired entity up to the date of the combination is...

part of what the parent paid for in the cost of the investment in the subsidiary.

Diluted EPS is conceptually different from BEPS. It is an imaginary calculation based on events that have not happened as of the balance sheet date. The FASB believes that requiring a second EPS number reflecting the effects of securities that may become common stock in the future enhances the value of...

per-share disclosures.

Management must assess the entity's ability to continue as a going concern. Management's assessment should be based on facts and circumstances that are...

"known or reasonably knowable" as of the date the financial statements are issued. *Note this assessment is not as of the balance sheet date, but rather should include information up to the date that the financial statements are issued.

On January 2 of the current year, Peace Co. paid $310,000 to purchase 75% of the voting shares of Surge Co. Peace reported retained earnings of $80,000, and Surge reported contributed capital of $300,000 and retained earnings of $100,000. The purchase differential was attributed to depreciable assets with a remaining useful life of 10 years. Peace used the equity method in accounting for its investment in Surge. Surge reported net income of $20,000 and paid dividends of $8,000 during the current year. Peace reported income, exclusive of its income from Surge, of $30,000 and paid dividends of $15,000 during the current year. What amount will Peace report as dividends declared and paid in its current year's consolidated statement of retained earnings? $8,000 $15,000 $21,000 $23,000

$15,000 *This is the amount ($15,000) that Peace will report as dividends in its consolidated statement of retained earnings. Only Peace's (the parent's) dividends paid of $15,000 are shown on the Peace/Surge consolidated statement of retained earnings. The dividend paid by Surge to Peace ($8,000 × .75 = $6,000) will not show on the consolidated statement of retained earnings, because it will be eliminated as intercompany dividend (you can't pay a dividend to yourself!). The balance of Surge's dividend ($8,000 × .25 = $2,000) goes to the 25% minority shareholders in Surge and reduces their claim to Surge's retained earnings, not Peace's consolidated retained earnings.

A company is preparing its year-end cash flow statement using the indirect method. During the year, the following transactions occurred: Dividends paid $300 Proceeds from the issuance of common stock $250 Borrowings under a line of credit $200 Proceeds from the issuance of convertible bonds $100 Proceeds from the sale of a building $150 What is the company's increase in cash flows provided by financing activities for the year?

$250. **The proceeds from the issuance of common stock (250), convertible bonds (100), and borrowing on the line of credit (200) are all cash inflows from financing activities. The payment of dividends (300) is a cash outflow from financing activities. 250 + 100 + 200 − 300 = 250.

Two Approaches—The statement contrasts two approaches to computing present value: Example of Uncertain Amount The amount of a cash flow may vary as follows: $200, $400, or $600 with probabilities of 10%, 60%, and 30%, respectively. The expected cash flow is...

$440 = $200(.10) + $400(.60) + $600(.30). The expected cash flow approach uses a range of cash flows with probabilities attached. Thus, the uncertainties of the cash flows themselves are reflected in the distribution of cash flows. Calculation of the present value is determined by using the probability weight cash flows discounted using the risk-free rate.

During 20x8, a firm discontinued a component qualifying for separate disclosure within the income statement. The disposal was completed before the end of 20x8 and resulted in a $300 disposal gain. The component earned $400 in 20x7 but lost $100 (negative income) in 20x8. The 20x7 income statement reported income from continuing operations (IFCO) of $6,000. The 20x8 income statement reported $7,000 of net income. Determine the following two amounts: IFCO for 20x7 as it is reported comparatively in the 20x8 statements IFCO for 20x8 $6,000 $7,000 $6,000 $6,800 $5,600 $6,800 $5,600 $7,200

$5,600 $6,800 *The discontinued operations section of the income statement for prior periods shown comparatively separates the operating income of discontinued components from IFCO even though the decision had not yet been made in those earlier periods. This reporting results in improved comparability because each year reports IFCO on the same basis. (1) IFCO for 20x7, as it is reported comparatively in the 20x8 statements, reflects the removal of the $400 operating income for the segment and thus equals $6,000 − $400, or $5,600. (2) IFCO for 20x8 is computed by removing the effect of the disposal gain and operating loss from income. IFCO for 20x8 equals $7,000 net income − $300 disposal gain + $100 operating loss, or $6,800.

The differences in Beal Inc.'s Balance Sheet accounts at December 31, 20X4 and 20X3, are presented below: Assets Increase (Decrease) Cash and cash equivalents $ 120,000 Short-term investments 300,000 Account receivable, net - Inventory 80,000 Long-term investments (100,000) Plant assets 700,000 Accumulated depreciation - $1,100,000 Liabilities and Stockholders' Equity Accounts payable and accrued liabilities $ (5,000) Dividends payable 160,000 Short-term bank debt 325,000 Long-term debt 110,000 Common Stock, $10 par 100,000 Additional paid-in capital 120,000 Retained Earnings 290,000 $1,100,000 The following additional information relates to 20X4: Net income was $790,000. Cash dividends of $500,000 were declared. Building costing $600,000, with a carrying amount of $350,000, was sold for $350,000. Equipment costing $110,000 was acquired through issuance of long-term debt. A long-term investment was sold for $135,000. There were no other transactions affecting long-term investments. These investments are categorized as available for sale. 10,000 shares of common stock were issued for $22 a share. The short-term investments are classified as trading securities. In Beal's 20X4 Statement of Cash Flows, net cash provided by operating activities was...

$620,000. *Net income $790,000 Increase in inventory (80,000) Decrease in AP/accrued liabilities (5,000) Gain on sale of long-term investments ($135,000 − $100,000 = 35,000) Increase in short-term investments (from purchase) (300,000) Depreciation expense 250,000 Equals net operating cash inflow = $620,000 The accumulated depreciation account did not change during the year. Therefore, depreciation expense equals $250,000, which offsets the decrease in the account due to the sale of the equipment.

Per SFAC 6, revenues are inflows of assets or settlements of liabilities, or both, during a period as a result of an entity's major or primary operations. Two essential characteristics of revenues are that revenues

(1) arise from a company's primary earnings activities and (2) are recurring or continuing in nature.

The following categories capture the types of exit or disposal activities:

1) those disposals that occur in the normal course of business that are disposals of individually insignificant assets, 2) disposals that meet the criteria of a discontinued operation, and 3) individually significant disposals that do not meet the criteria of a discontinued operation.

Fair Value Option Disclosures Objectives—Disclosures required when the fair value option is elected are intended to accomplish the following objectives: To achieve these objectives and outcomes, required disclosures must be provided in both...

1. interim and 2. annual financial statements.

Statement of Changes in Equity Format of the Statement—The most common formats encountered are:

1. the vertical and 2. horizontal formats.

The SEC is a member of the International Organization of Securities Commissions (IOSCO), which consists of more than ________ securities regulatory agencies or exchanges across the globe.

100

Form 10-Q reports the quarterly information to the SEC within 45 days (nonaccelerated filer) of the end of the quarter. (Only the first three quarters are reported because the 10-K reports the annual information.) Large companies designated as accelerated filers must file within ____________. Disclosures are less extensive than in the 10-K and include information for the specific quarter and year-to-date information.

40 days

An investor will report an investment in its financial statements using a different method than it uses to carry the investment on its books if its minimum ownership of the investee is: 10+%. 20+%. 50+%. 100%

50% *If an investor owns 50+% (up to and including 100%) of an investee, it will normally carry the investment on its books using the cost method, the equity method, or some other method, but it will report the investment in its financial statements as a consolidated subsidiary. The method used on the investor's books will be different than the method used to report the investment in financial statements.

Reportable Segments—the 75% Rule—The total external revenue reported by reportable segments must be at least _________________________________________. This is an overall materiality threshold for reporting.

75% of the company's total consolidated revenues

Fair value is used to measure and report financial statement items as required or permitted by a number of GAAP pronouncements (ASCs). Some pronouncements provide different definitions of "fair value" and provide only limited guidance in the determination of fair value for GAAP purposes. As a consequence, inconsistencies have occurred in how fair value is measured in practice. _______________ 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.

ASC 820

___________________ (AAER)—These report the enforcement actions that have been taken against accountants, brokers, or others.

Accounting and Auditing Enforcement Releases

The expected cash flow approach has been incorporated into...

Accounting for Asset Retirement Obligations

Errors and Irregularities ______ require footnote disclosure. *If prior-year income is affected, a prior-period adjustment is recorded that corrects the beginning balance of retained earnings and any other accounts affected in the year of discovery.

Both

Cash Flows from Operating Activities—Direct Method *Reconciliation of Net Cash Flow from Operating Activities with Net Income* — If the Direct Method is used to present Net Cash Flow from Operating Activities, a separate schedule must be provided that reconciles...

Cash Flows from Operating Activities to Net Income.

In a statement of cash flows, which of the following would increase reported cash flows from operating activities using the direct method? (Ignore income tax considerations.) Dividends received from investments Gain on sale of equipment Gain on early retirement of bonds Change from straight-line to accelerated depreciation

Dividends received from investments. **Businesses are encouraged to use the direct method of reporting operating activities under which major classes of cash receipts and cash payments are shown. The minimum cash flows to be disclosed under this method are cash collected from customers, interest and dividends received, cash paid to employees and suppliers, income taxes paid, and interest paid.

If goodwill is recognized as part of the investment eliminating entry, amortization expense for goodwill must be recognized on the consolidating worksheet. (true or false?)

FALSE

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 & II only. The bank prime rate and the default rates are both observable inputs. A financial forecast is developed by an entity and is an unobservable input or Level 3 input.

Diluted EPS (DEPS) (def)

Includes securities that may become common stock in the future, such as convertible stock and stock options, in addition to actual shares of common outstanding.

Form 10-K The SEC requires the ______________________ to be included in its reporting and, as such, provides a discussion of important aspects of the firm from the viewpoint of management. This report covers the firm's financial condition, changes in financial condition, results of operations, liquidity, capital resources and operations, identifies trends and significant events and uncertainties. The discussion also includes information about the effects of inflation and changing prices in nonquantitative form, and explanation of significant or unusual events and uncertainties and their effect or expected effect on the firm's financial performance. Also, the firm's important accounting policies are discussed in the MD&A.

Management's Discussion and Analysis (MD&A)

The balance sheet is formally referred to as the...

Statement of Financial Position, but balance sheet is the more commonly used term. A business enterprise discloses its economic resources (assets) and the manner of financing the acquisition of those resources (creditors, owners' contributions, and prior year's earnings) in the balance sheet.

Companies must disclose the future maturities on their borrowing for five years following the balance sheet date. (true or false?)

TRUE

According to the FASB conceptual framework, the objectives of financial reporting for business enterprises are based on...

The needs of the users of the information. *Per SFAC 8, the objectives of financial reporting focus on providing present and potential investors and creditors with information useful in making investment decisions. Financial statement users do not have the authority to prescribe the data they desire. Therefore, they must rely on external financial reporting to satisfy their information needs, and the objectives must be based on the needs of those users.

specific price changes example (2) The price of potato chips increased 3% during a period in which inflation was 2%. The specific price of potato chips moved in the same direction as inflation but the rate of increase was higher. this means...

The price of computer chips has steadily declined over the last several years even though there has been moderate inflation. The specific price of computer chips has moved in a direction opposite that of inflation.

Long-term assets and long-term liabilities (def)

These are defined by exclusion. All assets that do not meet the criteria necessary to be classified as current are classified as long-term assets. Likewise, all liabilities that do not meet the criteria necessary to be classified as current are classified as long-term liabilities.

The presentation of cash flows in the statement of cash flows follows a classification system established by the FASB. Cash flows are classified into three categories: operating

Those cash flows related to transactions that flow through the income statement.

IFRS Frequency of reporting—At a minimum, a complete set of financial reports at least...

annually, including comparative information.

Temporary declines in inventory are those expected to reverse by year's end These are not recognized as losses in the interim periods in which they occur. This treatment is consistent with the integral view of interim reporting. No loss is expected for the year; therefore...

a temporary loss should not be recognized in a specific quarter.

IFRS principles-based approach should focus on...

a true and fair view or a fair representation of the financial information.

The income statement is prepared by applying the ___________ approach. That is, almost all revenues, expenses, gains, and losses are shown on the income statement and are included in the calculation of net income. A major exception here is prior period adjustments, which are the effects of corrections of errors affecting prior year net income. Prior period adjustments are shown on the Statement of Retained Earnings as adjustments to the beginning balance of retained earnings in the year the error is discovered.

all-inclusive

Sale by Subsidiary to Parent - Parent Owns Less than 100% of the Subsidiary If You Have a Worksheet Without Income Statement: If the elimination occurs on a consolidating worksheet that does not include an income statement (i.e., only a balance sheet is provided), the elimination would be...

allocated on the worksheet between the parent and the noncontrolling shareholders' interest in proportion to their respective ownership percentages

Under IFRS, the determination of control would be based on...

an analysis of all the relevant facts and circumstances, including the design of the entity and the risk and reward relationship between the entities.

Materiality—Information that is material will impact a user's decision. Materiality is somewhat pervasive throughout the objectives of financial reporting in the sense that the financial statements should present material information because it is decision useful. The FASB believes that materiality is...

an entity specific attribute and that material information is relevant to the decision maker. Therefore, materiality is an attribute of relevance.

The general reporting philosophy for interim reports is that interim periods are to be viewed as...

an integral part of the annual period, rather than as a separate or discrete period. This principle guides many of the specific accounting principles. For example, materiality is determined with reference to annual reports, not to amounts in interim reports.

Form 10-K is the required vehicle for reporting...

annual financial information to the SEC. The 10-K is separated into four parts.

Cash Flows from Operating Activities—Direct Method One of the hallmarks of classifying an item as operating cash flows is that it is associated with net income. Notice that interest paid and received and dividends received are all operating cash flows, but dividends paid is a financing cash flow. The first three flows are associated with income statement items (interest expense and revenue, dividend revenue), but dividends paid is not an income item; rather, it is a direct reduction in retained earnings. Dividends paid are a distribution of income to owners and are not on the income statement, so they are not in cash flows from operations. Any cash inflow or cash outflow not properly classified as an investing or financing activity would be included as...

cash flow from operating activities (e.g., collection of a lawsuit settlement). **The Net Cash Flow from Operating Activities can be positive or negative

The accrual basis of accounting recognizes all resource changes when they occur. The cash basis of accounting limits the recognition of resource changes to...

cash flows.

The SCF also provides information about investing and financing activities that do not involve...

cash inflows (receipts) or outflows (payment) (e.g., acquiring a major long-term asset by incurring a liability).

A company acquired a building, paying a portion of the purchase price in cash and issuing a mortgage note payable to the seller for the balance. In a statement of cash flows, what amount is included in investing activities for the above transaction?

cash payment only.

The SCF must explain all of the changes in _________________________ between the beginning and end of the reporting period on the Balance Sheet.

cash, cash equivalents, and restricted cash

Posting is usually performed within the computerized system and is mechanical from the user's point of view. Posting references enables...

cross-referencing between journal and ledger. For example, the posting to the AR control account from the special journal might indicate the location of the total from the sales journal within the information system.

IASB - Elements of Financial Statements Expenses — Expenses represent...

decreases in economic benefits deriving from decreases in assets or increases in liabilities that result in decreases in equity (other than those related to distributions to shareholders).

The method a Parent uses to carry an investment in a subsidiary on its books (cost, equity, or other) will not affect...

final resulting Consolidated Statements.

GAAP does not require adjustments for price level changes and thus applies the ___________ capital maintenance concept in financial reports.

financial

Monetary and Nonmonetary Items—Assets and liabilities are categorized as (1) monetary or (2) non-monetary, depending on whether the item has a...

fixed unchangeable value.

SEC rules Auditors are prohibited from providing _________ services to audit clients.

nonaudit

Basic EPS is the EPS based...

only on actual transactions for the year.

The new cash flow derived from the OIFF elements (working down) equals...

the derived change in cash, cash equivalents, and restricted cash (working up).

Overall structure—Accounting guidance within the Codification has the following structure:

1. Areas 2. Topics 3. Subtopics 4. Sections 5. Subsections 6. Paragraphs

Typically, a VIE is established by...

another entity or entities (the sponsors) to carry out a well-defined, limited business purpose, with the sponsor(s)—also the variable-interest holders—providing most resources to the VIE, often in the form of loans or loan guarantees.

contingent liabilities / subsequent events Stock dividends and splits after the balance sheet date are treated as if they occurred __________________. Although it could be argued that because the dividend or split should not be recognized because it took place after the balance sheet date, a specific accounting principle requires recognition.

as of the balance sheet date

Form 10-K Forward-looking or prospective information is included for the purpose of...

assessing future cash flows.

Shares that are issuable for little or no cash consideration upon satisfaction of certain conditions are ____________________. They are considered outstanding as of the date the conditions have been met.

contingent shares

Application of Definition to Assets, Liabilities, and Shareholders' Equity Application to Liabilities The determination of fair value of a liability assumes that the liability is transferred to a market participant at the measurement date; it is not settled or canceled. The liability to the counterparty (i.e., the party to whom the obligation is due) is assumed to...

continue after the hypothetical transaction.

In the absence of information to the contrary, a business is assumed to have an indefinite life, that is, it will continue to be a going concern. Therefore, we do not show items at their liquidation or exit values. This assumption, also called the _____________________, supports the historical cost principle for many assets. Income measurement is based on historical cost of assets because assets provide value through use, rather than disposal. Thus, net income is the difference between revenue and the historical cost of assets used in generating that revenue. Without the going-concern principle, historical cost would not be an appropriate valuation basis

continuity assumption

Current Liability (CL) A liability expected to be extinguished through the use of current assets or by the incurrence of other current liabilities. The incurrence of other CL part of the definition means that CL that are...

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

Controlling ownership of an investee by an investor results from a business combination carried out in the form of a legal acquisition. In form, the parent and subsidiary are separate legal entities; in substance, they are a single "economic entity." If the parent can exercise its majority ownership to _______________________________, consolidated parent-subsidiary financial statements must be the primary form of financial reporting for the entities.

control the operating and financial activities of the subsidiary

The methods and significant assumptions used to estimate fair value must be disclosed only in annual reports. (true or false?)

TRUE

A variable-interest (investment) or subsidiary (unconsolidated subsidiary) that is not included in consolidated statements would be reported as an...

"Investment" by the interest-holder/investor.

During the transition period for an ASU to become effective, the Codification shows the new guidance as...

"Pending Text." When the new guidance is effective, the previous guidance (if any) is deleted and the new guidance takes its place.

An audit report of financial statements based on IFRS for SMEs might say something like the following:

"These statements fairly present the financial position, results of operations, and cash flows in conformity with the International Financial Reporting Standards for Small and Medium Sized Enterprises."

Process Steps to Follow—The steps to be followed in deriving consolidated financial statements from the separate trial balances or statements of the separate companies are: Complete Worksheet—After the separate company account balances and the adjusting and eliminating entries have been posted to the worksheet, it can be complete, mostly by...

"adding" across and down.

Consolidated Balance Sheet At the date of the combination, a consolidated balance sheet will __________ the assets, liabilities, and shareholder claims (majority and noncontrolling, if any) of the parent and its newly acquired subsidiary(ies).

"combine"

"financial" capital maintenance. As long as dividends do not exceed earnings, and earnings is not negative, financial capital has been maintained.

Process Steps to Follow—The steps to be followed in deriving consolidated financial statements from the separate trial balances or statements of the separate companies are: adjusting entries Are needed if one company (to be consolidated) has recorded a transaction with another company (to be consolidated), but the receiving company has not recorded the transaction. In such a case, the transaction is...

"in-transit" to the receiving company.

income statement Income Tax Expense—Income tax expense is attributable only to income from continuing operations. The tax effects of items below continuing operations are shown along with the item itself in a process called...

"intraperiod tax allocation."

Classification in the Fair Value Hierarchy—The investor is not allowed to __________ the alternative investment fund and classify the investment in the fair value hierarchy according to the investments made by the PE fund. The investor owns a share of the PE fund, not a share of the start-up company or the real estate.

"look through"

Per SFAC 6, the common quality shared by all assets is...

"service potential" or "future economic benefit." Per SFAC 6, assets commonly have other distinguishing features, such as being legally enforceable, tangible or acquired at a cost. These features, however, are not essential characteristics of assets.

Diluted EPS is a...

"worst-case" figure reflecting the potential dilution of stock options and convertible securities. EPS allows comparisons of performance for firms of any size.

A company buys ten shares of securities at $1,000 each on January 15, Year 1. The fair value of the securities increases to $1,250 per share as of December 31, Year 1. Assume no dividends are paid and that the company has a 30% tax rate. What is the amount of the holding gain arising during the period that is classified in other comprehensive income for the period ending December 31, Year 1?

$0 *None of the gain would be recognized in other comprehensive income. All of the holding gain ($1,750 = $2,500 net of tax) is recognized in current earnings.

treasury stock method step 3 Divide the total proceeds from exercise [$60,000 = 2,000($30)] by the average price per stock the firm would be required to pay for its own shares ($40). The result is that the firm would buy back 1,500 of its own shares. The net number of new shares outstanding as a result of the treasury stock method is 500. DEPS =

$1,200/(700 + 500) = $1.00. DEPS is less than BEPS. Therefore the options are dilutive and are entered into DEPS.

Baler Co. prepared its statement of cash flows at year-end using the direct method. The following amounts were used in the computation of cash flows from operating activities: Beginning inventory $ 200,000 Ending inventory 150,000 Cost of goods sold 1,200,000 Beginning accounts payable 300,000 Ending accounts payable 200,000 What amount should Baler report as cash paid to suppliers for inventory purchases?

$1,250,000. *Cash paid to suppliers is determined by adjusting CGS for the effect of the accrual of accounts payable and the increase or decrease in inventory. ---------------------------------------- CGS 1,200,000 Subtract: Decrease in inventory - (50,000) since inventory decreased, more goods were used than purchased Add: Decrease in accounts payable - 100,000 since AP decreased, more cash was paid than purchased on account = Cash paid to suppliers 1,250,000

treasury stock method step 1 Assume a firm's BEPS = $1,200/700 =

$1.71.

Two Approaches—The statement contrasts two approaches to computing present value: Example of Uncertain Timing A $100 cash flow might be received in 1, 2, or 3 years with probabilities of 10%, 60%, and 30%, respectively. Assuming an interest rate of 5%, the expected present value =

$100(pv1, .05, 1)(.10) + $100(pv1, .05, 2)(.60) + $100(pv1, .05, 3)(.30). [(pv 1, .05, 1) is the symbol for the present-value of a single payment of $1, due in 1 year discounted at 5%.] Calculation of the present value is determined by using the probability weight cash flows discounted using the risk free rate.

A company calculated the following data for the period: Cash received from customers $25,000 Cash received from sale of equipment 1,000 Interest paid to bank on note 3,000 Cash paid to employees 8,000 What amount should the company report as net cash provided by operating activities in its Statement of Cash Flows?

$14,000. **Cash received from the customers and paid to employees are operating activities. Interest paid on a bank note is also an operating activity. Therefore, the cash for from operating activities is $25,000 − 3,000 − 8,000 = $14,000. ***Interest paid on a bank note is also an operating activity; remember, the principal payments/receipts are financing activities, but the interest is operating. Cash received on equipment is an investing activity.

A company decided to sell an unprofitable division of its business. The company can sell the entire operation for $800,000, and the buyer will assume all assets and liabilities of the operations. The tax rate is 30%. The assets and liabilities of the discontinued operation are as follows: Buildings 5,000,000 A/D 3,000,000 Mortgage 1,100,000 Inventory 500,000 A/P 600,000 A/R 200,000 What is the after-tax net loss on the disposal of the division? $140,000 $200,000 $1,540,000 $2,200,000

$140,000 *The after tax net loss on the disposal of the division is the net asset value, ($2,700,000 of assets − $1,700,000 of liabilities) $1,000,000, less the selling price of $800,000. The result is a net loss of $200,000 before tax. After 30% taxes, the net loss is $140,000.

In preparing its cash flow statement for the year ended December 31, 20X4, Reve Co. collected the following data: Gain on the sale of equipment $ (6,000) Proceeds from the sale of equipment 10,000 Purchase of A.S., Inc. bonds (par value $200,000) (180,000) Amortization of bond discounts 2,000 Dividends declared (45,000) Dividends paid (38,000) Proceeds from the sale of treasury stock (carrying amount $65,000) 75,000 In its December 31, 20X4, Statement of Cash Flows, what amount should Reve report as net cash used in investing activities?

$170,000. *Proceeds from sale of equipment $10,000, less purchase of A.S. bonds (180,000), equals net cash outflow from investing activities $(170,000). These two items are the only investing cash flows. The gain on the sale of equipment is subtracted in the reconciliation of net cash flow and net income but it is not itself a cash flow. Likewise, the amortization of the bond discount is a reconciling item, not a cash flow.

interim income tax expense Example Income tax recognized for quarter 1 is $20,000, based on the annual rate that is expected to apply to the firm. At the end of quarter 2, the expected annual income tax rate is 30% and pretax income for the first two quarters is $130,000. Income tax expense to be recognized for quarter 2 only is...

$19,000 (.30 × $130,000 − $20,000).

Assume that on January 2, Company P recognized a $3,000 gain on the sale of a depreciable fixed asset to its subsidiary, Company S. Company S will depreciate the asset using straight-line depreciation over the remaining three-year life of the asset. What amount of intercompany gain will be eliminated from P's retained earnings at the end of the year following the year of the intercompany fixed asset transactions? $- 0 - $1,000 $2,000 $3,000

$2,000 *The amount of intercompany gain to be eliminated at the end of the year following the year of the intercompany fixed asset sale is $2,000. At the end of the year of the intercompany sale, depreciation taken by the buying affiliate on the $3,000 inter-company gain will be $1,000 ($3,000/3 years). As a consequence, $1,000 of the $3,000 intercompany gain will have been properly recognized, leaving only $2,000 to eliminate at the end of the second year. Depreciation expense taken on the intercompany gain for the second year will confirm another $1,000 of the intercompany gain, and depreciation expense taken on the intercompany gain for the third year will confirm the last $1,000 of the intercompany gain.

On October 1, 2008, Potato Company acquired 100% of the voting stock of Spud Company in a legal acquisition. Potato chose to account for its investment in Spud on its books using the cost method. Spud had the following incomes and dividends for the periods shown: 10/1 − 12/31/08 1/1 − 12/31/09 Net Income $3,000 $15,000 Dividends Decl./Paid 1,000 3,000 In its December 31, 2009, consolidating process, which one of the following is the amount of the reciprocity entry Potato will make on the consolidating worksheet? $2,000 $3,000 $14,000 $18,000

$2,000 *The purpose of the reciprocity is to bring the investment account (on the worksheet) in balance with the subsidiary's retained earnings as of the beginning of the period being consolidated. Therefore, only the undistributed income of the subsidiary since the business combination up to the beginning of the period being consolidated (January 1, 2009) will be the reciprocity entry at the end of 2009. The undistributed income from October 1 to December 31, 2008 (the beginning of 2009) is net income (+$3,000) less dividends declared and paid (-$1,000), or $2,000.

The following information pertains to each unit of merchandise purchased for resale by Vend Co.: March 1, year 1 Purchase price $ 8 Selling price $ 12 Price level index 110 December 31, year 1 Replacement cost $ 10 Selling price $ 15 Price level index 121 Under current cost accounting, what is the amount of Vend's holding gain on each unit of this merchandise?

$2.00 *Current cost accounting is a method of valuing and reporting assets, liabilities, revenues, and expenses at their current cost at the balance sheet date or at the date of their use or sale. A holding gain is recorded as an increase in an item's value. At December 31, year 1, Vend Co. is holding merchandise which is currently valued at $10 per unit (replacement cost), while the original recorded value of the merchandise was $8 per unit (purchase price). Therefore, the holding gain is $2 per unit.

Baker Co. began its operations during the current year. The following is Baker's Balance Sheet at December 31: Baker Co. Balance Sheet Assets Cash $192,000 Accounts receivable 82,000 Total Assets $274,000 Liabilities and stockholders' equity Accounts payable $ 24,000 Common stock 200,000 Retained earnings 50,000 Total liabilities and stockholders' equity $274,000 Baker's net income for the current year was $78,000, and dividends of $28,000 were declared and paid. Common stock was issued for $200,000. What amount should Baker report as cash provided by operating activities in its Statement of Cash Flows for the current year?

$20,000. *78,000 NI - 82,000 AR + 24,000 AP The accounts receivable increase represents sales included in net income but not yet collected and is subtracted because income was increased by an amount exceeding cash collections. The accounts payable increase represents purchases of inventory included in cost of goods sold not yet paid for. This amount is added because income was reduced by an amount exceeding cash payments.

The following items were among those that appeared on Rubi Co.'s books at the end of year 1: Merchandise inventory $600,000 Loans to employees 20,000 What amount should Rubi classify as monetary assets in preparing constant dollar financial statements?

$20,000. *The account "loans to employees" is a monetary asset account since its payment amount is fixed at some point in the future. Conversely, merchandise inventory is considered a nonmonetary asset account since its value will change based on relative price levels in the future. The total value of monetary assets is the balance of the loans to employees account, or $20,000.

Flax Corp. uses the direct method to prepare its Statement of Cash Flows. Flax's trial balances at December 31, 20X4 and 20X3, are as follows: December 31 20X4 20X3 Debits: Cash $ 35,000 $ 32,000 Accounts receivable 33,000 30,000 Inventory 31,000 47,000 Property, plant, & equipment 100,000 95,000 Unamortized bond discount 4,500 5,000 Cost of goods sold 250,000 380,000 Selling expenses 141,500 172,000 General & administrative expenses 137,000 151,300 Interest expense 4,300 2,600 Income tax expense 20,400 61,200 $756,700 $976,100 ======== ======== Credits: Allowance for uncollectible accounts $ 1,300 $ 1,100 Accumulated depreciation 16,500 15,000 Trade accounts payable 25,000 17,500 Income taxes payable 21,000 27,100 Deferred income taxes 5,300 4,600 8% callable bonds payable 45,000 20,000 Common stock 50,000 40,000 Additional paid-in capital 9,100 7,500 Retained earnings 44,700 64,600 Sales 538,800 778,700 $756,700 $976,100 ========= ========= Flax purchased $5,000 in equipment during 20X4. Flax allocated one-third of its depreciation expense to selling expenses and the remainder to general and administrative expenses. What amounts should Flax report in its Statement of Cash Flows for the year ended December 31, 20X4, for cash paid for goods to be sold?

$226,500. *Two accounts are related to cost of goods sold: inventory and accounts payable. Cost of goods sold $250,000 Less decrease in inventory (This represents an increase to cost of goods sold for inventory not purchased in the current period. Thus, the cash paid for inventory is less than cost of goods sold by this amount.) (16,000) Less increase in accounts payable (This represents an increase in purchases and, therefore, cost of goods sold that was not paid for in the current period. Thus, the cash paid for inventory is less than cost of goods sold by this amount.) (7,500) Equals cash paid for inventory $226,500

Karr, Inc. reported net income of $300,000 for 20X4. Changes occurred in several Balance Sheet accounts as follows: Equipment $25,000 increase Accumulated depreciation 40,000 increase Note payable 30,000 increase Additional information: During 20X4, Karr sold equipment costing $25,000, with accumulated depreciation of $12,000, for a gain of $5,000. In December 20X4, Karr purchased equipment costing $50,000 with $20,000 cash and a 12% note payable of $30,000. Depreciation expense for the year was $52,000. In Karr's 20X4 Statement of Cash Flows, net cash provided by operating activities should be...

$347,000. **Only an indirect calculation is possible from the data. The reconciliation of net income and net cash flow from operating activities shows the calculation. Net income $300,000 Plus depreciation expense 52,000 Less gain on sale of equipment (5,000) Equals net cash provided by operations = $347,000

capital maintenance (example) A firm uses up $5,000 worth of supplies in providing its service during the year, but to replace those supplies for use next year, $5,500 will have to be paid (10% increase in specific price of supplies). The financial capital maintenance model uses the $5,000 cost of supplies as the measure of revenue needed to maintain capital. If revenue for the current period is $5,000 and the firm had no other expenses, earnings would be zero and capital would just be maintained. The physical capital model would require revenue of...

$5,500 for capital to be maintained.

On May 15, Year 1, Munn, Inc. approved a plan to dispose of a segment of its business. It is expected that the sale will occur on February 1, Year 2, at a selling price of $500,000. The segment reported $195,000 in operating losses for Year 1. The segment is expected to lose $30,000 from operations in Year 2. The carrying amount of the segment at the date of sale was expected to be $850,000. Before income taxes, what amount should Munn report as a loss from discontinued operations in its Year 1 income statement? $575,000 $225,000 $195,000 $545,000

$545,000 *There are two components for discontinued operations: (1) the operating income or loss for the period in which the decision is made to dispose, and (2) the disposal loss. Only actual operating income (or loss) is recognized, but estimated as well as actual disposal losses are recognized. The $350,000 estimated disposal loss is the difference between the $850,000 carrying value of the segment, and its $500,000 estimated selling price. The operating loss for the period ($195,000) plus the estimated disposal loss ($350,000) equals the $545,000 total loss to be recognized for discontinued operations for Year 1.

On April 30, 20X5, Carty Corp. approved a plan to dispose of a segment of its business. The disposal loss is $480,000, including severance pay of $55,000 and employee relocation costs of $25,000, both of which are directly associated with the decision to dispose of the segment. The firm is a calendar-fiscal year firm, and the segment's operating loss for the entire year (20X5) through the date of disposal was $120,000. Before income taxes, what amount should be reported in Carty's income statement for the year ended December 31, 20X5, as the total income effect (loss) from discontinued operations? $600,000 $480,000 $120,000 $360,000

$600,000 The $600,000 total loss from discontinued operations is the sum of the operating loss ($120,000) and the loss on disposal ($480,000). The two amounts, $120,000 and $480,000, are disclosed separately but together comprise the total loss on the discontinued operation.

During the current year, Comma Co. had outstanding: 25,000 shares of common stock, 8,000 shares of $20 par, 10% cumulative preferred stock, and 3,000 bonds that are $1,000 par and 9% convertible. The bonds were originally issued at par, and each bond was convertible into 30 shares of common stock. During the year, net income was $200,000, no dividends were declared, and the tax rate was 30%. What amount was Comma's basic earnings per share for the current year? $3.38 $7.36 $7.55 $8.00

$7.36 *One year of preferred stock dividends is subtracted from income in the numerator of EPS because the stock is cumulative. The amount of dividends declared does not affect the calculation. The bonds are not relevant because basic EPS does not assume conversion of the bonds. The calculation is: Basic EPS = [$200,000 - (8,000 × $20 × .10)]/25,000 = ($200,000 − $16,000)/25,000 = $7.36.

Lance Corp.'s Statement of Cash Flows for the year ended September 30, 20X4, was prepared using the indirect method and included the following: Net income $60,000 noncash adjustments: Depreciation expense 9,000 Increase in accounts receivable 5,000 Decrease in inventory 40,000 Decrease in accounts payable (12,000) Net cash flows from operating activities $92,000 ========= Lance reported revenues from customers of $75,000 in its 20X4 Income Statement. What amount of cash did Lance receive from its customers during the year ended September 30, 20X4?

$70,000. *Accounts receivable increased during the year. Therefore, more sales were recognized than cash was collected. The amount of cash collected from customers is $70,000 = $75,000 sales − $5,000 increase in accounts receivable. The increase in accounts receivable is that portion of sales that was not collected.

The differences in some of Beal Inc.'s Balance Sheet accounts at December 31, 20X4 and 20X3, are presented below: Assets Increase (Decrease) Cash and cash equivalents $ 120,000 Investments in debt classified as trading securities 300,000 Accounts receivable, net - Inventory 80,000 Long-term investments (100,000) Plant assets (gross) 700,000 Liabilities and stockholders' equity Accounts payable and accrued liabilities $ (5,000) Dividends payable 160,000 Short-term bank debt 325,000 Long-term debt 110,000 Common Stock, $10 par 100,000 Additional paid-in capital 120,000 Retained earnings 290,000 The following additional information relates to 20X4: net income was $790,000; cash dividends of $500,000 were declared; building costing $600,000, with a carrying amount of $350,000, was sold for $350,000; equipment costing $110,000 was acquired through the issuance of long-term debt; and a long-term investment was sold for $135,000. There were no other transactions affecting long-term investments. 10,000 shares of common stock were issued for $22 a share. In Beal's 20X4 Statement of Cash Flows, net cash used in investing activities was....

$705,000. *Proceeds from sale of securities $ 135,000 Proceeds from sale of building 350,000 Purchase of other plant assets (1,190,000) Net cash used in investing activities $( 705,000) ----------------------------------------- The plant assets (gross) account increased $700,000. $700,000 increase = -$600,000 (sale of building) + $110,000 (equipment purchase) + X. X = additional purchases of plant assets. X = $1,190,000. The long-term investments were sold at a gain. That is why the change in the account ($100,000) does not equal the cash inflow from the sale. The equipment purchased with long-term debt is not listed in the investing section because no cash was used on the purchase (it is disclosed in the supplemental information). The purchase of debt securities classified as trading are classified as operating cash flow.

In its cash flow statement for the current year, Ness Co. reported cash paid for interest of $70,000. Ness did not capitalize any interest during the current year. Changes occurred in several balance sheet accounts as follows: Accrued interest payable $17,000 decrease Prepaid interest 23,000 decrease What amount of interest expense for the current year will Ness report in its income statement?

$76,000 *A summary journal entry is helpful to sort out what happened with interest during the period: Interest expense 76,000 Accrued int. pay. 17,000 Prepaid interest 23,000 Cash 70,000 The interest expense amount for the year is the derived amount in the entry. Also, a more verbal approach works: (1) accrued interest payable decreased implying that $17,000 more cash was paid in interest than was recognized in expense, and (2) prepaid interest decreased implying that $23,000 less cash was paid in interest than was recognized in expense. The net of these two yields $6,000 less cash paid in interest than was recognized in expense. With $70,000 cash paid for interest, $76,000 must have been expensed. Interest expense of $76,000 = cash interest paid of $70,000 − accrued payable decrease of $17,000 + prepaid interest decrease $23,000.

Zest Co. owns 100% of Cinn, Inc. On January 2, 1999, Zest sold equipment with an original cost of $80,000 and a carrying amount of $48,000 to Cinn for $72,000. Zest had been depreciating the equipment over a five-year period using straight-line depreciation with no residual value. Cinn is using straight-line depreciation over three years with no residual value. In Zest's December 31, 1999, consolidating worksheet, by what amount should depreciation expense be decreased? $0 $8,000 $16,000 $24,000

$8,000 *There are two ways to approach this solution. First, take the difference in carrying values 72,000-48,000 = 24,000. The 24,000 is the incremental amount Cinn carries the equipment over the carrying amount of Zest. The 24,000/3 = 8,000 OR, compute the depreciation for each company: Cinn is 72,000/3 = 24,000 Zest is 80,000/5 = 16,000 Since Cinn is 100% owned by Zest, the equipment cannot be depreciated by a greater amount through an intracompany sale. The difference is 24,000 − 16,000 = 8,000.

Jen Co. had 200,000 shares of common stock and 20,000 shares of 10%, $100 par value cumulative preferred stock. No dividends on common stock were declared during the year. Net income was $2,000,000. What was Jen's basic earnings per share? $9.00 $9.09 $10.00 $11.11

$9.00 *Earnings per share is: (net income - preferred dividends)/common shares outstanding. Preferred stock dividends are $100 × 10% × 20,000 shares = $200,000. Earnings per share is (2,000,000-200,000)/200,000=$9 per share.

Tulip Co. owns 100% of Daisy Co.'s outstanding common stock. Tulip's cost of goods sold for the year totals $600,000, and Daisy's cost of goods sold totals $400,000. During the year, Tulip sold inventory costing $60,000 to Daisy for $100,000. By the end of the year, all transferred inventory was sold to third parties. What amount should be reported as cost of goods sold in the consolidated statement of income? $900,000 $940,000 $960,000 $1,000,000

$900,000 *The total amount of cost of goods sold (COGS) should equal the cost to parties outside of the consolidated entity. Tulip reported $600,000 and Daisy reported $400,000 of COGS, a total of $1,000,000. However, $100,000 of Daisy's COGS is the amount paid to Tulip and should be eliminated from the consolidated financial statements. Therefore, $900,000 should be reported on the consolidated statement of income.

General-Purpose Financial Statements. The IASB Framework is concerned with general-purpose financial statements (similar to the FASB Concepts Statements), directed to provide financial information to a wide variety of users. Financial statements include:

(1) balance sheet, (2) income statement, (3)statement of changes in financial position (note that a later IAS requires a statement of cashflows), (4) notes and supplementary material. *Excluded from the purview are directors' and management reports and the like.

Eligibility for Consolidated Financial Statements Whether an entity (e.g., an investee), in which another entity (e.g., an investor) has an interest, must be consolidated depends on the nature of the relationship between entities. GAAP establishes a two-step (or two-tier) process for determining whether the relationship requires an entity to be consolidated with another entity. The entity being considered for consolidation must be assessed to determine...

(1) if it is a variable-interest entity (VIE) and, if so, the primary beneficiary of the VIE, and (2) if the entity is not a VIE, whether an investor has equity ownership that enables it to exercise control of the investee.

IASB - Elements of Financial Statements An item is recognized as an element if it meets one of the element definitions below and also meets the following two recognition criteria:

(1) it is probable that a future economic benefit associated with the item will flow to or from the entity, and (2) the item has a cost or value that can be measured with reliability. In addition, the substance over form principle must be considered (e.g., accounting for income taxes and for capital leases).

(example) Relevance over faithful representation. The pervasive use of accounting estimates (depreciation, bad debt expense, pension estimates) is an example of emphasizing relevance over faithful representation. Firms are providing estimates, rather than certain amounts. Reasonable approximations, although they cannot be perfectly reliable, are preferred by financial statement users to either...

(1) perfect information issued too late to make a difference, or (2) no information at all.

Nature of Operations Different types of businesses have different risks. Knowledge of the firm's... (hint, 3 things)

(1) products and services, (2) geographical locations and (3) principal markets will assist users in assessing risks concerning the firm's operations. For example, identification of competition and vulnerability to technological change are aided with this knowledge

Statement of Changes in Equity Vertical Format This format allows a check of accuracy by comparing total OE computed as

(1) the sum of each transaction affecting OE, and (2) the sum of individual OE account balances.

use of estimates The firm must communicate that:

(1) use of estimates is inescapable in preparing financial statements that conform with GAAP, (2) the use of estimates results in approximate amounts, not certainty, and (3) estimates involve assumptions about future events.

Quick or acid-test ratio = (equation)

(Cash + Short-term investments + AR)/CL. This ratio provides a more rigorous test of liquidity.

complex capital structure Formula—The Diluted Earnings per Share is calculated by the formula shown below, which includes the effects of potential common stock (PCS) DEPS =

(Net Income Available to Common Adjusted for Effects of PCS) / (Weighted Average Common Shares Plus Shares Issuable from PCS)

simple capital structure Formula—If the company has common stock and nonconvertible preferred stock outstanding, the Basic Earnings per Share is calculated by the formulas shown below. BEPS =

(Net Income Available to Common)/(Weighted Average Common Shares Outstanding) *BEPS= (*Net Income− Preferred Stock Dividend*)/(Weighted Average Common Shares Outstanding)

simple capital structure Formula—If the corporation only has common stock outstanding, the Basic Earnings per Share (BEPS) is calculated by the formula shown below. BEPS =

(Net Income)/(Weighted Average Common Shares Outstanding)

IFRS - Income Statement IFRS requires firms to analyze expenses either by...

(a) function or (b) nature of the expense. If a firm uses the functional system, the firm must disclose the additional information on the nature of expenses. This disclosure is usually in the notes. In the U.S. GAAP there is no such requirement although SEC registrants must report expenses by function.

IFRS If the entity __________________ _________________ (hint, two ways to fall under IFRS compliance), the statements must comply with IFRS.

(a) provides full interim statements as required by a securities regulator or other entity, or (b) voluntarily provides such statements described as complying with international standards

the financial statement accounts listed in order of non-current emphasizes the long-run perspective. Other variations include

(a) reporting net assets (total assets less total liabilities), (b) reporting current assets and liabilities in one section labeling the difference as working capital or net current assets, and (c) ordering by liquidity where the entire statement of financial position is listed in order of liquidity, within assets and liabilities.

Using Cash Flow Information and Present Value in Accounting Measurements Two Approaches—The statement contrasts two approaches to computing present value: the traditional approach (def)

(referred to as discounted cash flows) incorporates factors 2-5 above in the discount rate and uses a single most-likely cash flow in the computation. Uses the interest rate to capture all the uncertainties and risks inherent in a cash flow measure. This is the approach that continues to be applied in some present value applications in financial accounting.

Reporting Within the Balance Sheet—The use of contra accounts signified with a ____ symbol.

(−)

objective of financial reporting: Decision Usefulness primary qualitative characteristics:

*1. relevance* a. Predictive value b. Confirmatory value c. materiality *2. Faithful Representation* a. completeness b. Neutrality c. Free from error

Cash Flows from Financing Activities The major cash flow items in this category are the following:

*A. Inflows (cash received)* 1. sale of own stock 2. proceeds from borrowing (bonds, notes, etc) *B. Outflows (cash paid)* 1. repurchase own (treasury) stock 2. paying back lenders (principal only) 3. payment of dividends

Cash Flows from Investing Activities This category reports cash inflows and cash outflows that relate to "investment" in and disposal of noncash assets. The major cash flow items in this category are the following:

*A. Inflows (cash received)* 1. sale of long term assets 2. collection of loan principal 3. Disposal of debt and equity securities (of others, e.g., held-to-maturity or available-for-sale classifications) 4. Sale of other productive assets (e.g., patent or equipment; but not Inventory) *B. Outflows (cash paid)* 1. purchase of long term assets 2. lending (to others) 3. investment in debt and equity securities (of others, e.g., held-to-maturity or available-for-sale classifications) 4. Purchase of other productive assets (e.g., patent or equipment; but not Inventory)

Process Steps to Follow—The steps to be followed in deriving consolidated financial statements from the separate trial balances or statements of the separate companies are: Eliminating Entries—Identify and record balance sheet eliminating entries: The common balance sheet eliminating entries at the date of combination are: investment elimination entry Entry when parent owns less than 100% of subsidiary—Sample investment elimination entry (on the consolidating worksheet) when there is a noncontrolling interest in the subsidiary. Subsidiary's shareholder equity not owned by the parent (either directly or indirectly) belongs to the noncontrolling interest. It is the noncontrolling interest (minority) claim to consolidate net assets attributable to the subsidiary, which includes the subsidiary's net assets at fair value and the full fair value of any goodwill recognized on the acquisition. (hint, what is the JE?) *The noncontrolling interest account—Will show on the consolidated balance sheet as a separate item within shareholders' equity.

*DR:* Common Stock (of subsidiary) Add'l Paid-in Cap (of subsidiary) Retained Earnings (of subsidiary) Identifiable Assets (of subsidiary to FV, as needed) Goodwill (if Investment value > FV of subsidiary's NA) ------------------------------------------- *CR:* Identifiable Liabilities (of subsidiary to FV, as needed) Investment in subsidiary (from parent's books) Noncontrolling Interest (% claim to consolidated net assets attributable to the subsidiary)

*DR:* Common Stock (of subsidiary) Additional Paid-in Cap (of subsidiary) Retained Earnings (of subsidiary) Identifiable Assets (of subsidiary to FV, as needed) Goodwill (if Investment cost > FV of subsidiary's NA) ---------------------------------------- *CR:* Identifiable Liabilities (of subsidiary to FV, as needed) Investment in subsidiary (from parent's books)

IASB Framework Differences The IASB Framework lists only five elements: The FASB Framework lists 10 elements:

*IASB:* 1. assets, 2. liabilities, 3. equity, 4. income, and 5. expense. *FASB:* 1. assets, 2. liabilities, 3. equity, 4. revenues 5. expense 6. investment by owners, 7. distributions to owners, 8. comprehensive income, 9. gains, and 10. losses.

EPS amounts (all after tax) must be disclosed for the following line items in the income statement *BEPS only for simple capital structure *BEPS & DEPS for complex capital structure

*On the face of the Income Statement:* 1. Income from Continuing Operations 2. Net Income *Either on the face of the Income Statement or in Footnotes* 3. Discontinued Operations

Paper Co. had net income of $70,000 during the year. The dividend payment was $10,000. The following information is available: Mortgage repayment $20,000 Available-for-sale debt securities purchased 10,000 increase Bonds payable-issued 50,000 increase Inventory 40,000 increase Accounts payable 30,000 decrease What amount should Paper report as net cash provided by operating activities in its Statement of Cash Flows for the year?

0 **Operating activities come from adjustments to reconcile net income to net cash flows and through analyzing the change in current asset and liability accounts. Net income − increase in inventory − decrease in accounts payable $70.000 − $40 000 − $30 000 = $0

Fair Value Objectives—In order to accomplish the objectives of ASC 820, the following are provided:

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.

A discontinued operation is when a component or group of components of an entity are:

1) disposed for by sale or other than sale, or classified as held-for-sale, and 2) the disposal "represents a strategic shift that has (or will have) a major effect on an entity's operation and financial results." (ASU 2014-08) A strategic shift includes the disposal of a major geographical area, a major line of business, a major equity method investment, or other major parts of the entity.

The Codification standardized certain terms. For example, the Codification uses the term ________ rather than "firm" or "company" and thus uses the term __________ rather than "intercompany." Moreover, the word _______ is used for required treatments, rather than "should," "must, " or other terms.

1. "entity" 2. "intra-entity" 3. "shall"

Typical intercompany accounts receivable/accounts payable and the amount of each to eliminate are:

1. (Trade) Accounts Receivable/Accounts Payable (100%): The full amount of the intercompany receivable and intercompany payable must be eliminated. 2. Loan Receivable/Loan Payable 3. Interest Receivable/Interest Payable (100%) 4. Dividends Receivable (100%)/Dividends Payable (Intercompany %): Note that only the intercompany amount of the dividends payable must be eliminated. Any dividend payable to noncontrolling shareholders will not be eliminated.

The main pronouncements published by the SEC:

1. *Financial Reporting Releases (FRR)—*These are formal pronouncements and are the highest-ranking authoritative source of accounting for public companies. 2. *Staff Accounting Bulletins (SAB)—*These provide the SEC's current position on technical issues. Although SABs are not formal pronouncements (in the sense that they have not gone through any due process), they still are of importance to financial statement preparers, because they reflect the staff's current thinking on various technical issues

Application of Definition to Assets, Liabilities, and Shareholders' Equity Application to Assets The highest and best use of an asset may be:

1. *In use*—Maximum value to market participants would occur through its use in combination with other assets as a group; or 2. *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).

The SEC has five commissioners appointed by the president of the United States and five divisions (collectively referred to as "the commission"):

1. *The Division of Corporation Finance—*This division oversees the compliance with the securities acts and examines all filings made by publicly held companies. All filings go to this division. 2. *The Division of Enforcement—*When there is a violation of a securities law (except the Public Utility Holding Company Act), this division completes the investigation and takes appropriate actions. This division makes recommendations to the Justice Department concerning any punishments or potential criminal prosecution. 3. *The Division of Trading and Markets—*This division oversees the secondary markets, exchanges, brokers, and dealers. 4. *The Division of Investment Management—*This division oversees the investment advisers and investment companies under the Investment Company Act of 1940 and the Investment Advisers Act of 1940. 5. *Division of Economic and Risk Analysis—*This division was created in 2009 in response to the credit market crisis. The purpose of the division is to integrate financial economics and data analytics into the core mission of the SEC (www.sec.gov).

income statement Presentation Order—Below income from continuing operations, the prescribed presentation is the order as shown above. (aka...)

1. +/- income from discontinued operations (net of tax) 2. net income

A chart of accounts typically assigns account numbers to accounts for use in computerized information systems. For example, assets may be assigned numbers ___________, liabilities _______, etc. Cash might be assigned the number ______, with AR control assigned number ______. Each account in the AR subsidiary ledger then could be numbered ________.

1. 100 - 199 2. 200-250 3. 100 4. 104 5. 104-1, 104-2, etc.

The volume of IFRS (about _________ pages) is substantially ____ than U.S. GAAP (about __________ pages).

1. 3,000 2. less 3. 17,000

In addition to the cash basis, the modified cash basis, and the income tax basis of accounting, two additional categories of other comprehensive basis of accounting exist. These additional categories of OCBOA are:

1. A basis of accounting used to comply with a regulatory agency that has jurisdiction over the reporting entity. Regulatory financial statements do fall under the category of a Special Purpose Framework for audit purposes. a. Examples would include financial statements filed with state insurance or public utility regulatory agencies. b. Regulatory-based financial statements should be restricted to use by the entity and the regulatory agency. 2. There also may be financial statements that we have not covered. These financial statements are prepared using a basis with a definite set of accounting and reporting criteria that has substantial support and which is applied to all material financial statement items. One example of these might be financial statements that had price level or inflation adjusted financial statements.

For Assets and Liabilities That Are Measured at Fair Value on a Recurring Basis—In periods subsequent to initial recognition (e.g., debt or equity investments measured at fair value), the reporting entity must disclose the following information in the statement of financial position (balance sheet) for each interim and annual period for each major category of asset and liability: For fair value measurements in Level 3:

1. A description of the valuation process used 2. Quantitative information about the unobservable inputs used 3. A narrative description of the sensitivity of the fair value measurement to changes in unobservable inputs

Required Disclosures for Interim and Annual Statements of Financial Position (Balance Sheet)—As of each date for which a Statement of Financial Position (Balance Sheet) is presented, the following must be disclosed: If the fair value option is elected for some, but not all, eligible items within a group of similar eligible items:

1. A description of those similar items and the reasons for partial election 2. Information to enable users to understand how the group of similar items relates to individual line items on the Statement of Financial Position

Effective control may be lacking (even for a majority owned subsidiary) when it is:

1. A foreign subsidiary largely controlled by the foreign government through prohibition on paying dividends, control of day-to-day operations, or other impediments to control. 2. A domestic subsidiary in bankruptcy and under the control of the courts.

Current Liability (CL) (def):

1. A liability expected to be extinguished through the use of current assets or by the incurrence of other current liabilities. 2. The incurrence of other CL part of the definition means that CL that are continuously refinanced (rolled over) by replacing them with other CL due later (but within one year of the balance sheet date) must still be classified as CL, even though no CA will be used to extinguish them in the year after the balance sheet date.

Balance Sheet It is the only statement dated as of a point in time. The title consists of three lines:

1. ABC Company 2. Balance Sheet 3. As of December 31, 20X4

Characteristics of Financial Statements under IFRS for SMEs Unlike OCBOA, IFRS for SMEs is based on the accrual basis of accounting, just as is standard U.S. GAAP. However, IFRS for SMEs is both less complicated and less voluminous than U.S. GAAP. Some of that simplification is reflected in the following key areas where IFRS for SMEs differs from U.S. GAAP:

1. Accounting for financial assets and financial liabilities makes greater use of cost. 2. The use of the cost method to account for investments over which the investor has significant influence is permitted; the equity method also is permitted, but not required. 3. Inventories must be valued using FIFO or weighted-average cost; LIFO inventory valuation is prohibited. 4. Capitalization of interest incurred during construction of an asset is not required. 5. When the major components of an item of property, plant, or equipment have different patterns of consumption, depreciation must be based on a components approach. 6. Goodwill and other intangible assets are amortized and assumed to have a limited life and, if the life cannot be estimated, a 10-year period must be used for amortization purposes. 7. Impairment of goodwill is assessed using a one-step process, rather than a two-step process. 8. A simplified approach to temporary differences is used for income tax accounting. 9. If certain criteria are met, reversal of impairment charges is allowed, including for financial assets. 10. Only certain hedge types are allowed and conditions for the use of hedge accounting for those types are less restrictive. 11. There is no requirement for earnings per share or segment disclosures. 12. Disclosure requirements are simplified in several areas, including: a. Financial b. instruments; c. Leases; d. Pensions.

1. Accounting principles that address share-based payment transactions 2. ASCs that require or permit measurements that are similar to fair value but that are not intended to measure fair value, including: a. Accounting principles that permit measurements that are determined using vendor-specific objective evidence of fair value; or b. Accounting principles that address fair value measurement for purposes of inventory pricing 3. Accounting principles that address fair value measurements for purposes of lease classification or measurement 4. ASCs that permit practicability exceptions to fair value measurement

Applicability—ASC 820 applies to items that use fair value measurement either as required or as permitted by GAAP, except in very limited situations. Specifically, the guidance of ASC 820 does not apply to: ASCs that require or permit measurements that are similar to fair value but that are not intended to measure fair value, including:

1. Accounting principles that permit measurements that are determined using vendor-specific objective evidence of fair value; or 2. Accounting principles that address fair value measurement for purposes of inventory pricing

Current liabilities include:

1. Accounts payable, 2. accrued liabilities, 3. unearned revenue, 4. income tax payable, 5. notes payable, 6. current portion of long-term debt (the portion due within one year of the balance sheet date).

Cash Flow from Operating Activities—Accrual Reconciliation Accruals and Deferrals—Under GAAP, net income is based on accrual accounting, which recognizes economic events through accruals and deferrals which means many items used in determining net income do not reflect cash flows (e.g., losses and gains). Therefore, net income does not reflect net cash flow from operations. Using the indirect method, net income is adjusted to derive net cash flow from operating activities by:

1. Adding back noncash charges (reductions) included in deriving net income; and 2. Subtracting out noncash credits (increases) included in deriving net income.

Recognition and measurement differences Differences may exist in when and how an item is recognized in the financial statements.

1. Alternative methods may be acceptable in U.S. GAAP whereas only one method may be allowed for IFRS (or vice versa). 2. In some instances, either IFRS or U.S. GAAP may not require an item to be recognized in the financial statements. 3. In addition, the amount recognized (measurement of the item) may be different in the two sets of standards.

Amortization of Bond Premiums/Discounts Bond premiums and discounts arise from both an investment in bonds or the issuing of bonds, at the time the bonds are bought or sold. The subsequent amortization of a premium or discount will enter into net income (through interest income or interest expense) but will not generate or use cash. Therefore, the effects of premium or discount amortization must be added back to or subtracted from net income. Two illustrations are given:

1. Amortization of premium on bond investment—When bonds are purchased for more than maturity value, a premium results. The related entry would be: (DR) Investment in bonds (at face value) (DR) Premium on Bond Investment (CR) Cash *The cash outflow would be recognized in the period the investment is made as a component of cash flow from investing activities. The subsequent amortization of the premium would be recorded by a periodic entry: (DR) Interest Income (CR) Premium on Bond Investment *The debit to Interest Income reduces the amount of net income but does not use cash. Therefore, the amortization should be added back to net income. If the bonds had been acquired at less than maturity value, the resulting amortization of the discount would have to be subtracted from net income. 2. Amortization of discount on bonds payable—When bonds are issued for less than maturity value, a discount results. The related entry would be: (DR) Cash (DR) Discount on Bonds Payable (CR) Bonds Payable * The cash inflow would be recognized in the period the bonds were sold as a component of cash flow from financing activities. The subsequent amortization of the discount would be recorded by a periodic entry: (DR) Interest Expense (CR) Discount on Bonds Payable *The debit to Interest Expense reduces the amount of net income, but does not use cash. The amount of amortization should be added back to net income. If the bonds had been issued (sold) at more than maturity value, the resulting amortization of the premium would have to be subtracted from net income.

Current Assets (CA) def:

1. An asset expected to be realized in cash or to be consumed or sold during the normal operating cycle, or within one year of the balance sheet date, whichever is longer. 2. The operating cycle is the period of time from purchasing inventory to paying for the payable incurred on inventory purchase to the sale of goods to the collection of receivable and then to purchasing inventory all over again. 3. For most firms the operating cycle is less than one year, but some firms, such as construction and engineering companies, have operating cycles exceeding one year. Construction in process, an inventory account found in construction firms' balance sheets, is a current asset even though the constructed asset may require several years to complete.

Using Cash Flow Information and Present Value in Accounting Measurements Capture Economic Differences — A present value measurement that fully captures the economic differences between various estimates of future cash flows would include the following:

1. An estimate of future cash flows 2. Expectations about variations in amount or timing of those cash flows 3. Time value of money as measured by the risk-free rate of interest 4. The price for bearing the uncertainty inherent in the asset or liability 5. Any other relevant factors

Instruments Not Eligible for Fair Value Option—Entities may NOT use fair value to measure and report the following financial assets and financial liabilities:

1. An investment in a subsidiary that is to be consolidated 2. An interest in a variable interest entity that is to be consolidated 3. Employers' and plans' obligations (or assets) for pension benefits, other postretirement benefits, postemployment benefits, and other employee-oriented plans 4. Financial assets and liabilities recognized under lease accounting 5. Demand deposit liabilities of financial institutions 6. Financial instruments that are classified by the issuer as a component of shareholders' equity

Thus, under IFRS, the standard for determining control is broader than under U.S. GAAP. The IFRS standard applies regardless of the form of the investee entity, including to structured entities (what would be designated as SPEs or VIEs under U.S. GAAP) and the determination that control exists may occur in a greater number of relational circumstances than under U.S. GAAP. For example, under IFRS control may be deemed to exist in the following circumstances (which would not be considered control for consolidation purposes under U.S. GAAP):

1. An investor has control over more than 50% of the voting rights by virtue of an agreement with other investors. 2. An investor has the ability to govern the financial and operating policies of the entity under a statute or an agreement. 3. An investor can appoint or remove the majority of the members of the board of directors. 4. An investor can cast the majority of votes at a meeting of the board of directors.

Accounting Cycle Review The periodic accounting process leading to the preparation of financial statements is called the accounting cycle. The cycle steps used by a firm are specific to the information technology applied. The following is a representative list, in chronological order:

1. Analyze relevant source documents (e.g., sales invoices) and *record journal entries in a journal*, a temporary listing of accounts affected and the amount by which they are to be changed by transaction, event, or adjustment. 2. *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. 3. *Record adjusting journal entries* at the end of the accounting period. These journal entries record changes in resources and obligations not signaled by a new transaction or event. Examples include accrual of wages expense from the last payday to the end of the fiscal period, expiration of prepaids, and recognition of estimated expenses such as depreciation and warranty expense. These journal entries are also posted to the accounts. 4. *Prepare trial balances.* Some firms prepare a trial balance, which is a test of the equality of the sum of debit account balances and credit account balances, before and after adjusting journal entries. A trial balance is a quick test for the presence of an error in recording or posting. 5. *Prepare the income statement, balance sheet, and statement of cash flows (often in that order).* The first two are prepared directly from the ledger accounts or trial balance; the cash flow statement requires additional analysis. 6. *Close the temporary account balances* (revenues, expenses, gains, losses) setting them to zero, and transfer the net income amount to retained earnings.

Sale by Subsidiary to Parent - Parent owns 100% of the subsidiary:

1. Eliminate sales/COGS—All the intercompany sale/COGS would be eliminated as above. It is a mere reversal of the original intercompany sale and cost of goods sold. 2. Profit elimination—All the intercompany profit and profit in ending inventory carrying value would be eliminated as above and would reduce the parent's claim to net income and asset (inventory) carrying value, since there are no noncontrolling claims to the subsidiary.

The 1934 Securities Exchange Act enacted reporting requirements for the purpose of fully disclosing relevant information about publicly traded firms. The SEC's reporting principles for information in the reports are found in Regulation S-X, Financial Reporting Releases (FRRs), and Staff Accounting Bulletins (SAB). Regulation S-X helps reduce redundancy in reporting by allowing for integrated disclosures whereby a company may satisfy certain Form 10-K disclosure requirements by referencing its shareholder annual report as long as that report includes the required disclosures. The following is a list of the most common required forms:

1. Annual filing—Form 10-K 2. Quarterly filing—Form 10-Q 3. Report significant events affecting the company—Form 8-K 4. Proxy Statement—The report by which management requests the right to vote through proxy for shareholders at meetings

Balance Sheet Factors Limiting the Interpretation of Balance Sheet Information:

1. Assets and liabilities are acquired at different times and are not affected in the same way by inflation and specific price-level changes. This causes the recorded value of these accounts to be different from their current or real value and makes comparisons difficult. 2. Several different measurement bases are used (historical cost, depreciated historical cost, market (fair) value, realizable value, present value) which compromises the comparability characteristic of accounting information. 3. Consolidation of subsidiaries compounds the difficulties with interpretation of account balances when the parent and subsidiaries use different accounting methods. 4. The value of many assets is derived primarily through use (exceptions are investments, receivables); this value may differ considerably from book value and market value. How does the user really interpret book value when book value and market value are different?

Elements of Financial Statements—Ten elements that appear in a financial report:

1. Assets—Resources that have probable future benefits to the firm, controlled by management, resulting from past transactions. Note the three aspects of this definition. 2. Liabilities—Probable future sacrifices of economic benefits arising from present obligations of an entity to transfer assets or provide services to other entities as a result of past transactions or events. 3. Equity—Residual interest in the firm's assets, also known as net assets. Equity is primarily comprised of past investor contributions and retained earnings. 4. Investments by Owners—Increases in net assets of an entity from transfers to it by existing owners or parties seeking ownership interest 5. Distributions to Owners—Decreases in net assets of an entity from the transfer of assets, provision of services, or incurrence of liabilities by the enterprise to owners 6. Comprehensive Income—Accounting income (transaction based) plus certain holding gains and losses and other items. It includes all changes in equity other than investments by owners and distributions to owners. 7. Revenues—Increases in assets or settlements of liabilities of an entity by providing goods or services 8. Expenses—Decreases in assets or incurrences of liabilities of an entity by providing goods or services. Expenses provide a benefit to the firm 9. Gains—Increases in equity or net assets from peripheral or incidental transactions 10. Losses—Decreases in equity or net assets from peripheral or incidental transactions. Losses provide no benefit to the firm.

In addition, the accumulated balances of each individual component of OCI must be reported. This information can appear in the...

1. Balance Sheet, 2. Statement of Owners' Equity, or 3. footnotes. This disclosure allows the user to understand the changes in individual components of other comprehensive income.

Form 10-Q The financial statements presented are:

1. Balance sheet for the quarter and prior fiscal year end 2. Quarterly and year-to-date income statements for this quarter and the same period in the previous year 3. Cumulative year-to-date statements of cash flow for the current and prior fiscal years

Eligibility for and Election of IFRS for SMEs Under the standard, the following kinds of entities would have public accountability and, therefore, would be precluded from using IFRS for SMEs: Entities that hold assets in a fiduciary capacity for a broad group of outsiders, including:

1. Banks; 2. Insurance companies; 3. Brokers and dealers in securities; 4. Pension funds; 5. Mutual funds.

Increases and Decreases in Current Assets and Current Liabilities - Account Payable example Assume ABC Company's accounts payable balances for 20X1 and 20X2 were: AP - X1 = 80,000 AP - X2 = 90,000 increase 20X2 = 10,000

1. Because accounts payable increased by $10,000, an expense (COGS) is included in net income, but the cash has not been paid. Therefore, in the determination of cash flows from operations, $10,000 would be added to net income. 2. If accounts payable had decreased, more cash would have been paid than expenses recognized for the period. Then the amount of decrease would have to be deducted from net income to determine the related cash flow. 3. Increases and decreases in other current liabilities would be treated in the same manner.

Increases and Decreases in Current Assets and Current Liabilities - example of increase in assets receivable AR - X1 = 60,000 AR - X2 = 75,000 net increase 20X2 = 15,000

1. Because accounts receivable increased by $15,000, sales of that amount are included in net income, but the cash has not been collected. Therefore, in the determination of cash flows from operations, $15,000 should be subtracted from net income. 2. If accounts receivable had decreased, more cash would have been collected than sales recognized for the period. The decrease in accounts receivable would be added to net income to derive the cash flow from operations. 3. Increases and decreases in other current assets would be treated in the same manner.

Fair Value Option Disclosures Objectives—Disclosures required when the fair value option is elected are intended to accomplish the following objectives: The disclosures are intended to facilitate comparisons:

1. Between entities that choose different measurement methods for similar assets and liabilities, and 2. Between assets and liabilities in the financial statements of a single entity that selects different measurement methods for similar assets and liabilities.

interest rate swap When certain criteria are met, the private entity can assume the swap is 100% effective. This assumption significantly reduces the testing needed for assessing and measuring ineffectiveness. The criteria are (815-20-25-131D):

1. Both the variable rate on the swap and the borrowing are based on the same index and reset period. 2. The terms of the swap are typical (a "plain-vanilla" swap), and there is no floor or cap on the variable interest rate of the swap unless the borrowing has a comparable floor or cap. 3. The repricing and settlement dates for the swap and the borrowing match or differ by no more than a few days. 4. The swap's fair value at inception (i.e., at the time the derivative was executed to hedge the interest rate risk of the borrowing) is at or near zero. 5. The notional amount of the swap matches the principal amount of the borrowing. In complying with this condition, the amount of the borrowing being hedged may be less than the total principal amount of the borrowing. 6. All interest payments occurring on the borrowing during the term of the swap are designated as hedged whether in total or in proportion to the principal amount of the borrowing being hedged. **When these criteria are met, the private entity can use the practical expedient of settlement value to measure the value of the swap versus measuring the swap at fair value. Settlement value excludes the adjustment for performance risk and is generally viewed to be a simpler valuation.

Special Purpose Framework or Other Comprehensive Bases of Accounting—General-purpose financial statements, as described in prior lessons, are based on generally accepted accounting principles (GAAP) for public business enterprises. There are circumstances, however, when financial statements not based on GAAP are used by nonpublic business entities to avoid the time-consuming and costly application of GAAP. For example, another comprehensive basis of accounting (other than GAAP) may be used by sole proprietorships, partnerships or small, closely held corporations when the entity does not have loan covenants or other requirements that mandate the preparation of GAAP-based financial statements. There are over 2.8 million partnerships and over 20 million sole proprietorships in the United States. Many of these nonpublic businesses use another comprehensive basis of accounting. The primary acceptable other comprehensive bases of accounting widely used by nonpublic businesses entities, including cash basis, modified cash basis, and income tax basis, are covered in the following subsections. There are several categories of Special Purpose Framework or OCBOA financial statements:

1. Cash Basis 2. Modified Cash Basis 3. Income Tax Basis 4. Regulatory Basis 5. Other Basis with Substantial Support

The SCF must report information in the following categories:

1. Cash inflows and outflows from operating activities 2. Cash inflows and outflows from investing activities 3. Cash inflows and outflows from financing activities 4. Effects of foreign currency translation on cash flows 5. Reconciliation of net cash inflows/outflows (sum of the items listed above) with the reported change in cash, cash equivalents, and restricted on the Statement of Financial Position (Balance Sheet).

current assets include:

1. Cash, 2. cash equivalents, 3. short-term investments, 4. accounts receivable, 5. other receivables, 6. inventories, 7. pre-paids

Noncurrent Liability Disclosures—Companies are required to disclose the following information about liabilities:

1. Combined aggregate amount of maturities on borrowings for each of the five years following the balance sheet 2. Sinking fund requirements 3. The aggregate amount of payments for unconditional obligations to purchase fixed or minimum amounts of goods or services 4. The fair value of each financial debt instrument in the financial statements or in the notes 5. The nature of the firm's liabilities, interest rates, maturity dates, conversion options, assets pledged as collateral, and restrictions

Combined financial statements (as distinguished from consolidated statements) would be appropriate when:

1. Common control: One individual (not a corporation) owns a controlling interest in two or more businesses that have related operations; 2. Common management: Two or more businesses are under common management; 3. Unconsolidated subsidiaries: A parent lacks effective control over two or more subsidiaries (unconsolidated subsidiaries) for which it wishes to show summary results.

Regulation S-X governs the form and content of financial statements and financial statement disclosures. These include:

1. Income statement 2. Balance sheet 3. Changes in shareholders equity 4. Cash flow statement 5. Footnotes to financial statements 6. Qualification of accountants (independence rules)

intercompany example Assume that, during the period, Company P, the parent company, provided services to its subsidiary, Company S for $10,000. Each company would bring the following account balances onto the consolidating worksheet: (answer 1) On the consolidating worksheet the following eliminating entry would be required so that no intercompany revenue or expense will show on the consolidated financial statements: (answer 2)

1. Company P / I/C Revenue (from S) = $10,000 (CR) Company S / I/C Expense (to P) = $10,000 (DR) 2. DR: I/C Revenue (from S), $10,000 CR: I/C Expense (to P) $10,000 The full amount (100%) of intercompany revenues and expenses must be eliminated, even if the original transaction occurred at no profit to the "selling" affiliate.

intercompany example Assume that, during the period, Company P, the parent company, provided services to its subsidiary, Company S, and that Company S owed Company P $10,000 for those services at the end of the period. Each company would bring the following account balances onto the consolidating worksheet: (answer 1) On the consolidating worksheet the following eliminating entry would be required so that no intercompany receivable or payable will show on the consolidated financial statements: (answer 2)

1. Company P / Receivable from S = $10,000 (DR) Company S / Payable to P = $10,000 (CR) 2. DR: Payable to P, $10,000 CR: Receivable from S, $10,000

Owners' equity—two main types:

1. Contributed capital (common stock, preferred stock, contributed capital in excess of par), treasury stock (a contra account) 2. Retained earnings (total net income to date less total dividends to date)

A Parent records a subsidiary on its books as an investment (in Subsidiary). Subsequently, a Parent may carry an investment in a subsidiary that will be consolidated on its books using:

1. Cost method; 2. Equity method; 3. Any other method it chooses

Recognition and Measurement Criteria—In relation to measurement and recognition of items in a financial report, the following criteria must be met:

1. Definition—The definition of a financial statement element is met. 2. Measurability—There is an attribute to be measured, such as historical cost. 3. Relevance—The information to be presented in the financial report is capable of influencing decisions. The information is timely, has predictive ability, provides feedback value, and is material. 4. Faithful Representation—The information is complete, neutral and free from material error.

If the cost or expense benefits other quarters or interim periods, allocate the cost to those other quarters and recognize the appropriate amount of expense in those quarters (the integral view). examples:

1. Depreciation 2. Property tax expense 3. Rent expense if prepaid for longer than one interim period 4. Advertising expense if expenditures benefit more than one interim period 5. Bad debt expense if the firm uses an annual estimation procedure *These expenses are allocated to the interim periods benefited even though some may be paid in full in one interim period, because they benefit more than one interim period. **Repairs and maintenance expenditures may be cyclical with significant expenditures in one quarter benefiting the entire year. If the expenditures are planned to cover an annual period (or longer), then each interim period should recognize only its portion of the total expenditure as expense.

Cash Flow from Operating Activities—Accrual Reconciliation Items that are added back to net income are those that were deducted to derive net income, but cash was not used in the transaction. Examples of the items that are *added back* in the reconciliation are:

1. Depreciation expense 2. Amortization expense 3. Depletion expense 4. Losses (from sale of assets, etc.) 5. Loss under equity method of accounting for Investments 6. Amortization of premium on bond investment 7. Amortization of discount on bonds payable 8. Decreases in current assets (accounts receivable, inventory, prepaid assets, etc.) 9. Increases in current liabilities (accounts payable, deferred taxes, etc.) 10. Increase in unearned revenue

Regulation S-K governs the form and content of nonfinancial statement disclosures. These disclosures are the content of the 10-K outside of the financial statements (remember that "S-K" governs the "10-K" nonfinancial statement content). The nonfinancial statement disclosures are:

1. Description of the business 2. Description of stockholder matters 3. Management's discussion and analysis (MD&A) 4. Changes in and disagreements with accountants 5. Information on directors and management

income statement The total income tax effect for a given year is accomplished through multiple disclosures. The items for which intraperiod tax allocation is applied include:

1. Discontinued operations 2. Other comprehensive income items 3. Adjustment for retroactive accounting principle changes 4. Prior-period adjustments

nterim reporting The general rule for expense recognition is: If the cost or expense has no relationship to other quarters, recognize the entire expense in the quarter in which the cost was incurred (the discrete view). examples:

1. Discontinued operations net of applicable tax (if a component qualifying for discontinued operations reporting is considered held for sale in a particular quarter, the usual discontinued operations reporting is required for that quarter with later adjustments to any gain or loss recognized in those later quarters) 2. Gains and losses on disposals of plant assets *These items have no relationship to interim periods other than the one in which they occurred. **Arbitrary allocation of these items to other quarters is not permitted.

Under IFRS, an exposure, or a right, to variable returns from its involvement with an investee, which may be either positive, negative, or both, might include, for example:

1. Dividends 2. Remuneration 3. Other returns or benefits not available to other stakeholders (e.g., economies of scale, cost savings, access to scarce resources or proprietary information, synergies, etc.)

Consolidation After Acquisition If P uses the Equity Method—If the equity method is used to carry the investment in the subsidiary, the parent:

1. Does adjust on its books the carrying value of its investment in the subsidiary to reflect: a. The parent's share of the subsidiary's income or loss. b. The parent's share of dividends declared by the subsidiary. c. The amortization (e.g., "depreciation") of any difference between the FV of identifiable assets (but not goodwill) and the book value of those assets.

Practical expedient exception Alternative investments must meet the criteria in order to use NAV as the practical expedient:

1. Does not have a "readily determinable fair value." 2. The investment meets 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 practice and issues financial statements consistent with the measurement principles for an investment company.

Parent Owns Less than 100% of the Subsidiary—If You Have a Worksheet Without Income Statement:

1. Eliminate sale/COGS—All the intercompany sale/COGS would be eliminated as above. It is a mere reversal of the original intercompany sale and cost of goods sold. 2. Profit elimination—All the intercompany profit and the profit in ending inventory would be eliminated, but the profit elimination would be allocated between the parent and the noncontrolling shareholders' interest in proportion to their respective ownership percentages as part of the allocation of net income.

Consolidation After Acquisition Investment Elimination—The investment elimination entry is made to eliminate the adjusted Investment account (as of the beginning of year) against the subsidiary Shareholders' Equity (as of the beginning of year). The effects of this entry on the worksheet are to:

1. Eliminate the investment account of the parent (as of the beginning of the year) against the shareholder equity accounts of the subsidiary (as of the beginning of the year); 2. Adjust identifiable assets and liabilities of the subsidiary to fair value as of the date of the business combination; 3. Recognize goodwill, if any, as of the date of the business combination. Goodwill would be recognized at the original amount by which the investment value > FV of identifiable net assets acquired.

Eligibility for and Election of IFRS for SMEs IFRS for SMEs may be used by entities that do not have public accountability. Under the standard, the following kinds of entities would have public accountability and, therefore, would be precluded from using IFRS for SMEs:

1. Entities that are required to file financial statements with a securities commission or other regulatory body for the purpose of issuing instruments in a public market, such as equity or debt securities. 2. Entities that hold assets in a fiduciary capacity for a broad group of outsiders, including: a. Banks; b. Insurance companies; c. Brokers and dealers in securities; d. Pension funds; e. Mutual funds. 3. In addition, IFRS for SMEs are not intended for use by not-for-profit or governmental entities.

Management's Discussion and Analysis (MD&A) Additional discussion involves management's view of the firm's financial condition, changes in financial condition, and results of operations through analysis of the financial statements. examples

1. Explanations of the reasons for major changes in financial performance and financial position 2. Discussion of the effects of significant and unusual events provides further insight.

Interim Reports and Segment Reporting—When a firm subject to the segmental disclosure requirements issues interim reports, the following interim information is required to be reported for each segment:

1. External revenues (other than from intersegment sales) a. Intersegment revenues. b. Segment profit or loss.

For a disposal that meets the criteria of a discontinued operation the entity must disclose the following (ASU 2014-08):

1. Fact and circumstances leading to the disposal and reasons for the strategic shift and the effect of the strategic shift on operations 2. For the initial period in which the disposal group is classified as held for sale and for all prior periods presented in the statement of financial position, a reconciliation of (1) total assets and total liabilities of the discontinued operation that are classified as held for sale in the notes to the financial statements to (2) total assets and total liabilities of the disposal group classified as held for sale that are presented separately on the balance sheet 3. Operating and investing cash flows for the periods for which the discontinued operation's results of operations are reported in the income statement 4. Depreciation and amortization, capital expenditures, and significant operating and investing noncash items for the periods for which the discontinued operation's results of operations are reported in the income statement 5. Entities that have significant continuing involvement with a discontinued operation after the disposal date must provide additional disclosures regarding the nature of activities, including cash flows from or to the discontinued operation.

Reportable Segments—Required Disclosures—The required disclosures for reportable segments include the following (note that operating segments that are not reportable segments are not subject to these reporting requirements). Note also that the information reported reflects the way the firm reports information internally, which may not always be in conformity with GAAP. However, this approach was considered to be more useful than a pure GAAP-based reporting model:

1. Factors used to identify operating segments 2. General information about the products and services of the operating segments 3. Internal and external sales revenue 4. A measure of profit or loss, and total assets 5. The nature of differences between the measurement of segment quantitative information such as income and assets, and the measurement of the firm's reported quantitative information 6. Interest revenue 7. Interest expense 8. Depreciation, depletion, and amortization expense 9. Other significant noncash items 10. Unusual or infrequent items 11. Equity in net income of investees, in which the investment is accounted for under the equity method 12. Income tax expense or benefit 13. Reconciliation of the totals of segment revenues, reported profit or loss, assets, and other significant items to the total for the firm as a whole 14. Capital expenditures

A full set of financial statements should include the following:

1. Financial Position at year-end (balance sheet) 2. Earnings for the year (income statement) 3. Comprehensive Income for the year—total nonowner changes (statement of comprehensive income) 4. Cash Flows during the year (statement of cash flows) 5. Investments by and Distributions to Owners during the year (statement of owner's equity)

Information Requirements—In order to consolidate the financial statements of two or more entities, certain specific information is needed, including:

1. Financial statements (or adjusted trial balances) of the separate affiliated entities to be consolidated 2. Data as of the date of a business combination (i.e., acquisition date): a. Book values of assets acquired and liabilities assumed as of the acquisition date b. Fair values of assets acquired and liabilities assumed as of the acquisition date c. Fair value of any noncontrolling interest in the acquired entity as of the acquisition date d. Fair value of any equity interest in the acquired entity owned by the parent prior to the acquisition date 3. Intercompany (i.e., between the companies being consolidated) transaction data (for the operating period) and intercompany balances (as of period end)

Noncash Investing and Financing Activities - example A $100,000 note payable is settled by a cash payment of $60,000 and issuing stock with a fair value of $40,000. The cash portion ($60,000) would be a ___________. The noncash portion ($40,000) would be ______________________.

1. Financing Cash Outflow 2. disclosed as a noncash financing activity in the Schedule of Noncash Investing and Financing Activities

The underwriter provides marking and distribution of the securities. The underwriter is often contractually obligated to sell the securities under one of the following arrangements:

1. Firm commitment—The underwriter purchases the entire issue at a fixed price. 2. Best efforts—The underwriter sells as many shares as possible. 3. All or none—If the underwriter is unable to sell all (or a significant portion) then the issue may be canceled

Noncontrolling Interest (NCI) Determining NCI Equity (calculation steps)

1. First determine the NBV of S as of the date of consolidation. 2. Add to S's NBV the 100% purchase price differential less 100% of any depreciation/amortization or goodwill impairment. 3. Multiply the S's adjusted NBV by the NCI % to arrive at NCI Equity. *NCI Equity represents the amount of S's NBV allocated to the non-controlling shareholders of S including any FMV adjustments from the date of acquisition.

Accounts Affected—Intercompany fixed asset transactions affect the following accounts:

1. Fixed Asset—Any gain (or loss) recognized by the selling affiliate will cause the cost to the buying affiliate to overstate (or understate) the carrying value of the asset for consolidated purposes and must be corrected so that the asset is reported at original cost from a nonaffiliate. 2. Accumulated Depreciation—The sale of the fixed asset will cause the selling affiliate to write off its accumulated depreciation (on the asset sold), which will understate accumulated depreciation for consolidated purposes; the accumulated depreciation should be reinstated. 3. Depreciation Expense/Accumulated Depreciation—Any gain (or loss) included in the cost to the buying affiliate will cause subsequent depreciation taken by the buying affiliate and brought onto the consolidating worksheet to overstate (or understate) depreciation expense and accumulated depreciation for consolidated purposes in each subsequent period; these elements must be adjusted.

Sale By Subsidiary to Parent—Intercompany fixed asset by subsidiary to parent: Parent Owns Less than 100% of the Subsidiary Worksheet with Income Statement—If the elimination occurs on a consolidating worksheet that includes an income statement, the eliminations assuming an intercompany gain would be:

1. For Period of Intercompany Sale - To reestablish the fixed asset to its original cost, eliminate the intercompany gain, and reestablish accumulated depreciation written off by the selling affiliate. The debit to the gain will reduce the amount of income that will be allocated between the parent and the noncontrolling shareholders (interest) in proportion to their respective ownership percentages. - To eliminate the depreciation expense (and related accumulated depreciation) taken by the buying affiliate on the intercompany gain. The credit to depreciation expense will increase the amount of income that will be allocated between the parent and the noncontrolling shareholders' interest in proportion to their respective ownership percentages. 2. For periods subsequent to intercompany sale - To reestablish the fixed asset to its original cost, eliminate the unconfirmed portion of the intercompany gain in retained earnings and reestablish accumulated depreciation to the amount based on depreciation of original cost. The debit to fixed asset will remain constant; the debit to retained earnings and the credit to accumulated depreciation will decrease each year as a portion of the intercompany gain is confirmed. - The debit to retained earnings of S, the selling affiliate, will reduce the sub's retained earnings by the amount of the unconfirmed profit. - To eliminate the depreciation expense (and related accumulated depreciation) taken by the buying affiliate on the intercompany gain. The credit to depreciation expense will increase income that will be allocated between the parent and noncontrolling interest.

1. 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 2. A description of how interest and dividends are measured and where they are reported in the Income Statement 3. 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. 4. 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

Exceptions—There are exceptions to all-inclusive income statements: Other comprehensive income items (OCI):

1. Foreign currency translation adjustments 2. Unrealized holding gains and losses on securities available for sale 3. Pension and other postretirement benefit plan cost adjustments 4. Certain deferred derivative gains and losses *The OCI items above are disclosed in the statement of comprehensive income

_____________ is not replaced by comprehensive income. The purpose of requiring the reporting of comprehensive income is to report the net change in equity (other than from transactions with owners) in a single amount and to provide a more complete picture of the total earnings of the firm for a period. This reporting contributes to the objective of reporting an "all-inclusive" income amount.

1. Net income

Cash Flow from Operating Activities—Accrual Reconciliation Items that are subtracted from net income are those that were added to derive net income, but cash was not received in the transaction. Examples of items that are deducted in the reconciliation are:

1. Gains (from sale of assets, etc.) 2. Amortization of discount on bond investment 3. Amortization of premium on bond payable 4. Undistributed income under equity method of accounting for investments 5. Increases in current assets (accounts receivable, inventory, prepaid assets, etc.) 6. Decreases in current liabilities (accounts payable, deferred taxes, etc.) 7. Decrease in unearned revenue

Methods used in measuring inventory at lower of cost or market:

1. Historical cost, 2. replacement cost, and 3. net realizable value are

When to Recognize Revenue—Revenues are recognized when the entity completes its performance obligation to a customer and the revenue is earned and realized (or realizable) . The performance obligation is completed when the goods or services are delivered (revenue is earned) and cash or promise of cash is received (realized). In general, there are five steps to allocate the components of revenue:

1. Identify the contract with the customer (promise to deliver a good or service) 2. Identify if there is more than one performance obligation 3. Determine the transaction price 4. Allocate the transaction price to the separate performance obligations (if there is more than one performance obligation) 5. Recognize revenue when each performance obligation is satisfied.

Equity Method Adjustments Under the equity method, only cash dividends received from the investee cause a cash flow. The adjustments to net income to get cash flow would be:

1. If an equity investment loss, add back the amount of the loss. 2. If an equity investment income, subtract out the amount recognized as income that was not received as cash dividends.

Exceptions—There are certain limited exceptions to when an entity must consolidate another entity. Those exceptions include:

1. If an investor/parent has majority ownership of an investee/subsidiary (> 50% of the voting stock of the investee), but is prevented from exercising that majority ownership to control the financial and operating policies or activities of the subsidiary, it will not consolidate the subsidiary.

The fair value option may be applied on an instrument-by-instrument basis, with limited exceptions. The fair value option may be elected for a single eligible item without electing it for other identical items with the following exceptions:

1. 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; 2. If 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; or 3. If 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.

Two Values to Report—The following are separately disclosed and computed in the income statement below income from continuing operations:

1. Income — Income from the discontinued operation (DOP) for the portion of the year to disposal (or if disposal occurs in a later year, income for the entire year). 2. Gain or Loss — On disposal of the operation. The gain or loss is the net proceeds from sale of the component less book value of the component's net assets. Net proceeds are equal to the gross amount received on sale less the cost to dispose of the assets. Thus, the cost to dispose increases a loss and decreases a gain

Increases and Decreases in Current Assets and Current Liabilities Increases and decreases in current assets and current liabilities reflect differences between the amount of revenue or expense recognized for net income and the amount of cash received or paid. Two examples illustrate the relevant points:

1. Increase in accounts receivable When sales are made on account, the related entry would be: (DR) Assets Receivable (CR) Sales *The sales amount (credit) is included in net income, but unless the account receivable is collected within the same period there is no increase in cash. Therefore, net income would have to be decreased by the amount of the uncollected account receivable. The aggregate change in accounts receivable will have the same effect on net income as shown above. Therefore, the amount of the aggregate change in receivables (and other current assets) must be used to adjust net income to get the related cash flows. 2. Increase in accounts payable When purchases are made on account, the related entry would be: (DR) Purchases (or other expense) (CR) Account Payable *The purchase account (debit) is included in net income, but unless the accounts payable is paid within the same period, there is no decrease in cash. Therefore, net income would have to be increased by the amount of the unpaid account payable. The aggregate change in accounts payable will have the same effect on net income as shown above. Therefore, the amount of the aggregate change in payables (and other current liabilities) must be used to adjust net income to get the related cash flows.

fair value Market participants, as used in the definition, are buyers and sellers of the asset or liability that are:

1. Independent of the reporting entity 2. Acting in their economic best interest 3. Knowledgeable of the asset or liability and the transaction involved 4. Able and willing, but not compelled, to transact for the asset or liability

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:

1. Information about the nature of the event, and 2. Where the effect on earnings shows in the Income Statement.

For disclosable concentrations (those meeting the above criteria), the following is to be disclosed:

1. Information adequate to inform users about the nature of the risk associated with the concentration 2. For concentrations of labor (one of the four listed concentrations, see above) subject to collective bargaining agreements, the firm must disclose (a) the percentage of the labor force covered by the agreement, and (b) the percentage of the labor force covered the agreement that will expire within one year. 3. For concentrations of operations located outside of the entity's home country (one of the four listed concentrations, see above), the firm also must disclose the carrying amounts of net assets and the geographic areas in which they are located.

Fair Value Option Disclosures Objectives—Disclosures required when the fair value option is elected are intended to accomplish the following objectives: The disclosure requirements are expected to result in the following:

1. Information to enable users of financial statements to understand management's reasons for electing or partially electing the fair value option 2. Information to enable users to understand how changes in fair value affect earnings for a period 3. Provide the same kind/amount of information about certain items that would have been disclosed if the fair value option had not been elected for the items 4. Information to enable users to understand the differences between fair values and contractual cash flows for certain items

Required Disclosures for Interim and Annual Statements of Financial Position (Balance Sheet)—As of each date for which a Statement of Financial Position (Balance Sheet) is presented, the following must be disclosed: 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:

1. Information to enable users to understand how each line item in the statement relates to major categories of assets and liabilities 2. 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

Process for Combining Financial Statements—The process of preparing combined financial statements is similar to the process of consolidating financial statements:

1. Intercompany Items—Intercompany transactions and balances (i.e., between the companies being combined) are eliminated 2. Any other "unusual" matters would be treated in the same manner as in consolidated financial statements 3. Unlike consolidated financial statements, the resulting combined financial statements do not represent the financial position, results of operations, or cash flows of a single controlling entity but, rather, the aggregate results of the combined companies after eliminating intercompany account activity and balances.

The following are examples of assets and liabilities, related revenues and expenses, and disclosures of gain or loss contingencies that may be particularly sensitive to change in the near term:

1. Inventory subject to obsolescence 2. Equipment subject to technological obsolescence 3. Deferred tax asset valuation allowances 4. Capitalized software costs 5. Environmental remediation obligations 6. Litigation obligations 7. Obligations for defined benefit pension plans and other postemployment benefits

Examples of nonmonetary items

1. Inventory, 2. plant assets, 3. investments in equity securities, 4. unearned rent, and 5. other liabilities payable in goods and services

There are two components of comprehensive income:

1. Net income and 2. "Other" comprehensive income. *It is the second category that causes comprehensive income to differ from net income. "Other" comprehensive income items are not currently recognized in net income. They are recorded directly as increases or decreases in owners' equity.

Equity Method Adjustments An investor that uses the equity method to account for an investment must recognize its share of the investee's net income or net loss in the period it is reported by the investee, regardless of whether any dividends are paid by the investee. Therefore, the investor would make the following entries:

1. Investee reports Net Income, Investor entry: (DR) Investment in Investee (asset) (CR) equity investment income 2. Investee reports Net Loss, Investor entry: (DR) Equity Investment Loss (CR) Equity Investment Loss **In either case, the investor has increased or decreased its net income without any related cash flow. 3. If the investee paid a cash dividend during the period, the Investor entry would be: (DR) cash (CR) Investment in Investee (asset)

1. Investment elimination entry—All consolidations require an investment elimination entry to eliminate investment in the subsidiary account (brought on to the consolidating worksheet (W/S) by the parent) against the subsidiary's shareholders' equity (brought on to the W/S by the subsidiary). 2. Intercompany receivables/payables eliminations—Receivables and payables between companies being consolidated must be eliminated to the extent the amounts are intercompany (between the companies).

The PCC provides a definition for a public business entity because any entity that is not public is a private entity. The definition excludes not-for-profit companies and employee benefit plans. A public entity is one that (ASC 2013-12, para. 2):

1. Is required by the SEC to file or furnish financial statements; 2. Is required by the Securities Act of 1934 to file or furnish financial statements with a regulatory agency other than the SEC (for example debt securities); 3. Is required to file or furnish financial statements with foreign or domestic regulatory agencies in order to sell or issue securities; 4. Has issued securities that are traded, listed, or quoted on an exchange or over-the-counter market; or 5. Has securities that are not subject to contractual restrictions and is required by law, contract, or regulation to prepare U.S. GAAP financial statements and make them publicly available on a periodic basis.

A firm can reclassify a current liability as noncurrent if it accomplishes one of the following after the balance sheet date but before the financial statements are issued:

1. Issue stock to extinguish the debt; 2. Refinance the current liability with a non-current liability; or 3. Enter into an irrevocable agreement to refinance the current liability with a noncurrent liability.

An entity will be considered the primary beneficiary of a VIE if it meets both of the following conditions:

1. It has the power to direct activities of the VIE that most significantly impact the VIEs economic performance (called the power criterion), and 2. It has the obligation to absorb losses from or right to receive benefits of the VIE that potentially could be significant to the VIE (called the losses/benefits or risks/rewards criterion).

When estimates used to value assets, liabilities, or contingencies are subject to a reasonable possibility of material change, disclosures may be required. Disclosure about an estimate is required when information available before the financial statements are issued or are available to be issued indicates that the following two criteria are met:

1. It is at least reasonably possible that an estimate will change in the near term; 2. The effect of the change would be material. a. Materiality is based on the effect of using the new estimate on the financial statements.

IFRS - An asset is classified current if it meets one of the following criteria:

1. It is expected to be realized in, or is intended for sale or consumption in, the entity's normal operating cycle. 2. It is primarily held for the purpose of being traded. 3. It is expected to be realized within 12 months after the reporting period. 4. It is cash or a cash equivalent unless it is restricted from being exchanged or used to settle a liability for at least 12 months after the reporting period. 5. All assets not meeting any one of the above criteria are classified as noncurrent, being the default classification.

Filing Deadlines. Filing deadlines depend on the size of the company. Company size is as follows:

1. Large accelerated filer—A company with worldwide market value of outstanding voting and nonvoting common equity held by nonaffiliates of $700 million or more; 2. Accelerated filer—A company with worldwide market value of outstanding voting and nonvoting common equity held by nonaffiliates that is $75 million or more but less than $700 million; 3. Nonaccelerated filer—A company with worldwide market value of outstanding voting and nonvoting common equity held by nonaffiliates less than $75 million.

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

1. Nominal value 2. Market value 3. Realizable value 4. Present value 5. Future value

Fair Value Hierarchy—The fair value hierarchy (provided in ASC 820) prioritizes or ranks the inputs to valuation techniques used to measure fair value into three levels:

1. Level 1 — Inputs in this, the highest level, are unadjusted quoted prices in active markets for assets or liabilities (or equity items) identical to those being valued that the entity can obtain at the measurement date. 2. Level 2 — Inputs in this level are observable for assets or liabilities (or equity items), either directly or indirectly, other than quoted prices described in Level 1, above. 3. Level 3 — Inputs in this, the lowest level, are unobservable for the assets or liabilities (or equity items) being valued and should be used to determine fair value only to the extent observable inputs are not available.

1. Loans and long-term receivables that have contractual principal amounts and for which the fair value option is used 2. Long-term-debt instruments that have contractual principal amounts and for which the fair value option has been elected

Typical intercompany revenues and expenses and the amount of each to eliminate are:

1. Management Services Expense/Management Services Revenue (100%) 2. Interest Expense/Interest Revenue (100%)

risks and uncertainties The requirements apply only to those included in the standard and not to risks and uncertainties related to:

1. Management or key personnel 2. Proposed changes in government regulations 3. Proposed changes in accounting principles 4. Deficiencies in internal control 5. Possible effects of acts of God, war, sudden catastrophe

1. Management's reasons for electing a fair value option for each eligible item or group of similar eligible items 2. 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 - Information to enable users to understand how the group of similar items relates to individual line items on the Statement of Financial Position 3. 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 - 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 4. 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 - Long-term-debt instruments that have contractual principal amounts and for which the fair value option has been elected 5. 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 6. 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

Valuation Techniques/Approaches—In the determination of fair value for GAAP purposes, three valuation techniques or approaches could be used:

1. Market approach—This approach uses prices and other relevant information generated by market transactions involving assets or liabilities that are identical or comparable to those being valued. 2. Income approach—This approach converts future amounts to a single present amount. Discounting future cash flows would be an income approach to determining fair value. 3. Cost approach—This approach uses the amount that currently would be required to replace the service capacity of an asset (i.e., current replacement cost), adjusting for obsolescence.

Process for Combining Financial Statements—The process of preparing combined financial statements is similar to the process of consolidating financial statements: step 2 - Any other "unusual" matters would be treated in the same manner as in consolidated financial statements, including:

1. Minority ownership in any combined company 2. Foreign operations 3. Income taxes 4. Different fiscal periods

A foreign private issuer is any foreign issuer other than a foreign government, except an issuer that meets the following conditions (Rule 205, Securities Act 1933):

1. More than 50% of the outstanding voting securities are directly or indirectly owned by residents of the United States and 2. Any of the following: a. The majority of its executive officers or directors are U.S. citizens or residents. b. More than 50% of the assets of the issuer are located in the United States. c. The business of the issuer is administered principally in the United States

Classification in the Fair Value Hierarchy Alternative investments that are reported at NAV as a practical expedient are _____________ in the fair value hierarchy (Level 1, 2, or 3) but...

1. NOT categorized 2. 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.

The IFRS financial statements and notes must be clearly identified, including the following information:

1. Name of the reporting entity 2. Whether the statements are consolidated or of an individual entity 3. The date of the end of the reporting period or period covered 4. The presentation currency 5. The level of rounding (e.g., amounts in millions)

risks and uncertainties The required disclosures involve the following sources of risk and uncertainty:

1. Nature of the entity's operations 2. Use of estimates in financial statements 3. Certain significant estimates 4. Current vulnerability due to significant concentrations in certain aspects of operations 5. The entity's ability to exist as a going concern *The five areas are not mutually exclusive; rather, there may be some overlap

The Framework provides direction to evaluate the trade-off between user-relevance and cost-benefit for private companies. To help identify information needs of users of public company financial statements versus users of private company financial statements, the Framework outlines five factors that differentiate the needs of the financial statement users. These factors can help identify opportunities to reduce the complexity and costs of preparing financial statements for private companies:

1. Number of primary users and their access to management 2. Investment strategies of the primary users 3. Ownership and capital structure 4. Accounting resources available to generate reporting and disclosure information 5. Resources available for learning about new financial reporting guidance on a timely basis

IASB Framework The joint framework project is divided into eight phases or chapters with the goal of providing the framework in a single document:

1. Objective and qualitative characteristics 2. Elements and recognition 3. Measurement 4. Reporting entity 5. Presentation and disclosure 6. Framework for a GAAP hierarchy 7. Applicability to the not-for-profit sector 8. Remaining issues

A listing of the parts of the conceptual framework follows. This outline lists the major subsections of the framework in a progression leading from definitions and general concepts to specific accounting principles, the ultimate purpose of the framework:

1. Objective of financial reporting 2. Qualitative characteristics of accounting information 3. Accounting assumptions 4. Basic accounting principles 5. Cost constraint 6. Elements of financial statements

Inputs used may be:

1. Observable — 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; or 2. Unobservable — 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

PCC Process:

1. PCC reviews existing U.S. GAAP and identifies standards that require reconsideration. Any proposed alternative GAAP requires a two-thirds vote of all PCC members. 2. Proposed modifications to U.S. GAAP approved by the PCC are submitted to the FASB for endorsement. If endorsed by a simple majority of FASB members, the proposed modifications will be exposed for public comment. Following receipt of public comment, the PCC will determine if any changes are warranted and take a final vote. If approved, the final decision then will be submitted to the FASB for final approval. 3. If the FASB does not endorse the initial proposal or final modification, the FASB will provide to the PCC documentation describing the reason(s) for the non-endorsement and possible changes for the PCC to consider.

Required Statement of Financial Position Items (Where Present for an Entity):

1. PPE 2. investment property 3. intangible assets 4. financial assets 5. investments accounted for using the equity method 6. biological assets 7. inventories 8. trade and other receivables 9. cash and cash equivalents 10. non-current assets held for sale 11. trade and other payables 12. provisions - liabilities of uncertain timing or amount 13. financial liabilities 14. liabilities and assets for current tax 15. deferred tax liabilities and deferred tax assets (can be classified non-current only) 16. liabilities included in the disposal groups classified as held for sale 17. non controlling interests presented within equity 18. issued capital and reserves attributable to the owners of the parent

The basic purpose of the SCF is to provide information about the cash receipts and cash payments for an entity to help investors, creditors, and others assess:

1. Past ability to generate and control cash inflows and cash outflows related to operating, investing, and financing activities; 2. Probable future ability to generate cash inflows sufficient to meet future obligations and pay dividends; and 3. The likely need for external borrowing.

1. Payment of accounts payable by one company at year-end, but not yet received/recognized by the other company 2. Dividend declared by one company (e.g., subsidiary) at year-end, but not yet recognized by the receiving company (e.g., parent)

Under IFRS No. 10, just as under U.S. GAAP, the ability of one entity (investor) to control another entity (investee) requires that the controlled entity be consolidated with the investor. However, under IFRS the definition and determination of control specifies that control can be achieved even when an investor holds less than 50% of the voting rights. Under IFRS, one entity (investor) controls another entity (investee) when the investor has:

1. Power over an investee through existing rights that give it the ability to direct the activities that significantly affect the investee's returns; and 2. Exposure, or rights, to variable returns from its involvement with the investee; and 3. The ability to use its power over the investee to affect the amount of the investor's return.

Exceptions—There are exceptions to all-inclusive income statements:

1. Prior-period adjustments—Prior-period adjustments are shown on the Statement of Retained Earnings and are the correction of accounting errors affecting income of prior years. 2. Other comprehensive income items (OCI) - Foreign currency translation adjustments - Unrealized holding gains and losses on securities available for sale - Pension and other postretirement benefit plan cost adjustments - Certain deferred derivative gains and losses 3.

Eliminate Profit/Loss in Beginning Inventory—Elimination of intercompany inventory profit (or loss) in beginning inventory:

1. Profit/Loss Remain—Because the intercompany inventory profit (or loss) eliminated from ending inventory (illustrated above) occurs ONLY on the consolidating worksheet, the intercompany profit (or loss) will remain: a. On the books of the selling affiliate as an element of profit (or loss) closed to its retained earnings; b. On the books of the buying affiliate as an overstatement (or understatement) of its beginning inventory for the subsequent period. 2. Eliminate on Worksheet—The intercompany profit (or loss) in retained earnings and beginning inventory will be brought onto the consolidating worksheet of the subsequent period by the selling and buying affiliate, respectively, and must be eliminated on the worksheet. 3. Eliminating Entry—On the subsequent consolidating worksheet, the following eliminating entry would be made to simultaneously eliminate the intercompany profit in (beginning) retained earnings (of the selling affiliate) and the overstatement of the beginning inventory (of the buying affiliate): DR: Retained Earnings CR: Inventory - Beginning I/S

Fair Value Hierarchy—The fair value hierarchy (provided in ASC 820) prioritizes or ranks the inputs to valuation techniques used to measure fair value into three levels: Level 2—Inputs in this level are observable for assets or liabilities (or equity items), either directly or indirectly, other than quoted prices described in Level 1, above. This level includes:

1. Quoted prices for similar assets or liabilities in active markets; 2. Quoted prices for identical or similar assets or liabilities in markets that are not active markets in which there are few relevant transactions, prices are not current or vary substantially, or for which little information is publicly available; 3. Inputs, other than quoted prices, that are observable for the assets or liabilities being valued, including, for example, interest rates, yield curves, implied volatilities and credit spreads;and 4. Inputs that are derived principally from, or corroborated by, observable market date by correlation or other means (referred to as "market-corroborated inputs").

The most common and acceptable modifications to cash basis accounting include:

1. Recognizing the acquisition of property, plant, equipment and inventory as assets (rather than as expenses), and depreciating, amortizing, or otherwise writing-off the assets in a regular manner, or 2. Recognizing accounts receivable when revenues are earned and accounts payable when obligations are incurred, rather than deferring recognition until collections are received or payments are made, or 3. Recognizing income taxes (and, perhaps, other significant taxes) when they become payable, rather than when paid.

Process Steps to Follow—The steps to be followed in deriving consolidated financial statements from the separate trial balances or statements of the separate companies are:

1. Record Trial Balances 2. Adjusting Entries—Identify and record consolidating adjusting entries required, if any 3. eliminating entries

The basic sequence of steps in carrying out the consolidating process are (each of these requirements is covered in detail in the following lessons):

1. Record trial balances—Record account titles and balances of the separate entities on the consolidating worksheet from the adjusted trial balances, separate statements, or other sources. 2. Record adjusting entries—Develop and post to the worksheet consolidating adjusting entries, if any. 3. Record eliminating entries—Develop and post to the worksheet consolidating eliminating entries; these entries are likely to include: a. Investment eliminating entry (always required) b. Inter-company receivables/payables elimination(s) c. Inter-company revenue/expense elimination(s) d. Inter-company profit elimination(s) 5. Complete consolidating worksheet. 6. Prepare formal consolidated financial statements from worksheet.

Certain entities are precluded from consolidating controlled entities by industry-specific guidelines, including:

1. Registered investment companies. 2. Brokers/dealers in securities.

1. Regulation S-X, 2. Financial Reporting Releases (FRRs), and 3. Staff Accounting Bulletins (SAB). Regulation S-X helps reduce redundancy in reporting by allowing for integrated disclosures whereby a company may satisfy certain Form 10-K disclosure requirements by referencing its shareholder annual report as long as that report includes the required disclosures.

Only if the firm refinances an otherwise current liability with a noncurrent liability before the balance sheet is issued (or is available to be issued) can the original liability be reclassified as noncurrent. Refinance here includes:

1. Replacing the liability with a new liability that is due one year from the balance sheet date 2. Entering into an irrevocable agreement to do so with a capable creditor 3. Issuing stock to extinguish the debt

IFRS - Income Statement Example of function of expense presentation in an income statement: (ordering)

1. Revenue 2. cost of sales 3. gross profit 4. other income 5. less: a. distribution costs b. administrative expenses c. other expenses 6. profits before tax

Other Required Disclosures—If the following information is not already provided through the required segment information, firms must separately disclose the following:

1. Revenues from external customers from each product and service or groups of similar products or services 2. Revenues from the home country of the firm and from all foreign countries in total. If the revenues from one foreign country are material, then those revenues are to be disclosed separately. 3. The same disclosure as B above is required for long-lived assets other than financial instruments, long-term customer relationships with a financial institution, mortgage and other servicing rights, and deferred tax assets. 4. Major customers: If the revenue from a single customer amounts to 10% or more of the firm's revenues, this fact must be disclosed, including the amount of revenues from each such customer, and the operating segment or segments that earn that revenue. The identity of the customer need not be disclosed.

Capital Structure Disclosures—Companies are required to provide the following information related to capital structure:

1. Rights and privileges of outstanding securities 2. The number of shares issued during the annual fiscal period and any subsequent interim period presented 3. Liquidation preference of preferred stock 4. If the liquidation value of preferred stock is considerably in excess of par value or stated value of preferred stock, this information should be disclosed in the equity section of the balance sheet. 5. Other preferred stock disclosures—The following information can be disclosed in the footnotes or in the equity section of the balance sheet: a. Aggregate or per-share amounts at which preferred stock can be called or is subject to redemption through sinking fund operations b. Aggregate or per-share amounts of arrearages for cumulative preferred stock 6. Redeemable preferred stock — For each of the five years following the balance sheet date, the amount of redemption requirements for all types of redeemable capital stock must be disclosed in the notes to the financial statements.

Even though the SEC delegates the creation of accounting standards to the private sector, the SEC frequently comments on accounting and auditing issues. The SEC communicates through an array of venues. (hint - what are the venues?) Public companies must adhere to SEC pronouncements as well as U.S. GAAP; private companies do not have to adhere to SEC pronouncements.

1. SEC pronouncements, 2. along with the FASB Accounting Standards Codification, comprise authoritative U.S. GAAP.

If an interim report is provided, the minimum required disclosures include information about:

1. Sales and other revenue, unusual or infrequent items, discontinued operations, net income 2. Seasonal revenues and expenses allowing users to assess the impact on both the interim period and annual period 3. Changes in estimated income tax expense 4, Contingencies 5. Fair value 6. Earnings per share 7. Changes in accounting principle and estimates 8. Significant cash flow changes

Accounts Affected—Intercompany inventory transactions affect the following accounts:

1. Sales/Cost of Goods Sold—The level of sales and cost of goods sold (COGS) (of the selling affiliate) are overstated because for consolidated purposes it is as though no sale occurred and, therefore, the effects of the sale should be eliminated. 2. Inventory—Any intercompany profit (or loss) in the ending inventory of the buying affiliate overstates(or understates) the carrying value of that inventory for consolidated purposes and should be eliminated.

U.S. GAAP requires the disclosure of comprehensive income in a financial report in one of two ways:

1. Single statement of comprehensive income—This alternative presents the components of profit or loss (net income) within this single statement leading to net income as a subtotal. Displaying the other comprehensive income items leads to total comprehensive income. 2. Two statements—A separate income statement is presented (and as such it becomes part of a complete set of financial statements) immediately before the statement of comprehensive income. The net income amount resulting from the first statement is used as the beginning amount for the second statement, which then reports the other comprehensive income items leading to comprehensive income

IASB Framework Although the IASB Framework contains information similar to the Statement of Financial Accounting Concepts by the US Financial Accounting Standards Board (FASB), several important differences exist:

1. Some terms and definitions are different. 2. The elements of financial statements are not identical. 3. Candidates should become familiar with these subtle differences in the two sets of concepts.

the Statement of Changes in Equity Other titles for this statement include...

1. Statement of Changes in Owners' Equity, 2. Owners' Equity Statement, 3. Statement of Shareholders' Equity, and 4. Statement of Owners' Equity. **Some firms prefer to only report a separate statement of retained earnings and report the other changes in the notes.

IFRS—Footnotes Footnotes International standards suggest the following order of footnote presentation:

1. Statement of compliance with IFRS; 2. Summary of significant accounting policies; and 3. Supporting information for financial statement items.

A complete set of IFRS financial statements includes:

1. Statement of financial position (balance sheet); 2. Statement of comprehensive income; 3. Statement of changes in equity; 4. Statement of cash flows; Notes; and 5. Statement of financial position at the beginning of the earliest comparative period for which an entity applies an accounting policy retrospectively or makes a retrospective restatement of items in its financial statements, or when it reclassifies items in its financial statements.

Share Adjustments—__________ and ____________ are adjustments to the number of shares outstanding for all investors holding stocks.

1. Stock dividends and 2. splits

Sales journal as an example of a special journal—A sales journal for a firm might record all cash and credit sales and have the following six columns: 1. Date 2. customer 3. invoice # 4. DR cash 5. DR AR 6. CR sales Each line entered into the journal is a complete journal entry. Cash sales use all columns except for the DR AR column, and credit sales use all columns except for the DR Cash column. Special journals dispense with the flush left formatting for debits and indenting right for credits. Periodic posting is as follows:

1. Sum of the DR Cash column for a period is posted to the cash account; 2. Sum of the DR AR column for a period is posted to the AR control account while each individual amount in that column is posted to the appropriate AR subsidiary account; 3. Sum of the CR Sales account is posted to the sales account.

The Sarbanes-Oxley Act of 2002 (SOX) contains provisions to enhance corporate governance and to mitigate financial accounting abuses. A few of the significant provisions related to financial reporting are presented below:

1. The SEC requires registrants to have annual audits of their financial statements. The auditing firm must be registered with the Public Company Accounting Oversight Board (PCAOB), a private-sector organization created by the 2002 Sarbanes-Oxley Act (the SEC has oversight authority for the PCAOB). The PCAOB provides oversight of registered auditing firms. 2. Auditors are prohibited from providing nonaudit services to audit clients. 3. Audit committees are required to be composed of nonmanagement members of the board of directors, and the chair has to have financial experience. 4. Annual filing must include a management's report on the internal controls. This report must attest to the existence and effectiveness of the company's internal controls over corporate reporting. 5. There are Increased penalties for fraud and white-collar crime. Willfully failing to maintain audit records for five years is a felony. Criminal charges can be brought against corporate officers who fail to certify financial reports or who willfully certify statements they know do not comply with SOX.

Laws Administered by the SEC:

1. The Securities Acts of 1933 and 1934 2. The Public Utility Holding Company Act of 1935 3. Trust Indenture Act of 1939 4. Investment Company Act of 1940 5. Investment Advisors' Act of 1940 6. Securities Investor Protection Act of 1970 7. Sarbanes-Oxley Act of 2002

1. The aggregate fair value of loans that are 90 days or more past due 2. 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) 3. 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

IFRS—Footnotes Footnotes Also to be included in the notes:

1. The amount of dividends proposed or declared before the statements were authorized for issue (U.S. standards do not require disclosure of proposed dividends); and 2. Additional information enabling an assessment of the firm's objectives, policies and processes for managing capital.

The objective of general-purpose financial reporting is to provide information about the entity useful to current and future investors and creditors in making decisions as capital providers. Useful information includes information about:

1. The amount, timing, and uncertainty of an entity's cash flows; 2. Ability of the entity to generate future net cash inflows; 3. An entity's economic resources (assets) and claims to those resources (liabilities) that provides insight into the entity's financial strengths and weaknesses, and its liquidity and solvency; 4. The effectiveness with which management has met its stewardship responsibilities; 5. The effect of transactions and other events that change an entity's economic resources and the claims to those resources.

Income Tax Expense—Firms face a graduated annual income tax rate. The final rate(s) applicable to annual income is not known until the end of the year. The income tax expense (which is computed only for income from continuing operations) for each interim period is computed as follows:

1. The annual rate to be applied to income from continuing operations is re-estimated each quarter (the rate does not consider the tax on discontinued operations, which would be reported in the quarter these items were incurred, at the incremental rate at the time). 2. That rate is applied to total interim income through the end of the current quarter, yielding total estimated tax to date. 3. The income tax reported in previous quarters is subtracted from the results in the second step to yield the income tax expense for the current quarter. *This procedure is a good example of the integral view of interim reporting—the interim period is an integral part of an annual period.

Summary of significant accounting policies—The first footnote is typically a summary of significant accounting policies—the principles and methods chosen by management where GAAP allows a choice. Such disclosure is required. Users' understanding of financial statement amounts is greatly facilitated by knowing the methods used in preparing the statements. This footnote usually includes information about the following:

1. The chosen depreciation method 2. The chosen method of valuing inventory 3. The securities classified as cash and cash equivalents 4. The basis for consolidation: a. Amortization policies b. Revenue recognition policies

Both quantitative and qualitative information should be considered when assessing the entity's ability to meet its obligations. The look-forward period for this assessment is one year from the issuance of the financial statements. Per ASU 2014-15, the following information should be taken into consideration:

1. The company's current financial condition—Including its current liquid resources (e.g., available cash or available access to credit). 2. Conditional and unconditional obligations —Due or anticipated in the next year (whether or not they are recognized in the financial statements). 3. Funds necessary to maintain operations—Considering the company's current financial condition, obligations, and other expected cash flows in the next year. 4. Other conditions—That could adversely affect the company's ability to meet its obligations in the next year (when considered in conjunction with the above). For example: Negative financial trends (e.g., recurring operating losses, working capital deficiencies, or negative operating cash flows). a. Other indications of financial difficulties (e.g., default on loans, denial of supplier credit, a need to restructure debt or seek new debt, noncompliance with statutory capital requirements, or a need to dispose of substantial assets) b. Internal matters (e.g., labor difficulties, substantial dependence on the success of a project, uneconomic long-term commitments, or a need to significantly revise operations) c. External matters (e.g., significant litigation, loss of a key customer, franchise, license, patent or supplier, or an uninsured natural disaster)

Disclosure of a concentration is required if all the following criteria are met. These concentrations are called disclosable concentrations:

1. The concentration exists at the balance sheet date; 2. The entity is vulnerable to the risk of a near-term severe impact because of a concentration and 3. It is at least reasonably possible that events capable of causing a severe impact will occur in the near term. (Note: Reasonably possible is less than probable.)

Two categories—There are two categories of subsequent events, each requiring different accounting treatment:

1. The condition leading to the subsequent event existed at the balance sheet date; 2. The condition leading to the subsequent event did not exist at the balance sheet date-the condition arose after the balance sheet date.

The period during which to evaluate subsequent events is the period between the balance sheet date, and either:

1. The date the financial statements are issued—when they are widely distributed (e.g., filed with the SEC) for general use, or 2. The date the financial statements are available to be issued—when they are complete, comply with GAAP, and have all the approvals necessary for issuance.

Increases and decreases in unearned revenues - example Assume the following information is from the balance sheets for 20X1 and 20X2 of ABC Co.: unearned rev - X1 = 0 unearned rev - X2 = 25,000 increase X2 = 25,000 The increase occurred as the result of ABC making an entry such as: (DR) cash (CR) unearned revenues

1. The debit to cash increased cash flow, but the credit to unearned revenue did not enter into the determination of net income. Therefore, net income understates cash flow for the period. The amount of increases in unearned revenues must be added back to net income to determine cash flow. 2. If unearned revenue had decreased, it would have caused an increase in net income (DR: Unearned Revenue; CR: Revenue) without generating a related cash flow. Therefore, the amount of a decrease in unearned revenue must be subtracted from net income to determine the related cash flow.

interim Specific examples of the discrete view applied in international standards:

1. The deferral of manufacturing variances that are expected to be offset in a later interim period within the same annual period is not allowed. 2. The deferral of a temporary market decline in inventory expected to be recovered in a later interim period within the same annual period is not allowed. 3. Volume rebates and other anticipated changes in the costs of inventory to be purchased for the year can be anticipated (allocated over the year) only if the cost adjustments are contractual.

Under IFRS, power over an investee arises from rights of the investor, which may include:

1. Voting rights (the critical criteria under U.S. GAAP) 2. Potential voting rights (e.g., convertible instruments, stock options, etc.) 3. Rights to appoint key personnel of the investee 4. Decision-making rights under a management agreement

Comparison of the Direct/Indirect Method of Determining Cash Flows from Operating Activities The direct method and the indirect method are alternative ways of developing and presenting cash flow from operating activities. The most significant aspects of the two methods are:

1. The direct method presents cash flows in terms of the specific sources from which cash was received (inflows) and to which cash was paid (outflows). 2. The indirect method develops cash flows by adjusting net income and does not (necessarily) identify the specific sources of cash inflows or outflows. 3. Under either method, the cash flow from operating activities will be the same amount. 4. Under either method, the other major sections of the statement of cash flows—investing, financing, foreign currency effects, and the reconciliation of the change in cash—will be the same. 5. The direct method is preferred (by the FASB). 6. Both methods require disclosure of and Noncash Investing and Financing activities. 7. The direct method requires an additional schedule to reconcile net income to cash flow from operating pctivities. 8. The indirect method requires an additional disclosure of the amount (of cash) paid for interest and dividends.

Fair Value Option Disclosures Objectives—Disclosures required when the fair value option is elected are intended to accomplish the following objectives:

1. The disclosures are intended to facilitate comparisons: a. Between entities that choose different measurement methods for similar assets and liabilities, and b. Between assets and liabilities in the financial statements of a single entity that selects different measurement methods for similar assets and liabilities. 2. The disclosure requirements are expected to result in the following: a. Information to enable users of financial statements to understand management's reasons for electing or partially electing the fair value option b. Information to enable users to understand how changes in fair value affect earnings for a period c. Provide the same kind/amount of information about certain items that would have been disclosed if the fair value option had not been elected for the items d. Information to enable users to understand the differences between fair values and contractual cash flows for certain items 3. To achieve these objectives and outcomes, required disclosures must be provided in both interim and annual financial statements. 4. The disclosures, as outlined below, do not replace disclosure requirements in other existing GAAP pronouncements, including other pronouncements that require fair value measurement use and disclosures

Required Disclosures for Interim and Annual Income Statements—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 liabilities with fair values that have been significantly affected during the reporting period by changes in the instrument-specific credit risk:

1. 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 2. How the gains and losses were determined 3. Qualitative information about the reasons for those changes

1. The estimated amount of gains and losses included in earnings for the period attributable to changes in instrument-specific credit risk, and 2. How those gains and losses were determined.

1. The fair value measurements at the reporting date 2. Segregated into each of the three levels within the fair value hierarchy 3. Transfers into each level and transfers out of each level disclosed and discussed separately, with the amounts of any transfers between Level 1 and Level 2, the reasons for such transfers, and the policy for determining when those transfers occur disclosed separately 4. 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 the period, if any 5. For fair value measurements in Level 3, unobservable inputs, a reconciliation of the beginning and ending balances, separately presenting changes during the period attributable to the following: a. 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 b. Purchases, sales, issuances, and settlements, disclosed separately c. Transfer in and/or out of Level 3 disclosed separately, the reasons for such transfers, and the policy for determining when those transfers occur 6. For fair value measurements in Level 3: a. A description of the valuation process used b. Quantitative information about the unobservable inputs used c. A narrative description of the sensitivity of the fair value measurement to changes in unobservable inputs 7. The amount of total gains or losses for the period that are attributable to the change in unrealized gains or losses relating to assets and liabilities still held at the reporting date and a description of where those unrealized amounts are reported in the Income Statement. 8. For nonfinancial assets, disclose if highest and best use differs from current use and why.

For Assets and Liabilities That Are Measured at Fair Value on a Nonrecurring Basis—In periods subsequent to initial recognition (e.g., an asset impairment that is not measured on a recurring basis) the reporting entity must disclose the following information in the statement of financial position (balance sheet) for each major category of asset and liability:

1. The fair value measurements at the reporting date and the reasons for the measurement 2. Segregated into each of the three levels of the fair value hierarchy 3. 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 the period, if any 4. For fair value measurements in Level 3, unobservable inputs, a description of the valuation process used and quantitative information about the unobservable inputs used 5. For nonfinancial assets, disclose if highest and best use differs from current use and why

Entities that elect to use the fair value measurement (referred to as the fair value option) for eligible financial assets and financial liabilities must adhere to certain requirements. Those requirements include:

1. The fair value option may be applied on an instrument-by-instrument basis, with limited exceptions.

Valuation Technique/Approach Selection In some cases, multiple valuation techniques will be appropriate (e.g., when valuing an entire business). considerations:

1. When multiple valuation techniques are used, the different results should be evaluated and weighted. 2. When multiple valuation techniques are used, professional judgment will be required to select the fair value from within the range of alternative values that is most representative in the circumstances.

Elimination in Years Subsequent to Intercompany Transaction—Elimination of Intercompany Gain (or loss) and Adjustment of Asset and Accumulated Depreciation—In Years Subsequent to Intercompany Transaction: Effects/Eliminations—Because the elimination made at the end of one period is recorded only on the consolidating worksheet (and not on the entity books), in years subsequent to the intercompany sale the following affects and eliminations apply:

1. The gain (or loss) on the sale of fixed assets recognized by the selling affiliate will have been closed through net income to retained earnings. Therefore, the unconfirmed portion of the gain (or loss) will have to be eliminated from retained earnings brought onto the worksheet by the selling affiliate. 2. The cost of the asset as recorded by the buying affiliate will continue to misstate the cost from a nonaffiliate. Therefore, the asset value brought onto the worksheet by the buying affiliate will have to be adjusted to its cost from a nonaffiliate; the amount of the adjustment will remain the same and will have to be made for as long as the asset remains on the books of the buying affiliate. 3. The accumulated depreciation on the buying affiliate's books will continue to be misstated (by a decreasing amount) until the asset is fully depreciated because it does not include the accumulated depreciation written off by the selling affiliate. Therefore, accumulated depreciation related to the intercompany fixed asset will have to be adjusted each period until the asset is fully depreciated.

A modified cash basis of accounting is acceptable as another comprehensive basis of accounting if the modification(s) has substantial support in practice. Substantial support likely would be established if:

1. The modification is equivalent to an element of accrual basis accounting, and 2. The modification is logical and consistent with GAAP.

Required Disclosures for Interim and Annual Statements of Financial Position (Balance Sheet)—As of each date for which a Statement of Financial Position (Balance Sheet) is presented, the following must be disclosed: 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:

1. The name of each investee and the percentage ownership of its common stock 2. The accounting policies of the investor with respect to investments in common stock

For the quantitative tests, two or more segments can be aggregated provided this aggregation is consistent with the objective of segment reporting, and the segments are similar in each of the following areas:

1. The nature of products and services 2. The nature of the production processes 3. Customer type or class 4. Distribution methods for products and services 5. The nature of the regulatory environment

*U.S. GAAP-IFRS Differences* Also required are disclosures about the assumptions made about the future, and major sources of estimation uncertainty that have a significant risk of requiring material adjustment to the carrying amounts of assets and liabilities within the coming year. An exception is assets and liabilities measured at fair value based on observed market prices because such changes are attributable to market forces. The above disclosures are to be presented in such a way that users of the statements understand the judgments made by management and about other sources of estimation uncertainty. Examples include:

1. The nature of the assumption or other estimation uncertainty 2. The sensitivity of carrying amounts to assumptions and estimates, and an explanation for their sensitivity 3. How the uncertainty is expected to be resolved and the range of reasonably possible carrying values of the assets and liabilities affected, within the next year 4. If the uncertainty remains unresolved, a description of the changes made to past assumptions concerning the affected assets and liabilities

Related party transactions—Companies must disclose the following information:

1. The nature of the relationship between the related entities (Related parties include a parent and its subsidiaries, a firm and its principal owners and management and members of their immediate families, a firm and its equity-method investees, and others.) 2. A description of all related-party transactions for the accounting years in which an income statement is presented in the financial report 3. The dollar amounts of the related-party transactions for the accounting years in which an income statement is presented in the financial report 4. In relation to related parties, any receivables or payables from or to related parties as of the date of each balance sheet presented in the financial report

significant estimates The disclosures must include:

1. The nature of the uncertainty that may cause an estimate to change and a statement that it is at least reasonably possible that a change in an estimate will occur in the near term. If the estimate concerns a loss contingency, the disclosure must also include an estimate of the possible loss or range of loss, or state that such an estimate cannot be made. 2. The estimated effect of the change as of the date of the financial statements must be disclosed.

Consolidation After Acquisition If P Uses the Cost Method to Account for the Investment in S—In this case the parent: DOES NOT adjust on its books the carrying value of its investment in the subsidiary to reflect:

1. The parent's share of the subsidiary's income or loss; 2. The parent's share of dividends declared by the subsidiary; 3. The "depreciation"/amortization of any difference between the fair value of the subsidiary's identifiable net assets and the book value of the subsidiary's identifiable net assets.

Justification—The preparation and presentation of consolidated financial statements is justified based on:

1. The presumption that consolidated statements are more meaningful than separate financial statements. "There is a presumption that consolidated statements are more meaningful than separate statements and that they are usually necessary for a fair presentation when one of the entities in the group directly or indirectly has a controlling financial interest in the other entities" (ASC 810-10-1). 2. The supposition that economic substance (common controlling interest) take precedence over legal form (separate legal entities).

Application of Definition to Assets, Liabilities, and Shareholders' Equity Application to Net Financial Assets & Financial Liabilities 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:

1. The price that would be received to sell a NET asset position for a particular risk, or 2. The price that would be paid to transfer a NET liability position for a particular risk.

Disclosures are required only when conditions give rise to substantial doubt about the entity's going concern. No disclosures are required if there is no going concern uncertainties. If the substantial doubt is alleviated because management developed a plan to mitigate the effects of the uncertainties, the disclosures are still needed and the disclosures would include a description of management's plans to alleviate the substantial doubt. Disclosures include:

1. The principal conditions that give rise to the uncertainties 2. Management's evaluation of these conditions (essentially management's response to the factors found in C. above 3. Management's plans to alleviate the substantial doubt

Private companies are not required to apply the criteria for determining whether there is a variable interest in certain leasing arrangements. This exemption applies when:

1. The private company lessee and lessor are under common control; 2. The private company lessee has a leasing arrangement with the lessor; 3. Substantially all of the activity between the private company lessee and the lessor is related to the leasing activities; and 4. The private company lessee explicitly guarantees any obligation of the lessor related to the leased asset.

Using Cash Flow Information and Present Value in Accounting Measurements Present Value Measure—When a present-value measure is used:

1. The result should be as close as possible to fair value if such a value could be obtained. 2. The expected cash flow approach is preferred, because present-value measurements should reflect the uncertainties inherent in the estimated cash flows.

In either of the foregoing cases, the entities are separate legal entities, but are under common economic control:

1. The shareholders of the parent entity control that entity, which, in turn, has control of the subsidiary entity. 2. The shareholders of the variable-interest holder entity control that entity, which, in turn, has control of the variable-interest entity.

Continuing Operations and Other Items of Income—The income statement is divided roughly into two portions: Top portion—The top portion includes routinely occurring items and other items that are appropriately included in income from continuing operations:

1. The subtotal income from continuing operations is used by investors as a broad measure of operating income. 2. GAAP does not prescribe the specific format in which information should be presented in the top portion of the Income Statement. 3. Income from continuing operations includes all income items other than those in the bottom portion of the income statement

Using Cash Flow Information and Present Value in Accounting Measurements Two Approaches—The statement contrasts two approaches to computing present value:

1. The traditional approach (referred to as discounted cash flows) incorporates factors 2-5 above in the discount rate and uses a single most-likely cash flow in the computation. The traditional approach uses the interest rate to capture all the uncertainties and risks inherent in a cash flow measure. This is the approach that continues to be applied in some present value applications in financial accounting. 2. The expected cash flow approach uses a risk-free rate as the discount rate. That is, factors 2-5 are incorporated into the risk-adjusted expected cash flow and the discount factor is the risk-free rate.

In some cases, however, the entry (transaction) price may not be the exit price and therefore not be fair value at the date of initial recognition of an asset or liability. For example, the transaction price might not be fair value (exit price) if:

1. The transaction is between related parties; 2. The transaction takes place when the seller is under duress (e.g., in a liquidation sale); 3. 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. For example, 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; or 4. The market in which the transaction price takes place is different from the principal market (or most advantageous market).

Sale By Subsidiary to Parent—Intercompany fixed asset by subsidiary to parent: Parent Owns 100% of the Subsidiary

1. The worksheet eliminating entries made when the parent owns 100% of a subsidiary, which sells fixed assets to the parent are the same as those made when the parent sells fixed assets to the subsidiary; there is no noncontrolling interest in the subsidiary. 2. All of the intercompany gain (or loss), net asset adjustment and subsequent depreciation expense adjustment would affect the parent's claim to net income and net asset carrying value.

Sale By Subsidiary to Parent—Intercompany fixed asset by subsidiary to parent: Parent Owns Less than 100% of the Subsidiary

1. The worksheet eliminating entries made when the parent owns less than 100% of a subsidiary that sells fixed assets to the parent are the same as those made when the parent sells fixed assets to the subsidiary, but the gain (or loss) eliminated, the net asset adjustment and the subsequent depreciation expense adjustment would be allocated between the parent and the noncontrolling shareholders' interest in proportion to their respective ownership percentages. Those entries are repeated below as a means of review and to show the allocations necessary when a less than 100% owned subsidiary sells fixed assets to its parent.

Continuing Operations and Other Items of Income—The income statement is divided roughly into two portions: Bottom portion—The bottom portion includes items that are specifically defined by GAAP as being unrelated to continuing operations:

1. These items are not representative of the firm's ability to generate income and are unique items that will not be repeated. They are, however, components of total income. 2. GAAP is very specific about the measurement and presentation of items in the bottom portion. For example, there is very specific guidance on the presentation and measurement of discontinued operations. 3. Discontinued operations are required to be presented at the bottom portion of the income statement. Discontinued operations are major components of an entity that are either sold or planned to be sold and thus are no longer part of continuing operations.

Earnings per Share Only public entities are required to present earnings per share (EPS). Nonpublic entities often choose to present EPS, but are not required to do so. There are two EPS figures that firms disclose:

1. basic and 2. diluted.

Purposes of the IASB Framework:

1. To assist the Board in developing new IASs and reviewing existing IASs (the Framework was written when the IASC was the body promulgating standards. "IASs" here may be more loosely interpreted to include IASs, IFRSs, SICs, and IFRICs). 2. To assist the Board in promoting harmonization of standards by providing a basis for reducing the number of alternative accounting treatments permitted by IASs 3. To assist national standard-setting bodies in developing standards 4. To assist preparers in applying IASs and dealing with topics not yet covered by IASs 5. To assist auditors in forming an opinion as to whether financial statements conform with IASs 6. To assist users in interpreting financial statements prepared in conformity with IASs 7. To provide information for parties interested in the work of the IASC (now IASB)

Noncontrolling Interest (NCI) Determining Income to NCI (calculation steps)

1. To calculate income to the NCI, start with S's net income and 2. adjust it for the depreciation and/or amortization of the purchase price differential from the date of acquisition. 3. You will also subtract any goodwill impairment loss that occurred during the current year. 4. Once you have S's net income adjusted for the amounts related to the purchase price differential, multiply by the NCI percentage ownership and this will give you the amount of income to the NCI.

PCC Purpose—In May 2012, the Financial Accounting Foundation (FAF) approved the establishment of the Private Company Council (PCC), an organization that will assist in setting accounting standards for private companies. The PCC has two principal responsibilities:

1. To work with the Financial Accounting Standards Board (FASB) to identify places within existing Generally Accepted Accounting Principles (GAAP) where there are opportunities for alternative accounting for private companies. 2. To serve in an advisory capacity to the FASB on the appropriate treatment of items under consideration for new GAAP and how those items may impact private companies.

Continuing Operations and Other Items of Income—The income statement is divided roughly into two portions:

1. Top portion—The top portion includes routinely occurring items and other items that are appropriately included in income from continuing operations. 2. Bottom portion—The bottom portion includes items that are specifically defined by GAAP as being unrelated to continuing operations.

1. 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 2. Purchases, sales, issuances, and settlements, disclosed separately 3. Transfer in and/or out of Level 3 disclosed separately, the reasons for such transfers, and the policy for determining when those transfers occur

The results of transactions with other entities to be included in the consolidated financial statements must be eliminated, including the results of:

1. Transactions between a parent and its subsidiaries 2. Transactions between affiliated subsidiaries

A prospectus describes the issuing company, the business operations and risks, the financial statements, and the expected use of the proceeds. The basic financial statements requirements are:

1. Two years of balance sheets 2. Three years of income statements, statements of cash flow, and statements of shareholders' equity 3. The financial statements must be audited. 4. Prior statements are presented on a comparative basis. 5. The SEC requires five years of selected financial information.

"Other" Comprehensive Income Items (OCI) The following items are items included in the second category above; that is, they are included in comprehensive income but not in income:

1. Unrealized gains and losses on debt securities classified as available-for-sale (AFS). 2. Unrecognized pension and postretirement benefit cost and gains. Currently, GAAP does not recognize all changes in these liabilities and assets immediately in income. Rather, some are recognized in other comprehensive income. 3. Foreign currency translation adjustments are changes in the value of foreign currency and accounts measured in foreign currency 4. Certain deferred gains and losses from derivatives.

A U.S. entity that is not required to follow either U.S. GAAP or full IFRS in the preparation of its financial statements may use one of four bases of accounting:

1. Use, on an elective basis, U.S. GAAP; 2. Use, on an elective basis, full IFRS; 3. Use an Other Comprehensive Basis of Accounting; 4. Use IFRS for SMEs.

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):

1. When the item is first recognized; 2. When an eligible firm commitment is established; 3. Specialized accounting for an item ceases to exist; 4. An investment becomes subject to equity method accounting (but is not consolidated) or to a VIE that is no longer consolidated; or 5. An event that requires the item to be measured at fair value, such as a business combination or significant modifications to debt instruments.

Factors Effecting the Consolidation Process—Although the general process is the same for carrying out all consolidating processes, the specific adjustments, eliminations and related amounts depend on the specific circumstances. The following alternatives will affect the specific adjustments and eliminations made during the consolidating process:

1. Whether the consolidating process is being carried out at the date of the business combination or at a subsequent date 2. Whether the parent owns 100% (all) of the voting stock of a subsidiary or less than 100% of the voting stock 3. Whether on its books the parent carries its investment in a subsidiary using the cost or equity method of accounting 4. Whether transactions between the affiliated entities (parent and its subsidiaries) originate with the parent or with a subsidiary

IASB - Elements of Financial Statements The vocabulary differences regarding the elements of financial statements are subtle but important. With U.S. GAAP, the term income is not a financial statement element. Rather, the term is used to describe.... However, with IFRS, the term income is a...

1. a calculation of some type (e.g., income from continuing operations, net income) or to designate a specific type of income, such as interest income. 2. financial statement element, and the items that are considered income are revenues and gains. **IFRS uses the term profit where U.S. GAAP uses the term net income.

1. a description of the valuation techniques and inputs used to measure fair value and 2. a discussion of changes in valuation techniques during the period, if any

Management's Discussion and Analysis (MD&A) Forward-looking information is provided that is not reflected in the financial statements. This includes management's general prognosis about future sales, effects of competition, and expected effects of general macroeconomic conditions. examples

1. a discussion of the effect of inflation or specific price-level changes on future sales and earnings. 2. a discussion of the possible effects of uncertainties on the firm's financial statements.

Noncash Investing and Financing Activities If an Investing or Financing Activity involves part cash and part noncash, the cash portion should be _______________; the noncash portion should be __________________.

1. a part of (on the face of) the SCF 2. disclosed in Noncash Investing and Financing Activities

The determination of fair value for a particular asset or liability (or equity item) may be either...

1. a stand-alone asset or liability (e.g., a financial instrument or a nonfinancial operating asset) or 2. a group of assets/liabilities (e.g., a reporting unit or business). *Fair value determination should consider the attributes (e.g., condition, location, restriction on asset use or sale, etc.) of the specific asset or liability being measured.

Business Combinations A business combination must be accounted for using the ___________ method of accounting. Immediately following an acquisition the consolidated balance sheet will be _______________ the parent's (acquiring entity's) financial statements. If an income statement, statement of cash flows, or statement of retained earnings were prepared at the date of acquisition, it would represent information of the parent company only because there will not yet have been any activity including the subsidiary.

1. acquisition 2. different from

SCF - direct vs. indirect method The direct method reports the ____________________ in the operating section. The indirect method reports the ________________ in the operating section. Both lead to the same subtotal: net operating cash flow.

1. actual operating cash inflows and outflows 2. reconciliation of net income and net operating cash flow

In general, SEC registrants must disclose more information to the SEC than in the annual reports to shareholders. For off-balance-sheet financing relationships, the SEC requires firms to disclose...

1. all contractual liabilities and 2. contingent liabilities, *whether they are recognized in the accounts.

Controlling interest is usually present when:

1. an entity (investor/parent) has a greater than 50% ownership (directly or indirectly) of another entity (investee/subsidiary) and, therefore, can direct the activities of the investee/subsidiary; or 2. an entity (variable-interest holder) is the principal beneficiary of a variable-interest entity.

Disclosures Required — GAAP requires the following disclosures when fair value measurement is used, either...

1. as required or 2. permitted by other accounting pronouncements.

the IASB Framework has five elements:

1. asset, 2. liability, 3. equity, 4. income, and 5. expense. Note that income includes both revenues and gains.

Noncash Investing and Financing Activities Noncash activities must be presented...

1. at the bottom of the SCF or 2. in a disclosure (e.g., schedule or footnote).

Consolidation After Acquisition If at acquisition the fair value of the subsidiary's identifiable net assets was greater than the parent's investment (plus the fair value of the noncontrolling interest, if any), a _________________ would have resulted. In this case, the bargain purchase amount would have been recognized by the parent as a gain in the period of the business combination. At the end of the period of the business combination, the bargain purchase gain would have been closed to the...

1. bargain purchase 2. parent's Retained Earnings, and would be included in that Retained Earnings in all subsequent periods.

A company that wants to sell debt or stock in interstate offerings to the general public is required to register those securities with the SEC. Registration requires extensive disclosures about the company, management, and the intended use of the proceeds from the issue. The intent of the securities laws is, in part, to regulate the disclosure of financial information by firms issuing publicly traded securities. Form S-1 is the _______________ form for new securities and it includes a list of required disclosures. The financial information includes a balance sheet dated within 90 days of the filing. Part 1 on Form S-1 is the...

1. basic registration 2. prospectus that is supplied to each potential purchaser of the security.

Cash Flows from Operating Activities—Direct Method In order to convert revenue and expense items on the accrual-based income statement to the amount of cash they generated or used, the effects of accruals and deferrals must be removed. The following subsections describe and illustrate the conversion process for the major types of items including....

1. cash collected from customers, 2. cash payments to suppliers, and 3. cash payments for (any) operating expense

cash equivalents example: A T-bill purchased with a three-month term is a _______________. But a T-bill with a four-month term does not become a cash equivalent after holding it one month

1. cash equivalent

IFRS - Income Statement IFRS - Income Statement The *nature* of expense reporting focuses on the type of expense. Examples include:

1. changes in inventories of finished goods and work in progress, 2. raw materials and consumables used, 3. employee benefit expense, 4. depreciation and amortization expense.

Cash Flows from Operating Activities—Direct Method *Cash payments to suppliers* — Cost of Goods Sold on an income statement may include _______________ and/or ________________. To determine cash paid to suppliers for purchases, these changes must be considered.

1. changes in inventory 2. changes in accounts payable

A complex capital structure typically includes...

1. common stock, along with 2. equity contracts and 3. convertible securities. These securities may become common stock in the future and thus must be included in an EPS figure so that users can assess the impact of these potential changes on EPS.

objective of financial reporting: Decision Usefulness enhancing qualitative characteristics:

1. comparability 2. verifiability 3. timeliness 4. understandability

The IASB Framework for the Preparation and Presentation of Financial Statements has converged with the FASB's SFAC 8. The concept of faithful representation, includes:

1. completeness, 2. neutrality, and 3. free from error.

Comparative Financial Statements The income of a discontinued operation, and any gain or loss from its disposal, are separated from income from continuing operations, for all periods presented, even though in previous periods the income from the segment was part of continuing operations. This requirement enhances the ____________ of comparative financial statements. Discontinued operations are shown below income from continuing operations in the income statement. Earnings per share is presented for discontinued operations on the face of the income statement.

1. consistency

Prospective information should be prepared in accordance with GAAP, using information that is...

1. consistent with the plans of the entity, and 2. with due professional care so as not to mislead the user of the financial statements.

contra/adjunct/valuation account example Accumulated depreciation is a __________ to property, plant, and equipment but is not a valuation account because net book value in this case is not equal to market value.

1. contra account

contra/adjunct/valuation account example Allowance for uncollectible accounts is a __________ to accounts receivable and is a _____________ because net accounts receivable is an approximation to net realizable value, a measure of current value.

1. contra account 2. valuation account

contra/adjunct/valuation account example Valuation allowance for investments in marketable securities is a _______________ and is a ________________ because it decreases or increases the net book value of the investment to current market value.

1. contra or adjunct account 2. valuation account *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.

Other Columns—Other columns found in the statement of changes in equity include:

1. contributed capital in excess of par, preferred 2. contributed capital from treasury stock 3. equity attributable to non-controlling interests (minority interests) 4. equity attributable to the shareholders of the parent (the reporting company). The sum of this is total and for minority interest yields the total OE of the reporting company.

In general, the acquirer in a business combination must recognize all intangible assets that are (1) separable or (2) arise from contractual or other legal rights. Private companies will be excluded from this requirement with respect to....

1. customer contracts - Customer contracts that are nontransferable would not need to be separately valued and recognized. 2. customer relationships - Customer relationships are often nontransferable because the relationship is unique with the private company. 3. noncompete agreements - Noncompete agreements are also often nontransferable because the agreement is with an employee (or former employee) and the private entity. A noncompete agreement is a legal arrangement to prohibit another party from competing with the entity in a certain market for a certain period of time.

Private companies have the option to not recognize certain intangible assets associated with a business combination. Specifically, private companies can elect to not recognize...

1. customer-related intangibles that cannot be sold or licensed independent of the business (customer contracts and relationships) and 2. noncompete agreements separately from goodwill. **These intangible assets are costly and complex to value.

Noncash investing and financing activities are those that do not use cash to complete the transaction (e.g., the purchase of land with a note payable). The transaction involves investing (in the land) and financing (the note payable) but no cash. Non-cash transactions can be significant. To provide complete information to the financial statement user, noncash investing and financing activities must be...

1. disclosed on the face of the statement of cash, 2. in a supplemental schedule or 3. in the footnotes.

Under IFRS for SMEs, neither _______________, nor _________________ is required in financial statements.

1. earnings per share (EPS) 2. information by segment

An unconsolidated subsidiary would be reported as an "Investment" asset by the parent. The parent would account for its investment in an unconsolidated subsidiary using...

1. either fair value or 2. the equity method, *depending on the extent of influence that it can exercise over the investee

Consolidation After Acquisition After the date of acquisition, the parent company (P) will account for its Investment in S using _____________________________. Remember that P's stand-alone financial statements are ______________ because P must consolidate all subsidiaries under its control. In order to consolidate P and S, you must first understand how P accounted for the Investment in S, because upon consolidation the Investment in S is eliminated.

1. either the equity method or cost method 2. not GAAP compliant

Proxy statements are materials sent to the shareholders for vote. Proxy materials can address things such as...

1. election of directors, 2. changes in the corporate charter, 3. issuance of new securities, 4. plans for a major business combination etc. Frequently these items are voted on during the shareholders annual meeting, but sometimes these matters need to be addressed during interim periods, in which case the proxy materials regarding the issue must be circulated.

Fair Value Determination — When an asset is acquired or a liability is assumed in a transaction, the price paid to acquire the asset or the price received to assume the liability is an ______ price. The price paid when an asset is initially recognized may or may not equal fair value. Fair value of an asset or a liability is the price that would be received to sell an asset or paid to transfer a liability which is an _____ price.

1. entry 2. exit

Prospective information is useful to the financial statement user because it promotes understanding of...

1. events, 2. circumstances, 3. trends, and 4. uncertainties when there are material trends and uncertainties.

Susceptibility to risk and uncertainty increases when diversification is lacking −when the firm has concentrations in various aspects of its business. Examples of concentrations include...

1. excessive reliance on one customer, 2. having one product or service account for most of the firm's revenues, and 3. reliance on one or a small number of suppliers.

Cash Flows from Operating Activities—Direct Method *Cash payments for operating expenses* — Expenses on an income statement may include accruals (___________________) and/or deferrals (____________________). To derive cash paid for operating expenses these accruals/deferrals must be reversed.

1. expenses incurred but not paid 2. cash paid but expense not incurred

The 1933 Securities Act requires publicly traded firms offering securities for sale to the public in primary and secondary markets to...

1. file a registration statement, and 2. provide each investor with a proxy statement before each shareholders' meeting.

Cash Flows from Operating Activities—Direct Method One of the hallmarks of classifying an item as operating cash flows is that it is associated with net income. Notice that interest paid and received and dividends received are all operating cash flows, but dividends paid is a ______________. The first three flows are associated with income statement items (interest expense and revenue, dividend revenue), but dividends paid is not an income item; rather, it is a __________________________. Dividends paid are a distribution of income to owners and are not on the income statement, so they are not in cash flows from operations. Any cash inflow or cash outflow not properly classified as an investing or financing activity would be included as cash flow from operating activities (e.g., collection of a lawsuit settlement). The Net Cash Flow from Operating Activities can be positive or negative

1. financing cash flow 2. direct reduction in retained earnings

SEC rules There are Increased penalties for fraud and white-collar crime. Willfully failing to maintain audit records for _________ is a felony. Criminal charges can be brought against corporate officers who fail to...

1. five years 2. certify financial reports or who willfully certify statements they know do not comply with SOX.

interest rate swap The private entity must complete documentation requirements related to cash flow hedge accounting and must comply with the disclosure requirements for...

1. hedge accounting (Topic 815) and 2. fair value (Topic 820).

Practical Expedient Exception — ASU 820 allows a company to use a "practical expedient" 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 investment vehicles are often referred to as alternative investments. Examples are:

1. hedge funds, 2. private equity funds, 3. real estate funds, 4. venture capital funds, 5. common/collective funds, and 6. offshore funds.

Per SFAC 5, five different attributes are used to measure assets and liabilities in present practice:

1. historical cost, 2. current (replacement) cost, 3. current market value, 4. net realizable value, and 5. present value of future cash flows.

Purchasing power gain A purchasing power gain results from...

1. holding monetary assets during deflationary times or 2. having monetary liabilities during inflationary times.

Purchasing power loss A purchasing power loss results from...

1. holding monetary assets during inflationary times or 2. having monetary liabilities during deflationary times.

Comparative Statements SEC registrants report three years of OE statements, as is the case with the income statement and statement of cash flows. The current year statement is shown comparatively with the statement for the previous two years. Again, either the vertical or the horizontal format is used for presentation. The comparative multiyear display for the horizontal format for single year statements adds two more sets of columns, one for each year shown comparatively. This type of display, thus, is ___________ within each year and ____________ across years.

1. horizontal 2. vertical

Classification in the Fair Value Hierarchy There are other instances where practical expedient is allowed. An entity is allowed to use a practical expedient in other circumstances, such as...

1. in the valuation of benefit plans or 2. for a private company's measurement of share-based payments.

The value of the VIE to the variable-interest holders depends on (varies with) the success of the VIE; the variable-interest holders' interest... (hint, how does the interest increase and decrease?)

1. increases if the net asset value of the VIE increases or 2. decreases if the net asset value of the VIE decreases.

Part 2 of Form S-1 includes...

1. information about the cost of issuing and distributing the security, 2. more detailed information about the directors and officers and 3. additional financial statement schedules.

Using Cash Flow Information and Present Value in Accounting Measurements Measurement Issues This Statement addresses only measurement issues, not recognition. The statement applies to...

1. initial recognition, 2. fresh-start measurements, and 3. amortization techniques based on future cash flows.

Identifiable assets and liabilities with market values different from their book values cause the difference between total OE and the market value of net identifiable assets. Examples include:

1. investments and 2. natural resources.

The IASB Framework does not include as elements the following items appearing in the FASB Framework's list of elements:

1. investments by owners, 2. distributions to owners, 3. comprehensive income, 4. gains, and 5. losses. **However, specific IFRSs address these elements within the context of the specific standard.

Measurement Bases for Balance Sheet Valuation Historical cost or other historical value Some accounts are measured and reported at a fixed, unchanging historical amount. Examples include:

1. land, 2. some investments, 3. cash, 4. pre-paids, 5. many current liabilities, 6. contributed capital accounts, and 7. treasury stock.

subsequent events examples

1. lawsuits, 2. changes in corporate structure, 3. issuances of debt and equity securities, 4. major acquisitions, and 5. significant gains and losses.

Interim reports are not audited although for SEC registrants the reports are reviewed—a more limited procedure relative to an audit. As such, interim reports must be analyzed with more caution, compared with annual reports. Interim reports tend to be...

1. less accurate, 2. subject to greater estimation error due to the shorter period involved, and 3. are less complete. **However, they improve the timeliness (time period assumption) of financial reporting.

the financial statement accounts listed in order of non-current emphasizes the ____________ perspective. Within assets and liabilities, first displayed are the...

1. long-run 2. infrastructure assets that provide the long-term physical structure of operating capacity and the means of obtaining the long-term financing of those assets.

Form 8-K reports significant events affecting the company such as...

1. material impairment, 2. bankruptcy, 3. entry or termination of a definitive agreement, 4. changes in the registrant's CPA, 5. changes in control etc. *These are all events that the public shareholder should be aware of, as the events are significant enough to influence decisions.

fair value The most advantageous market is the one in which the reporting entity could sell the asset at a price that....

1. maximizes the amount that would be received for the asset, or 2. that minimizes the amount that would be paid to transfer the liability

Income statement: The gain or loss from the discontinued operation is presented on the face of the income statement as income (loss) from discontinued operation (_________). In contrast, gains or losses from the disposal that does not qualify as a discontinued operation is...

1. net of tax 2. included in income from continuing operations.

A change in valuation technique or application may be appropriate, for example, if...

1. new markets develop, new information becomes available, 2. previous information is no longer available, or 3. valuation techniques improve.

Noncontrolling Interest (NCI) Consolidated Income Statement The noncontrolling interest claim to consolidated net income is the...

1. noncontrolling interest percentage share of the subsidiary's reported net income, 2. + (-) its percentage share of depreciation/amortization expense on fair value in excess of (less than) book value and 3. its percentage share of any other revenues/expenses or gains/losses attributable to the subsidiary recognized on the consolidating worksheet.

Noncontrolling Interest (NCI) Consolidated Balance Sheet The amount of the noncontrolling equity interest is the...

1. noncontrolling percentage claim to the subsidiary's book value at the acquisition date, 2. + (-) its claim to the unamortized difference between fair values and book values at acquisition, 3. + its claim to goodwill recognized at acquisition, minus its share of any goodwill/impairment /losses.

IFRS—Statement of Comprehensive Income Per Share Measures — Comprehensive income per share is __________ under IFRS but is ___________ under U.S. GAAP.

1. not prohibited 2. prohibited

Valuation techniques used to measure fair value should maximize the use of _________ inputs and minimize the use of _____________ inputs.

1. observable 2. unobservable

Since the components of cash, cash equivalents, and restricted cash may be reported on separate lines on the statement of financial position, the entity must disclose how the change in cash presented on the SCF reconciles to the components of cash presented on the statement of financial position. This reconciliation can be...

1. on the face of the SCF or 2. in the notes to the financial statements.

Simple capital structure A simple capital structure is one in which the corporation... (hint, two options)

1. only has common stock outstanding or 2. one in which the corporation has common stock and nonconvertible preferred stock outstanding.

The fair value option is applied only to an entire instrument and not to...

1. only specific risks, 2. specific cash flows, or 3. portions of an instrument.

The categories used to explain the net change in cash and equivalents should be presented in the order shown and can be remembered as OIFF ("Oh, If—I could only remember"). (hint, what are the 4 types from the OIFF acronym?)

1. operating, 2. investing, 3. financing, and 4. foreign currency

Application of Definition to Assets, Liabilities, and Shareholders' Equity Application to Assets The highest and best use must take into account what is...

1. physically possible, 2. legally permissible and 3. financially feasible at the measurement date.

IFRS differs in history and level of development as compared with U.S. GAAP. U.S. GAAP is _________ and provides ____________ guidance, whereas IFRS allows for _______________ in many areas and provides ______________ guidance. The resulting standards are significantly different in size.

1. precise 2. conservative 3. subjectivity 4. general qualitative

The IASB Framework provides that relevance includes the qualities of:

1. predictive value and 2. confirmatory value

Presentation and disclosure differences Again, differences exist as to whether an item must be...

1. presented in the financial statements or 2. disclosed in the footnotes, as well as 3. the types of information that must be disclosed.

Measurement Bases for Balance Sheet Valuation 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:

1. property, plant and equipment; 2. intangibles; 3. natural resources.

The stand-alone financial statements of a subsidiary consolidated with a public company are not considered ___________________ for purposes of its stand-alone financial statements. However, the subsidiary is considered a _______________ for purposes of the financial statements that are included in an SEC filing.

1. public business entities 2. public business

Cash Flows from Investing Activities - outflows

1. purchase of long term assets 2. lending (to others) 3. investment in debt and equity securities (of others, e.g., held-to-maturity or available-for-sale classifications) 4. Purchase of other productive assets (e.g., patent or equipment; but not Inventory)

Prospective financial statements should disclose information as to the...

1. purpose of the statements, 2. assumptions, and 3. significant accounting policies.

Subsequent Events—Conditions Existed at the Balance Sheet Date This category of subsequent events requires...

1. recognition in the financial statements and 2. includes all events that provide evidence about conditions existing at the balance sheet date including estimates used in the process of preparing the statements. *Footnotes may be included to supplement and explain the recognition.

Conservatism (also called prudence) is the reporting of less optimistic amounts (lower income, net assets) when...

1. we are under conditions of uncertainty or 2. when GAAP provides a choice from among recognition or measurement methods.

Net income is not replaced by comprehensive income. The purpose of requiring the reporting of comprehensive income is to...

1. report the net change in equity (other than from transactions with owners) in a single amount and 2. to provide a more complete picture of the total earnings of the firm for a period. This reporting contributes to the objective of reporting an "all-inclusive" income amount.

Both net income and OCI items occur each year and together yield comprehensive income. Net income is closed to __________ and OCI is closed to ________ each year.

1. retained earnings 2. AOCI *Both retained earnings and AOCI are OE accounts.

Other events—Other events reported in the statement of changes in equity (and columns affected) include:

1. retrospective change in accounting principle affecting prior earnings (RE and total OE) 2. restatement of income statement for an error affecting prior earnings - prior period adjustment (RE and total OE) 3. contributed capital from conversion of bonds (contributed capital and total OE) 4. contributed capital from stock options and stock award plans (contributed capital and total OE)

Required Statement of Financial Position Items (Where Present for an Entity) U.S. GAAP discourages the use of the term "reserve," which is a category found within equity and liabilities under IFRS. IFRS permits the term. Examples include reserves arising from...

1. revaluation of plant assets, 2. foreign currency translation, and 3. recognition of expenses before they are legally due. **Note that wherever the term reserve is used, it represents a specific purpose, and not simply general reserves that might be used to smooth earnings.

1. revenue 2. finance costs 3. share of the profit or loss of associates under the equity method 4. tax expense 5. a single amount comprising the total of (1) after-tax profit or loss on discontinued operations and (2) after-tax gain or loss on disposal of discontinued operations 6. profit or loss 7. each component of other comprehensive income 8. share of other comprehensive income of associates under the equity method 9. total comprehensive income

Cash Flows from Operating Activities—Direct Method *Collection from customers* — Revenues on an income statement may include accruals (_____________________) and exclude deferrals (__________________). To derive the cash collected from customers, these accruals/deferrals must be reversed

1. revenue earned but not collected 2. cash collected but revenue not earned

All-inclusive income statement The current income statement under GAAP is mostly an all-inclusive one in which essentially all...

1. revenues, 2. expenses, 3. gains, and 4. losses are shown on the income statement and included in the net income calculation.

IFRS interim semi-annual If a report is provided, the minimum reporting requirements include the following condensed financial statements:

1. statement of comprehensive income, 2. balance sheet, 3. statement of cash flows, and 4. statement of changes in equity.

A firm can reclassify a current liability as noncurrent if it accomplishes one of the above after the balance sheet date but before the financial statements are issued. The recognition (change in classification to noncurrent) takes place during the ___________________ period, but it can be argued that the decision was made to effect the reclassification _______ the balance sheet date. Thus, although the situation appears to be similar to subsequent events accounting, a specific accounting principle governs this accounting.

1. subsequent event 2. after

Millions of companies worldwide can, and are, using IFRS for Small and Medium Sized Enterprises (IFRS for SMEs). In many of these countries (but not _____________) incorporated companies are required to have audited financial statements regardless of...

1. the United States 2. whether they are a public company with publicly traded equity or debt.

Required Disclosures for Interim and Annual Income Statements—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)...

1. the amount of gains and losses from fair value changes included in earnings for the period and 2. in which line in the Income Statement those gains/losses are reported

Entities other than public entities are not required to evaluate subsequent events after the point of availability. However, a non-SEC filer must also disclose...

1. the date through which the subsequent events were evaluated and 2. whether that date is the date the financial statements are issued or available to be issued.

Process Steps to Follow—The steps to be followed in deriving consolidated financial statements from the separate trial balances or statements of the separate companies are: Eliminating Entries—Identify and record balance sheet eliminating entries: The common balance sheet eliminating entries at the date of combination are: investment elimination entry Entry when parent owns 100% of subsidiary—Sample investment elimination (on the consolidating worksheet) when there is no noncontrolling interest (formerly minority interest) in the subsidiary: identifiable assets (liabilities) would be debited (credited) if... If goodwill is recognized (debited), at the date of acquisition no ______________ is required. (But, at the end of every subsequent period, goodwill must be assessed for impairment; it is not amortized.)

1. the fair value of identifiable assets (liabilities) is greater than the book value of identifiable assets (liabilities) at the acquisition date. 2. assessment of impairment

IFRS The objective of financial statements is to provide information about... The financial information included in the financial statements along with the note disclosures assist users of financial statements in...

1. the financial position, financial performance, and cash flows of an entity that is useful to a wide range of users in making economic decisions. 2. predicting the entity's future cash flows and, in particular, their timing and certainty.

Form 10-K The SEC requires the Management's Discussion and Analysis (MD&A) to be included in its reporting and, as such, provides a discussion of important aspects of the firm from the viewpoint of management. This report covers...

1. the firm's financial condition, 2. changes in financial condition, 3. results of operations, 4. liquidity, 5. capital resources and operations, 6. identifies trends and significant events and uncertainties. The discussion also includes information about 7. the effects of inflation and changing prices in nonquantitative form, and 8. explanation of significant or unusual events and uncertainties and their effect or expected effect on the firm's financial performance. 9. Also, the firm's important accounting policies are discussed in the MD&A.

Declines in Inventory Application to Interim Reports The decline in the value of the inventory is determined by applying either...

1. the lower of cost or net realizable value (LC -NRV) or 2. the lower of cost or market (LC-M) approach.

IFRS does not require specific formatting of statement of financial position information. For example, both horizontal and vertical formats are acceptable. Firms may change...

1. the order of accounts, the title of the statements (e.g., Balance Sheet is acceptable instead of the formal name, Statement of Financial Position) and 2. the level of detail to provide the most useful information

fair value The hypothetical transaction to sell the asset or transfer the liability is assumed to occur in...

1. the principal market or, alternatively, 2. in the absence of a principal market, the most advantageous market for the asset or liability, to which the entity has access, after taking into account transaction costs and transportation costs.

Eliminate Profit/Loss in Beginning Inventory—Elimination of intercompany inventory profit (or loss) in beginning inventory: Eliminating Entry—On the subsequent consolidating worksheet, the following eliminating entry would be made to simultaneously eliminate the intercompany profit in (beginning) retained earnings (of the selling affiliate) and the overstatement of the beginning inventory (of the buying affiliate): DR: Retained Earnings CR: Inventory - Beginning I/S The debit to retained earnings eliminates the intercompany profit recognized in ______________ on the books of the selling affiliate and brought on to the worksheet of the current period in its (selling affiliates) retained earnings; the credit to beginning inventory as reported on the worksheet income statement eliminates the intercompany profit in the _____________ shown on the books of the buying affiliate and brought on to the worksheet of the current period.

1. the prior period 2. beginning inventory

Inputs — Inputs refer to the various assumptions that market participants would use in determining fair value, including assumptions about...

1. the risk inherent in using a particular valuation technique, 2. as well as the risk inherent in using various inputs (data, assumptions, etc.) with each valuation technique.

Formats Leading to Income from Continuing Operations Income from continuing operations includes the revenues, expenses, gains, and losses that are normal and recurring. In addition to including those items that are specifically related to primary business operations, income from continuing operations also includes those revenues, expenses, gains, and losses that are the result of incidental or peripheral activities. The presentation of income from continuing operations follows one of two formats:

1. the single-step format or 2. the multiple-step format. **Note the required per share disclosures shown at the bottom of the income statements.

For Assets and Liabilities That Are Measured at Fair Value on a Nonrecurring Basis — In periods subsequent to initial recognition (e.g., an asset impairment that is not measured on a recurring basis) the reporting entity must disclose the following information in the statement of financial position (balance sheet) for each major category of asset and liability: For fair value measurements in Level 3:

1. unobservable inputs, 2. a description of the valuation process used and 3. quantitative information about the unobservable inputs used

Comparative Statements SEC registrants report three years of OE statements, as is the case with the income statement and statement of cash flows. The current year statement is shown comparatively with the statement for the previous two years. Again, either the vertical or the horizontal format is used for presentation. The comparative multiyear display for the vertical format for single year statements results in the statements of three years stacked one on top of the other. This type of display, thus, is ___________ within each year and ____________ across years.

1. vertical 2. horizontal

Issued Midyear If the bonds were issued at midyear, the numerator and denominator effects each would be multiplied by...

1/2, resulting in smaller increases to the BEPS numerator and denominator.

revenue example: (use of the 5 steps) A contract is entered into with the customer to deliver an automobile and provide a warranty on the parts associated with the automobile.

1/2. There are two separate performance obligations: Deliver the automobile and provide parts if needed. 3. Determine the price of the automobile without the warranty or the price that the warranty is sold for separate from the automobile. 4. Allocate the transaction price to the separate performance obligations. 5. Recognize revenue when each performance obligation is satisfied. With respect to the automobile, revenue would be recognized upon delivery; with respect to the warranty, the revenue would be recognized over the warranty period.

Effects on Cash of Foreign Currency Translation Example A foreign subsidiary has a (nondollar) cash balance that does not change during 20X2 of 100,000 euro. Assume the (spot) exchange rates were: 12/31/X1: 1 euro = $ .10 12/31/X2: 1 euro = $ .11 The dollar value of cash for U.S. reporting would be:

12/31/X1 (100,000 euro × .10) = $10,000 12/31/X2 (100,000 euro × .11) = 11,000 Net Increase in Cash = $ 1,000

Which one of the following levels of voting ownership is normally assumed to convey significant influence over an investee? 0% - 10%. 20% - 50%. 50% - 100%. 100%.

20% - 50% *Between 20% and 50% voting ownership of an investee normally is assumed to give the investor significant influence over the investee. Ownership of 20% to 50% of the voting stock of an investee may not give the investor significant influence over the investee if additional special circumstances exist, but normally, it does.

New England Co. had net cash provided by operating activities of $351,000; net cash used by investing activities of $420,000; and cash provided by financing activities of $250,000. New England's cash balance was $27,000 on January 1. During the year, there was a sale of land that resulted in a gain of $25,000, and proceeds of $40,000 were received from the sale. What was New England's cash balance at the end of the year?

208,000. **The cash balance at the end of the year equals the cash balance at the beginning of the year, $27,000, plus the net sum of the three categories of cash flows: $351,000 operating − $420,000 investing + $250,000 financing. The ending balance is $208,000. The $40,000 proceeds from land sale are included in the net cash outflow from investing activities.

*Subsequent Events—Conditions Existed at the Balance Sheet Date* example A major customer's financial situation has been deteriorating during the reporting year (20X4), with bankruptcy being declared early in 20X5. As a result, a receivable from that customer is deemed worthless after the 20X4 balance sheet date but before the issuance of the financial statements. The loss from the write-off of the receivable should be recognized in...

20X4 income, and the 20X4 balance sheet should reflect the write-off because the condition leading to the bankruptcy existed at the balance sheet date.

In its financial statements, Hila Co. discloses supplemental information on the effects of changing prices. Hila computed the increase in current cost of inventory as follows: Increase in current cost (nominal dollars) $15,000 Increase in current cost (constant dollars) $12,000 What amount should Hila disclose as the inflation component of the increase in current cost of inventories?

3,000. *The increase in current cost (nominal dollars) of $15,000 is the total increase in current cost, including any increase caused by inflation. The effect of changes in the general price level is not separated from the effect of changes in specific value. The increase in current cost (constant dollars) of $12,000 is the increase in current cost after eliminating any increase caused by inflation. Therefore, the inflation component of the increase in current cost of inventories is $3,000 ($15,000 − $12,000).

3,800. *The only account listed that is related to interest expense is unamortized bond discount, which decreased $500. No bonds were retired. Therefore, the decrease in the discount account represents amortization. This amortization causes interest expense to increase without cash flow effect. A reconstructed journal entry tells the story: Interest expense 4,300 Bond discount 500 Cash 3,800

Cash Flows from Operating Activities—Noncash Items *Depreciation/Amortization/Depletion Expenses* These are noncash expenses that must be added back to net income. Often the amount of depreciation/amortization/depletion expense is not given and you need to solve for the expense:

A T-account is the best way to derive depreciation/amortization/depletion expense (collectively referred to as depreciation expense going forward). Use the information provided in the problem and fill in the known amounts for the accumulated depreciation, asset value, and any gain or loss. Solve for the unknown values to back into the unknown depreciation expense.

During a period of inflation in which a liability account balance remains constant, what occurs?

A purchasing power gain, if the item is a monetary liability. *A purchasing power gain or loss is the net gain or loss determined by restating in units of constant purchasing power the opening and closing balances of, and transactions in, monetary assets and liabilities. During a period of rising prices, monetary liabilities give rise to purchasing power gains because they will be settled with cash which can be used to purchase relatively fewer goods or services at a future time.

Purchasing power loss example A firm has a cash balance of $4,000 at the beginning of the year. If inflation is 10% during the year (beginning price level of 100, ending price level of 110), and the firm has had no change in its cash balance, the value of the dollars held at year's end is 10% less in terms of purchasing power. Thus, the firm has a purchasing power loss because the firm has 10% less in purchasing power than it had at the beginning of the year. *solve for PP loss*

Amount of cash required at 12/31 to be in the same purchasing power position it was in at 1/1: $4,000(110/100) = $ 4,400 Amount of cash actually held at 12/31: $(4,000) Purchasing power loss = $ 400 The firm's $4,000 cash will buy $400 less in goods and services at year-end compared with the amount it could buy at the beginning of the year.

Purchasing power gain example A firm owes $4,000 on a note due in one year. If inflation is 10% during that year (beginning price level of 100, ending price level of 110), the purchasing power of the dollars paid at the end of the year is 10% less than the dollars borrowed. Thus, the firm has a purchasing power gain because the firm is paying 10% less in purchasing power to extinguish the debt than it received from the creditor. (This is why interest rates increase with inflation, to compensate the creditor for the loss in purchasing power during the term of the borrowing.) *solve for PP gain*

Amount of debt required at 12/31, for the firm to be in the same purchasing power position it was in at 1/1: $4,000(110/100) = $ 4,400 Amount of debt actually owed at 12/31: $(4,000) Purchasing power gain = $ 400 If the debt increased to $4,400 by year-end, the firm would be in the same purchasing power situation as it was at the beginning of the year. But it actually owes only $4,000. Therefore, the firm is $400 ahead in purchasing power at 12/31.

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

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

Payne Co. prepares its Statement of Cash Flows using the indirect method. Payne's unamortized bond discount account decreased by $25,000 during the year. How should Payne report the change in the unamortized bond discount in its Statement of Cash Flows?

As an addition to net income in the operating activities section *Bond discount represents interest in excess of the cash interest paid each period. Bond discount is the difference between the amount borrowed and face value and, thus, represents interest to be recognized over the bond term. This interest is recognized in interest expense as a reduction in the discount account. The semiannual journal entry is: dr. Interest expense; cr. Discount; cr. Cash. Interest expense recognized exceeds cash interest paid (an operating cash flow) by the cr. to Discount (this is the amortization amount). Therefore, income is reduced by more than the amount of operating cash outflow. The amortization of discount is the difference between the reduction in earnings and reduction in operating cash flow. Therefore, the amortization amount is added to income in the reconciliation of net income and net operating cash flow.

The securities that may become common stock in the future are called potential common stock (PCS) or potentially dilutive securities. If a firm has no PCS then only ______ is reported.

BEPS

DEPS incorporates the effect of potential common stock (PCS)-securities that can become common stock in the future, into BEPS. There may be both numerator and denominator effects. BEPS is used as the benchmark value into which the numerator and denominator changes stemming from PCS are incorporated. Thus, DEPS equals...

BEPS adjusted by the effects of PCS.

Should the following be added back to net income when reporting operating activities' cash flows by the indirect method? - Excess of treasury stock acquisition cost over sales proceeds (cost method) - Bond discount amortization

BOND DISCOUNT AMORTIZATION ONLY. *Treasury stock transactions are not operating and never affect net income. Thus, they would never be shown in the reconciliation of net income and net operating cash flows. The amortization of the bond discount increases interest expense but does not require the outflow of cash. Therefore, it is added in the reconciliation. An entry shows an example: Interest expense 100 Bond discount 20 Cash 80 Bond discount has a debit balance. When it is amortized, it is credited (reduced). The net cash flow from operations reflects an outflow of $80, but income has been reduced by $100. Therefore, the $20 amortization of bond discount must be added back to net income in the reconciliation.

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 USING AN EXIT PRICE.

Current ratio = (equation)

CA/CL. This ratio is frequently used as a measure of liquidity. Many analysts use a minimum value of 2 when evaluating firms because the extra CA provides a buffer for uncertainty, and CA includes inventories and prepaids that are not considered very liquid.

CL example: A note payable due 3/1/x2 is expected to be refinanced continuously on a 4-month basis, each time substituting a new 4-month note for the old. This note should be classified as a...

CL in the 12/31/x1 balance sheet because there is no certainty that the firm will not use CA in the next year to pay off the debt. The debtor firm cannot control the creditor who may decide not to refinance. Interest rates may increase substantially changing the strategy of the debtor firm. However, if the new note is due later than 12/31/x2 then the original note is classified as NCL.

Noncurrent assets (NCA) and noncurrent liabilities (NCL) Defined by default as assets and liabilities that are not current. The current/noncurrent distinction is important because firms would rather report more CA and less CL to appear more liquid and less risky in the short run. There is great incentive to move...

CLs into the NCL category, for example.

According to the FASB conceptual framework, what is an enhancing quality that relates to both relevance and faithful representation?

COMPARABILITY

general prices The Bureau of Labor Statistics publishes the ______________________, which is an index reflecting the aggregate increase in the price of many goods and services used by individuals. It is one measure of inflation commonly quoted in the financial press. If inflation is 2% for an annual period, then the CPI-U has increased 2% for the year.

CPI-U (Consumer Price Index for All Urban Consumers)

Because, in a pure cash basis of accounting, cash received is recognized as revenue (DR. Cash/CR. Revenue) and cash paid is recognized as expense (DR. Expense/CR. Cash), a balance-sheet-like statement would show only...

Cash and Equity; there would be no other assets or liabilities shown. For example, a payment for capital assets (e.g., property, plant, or equipment) would be recognized as an expense, not as a long-term asset. Similarly, a collection of cash would be recognized as revenue, whether or not the good or service had been provided.

What is included in the Financing Activities section of the Statement of Cash Flows?

Cash effects of transactions obtaining resources from owners and providing them with a return on their investment

The formal SEC rules are found in the...

Code of Federal Regulations. All publicly traded companies (either public equity or public debt) must comply with the securities regulations. The governing regulations are Regulation S-X and Regulation S-K.

Relevance and Faithful Representation May...

Conflict—In such cases, a trade-off is made favoring one or the other.

Comparability — The quality of information that enables users to identify similarities and differences between sets of information. _____________________________________________ enhances comparability.

Consistency in application of recognition and measurement methods over time

Process Steps to Follow—The steps to be followed in deriving consolidated financial statements from the separate trial balances or statements of the separate companies are: adjusting entries in-transit intercompany transactions (example) Example—At the time P acquired S, S had recorded a payment of $5,000 to P on an Accounts Payable; the payment was still in transit (i.e., P had not yet received the payment). What entry would be made on the consolidating worksheet immediately after the combination as an adjusting entry?

DR: cash 5,000 CR: AR 5,000

Assume that in acquiring a subsidiary, the parent determined that several depreciable assets had a fair value greater than book value. If the parent accounts for its investment in the subsidiary using the equity method, what effect will the amortization of the excess fair value over the book value of the subsidiary's assets have on the following parent's accounts? Investment in Subsidiary & Equity Revenue from Subsidiary Increase Increase Increase Decrease Decrease Increase Decrease Decrease

Decrease Decrease *When the fair value of a subsidiary's assets is greater than book value, it is as though the parent paid more for the assets than the subsidiary paid for those assets. Using the equity method of accounting for the investment, the parent must depreciate the excess of fair value over book value. That equity entry would be: DR: Equity Revenue - to reduce it by the amount of depreciation on the excess of fair value over book value, and CR: Investment in Subsidiary - to offset a portion of the net income (or increase the amount of net loss) recognized from the subsidiary. Thus, both accounts would be decreased.

One of the guiding interim reporting principles for international standards is that all recognized accounts for interim purposes must meet their...

IFRS definitions in the interim period. The same process for estimates, accruals, deferrals and allocations made at the end of an annual period apply to each interim period. This provision of the international standards reflects the preference for the discrete view, and is in contrast with U.S. standards.

Assume a company does not elect the fair value option for reporting financial assets and liabilities. Which of the following is not classified as other comprehensive income? I. An adjustment to pension liability to record the funded status of the plan II. Subsequent decreases of the fair value of available-for-sale debt securities that have been previously written down as impaired III. Decreases in the fair value of held-to-maturity securities IV. None of the available choices

III. Decreases in the fair value of held-to-maturity securities *If the fair value option is not elected, held-to-maturity securities are reported at amortized cost. Any decreases or increases in fair value are reported neither in net income nor as part of other comprehensive income.

interim reporting The general rule for expense recognition is:

If the cost or expense has no relationship to other quarters, recognize the entire expense in the quarter in which the cost was incurred (the discrete view).

How should the amortization of a bond discount on long-term debt be reported in a Statement of Cash Flows prepared using the indirect method?

In operating activities as an addition to income *When bond discount is amortized, a portion of the discount is recognized as expense. The result is that interest expense exceeds the amount of cash paid with each interest payment. The discount is gradually amortized over the bond term as additional interest expense because the firm received less than the amount due at maturity. The operating activity section of the indirect method begins with net income and ends with net cash flow from operations. Income is reduced by the interest expense that exceeds the cash interest paid by the amount of discount amortization. Therefore, the discount amortization is added back, yielding a reduction in net cash flow from operations equal to the amount of cash interest paid.

Basic EPS (BEPS) (def)

Includes only actual common shares outstanding.

constant dollars (def)

Measurements in the general price level as of a specific date. Constant dollar measurements reflect an adjustment for inflation and allow comparisons using dollars with the same purchasing power.

nominal dollars (def)

Measurements in the price level in effect at a transaction date. These measurements are not adjusted for inflation.

Noncontrolling Interest (NCI) Determining NCI Equity Determining the value of the NCI Equity reported by the consolidated entity can be done via calculation. NCI Equity is represented on the consolidated financial statements and is created during the consolidation process. This account does not exist on the individual financial statements of P or S. The CPA Exam frequently will ask you to provide the value of the NCI Equity or the Income that should be allocated to the NCI. Here we show you how to calculate theses values, it is also important because the calculation shows the conceptual relationship between S's NBV and the amount of S's NBV that is allocated to the noncontrolling interest. NCI Equity is the...

NBV of S that is allocated to the noncontrolling interest and is represented on the consolidated balance sheet.

Reconciliation of Change in Cash The net effect of operating, investing, financing cash flows and the net effect of foreign currency translation will be the difference between cash (including cash equivalents and restricted cash) at the beginning and end of the period. The items in this category are:

Net Increase (or Decrease) in Cash (during X2) ± Beginning Cash (1/1/X2) = Ending Cash (12/31/X2) *The beginning and ending Cash would include cash, cash equivalents, and restricted cash reported on the respective (1/1/X2 and 12/31/X2) Balance Sheets.

For consolidated purposes, what effect will the intercompany sale of a fixed asset at a profit or at a loss have on depreciation expense recognized by the buying affiliate? At a Profit & At a Loss (overstate or understate for each)

Overstate Understate *An intercompany sale of a fixed asset at a profit will result in the buying affiliate overstating depreciation expense by the amount of depreciation taken on the intercompany profit, and an intercompany sale at a loss will result in an understatement of depreciation expense taken by the buying affiliate. When an intercompany sale of a fixed asset results in a loss, the carrying value of the asset will be understated by the amount of the loss. As a result, depreciation expense taken by the buying affiliate will be understated by the amount of depreciation that would have been taken on the intercompany loss.

Process Steps to Follow—The steps to be followed in deriving consolidated financial statements from the separate trial balances or statements of the separate companies are: record trial balances

Record account titles and balances on worksheet from trial balance, separate financial statements, or other sources of the separate companies that are to be consolidated.

A company that wishes to disclose information about the effect of changing prices should report this information in....

Supplementary information to the financial statements. *The Codification encourages, but does not require, business enterprises to disclose supplementary information on the effects of changing prices. The statement presents requirements to be followed by enterprises that voluntarily elect to disclose this information.

Cash Flows from Operating Activities—Noncash Items - depreciation example Example Assume the following information is from the balance sheets (20X1 and 20X2) and additional disclosures of ABC Co.: Accumulated Depreciation - 12/31/x1 = 400,000 Accumulated Depreciation - 12/31/x2 = 500,000 net increase 20X2 = 100,000 Additional information: Equipment with a book value of $25,000 (cost = $75,000 and accumulated depreciation = $50,000) was sold for $30,000. What is the calculation of depreciation expense?

T account for accumulated depreciation: (left side) (right side) $50,000 40,000 beg balance sale of assets *50,000 (plug #) depr.* = 50,000 end balance *In the determination of cash flows from operations, $150,000 of depreciation expense should be added back to net income because depreciation expense is not a cash outflow.

Which set(s) of financial statements generally cannot be prepared directly from the adjusted trial balance?

THE STATEMENT OF CASH FLOWS ONLY. *The Balance Sheet can be prepared from the adjusted trial balance, provided that the amount of income is placed into retained earnings. Th statement of cash flows generally requires a significant amount of analysis to uncover the cash flows reported within. The adjusted trial balance presents ending account balances. The Statement of Cash Flows reports changes in cash by category. Cash flows are changes in cash and are categorized by type and reported in three categories: operating, investing, and financing.

Cash payments for income tax is a cash outflow from operating activities. (true or false?)

TRUE

Following a legal acquisition, a full set of consolidated financial statements must be prepared at the end of each operating period (true or false?)

TRUE

If a parent carries an investment in a subsidiary using the equity method, the parent will recognize on its books amortization of the excess of fair value over the book value of depreciable/amortizable assets. (true or false?)

TRUE

If the fair value of a subsidiary's depreciable assets is greater than the book value of those assets, additional depreciation expense must be recognized on the consolidating worksheet. (true or false?)

TRUE

If there is an operating period between an acquisition combination and the preparation of consolidated statements, there likely will be eliminating entries that were not needed for consolidated statements prepared immediately following the combination. (true or false?)

TRUE

International accounting standards are not included in the FASB Accounting Standards Codification. (true or false?)

TRUE

Management compensation is not required to be included in the summary of significant accounting policies. (true or false?)

TRUE

One example of an expense is an increase in a liability from providing the firm's main service. (true or false?)

TRUE

Prior period adjustment is not found below income from continuing operations in the income statement. (true or false?)

TRUE

The IASB Framework identifies accrual accounting as a basic assumption. (True or false?)

TRUE

The IASB Framework treats expenses and losses as an expense, where the U.S. Framework treats expenses and losses as separate elements. (true or false?)

TRUE

The amount of "Cash Flows from Operating Activities" will be the same whether the direct of the indirect method is used. (true or false?)

TRUE

The entries made on its books during a fiscal period by a parent company using the equity method must be reversed on the consolidating worksheet at the end of the fiscal period. (true or false?)

TRUE

The entries made on its books during a fiscal period by a parent company using the equity method must be reversed on the consolidating worksheet in order to prevent double counting of the subsidiary's results of operation for the period. (true or false?)

TRUE

Wood Co.'s dividends on noncumulative preferred stock have been declared but not paid. Wood has not declared or paid dividends on its cumulative preferred stock in the current or the prior year and has reported a net loss in the current year. For the purpose of computing basic earnings per share, how should the income available to common stockholders be calculated? The current-year dividends and the dividends in arrears on the cumulative preferred stock should be added to the net loss, but the dividends on the noncumulative preferred stock should NOT be included in the calculation. The dividends on the noncumulative preferred stock should be added to the net loss, but the current-year dividends and the dividends in arrears on the cumulative preferred stock should NOT be included in the calculation. The dividends on the noncumulative preferred stock and the current-year dividends on the cumulative preferred stock should be added to the net loss. Neither the dividends on the noncumulative preferred stock nor the current-year dividends and the dividends in arrears on cumulative preferred stock should be included in the calculation.

The dividends on the noncumulative preferred stock and the current-year dividends on the cumulative preferred stock should be added to the net loss. *In general, the dividends subtracted in computing basic EPS are (1) the annual dividend commitment on cumulative preferred whether or not declared or paid, and (2) declared dividends on noncumulative preferred whether paid or not. The firm has negative income. This answer means that the dividends reduce the numerator further - beyond the loss. The final numerator amount is less than (more negative than) the loss. Also, arrear dividends are never included in EPS because they were subtracted in computing EPS in a previous year.

inflation (def)

The increase in general prices for a period of time; deflation is the decrease in general prices. When inflation is 4%, there has been a 4% increase in the general price level index.

The PCC Framework discusses the areas in which financial accounting and reporting guidance might differ for private companies and public companies:

The main areas of guidance for private company accounting are with respect to (a) recognition and measurement, (b) disclosures, and (c) presentation.

fair value (def)

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.

comprehensive income (equation) CI =

The sum of (1) net income and (2) other comprehensive income. NI + OCI

Control and Subsidiary Accounts Example 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. (what is the control account?)

The sum of the 100 subsidiary AR balances equals the balance in the control AR account balance, which is reported on the balance sheet.

Example The income of Old, a reporting unit of Car, Inc., is $20 and $5 for years 6 and 7. Total Car income is $100 each year. In year 7 Old is discontinued and put up for sale. Year 7's comparative income statement shows the change in reporting for year 6.

The year 6 income statement published in year 6 included Old's income of $20 in income from continuing operations because in that year Old was part of the continuing operations of Car, Inc. However, in year 7, that is no longer the case and Old's results are separated from income from continuing operations for both years presented.

Fair value (def)

This value is also referred to as current market value. It is the price that would be received to sell an asset (or the price to settle a liability) in an orderly transaction from the perspective of a market participant at the measurement date (see the fair value lessons for further discussion of fair value).

The denominator of BEPS is the weighted average (WA) shares outstanding during the period (not the number outstanding at the end of the period unless there has been no change in the number of shares outstanding all year). __________________________ reduce the WA.

Treasury shares purchased during the period

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?

When there are multiple markets for an asset, the fair value of an asset is determined based on prices in the principal or most advantageous market. The second market is more advantageous because it has the higher selling price. In addition, fair value excludes transaction cost; therefore, the valuation of the asset would be $81 ($80 + $1).

An inventory loss occurred in the first quarter and was not expected to reverse in the current year. But the loss was recovered in the second quarter with the market price increase exceeding the decline from the first quarter. How should this be treated in the interim reports for quarters 1 and 2?

Write the inventory down in quarter 1, recognize the loss, and then write it back up in quarter 2 but only to cost, recognizing a gain.

Which of the following can be overstated on consolidated financial statements if intercompany inventory balances on-hand at the end of a period are not eliminated? Consolidated Income (and/or) Consolidated Loss

Yes Yes *Either consolidated income or consolidated loss could be overstated on consolidated statements as a result of failure to eliminate intercompany inventory balances. An overstatement of income would result if the goods were sold by the selling affiliate at a price greater than the cost to the selling affiliate. An overstatement of loss would result if the goods were sold by the selling affiliate at a price less than the cost to the selling affiliate.

If a parent uses the equity method on its books to carry its investment in a subsidiary, which one of the following current year entries (made by the parent) must be reversed on the consolidating worksheet? Income from Subsidiary (and/or) Dividends from Subsidiary

Yes Yes *When a parent uses the equity method to account for its investment in a subsidiary, the parent will recognize on its books during the year its share of the subsidiary's income (or loss) and its share of dividends declared by the subsidiary. Therefore, in the consolidating process, those entries (and any other equity-based entries made by the parent) must be reversed so that the elements that make up those entries (revenues, expenses, etc.) can be individually recognized on the consolidating worksheet and the consolidated financial statements.

Consolidated financial statements are justified only when the...

controlling financial interest of the firms being consolidated rests directly or indirectly with one of the firms (a "parent") to be included in the consolidation.

Disclosure of EPS ASC 260 provides guidance on the disclosure of earnings per share information on the face of the income statement. This guidance is provided for companies with...

a simple capital structure and for those companies with a complex capital structure.

For Assets and Liabilities That Are Measured at Fair Value on a Nonrecurring Basis — In periods subsequent to initial recognition (e.g., an asset impairment that is not measured on a recurring basis) the reporting entity must disclose the following information in the statement of financial position (balance sheet) for each major category of asset and liability: for level 2 & 3:

a description of the valuation techniques and inputs used to measure fair value and a discussion of changes in valuation techniques during the period, if any

full disclosure principle (example) An aircraft manufacturer enters into a contract to build 200 airplanes for an airline company. As of the balance sheet date, production has not begun. Thus, there is no recognition of this contract in the accounts. However...

a footnote should explain the financial aspects of the contract. This information is potentially of greater interest than many items recognized in the accounts.

Application of Definition to Assets, Liabilities, and Shareholders' Equity Application to Shareholder's Equity The measurement assumes the instrument is transferred to a market participant at the measurement date and is measured from the perspective of...

a market participant that holds the instrument as an asset.

Using Cash Flow Information and Present Value in Accounting Measurements Measurement Issues This Statement addresses only measurement issues, not recognition. The statement applies to initial recognition, fresh-start measurements, and amortization techniques based on future cash flows. A fresh-start measurement establishes...

a new carrying value after an initial recognition and is unrelated to previous amounts (e.g., mark-to-market accounting and recognition of asset impairments).

The fair value option is irrevocable unless and until...

a new election date for the specific item occurs.

Intraperiod Tax Allocation It is the allocation of the total tax consequence for that year among income from continuing operations, and the four items listed above. This process contrasts with interperiod tax allocation, which records...

a period's total tax consequence in current taxes payable and deferred tax accounts.

use of estimates When estimates used to value assets, liabilities, or contingencies are subject to ___________________________________, disclosures may be required. Disclosure about an estimate is required when information available before the financial statements are issued or are available to be issued.

a reasonable possibility of material change

Understandability — Information is understandable if the user comprehends it within the decision context at hand. Users are assumed to have...

a reasonable understanding of business and accounting and are willing to study the information with reasonable diligence.

Application of Definition to Assets, Liabilities, and Shareholders' Equity Application to Net Financial Assets & Financial Liabilities An exception to the requirement that fair value of qualified financial assets and financial liabilities be measured separately is permitted when...

a reporting entity manages risk associated with a portfolio of financial instruments on a *net exposure basis*, rather than on a gross exposure basis.

The periodic accounting process leading to the preparation of financial statements is called the _________________.

accounting cycle

In general, firms must use the same _____________________ (e.g., LIFO, straight-line depreciation) for interim reporting as they do for annual reporting.

accounting methods

Measurement Bases for Balance Sheet Valuation 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.

Statement of Changes in Equity Vertical Format The statement of comprehensive income is presented either in a separate statement or in a combined statement with net income. The firm is not required to report the components of other comprehensive income in this statement. However, _____________________ are reported.

accumulated other comprehensive income totals

IASB - Elements of Financial Statements Losses may also arise from...

activities not in the ordinary course of business.

IFRS - Income Statement The *function* of expense reporting focuses on the...

activity to which the expense relates. Examples include cost of sales, distribution costs, and administrative expenses.

LIFO liquidation Restoration Not Expected—If the liquidation is not expected to be restored, then the interim period cost of goods sold should reflect the...

actual cost of the layer liquidated.

IFRS - Income Statement In the United States, it is generally accepted that either a single-step or a multiple-step format be used and the bottom portion of the income statement is prescribed by U.S. GAAP. However, specific IFRS standards do mandate that...

additional line items, headings, or subtotals depending on whether a firm is reporting a pertinent item be disclosed separately.

adjust its own data if information indicated that market participants would use different assumptions.

Cash Flows from Operating Activities—Direct Method To derive net cash provided by operating activities using the direct method, each item in the income statement is....

adjusted from an accrual basis to cash basis This means that individual items of gross receipts of cash (from revenue activities) and gross payments of cash (from expenses incurred) must be converted from accrual to cash basis.

Fair Value Hierarchy—The fair value hierarchy (provided in ASC 820) prioritizes or ranks the inputs to valuation techniques used to measure fair value into three levels: Level 2 Depending on factors specific to the asset or liability being valued, these inputs may need to be...

adjusted when applied to the asset or liability for factors such as: 1. condition, 2. location, and 3. the level of activity in the relevant market.

Comparison of the Direct/Indirect Method of Determining Cash Flows from Operating Activities The indirect method develops cash flows by...

adjusting net income and does not (necessarily) identify the specific sources of cash inflows or outflows.

IFRS—Footnotes Footnotes Footnotes, including the summary of significant accounting policies, are considered...

an integral part of a complete set of financial statements and thus are required for all entities reporting under international accounting standards.

Cash Flows from Operating Activities—Direct Method Reconciliation of Net Cash Flow from Operating Activities with Net Income—If the Direct Method is used to present Net Cash Flow from Operating Activities, a separate schedule must be provided that reconciles Cash Flows from Operating Activities to Net Income. The reconciliation shows the _______________ necessary to arrive at Cash Flow from Operating Activities.

adjustments to Net Income

IFRS—Statement of Comprehensive Income A Fifth Other Comprehensive Income (OCI) Item International accounting standards allow firms to revalue plant assets and intangibles to fair value (details in a later lesson). U.S. standards prohibit this practice. Under international standards, if the revaluation results in an increase in the value of the asset, the increase is called a revaluation surplus and is reported in other comprehensive income. This surplus is a fifth OCI item, in addition to the four under U.S. standards. The revaluation surplus can never be reclassified to affect net income. Once a firm has chosen to revalue assets, those revaluations cannot...

affect net income.

Subsequent Events and IFRS IFRS does not require adjustment to the balance sheet for share splits or reverse splits occurring...

after the reporting date but before the financial statements are issued.

Example If a firm has three major department stores in various parts of the country, each of which meets the operating segment definition, the stores can be...

aggregated into a single reportable segment to avoid excessive reporting.

The IASB's Framework for the Preparation and Presentation of Financial Statements (Framework) is similar to the FASB's Concepts Statements although much shorter in length. Like the FASB's, the IASB Framework does not constitute GAAP (exception, see below) but, rather, provides the basis for development of specific GAAP on a consistent basis. The IASB Framework is intended to apply to the financial statements of...

all entities, public or private.

The International Accounting Standards Committee (IASC) issued International Accounting Standards (IAS) from 1973 to 2001. In addition, the IASC created a Standing Interpretations Committee (SIC) that provided further interpretive guidance on accounting issues not addressed in the standards. In 2001, the International Accounting Standards Board (IASB) replaced the IASC. The IASB adopted the existing International Accounting Standards (IAS) and interpretations issued by the Standing Interpretations Committee (SIC). Since 2001, the IASB is responsible for issuing International Financial Reporting Standards (IFRS), and the IFRS Interpretations Committee (IFRIC) is responsible for issuing interpretations of the standards. Therefore, the current international accounting guidelines are contained in the IAS and IFRS pronouncements. Together with SIC and IFRIC interpretations, International Financial Reporting Standards comprise...

all existing standards and interpretations of the IASB and its predecessor. This means that when one refers to IFRS, one refers to pronouncements of all of the guidance described.

Subsequent Events—Conditions Existed at the Balance Sheet Date The financial statements should reflect...

all information regarding these events up to the balance sheet date.

Regulation S-X helps reduce redundancy in reporting by...

allowing for integrated disclosures whereby a company may satisfy certain Form 10-K disclosure requirements by referencing its shareholder annual report as long as that report includes the required disclosures.

IFRS - Income Statement U.S. GAAP allows ________________________________ to be reported on the face of the income statement. Examples include earnings before interest, taxes, depreciation and amortization. Such reporting in the income statement is not included in the illustrative examples that are part of IAS 1, Presentation of Financial Statements.

alternative measures of performance

Management's Discussion and Analysis (MD&A) This is a narrative written by management and....

although not considered part of the footnotes, is nonetheless an important disclosure supplementing the financial statements.

Beni Corp. purchased 100% of Carr Corp.'s outstanding capital stock for $430,000 cash. Immediately before the purchase, the balance sheets of both corporations reported the following: *Beni* *Carr* Assets $2,000,000 $750,000 Liabilities $750,000 $400,000 Common stock $1,000,000 $310,000 Retained earnings $250,000 $40,000 Liabilities and SE $2,000,000 $750,000 On the date of purchase, the fair value of Carr's assets was $50,000 more than the aggregate carrying amounts. In the consolidated balance sheet prepared immediately after the purchase, the consolidated stockholders' equity should amount to: $1,680,000 $1,650,000 $1,600,000 $1,250,000

answer: $1,250,000 *On the date of a business combination using acquisition accounting, the consolidated stockholders' equity will exactly equal the parent company stockholders' equity. This will continue to be the case as long as the parent company uses a complete equity method of accounting for the subsidiary.

An intercompany depreciable fixed asset transaction resulted in an intercompany gain. Which one of the following is least likely to be reflected in the consolidated financial statements prepared at the end of the period in which the intercompany transaction occurred? Consolidated income will be less than the sum of the incomes of the separate companies being combined. Consolidated assets will be less than the sum of the assets of the separate companies being combined. Consolidated depreciation expense will be more than the sum depreciation expense of the separate companies being combined. Consolidated accumulated depreciation will be more than the sum of accumulated depreciation of the separate companies being combined.

answer: Consolidated depreciation expense will be more than the sum depreciation expense of the separate companies being combined. *Consolidated depreciation expense will be less, not more, than the sum of depreciation expense of the separate companies being combined. Because the intercompany transaction resulted in a gain, the buying affiliate will have the asset on its books with the intercompany gain included in its carrying value and will depreciate that value on its books. For consolidated purposes, that depreciation on the intercompany gain will be eliminated, resulting in less depreciation expense than the sum of the depreciation expense of the separate companies. Consolidated accumulated depreciation will be more than the sum of accumulated depreciation of the separate companies being combined. At the time of the intercompany sale, the selling affiliate will write off its accumulated depreciation. For consolidated purposes, that accumulated depreciation will be reestablished, resulting in more accumulated depreciation than the sum of accumulated depreciation of the separate companies.

On January 1, 20X1, Prim, Inc. acquired all the outstanding common shares of Scarp, Inc. for cash equal to the book value of the stock. The carrying amount of Scarp's assets and liabilities approximated their fair values, except that the carrying amount of its building was more than fair value. In preparing Prim's 20X1 consolidated income statement, which of the following adjustments would be made? Depreciation expense would be decreased, and goodwill would be recognized. Depreciation expense would be increased, and goodwill would be recognized. Depreciation expense would be decreased, and no goodwill would be recognized. Depreciation expense would be increased, and no goodwill would be recognized.

answer: Depreciation expense would be decreased, and goodwill would be recognized. *Although the cost of the investment was equal to book values, the cost of the investment was greater than the fair values, because the carrying amount of Scarp's building was more than its fair value. For consolidated statement purposes, the building would be written down to its lower fair value, and the excess of cost over fair values would be assigned to recognize goodwill. Since for consolidated purposes the building has a lower fair value than its carrying value, the depreciation expense taken on the carrying value would be greater than the depreciation expense for consolidated purposes. Thus, depreciation expense would be decreased in the consolidating process, and goodwill would be recognized.

Parent Co. owns 90% of the 10,000 outstanding shares of Subsidiary Co.'s common stock on December 31, Year 1. On that date, the stockholders' equity of Subsidiary was $150,000, consisting of $100,000 of no-par common stock and $50,000 of retained earnings. On January 2, Year 2, Subsidiary issued 2,000 previously unissued shares for $24,000 to various outside investors. As a consequence of this transaction, Parent's ownership share was reduced to 75%. Which of the following correctly reports this transaction? Parent's investment in Subsidiary is reduced by $4,500. Parent's investment in Subsidiary is increased by $3,000. The consolidated income statement reports a loss of $7,500. The consolidated income statement reports a gain of $4,000.

answer: Parent's investment in Subsidiary is reduced by $4,500. Correct! The change in Parent's equity ownership would reduce the investment in Subsidiary by $4,500. Investment balance before sale of securities ($150,000 × 90%) = $135,000 Investment balance after sale of securities (($150,000 + 24,000) × 75%) = 130,500 Decrease in investment in Subsidiary $ 4,500

Which one of the following would be of concern in preparing consolidated financial statements at the end of the operating period following a business combination that would not be a concern in preparing financial statements immediately following a combination? Whether or not there are intercompany accounts receivable/accounts payable. Whether or not goodwill resulted from the business combination. Whether the parent carries its investment in the subsidiary using the cost method or the equity method. Whether or not there is a noncontrolling interest in the subsidiary.

answer: Whether the parent carries its investment in the subsidiary using the cost method or the equity method. *Whether the parent carries its investment in the subsidiary using the cost method or the equity method would be of concerning in preparing consolidated financial statements at the end of the operating period following a business combination but would not be of concern in preparing financial statements immediately following the combination. When consolidated financial statements are prepared immediately following a combination, there has been no period over which the parent has "carried" the investment on its books. Therefore, the method it WILL (going forward) use is not of concern immediately after the combination.

Fair Value Hierarchy—The fair value hierarchy (provided in ASC 820) prioritizes or ranks the inputs to valuation techniques used to measure fair value into three levels: level 3 When market participants would apply a premium or discount related to a characteristic of the asset or liability being valued (e.g., a control premium), an entity should...

apply the premium or discount in measuring fair value.

IASB - Elements of Financial Statements Losses also may result from ordinary activities and thus...

are not treated as separate elements.

In 2016, the FASB revised the adoption and transition guidance for the adoption of the private company standards. In essence, private companies can elect to adopt any of the PCC alternatives at the beginning of any annual period with no retrospective application. No retroactive application upon adoption significantly simplifies the adoption of a PCC accounting alternative and makes the PCC accounting much more accessible to private companies. In addition, the adoption of the PCC alternative can be done without...

assessing the preferability of the PCC alternative. Eliminating the need to assess preferability provides private companies with greater flexibility when deciding whether or not to adopt PCC accounting.

Balance Sheet Account balances reflect only the transaction-based U.S. GAAP recognition and measurement system. A transaction or event is required for recognition of all items. The balance sheet does not report all assets of the firm, only the...

assets acquired through a transaction. For example, internally generated goodwill is not recorded (recognized), and the recorded value of other intangibles such as trademarks may be significantly less than their current value.

U.S. GAAP-IFRS Differences Also required are disclosures about the assumptions made about the future, and major sources of estimation uncertainty that have a significant risk of requiring material adjustment to the carrying amounts of assets and liabilities within the coming year. An exception is

assets and liabilities measured at fair value based on observed market prices because such changes are attributable to market forces.

Statement of Changes in Equity Vertical Format In most cases, each event causing a change in OE requires ____________ entries per row (more than one column affected). The total OE column is usually but not always affected. The stock dividend, for example, has no effect on total OE. Both net income (from the income statement) and cash dividends declared are entered into the retained-earnings column and total-OE column and have opposite effects. Treasury stock is a contra-OE account, a direct reduction to owners' equity.

at least two

This standard can be applied to existing swaps if the swap had a fair value...

at or near zero at the time the swap was initiated. The swap does not need to have a fair value at or near zero at the date the standard is elected. After the initial election, the entity cannot apply this standard to other swaps that existed at the date of election. In other words, once this standard is adopted, the entity must identify those existing swaps to which it wants to apply the standard. After application, the entity cannot go back and apply to other existing swaps—the application should happen all at once rather than piecemeal.

at the beginning of any annual period with no retrospective application. No retroactive application upon adoption significantly simplifies the adoption of a PCC accounting alternative and makes the PCC accounting much more accessible to private companies.

SEC rules The SEC requires registrants to have annual...

audits of their financial statements. The auditing firm must be registered with the Public Company Accounting Oversight Board (PCAOB), a private-sector organization created by the 2002 Sarbanes-Oxley Act (the SEC has oversight authority for the PCAOB). The PCAOB provides oversight of registered auditing firms.

IFRS is now the primary or alternate basis of financial accounting and reporting in more than 100 countries. IFRS are...

authoritative guidance for preparation of general-purpose financial statements of all entities that use IFRS for their primary financial reporting basis.

subsequent events - other than public entities All other entities use the...

available to be issued date.

If non-SEC registrants choose to report interim financial statements, there is no requirement that the statements be as complete as annual statements. As a result, there is considerable variation in the detail reported. The FASB encourages the reporting of an interim...

balance sheet and statement of cash flows. Larger firms tend to provide more complete information. When the fourth quarter interim report is not provided, the annual report should disclose significant events for that quarter, along with material adjustments at year's end including unusual or infrequent items or discontinued operations.

be sacrificed to provide relevant disclosures. The use of estimates is required for timely reporting but also implies a possible loss of reliability.

Statement Requirement — A Statement of Cash Flows (SCF) is required for all business enterprises that report...

both financial position (Balance Sheet) and results of operations (income statement) for a period.

Basis for Combined Financial Statements Like consolidated financial statements, combined financial statements are the product of...

bringing together the financial statements of two or more related firms. However, the circumstances when combined financial statements (as opposed to consolidated financial statements) would be appropriate, as well as the process of combining financial statements (as opposed to consolidating financial statements), are somewhat different.

Controlling ownership of an investee by an investor results from a...

business combination carried out in the form of a legal acquisition.

Private companies have the option to not recognize certain intangible assets associated with a...

business combination. Specifically, private companies can elect to not recognize customer-related intangibles that cannot be sold or licensed independent of the business (customer contracts and relationships) and noncompete agreements separately from goodwill. These intangible assets are costly and complex to value.

Intercompany Transactions include...

buying, selling, and transfers. They also include the profits or losses and the outstanding balances that result from these transactions.

In 2002, the FASB and the IASB agreed to work toward _____________ in the accounting standards. Therefore, you will find some IFRS accounting treatments identical, some similar, and others different from U.S. GAAP.

convergence

Reconciliation of Change in Cash The net effect of operating, investing, financing cash flows and the net effect of foreign currency translation will be the difference between...

cash (including cash equivalents and restricted cash) at the beginning and end of the period.

IFRS - Income Statement As with the statement of financial position, IFRS requires certain line items to be disclosed on the face of the income statement. Other than __________________, U.S. GAAP standards have no such requirement.

certain earnings per share disclosures

The entity should disclose its policy for designating items as cash equivalents and restricted cash. A change in policy for designating cash equivalents or restricted cash is a...

change in accounting principle.

Comprehensive income was designed to report the...

change in net assets during the period from all sources other than from transactions with owners acting as owners.

Effects on Cash of Foreign Currency Translation Companies that have transactions in foreign currencies or convert financial statements expressed in a foreign currency to statements expressed in dollars may incur a...

change in the dollar value of cash simply because of exchange rate changes.

Changes in fair value resulting from changes in valuation techniques or applications are treated as...

changes in accounting estimates.

IFRS—Statement of Cash Flows The differences between IFRS and U.S. GAAP relate to the...

classification of items as 1. operating, 2. investing, or 3. financing activities.

Both IFRS and U.S. accounting standards require a...

classified statement of financial position (commonly called a balance sheet in the United States) to be reported.

Restricted cash is identified by the entity as the cash that is held for a specific purpose and is not available for the company to freely use. Often the restriction of the cash is part of a.... For all restricted cash, the entity must disclose the nature of the restriction. Frequently, restricted cash is reported on a separate line item on the statement of financial position.

collateral or other type of agreement with a third party.

Statement of Changes in Equity Vertical Format In this format, each OE account is reported in a separate...

column of a spreadsheet-type document. Each column reconciles the beginning and ending account balance for one account by disclosing all the changes in the account during the period. Total OE is also shown as a column. This format allows a check of accuracy by comparing total OE computed as (1) the sum of each transaction affecting OE, and (2) the sum of individual OE account balances.

Disclosures Reporting entities are encouraged, but not required, to...

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

Reportable Segments—"All Other" Category—All nonreportable segments are grouped into an all other category and their results are...

combined for reconciliation purposes.

Codification research: Moreover, information can be...

combined. For example, all content in a subsection may be viewed in one document without having to separately access each individual section.

Balance Sheet Factors Limiting the Interpretation of Balance Sheet Information: Several different measurement bases are used (historical cost, depreciated historical cost, market (fair) value, realizable value, present value) which compromises the _________________ of accounting information.

comparability characteristic

Balance Sheet Factors Limiting the Interpretation of Balance Sheet Information: Assets and liabilities are acquired at different times and are not affected in the same way by inflation and specific price-level changes. This causes the recorded value of these accounts to be different from their current or real value and makes...

comparisons difficult.

Faithful representation (primary characteristic) — Information faithfully represents an economic condition or situation when the reported measure and the condition or situation are in agreement. Financial information that faithfully represents an economic phenomenon portrays the economic substance of the phenomenon. Information is representationally faithful when it is...

complete, neutral, and free from material error. Faithful representation replaces reliability as a primary qualitative characteristic.

risks and uncertainties The requirements of the standard apply to annual and complete interim statements but not to...

condensed or summarized interim statements. The disclosure requirements only apply to the current year's statements in comparative financial statements.

Eliminate Profit/Loss in Beginning Inventory—Elimination of intercompany inventory profit (or loss) in beginning inventory: Eliminating Entry—On the subsequent consolidating worksheet, the following eliminating entry would be made to simultaneously eliminate the intercompany profit in (beginning) retained earnings (of the selling affiliate) and the overstatement of the beginning inventory (of the buying affiliate): DR: Retained Earnings CR: Inventory - Beginning I/S The credit to beginning inventory in the income statement section (and the resulting reduction in cost of goods sold) causes the intercompany profit eliminated (deferred) in the prior period to be treated as though it is...

confirmed (recognized) in the subsequent period.

Confirmatory value — Information has confirmatory value if it...

confirms or changes past (or present) expectations based on previous evaluations. For example, if reported earnings for a period bear out market expectations, then it has confirmatory value.

Small registrations, under a certain monetary threshold or number of purchasers are...

considered to be private placements and are exempt from certain disclosures.

nterim Relates to Annual—When investors read an interim report, they are interested in evaluating the interim period as it relates to the annual period. Thus, when more than one interim period is affected by an expenditure for example, the related expense is recognized in the periods benefited, rather than recognized in the period cash was paid. There are exceptions to this principle, however. Although the integral view is required by GAAP, the discrete view—_________________________________—is applied in several situations.

considering each interim reporting period as a separate period

An entity that is determined to be the primary beneficiary of a VIE (an, therefore, has a controlling financial interest) will...

consolidate the financial statements of the VIE.

Accounting policy requirement Under U.S. GAAP, a parent and its subsidiaries do not have to follow the same accounting policies in order to be consolidated. Different accounting policies can be used by different affiliated entities as long as all policies used are U.S. GAAP. Under IFRS, however...

consolidated statements have to be prepared using the same accounting policies by all affiliated entities for like transactions and events. Thus, under IFRS, if a subsidiary used an accounting policy different than that employed by the parent, for consolidating purposes the subsidiary's accounts affected by the different policy would have to be adjusted prior to consolidation

LIFO liquidation Restoration Expected—If the liquidation is expected to be restored, then the interim period cost of goods sold should reflect the estimated cost of the replacement (this preserves the effect of LIFO for the interim period during which the liquidation took place). The firm recognizes an increase in...

cost of goods sold and recognizes a provision (liability) for the future purchase. This liability is extinguished in a later interim period when the inventory is replenished. As a result, overestimated earnings are avoided. Also, the ending inventory for the interim period reflects the restoration. This is another example of the integral view of interim reporting.

Codification: Industry - The general area topics include relevant guidance referenced to specific industries. Thus, the Codification is...

cross-referenced.

There are three important valuations for a firm: Total OE or net assets — This is the amount determined by...

current U.S. GAAP and is found in the balance sheet.

Balance Sheet Classification of Assets and Liabilities Assets and liabilities are classified as current or noncurrent. U.S. GAAP defines only ______________; the non-current classification represents items that are not classified as current. The purpose of this classification is to distinguish items that will affect the firm's liquidity in the near term (one year) from those that will not. Classification helps financial statement users assess the ability of a firm to pay its debts in the near future. Owners' equity accounts are not classified because they do not represent resources or obligations.

current items

Balance Sheet Classification of Assets and Liabilities Assets and liabilities are classified as current or noncurrent. U.S. GAAP defines only...

current items; the noncurrent classification represents items that are not classified as current. The purpose of this classification is to distinguish items that will affect the firm's liquidity in the near term (one year) from those that will not. Classification helps financial statement users assess the ability of a firm to pay its debts in the near future. Owners' equity accounts are not classified because they do not represent resources or obligations.

Current replacement cost — This value represents how much you would have to pay to replace an asset. Current replacement cost would represent...

current market value from the buyer's perspective.

Balance Sheet Many different measurement (valuation) bases are represented—total assets of $10 million is not really $10 million of the types of same dollars. Most reported account balances do not represent...

current market value.

Effective for testing on or after January 1, 2018, only ____________ are classified as available-for-sale with unrealized gains and losses in OCI.

debt securities

Enhancing Characteristics — These are complementary to the primary characteristics and enhance the...

decision usefulness of financial reporting information that is relevant and faithfully represented.

Pervasive Applicability — Other than the exceptions, the content of ASC 820 must be followed when...

fair value measurement is used, either as required or permitted by other pronouncements.

Noncurrent assets (NCA) and noncurrent liabilities (NCL) Defined by ________ as assets and liabilities that are not current. The current/noncurrent distinction is important because firms would rather report more CA and less CL to appear more liquid and less risky in the short run. There is great incentive to move CLs into the NCL category, for example.

default

Cash Flows from Operating Activities—Noncash Items *Losses/Gains* These are noncash deductions or additions in computing net income that must be added back to or subtracted from net income (by the amount recognized as a loss or gain). If the amount of a loss or gain is not provided, it must be...

derived from information that is given.

IFRS requires more ______________________________ for various statements of financial position items, compared with U.S. GAAP.

detailed note disclosures

In 2008, the SEC began accepting the financial statements of foreign private issuers prepared in compliance with IFRS without reconciliation to U.S. GAAP. This is a significant step toward acknowledging the IFRSs as issued by IASB. The reconciliation (complete on Form 20-F) was considered to be an unnecessary requirement if the goal was one set of high-quality standards. In addition, the cost of completing the reconciliation was viewed as a...

deterrent for foreign issuers to access the U.S. capital markets. Eliminating the requirement will hopefully encourage more foreign businesses to list their securities in the United States.

IASB Framework One of the more involved joint convergence projects is the development of a common conceptual framework. This project's purpose is to...

develop a framework that will be the underlying conceptual support for future principles-based internally consistent accounting standards for the most useful financial reporting.

Verifiability — Information is verifiable if...

different knowledgeable and independent observers could reach similar conclusions based on the information.

If-Converted Method The convertible is assumed converted as of the beginning of the period or date of issuance, whichever is later. The numerator and denominator effects are computed and entered into DEPS. If DEPS decreases, the PCS is...

dilutive and the security is included in the computation of DEPS.

Retrospective changes in accounting principle affecting income. These are treated as...

direct adjustments to retained earnings.

Effects on Cash of Foreign Currency Translation The items that make up Net Effect of Foreign Currency Translation are presented in the same manner, regardless of whether the __________ approach is used to present Cash Flow from Operating Activities.

direct or indirect

An item recognized in OCI one year may be recognized in net income in a later year. To avoid double counting in OE, the OCI item from the previous year is removed from AOCI. This is called a reclassification adjustment. The entity must ______ the reclassification adjustments and the effect of the reclassification adjustment on NI and OCI.

disclose

Since the components of cash, cash equivalents, and restricted cash may be reported on separate lines on the statement of financial position, the entity must ... This reconciliation can be on the face of the SCF or in the notes to the financial statements.

disclose how the change in cash presented on the SCF reconciles to the components of cash presented on the statement of financial position

For disposal of an individually significant component that does not meet the definition of a discontinued operation, the entity must...

disclose pretax profit or loss reported in the income statement for the period in which the disposal group is sold or is classified as held for sale.

Restricted cash is identified by the entity as the cash that is held for a specific purpose and is not available for the company to freely use. Often the restriction of the cash is part of a collateral or other type of agreement with a third party. For all restricted cash, the entity must...

disclose the nature of the restriction. **Frequently, restricted cash is reported on a separate line item on the statement of financial position.

IASB - Elements of Financial Statements In the IASB Framework, there are only two underlying assumptions: (1) that the financial statements are prepared on the accrual basis and (2) that the entity is a going concern. The meaning is the same as in the FASB Framework. Neither assumption needs to be stated as such in the notes. When material uncertainties exist as to the continuation of the entity, or when it is clear that the going-concern assumption does not apply resulting in a different basis of reporting, the entity should...

disclose this information.

Illegal Acts Examples include illegal contributions and bribes. The Foreign Corrupt Practices Act was passed by the US Congress to discourage such acts. The nature and impact of illegal acts on the financial statements should be....

disclosed fully in the notes.

does not reflect net cash flow from operations.

*Subsequent Events—Conditions Did Not Exist at the Balance Sheet Date* example A major customer declared bankruptcy as a result of a casualty in early 20X5. As a result, a receivable from that customer is deemed worthless after the 20X4 balance sheet date but before the issuance of the financial statements. The loss from the worthless receivable is...

disclosed in the footnotes, but recognition is postponed until the 20X5 statements, because the casualty occurred after 20X4.

discloses that it is reasonably possible for outcomes to require a material adjustment to the carrying amount of the asset or liability affected.

IASB - Elements of Financial Statements Failure to recognize in the financial statements an item satisfying the recognition criteria and one of the element definitions is not cured by...

disclosure in the notes.

Comparison of the Direct/Indirect Method of Determining Cash Flows from Operating Activities 6. Both methods require...

disclosure of and Noncash Investing and Financing activities.

disclosure of financial information by firms issuing publicly traded securities.

disclosure of total liabilities if that information is provided to the firm's chief operating decision maker

The measurements for the DOP disposal loss is the same as for individual impaired assets held for disposal. The only difference is the location on the income statement the gain or loss is reported. The gain or loss recognized for individual assets is included in income from continuing operations whereas the gain or loss from DOP is reported as...

discontinued operations below income from continuing operations.

Whereas the stated preference in U.S. reporting for interim statements is the integral view (with major exceptions), international standards have a stated preference for the...

discrete view, again with major exceptions. For example, assessments of materiality are made with reference to interim amounts (a lower threshold than for U.S. standards). However, neither reporting system is a pure approach.

One of the guiding interim reporting principles for international standards is that all recognized accounts for interim purposes must meet their IFRS definitions in the interim period. The same process for estimates, accruals, deferrals and allocations made at the end of an annual period apply to each interim period. This provision of the international standards reflects the preference for the...

discrete view, and is in contrast with U.S. standards.

Disclosures for the Effects of Changing Prices During times of price instability, financial reporting can be...

distorted, especially for items measured using historical cost. Both the balance sheet and income statement items (e.g., depreciation expense) are affected. Both inflation (general price-levels) and specific price changes affect the interpretation of reported amounts.

Consolidation After Acquisition If P Uses the Cost Method to Account for the Investment in S—In this case the parent: DOES recognize its share of dividends declared by the subsidiary as...

dividend income (not as an adjustment to the investment account).

tax effect There is no tax effect to consider for preferred stock dividends because...

dividends paid are not deductible for tax purposes.

Eligibility for and Election of IFRS for SMEs IFRS for SMEs may be used by entities that...

do not have public accountability.

Practical Expedient Exception — ASU 820 allows a company to use a "practical expedient" 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 investment vehicles are often referred to as alternative investments. Examples are hedge funds, private equity funds, real estate funds, venture capital funds, common/collective funds, and offshore funds.

double counting

The matching principle says: Recognize expenses only when expenditures help to produce revenues. Revenues are recognized when...

earned and realized or realizable; the related expenses are recognized, and the revenues and expenses are "matched" to determine net income or loss.

Since financial statements prepared under IFRS for SMEs are those of entities not traded on exchanges or otherwise required to file with regulatory agencies...

earnings per share and segment reporting are not considered important information for users. These are two of the simplifications in IFRS for SMEs that make the standards less burdensome than either U.S. GAAP or full IFRS.

"The mission of the U.S. Securities and Exchange Commission is to protect investors, maintain fair, orderly, and efficient markets, and facilitate capital information" (http://www.sec.gov/about/whatwedo.shtml). An important component of the mission is...

ease and access to information that is relevant to the decision maker. (Remember that relevance is a primary characteristic in the FASB's conceptual framework!)

A variable-interest (investment) or subsidiary (unconsolidated subsidiary) that is not included in consolidated statements would be reported as an "Investment" by the interest-holder/investor. The variable-interest investment would be measured as the entity's claim to the net asset value of the variable-interest entity. The unconsolidated subsidiary investment would be measured using...

either fair value or the equity method of accounting, depending on the extent of influence that can be exercise over the subsidiary by the parent.

IFRS for SMEs are not an other comprehensive basis of accountingbut rather are a form of generally accepted accounting principles (GAAP) for U.S. entities and can be used by qualified U.S. companies as the basis for preparing financial statements. Thus, an entity that does not have to follow either standard U.S. GAAP or the full IFRS may...

elect to prepare general-purpose financial statements under the requirements of IFRS for SMEs.

IASB Framework The definitions of ____________ are at the center of the standard setting-process for the IASB. The Framework defines income and expenses in terms of assets and liabilities.

elements

eliminate investment in the subsidiary account (brought on to the consolidating worksheet (W/S) by the parent) against the subsidiary's shareholders' equity (brought on to the W/S by the subsidiary).

eliminated to the extent the amounts are intercompany (between the companies).

U.S. GAAP-IFRS Differences Entities are ________________ to present, outside the financial statements, a review by management describing the entity's financial performance and position, and the main uncertainties faced by the entity. This section of the standard does not provide detail regarding required disclosures in the risk and uncertainty area.

encouraged (but not required)

the use of estimates If the criteria above (1 - It is at least reasonably possible that an estimate will change in the near term; and 2 - The effect of the change would be material) are not met because the firm uses a risk-reduction technique, the disclosures are...

encouraged but not required.

Gross Margin Method for Inventory The gross margin method (also called the gross profit method) is not allowed for annual reporting purposes, but can be used for interim reporting. This method uses the gross margin percentage to estimate cost of goods sold from purchase information. The estimated cost of goods sold then is used to estimate...

ending inventory for the quarter without having to count inventory. *Footnote disclosure of the use of this method is required.

Accounting and Auditing Enforcement Releases (AAER)—These report the...

enforcement actions that have been taken against accountants, brokers, or others.

The Sarbanes-Oxley Act of 2002 (SOX) contains provisions to...

enhance corporate governance and to mitigate financial accounting abuses.

Current operating performance income statement Due to ________________________________, the all-inclusive approach was selected over the current operating approach for income statement presentation purposes.

enhanced opportunities to manipulate net income

The SEC regulates the issuance of securities by publicly traded companies and regulation of the trading of those securities on secondary markets. The SEC's intent is to...

ensure that there is adequate information in the public domain before firms issue securities and before those securities are subsequently traded. Some of the most critical information used by the participants in the marketplace is the financial information provided by the registrant. This is why the SEC is so involved with financial reporting and accounting standards.

From the perspective of the separate legal entities, transactions between them, and the related gains/losses and changes in account balances, should be recognized on their separate books. Even if the parent owns less than 100% of the subsidiary (but more than 50% as required for consolidation)—the ___________________ must be eliminated.

entire amount of the intercompany transaction

In summary, even though the equity investors in a VIE are its legal owners, because of contractual or other arrangements, they play little role in the operation of the entity and carry little risk or receive little benefit from ownership; those risks and benefits accrue to the variable-interest holders (usually also the sponsors). Thus, a VIE is an... (hint - definition)

entity in which another entity has a controlling interest achieved by a means other than holding a majority of the voting rights.

The accumulated balance of other comprehensive income should be reported as a component of...

equity, separate from retained earnings and additional paid-in capital.

Current operating performance income statement Many other items would be run through owners' equity and thus...

escape the attention of financial statement users who rely more heavily on the income statement.

If the private company elects the PCC guidance on intangibles, it must also adopt the goodwill accounting alternative described above (ASU 2014-02), which requires goodwill to be amortized over a period of up to 10 years. The tandem requirement ensures that the customer-related and noncompete-related intangible assets embedded in goodwill are...

essentially amortized. The opposite is not required—if the private company elects to amortize goodwill, it does not have to elect this guidance on the intangible assets.

LIFO liquidation Restoration Expected—If the liquidation is expected to be restored, then the interim period cost of goods sold should reflect the...

estimated cost of the replacement (this preserves the effect of LIFO for the interim period during which the liquidation took place). The firm recognizes an increase in cost of goods sold and recognizes a provision (liability) for the future purchase. This liability is extinguished in a later interim period when the inventory is replenished. As a result, overestimated earnings are avoided. Also, the ending inventory for the interim period reflects the restoration. This is another example of the integral view of interim reporting.

The matching principle says: Recognize expenses only when... Revenues are recognized when earned and realized or realizable; the related expenses are recognized, and the revenues and expenses are "matched" to determine net income or loss.

expenditures help to produce revenues.

non-current assets Goodwill is by far the largest intangible in terms of dollar amount for many firms and equals the excess of the purchase price paid for another business over the market value of its net assets. Only when a firm is purchased by another is goodwill recognized in the balance sheet of the purchaser. Internally, generated goodwill is...

expensed.

The OIFF elements must exactly...

explain the known amount of change in cash (and equivalents).

IFRS - Income Statement IFRS and U.S. GAAP does not allow the reporting of income statement items as...

extraordinary (U.S. GAAP eliminated reporting of extraordinary items effective 2015).

present value should attempt to capture the elements that taken together would comprise a market price, if one existed, that is...

fair value

Application of Definition to Assets, Liabilities, and Shareholders' Equity Application to Shareholder's Equity The requirements for the determination of fair value apply to instruments classified in shareholders' equity that are measured at...

fair value (e.g., equity interest issued as consideration in a business combination).

economic income Any investments by owners would be added and any dividends paid or treasury stock purchased would be subtracted, when making this calculation. FV Net Assets at 1/1 + NI + Owner investments - dividends and stock repurchases =

fair value at 12/31

In many cases, the entry price (transaction price) and the exit price (fair value) will be the same at the date of initial recognition of an asset or liability and, therefore, constitute the fair value of the asset or liability at that date. In some cases, however, the entry (transaction) price may not be the exit price and therefore not be...

fair value at the date of initial recognition of an asset or liability.

fair value measurement

(example) Faithful representation over relevance. In the opinion of many, the use of historical cost as a valuation base is an example of emphasizing....

faithful representation over relevance. Historical cost is very reliable because it is based on objectively verifiable past information. However, historical cost is considered to be less current and, therefore, less relevant than market value.

Although the financial statement date is the "closing date" for reporting, users of financial statements typically read the disclosures as if they are current as of the date of issue. Furthermore, the _____________ principle mandates that all relevant information be disclosed.

full disclosure

Financial Report Disclosures —To achieve the objectives of the ___________________, the three primary financial statements are supplemented by footnote disclosures and disclosures that appear in related schedules.

full disclosure principle

IFRS for SMEs are not an other comprehensive basis of accounting but rather are a form of...

generally accepted accounting principles (GAAP) for U.S. entities and can be used by qualified U.S. companies as the basis for preparing financial statements. Thus, an entity that does not have to follow either standard U.S. GAAP or the full IFRS may elect to prepare general-purpose financial statements under the requirements of IFRS for SMEs.

The reporting basis of the Statement of Cash Flows is cash and cash equivalents. The purchase of a cash equivalent has no effect on the total of cash and cash equivalents. Such purchases increase cash equivalents and decrease cash by the same amount. Thus, the total of cash and cash equivalents is unaffected. The Statement of Cash Flows reports changes in the fund defined as cash and cash equivalents. Thus, the purchase of cash equivalents are...

generally not reported in the Statement of Cash Flows.

The difference between a firm's market capitalization and the market value of net identifiable assets is ____________—an amount that cannot be identified with any individual recorded asset.

goodwill

Consolidation After Acquisition Any difference is implicit in the acquisition date difference between the Investment on the parent's books (plus the noncontrolling interest, if any) and the Shareholders' Equity on the subsidiary's books (which is also the book value of the subsidiary's net assets). It is only when the two values (P's Investment + any noncontrolling interest and S's Shareholders' Equity) are brought together in the Investment elimination entry on the worksheet that the difference becomes explicit. The subsidiary's identifiable assets and liabilities are adjusted to fair value on the worksheet and, if the investment value is different than the resulting net asset value, ______________________ is recognized. Any adjustment (increase or decrease) to depreciable or amortizable assets on the worksheet will result in the need for an adjustment (increase or decrease) to depreciation or amortization expense on the worksheet

goodwill (or a bargain purchase gain)

If the private company elects the PCC guidance on intangibles, it must also adopt the...

goodwill accounting alternative described above (ASU 2014-02), which requires goodwill to be amortized over a period of up to 10 years. The tandem requirement ensures that the customer-related and noncompete-related intangible assets embedded in goodwill are essentially amortized. The opposite is not required—if the private company elects to amortize goodwill, it does not have to elect this guidance on the intangible assets.

One of the most significant differences between U.S. GAAP and IFRS in accounting for business combinations is in the possible measurement of noncontrolling interest (NCI) because of the...

goodwill allocated to NCI.

In rare cases, where the IASB Framework is in conflict with an accounting standard for compelling practical reasons, the standard is used as the guidance. In cases where no applicable accounting exists, the IASB Framework may be considered as...

guidance for GAAP.

Conservatism is a ___________ that is used to limit the reporting of aggressive accounting information. Conservatism is used to avoid misleading internal and external users of the financial statements

guideline

Ending Inventory Value—Profit (or loss) recognized on an intercompany sale that is related to inventory that __________________ by the buying affiliate, will also overstate (or understate) the carrying value of the remaining intercompany ending inventory (as brought onto the worksheet by the buying affiliate)

has not been resold (to a non-affiliate)

Going Concern Assumption In the absence of information to the contrary, a business is assumed to...

have an indefinite life, that is, it will continue to be a going concern. Therefore, we do not show items at their liquidation or exit values.

General Rule WA Calculation—All stock dividends and splits are assumed to...

have been outstanding since the inception of the firm. Apply the percentage of the stock dividend or the factor in a split (factor = 3 in a three-for-one split) to all changes in outstanding stock occurring before the stock dividend or split.

Bay Manufacturing Co. purchased a three-month U.S. Treasury bill. In preparing Bay's Statement of Cash Flows, this purchase would....

have no effect. *Even if this transaction involved a change in cash and cash equivalents, it would not be classified as an investing activity. But the three-month bill meets the definition of cash equivalent. Three months is the maximum original maturity under the definition. Cash and cash equivalents are the reporting basis of the Statement of Cash Flows. Cash decreased but cash equivalents increased the same amount as a result of this purchase. Thus, there is no net effect on cash and cash equivalents. Therefore, there is nothing to report in the Statement of Cash Flows.

Restricted cash is identified by the entity as the cash that is...

held for a specific purpose and is not available for the company to freely use. *Often the restriction of the cash is part of a collateral or other type of agreement with a third party. For all restricted cash, the entity must disclose the nature of the restriction. Frequently, restricted cash is reported on a separate line item on the statement of financial position

Cash Flows from Investing Activities Investment in and disposal of debt and equity securities of other entities. This includes investments in debt securities classified as...

held-to-maturity or available-for-sale.

PPE's measurement basis is...

historical cost & depreciated/amortized historical cost

Amortized cost — This value is...

historical cost less the accumulated amortization or depreciation of the asset.

Accounting Principles Measurement — At the time of origination, assets and liabilities are recorded at the market value of the item on the date of acquisition, usually the cash equivalent. This origination value is referred to as... For many assets and liabilities, this value is not changed even though market value changes. Other assets, such as plant assets and intangibles, are disclosed at historical cost less accumulated depreciation or amortization. Given the going-concern assumption, revaluation to market value is inappropriate for plant assets, because the value of these assets is derived through use, rather than from disposal.

historical cost.

Application of Definition to Assets, Liabilities, and Shareholders' Equity Application to Liabilities 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, the liability should be measured from the perspective of the party that ...

holds the item as an asset.

Application of Definition to Assets, Liabilities, and Shareholders' Equity Application to Shareholder's Equity When a quoted price for the transfer of an identical or similar shareholders' equity instrument is not available and the identical instrument is held by another party as an asset, the instrument should be measured from the perspective of the party that...

holds the item as an asset.

This standard can be applied to existing swaps if the swap had a fair value at or near zero at the time the swap was initiated. The swap does not need to have a fair value at or near zero at the date the standard is elected. After the initial election, the entity cannot apply this standard to other swaps that existed at the date of election. In other words, once this standard is adopted, the entity must...

identify those existing swaps to which it wants to apply the standard. After application, the entity cannot go back and apply to other existing swaps—the application should happen all at once rather than piecemeal.

For Assets and Liabilities That Are Measured at Fair Value on a Nonrecurring Basis — In periods subsequent to initial recognition (e.g., an asset impairment that is not measured on a recurring basis) the reporting entity must disclose the following information in the statement of financial position (balance sheet) for each major category of asset and liability: For nonfinancial assets, disclose...

if highest and best use differs from current use and why

if highest and best use differs from current use and why.

An antidilutive PCS (one that increases EPS when it is added into BEPS) is...

ignored for purposes of computing DEPS.

IASB - Elements of Financial Statements An expense is recognized...

immediately for expenditures producing no future economic benefit qualifying as an asset.

This ASU allows a private entity to amortize goodwill on a straight-line basis over 10 years, or less than 10 years if it is more appropriate. This means that the entity does not have to complete annual...

impairment testing. At the time of adoption of this standard, the entity must make an election to test goodwill impairment at the entity level or the reporting unit level.

Although the SEC has the legal authority to prescribe accounting standards for publicly traded corporations, it continues to believe that standard setting should remain...

in the private sector, subject to its oversight. The SEC often agrees with the FASB's accounting standards, while communicating its preferences in comments on FASB Exposure Drafts and other documents. In a few cases, the SEC has rejected a FASB standard and in others has applied pressure to have a standard or proposed standard modified, or to come to a decision more quickly.

According to the IASB Framework, the financial statement element that is defined as increases in economic benefits during the accounting period in the form of inflows or enhancements of assets or decreases of liabilities that result in increases in equity, other than those relating to contributions from equity participants, is....

income *This answer is correct because the IASB Framework has five elements: asset, liability, equity, income, and expense. The definition given is that of income. Note that income includes both revenues and gains.

income statement Income Tax Expense—Income tax expense is attributable only to ________________________.

income from continuing operations

For purposes of testing for dilution and antidilution, the control number is...

income from continuing operations.

Discontinued operations is reported in the...

income statement

A valuation account is one used to...

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

The SEC's EDGAR (Electronic Data Gathering, Analysis and Retrieval System) database facilitates the collections, validations, and indexing of financial statement information. The purpose of EDGAR is to...

increase the efficiency of the securities markets by providing timely and accessible data.

Revenue Defined — What revenue is: Revenue refers to...

increases in assets or the extinguishment of liabilities stemming from the delivery of goods or the provision of services—that is, the main activities of the firm.

IASB - Elements of Financial Statements Income—Income represents...

increases in economic benefits deriving from increases in assets or decreases in liabilities that result in increases in equity (other than those related to contributions from shareholders).

Gains represent...

increases in equity or net assets from peripheral or incidental transactions.

Revenues represent...

increases in net assets or settlements of liabilities by providing goods and services.

U.S. GAAP - For diluted EPS, dilution potential of ordinary shares determined cumulatively year to date IFRS - For diluted EPS, dilution potential of ordinary shares determined...

independently each period

Potentially Dilutive Securities The number of potentially dilutive securities is determined...

independently for each reporting period and not a weighted average of the dilutive potential common stock for each interim period. Therefore, the number of potentially dilutive securities in the annual or year-to-date report may not equal the potentially dilutive securities in the interim period. Under U.S. GAAP the year-to-date diluted EPS uses a year-to-date weighted average of the shares included in each quarter.

SCF - direct vs. indirect method Only the operating activities section is different between the formats. Most firms use the __________ method

indirect

The OIFF categories are used to explain the net change in cash, cash equivalents, and restricted cash, and include items of both...

inflow (receipts) and outflow (payments)

Per SFAC 6, revenues are... Two essential characteristics of revenues are that revenues (1) arise from a company's primary earnings activities and (2) are recurring or continuing in nature.

inflows of assets or settlements of liabilities, or both, during a period as a result of an entity's major or primary operations.

Classification in the Fair Value Hierarchy Companies that use NAV as a practical expedient for measuring fair value must disclose sufficient information so that financial statement users understand the nature and the risks of the investment. The disclosure must include...

information about the terms and conditions in which the company can redeem its investments.

other disclosures If net asset value (NAV) is used as a practical expedient to determine fair value, NAV is not reported within the fair value hierarchy but rather is separately disclosed in the footnotes of the financial statements. Companies that use NAV as a practical expedient for measuring fair value must disclose sufficient information so that financial statement users understand the nature and the risks of the investment. The disclosure must include...

information about the terms and conditions in which the company can redeem its investments.

If an entity is required or permitted to measure an asset or liability initially at fair value and the transaction price at initial recognition differs from fair value, a gain or loss is recognized in earnings at...

initial recognition of the asset or liability (unless otherwise required by GAAP for that item). 1. The asset or liability would be recorded at fair value. 2. The difference between the transaction (entry) price and the recorded fair value (exit price) would be recognized as a loss or gain in the period of initial recognition.

the balance sheet is largely historical, and is limited to transactions that have already taken place. It is not the responsibility of financial statements to provide current value. Rather, current value is a constantly changing amount based on investors' perceptions in the market at the time. In sum, the information in the balance sheet and other financial statement information is an _______ to market valuation, not the other way around. Stock prices react to changes in financial statement information and other information.

input

Cash equivalents are sufficiently close to maturity so that the risk of changes in value due to changes in interest rate is...

insignificant.

integral

irregularities are

intentional

This simplified hedge accounting applies only to interest rate swaps for variable rate debt to fixed rate debt (cash flow hedge). Many private companies have difficulty obtaining fixed rate debt at a competitive interest rate. Therefore these companies frequently enter into an ____________________ to convert the variable rate debt to fixed rates.

interest rate swap

Required Statement of Financial Position Items (Where Present for an Entity) The requirements may not apply to...

interim financial statements, if the entity reports interim financial reports according to IAS 34, Interim Financial Reporting. Those interim reports are more condensed.

In an agreement between the IASC and the IOSCO, it was agreed to endorse the use of...

international accounting standards for cross-border listings on stock exchanges. The international standards were formally endorsed in 2000.

Measurement Bases for Balance Sheet Valuation Because so many different measurement bases are represented in the balance sheet, the totals for assets and liabilities are difficult to...

interpret and compare across firms.

Balance Sheet Factors Limiting the Interpretation of Balance Sheet Information: Consolidation of subsidiaries compounds the difficulties with _____________________ when the parent and subsidiaries use different accounting methods.

interpretation of account balances

Measurement Bases for Balance Sheet Valuation Market value, a type of current value Examples include: 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.

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).

The total owners' equity of most publicly traded firms (also known as net assets or A − L) is significantly less than the market value of the firm because...

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

The basic purpose of the SCF is to provide information about the cash receipts and cash payments for an entity to help...

investors, creditors, and others assess

Lewis Company was formed on January 1, year 1. Selected balances from the historical cost balance sheet at December 31, year 2, were as follows: Land (purchased in year 1) $120,000 Investment in nonconvertible bonds (pur- chased in year 1, and expected to be held to maturity) 60,000 Long-term debt 80,000 The average Consumer Price Index was 100 for year 1, and 110 for year 2. In a supplementary constant dollar balance sheet (adjusted for changing prices) at December 31, year 2, these selected account balances should be shown at

land = $132,000 investment = $60,000 LT debt = $80,000 *In a constant dollar balance sheet, nonmonetary items are restated to the current price level, while monetary items are not restated because they are already stated in current dollars. The investment in bonds and the long-term debt are monetary items since their amounts are fixed by contract in terms of number of dollars. Therefore, these items are not restated and are reported at $60,000 and $80,000, respectively. The land, however, is a nonmonetary item and its cost ($120,000) must be restated to current dollars by using the TO/FROM ratio (110/100), resulting in an adjusted amount of $132,000 ($120,000 × 110/100).

Private companies are not required to apply the criteria for determining whether there is a variable interest in certain leasing arrangements. The private company does not need to provide the disclosures associated with a VIE, but rather would disclose the information related to the...

lease arrangement. The disclosure should include a description of the lease arrangements that exposes the private company lessee to provide financial support to the lessor.

Applicability—ASC 820 applies to items that use fair value measurement either as required or as permitted by GAAP, except in very limited situations. Specifically, the guidance of ASC 820 does not apply to: Accounting principles that address fair value measurements for purposes of...

lease classification or measurement

Interim Period Length Interim periods can be of any length of _______________________; they are not limited to three-month periods (quarterly periods) although for SEC registrants, the quarterly report (10-Q) is the focus of interim reporting. Revenues earned and realizable in an interim period are recognized in that interim period.

less than a year

U.S. GAAP-IFRS Differences International standards require some of the same disclosures regarding risks and uncertainties as for U.S. standards but the international requirements are ____________ and the two sets of requirements are not exactly parallel.

less voluminous

Application of Definition to Assets, Liabilities, and Shareholders' Equity Application to Liabilities The determination of fair value of a liability assumes that the...

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

Characteristics of Financial Statements under IFRS for SMEs The attractiveness of IFRS for SMEs is further enhanced by the fact that the IASB has...

limited the revision of the standards to once every three years rather than the more or less continuous revisions made to US GAAP and full IFRS.

Balance Sheet A classified balance sheet distinguishes current and noncurrent assets and liabilities which helps users assess...

liquidity.

Typically, the ordering of the statement of financial position items for U.S. GAAP balance sheets starts with current items. Since IFRS does not have any recommended format, many countries use their customary formats, including presenting the items in reverse order, reporting noncurrent items before current items. In addition, within categories, the ordering may be the opposite of U.S. GAAP ordering, that is, from less liquid to more liquid, but this is simply a...

local format and not one required by IFRS.

IASB - Elements of Financial Statements Similarly, there is no concrete guidance on reliable measurement, which often requires...

making a reasonable estimate. The framework contains little guidance on specific measurement bases noting that several are available with historical cost the most common, often being combined with other bases.

Market Capitalization The market capitalization is generally... The purpose of the balance sheet is not to provide a firm's market value, but rather to provide information that is a starting point for valuing a firm and assessing its riskiness. The relative investment in plant assets, natural resources, investments, and in affiliated companies, along with the ratio of debt to equity provides investors with valuable information about the financial structure and direction of the firm. The trend in balance sheet values over time also provides useful information.

many times recorded OE in amount.

In determining the fair value of a nonfinancial asset, how the reporting entity would use the asset would not be taken into account in assessing the highest and best use of the asset. The highest and best use is based on use of the asset by _______________, not by the reporting entity.

market participants

Accounting income Investments with readily determinable market values are an exception. These investments (trading securities, securities available for sale) are reported at...

market value. Moreover, inventories are written down to lower of cost or market.

Information about the risks and uncertainties faced by the firm enhances the ability of financial statement users to predict the future cash flows and operations of the firm. GAAP requires certain information about risks and uncertainties to be disclosed. The applicable accounting standard provides for selectivity whereby specified criteria are used to screen all the possible risks so that the required disclosures are limited to matters that...

materially affect a particular entity.

risks and uncertainties The disclosures are primarily concerned with risks and uncertainties that could...

materially affect financial statement amounts within one year of the date the financial statements are issued (the near term)

example - AAER No. 1585 against WorldCom on its massive accounting fraud—this was the...

mechanism to publicly report that the SEC was taking action against WorldCom.

Private companies must recognize other identifiable intangibles such as copyrights, trademarks, and patents, separately from goodwill. In addition, customer-related intangibles that can be sold or licensed independent of other assets of the businesses must be recognized. For example, customer lists and other customer information that can be sold or licensed independently of the business would...

meet the separability criterion and would be valued and recognized as part of the business combination.

Correct Depreciation Expense—Because the buying affiliate has the asset on its books at its cost from the selling affiliate, the annual depreciation expense (and related accumulated depreciation) recognized will be...

misstated for consolidated purposes because it will include depreciation on the intercompany gain (or loss). Therefore, the depreciation expense for the period brought onto the consolidating worksheet by the buying affiliate will have to be corrected to eliminate the depreciation related to the intercompany gain or loss.

Modified cash basis financial statements result from using a combination of elements of cash basis accounting and accrual basis accounting. Conceptually, modified cash basis accounting would be any point on a continuum between pure cash basis at one end and full accrual basis at the other; the greater the number of accrual basis elements adopted, the greater the...

modification of the cash basis.

Purchasing Power Gains and Losses The change in the purchasing power of an item due to a change in the general price level is measured only for __________________________________________________. During inflation, the amount of goods a $10 bill can purchase definitely decreases but the same cannot necessarily be said for an item of inventory originally costing $10. The value of the inventory item may increase with inflation but the value of the $10 bill cannot increase.

monetary items because the specific price of nonmonetary items can change

Unit-of-Measure Assumption — Assets, liabilities, equities, revenues, expenses, gains, losses, and cash flows are measured in terms of the...

monetary unit of the country in which the business is operated. Price level changes cause the application of this assumption to weaken the relevance of certain disclosures.

Reportable Segments—the 75% Rule—The total external revenue reported by reportable segments must be at least 75% of the company's total consolidated revenues. This is an overall materiality threshold for reporting. If this test is not met initially, ________________________ must be identified, even if the additional segments do not meet one of the three quantitative tests.

more reportable operating segments

Two formats have become accepted in practice: single-step and multiple step statements. There are many variants of each: Both formats provide the same information although the multiple-step format provides...

more subtotals and organization.

If estimates of an outcome are not equally likely, the preferred approach is to report the...

most likely estimate, rather than the more conservative estimate, if the latter is less likely.

For balance sheet reporting, assets and liabilities are typically reported in order from...

most liquid to least liquid. For example, current assets begin with cash and cash equivalents, then short-term investments, receivables, inventories and finally prepaids.

If the asset is abandoned or there is an involuntary conversion because the asset is destroyed, then no cash is received and the gain or loss equals the.... (hint, what does it equal but also what kind of a loss is it? and where is it reported?)

net book value of the asset on the date of the abandonment or conversion. The loss on abandonment or conversion is an ordinary loss and part of continuing operations on the income statement

Reconciliation of Change in Cash The difference between beginning and ending Cash is the...

net change (increase or decrease) in Cash

Cash Flows from Operating Activities—Direct Method One of the hallmarks of classifying an item as operating cash flows is that it is associated with ___________. Notice that interest paid and received and dividends received are all operating cash flows, but dividends paid is a financing cash flow. The first three flows are associated with income statement items (interest expense and revenue, dividend revenue), but dividends paid is not an income item; rather, it is a direct reduction in retained earnings. Dividends paid are a distribution of income to owners and are not on the income statement, so they are not in cash flows from operations. Any cash inflow or cash outflow not properly classified as an investing or financing activity would be included as cash flow from operating activities (e.g., collection of a lawsuit settlement). The Net Cash Flow from Operating Activities can be positive or negative

net income

An item recognized in OCI one year may be recognized in...

net income in a later year. To avoid double counting in OE, the OCI item from the previous year is removed from AOCI. This is called a reclassification adjustment. The entity must disclose the reclassification adjustments and the effect of the reclassification adjustment on NI and OCI.

The direct method Statement of Cash Flows must be supported by the supplemental disclosure of a reconciliation, but the reconciliation is of __________________________, not retained earnings to net cash flow from operations. The ending retained earnings balance is not related to, and does not affect, operating cash flow.

net income to net cash flow from operations

Contingency—If the contingency is a future earnings level...

no contingent shares are included in the WA of BEPS because the contingency cannot be met until a future period. The same holds for a current-period earnings level because the contingency cannot be met until the last day of the year.

Using Cash Flow Information and Present Value in Accounting Measurements If the fair value of an asset or liability is available, there is....

no need to use present-value measurement. If not, present value is often the best available technique to estimate what fair value would be if it existed in the situation.

Cumulative means that if a year's preferred dividend is not paid (skipped)...

no other dividends may be paid before the skipped dividends (dividends in arrears) are paid. Regardless of whether dividends are declared on cumulative preferred stock, one full year's dividends is subtracted from the numerator of BEPS because no common dividends can be paid on these earnings before the preferred dividends are declared. This also means that in a year in which dividends in arrears from a previous year are paid in addition to the current year dividend, still only one year is subtracted from the current-year BEPS numerator because BEPS in the previous year has already been reduced by the skipped dividends.

As a result of the joint efforts of the IASB and the FASB, there are _______________ differences between U.S. GAAP and IFRS related to the meaning of fair value, its measurement or required disclosures.

no significant **According to ASU 2011-04: "The Boards (FASB and IASB) worked together to ensure that fair value has the same meaning in U.S. GAAP and in IFRSs and that their respective fair value measurement and disclosure requirements are the same (except for minor differences in wording and style)."

IASB - Elements of Financial Statements The Framework defines income and expenses in terms of assets and liabilities. As such, the Framework cautions that applying the matching principle should not result in recognizing items that do not meet the definition of assets and liabilities. Difference — The FASB Framework has...

no such prohibition.

Disclosures for the Effects of Changing Prices In the past, large firms were required to provide extensive footnote disclosure about the effects of price changes on the financial statements. Because inflation has subsided, there currently is....

no such requirement although disclosure of information on the effects of changing prices continues to be encouraged.

Cost Accounting Variances—Purchase price variances, and volume variances expected to be absorbed by the end of the current year are deferred (not recognized in earnings) for the interim period. This is consistent with the integral view of interim reporting because there is no variance expected for the year. The reason for the deferral is that, from the point of view of the entire reporting year, there will be...

no volume variance.

For consolidated financial statements purposes the separate entities are treated as a single economic entity. As a consequence, only transactions with ______________ should be recognized in consolidating financial statements.

nonaffiliates

Sales and cost of goods sold (or purchases) for consolidated purposes should consist only of the effects of sales to and purchases from...

nonaffiliates.

Measurement Bases for Balance Sheet Valuation Present value The present value of a future cash flow is its discounted value. This is the primary measurement basis for: The present value is the measure of current sacrifice when extinguishing the debt at the balance sheet date.

noncurrent debt (mainly bonds and long-term notes).

SEC rules Audit committees are required to be composed of...

nonmanagement members of the board of directors, and the chair has to have financial experience.

At the other end of the spectrum is the current operating performance approach to income statement preparation, which would limit the income statement to...

normal, recurring items.

Carrying Investment in Subsidiary At the date of combination, the method the parent will use to account for the investment in the subsidiary (cost, equity or other) is...

not a consideration—that is, there is no "carrying" period yet.

A monetary item is one that is fixed or determinable without reference to future prices. Accumulated depreciation is...

not a monetary item.

Alternative Measures of Earnings IFRS permits presentation in the footnotes EPS information based on alternative measures of earnings. U.S. GAAP does...

not allow this reporting and the SEC restrict the use of non-GAAP measures.

Not all subunits of a corporation are operating segments. The corporate headquarters would...

not be an operating segment for many firms for example

If an asset was acquired from the acquiring firm's majority shareholder, an auditor likely would be especially concerned as to whether or not the price paid to acquire the asset was fair value of the asset because an entity and its majority shareholder are related parties. Related party transactions may...

not be at arm's length and, therefore, may require special attention of an auditor and special disclosures related thereto.

Application of Definition to Assets, Liabilities, and Shareholders' Equity Application to Liabilities A separate input or an adjustment to other inputs to account for a restriction that prevents the transfer of liabilities should...

not be made in measuring fair value.

Application of Definition to Assets, Liabilities, and Shareholders' Equity Application to Shareholder's Equity A separate input or an adjustment to other inputs to account for a restriction that prevents the transfer of a shareholder equity instrument should...

not be made in measuring the fair value.

Potentially Dilutive Securities The number of potentially dilutive securities is determined independently for each reporting period and not a weighted average of the dilutive potential common stock for each interim period. Therefore, the number of potentially dilutive securities in the annual or year-to-date report may...

not equal the potentially dilutive securities in the interim period. Under U.S. GAAP the year-to-date diluted EPS uses a year-to-date weighted average of the shares included in each quarter.

income statement Presentation Requirements There is no prescribed way of displaying the items above income from continuing operations. For example, some firms provide a subtotal called "operating income," which appears before miscellaneous items. Such disclosure is...

not mandated by GAAP.

An alternative concept of capital maintenance is... This concept holds that earnings cannot be recognized until the firm has provided for the physical capital used up during the period. To measure the capital used up, changes in price level must be considered.

physical capital maintenance.

Cash Flows from Operating Activities—Direct Method One of the hallmarks of classifying an item as operating cash flows is that it is associated with net income. Notice that interest paid and received and dividends received are all operating cash flows, but dividends paid is a financing cash flow. The first three flows are associated with income statement items (interest expense and revenue, dividend revenue), but dividends paid is not an income item; rather, it is a direct reduction in retained earnings. Dividends paid are a distribution of income to owners and are __________________________. Any cash inflow or cash outflow not properly classified as an investing or financing activity would be included as cash flow from operating activities (e.g., collection of a lawsuit settlement). The Net Cash Flow from Operating Activities can be positive or negative

not on the income statement, so they are not in cash flows from operations

Codification: Industry - Area 900 holds industry topics and contains only the guidance that is...

not otherwise applicable in the other eight areas. For consistency, the topics within the industry area are structured the same way as in the other areas. Agriculture is industry topic 905 for example. Within that topic, the receivables subtopic is listed and numbered as Agriculture —Receivables: 905-310.

The consolidating process and the results of that process are ________________ on the books of the affiliated entities.

not recorded

Fair Value Hierarchy—The fair value hierarchy (provided in ASC 820) prioritizes or ranks the inputs to valuation techniques used to measure fair value into three levels: If net asset value (NAV) is used as a practical expedient to determine fair value, NAV is...

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

Combined disclosures about fair value measurements required by all pronouncements are...

not required, but are encouraged.

not required—if the private company elects to amortize goodwill, it does not have to elect this guidance on the intangible assets.

Eligibility for and Election of IFRS for SMEs IFRS for SMEs are not intended for use by...

not-for-profit or governmental entities.

Expenses provide benefit to the firm. Losses do...

not.

IASB - Elements of Financial Statements An item is recognized as an element if it meets one of the element definitions below and also meets the following two recognition criteria: Where only one or no criterion is met...

note disclosure may be required.

In addition to the changes in OE accounts for the period, firms must also report the changes in the...

number of shares of equity securities. This information is the counterpart to some of the account changes in the statement of changes in equity, but measured in shares. Some firms report the share information in a column adjacent to the changes in the relevant accounts measured in dollars.

Concepts of Income The accountant and economist have different ways to measure income. There are many different ways to approach the problem. GAAP takes an ______________________ approach to measurement and recognition.

objective, arm's-length transaction

Under IFRS, the acquirer can elect to allocate the proportional share of goodwill.... (hint, when can they elect this?)

on a business combination-by-business combination basis; it does not have to use the same basis for all combinations.

Sale of a plant asset requires 1. removing the asset and accumulated depreciation, 2. recording the receipt of cash, and 3. recognition of the gain or loss on the sale. When the cash received from the sale exceeds the assets net book value (asset cost - accumulated depreciation), then a gain is recognized. When the cash received is less than the assets net book value, then a loss is recognized. The gain or loss on the disposal of an asset is reported... (hint - where? what statement?)

on the income statement with other items from customary business activities

Statement of Changes in Equity Horizontal Format Alternatively, the statement can be presented in horizontal format. Each account is explained from beginning balance to ending balance in...

one set of rows, one account schedule on top of another

Both quantitative and qualitative information should be considered when assessing the entity's ability to meet its obligations. The look-forward period for this assessment is...

one year from the issuance of the financial statements.

Subsequent Events—Conditions Did Not Exist at the Balance Sheet Date This category of subsequent event requires...

only footnote disclosure of events that have material effects on the financial statements. The footnote disclosures include: 1. a description of the nature of the event and 2. an estimate of the financial effect, or a statement that an estimate cannot be made. *Recognition is inappropriate because the condition existed after the balance sheet date

A business combination carried out as a legal merger or legal consolidation results in...

only one remaining firm. Financial statements are prepared for that single firm; there are no sets of financial statements to consolidate.

Intraperiod Tax Allocation Pertains to the tax effects for... It is the allocation of the total tax consequence for that year among income from continuing operations, and the four items listed above. This process contrasts with interperiod tax allocation, which records a period's total tax consequence in current taxes payable and deferred tax accounts. Interperiod tax allocation is a much more extensive process and is covered in another lesson

only one year.

Two formats have become accepted in practice: single-step and multiple step statements. There are many variants of each: The format differences affect __________________ in calculating income from continuing operations.

only the ordering

other comprehensive income items through the Balance Sheet date. Irrespective of the reporting option chosen for comprehensive income, U.S. GAAP requires that the total of other comprehensive income be separately displayed in the owners' equity section of the Balance Sheet in an account with a title such as AOCI. AOCI is an owners' equity (OE) account.

The fair value option may be elected for a single eligible item without electing it for other identical items. The fair value option does not have to be applied to all instruments issued or acquired in a single transaction (except as noted in 1, above). The fair value option may be applied to some of the individual instruments issued or acquired (e.g., shares of stock or bonds) in a single transaction, but not to...

other individual instruments issued or acquired in that transaction.

Because IFRS serves a much broader constituency than U.S. GAAP, there are certain reporting matters that may be modified or otherwise enhanced by...

other national SEC-type agencies and/or exchanges where foreign securities are traded. For example, in Europe, the European Union (EU) Parliament has established its own modifications and enhancements to IFRS, even though IFRS has already been adopted for all EU member states for publicly traded entities.

Cash Flows from Operating Activities—Direct Method *Cash payments for other types of expenses* — The calculation methodology used to derive cash flow from operating expenses (in the examples above) can be used for...

other types of expenses (e.g., interest, income taxes, etc.)

Shares that are issuable for little or no cash consideration upon satisfaction of certain conditions are contingent shares. They are considered _________________ as of the date the conditions have been met.

outstanding

There are three important valuations for a firm: 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.

Reportable Segments—the 75% Rule—The total external revenue reported by reportable segments must be at least 75% of the company's total consolidated revenues. This is an __________________ threshold for reporting.

overall materiality

Sale by Subsidiary to Parent—Intercompany Inventory Sale by subsidiary to parent: f a subsidiary sells to its parent, the transaction is an upstream sale. The intercompany elimination for upstream sales depends, in part, on the...

parent's percentage ownership of the subsidiary.

Revenue Recognition—Revenues are recognized in each interim period, as they would be in an annual period. Revenues earned and realizable in an interim period are recognized in that interim period. A firm uses the percentage of completion method on long-term contracts. The profit recognized each quarter is based on the...

percentage of completion at the end of each quarter. If a loss is anticipated in quarter 3, the entire contract loss is recognized in quarter 3.

The numerator of EPS is income, an amount representing the entire year. The income earned on the capital investment must be related to the...

period for which the investment was used by the firm.

Interest Expense If the bonds were sold at a discount or premium, interest expense will reflect...

periodic amortization. The interest expense recognized should be added back (after tax), not the cash interest paid, because earnings was reduced by the expense.

permits this term.

"The mission of the U.S. Securities and Exchange Commission is to...

protect investors, maintain fair, orderly, and efficient markets, and facilitate capital information" (http://www.sec.gov/about/whatwedo.shtml). An important component of the mission is ease and access to information that is relevant to the decision maker. (Remember that relevance is a primary characteristic in the FASB's conceptual framework!)

provide disclosure of the impact of inflation.

The objective of general-purpose financial reporting is to...

provide information about the entity useful to current and future investors and creditors in making decisions as capital providers.

IASB Framework The objective of financial reporting under the IASB Framework is similar to the FASB: to aid in the decision-making of the financial statement user. The Framework states (para. 12): "The objective of financial statements is to...

provide information about the financial position, performance and changes in financial position of an entity that is useful to a wide range of users in making economic decisions."

An entity with a variable interest in a VIE must...

qualitatively assess whether it is the primary beneficiary of the VIE; if so, it is deemed to have a controlling financial interest in the VIE.

Debt Disclosures These are perhaps the most important items found in the balance sheet, dollar for dollar. They indicate a _________________ faced by the firm in the future.

quantifiable financial risk

Form 10-Q reports the...

quarterly information to the SEC within 45 days (nonaccelerated filer) of the end of the quarter. (Only the first three quarters are reported because the 10-K reports the annual information.) Large companies designated as accelerated filers must file within 40 days. Disclosures are less extensive than in the 10-K and include information for the specific quarter and year-to-date information.

*Subsequent Events—Conditions Existed at the Balance Sheet Date* example Information is discovered early in 20X5 indicating that the total useful life of certain plant assets will be significantly less than originally estimated due to obsolescence. This condition developed gradually during 20X4. The useful lives of the affected assets should be...

re-estimated and depreciation expense for 20X4 should reflect those revised estimates.

IASB - Elements of Financial Statements Expenses may be...

realized or unrealized.

IASB - Elements of Financial Statements Income may be...

realized or unrealized.

SFAC 7 provides a framework for using future cash flows as the basis for accounting measurements at initial recognition or fresh-start measurements and for the interest method of amortization. FASB limited SFAC 7 to measurement issues (how to measure) and chose not to address...

recognition questions (when to measure). SFAC 7 introduces the expected cash flow approach, which differs from the traditional approach by focusing on explicit assumptions about the range of possible estimated cash flows and their respective probabilities.

Permanent declines in inventory are those not expected to reverse in the current year and are __________________ in the interim periods in which they occur.

recognized as losses

Temporary declines in inventory are those expected to reverse by year's end These are not _________________ in the interim periods in which they occur. This treatment is consistent with the integral view of interim reporting.

recognized as losses

recognized in the quarter of incurrence.

recognizing items that do not meet the definition of assets and liabilities.

Comparison of the Direct/Indirect Method of Determining Cash Flows from Operating Activities 7. The direct method requires an additional schedule to...

reconcile net income to cash flow from operating activities.

When material, prospective information is ___________ to aid the analysis of long and short-term liquidity, capital resources, material changes in a line item on the financial statements, and any preliminary merger negotiations.

required

A company may voluntarily sell, dispose, or abandon plant assets that are individually insignificant to the operations of the business. These disposals occur and are not the primary source of revenue for the entity, but are incidental to operations. In the case of fire, flood, or other event, the plant asset may be destroyed involuntarily. In either case, the asset must be depreciated up to the date of the disposal. The first thing that must be done before recording an exit or disposal activity is to...

record depreciation

Subsequent Events and IFRS IFRS does not consider _____________________________ when determining the classification of debt as current or noncurrent. U.S. GAAP permits the entity to consider these items when determining the current or noncurrent classification of debt.

refinancing, amendments or waivers

what characteristic of accounting information primarily allows users of financial statements to generate predictions about an organization?

relevance

Unit-of-Measure Assumption—Assets, liabilities, equities, revenues, expenses, gains, losses, and cash flows are measured in terms of the monetary unit of the country in which the business is operated. Price level changes cause the application of this assumption to weaken the...

relevance of certain disclosures.

(example) Relevance over faithful representation. The pervasive use of accounting estimates (depreciation, bad debt expense, pension estimates) is an example of emphasizing...

relevance over faithful representation. Firms are providing estimates, rather than certain amounts. Reasonable approximations, although they cannot be perfectly reliable, are preferred by financial statement users to either (1) perfect information issued too late to make a difference, or (2) no information at all.

Primary Characteristics — For information to be useful for decision-making, it must be both...

relevant and a faithful representation of the economic phenomena that it represents.

Reclassification example A firm recognizes a $5,000 unrealized gain on an AFS debt investment in Year 1 OCI. In Year 2, the AFS debt investment is sold for a $5,000 gain (recognized in net income causing retained earnings to increase by $5,000). At the end of Year 2, the $5,000 unrealized gain from Year 1 in AOCI is...

removed by reducing AOCI by $5,000 (the reclassification adjustment). The gain in OCI is "reclassified" as a gain recognized in net income. Without the reclassification adjustment, total OE would count the $5,000 twice. Reclassification adjustments are reported in the footnotes.

An item recognized in OCI one year may be recognized in net income in a later year. To avoid double counting in OE, the OCI item from the previous year is... This is called a reclassification adjustment. The entity must disclose the reclassification adjustments and the effect of the reclassification adjustment on NI and OCI.

removed from AOCI.

Control and Subsidiary Accounts The accounts reside in the ledger. The general ledger contains all accounts to be used in preparing the balance sheet. Some of these accounts are called control accounts because they...

report the aggregate balance of several subsidiary accounts.

Identification of Reportable Segments—Quantitative Tests—A reportable segment is one that meets one or more of the following three quantitative tests. Not all operating segments are...

reportable segments.

Unlike consolidated financial statements, the resulting combined financial statements do not...

represent the financial position, results of operations, or cash flows of a single controlling entity but, rather, the aggregate results of the combined companies after eliminating intercompany account activity and balances.

Balance Sheet Only asset, liability, and owners' equity accounts are...

represented (and related contra (−) and adjunct (+) accounts) and as such the balance sheet reports the entity's financial position at a point in time.

Fair Value Option Disclosures Objectives—Disclosures required when the fair value option is elected are intended to accomplish the following objectives: The disclosures, as outlined below, do not replace disclosure requirements in other existing GAAP pronouncements, including other pronouncements that...

require fair value measurement use and disclosures.

Management's Discussion and Analysis (MD&A) Publicly held firms are __________ to include the MD&A in the annual report. It provides management's discussion about the operations of the firm, its liquidity, and capital resources.

required

Summary of significant accounting policies The first footnote is typically a summary of significant accounting policies—the principles and methods chosen by management where GAAP allows a choice. Such disclosure is __________. Users' understanding of financial statement amounts is greatly facilitated by knowing the methods used in preparing the statements.

required

IASB - Elements of Financial Statements Equity—Currently, the IASB Framework definition is as follows (para. 49 c): "Equity is the...

residual interest in the asset after subtracting liabilities. Several sub-categories of equity are mentioned including funds contributed by shareholders, retained earnings, and reserves representing appropriations or capital maintenance adjustments."

IASB - Elements of Financial Statements Assets—Currently, the IASB Framework definition is as follows (para. 49 a): "An asset is a...

resource controlled by the entity as a result of past events and from which future economic benefits are expected to flow to the entity."

IFRS—Footnotes Footnotes Disclosures for the Effect of Changing Prices Hyperinflationary Economies a significant difference between US and international standards is the latter's requirement that firms operating in economies with very substantial inflation are required to provide disclosure of the impact of inflation. This requirement specifically requires financial statements to be...

restated to reflect the current general price level. The restated statements are to be presented as the primary statements. International standards discourage reporting of the pre-restated financial statements. At present, very few such economies are experiencing hyperinflation (defined roughly as 100% or more over three years), and therefore this requirement does not affect many firms.

adjustments for retroactive accounting principle changes & prior period adjustments are reported in the...

retained earnings statement.

The Balance Sheet can be prepared from the adjusted trial balance, provided that the amount of income is placed into...

retained earnings.

Under ASC 220, Comprehensive Income, corrections of errors are reported in...

retained earnings.

A change in accounting principle made in an interim period is reported in the same way as for annual statements. The retained earnings balance at the beginning of that interim period is adjusted to reflect the new principle, and the balances of previous interim periods reported comparatively with the interim period of change are...

retrospectively adjusted.

reversed.

The 10-Q is not required to be audited, but must be...

reviewed by the independent auditor.

The global economy has called for the need for one high-level, comprehensive set of accounting standards. The SEC has been the champion and driver in the United States to converge GAAP and IFRS. In 2005, SEC and top European Union officials agreed to a...

roadmap toward convergence between U.S. GAAP and IFRS.

IFRS - Income Statement Some of the IFRS terminology is also different from the U.S. GAAP counterpart. U.S. statements refer to the bottom line as net income or net loss. For IFRS statements, that net amount is called profit or loss for the period. It appears as a subtotal in the single statement option above or as the bottom line in the income statement under the two-statement option. As another example, the term turnover is used for...

sales by some firms in their IFRS income statements, even though IFRS uses the term Revenue. This is usually a cultural difference, as British companies refer to Revenue as Turnover.

When modifications to cash basis accounting are made, all related accounts must be reported using the...

same basis of accounting. For example, if long-term assets are recognized, then the related depreciation expense and accumulated depreciation must be recognized. Similarly, if debt is recognized, then the related interest expense (accrued and paid) must be recognized.

In the preparation of combined financial statements, would the following issues be treated in the same way as when preparing consolidated financial statements or in a different way? Minority Interest Foreign Operations Different Fiscal Periods

same same same *According to ASC 810, if problems associated with minority interest, foreign operations, different fiscal periods, or income taxes occur in the preparation of combined financial statements, they should be treated in the same manner as in the preparation of consolidated financial statements. Therefore, all three items should be treated in the same manner as in consolidated statements.

A special-purpose entity (SPE), as the term implies, is a...

separate legal entity (or other entity) established to fulfill a narrow, specific or temporary purpose, generally with the intent of isolating the establishing firm from risk and assigning responsibility for risk through the use of agreements and other instruments.

Noncontrolling Interest (NCI) Consolidated Balance Sheet On each consolidated balance sheet, the noncontrolling interest will be recognized as a...

separate line item (e.g., Noncontrolling Interest Equity) in the Shareholders' Equity section.

Noncontrolling Interest (NCI) Consolidated Income Statement For each operating period, the noncontrolling interest percentage claim to consolidated net income will be shown as a...

separate line item on the consolidated income statement. *This account is usually shown as Income to Noncontrolling Interest.

IFRS—Statement of Shareholders' Equity The IFRS and U.S. GAAP statements are quite similar. Under U.S. GAAP the statement of shareholders' equity can be presented in the footnotes; under IFRS, it must be presented as a...

separate statement.

IASB - Elements of Financial Statements Gains are usually reported...

separately from revenues.

share-based payment transactions

The guidance for determining fair value provided in the fair value framework is not appropriate for determining the fair value of legal services received in exchange for an entity's common stock. ASC 820 specifically exempts...

share-based payment transactions (and inventory valuing and other minor items) from the purview of the fair value framework.

cash equivalents (def)

short-term, highly liquid investments that are readily convertible to known amounts of cash.

The standard is concerned with "severe impacts" caused by concentrations. A severe impact is a...

significant financially disruptive effect on the normal functioning of the firm, where "severe" is greater than material but less than catastrophic. Bankruptcy is considered catastrophic for example.

In rare circumstances, under IFRS an investor may have the ability to control another entity with 50% or less of its voting ownership when it has...

significant ownership and other ownership is widely dispersed and not organized. Such a determination would have to be made on a case-by-case basis taking into account all relevant facts and circumstances.

Codification Research: In addition, the Codification allows users to aggregate findings by...

similar content. For example, all Status sections for a topic can be accessed and joined without separately accessing the Status section for each subtopic.

Consolidated financial statements present the financial information of two or more separate legal entities, usually a parent company and one or more of its subsidiaries, as though they were a...

single economic entity (remember the economic entity concept from the conceptual framework).

A pure cash basis accounting and resulting financial statements may be appropriate for...

small, very closely held businesses (e.g., sole proprietorships, small partnerships, etc.) where the owners/managers whose primary interest and even survival depends on cash flows.

Vocabulary or definition differences Although the concepts of U.S. GAAP and IFRS may be similar, vocabulary and definitions are often...

somewhat different.

Other comprehensive income items are reported in a...

special OE account called accumulated other comprehensive income,

Variable-Interest Entities/Special-Purpose Entities—IFRS does not address variable-interest entities or control of such entities, but it does address...

special-purpose entities, a similar entity concept.

The FASB's Statements of Financial Accounting Concepts, as amended, comprise the conceptual framework for financial accounting. The framework does not constitute GAAP but rather provides consistent direction for the development of specific GAAP. The conceptual framework is a "constitution" for developing....

specific GAAP.

contingent liabilities / subsequent events In addition, for contingent liabilities, the quality that distinguishes recognition from footnote disclosure only is the likelihood of the future event and whether the economic sacrifice is estimable. Thus, although the situation appears to be similar to subsequent events accounting, a ______________________ governs this accounting.

specific accounting principle

When changes to the codification happen, the FASB updates...

the Codification and issues the ASU simultaneously.

IFRS does not require...

specific formatting of statement of financial position information. For example, both horizontal and vertical formats are acceptable. Firms may change the order of accounts, the title of the statements (e.g., Balance Sheet is acceptable instead of the formal name, Statement of Financial Position) and the level of detail to provide the most useful information

Restrictions — Specific price changes refer only to...

specific goods and services and are not necessarily correlated with inflation (general price level increase) although frequently they are.

Comparison of the Direct/Indirect Method of Determining Cash Flows from Operating Activities The direct method presents cash flows in terms of the...

specific sources from which cash was received (inflows) and to which cash was paid (outflows).

In rare cases, where the IASB Framework is in conflict with an accounting standard for compelling practical reasons, the...

standard is used as the guidance.

still needed and the disclosures would include a description of management's plans to alleviate the substantial doubt.

Noncontrolling Interest (NCI) Determining Income to NCI The portion of S's net income that is allocated to the NCI is created during the consolidation process and can be calculated. 100% of S's revenues and expenses are represented on the consolidated income statement. The NCI portion of S's net income that is not available for distribution to the shareholders of P must be...

subtracted out of total net income.

Advantages of special journals The number of postings also is reduced because only the ________________ in the special journal accounts for the period need to be posted to the respective accounts.

sum of the changes

The quantitative disclosures required above must be presented using a...

tabular format.

The Office of the Chief Accountant of the SEC is the most important office for standard setting. This office houses the...

technical expertise on accounting principles, auditing standards and financial disclosure requirements. This office also issues position papers for the SEC to consider and is the link between the SEC and the accounting profession.

fair value 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.

Intraperiod Tax Allocation—Pertains to the tax effects for only one year. It is the allocation of the total tax consequence for... This process contrasts with interperiod tax allocation, which records a period's total tax consequence in current taxes payable and deferred tax accounts.

that year among income from continuing operations, and the four items listed below: 1. Discontinued operations 2. Other comprehensive income items 3. Adjustment for retroactive accounting principle changes 4. Prior-period adjustments

Fair Value Hierarchy—The fair value hierarchy (provided in ASC 820) prioritizes or ranks the inputs to valuation techniques used to measure fair value into three levels: Level 1 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 *often referred to as...

the "blockage factor"

Cash Flows from Operating Activities—Direct Method Reconciliation of Net Cash Flow from Operating Activities with Net Income—If the Direct Method is used to present Net Cash Flow from Operating Activities, a separate schedule must be provided that reconciles Cash Flows from Operating Activities to Net Income. The schedule that presents the reconciliation is identical to __________________ in the Statement of Cash Flows presented using the Indirect Method

the Cash Flow from Operating Activities section

In the IASB Framework, there are only two underlying assumptions: (1) that the financial statements are prepared on the accrual basis and (2) that the entity is a going concern. The meaning is the same as in the FASB Framework. Difference — Accrual accounting considers an assumption in the IASB Framework but not in...

the FASB Framework.

IASB Framework The portions of the original IASB Framework not yet modified by the joint IASB-FASB project are provided in this lesson. You will notice considerable similarity with...

the FASB framework.

economic income The net worth of a business enterprise is described as the fair value (FV) of net assets (rather than total owners' equity per GAAP). Thus, the FV of a business on December 31 of a given year is compared with...

the FV of the business on January 1 of that year to determine economic income.

In 2001, the International Accounting Standards Board (IASB) replaced the IASC. The IASB adopted the existing International Accounting Standards (IAS) and interpretations issued by the Standing Interpretations Committee (SIC). Since 2001, the IASB is responsible for issuing International Financial Reporting Standards (IFRS), and the IFRS Interpretations Committee (IFRIC) is responsible for issuing interpretations of the standards. Therefore, the current international accounting guidelines are contained in...

the IAS and IFRS pronouncements.

IFRS has become a globally recognized basis for financial accounting and reporting. The IFRS Foundation's independent standard-setting body is...

the IASB.

Adoption in the United States refers to...

the SEC requirement for publicly traded companies to implement the IFRS accounting standards—the latter of which has not occurred.

Firms are required to report the changes in their owners'-equity (OE) accounts for the period. Supplementary schedules or footnotes may be used, but often large firms report...

the Statement of Changes in Equity to meet this requirement.

Exceptions—There are exceptions to all-inclusive income statements: Prior-period adjustments Prior-period adjustments are shown on...

the Statement of Retained Earnings and are the correction of accounting errors affecting income of prior years.

Effects on Cash of Foreign Currency Translation The SCF also shows the effect on the change in cash (between the beginning and the end of the period) that results from changes in currency exchange rates between...

the U.S. dollar and foreign currencies.

Loss on Disposal—When the BV of the net assets of the component exceeds the component's fair value less cost of disposal at year-end, then the component assets are written down to fair value less cost of disposal. The latter amount (fair value less cost of disposal) is estimated at the end of the year, and the loss is recognized even though disposal or sale has not taken place. If the disposal takes place in the year the decision is made, then the disposal loss reported is...

the actual amount.

Cash Flows from Operating Activities—Direct Method Under GAAP, the income statement is prepared on the accrual basis, which recognizes accruals and deferrals. Therefore, the items of revenue and expense do not necessarily reflect cash received and cash paid. Income Statement items affected by accrual accounting must be adjusted to reflect...

the actual cash generated or used.

Comparison of the Direct/Indirect Method of Determining Cash Flows from Operating Activities 8. The indirect method requires an additional disclosure of...

the amount (of cash) paid for interest and dividends.

Accumulated other comprehensive income (AOCI) is...

the amount carried over from the previous period and then either increased or decreased during the current period. This total is the running total of other comprehensive income items through the Balance Sheet date. Irrespective of the reporting option chosen for comprehensive income, U.S. GAAP requires that the total of other comprehensive income be separately displayed in the owners' equity section of the Balance Sheet in an account with a title such as AOCI. AOCI is an owners' equity (OE) account.

purchasing power example The purchasing power of a $10 bill decreases during periods of inflation because...

the amount of goods and services that the bill can purchase declines. (There was a time that going to a movie cost $1.00. Now it costs as much as $8.00 for a movie. A dollar does not go as far as it used to.)

Increases and decreases in unearned revenues Increases and decreases in unearned revenue reflect differences between...

the amount of revenue recognized in net income and the amount of cash received. Therefore, the amount of these increases or decreases must be added back to or subtracted from net income to get the related cash flow.

1. Use, on an elective basis, U.S. GAAP; 2. Use, on an elective basis, full IFRS; 3. Use an Other Comprehensive Basis of Accounting; 4. Use IFRS for SMEs. Each of these bases would be considered...

the application of generally accepted accounting principles and a U.S. CPA could audit the resulting statements.

Going Concern Assumption (example) Prepaid assets, such as prepaid rent, would not be assets without...

the assumption of continuity.

Valuation Technique/Approach Selection — Which approach (or approaches) is appropriate to measure fair value will depend on the circumstances, including...

the availability of sufficient data for the respective approaches, and will maximize the use of relevant observable inputs and minimize the use of unobservable inputs.

Example A change in property, plant, and equipment useful lives is made in quarter 3. The new estimate is applied as of...

the beginning of quarter 3. The effect of the change on earnings for quarter 3 is reported in quarter 3 results. The new estimate is also applied to quarter 4 and the effect of the change on quarter 4 earnings is reported.

If-Converted Method The convertible is assumed converted as of...

the beginning of the period or date of issuance, whichever is later. The numerator and denominator effects are computed and entered into DEPS. If DEPS decreases, the PCS is dilutive and the security is included in the computation of DEPS.

The disclosure of noncash investing and financing activities can be on a separate schedule or in the footnotes, or at the bottom of the SCF. The noncash activities are not presented in...

the body of the SCF

Measure Revenue — How to measure revenue: Revenues are measured at...

the cash equivalent amount of the good or service provided.

The primary purpose of a statement of cash flows is to provide relevant information about....

the cash receipts and cash disbursements of an enterprise during a period.

A change in valuation technique or its application is appropriate if...

the change will result in a more representative fair value.

Multiple-Step Format The multiple-step format involves a presentation of income from continuing operations that includes multiple comparisons of revenues, expenses, gains, and losses. In doing so, the reader is provided with the operating margin of the company, which is the excess of operating revenues over operating expenses. In other words, these revenues and expenses are directly tied to...

the company's primary business operations. Beyond the operating margin, the incidental or peripheral gains and losses are shown in the presentation of income from continuing operations.

The FASB's Statements of Financial Accounting Concepts, as amended, comprise ___________________________. The framework does not constitute GAAP but rather provides consistent direction for the development of specific GAAP. The conceptual framework is a "constitution" for developing specific GAAP.

the conceptual framework for financial accounting

Contingency—If the contingency is a future earnings level, no contingent shares are included in the WA of BEPS because the contingency cannot be met until a future period. The same holds for a current-period earnings level because...

the contingency cannot be met until the last day of the year.

According to SFAC 7, Using Cash Flow Information and Present Value in Accounting Measurements, the most relevant measurement of an entity's liabilities at initial recognition and fresh-start measurements should always reflect....

the credit standing of the entity.

Subsequent Events and IFRS Under U.S. GAAP, the cut-off date for subsequent events is when the financial statements are issued or available to be issued. Under IFRS, the cut-off date for subsequent events is...

the date the financial statements are considered authorized for issuance.

In the absence of information to the contrary, a business is assumed to have an indefinite life, that is, it will continue to be a going concern. Therefore, we do not show items at their liquidation or exit values. This assumption, also called the continuity assumption, supports the historical cost principle for many assets. Income measurement is based on historical cost of assets because assets provide value through use, rather than disposal. Thus, net income is....

the difference between revenue and the historical cost of assets used in generating that revenue. Without the going-concern principle, historical cost would not be an appropriate valuation basis

Cash Flows from Operating Activities—Direct Method This category reports cash inflows and cash outflows that relate to items that are included in the determination of net income. The items that make up Cash Flow from Operating Activities may be presented in the Statement of Cash Flow (SCF) using either...

the direct method or the indirect method.

Cash Flows from Financing Activities The items that make up Cash Flow from Financing Activities are presented in the same manner, regardless of whether _________________ approach is used to present Cash Flow from Operating Activities.

the direct or indirect

The operating section of the SCF can be presented using either...

the direct or the indirect format.

Application of Definition to Assets, Liabilities, and Shareholders' Equity Application to Liabilities The determination of fair value of a liability should consider...

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

US GAAP vs IFRS Liabilities—Accrual of planned expenses at the end of an interim period before an expenditure is made (e.g., planned maintenance to be paid for later in the same annual period) is not permitted unless the firm has a liability at...

the end of the interim period. Thus, international standards do not allow the allocation of accrued expenses between interim periods unless there is a liability at the end of an interim period.

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.

the entity's claim to the net asset value of the variable-interest entity.

IFRS - Income Statement The expense classification and disclosure may be presented either on...

the face of the income statement or in the notes.

economic income The net worth of a business enterprise is described as...

the fair value (FV) of net assets (rather than total owners' equity per GAAP).

Timeliness — Information is timely if it is received in time to make a difference to the decision maker. Timeliness can also enhance ______________________________.

the faithful representation of information

Accounting period requirement Under U.S. GAAP, the fiscal reporting period of a parent and its subsidiaries may be up to three months different. Significant transactions or events that occur during the gap require only disclosure in the consolidated statements; no adjustment to accounts or amounts is required. Under IFRS, however...

the financial information of a parent and its subsidiaries should be as of the same period-ending date, unless it is impracticable to do so. In any case, the difference between the parent ending date and the subsidiary ending date cannot be more than three months. Further, significant transactions or events that occur during the gap must be reflected in adjustments to the accounts/amounts used for consolidating purposes.

cost constraint (example) A firm would not report its entire inventory subsidiary ledger in...

the footnotes or financial statements. The reporting of total inventory cost is sufficient. Reporting more detailed information is not worth the cost of doing so.

Weighting Fraction Period—The weighting is for...

the fraction of the period the conditions were met.

The IASB issued IFRS for SMEs in 2009. The IFRS for SMEs pronouncement is a modification and simplification of...

the full IFRS and is designed to be used primarily by private companies. Although simplified, it is still based on the IFRS conceptual framework.

the goods or services are delivered (revenue is earned) and cash or promise of cash is received (realized).

Application of Definition to Assets, Liabilities, and Shareholders' Equity Application to Assets The determination of fair value of a nonfinancial 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 concept of highest and best use does not apply to measuring the fair value of financial assets (or liabilities).

Cash Flows from Investing Activities Firms classify cash flows from purchases, sales, and maturities of debt investments in trading securities based on...

the intended purpose of the investment. If the firm plans to hold the securities only for a short time, then the related cash flows are classified as operating. If the intent of holding is other than for short-term speculation, then the related cash flows are classified as investing.

A change in estimate is accounted for in...

the interim period in which the change in estimate is made. Earlier interim periods are not affected. If material, the effect of the change on net income for the interim period and subsequent periods is reported.

SEC rules Annual filing must include a management's report on...

the internal controls. This report must attest to the existence and effectiveness of the company's internal controls over corporate reporting.

The reporting principles for contingent liabilities are similar to those of subsequent events and in some cases overlap. However, for recognized contingencies (those that are probable and estimable as of the balance sheet date), the event confirming the loss, reduction in asset, or recognition of liability need not take place before...

the issuance of the financial statements.

Example If an accounting principle change is adopted in the second quarter, these disclosures are required for...

the last three quarters of the fiscal year.

contingent liabilities / subsequent events example For example, a firm recognizes warranty expense and a warranty liability at the end of 20X4 on sales recognized in 20X4 because warranty claims are probable and the amount to service the claims is estimable. The condition giving rise to the expense and liability existed at the balance sheet date (the obligation to service the claims and the probable nature of the claims), but the warranty claims need not occur before the issuance of the balance sheet in order for...

the liability to be recognized at the end of 20X4.

Nature of Operations Financial statements and notes are required to include a description of...

the major products or services of the firm, and its principal markets and their locations. If the firm operates in more than one type of business, the relative importance of the operations in each business is disclosed, along with the basis of this determination (based on assets, revenues, or earnings for example).

Accounting Principles Measurement — At the time of origination, assets and liabilities are recorded at... This origination value is referred to as historical cost. For many assets and liabilities, this value is not changed even though market value changes. Other assets, such as plant assets and intangibles, are disclosed at historical cost less accumulated depreciation or amortization. Given the going-concern assumption, revaluation to market value is inappropriate for plant assets, because the value of these assets is derived through use, rather than from disposal.

the market value of the item on the date of acquisition, usually the cash equivalent

Fair Value The transaction to sell the asset or transfer the liability is a hypothetical transaction at...

the measurement date that would occur under current market conditions; *it is not a transaction that would occur in a forced liquidation or distress sale

other disclosure requirements In annual reports only, ____________________________________________________________ must be disclosed.

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

Gain on Disposal Actual gains on disposal (when the decision to discontinue the operation and the disposal occur in the same period) are recognized but estimated gains are *not.* A gain occurs when...

the net proceeds from the sale of the component exceed the BV (book value) of the net assets of the component.

Accumulated other comprehensive income (AOCI) is the amount carried over from the previous period and then either increased or decreased during the current period. This total is the running total of other comprehensive income items through the Balance Sheet date. Irrespective of the reporting option chosen for comprehensive income, U.S. GAAP requires that the total of other comprehensive income be separately displayed in...

the owners' equity section of the Balance Sheet in an account with a title such as AOCI. AOCI is an owners' equity (OE) account.

A majority owned (> 50% of voting stock, controlled either directly or indirectly) subsidiary must be consolidated with its parent unless...

the parent lacks the ability to exercise its majority ownership to control the operating and financial activities of the subsidiary (i.e., the parent lacks effective control of the subsidiary).

Current Assets (CA) An asset expected to be realized in cash or to be consumed or sold during the normal operating cycle, or within one year of the balance sheet date, whichever is longer. The operating cycle is...

the period of time from purchasing inventory to paying for the payable incurred on inventory purchase to the sale of goods to the collection of receivable and then to purchasing inventory all over again. For most firms the operating cycle is less than one year, but some firms, such as construction and engineering companies, have operating cycles exceeding one year. Construction in process, an inventory account found in construction firms' balance sheets, is a current asset even though the constructed asset may require several years to complete.

Presentation refers to...

the presentation of items on the financial statements

the previous loss was not recorded.

the primary statements. International standards discourage reporting of the pre-restated financial statements. At present, very few such economies are experiencing hyperinflation (defined roughly as 100% or more over three years), and therefore this requirement does not affect many firms.

significant accounting policies (def)

the principles and methods chosen by management where GAAP allows a choice. Such disclosure is required. Users' understanding of financial statement amounts is greatly facilitated by knowing the methods used in preparing the statements.

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).

Application of Definition to Assets, Liabilities, and Shareholders' Equity Application to Liabilities Nonperformance risk relating to the liability is assumed to be...

the same after the hypothetical transaction as before the transaction.

the same amount as eliminated in the ending inventory of the prior period.

Comparison of the Direct/Indirect Method of Determining Cash Flows from Operating Activities 3. Under either method, the cash flow from operating activities will be...

the same amount.

Two formats have become accepted in practice: single-step and multiple step statements. There are many variants of each: Income from continuing operations and net income are...

the same amounts regardless of the format used.

Parent Owns Less than 100% of the Subsidiary—If You Have a Worksheet *With* Income Statement: If the elimination occurs on a consolidating worksheet that includes an income statement, the elimination would be...

the same as presented above to eliminate intercompany profit in ending inventory

Consolidated Income Statement/Retained Earnings Statement/Cash Flow Statement There has not yet been an operating period (and operating results) during which the Subsidiary was controlled by the parent. Therefore, the consolidated income statement, retained earnings statement, and cash flow statement will be...

the same as the parent's at the date of the combination.

Consolidated Income Statement/Retained Earnings Statement/Cash Flow Statement At the date of combination, a consolidated income statement, statement of retained earnings, or statement of cash flow would be...

the same as the statements of the parent entity.

In many cases, the entry price (transaction price) and the exit price (fair value) will be...

the same at the date of initial recognition of an asset or liability and, therefore, constitute the fair value of the asset or liability at that date.

Most, but not all, special-purpose entities will be variable-interest entities. Therefore, they have...

the same general characteristics as VIEs and, under IFRS, are treated similar to the treatment of VIEs under U.S. GAAP.

Expenses Directly Related to Revenue—Expenses directly related to revenue (cost of goods sold, sales commissions) are recognized in...

the same period as the related revenue.

Two formats have become accepted in practice: single-step and multiple step statements. There are many variants of each: The presentation below income from continuing operations is mandated by U.S. GAAP and is...

the same regardless of how the top portion is presented.

For consistency, the topics within the industry area are structured...

the same way as in the other areas. Agriculture is industry topic 905 for example. Within that topic, the receivables subtopic is listed and numbered as Agriculture —Receivables: 905-310.

Comparison of the Direct/Indirect Method of Determining Cash Flows from Operating Activities 4. Under either method, the other major sections of the statement of cash flows—investing, financing, foreign currency effects, and the reconciliation of the change in cash—will be....

the same.

Factors Effecting the Consolidation Process Although the general process is the same for carrying out all consolidating processes, the specific adjustments, eliminations and related amounts depend on...

the specific circumstances.

Effects on Cash of Foreign Currency Translation Cash balances held in foreign currency at period-end should be converted to dollars using...

the spot (current) exchange rate at the date of the Balance Sheet.

Statement of Changes in Equity Vertical Format Nonetheless, accumulated other comprehensive income (AOCI) has its own column. Recall that AOCI is the running total of all other comprehensive income (OCI) items. Any firm with AOCI will report it in...

the statement of changes in equity, regardless of its policy concerning reporting the statement of comprehensive income.

The Statements of Financial Accounting Concepts (SFAC) were issued to establish a framework from which financial accounting and reporting standards could be developed. The SFAC provide...

the theory behind accounting and reporting and provide guidance when no GAAP exists. The SFAC are not included as GAAP.

Earnings Per Share (EPS) is reported under the discrete view. Each quarterly EPS amount reflects only the events of that quarter. The assumptions and computations leading to the quarterly EPS amount reflect the circumstances within each interim period separately, rather than estimations of year-end circumstances. For example, shares issued in the third quarter affect reported EPS for...

the third and fourth quarter only, not the first two quarters.

to make an adjusting entry on the consolidating worksheet to complete the transaction as though it had been received by the receiving company (i.e., as though the transaction were completed on both sets of books).

The concept of capital maintenance is related to.... Capital is said to be maintained when the firm has positive earnings for the year, assuming no changes in price levels. When a firm has income, it has recognized revenue sufficient to replace all the resources used in generating that revenue (return of capital), and has resources left over in addition (income, which is return oncapital). That income could be distributed as dividends without eroding the net assets (capital) existing at the beginning of the year. GAAP is based on the concept of "financial" capital maintenance. As long as dividends do not exceed earnings, and earnings is not negative, financial capital has been maintained.

the unit of measure assumption.

Two for One Stock Split A 10% stock dividend gives an investor holding 1,000 shares an additional 100 shares. Each investor maintains the percentage of the firm previously owned. There are 10% more shares outstanding but each share is worth proportionately less. A two-for-one stock split doubles the number of shares outstanding but...

the value of each share is halved. These are not substantive changes in shares outstanding the way a new stock issuance is. They bring no resources into the firm.

Accounting Principles Measurement — At the time of origination, assets and liabilities are recorded at the market value of the item on the date of acquisition, usually the cash equivalent. This origination value is referred to as historical cost. For many assets and liabilities, this value is not changed even though market value changes. Other assets, such as plant assets and intangibles, are disclosed at historical cost less accumulated depreciation or amortization. Given the going-concern assumption, revaluation to market value is inappropriate for plant assets, because...

the value of these assets is derived through use, rather than from disposal.

Convergence refers to...

the working relationship between the FASB and the IASB to develop compatible, high-quality accounting standards.

If BEPS and DEPS are equal, both are reported so that users know...

there are PCS but there was no material dilutive effect.

No Tax Effect Convertible preferred stock is handled the same way as convertible bonds except...

there is no tax effect.

IASB - Elements of Financial Statements Gains are not treated as separate elements because...

they also may be due to ordinary activities, as well as from activities not in the ordinary course of business.

Investments in equity securities cannot be cash equivalents because...

they are not convertible to a known amount of cash.

U.S. GAAP-IFRS Differences Entities are required to disclose judgments, other than ________________, that management made in applying the firm's accounting policies.

those involving estimates

The SEC is a federal agency created by Congress after the 1929 stock market crash. It administers the U.S. securities laws, most notably the Securities Act of 1933 and the Securities Exchange Act of 1934. The SEC requires registrants (those publicly held companies under its purview) to adhere to U.S. GAAP when reporting financial statements, except...

those non-U.S.-domiciled companies who may report using IFRS without a reconciliation to U.S. GAAP (see discussion below).

If the cost or expense benefits other quarters or interim periods, allocate the cost to...

those other quarters and recognize the appropriate amount of expense in those quarters (the integral view).

IFRS interim If full statements are not provided, the headings and subtotals should include...

those presented in the most recent annual statements. Basic and diluted EPS must be reported if the entity is subject to EPS requirements for its annual statements (publicly traded firms).

Comparative Statements SEC registrants report ______ years of OE statements, as is the case with the income statement and statement of cash flows.

three *The current year statement is shown comparatively with the statement for the previous two years. Again, either the vertical or the horizontal format is used for presentation.

Investments usually are considered cash equivalents only when the original maturity is...

three months or less (e.g., treasury bills, money market funds).

To enter stock options and warrants (which are PCS) into DEPS, a ______________ process is used called the treasury stock method.

three-step

Time Period Assumption — The indefinite life of a business is broken into smaller time frames, typically a year, for evaluation purposes and reporting purposes. For accounting information to be relevant, it must be __________. The reliability of the information often must be sacrificed to provide relevant disclosures. The use of estimates is required for timely reporting but also implies a possible loss of reliability.

timely.

Using Cash Flow Information and Present Value in Accounting Measurements — The concepts statement addresses the use of present-value measurements. Like all concepts statements, it does not constitute GAAP but is...

used in the development of GAAP.

The 1934 Securities Act regulates the...

trading of securities after they are issued and provides the requirements for periodic reporting and disclosures.

If the fair value option is elected for held-to-maturity securities, those securities will be treated and reported as...

trading securities.

fair value The price determined in the principal or most advantageous market should not be adjusted for...

transaction costs —incremental direct cost to sell the asset or transfer the liability — which do not measure a characteristic of the asset or liability. *However, cost incurred to transport the asset or liability to its principal or most advantageous market (the location characteristic of an asset) would be used to adjust fair value for measurement purposes.

Balance Sheet Account balances reflect only the...

transaction-based U.S. GAAP recognition and measurement system. A transaction or event is required for recognition of all items. The balance sheet does not report all assets of the firm, only the assets acquired through a transaction. For example, internally generated goodwill is not recorded (recognized), and the recorded value of other intangibles such as trademarks may be significantly less than their current value.

economic income The use of fair values and other price level changes takes into account the changes in the value of the firm's assets and liabilities and goes beyond the recording of transactions. However, because GAAP is concerned with reliability of information, __________________ is the current model used.

transaction-based reporting

Constant dollar adjustments allow comparisons of dollar amounts for...

transactions occurring on different dates. The effect of inflation is stripped away leaving "real" dollar measurements.

IASB - Elements of Financial Statements Difference — The IASB Framework element is income, which includes both revenues and gains, whereas the FASB Framework...

treats revenue and gains as separate elements.

Market Capitalization The market capitalization is generally many times recorded OE in amount. The purpose of the balance sheet is not to provide a firm's market value, but rather to provide information that is a starting point for valuing a firm and assessing its riskiness. The relative investment in plant assets, natural resources, investments, and in affiliated companies, along with the ratio of debt to equity provides investors with valuable information about the financial structure and direction of the firm. The ______ in balance sheet values over time also provides useful information.

trend

A business combination carried out as a legal acquisition results in one legal entity (the parent) having majority ownership, either directly or indirectly, of the other legal entity (the subsidiary). Each firm is a separate legal (and accounting) entity, but...

under the common control of the parent shareholder.

If your current-period dividends declared are cumulative preferred...

use 1 full year's dividends in the EPS numerator

Practical Expedient Exception (example) For example, a private equity fund (PE) may invest in start-up companies, rare archeological artifacts, artwork, and real estate. The PE fund most likely reports the investment in these items at fair value or investment value. The PE fund may report NAV to the investors; if the PE fund meets the criteria as an alternative investment, the investor can...

use NAV as a practical expedient to measure fair value.

Typically, the ordering of the statement of financial position items for U.S. GAAP balance sheets starts with current items. Since IFRS does not have any recommended format, many countries...

use their customary formats, including presenting the items in reverse order, reporting noncurrent items before current items. In addition, within categories, the ordering may be the opposite of U.S. GAAP ordering, that is, from less liquid to more liquid, but this is simply a local format and not one required by IFRS.

fair value Notice that although transaction and transportation costs are taken into account in determining the most advantageous market, transaction costs are not...

used (i.e., not deducted from the asset market price or added to the liability transfer cost) in determining the fair value of an asset or liability in the most advantageous market.

Using Cash Flow Information and Present Value in Accounting Measurements Two Approaches—The statement contrasts two approaches to computing present value: Expected Cash Flow Approach (def)

uses a risk-free rate as the discount rate. That is, factors 2-5 are incorporated into the risk-adjusted expected cash flow and the discount factor is the risk-free rate. Uses expectations about all possible cash flows instead of a single most-likely cash flow. Both uncertainty as to timing and amount can be incorporated into the calculation. The Board believes that the expected cash flow approach is likely to provide a better estimate of fair value than a single value because it directly incorporates the uncertainty in estimated future cash flows.

Similar to U.S. standards, interim period income tax expense is computed on an annualized basis (integral view). For international standards, entities must estimate the average annual effective tax rate for the full fiscal year, and apply it to each quarter. Anticipated tax rate changes and the pattern of earnings must be taken into account. When the entity is subject to taxation from more than one jurisdiction, or is subject to more than one rate across categories of income, the entity is allowed to use a ______________________________ provided that this process results in a reasonable approximation to the more exact calculation.

weighted average rate across jurisdictions and income categories

A downstream transaction is...

when the parent sells to the subsidiary. Any intercompany profit that results from the sale will be on the books of the parent.

An upstream transaction is...

when the subsidiary sells to the parent. Any intercompany profit that results from the sale will be on the books of the subsidiary.

use of estimates The degree to which estimates can be relied upon is affected by many factors including...

whether the business and economic environment is stable or unstable at the time. This area of disclosure reminds users that they should not place an unwarranted degree of reliability on the reported amounts in financial statements.

LIFO Liquidation If a firm uses LIFO for annual reporting, it must also use LIFO for interim reporting. When a LIFO layer is liquidated in a particular interim period (number of units purchased is less than number of units sold in the interim period), the accounting depends on...

whether the liquidation is expected to be restored by the end of the annual period.

Process Steps to Follow—The steps to be followed in deriving consolidated financial statements from the separate trial balances or statements of the separate companies are: Formal Consolidated Statements—Prepare formal consolidated statements: Once the ______________ is completed, it is the basis for preparing the formal consolidated financial statements.

worksheet

Loss on Disposal When the BV of the net assets of the component exceeds the component's fair value less cost of disposal at year-end, then the component assets are...

written down to fair value less cost of disposal. The latter amount (fair value less cost of disposal) is estimated at the end of the year, and the loss is recognized even though disposal or sale has not taken place.

Δcash = **this is used to convert from accrual to cash accounting

ΔL + ΔE − Δother assets

Codification: Sections—Each subtopic has the following 16 sections with the associated numeric identifier:

00 - status 05 - overview and background 10 - objectives 15 - scope and scope exceptions 20 - glossary 25 - recognition 30 - initial measurement 35 - subsequent measurement 40 - de-recognition 45 - other presentation matters 50 - disclosure 55 - implementation guidance and illustrations 60 - relationships 65 - transition and open effective date information 70 - grandfathered guidance 75 - XBRL definitions

Codification: Subtopics — There is at least one subtopic within each topic. The "overall" subtopic appears within each topic. The number of subtopics within a topic varies by area, again depending on content. Each carries a numeric identifier. The "overall" subtopic contains the ____________ guidance for a topic. The other subtopics provide ___________ guidance and exceptions. For example, 310-40 is the Troubled-Debt Restructurings by Creditors subtopic within the Receivables topic, which is within the Asset area.

1. "big picture" level 2. additional specific

In reviewing the statement of cash flows, it is important to remember the articulation between the balance sheet and the 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 ______. 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 _____________.

1. cash 2. Cash and Cash Equivalents.

Balance Sheet Accounts Owners' Equity (also referred to as Shareholders', Stockholders', or Shareowners' Equity) items are shown in order of permanence. Ex: For a corporation, the contributed capital accounts are shown ______ and retained earnings are typically shown ________ in Stockholders' Equity. Retained earnings are thought to be _________ due to the fact that dividends are a distribution of earnings.

1. first 2. as the final item 3. less permanent

The presentation of cash flows in the statement of cash flows follows a classification system established by the FASB. Cash flows are classified into three categories:

1. operating, 2. investing, and 3. financing.

The operating cycle of a firm is the period of time required to purchase or produce inventory, sell the inventory, and collect cash from the resulting receivables. For most firms, the operating cycle is ___________ than one year. For firms in some industries, such as construction, the operating cycle is _________ than one year.

1. significantly less 2. longer

The FASB Codification is the ____ authoritative source for such GAAP and includes guidance from the Committee on Accounting Procedure (CAP) and the Accounting Principles Board (APB). For publicly traded entities, the ______ has additional reporting guidelines.

1. sole 2. SEC

The majority of GAAP includes the pronouncements issued by...

1. the Committee on Accounting Procedure (CAP), 2. the Accounting Principles Board (APB), and 3. the Financial Accounting Standards Board (FASB).

Income Statement There are other items that would appear to be income items but are not reflected in net income. These include:

1. unrealized gains and losses on investments in securities available-for-sale, 2. certain pension cost adjustments, and 3. foreign currency translation adjustments. These items are included in comprehensive income, which now is a required disclosure. However, except for items included in comprehensive income but not also in net income, prior period adjustments, and a few other items, the reporting of net income in the income statement reflects an all-inclusive approach.

Codification: Topics—There are approximately... (hint, how many?)

90 topics across the nine areas. For example, all asset topics are within 300-399. The number of topics varies by area, depending on the content within each area. For example, 310 is the receivables topic, within the Asset area.

Changes to authoritative GAAP are accomplished through...

FASB Accounting Standards Updates (ASU), including amendments to SEC content. No longer will separate FASB Statements or other documents be separately published. ASUs are designated chronologically by year. For example, ASU 2014-12 refers to the twelfth ASU issued by the FASB in 2014.

Overall structure—Accounting guidance within the Codification has the following structure: Areas—Topics—Subtopics—Sections—Subsections—Paragraphs Each area has at least one topic. Within a topic, there are subtopics. Within subtopics, there are sections, and so forth. The topic, subtopic, and section levels reflect the structure used by...

international accounting standards.

The statement of cash flows is the third of the three major financial statements required to be reported. It describes the major changes in cash by...

meaningful category. Like the income statement, it is dated for the entire period (e.g., for the year ended December 31, 20xX).

The FASB Accounting Standards Codification is the sole source of authoritative U.S. GAAP for...

nongovernmental entities, except for SEC guidance. All guidance in the Codification carries the same level of authority (one level of GAAP). There is no longer a hierarchy of GAAP.

Such superseded guidance continues to be authoritative but is...

not included in the Codification. Examples include pooling of interests and pension transition obligations.

Balance sheet presentation reflects the classification of assets and liabilities. The classification criteria used for each is indicated below and is affected by the firm's...

operating cycle. The operating cycle of a firm is the period of time required to purchase or produce inventory, sell the inventory, and collect cash from the resulting receivables. 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.

Codification: The ___________ is the primary research level because the accounting guidance in the form of paragraphs resides within the sections.

section level

If guidance for a transaction or event is not specified in the Codification, authoritative GAAP for _____________________ should be considered before considering nonauthoritative GAAP. Sources of nonauthoritative guidance include widely recognized and prevalent practices, FASB Concepts Statements, AICPA Issues Papers, IFRS, and others. There is no implied hierarchy for these sources.

similar transactions or events

Some accounting standards have allowed entities to apply the provisions of ___________ for transactions that have an ongoing effect on an entity's statements.

superseded standards

Overall structure—Accounting guidance within the Codification has the following structure: Areas—Topics—Subtopics—Sections—Subsections—Paragraphs Each area has at least one ______. Within a topic, there are subtopics. Within subtopics, there are sections, and so forth. The topic, subtopic, and section levels reflect the structure used by international accounting standards.

topic

External users of financial reports do not have access to the ________ records of businesses and thus are dependent on the information in the report. The report is a "general-purpose" report because it is designed to meet the information needs of a broad class of users (mainly investors and creditors), rather than a predefined specific use report.

internal

Goals of the Codification—The FASB Codification Research System is the online, real-time database by which users access the Codification. The Codification system became effective on July 1, 2009. The online nature of the Codification and its internal structure were designed to achieve the following goals:

1. Simplify the structure and accessibility of authoritative GAAP. 2. Provide all authoritative literature in a single location. 3. Reduce the time and effort required to research an accounting issue. 4. Reduce the risk of noncompliance with GAAP. 5. Facilitate updating of accounting standards. 6. Assist the FASB with research and convergence (IFRS) efforts.

The statement of comprehensive income includes net income (or loss) and the items included in comprehensive income that are not part of net income. Those items include:

1. Unrealized gains and losses on available-for-sale securities 2. Adjustments in the calculation of the pension liability 3. Foreign currency translation adjustments 4. Deferrals of certain gains or losses on hedge accounting.

GAAP, and therefore the financial statements, reflect the _____ basis of accounting rather than the _______ basis of accounting. Both U.S. and international GAAP reflect the ______ basis of accounting.

1. accrual 2. cash 3. accrual

The presentation of cash flows in the statement of cash flows follows a classification system established by the FASB. Cash flows are classified into three categories: operating (example)

Operating cash inflows include receipts from customers and interest. Cash outflows include payments to suppliers, to employers, and to taxing authorities.

The income statement is prepared by applying the all-inclusive approach. That is, almost all revenues, expenses, gains, and losses are shown on the income statement and are included in the calculation of net income. A major exception here is prior period adjustments, which are the effects of corrections of errors affecting prior year net income. Prior period adjustments are shown on the....

Statement of Retained Earnings as adjustments to the beginning balance of retained earnings in the year the error is discovered.

When the cash activity occurs, first you create a...

deferral account. (You are deferring the recognition of an expense or revenue as an asset or liability.)

SEC Guidance Authoritative GAAP include relevant SEC rules and interpretative releases (applicable only to publicly traded firms). The Codification includes relevant portions of SEC content but...

does not contain the entire text of relevant SEC rules, regulations, interpretive releases and staff guidance. For example, the Codification does not include SEC content related to Management's Discussion and Analysis and other items appearing outside the financial statements. The Codification does not replace or affect guidance issued by the SEC and is provided on a convenience basis.

Financial accounting is, like most types of accounting, a service activity. The provision of information is accomplished through the issuance of a General Purpose External Financial Report. That is, the financial report issued by business enterprises, is a general-purpose one intended for...

all external users. External users of financial reports do not have access to the internal records of businesses and thus are dependent on the information in the report. The report is a "general-purpose" report because it is designed to meet the information needs of a broad class of users (mainly investors and creditors), rather than a predefined specific use report.

There are other items that would appear to be income items but are not reflected in net income. These include unrealized gains and losses on investments in securities available-for-sale, certain pension cost adjustments, and foreign currency translation adjustments. These items are included in...

comprehensive income, which now is a required disclosure. However, except for items included in comprehensive income but not also in net income, prior period adjustments, and a few other items, the reporting of net income in the income statement reflects an all-inclusive approach.

The question requires a solution for cash collected on accounts receivable. Using the information for accounts receivable, the collections amount can be found:

Beginning balance + sales − collections − write-offs = ending balance

The presentation of cash flows in the statement of cash flows follows a classification system established by the FASB. Cash flows are classified into three categories: financing

Cash flows related to the liabilities and owners' equity sections of the balance sheet.

The presentation of cash flows in the statement of cash flows follows a classification system established by the FASB. Cash flows are classified into three categories: investing (examples)

Investing cash outflows include purchases of plant assets and investments. Cash inflows include proceeds from the sale of these items.

The presentation of cash flows in the statement of cash flows follows a classification system established by the FASB. Cash flows are classified into three categories: investing

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

The presentation of cash flows in the statement of cash flows follows a classification system established by the FASB. Cash flows are classified into three categories: financing (examples)

Financing cash inflows include issuing debt and equity securities. Cash outflows include retirement of debt and equity securities, and dividend payments.

SEC Guidance The Codification includes relevant portions of SEC content but does not contain the entire text of relevant SEC rules, regulations, interpretive releases and staff guidance. For example, the Codification does not include SEC content related to Management's Discussion and Analysis and other items appearing outside the financial statements. The Codification does not replace or affect guidance issued by the SEC and is provided on a...

convenience basis.

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