FAR Chapter 1: Basic Concepts & Framework for Accounting & IFRS
What is OCI made up of?
OCI, below NI: (DENT) -Derivative cash flow hedges -Excess adjustment of Pension PBO and FV of plan assets at year end -Net unrealized gains or losses on "available-for-sale" securities -Translation adjustments for foreign currency
What is the physical capital maintenance concept?
Only recognize an event when an asset is sold or a liability is settled (measures the effects of price changes in nominal or constant dollars).
What is full disclosure?
Providing all useful info in the F/S.
What is recognition concept?
Providing all useful info in the F/S.
What are the key elements of a financial reporting framework?
Recognition Criteria: that determine what will appear on financial statements (F/S) and when it will appear. Measurement Criteria: that determine the amount at which it will be reported. Presentation Criteria: that determine where it will appear on the F/S. Disclosure Criteria: that determine what information and how much information must be provided to F/S users.
What is the matching principle?
Recognize a cost as an expense in the same period as the benefit (usually a revenue) is recognized.
What is the financial capital maintenance concept?
Recognize an event as a change in the value of an asset or liability occurs (recognize holding gains and losses - current GAAP).
What do revenues result from?
Revenues and expenses result from providing goods or services to customers through an entity's primary operations (eg, a bakery selling desserts). Gains and losses result from incidental transactions that are peripheral to an entity's primary operations. For instance, if a bakery sells investment land for more than it originally paid, a gain (not revenue) is recognized because selling land is outside a bakery's normal course of business Things to remember:Revenues and expenses result from an entity's primary operations, whereas gains and losses result from an entity's incidental transactions. Revenues and gains result from increases in assets or decreases in liabilities, whereas expenses and losses result from decreases in assets or increases in liabilities
What is the consistency concept?
Same principle each year.
What is allocation concept?
Spreading a cost over more than one period.
Which is the most appropriate financial statement to use to determine if a company obtained financing during a year by issuing debt or equity securities?
Statement of Cash Flows- B/c of cash inflows from financing B/S- would only show the balance at the end of the accounting period for debt and equity and not necessarily whether the company obtained financing during any given year.
What should be the fair value of a non-financial asset be? Like land
The fair value of a nonfinancial asset should reflect that asset's highest and best use because sellers will transact wherever they will receive the most consideration. That use must be physically possible, legally permissible, and financially feasible. If the highest and best use for an asset differs from the current use, the former equals fair value. The highest and best use of the land reflects a fair value of $180,000. Because neighboring factories have sold their land to be used for residential development, this use is physically possible, legally permissible, and financially feasible.
What is the holding gain or loss on inventory?
The holding gain or loss on inventory is the difference between its replacement cost and its purchase price.
What is price to earnings ratio?
The price earnings ratio on common stock is equal to net income attributable to common stockholders, which is net income minus preferred dividends, $1,200,000 - $300,000 or $900,000 divided by the number of common shares, 100,000, resulting in $9 per share. The price earnings ratio is the share price, $72, divided by $9 or 8 to 1.
What is the times preferred dividends earned ratio?
The times preferred dividends earned ratio is the ratio of total earnings, $480,000 in this case, to total preferred dividends, $200,000, resulting in a ratio of 2.4 to The term times preferred dividends earned ratio refers to a measure that allows the investor-analyst to understand if the company is generating enough cash to pay its preferred dividends. The times preferred dividends ratio is also of interest to holders of common stock, since preferred shareholders will be paid their dividend before holders of common stock.
What is the difference between a current ratio, quick ratio, and cash ratio?
Things to remember: 1) The quick ratio assesses an entity's ability to meet its short-term obligations. It is calculated by the sum of cash and assets that can be easily converted to cash (eg, marketable debt securities, net accounts receivable) divided by current liabilities. Fluctuating market prices on marketable securities is one limitation of the quick ratio 2) The current ratio is a liquidity ratio that measures a company's ability to pay short-term obligations or those due within one year. 3) The cash ratio is a measurement of a company's liquidity, specifically the ratio of a company's total cash and cash equivalents to its current liabilities.
Bank Reconciliation formula
Things to remember:Bank reconciliations are used to reconcile differences between cash balances per bank and per book to arrive at the correct cash balance. A company removes cash from its books only when checks are mailed or electronically transmitted to another party.
Answer this dad: At June 30, Almond Co.'s cash balance was $10,012 before adjustments, while its ending bank statement balance was $10,772. Check number 101 was issued June 2 in the amount of $95, but was erroneously recorded in Almond's general ledger balance as $59. The check was correctly listed in the bank statement at $95. The bank statement also included a credit memo for interest earned in the amount of $35 and a debit memo for monthly service charges in the amount of $50. What was Almond's adjusted cash balance at June 30?
Things to remember:To calculate the adjusted cash balance starting from the balance per books, all items not properly reflected in the books are added/subtracted. To calculate the adjusted cash balance starting from the balance per bank, all items not properly reflected in the bank statement are added/subtracted.
What is the primary objectives of financial reporting?
To provide information that is useful to existing and potential investors, lenders, and other creditors (ie, users) in making decisions about providing resources to the entity. Other important objectives: -Changes in economic resources -Financial performance reflected in accrual accounting -Financial performance reflected in the cash flow -Changes in economic resources and claims NOT resulting from financial performance (eg,issuing additional stock) - Statement of Changes in Owners' Equity.
What are Fair Value assumptions based on when there is no principle market?
When there is no principal market, fair values are based on the assumption that a transaction would occur in the most advantageous market. Therefore the second market, which would result in net sales proceeds of $80, is assumed. Though transaction costs are considered in determining the most advantageous market, they are ignored for the purpose of the fair value measurement. Therefore, the transaction cost of $1 is added back to net sales proceeds of $80, for a fair value measurement of $81, which is the answer. ' Lower transaction amount is the answer
Will you need to sometimes consider AFS, cash flow derivative, and OCI pension, net of tax?
Yes- The other side of the entry for unrealized holding gains for AFS debt securities will be a gain credited to other comprehensive income (OCI). The unrealized holding gain on available-for sale debt securities (net of tax) should be $10,500 ($89,500 - $74,500 = $15,000 × (1 - .3) = $10,50
What is mark to market?
ASC 820 defines fair value as "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 (at exit price)"
Kind of tricky, so try to answer: Image to question
Accounts receivable properly includes trade accounts of $96,000. The allowance for credit losses of $2,000 is a contra-account to the receivables, resulting in a net value of $94,000 for the receivables. The inventory on consignment should be included in inventory at cost. Since the $26,000 represents 130% of Mare's cost, the cost would be $20,000, which would be added to inventory giving a total of $80,000. Total current assets would consist of cash of $70,000, net accounts receivable of $94,000, and inventory of $80,000 for a total of $244,000.
Solve if you dare! Question in the image
Answer: With revenues of $3,600,000 and expenses of $2,600,000, Trey has income of $1,000,000. At a tax rate of 30%, income tax expense will be $300,000. As a result, the prepaid taxes will be reclassified as income tax expense. The $500,000 due from a customer would consist of $250,000 as a current receivable based on the installments due on 4/1 and 10/1 of next year. The remaining $250,000 would be a noncurrent receivable, reducing net accounts receivable by $250,000 to $1,400,000. Current assets would include the cash of $550,000 and net accounts receivable of $1,400,000, for a total of $1,950,000.
What is the conservatism concept?
Considering all risks inherent in the business (accruing a contingent loss).
What is realization concept?
Converting noncash resources into cash or a claim to cash.
What is cost/benefit?
Costs don't exceed benefits to be derived.
What are monetary assets and liabilities and how does inflation affect them? See example of image
Monetary assets and liabilities are financial instruments that are fixed in amount and do not vary in dollar amount as a result of inflation. As prices increase or decrease, the dollar value of equipment would change and, since it is based on the amount reported as equipment, accumulated depreciation would as well. As a result, it is nonmonetary.
Some questions about OCI and AOCI: 1) Which of these accounts is temporary and permanent? 2) Where do these accounts get reported? 3) What do these accounts represent?
1) Accumulated OCI (AOCI) is the collective amount of OCI at a specific time and is reported on the balance sheet. At the end of every period, OCI (temporary account) is transferred and closed to AOCI (permanent account), such as the close of net income to retained earnings. 2) OCI can be reported on the income statement or the statement of comprehensive income. -Accumulated OCI (AOCI) is the collective amount of OCI at a specific time and is reported on the balance sheet. 3) Other comprehensive income (OCI) refers to changes in a business's equity that arise from sources other than net income or owner transactions. OCI specifically includes five categories of fair value changes from assets and liabilities in an accounting period. OCI can be reported on the income statement or the statement of comprehensive income. Things to remember:Other comprehensive income (OCI) includes changes in equity related to fair value gains and losses. There are five categories of income that are aggregated each period to determine OCI. Accumulated OCI (AOCI) is the sum of OCI in the current period plus all prior periods (if any) and is reported as equity on the balance sheet.
What are the 10 key elements that make up all of the F/S?
1) Assets 2) Liabilities 3) Equity or Net Assets 4) Investments by owners (contributions) 5) Distributions by owners (dividends) 6) Comprehensive Income 7) Revenues 8) Expenses 9) Gains 10) Losses
When is revenue recognized?
1) Earned - Earnings process is complete (goods delivered) 2) Realizable (realized) - Collect cash or a claim to cash.
What are the ways to measure in historical terms?
1) Historical cost: Amount paid (eg, PP&E). 2) Replacement (current) Cost: Cost to replace an item (eg, inventory). 3) Fair Value: The price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (ASC 820)—aka, Fair Market Value (FMV). 4) Net Realizable Value: (NRV) - Amount expected to be converted into (eg, A/R). 5) Present Value: Discounted cash flows due to the time value of money (used for notes receivable, bonds payable, leases).
What are the six steps to applying the fair value measurement approach?
1) Identify the asset or liability to be measured. 2) Determine the principal or most advantageous market (highest and best use. Assume asset/liability is sold in either the principal market or if not known, the most advantageous market 2a) Principal market - greatest volume and level of activity occurs (NYSE) 2b) Most advantageous market - maximizes price received for the asset or minimizes amount paid to transfer the liability. 3) Determine the valuation premise (in-use or in-exchange). Assume the highest and best use premise to determine the fair value. 3a) "in-use" - if maximizes value by using it with other assets as a group. 3b) "in exchange" - if asset provides maximum value on a stand-alone basis 4) Determine the appropriate valuation technique (market, income, or cost approach) to measure fair value (MIC). Any change in these is considered a change in estimate 4a) Market approach - uses prices and relevant information from market transactions for identical or comparable assets/liabilities. 4b) Income approach - uses present value techniques to discount cash flows or earnings 4c) Cost approach - uses current replacement cost. 5) Obtain inputs for valuation (Level 1, Level 2, or Level 3) 5a) Level 1 - uses quoted prices from active markets (stock quotes) 5b) Level 2 - Directly or indirectly observable inputs, other than level 1 (yield curves, bank prime rates, interest rates, credit risks, default rates on loans) 5c) Level 3 - Unobservable inputs are used if level 1 or 2 are not available (using financial forecasts or expected cash flow estimates) 6) Calculate the fair value of the asset.
When do you recognize financial statement elements?
1) Meets the definition: The item meets the definition of an element (asset, liability, etc.) 2) Measurable: Element is capable of being measured in monetary terms. 3) Relevant: The item is capable of making a difference in user decisions. 4) Reliable: The information is faithfully represented and verifiable (ie, useful).
When assets or services are exchanged for future cash, the most appropriate means of measuring the transaction may be the present value of future cash flows. What factors must you consider?
1) Risk - the probability that the cash will actually be paid or received 2) Timing - the periods in which the payments are expected to be received 3) Interest - the interest rates that would be appropriate taking into consideration market rates and the credit standing of the parties involved.
What does a full set of F/S include?
1) Statement of Financial Position (Balance sheet) 2) Statement of Earnings & Comprehensive Income (Income statement) 3) Statement of Cash Flows 4) Statement of Changes in Owners' Equity (statement of Investments by and Distributions to Owners)
What should disclosures about the use of FV provide users of F/S?
1) Valuation techniques 2) Uncertainty of the FV measurements 3) The effect of changes in FV measurements (in earnings or cash flows)
Could converting GAAP financial statements to current cost financial statements result in gains for goods sold during the reporting period and gains on inventory at the end of the period?
Current cost accounting addresses changing prices in financial reporting and may be presented as supplementary information accompanying the basic financial statements (F/S). This method is useful during periods of high inflation or deflation since it provides F/S users with relevant information on the current amount at which F/S items could be sold or settled. GAAP incorporates some elements of current cost accounting (eg, measuring trading debt securities at fair value), but many items are reported under GAAP at their historical amounts. On a current cost F/S, assets on the balance sheet (eg, inventory) are reported at replacement cost. Replacement cost is the current price an entity would have to pay to replace an existing asset. Any difference between the asset's replacement cost and its original cost of purchase will result in a gain or loss. When inventory is sold, the COGS reported on a current cost F/S is the number of units sold multiplied by the average current cost during the period. Any difference between the average current cost and the original purchase cost will result in a gain or loss. Things to remember:Current cost accounting measures financial statement (F/S) accounts using current amounts instead of historical amounts. It is useful during periods of high inflation or deflation. On a current cost F/S, the changing prices of both inventory and goods sold will result in gains or losses in the reporting period.
During periods of rising inflation, when is purchasing power loss incurred?
During a period of rising prices, a purchasing power loss is incurred on monetary assets: Cash, AR, Bond investments, prepaid expenses, Accounts/Notes, BP.
What type of financial reporting framework do public entities use?
Either GAAP or IFRS; cannot use a special purpose framework
What is the most authoritative source of GAAP?
FASB Accounting Standards Codification. FASB created the Accounting Standards Codification (ASC) in 2009 to provide all authoritative literature on specific accounting topics in one place. The ASC reorganized many (non-SEC) GAAP pronouncements from several sources (eg, AICPA, Accounting Principles Board) into a single source of authoritative guidance for nongovernmental entities. The ASC is organized into nine broad topics (eg, assets) and approximately 90 specific subtopics (eg, receivables). ASC standards are the most authoritative source of accounting information. Previous GAAP standards are superseded, and all other accounting literature not included in the Codification is considered nonauthoritative. For example, an AICPA Statement of Position (SOP) is a type of authoritative pronouncement that was issued prior to the Codification. SOPs are no longer issued, and all prior SOPs have been superseded by the ASC. Things to remember:The Accounting Standards Codification (ASC) is currently the most authoritative source of (non-SEC) accounting guidance for nongovernmental entities; accounting literature from other sources is considered nonauthoritative. The Codification simplifies access to U.S. GAAP by locating all authoritative literature pertaining to a specific topic in one place.
What is FASB Accounting Standards Updates?
FASB created the Accounting Standards Codification (ASC) in 2009. The ASC is a reorganization of thousands of GAAP pronouncements from several sources into a single source of authoritative guidance. This codification simplified technical accounting research by collecting all authoritative literature on a topic in one source. The ASC governs any entity that follows GAAP (ie, issuers and nonissuers). A FASB Accounting Standards Updates (ASU) is issued to amend the existing ASC. The FASB deliberates and solicits the views of stakeholders before issuing an ASU. An ASU is not an authoritative standard but a document that communicates how and why the ASC is changing. Things to remember:A FASB Accounting Standards Update (ASU) is issued to amend the existing Accounting Standards Codification (ASC). An ASU is not an authoritative standard but a document that communicates how and why the ASC is changing.
What type of financial reporting framework do non-public entities use?
GAAP, IFRS, or any other special purpose framework like: -Cash, tax basis, contractual basis, regulatory basis, FRF for small and medium size entities
How do you determine FV of an asset when there is no principal market?
In fair value calculations, the most advantageous market maximizes the net sales proceeds of an asset. The market with the highest sales proceeds is where sellers will transact because that is where they will receive the most consideration. When determining fair value, the market price must be adjusted for transportation costs because these costs are unavoidable and do not reflect the value of the item itself. Conversely, the market price is not adjusted for transaction costs; these costs are only incurred if a willing buyer decides to purchase or assume the item. Things to remember:The most advantageous market maximizes the sales proceeds of an asset. While net sales proceeds (quoted price less transaction and transportation costs) determines which market is the most advantageous, fair value is determined by subtracting only transportation costs from the quoted market price.
Solve in image:
In fair value reporting, the most reliable input is the price from the principal market. If no principal market exists, an item's fair value is the price from the most advantageous market. This market maximizes the sales proceeds of an asset or minimizes the transfer price of a liability. A seller will transact wherever they will receive the most consideration. As a result, when determining the most advantageous market, transaction costs must be subtracted from the quoted market price because the seller would not receive that amount. However, fair value is the quoted market price (including transaction costs) from the most advantageous market because that amount is what a willing buyer must pay for that item. There are three steps for using the most advantageous market to determine fair value. The financial asset's fair value is $1,000 (quoted price from Market A) and is calculated as follows: Market A: 1000-75=92 Market B: 1050-150=900 Therefore Market is the most advantageous. Take Market A's FMV of $1,000
When are expenses or losses recognized?
as incurred or when a loss of future economic benefits is discovered
What is inventory turnover ratio?
cost of goods sold/average inventory
