FAR

Calculation of comprehensive income

Comprehensive income is equal to current period net income plus other comprehensive income. Net income = Sales revenue - COGS - Operation expense - Income tax expense Comprehensive income = Net income + Other comprehensive income

Disclosures about the risks are required for most financial instruments. What kinds of risk?

Concentration of credit risk - the risk that the other party to the instrument will not perform - must be disclosed. Disclosure of market risk - the risk of loss from changes in market prices - is encouraged, but not required.

Cash collection is a critical event for income recognition in the

Cost-recovery method and installment method Under the cost recovery method, revenue is recognized after cash equaling the cost of the item is collected. Under the installment method, gross profit is recognized as a gross profit percentage times the cash collected from the sale.

Land was purchased to be used as the site for the construction of a plan. A building on the property was sold and removed by the buyer so that construction on the plant could begin. The proceeds from the sale of the building should be ...

Deducted from the cost of the land Rule: Cost of land includes all costs necessary to put the land in place and condition for construction of the plant. Any proceeds from the sale of any existing buildings (or standing timber, or soil) or scrap are deducted from the cost of the land

According to the FASB conceptual framework, which statement conforms to the realization concept

Depreciated equipment was sold in exchange for a note receivable Revenue and gains are realized when assets are exchanged for cash or claims to cash.

A corporation entered into a purchase commitment to buy inventory. At the end of the accounting period, the current market value of the inventory was less than the fixed purchase price, bu a material amount. What is most appropriate accounting treatment?

Describe the nature of the contract in a note to the financial statements, recognize a loss in the income statement, and recognize a liability for the accrued loss.

According to the FASB and IASB conceptual frameworks, useful information must exhibit the fundamental qualitative characteristics of

Faithful representation and relevanse

Which depreciation uses the straight-line depreciation method?

Group and composite depreciation The group method is for groups of similar assets while the composite method is for a collection of dissimilar assets.

In an exchange of dissimilar assets under IFRS, an entity received equipment with a fair value equal to the carrying amount of the other assets given up. The entity also paid cash. As result of the exchange, the entity recognized ...

A loss equal to the cash given up. Under IFRS, exchanges of dissimilar assets are regarded as exchanges that generate revenue and all gains and losses are recognized. In this problem, the entity gave up cash and asset in exchange for equipment with a FV equal to CV of the asset given up. Example: FV of new equipment $10,000 and $1,500 paid ... Dr. Equip received $10,000 Dr. Loss 1,500 Cr. Asset given $10,000 Cr. Cash paid 1,500

The proper accounting for losses when non-monetary assets are exchanged for other non-monetary assets

A loss is recognized immediately, because assets received should not be valued at more than their cash equivalent price Under the rule of conservatism, losses are recognized all non-monetary exchanges when the book value exceeds the FV of the asset given up. An asset's cash equivalent price is the asset's FV. Asset should not be valued at more than FV, so when BV exceeds FV, the asset should be recorded at the lower FV. when a loss is recorded, the asset received is recorded at the BV of the asset given up plus any cash paid minus any cash received minus the loss recognized.

For a company to obtain a retail business license in a particular state, the company is required to pay the state the equivalent of three months of sales taxes on its projected retail sales. This amount is fully refundable after five years, provided the company has filed all required sales tax returns and paid all sales taxes due. Initially the company should report the payment related to this licensing requirement as

A non-current asset Paying the equivalent of three months of sales taxes on projected retail sales in satisfaction of the licensing requirement that is fully refundable after five years is a non-current asset. Because the transaction is expected to result in the realization of cash in the future, the payment is an asset. It is a non-current asset because the cash will be realized at a time beyond the normal operating cycle or one year.

Compared to the accrual basis of accounting, the cash basis of accounting understates income by the net decrease during the accounting period of

Accrued expenses A net decrease in AR means cash collected exceeds revenue recognized on the accrual basis. This would mean higher cash basis income than accrual basis income. This yields a "no for AR. A net decrease in accrued expense means cash paid to reduce accrued expense was more than the accrual basis expense recorded. This would mean a higher expense under the cash basis than under the accrual basis.

Loss occurred by frequent hailstorm damage. How should the hail damage cost be reported in financial statements under US GAAP?

Actual hail damage must be reported without separate disclosure. Because the hailstorms are frequent, the damage is not considered unusual.

A company purchased a coal mine for $10,000,000. As a condition of the purchase, a company agreed to restore the land after mining operations ceased. Restoration costs are estimated at $2,500,000. The proper accounting for these restoration costs is ...

Add them into the depletion base of the mine

The allowance method for recognizing uncollectible accounts. Ignoring deferred taxes, the entry to record the write-off of a specific uncollectible account

Affects neither net income nor working capital.

A method of estimating uncolletible accounts that emphasizes asset valuation rather than income measurement is the allowance method based on

Aging the receivables

Generally, which US GAAP inventory method approximates most closely the current cost?

COGS - LIFO Ending Inventory - FIFO

Common modification used to prepare modified cash basis financial statements

Capitalizing inventory

According to the installment method of accounting, gross profit on an installment sale is recognized in income

In proportion to the cash collection. Under the installment method, total gross profit is deferred until cash payments are received. Realized gross profit equals the gross profit percentage on the sale time the cash received.

When the double extension approach to the US GAAP dollar value LIFO inventory method is used, the inventory layer added in the current year is multiplied by an index number. How components are used in the calculation of this index number?

In the numerator, the ending inventory at current year cost; in the denominator, the ending inventory at base year cost.

When the allowance method of recognizing uncollectible accounts is used, the entries at the time of collection of a small previously written off would

Increase the allowance for uncollectible accounts A collection of a previously written-off account receivable would increase the "allowance" account, which is a credit balance account Dr. Cash $1,000 Cr. Allowance for doubtful accounts $1,000

In the footnotes to the financial statements should be disclosed

Information about changes in stockholders' equity Also other information about significant asset and/or liability accounts

According to the FASB and IASB conceptual framework, what does the concept of faithful representation include?

Neutrality The concept of faithful representation includes neutrality, completeness, and freedom from error.

According to the FASB and IASB conceptual framework, one of the fundamental qualitative characteristics of useful financial information is

Relevance and faithful representation

According to the FASB and IASB conceptual frameworks, which of the following correctly pairs a fundamental qualitative characteristic of useful information with one of its components?

Relevance and materiality

According to the FASB conceptual framework, certain assets are reported in financial statements at the amount of cash or its equivalent that would have to be paid if the same or equivalent assets were acquired currently. What is the name of the reporting concepts?

Replacement cost

Lano Corp.'s forestland was condemned for use as a notional park. Compensation for the condemnation exceeded the forestland's carrying amount. Lano purchased similar, but larger, replacement forest land for an amount greater than the condemnation award. As a result of the condemnation and replacement, what is the net effect on the carrying amount of forestland reported in Lano's balance sheet?

The amount is increased by the excess of the replacement forestland's cost over the condemned forestland's carrying amount. Rule: When a fixed asset is sold (voluntarily or involuntarily) gain or loss is recognized (proceeds vs. carrying amount) as part of income from continuing operations. The carrying amount of the replacement property is equal to the FV of the consideration paid for it.

Once the division has been made to dispose of a component of a business and that component meets the criteria to be classified as held for sale, the operating results of the component for the period report on, and any gain or loss from the disposal, should be reported

as gain or loss from operations of a component and included in gain or loss from discontinued operations. Reported separately from continuing operations, net of tax.

If a change in accounting estimate cannot be distinguished from a change in accounting principle, the change is

considered a change in accounting estimate treated as a change in accounting principle and is accounted for prospectively.

A segment of company was discontinued during Year 1. A company loss from discontinued operations should not

exclude operating losses from the date the decision to dispose of the segment was made until the end of Year 1.

After being held for 40 days, a 120-day 12% interest-bearing note receivable was discounted at a bank at 15%. The proceeds received from the bank equal ...

maturity value less the discount at 15% The discount is always applied on the maturity value

Under US GAAP, substantial doubt about an entity's ability to continue as a going concern exists when relevant conditions and events indicate that it is

probable that the entity will not be able to meet its obligations as they come due within one year from the date the financial statements are issued

Cost approach determines fair value by ...

using current replacement cost. A discount rate is not used in this approach.

Market approach determines fair value by ...

using prices and other relevant information from market transactions involving identical or comparable assets or liabilities to determine fair value. A discount rate is not used in this approach.

The financial statements should be prepared under the going concern basis of accounting, ...

with footnote disclosure explaining the conditions that originally raised doubt about the entity's status as a going concern.

On December 31, a building owned by Carr, inc. was destroyed by fire. Carr paid $12,000 for removal and clean-up costs. The building had a BV of $250,000 and FV of $280,000 on December 31. What is the loss in this involuntary conversion?

$262,000 Rule: Gain of loss on fixed assets (including involuntary conversions) are always recognized during the period incurred based on recorded amount (NBV) plus any costs associated with the transaction.

Fair values are

- Fair value includes transportation costs, but not transaction costs. - The price in the principal market for an asset or liability will be the fair value measurement - Fair value is a market-specific measurement - Fair value is an exit price

Required disclosure under IFRS but not under US GAAP

- Statement of compliance with applicable accounting principles - Disclosure of judgments made in the preparation of the financial statements

Disclosure of vulnerability to concentration is required if all of criteria are met

- the concentration exists as of the financial statement date - the concentration makes the entity vulnerable to the risk of a near-term severe impact - it is at least reasonable possible that the events that could cause a severe impact from the vulnerability will occur in the near-term Although the concentration in question might be in a specific geographic area, other concentrations (with respect to specific customer or a specific supplier) must also be disclosed if the above criteria are met.

For purpose of determining the period over which subsequent events must be evaluated, financial statements are considered to be "issued" when ...

- the financial statements are in a form and format that comply with GAAP - the financial statements have been widely distributed to financial statement users

A company sells products to B company. B company obligate to pay products with in six months. B company is given 12 months to return any of products for a refund if it experiences low demand. B is also given 18 months to exchange any products to low demand. At time of sale, but estimates $5,000 in exchanged goods. A company should recognize revenue for the aforementioned transaction

12 months after the date of sale Because B is given 12 months to return any products for a refund, once the 12-month period has passed, A can then recognize revenue because any future return will result in exchanges rather than refunds.

A company is an accelerated filer that is required to file Form 10-K with the US SEC. What is the maximum number of days after the company's fiscal year end that the company has to file 10-K with SEC?

75 days

A disadvantage of the periodic inventory system

A disadvantage of the periodic inventory system is that the COGS amount used for financial reporting purpose includes both the cost of inventory sold and inventory shortages.

Under construction contract, using the percentage-of-completion method, when should recognize as a current liability at year end?

A liability only exists when progress billings exceed costs and estimated earnings.

Which of the documents is typically issued as part of the due-process activities of the FASB for amending the FASB Accounting Standards Codification?

A proposed accounting standards update

How should a first-time adopter of IFRS recognize the adjustments required to present its opening IFRS statement of financial position?

All of the adjustments should be recognized directly in retained earnings or, if appropriate, in another category of equity.

How should the effect of a change in accounting principle that is inseparable from the effect of a change in accounting estimate be reported?

As a component of income from continuing operations

Interim financial reporting should be viewed primarily in which ways?

As reporting for an integral part of an annual period

In a summary of significant policies should be disclosed

Basis of consolidation The summary of significant accounting policies is typically the first note provided after the financial statements and will include components such as: measurement bases, accounting principles and methods, criteria, and policies such as basis of consolidation, depreciation methods, revenue recognition, etc.

The inventory goods FOB shipping point at year end purchases were excluded from ending inventory. What effect does the omission have on asset and retained earnings?

Both asset and retaining earnings are understated. By not including inventory in asset, that results assets are understated. An understated of ending inventory results in an overstatement of COGS, which results in an understatement of net income and retained earnings.

According to the FASB, the amount of deferred gross profit relating to collections 12 months beyond the balance sheet date should be reported in the

Current asset section as a contra account

Disclosure of accounting policies

Disclosure of accounting policies is an integral part of the financial statements.

When specific inventory price is increasing, which inventory method will result the lowest ending inventory?

Dollar-value LIFO

A non-governmental NPO, received unconditional promises of $100,000 expected to be collected within one year. an organization received $10,000 prior to year-end. An organization anticipates collecting 90% of the contributions and has a June 30 fiscal year-end. What amount should an organization record as contribution revenue as of June 30?

Dr. Pledge receivable $100,000 Cr. Allowance for doubtful accounts $10,000 Cr. Contribution revenue $90,000

At the end of year 1, a company reduced its inventory cost from $100 to its net realizable value of $80. As of the end of year 2, the inventory was still on hand and its net realizable value increased to $150. Under IFRS, what journal entry should the company record for year 2 to properly report the inventory value?

Dr. inventory $20 Cr. expense $20 a $20 recovery is allowed to increase the inventory value back to its original cost of $100 and decrease the expense, but the total increase of $70 is not allowed as this would cause the inventory value to exceed its original cost.

A US public company need guidance in accounting for an reporting a complex derivative transaction that it entered into with a European subsidiary. This company is most likely to find the appropriate guidance in the

FASB accounting standards cordification

Assuming constant inventory quantities, which inventory costing method will produce a lower inventory turnover ratio in an inflationary economy?

FIFO Under FIFO, COGS would be lower, and ending inventory would be higher, causing average inventory to be higher as well. Therefore, FIFO will result in a lowest inventory turnover in an inflationary environment assuming constant inventory quantities.

Costs for FOB destination

FOB destination means that title passes when received by the buyer, and that packaging, shipping, and handling are costs to the seller.

Costs for FOB shipping point

FOB shipping point means that title passes when the goods leave the seller's location and that shipping is a cost of buyer.

For which of method of determining fair value would an entity's discount rate be most important?

Income approach Income approach determines fair value by converting future amounts, including cash flows or earnings, to a single discounted amount. This would require the use of a discount rate.

Under US GAAP, a gain that is both unusual and infrequent should be reported as

Income from continuing operations

When computing diluted earnings per share, convertible securities are

Recognized only if they are dilutive Rule: Convertible securities are recognized when computing diluted EPS only if the conversion is dilutive

Under US GAAP, if a company is not presenting comparative financial statements, the correction of an error in the financial statements of a prior period should be reported, net of applicable income taxes, in the current

Retained earnings statement as an adjustment of the opening balance

Example of Level 3 input

Shares of a privately held company whose value is based on projected cash flows Projected cash flows are an un-observable input based on entity assumptions and would be classified as a Level 3 input.

The installment sales method of recognizing revenue

Should be used only if the amount ultimately collectible cannot be estimated. If collection is in doubt, the "cost recovery" method should be used.

Under IFRS, when required disclosure required footnotes to the financial statements?

Such disclosure required when management is aware of material uncertainties that may give rise to substantial doubt about the entity's ability to continue as a going concern

The method of recording uncollectible accounts expense is consistent with accrual accounting

The allowance method - is used to match expenses with revenues and to record the proper carrying amount for accounts receivable. The direct write-off method does not achieve these objectives.

A firm's ending inventory balance was overstated by $1,000 which statement is correct according to a periodic inventory system?

The retained earnings were overstated by $1,000 An ending inventory balance that is overstated by $1,000 implies that COGS sold is under stated by the same $1,000. An understated COGS leads to an overstatement of $1,000 in net income, which in turn leads to a $1,000 overstatement in retained earnings.

During periods of rising prices, when the FIFO inventory method is used, a perpetual inventory system results in an ending inventory cost that is ...

The same as in a periodic inventory system

A company has a cash account for segregated solely for a payment current maturity into a bond sinking fund. How should this account be reported in classified balance sheet?

The segregated bank account should be reported as a non-current asset. To be used to pay a current maturity of a long-term bond sinking fund debt should be classified as a non-current asset, not "cash".

According to the FASB and IASB conceptual frameworks, which is an enhancing qualitative characteristic?

Timeliness Timeliness, understandability, comparability and verifiability are characteristics that enhance the usefulness of information that is relevant and faithfully represented.

When an entity reissues financial statements, the entity should NOT recognize

When an entity reissues financial statements, the entity should not recognize events (adjust for events) that occurred between the date the original financial statements were issued or available to be issues and the date the financial statements were reissued.

When would a company use the installment sales method of revenue recognition?

When installment sales are material, and there is no reasonable basis for estimating collectibility.

Comprehensive income may be shown on the face of

a combined "statement of income and comprehensive income" a separate section below net income, or in a separate "statement of comprehensive income."

A change from direct recognition to the installment method is a change in

accounting estimate. Treatment as prospectively.

In a business combination, the valuation of goodwill is a calculation

of the residual paid above the fair value of the identifiable net assets.

Comprehensive income must be disclosed for

related tax effects for components must be disclosed

A state had general obligation bonds outstanding that required payment of interests each year. State law allowed for the general fund to make debt payments without the use of a fiscal agent. The fiscal year ended. Which of the accounts would have decreased when the state paid the interest due?

Fund balance

Under US GAAP, the effect of a material transaction that is infrequent in occurrence but not unusual in nature should be presented separately as a component of income from continuing operations when the transaction results in a

Gain or loss

According to the IASB conceptual framework, which is an underlying assumption of financial statement preparation and presentation?

Going concern

In the exchange of non-monetary assets that lacks commercial substance ...

If boot is paid, all realized losses are fully recognized.

Under US GAAP, is the cumulative effect of an inventory pricing change on prior years earnings reported on the financial statements for

LIFO to weighted average (retrospective) In a change to LIFO is prospectively.

Under US GAAP, what method of accounting must be used in the preparation of financial statements for an entity that is NOT considered a going concern?

Liquidation basis

Form 8-K is a form required to be filed by all companies registered with SEC. The form reports on ...

Major corporate events, including corporate asset acquisitions/disposals, accountant changes, financial statement changes, management changes, changes in securities, etc. Quarterly results of operations will be reported using Form 10-Q

A company sold a fixed asset used for operations for greater than its carrying amount. A company should report the transaction in the income statement using the

Net concept, showing the total gain as part of continuing operations, not net of income taxes. This gain resulted in the recognition of an asset not in the ordinary course of business, but it did not qualify as part of discontinued operations.

If an entity sold $100 of inventory for $100 of cash on December 31, Year 2, which ratio would be decrease?

Net profit margin

On December 31, a company decided to end operations and dispose of its assets within three months. At December 31, the net realize value of the equipment was below historical cost. What is the appropriate measurement basis for equipment included in a Company's December 31 balance sheet?

Net realizable value Because of the decision to end operations and quickly (3 months) dispose of its assets

When a permanent impairment occurs on PPE, the book value is reduced and a loss is recorded. The loss is credited to ...

PPE permanent impairment loss is recorded in credited to accumulated depreciation. Accum depr. Y4 420 Loss (900-420)-300 180 New Depr (300/3) 100 Total Accum dep 700

When inventory prices are expected to generally increase, what inventory system will maximize the inventory carrying amount?

Perpetual moving average method and lower of cost or market for total inventory. Perpetual moving average method will produce a higher inventory carrying amount than periodic weighted average when prices are increasing. the lower of cost or market rule will result in a higher inventory cost if applied to total inventory than individual items when prices are generally increasing.

Qualified transaction as a discontinued operation

Planned and approved sale of a segment

How should unconditional pledges received by nongovernmental not-for-profit organization that will be collected over more than one year be reported?

Pledges receivable, valued at their present values

According to the FASB conceptual framework, which attributes would not be used to measure inventory?

Present value of future cash flow The present value of future cash flow is used to measure long-term receivables or payable, not inventory, because inventory is a short-term asset, which has more immediate cash flows.

Changing from the cash basis to the accrual basis of accounting during the current year. The cumulative effect of this change should be reported in current year financial statements as a

Prior period adjustment resulting from the correction of an error

An entity purchased new machinery. The entity paid freight charges for the purchased machinery. The entity took out a loan from a bank to finance the purchase. Under IFRS, what is the proper accounting treatment for the freight and interest costs related to the machinery purchase?

The freight cost should be capitalize as part of property, plan and equipment, and the interest cost should be immediately expensed. Just like GAAP, the interest incurred to finance the purchase is expensed and not capitalized as part of the historical cost.

According to the FASB conceptual framework, which would cause earnings to differ from comprehensive income?

Unrealized holding loss from available-for-sale securities Unrealized holding loss from available-for-sale securities is a component of other comprehensive income, which is not included in net income and would thus cause earnings to differ from comprehensive income.

Slate Co. and Talse Co. exchanged similar plots of land with FV in excess of CV in an exchange that lacks commercial substance under US GAAP. in addition, Slate received cash of less than 10% of the total consideration received from Talse to compensate for the difference in land values. As a result of the exchange, Slate should recognize ...

A gain in an amount determined by the ratio of cash received to total consideration. This transaction is non-monetary exchange that lacks commercial substance under US GAAP. As such, the transaction is an exception to the general rule of basing the measurement value of the exchange on FV. In this question, cash (boot) is received. Because the cash is less than 10% of the total consideration, a proportional amount of the gain is recognized.

Non-monetary exchange has commercial substance Exchanging truck with investments (such as stock, land) and question does not provide investment's FV. How should determine investment transaction?

When question does not provide FV for receiving investment, do not use BV. Use FV of given up asset (truck) for measuring the transaction.

Due to the absence of seasonal fluctuations, the end of the preceding fiscal year is the appropriate period to include in addition to

the end of preceding fiscal year (the most recent quarter end)

A company uses the complete-contract method to account for a long-term construction contract under US GAAP. Revenue is recognized when

the job completed, NOT when progress billing are collected or when they exceed recorded costs.

A company has a single-employer defined benefit pension plan. A company should report a liability related to the plan equal to

the unfunded projected benefit obligation. The fund status of the pension plan is equal to the fair value of plan assets less the projected benefit obligation. this funded status must be reported on the balance sheet as either an asset (when plan assets exceed the projected benefit obligation) or a liability (when the projected benefit obligation exceeds plan assets). A liability on the balance sheet represents the incremental (unfunded) porttion of the projected benefit obligation that exceeds plan assets.