Financial Accounting & Reporting
How to calculate stock proceed allocation
# OF Shares x Market price = total market = Market ratio (specific stock price/total stock price) x total proceeds for issuing stocks = allocation
How to calculate Goodwill related to an acquisition
Acquisition cost - FV of NET assets(assets-liabilities) = goodwill AKA. Acquisition= Acquisition Cost - Company Net Worth
What is the definition of prepaid expense
Assets paid for before a company can even use them Prepaid asset cash Adjusting Journal entry Prepaid exp Prepaid asset
In Decision usefulness what falls under Faithful Representation
Complete Neutral Free from Error
What are cash and cash equivalent
Demand deposits (same checking account bank can net each other) Cash equivalent Short term Very liquid Original Maturity less than 3 months (9 month bond matures in 2 months NOT CASH EQUIVALENT BECAUSE THE ORIGINAL MATURITY DATE is 9 month)
Modified Accrual
Modified Accrual uses government funds. For example the revenues are recorded only if they're MEASURABLE and AVAILABLE for paying current period obligations ex. Awarded a grant of $2mil but only 800k eligible for expenditure this 800k is revenue--> the amounts are measurable and it tells you the amount AVAILABLE (800K) for paying rent
How to record net capitalized cost of software
1) Amortization of software is the greater of the ratio of current sales to expected total sales or the straight-line method over the useful of the asset 2) If amortized software cost is greater than the software nrv then write down to nrv. If not then ignore
According to SFAC 6. What are the elements of Financial Statements. What are the 3 characteristics of assets
1) Probable future 2) Particular entity can maintain control 3) Transaction/event that gave rise to an entity's control
Give definition for 1933 Securities Exchange Act 1934 Securities Exchange Act
1933 Securities Exchange Act--> contains accounting and disclosure requirements for the initial offering of stocks or bonds. In addition to requirements for secondary market offerings The 1934 Securities Exchange Act--> created the SEC
Define Encumberance
Accounts used to record the estimated amount of purchase orders, contracts, or salary commitments
What is the pervasive constraint
Benefits > Costs
Cash received greater than cv of land given up. Used this cash to purchase a more expensive land
Cash received greater than cv of land given up. Used this cash to purchase a more expensive land
What are the Enhancing Qualitative Characteristics
Comparability (consistency helps achieve comparability) Verifiability Timeliness Understandability
How to calculate realized GP
Compute GP% x Cash Collected
Methods for calculating gain/loss and recording on nonmonetary asset exchanges based on criteria
Copy from handout 11-1
Liability for coupons example
Cost of Toys (Payment you receive from customers that redeem your products) =Liability owed for cost of toys
How would a municipality that uses modified accrual and encumbrance accounting record the transaction of property taxes collected in advance
Credit deferred revenues--> because something is being recorded so a general fund is being used which uses modified accrual and this revenue is received in advance so it hasn't been earned yet
How to record depreciation expense when there's a change in estimate
Current year (CV-SV)/New estimated depreciation years as if you've always used this one and subtract how many years have passed
What is Asset and Liability approach
Determines income tax expense by focusing on the calculation of deferred tax assets and liabilities,
How does an acquirer record direct costs of combination and issuance costs recorded
Direct combination costs--> out of pocket costs such as fees of finders and consultants are expensed Issuance costs such as SEC filing fees are charged to the paid-in-capital account
FASB codification "Risk & Uncertainties" primary subject discussed is
Disclosure 1) name of operations such as major products/service 2) Use of estimates in preparation of financial statement 3) Certain Significant estimates 4) Current vulnerability due to concentrations
What is the Inventory and Retained Earnings relationship
EI (U) BI (O) COGS (O) COGS (U) NI (U) NI (O) RE (U) RE (O)
What is a Fund
Each State/Local (Town, County, District) government has a fund Funds include Government fund Proprietary--> more business like an example is like the IRS Fiduciary--> helps manage someone else's assets an example is employee pension funds
What are the Financial statements for Proprietary funds
Economic resource focus and uses accrual basis like a business Proprietary fund Financial Statements Statement of net assets Statements of revenues, expenses, and changes in net assets Statement of Cash Flows
How to calculate Deferred revenue at year end
Ending receivable - collections - ending allowance for undoutful accounts = deferred revenue formatted this way because deferred revenue is revenue that isn't recognized yet since the actual spending amount hasn't been received
What is a General Fund
Every State and Local (Town/County/District) government each have ONE General Fund The general fund is considered the fund that is responsible for the operations and they're the ones that records the revenues (tax, tickets, fines, license) and expenses (police spending, education spending, and fire department spending) It doesn't collect or impose that job is for the fiduciary (IRS)
Modified accrual for expenditures
Expenditures (not expenses) are recognized when they create an obligation to be paid from current financial resources
What funds records depreciation expenses and capital assets
Fiduciary Proprietary
What is the principle concerning the use of fund accounting A government entity can only have one............
General fund A governmental entity could have a need for more than one pension trust fund, internal service fund, or capital projects fund
What falls in government wide financial statement
Government fund is modified accrual focusing on flow of cash government has gov wide to focus on flow of economic resources Statement of net position & activities Statement of net position Statement of activities
Difference between Government-wide financial statements vs. Government fund Financial Statements
Government has 2 sets of Financial statements does not apply to fiduciary and proprietary one that it records flow of cash (fund) using modified accrual and one that focuses on flow of economic resources just like a business (gov wide) using accrual
What basis of accounting do these funds use Government Proprietary Fiduciary
Government--> modified accrual Proprietary--> accrual Fiduciary--> accrual
Why is it inappropriate to record depreciation expense in Governmental Funds
Governmental funds are responsible for Expenditures (spending money on their appropriation purpose). This fund doesn't deal with expenses because expenses are more maintenance/operation related
What are the Fiduciary Fund Financial Statements
Has an economic resource focus and uses accrual just like a business Government manages taxpayer's assets and protects them Statement of net position Statement of changes in net position
What is modified cash basis
Hybrid method which combines the cash & accrual basis provides more info to uses than cash basis while continuing to avoid the complexities of GAAP.
When should an entity recognize FV of an ARO and add that amount to the BV of the asset
IF a reasonable estimate of FV can be made, an entity should recognize the FV of an ARO in the period in which the obligation is incurred If the estimate cannot be made, the liability should be recognized in the first period in which a reasonable estimate can be made.
What's the process for issuing a new FASB accounting standards update
Identify Financial Reporting issue from stakeholders FASB Chairman consults with FASB members & Board of trustees & decides whether to add another project. The board of trustees VOTES on whether or not to add the projects to its agenda (majority vote wins) Eventually the BOARD ISSUES STANDARDS UPDATES THROUGH A SIMPLE MAJORITY VOTE
Criteria for calculating Gain/loss and recording assets on CV/FV for nonmonetary exchanges
If it meets none of these or meets 2 & 3 1) FV is unknown 2) Exchange transaction is to facilitate sales for customers 3) exchange transaction lacks commercial substance (Business property with nonfluctuating CF) Cash flows do NOT change in their risk, timing, and amount Do NOT include tax effects when considering the cash flow
How does loss carryforwards and carryback work
If you incur loss in X1 you can carry this loss back 2 periods to where there is income to offset this loss if there is still a loss then you carryforward this loss and minus the next period incomee
SFAC 5 Recognition & Measurement in F/S of Business enterprise. When should revenue such as royalty revenue be reported as revenue
If your supposed to receive royalty for lets say 3 years then recognize revenue in the period earned
In Decision usefulness what falls under Relevance
Predictive Value Confirmatory Value
How should noncontrolling interest be disclosed in an income statement
Revenue Expenses Gains Losses Net income/loss Are lumped into the parent company's total amount BUT on the consolidated NI for parent and noncontrolling interest MUST be clearly identified and disclosed in the face of the consolidated statement of income
How should the effect of a change in accounting estimate be accounted for?
In the period of change and future periods if it affects both
What is included in partnership capital
Initial Capital investment Profit and loss earned by business and allocated based on partnership agreement distribution & money taken out
How to calculate the Intercompany sales in the consolidation process
Intercompany sales = total sales for Parent and Subsidiary - Consolidated sales between the 2 = Intercompany sales
How do you report Change in Accounting Principle that is inseparable from the effect of a change in Accounting Estimate be reported
It becomes change in Accounting Estimate and handled prospectivelyt This change becomes a part of Income for continuing operation because no special disclosure is required
Special purpose unit of government can become a primary government if
It has a separately elected governing body It is legally separate It is fiscally independent of other state and local governments
What are General & Administration expense
It's a part of operating expense because operating expense includes selling and admin expense The admin expense applies to company as a whole like fixed salaries etc For example sales representative would be EXCLUDED FROM General and admin expense because they're considered selling expense helping to promote sales
What is a government MD&A (management's discussion and analysis)
It's a required supplementary information designed to communicate in narrative easily readable form the purpose of the basic financial statements and the government's current position
What is the equity method and how to apply
Its a method to record investment cost and you use this method when the investor has significant influence over the financial and operating policies of the investee Cost of investment (unadj) + share of income - share of dividends minus dividends because cash Cost of investment
When should internally developed patents be capitalized and amortized
Legal costs incurred to successfully defend the internally developed patent should be capitalized and therefore get amortized over its remaining economic life
What are the Financial statements for General fund
Modified accrual focuses solely on flow of cash Government fund statements 1) B/S 2) Statement of revenue, Expenditure, and changes in fund balance
Do prior year OCI related errors affect beginning RE
No they do not. They instead result in erroneous balances in accumulated OCI
Included in $292,500 is the $30k cost of printing catalogues for a sales promotional campaign in January 20X2. Should this 30k be included in 20X1 expense?
No this 30k should be deferred to 20X2 because that's what the costs are for unless it specifically states it's prepaid
What kind of asset is cash that is restricted as to withdrawal
Noncurrent asset because it's restricted so you don't have access to it therefore it can't be converted to cash within 3 months.
IFRS change in accounting estimate
Occurs due to uncertainties in measuring items on financial statements Change in estimate is accounted for on a prospective basis in the period of change (current & future periods)
JE process for encumbrances after the supplies and invoice were received
Purchase order approved (est cost) Encumbrances Budgetary fund balance encum Actual cost received Budgetary fund balances encum Encumbrances
For customers who pay annual fees in advance how is the revenue recognized
Recognize revenue evenly over the contract year as the service are performed the unearned liability gets reduced as you perform more work
What is Capital maintenance
Recovery of cost
What is the effect of a Cumulative foreign exchange translation loss
Reduces stock holder equity because when the foreign currency decreases in value then you have an unrealized loss in OCI which reduces income and reduces Shareholder equity
Predictive value is an ingredient of
Relevance
What are the components of a discontinued operation
Reportable Operating segment Reporting unit subsidiary asset group
Change in principle from (from GAAP to GAAP) process
Retrospective adj--> go back to each period and & apply new method Direct adjustment for inv, deferred tax, impairment recognize in Prior periods Indirect effects--> any changes to current or future CF that resulted from making change in accounting principle (ex. royalty payment, profit sharing)
What are net sales
Sales - returns (expected returns)
What are trading securities
Securities bought and held just to sell in the short term. Therefore they're recorded in FV and are current asset and holding gains and losses included in earnings because they're ready to get sold in the market
According to FASB Accounting Standards Codification, the financial statements of a not-for-profit entity focus on
The entity as a whole
The GASB establishes accounting and reporting standards for whom?
State & local governmental entities 1. states, counties, cities, and towns 2. Independent school districts 3. State & Local Government educational institutions (colleges and universities) 4. Hospitals & other health care organizations 5. Charitable & other Gov not-for-profit organizations
Define impaired asset
The PV of the company's asset is less than the CV. You have to write down the asset's CV to its PV
When a full set of General Purpose Financial Statements are presented, comprehensive income and its componenets should
The comprehensive income should be displayed in a financial statement too that carries the same importance as other financial statements
What are some examples of significant estimates
The disclosure of accounting estimates need to include the nature of the uncertainty and an indication that it is at least reasonably possible that this change in the estimate will occur in the near term Examples of required disclosures (Inventory subject to rapid technological obsolescence & contingent liabilities for obligations of other entities & estimated net proceeds recoverable, the provisions for expected loss to be incurred, or both, on disposition of a business or assets)
What is physical capital concept
The effect of price changes are recognized as "capital maintenance adjustments"
What is financial Capital
The effects of price changes on assets held and liabilities owed are recognized as "holding gain & losses" & included in return on capital ---> this is applied to currently reported NI therefore affects the comprehensive income
Should Accounting Policies be disclosed and why
Yes accounting policies should be disclosed because it shall identify and describe the accounting principles followed by the entity and the methods of applying those principles that affect the determineiation of financial position, CF, or results of operationp
Do government organization pay taxes yes or no and why
Yes they do pay taxes Certain nongovernmental organization don't pay taxes like charitable organizations
Is it possible to update the balance sheet after 12/31/x
Yes you can update when it's an event that occurred during a certain year like a lawsuit and it you were awarded cash after 12/31/x but because it occurred during that year then it would be reported on 12/31/x B/S You also need a disclosure as well
Examples of Comprehensive Income Items
adjustments 2) unrealized holding G/L 3) Pension/Other Postretirement Benefit (Pension G/L, Pension prior service costs/credits, Pension transition assets or obligations associated with pension 4) The unrealized holding G/L on Derivatives held as CF hedges 5) Cumulative foreign currency translation adj
What is the primary measurement focus for governmental fund types
flow of financial resources which means how current assets will be converted to cash in current period Balance of financial resource which means where the current financial position and the changes in the government financial position
When should unconditional contribution be recognized as revenue by a private not-for-profit organization
in the period received at FV. Unconditional contributions, whether promised or received as cash, are recognized as revenue in the period received. Contribution should be measured at FV. Donors INTENTION to give are NOT revenue
What is a full set of General Purpose Financial Statement
issued throughout the year to aid investors and creditors in their decision making process. Includes balance sheet, income statement, statement of owner's equity/retained earnings, and statement of cash flows.
Would depreciation expense be recorded in the income statement of a proprietorship
yes because depreciation is an expense incurred in generating income and is reported in the income statement A proprietor's draw/contribution of additional resources does not affect income so it's excluded
What's the most authoritative accounting pronouncement (Formal/authoritive announcement/declaration)
Accounting standards Codification SFAC not authoritative cause it's just rules for following the rules
What are general revenues
When state and local governments receive revenue from unrestricted grants
Example of temporarily restricted asset for nongovernmental not-for-profit
A nongovernmental not-for-profit organization, received a cash gift with the stipulation that the principal be held for at least 20 years. How should the cash gift be recorded
Define tax position
A position in previously filed tax return or a position expected to be taken in a future tax return that is reflected in measuring current or deferred income tax assets and liabilities for intern/annual periods. Tax position can result in permanent reduction of income taxes payable or a deferral of income taxes payable in future years ex. Not filing a tax return and excluding taxable income in a tax return etc. because they can result in deferral of income taxes payable
What is a noncontrolling interest
Acquirer owns less than 100% but more than 50% of the acquiree's outstanding stock. The % of stock not owned by acquirer is the noncontrolling interest that's why it's called "noncontrolling interest" because you don't own it Portion of NI & dividends are allocated to parent based on their NONCONTROLLING interest
IFRS Rules for change in principle
Voluntary change can be made if it provides reliable and more relevant information about the transactions, entity financial position, performance, cash flow 1) Retrospective application apply the new method and adjusted for the earliest period presented 2) If it's impracticable to determine effects of the change then change can be applied prospectively
What items are eligible for the FV election
All financial assets Cash Evidence of an ownership interest in an entity A contract that conveys a right to receive cash/another financial instrument/to exchange financial instruments on favorable terms Available for sale Held to maturities Equity method investments Certain financial liabilities Firm commitments that involve financial instruments, written loan commitments nonfinancial insurance contracts that can be settled by paying a third party Warranties that can be settled by paying a third party Host financial instrument that is an embedded nonfinancial derivative instrument separated from a nonfinancial hybrid instrument
What is a certificate of deposit
Allow members to save money by locking into a deposit that you can't touch. You earn interest. Ex) 180 day certificate due march 15 means you can't touch your cash for 180 days and you'll earn interest on March 15
When is amortization expense recorded?
Amortization expense is recorded at END OF THE YEAR SO 12/31/XX For example, if a company was to eliminate the patent on 12/31/x2 then there is no amortization expense on for x2
The budget estimates are Appropriation & Encumbrance. Give definition
Appropriation = highest amount allowed for spending for a particular purpose Encumbrance = account used to record the amount of purchase orders, contracts, or salary commitments
What is the process for recording ARO
Capitalize the original cost of the asset and add to it the cost of removing which is the ARO entry see below Debit asset (Needs to be same as ARO PV) Liability (ARO Measure at PV) Discount because you in year you capitalizing asset and removal won't happen years from now and debit asset cause the removal cost gets added on to asset
What does the International Accounting Standards Board do?
The international Accounting Standards Board (IASB) is an international organization organized to develop international financial reporting standards (IFRS). Additional goals of the organization are to promote the use of these standards and to work towards the convergence of the IFRS and National Accounting Standards
What are the effects of >50% consolidation
The investment account/stockholder equity of the company being acquired is eliminated Consolidated retained earnings would only include the retained earnings of the parent company
When does the parent company need to prepare a consolidated F/S
The parent company must have an acquisition of more than 50% of the outstanding voting stock will normally result in control
In a consolidation why does the subsidiary's stockholder equity account get eliminated in the parent's balance sheet
The parent company records the Investment in subsidiary as an asset on B/S and subsidiary shows how much stock the parent owns. So the parent company would be double counting if it consolidated the subsidiary's stockholder equity in the B/S on equity portion This investment in subsidiary account will be eliminated in the consolidating working papers and will be replaced with the specific assets & liabilities
Are Postdated check from customer dated 1 month from B/S date considered cash
These are checks that have a future date written on its face. If an entity is a recipient of an outstanding check, it is not considered as cash because postdated checks are not acceptable by the bank for deposit or immediate credit. Postdated checks are considered as accounts receivable.
Define available-for-sale securities
They're recorded at FV because they're available for sale Classified as current/noncurrent assets because 2 types of available for sale 1) trading 2) Held-to-maturity Unrealized hold G/L since they're available for sale
what happens to the Intercompany sales?
This intercompany sales PROFIT amount gets eliminated because it misstates the results to the users of the financial statement such as investors and creditors. If it's not eliminated then then the Parent and subsidiary can keep selling good among each other to inflate results. BUT whoever made the sale records the sale profit when the merchandise GETS SOLD to a THIRD PARTY
What happens when you reclassify a security type for example from Trading to available for sale and vice versa
Transfer security from trading to available for sale-->unrealized holding G/L have already been recognize in earnings no reversing From available to sale to trading--> unrealized holding G/L recognized in earnings immediately
Qualitative characteristics of useful info, what are US and IFRS differences
U.S. and GAAP have the same qualitative characteristics of useful info Both have Element Recognition Measurement Financial statements Earnings CF liquidity
