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61 Cards in this Set

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what is GAAP?
Those accounting principles that have substantial authoritative support. SEC can establish them but lets acounting professionl self regulate it.
SFAC:1 Objectives of Financial Reporting
- Disclose entity's performance
- Focus on informational needs of the external users
SFAC 6 - Elements of Financial Statemetns
Comprehensive Income (Net Income + PUFE)
Investment by owners
Distribution to owners
What are authorititative sources of GAAP?
Bulletins - accounting research bulletins
Opinions - accounting principles board opinions
Interpretations - FASB interpretations
Standards - Statment of financial accounting standards (not concepts)
SFAC 2 - Qualitative Characteristics
My Crotch Burns Under RR
Other Sources of GAAP other than BOIS
- Pronouncements offered for public comment
- Pronouncements not offered for public comment but issued by accounting experts
- Industry practices
SFAC 2- Qualitative Characteristics

Primary Quality of Decision Usefulness
- Predictive Value
- Feedback
- Timely

- Neutral
- Represationally Faithful
- Verifiable
Relevance: Passing Feels Terrific

Reliability: Nobody Relies on Financials unless Verified
SFAC 2- Qualitative Characteristics

Secondary Characteristics
Comparability: enables users to identify similarities in and differences between two sets of economic phenomena.
Apple Vs Microsoft

Consistency: in accounting policies over years
Fundamental Assumptions
Going Concern
Monetary Unit
Historical Cost
Revenue Recogntion (earned and realized)
Full Disclosure Principle
Conservatism (defer estimated gain and record estimated losses immediately)
Gains and Losses

Ordinary or inordinary ?
they do not occur in ordinary course of business. they are both unsual and infrequent
What is reported on Income Statement?
I Income from continued operations GROSS
D Income from Discontinued Operations NET
E Extraordinary Items NET
A Cummulative effect of change in accounting principles NET
What are exta-orinary items?
Presented net of tax include items that are (a) unusual, and (b) infrequent. Both conditions are neccessary to report this an extraordinary item.
Presentation of IDEA
Income from Operating Operations xxx
Income from Non operating Operations xxx
Taxes xxx
Discontinued Operations
SFAS 144 - Discontinued operations are reported separately from continued operations, net of tax. Normally, the loss from discontinued operations consist of an impairment loss, a gain or loss from actual operations, and a gain or loss on disposal. All these losses are included in discontinued operations in the period in why they occur. anticipated losses are no longer allowed.
What are components of an entity?
Operating segment
Reportable segment
Reporting unit
Asset group
What is asset group?
A collection of assets to be disposed of together as a group in a single disposal transaction and the liabilities directly associated with those assets that will be transferred in the same transaction.
What are the criterion for Held for Sale?
All of the following criteria should be met:
- Managment commits to a plan to sell the component
- Component available for immediate sale
- Active program to locate a buyer has been initiated
- Sale of component is probable and sale is expected to be completed wihtin one year.
- Sale of the component is being actively marked.
- Actions reqaured to complete the sale make it unlikely that significant changes to the plan will be made or that the plan will be withdrawn.
What are accounting rules related to discontinued operations?
Results of an operation to reported under disscontinued operations, if either the component (a) disposed or (b) classified as held for sale.

Conditions that must be present are (a) eliminated from ongoing operations, AND (b) No significant continuing involvement.
How to report results for discontinued operations - Disposed or Held for Sale
Result of operations of the component for that period
Gain or loss on disposal of component reported in period of sale
Impairement loss or initial loss recognized in period held for sale
Subsequent increase in fair value is recognized only to the extent of previously recognized cummulative loss.

Assets within the component are no longer depreciated or amortized.

Measurement and valuation of a component helf for sale is measured at the lower of (not at historical cost) its carrying amount or fair value less costs to sell.
Examples of Non Extraordinary Items
Gains or Losses from sale or abandoment of PPE used in business

Large write downs of (a) receivables (b) inventories (c) intangibles (d) long term securities permanent decline (e) gain or loss from foreign currency transactions or translation (f) losses from amjor strike by employees (g) long term debt extinguishments taht are part of a common mangagment strategy
Accounting changes are classified as
Change in Estimate - P
Change in Principle - R
Change in Entity
Change in Accounting Principle Criterion
Rule of Preferability - changed only if alternative principle more fairly presents the information

Change should not be made for transaction that has occurred in the past that has been terminated and is nonrecurring

Effects of a change (a) direct effect R (b) Indirect Effect (c) Cummulative Effect to restate begining retained earnings for the period in which change is made and prior periods that are affected.
Reporting Changes in Accounting Principle - If General Rule can not be applied
Impracticable to Estimate
Change in depreciation method (is both considered change in accounting principle and estimate but treated prospectively)
Changes in accounting entity R
Restatement to reflect information for the new entity if comparative financial statements are presented.

Full disclosure of cause and nature of change should be made.
Prior Period Adjustments
Require restatment and prior periods adjustment consist of:

a) correction of errors in financial statements

b) retroactive restatements required by new GAAP pronouncements

c) changes from a non-gaap method of accounting to a gaap method of accounting
How to handle accounting for prior period adjustments?
1) Comparative Financial Statements Presented
a) correct the information, if year is presented
b)adjust beg retained earnings of the earliest year presented, if the year is not presented

2) Comparative financial statements not presented, the error correction should be reported as an adjustment to the opening balance of retained earnings.
What is comprehensive income?
Change in equity (net assets) of a business enterprise during a period from transactions and other events and circumstances from NON-OWNER sources.

Net Income + Other Comprehensive Income

Comprehensive income should not be reported on a per share basis
Other Comprehensive Income = PUFE
OCI includes those items in comprehensive income that are excluded from net income.

P = Pension minimum liability adjustments
U = Unrealized gains and losses
F = Foreign currency items
E = Effective portion cash flow hedges
What is purpose of BS
Risk assessment
What has to be disclosed in Notes to Financial Statements SECTION - Summary of Significant Accounting Policies - as per GAAP?
Summary of Significant Accounting Policies

Identify and Describe:

a) Principles and methods
b) Criteria
c) Policies
d) Pricing (Methodology)
Items not to be included in Summary of Significant Accounting Policies to F/S
a) Composition of accoutns
b) amounts in dollars of account balances
c) Details relating to changes in accounting principles
d) Dates of maturity and amounts of long term debt
e) Yearly computation of depreciation, depletion, and amortization
Interim Reporting - Quarterly Reporting

Relevance or Reliability
Relevance over Reliability

Interim financial statements are integral part of annual financial statements?

True or False
What tax rate should be used for Interim Financial Statements
Use estimated average tax rate for the Entrie year on all interim financial statements
What are the required disclosures for public companies related to segment reporting?
Opearting Segments
Products and Services
Geographic Areas
Major Customers
What are the obejective of required disclosures for segment reporting?
Objecitve is provide information on the business activities and the economic environment of a company to help users of the financial statements.
What is the definition of operating segments?
An operating segment is a component of an enterprise:

a) engages in business activities from which it may earn revenues and incur expenses (including revenues and expenses relating to transcations with other components of the same enterprise)
b) whose operating results are regularly reviewed by CEO
c) discrete financial information is available
What is not an operating segment?
a) Corporate Headquarters
b) Pension Plan
What are the quantitative thresholds for reportable segments?
1) 10% size test
a) Revenues (internal & external) excluding interest income from related parties more than 10%
b) Profit and Loss is more than 10% of the segment provided combined reported profit or loss did not report income or loss.
c) assets, if more than 10%

2)75% Reporting Sufficiency Test for external Revenue, which is that if operating segments reported have 75% or more of total revenues, stop adding more reportable segments on financial statements. Segment limit is 10 usually.

3) 90% Sigle Industry dominance test is to limit one segment reported if revenues, profit or loss, assets for that segment are more than 90%
What are development stage enterprises?
A development stage enterprise is one in which either:

a) principal operations have not yet commenced, or

b) principal operations have generated an insignificant amount of revenue or loss.
During development stage, where does enterprise spend most of its resources?
Establishing the business
How are development or start up costs treated for development stage enterprises?
Expensed immediately
What items are to be excluded from operating profit and loss for segment reporting?
general corporate expenses or revenues, interest expenses except for financial institutions, income taxes, equity in earnings, gains or losses from discontinued operations, extra ordinary items, minority interest unless CEO attests to it.
what are the disclosure requirements for development stage enterprise?
a) identify financial statements as those of a development stage enterprise
b) in the balance sheet, describe cummulative net losses as deficit accumulated during the development stage
c) in the income statement, show revenues and expenses fro each period being presented, and present a cummulative amount from the company's inception
d) in the cash flow statement, include cumulative amounts of cash inflows and cash outflows from company's inception and current amounts prsented for each period presented
e) in shareholders equity, include number of shares issued, date of issuance, dollar amounts assigned, if non cash consideration, disclose details for valuation purposes.
According to the FASB conceptual framework, which of the following attributes would not be used to measure inventory?
Present value of future cash flows
What is the concept of realization?
Realization is the process of converting noncash resources and rights into money
What is the concept of recognition?
Recognition is the process of recording an item in the financial statements of an entity
Some examples of realization concept
Choice "b" is correct. Revenues and gains are realized when assets are exchanged for cash or claims to cash. SFAC 5 para. 83.
Choice "a" is incorrect. Assigning depreciation in a production department is an example of allocating overhead. There is no realization associated with the assignment.
Choice "c" is incorrect. The realization concept is integral to accounting for revenues and expenses and is not connected to collection of receivables.
Choice "d" is incorrect. Assignment of overhead costs to products and thus to cost of goods sold is an example of matching. There is no realization associated with this assignment.
Sales Allowance
When sales returns can be estimated, a decrease in revenue with a credit to allowance for sales returns is made. 10% returns are expected. $1,000,000 less 10% is $900,000. Expected exchanges do not affect net sales or inventory or cost of sales. The earnings process is complete for the exchanges. SFAS 48 para.
what is the example of relevance and reliability?
The quality of information that helps users increase the likelihood of correctly forecasting the outcome of past or present events is called .....
Predictive Value
When a new FASB statement is issued?
A new statement from the FASB is issued only after a majority vote of the members of the FASB.
Income tax-basis financial statements differ from those prepared under GAAP in that income tax-basis financial statements:
Income tax-basis financial statements recognize events when taxable income or deductible expenses are recognized on the entity's tax return. Non-taxable income and non-deductible expenses are shown on the financial statement and included in the determination of income (and become M-1 adjustments to arrive at taxable income).
Accounting estimate
When a change in accounting principle is considered inseparable from a change in estimate, the change is handled as a change in estimate - prospectively. No cumulative effect adjustment is made.
Change in accounting estimate should be reported as:
As a component of income from continuing operations.
Change to GAAP from non GAAP is not change in accounting principle
The cash basis for financial reporting is not a generally accepted accounting basis of accounting (GAAP); therefore, it is an error. Correction of an error from a prior period is a reported as prior period adjustment to retained earnings.
Change in accounting principle affects ...
A change in accounting principle affects retained earnings, not the income statement, under SFAS No. 154.
cummulative effect of change in accounting principle ....
The cumulative effect of a change in accounting principle is now shown as an adjustment to beginning retained earnings. Even though the description of the treatment is retrospective, it the effectively the same as a prior period adjustment. The prior period adjustment wording really should be restricted to corrections of errors. In this question, however, it is the best alternativ
Financial statements of all prior periods presented should be restated when there is a "change in entity" such as resulting from:
1. Changing companies in consolidated financial statements.
2. Consolidated financial statements vs. Previous individual financial statements.
How to report prior period adjustments?
The correction of an error in the financial statements of a prior period should be reported, net of tax, in the current statement of retained earnings as an adjustment of the opening balance.
Cummulative effect of a change in accounting principle
The cumulative effect of a change in accounting principle equals the difference between retained earnings at the beginning of period of the change and what retained earnings would have been if the change was applied to all affected prior periods.