Far - Part 1 - Basic Concepts

Front 1

Primary Users of Accounting Information

Back 1

Potential investors, lenders, and creditors

Front 2

Pervasive Constraint of Accounting Information

Back 2

Benefits > Costs

Front 3

Fundamental Qualitative Characteristics of Accounting Information

Back 3

Relevance
Faithful Representation

Front 4

Components of Relevance

Back 4

Predictive Value
Confirmatory Value

Front 5

Faithful Representation

Back 5

Completeness
Neutrality
Freedom from Error

Front 6

Enhancing Qualitative Characteristics

Back 6

Comparability
Verifiability
Timeliness
Understandability

Front 7

Threshold for Recognition

Back 7

Materiality (entity-specific and related to relevance)

Front 8

Although an item may possess other qualitative characteristics, it is not disclosed if:

Back 8

it does not fall within the cost benefit constraint or the materiality threshold.

Front 9

Relevance converged under IFRS and US Conceptual Framework

Back 9

Predictive Value
Feedback Value
Materiality

Front 10

Basic Accounting Equation

Back 10

assets = liability + equity

Front 11

Equity =

Back 11

Contributions to Owners - Distribution to Owners = Comprehensive Income

Front 12

Comprehensive Income =

Back 12

Revenues - Expenses + Gains - Losses

Also includes: GM, CM, Operating Income, and Income from Continuing Operations

= Net income +/- adjustments to s/e

Front 13

IFRS Elements

Back 13

Assets
Liabilities
Equity
Income (revenues and gains)
Expenses (expenses and losses)

Front 14

Basic rules and concepts

Back 14

CRRAM Full

Consistency
Realization
Recognition
Allocation
Matching
Full Disclosure

Front 15

Revenue Recognition Methods

Back 15

Accrual Method
Installment Sale Method
Cost Recovery Method

Front 16

Accrual method of revenue recognition is used when

Back 16

1. Collection is reasonably assured
2. Degree of uncollectibility is estimable

Front 17

Installment sale method of revenue recognition is used when

Back 17

Collection is not reasonably assured

Front 18

Cost recovery method of revenue recognition is used when

Back 18

1. Collection is not reasonably assured
2. No basis for determining whether or not collectible

Front 19

Installment Sales Method: Deferred Gross Profit =

Back 19

Installment receivable balance x Gross Profit %

On Balance Sheet

Front 20

Installment Sales Method: Realized Gross Profit =

Back 20

Cash Collections x Gross Profit %

On Income Statement

Front 21

For the installment sales method, GP is recognized on:

Back 21

sales price collected only, not on interest

Front 22

What is the rule for the cost recovery method?

Back 22

All collections are applied to cost before any profit or interest income is recognized.

All collections meaning BOTH principal and interest.

This does not mean that the final payment has to be received.

Front 23

J/E for Cash to Accrual Basis Revenues

Back 23

Dr. Cash (amt received)
Dr. Increase in A/R
-----Cr. Decrease in A/R
-----Cr. Revenues (plug)

Front 24

J/E for Cash to Accrual Basis Cost of Sales

Back 24

Dr. Cost of Sales (plug)
Dr. Increase in Inventory
Dr. Decrease in A/P
-----Cr. Decrease in Inventory
-----Cr. Increase in A/P
-----Cr. Cash (payment for merch)

Front 25

J/E for Cash to Accrual Basis Expenses

Back 25

Dr. Expenses (plug)
Dr. Increase in prepaid expenses
Dr. Decrease in accrued expenses
-----Cr. Decrease in prepaid expenses
-----Cr. Increase in accrued expenses
-----Cr. Cash (paid for expense)

Front 26

When is installment sales revenue recognized?

Back 26

As cash is collected, not at the point of sale.

Front 27

COGS formula

Back 27

BI + Purchases - EI = COGS

*Purchases can include a change in A/P as indication for goods purchased. A decrease in A/P is added to total purchases number.

Front 28

Items in Current Assets

Back 28

COCCI TTIP

Cash available for current operations
Inventories
Trade Receivables
Other Receivables collectible in 1 year
Prepaid Expenses
Trading Securities
Current Securities AFS
Current Deferred Tax Assets
Installment, deferred accounts, and notes receivable

Front 29

When is franchise revenue recognized and what do we include?

Back 29

Franchise revenue is recognized when the franchisor has substantially performed all services.

Include the franchise fee and the PV of future payments.

Front 30

How are barter transactions recognized?

Back 30

If the goods are similar, then they are not recognized.

If the exchanged goods are dissimilar, then revenue is recognized as the FV of the goods received.

Front 31

How do we treat wages payable at year end?

Back 31

If December 31 falls in the middle of the pay period, only accrue wage payable on or after January 1. Do not include CY wages - they are treated as paid in the CY.

Front 32

IFRS does not allow the

Back 32

completed contract method

Front 33

What do we include as revenues for year 2?

Back 33

Cash collected for sales made during year 2 and cash collected in previous or following years for sales made during year 2.

Front 34

How do we classify cash collected this year for sales made in previous years?

Back 34

Decrease in A/R

Front 35

How do we classify cash collected this year for sales made in following years?

Back 35

Unearned revenue

Front 36

What conditions must exist to recognize revenue on right of return sales

Back 36

PB FENS

1. price is substantially fixed or determinable
2. buyer has paid or is unconditionally obligated to pay
3. obligation has not changed by theft, destruction, or damage of product
4. buyer has economic substance apart from the seller
5. seller has no significant obligation for directly reselling the product
6. amount of future returns can be reasonably estimated

Front 37

What factors may impair the ability to make reasonable estimate of returns for right of return sales?

Back 37

1. Susceptibility to external factors (obsolescence)
2. Long period of return privilege
3. Little experience with similar products
4. Low volume of similar transactions

Front 38

Accrual Revenues and Expenses

Back 38

Revenues earned but not received
Expenses incurred but not paid

Front 39

Deferral Revenues and Expenses

Back 39

Cash received but revenue not earned
Cash paid but expense not incurred

Front 40

Describe the allocation umbrella

Back 40

Allocation is the broadest. Amortization is a subset of allocation. Depletion, depreciation, and insurance are all expenses that are recognized within amortization.

Front 41

When economic benefits are consumed during a period, an expense may be recognized by:

Back 41

Matching (COGS)
Immediate Recognition (Selling & G/A Exp)
Systematic and Rational Allocation (Depreciation)

Front 42

What is a condition permitting recognition of revenue prior to a sale?

Back 42

An assured sales price

Front 43

Earnings (NI) excludes certain ____ that are included in ____.

Back 43

Earnings (NI) excludes certain Gains and Losses that are included in Comprehensive Income.

Front 44

Comprehensive income reflects:

Back 44

all changes in the equity of an entity EXCEPT investments by owners and distributions to owners.

Front 45

Where are OCI accounts closed to?

Back 45

Accumulated OCI

Front 46

Where is Accumulated OCI located?

Back 46

In the stockholder's equity section of the balance sheet

Front 47

What alternative measurement bases are used?

Back 47

Current Market Value
DCF
Replacement Cost
NRV

Front 48

What is the difference between product cost and period costs and when are they expensed?

Back 48

Product costs are attached to a specific product and are expensed only when the product is SOLD.

Period costs are not assignable to a certain product. They are expensed over time through allocation.

Front 49

What is the only source of US GAAP?

Back 49

The FASB Accounting Standards Codification

Front 50

Dividends Payable and LT Debt Payable are not ___ because ___.

Back 50

Dividends Payable and LT Debt Payable are not accrued liabilities because they do not result from an expense.

Front 51

How are start up (organization costs) treated?

Back 51

Immediately expensed

Front 52

Information provided by financial reporting pertains to

Back 52

individual business enterprises

not to industries, economy as a whole, or members of society as consumers.

Front 53

What is the definition of recognition

Back 53

Formally recording or incorporating an item into the financial statements

Front 54

How are legal fees paid to obtain a franchise treated?

Back 54

Capitalized and deferred

Front 55

How are continuing franchise fees (based on revenues) treated

Back 55

Expensed when incurred

Front 56

Where is unamortized prior service cost disclosed?

Back 56

Other Comprehensive Income

Front 57

What two things does IFRS require in order for an item to be recognized in the FS?

Back 57

1. Meet the definition of an element
2. Be measured reliably

Front 58

What items do not affect the deferred gross profit account in the installment sales method?

Back 58

Regular sales, cost of regular sales, and G/A expenses.

Front 59

What is the effect on NI, COGS, and R/E for overstated ending inventory?

Back 59

If EI is too high, COGS is too low, NI is too high, R/E is too high. Next period BI is too high, COGS is too high, NI is too low, and R/E is too low but is canceled out.