What are the 3 types of accounting changes?
F2 M2
- Change in estimate 2. Change in principle 3. Change in reporting entity.
How to handle a change in estimate?
F2 M2
Apply prospectively – no prior periods adjusted. Update future periods only.
How to handle a change in accounting principle?
F2 M2
Apply retrospectively – adjust prior periods and restate financials.
Example of a change in estimate?
F2 M2
Changing bad debt %, useful life of equipment, or inventory obsolescence rate.
Example of a change in principle?
F2 M2
Switching from FIFO to LIFO, or cash to accrual accounting.
How to correct an error in prior statements (misstatement)?
F2 M2
Correct retrospectively – restate prior periods and adjust retained earnings.
Where is a change in estimate disclosed?
F2 M2
In the notes, with effect on income from continuing operations.
What triggers a change in reporting entity?
F2 M2
Consolidating new subsidiaries or changing reporting units.
Q:
How do you calculate unearned subscription revenue for a company selling 1- and 2-year subscriptions paid upfront?
F2 M3
Topic: Unearned Subscription Revenue
A:
Customers pay upfront; cash is recorded as Unearned Revenue (liability).
Revenue is earned monthly over the subscription period (1/12 for 1-year, 1/24 for 2-year).
At period-end, calculate total subscriptions sold minus revenue earned to find unearned revenue.
Unearned revenue = Subscriptions sold but not yet expired (service not fully delivered).
Journal entries:
On sale: Dr Cash, Cr Unearned Revenue
As earned: Dr Unearned Revenue, Cr Revenue
Example:
If total net sales = $870,000 and revenue earned by end of Year 2 = $405,000, then:
Unearned revenue = $870,000 - $405,000 = $465,000
Key point:
Unearned revenue reflects the value of subscription services still owed to customers.
What is a subsequent event and what are the two categories of subsequent events?
F2 - M5 - Subsequent Events - MCQ-16129
A subsequent event is an event or transaction that occurs after the balance sheet date but before the financial statements are issued or are available to be issued.
**Recognized subsequent events **— Provide additional information about conditions that existed at the balance sheet date and require adjustment in the financial statements.
**Nonrecognized subsequent events **— Provide information about conditions that arose after the balance sheet date and do not require adjustment but may require disclosure if material
What is the Principal Market in fair value measurement?
F2 M6
The market with the greatest volume and level of activity for the asset or liability. It’s the entity’s main trading venue—use it as the primary basis for fair value if accessible.
When do you use the Most Advantageous Market?
F2 M6
If Principal Market exists or isn’t accessible, it’s the market that maximizes net proceeds (for assets) or minimizes net cost (for liabilities), after transaction costs and exit price.
Key difference: Principal vs. Most Advantageous Market?
F2 M6
Principal prioritizes highest activity/volume. Most Advantageous focuses on best economic outcome when principal isn’t available. Both consider orderly transactions, not forced sales.
What determines the level in the fair value hierarchy for a fair value measurement?
M6 - Fair Value Measurements
The level is based on the lowest level significant input used in the measurement.
Level 1 = quoted prices for identical assets (highest priority)
Level 2 = quoted prices for similar assets or other observable inputs
Level 3 = unobservable inputs based on assumptions
Use the lowest level input that significantly affects the fair value to classify the measurement.
How do you calculate the gross profit recognized to date for a long-term construction contract using the percentage of completion method?
M1 - Revenue Recognition Introduction
Step 1: Compute total gross profit of the contract
Total contract sales price: $18,000,000
Less total estimated costs: $16,200,000
Total gross profit: $1,800,000
**Step 2: **Compute percentage of completion
Costs incurred to date: $5,400,000
Estimated costs remaining: $10,800,000
Total estimated costs: $16,200,000
Percentage complete =16,200,000/
5,400,000= 1/3 or 33.33%
Step 3: Compute gross profit earned to date
Total gross profit × % of completion =
1,800,0001/3= 600,000
Gross profit recognized to date = $600,000
How do you calculate inventory turnover? Include the formulas for cost of goods sold and average inventory.
M8 - Ratio and Variance Analysis
**Inventory Turnover **= Cost of Goods Sold (COGS) ÷ Average Inventory
**COGS **= Beginning Inventory + Purchases – Ending Inventory
**Average Inventory **= (Beginning Inventory + Ending Inventory) ÷ 2
Example:
Beginning Inventory = $100,000
Purchases = $700,000
Ending Inventory = $300,000
Calculate:
COGS = 100,000 + 700,000 – 300,000 = 500,000
Average Inventory = (100,000 + 300,000) ÷ 2 = 200,000
Inventory Turnover = 500,000 ÷ 200,000 = 2.5
MCQ-05956
What is the Dividend Payout Ratio formula and how do you calculate it?
M8 - Ratio and Variance Analysis
Formula:
Dividend Payout Ratio = Dividends per Share /Earnings per Share (EPS)
Example:
Quarterly dividend = $0.50
Annual dividend = $0.50 × 4 = $2.00
Annual EPS = $3.20
*Calculation:
2.00/3.20= 0.625 = 62.5%
This means the company pays out 62.5% of its earnings as dividends.
Accounting Changes Overview Chart
M2 - Accounting Changes and Error Corrections
Working Capital
Current Assets - Current Liabilities
Current Ratio
Current Assets / Current Liabilities
Quick Ratio (Acid-Test)
(Cash + Cash Equivalents + Net Receivables + Marketable Securities) / Current Liabilities
Cash Ratio
(Cash + Cash Equivalents) / Current Liabilities
Operating Cash Flow Ratio
Cash Flow from Operations / Current Liabilities
Accounts Receivable Turnover
Net Credit Sales / Average Accounts Receivable
