Financial Accounting and Reporting > Financial Reporting > Flashcards

Financial Reporting Flashcards

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1
Q

What is the primary objective of accounting?

A

To measure income.

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2
Q

What is the most authoritative set of accounting pronouncements?

A

The FASB Codification. All pronouncements fall under this.

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3
Q

Which financial reports are required to be filed with the SEC?

A

Form 10K - Annual and Audited

Form 10Q - Quarterly and Reviewed

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4
Q

What is the focus of financial reports for individual companies?

A

Focus is on the needs of users to help them make decisions and assessments about the company. Does not make assessments of the economy.

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5
Q

What are the TWO Primary Constraints of Financial Reporting?

A

Cost vs. Benefit

Materiality

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6
Q

What are the TWO Secondary Constraints of Financial Reporting?

A

Consistency - Year vs. Year

Comparability - Company vs. Company

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7
Q

What are the Qualitative Characteristics of Financial Reporting?

A

Relevance & Faithful Representation

Relevance Includes:

  1. Predictive Value
  2. Materiality

Faithful Representation Includes:

  1. Completeness
  2. Neutrality
  3. Free from Material Error
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8
Q

What are the Enhancing Qualitative Characteristics of Financial Reporting?

A
  1. Comparability : compare different items among various periods
  2. Verifiability: Different people would reach a similar conclusion
  3. Timeliness: Info is available early enough to impact decision making
  4. Understandability: Info is easy to understand.
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9
Q

What is an accrual?

A

Earned (Revenue) or Incurred (Expense) but no Cash Receipt/Outlay yet.

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10
Q

What is a deferral?

A

Cash Receipt/Outlay but not Earned (Revenue) or Incurred (Expense).

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11
Q

What is recognition in accounting?

A

When an item is recorded and included in the financial statements.

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12
Q

Describe fair value with respect to an asset.

A

The price you would receive if you sold the asset. Assumes asset is at its highest and best value, and that asset is sold in its most advantageous market to get the best price possible.

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13
Q

What market assumptions are made in a fair value assessment (4)?

A
  1. Buyer and Seller are not Related
  2. Buyer and Seller are Knowledgeable
  3. Buyer and Seller are able to transact - i.e. This isn’t a hypothetical transaction just to measure FV.
  4. Buyer and Seller are both motivated to buy/sell
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14
Q

What items are included in a Level 1 input in the fair value hierarchy?

A

Price quotes or market prices (ex. NYSE or NASDAQ).

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15
Q

What items are included in a Level 2 valuation input?

A

Interest rates

Prime rate

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16
Q

What items are included in Level 3 inputs of the fair value hierarchy?

A

Unobservable inputs such as assumptions or forecasts (this is the lowest priority for valuation)

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17
Q

What are the THREE acceptable valuation techniques for fair value?

A
  1. Market approach: uses market transactions and prices to value the asset.
  2. Income approach: uses PV and discounts earnings
  3. Cost approach: uses replacement cost to value the asset
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18
Q

What is an accrued liability?

A

Expense that has been incurred but not paid (ex. rent payable).

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19
Q

What is a deferred revenue?

A

A type of current liability. Payments that have been received but cannot be recorded as revenue yet. (ex. Tenant pre-pays rent - Landlord still must perform to earn it and is a liability until this happens).

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20
Q

When are revenues recognized?

A

When they have been earned.

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21
Q

What is a gain?

A

Increase in equity from an activity or event that is not central to the main activities of the business. Can be operating or non-operating.

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22
Q

What is a loss?

A

Decrease in equity from an activity or event that is not central to the main activities of the business. Can be operating or non-operating.

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23
Q

What is an operating cycle?

A

Average time it takes to turn materials or services into Cash.

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24
Q

What is the present value of future cash flows?

A

Valuation method: the current value of a future amount of money using a specific interest rate.

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25
What is historical cost?
How much an asset cost at the time of purchase, net of depreciation and amortization.
26
What is replacement cost?
How much it would cost to reacquire an asset today (Entrance Cost).
27
What is a market cost?
The sale price of an asset (Exit Cost).
28
What is Net Realizable Value (looking for the equation)?
Sale Price of an Asset - Selling/Disposal Fee.
29
When is royalty income recognized? How is it recognized? What if the royalty % is applied against net sales?
Recognized when earned. If the royalty % is applied against net sales, then subtract the estimated return amount from the gross sales first and then apply the royalty rate.
30
When is revenue recognized in an installment sale? When is this method used?
Revenue recognized upon receipt of cash. This method is only used when cash collection is uncertain.
31
What is deferred gross profit? What is the equation?
Gross Profit that can't be recognized until cash is received. Deferred Gross Profit = Gross Profit % x AR (Pay attention to the year if GP% varies).
32
What is subscription revenue? How is it recorded on the balance sheet?
Payment has been received but performance is not complete. As company performs revenue is recognized. Recorded as a Deferred Revenue (Liability) on Balance Sheet.
33
How are franchise revenues recorded for both the franchisor and the franchisee?
Franchisor: Startup franchise fee revenue is deferred until substantial performance. Franchisee: Costs are deferred until corresponding revenue is recognized.
34
How do you calculate sales revenue starting from cash basis income? What is the acronym to remember it?
Mnemonic: SPEAR-BARSales (i.e. Customer Payments)+ Ending Accounts Receivable- Beginning Accounts Receivable: Sales Revenue on an Accrual Basis
35
How do you calculate COGS starting from Cash Basis? What is the acronym to remember it?
Mnemonic: CPIAP-II: Cash Paid+Increase in Accounts Payable-Increase in Inventory = COGS on an Accrual Basis
36
How are discontinued operations reported on the income statement? When are they used? How are they calculated?
Reported Net of Tax after Continuing Operations but before Extraordinary Items. Includes Income (or loss) from the period plus the gain (or loss) from disposal.
37
For discontinued operations, what are the three ways that assets can be removed from operations?
They must be: 1. Held for Sale 2. Sold 3. or Disposed of
38
What is constant dollar accounting?
Adjusts assets to reflect a consistent level of purchasing power due to inflationUses the Consumer Price Index (CPI).
39
What are accrued expenses? How are they accounted for in relation to product and period costs?
Expenses incurred but not yet paid. 1. Product costs: Expenses s/b matched w/associated revenues as they are recognized (sales commission on a used car sale). 2. Period costs: Expenses amortized and recognized with the passage of time
40
What major items should be classified under General & Administrative (G&A) expenses?
Office staff salaries Office/building rent Office supplies
41
What are business start-up costs? How are they accounted for?
One-time costs for opening a new business. They are expensed as they are incurred.
42
When is interest *not* expensed?
Interest on projects (software) for internal use is not expensed but is instead capitalized.
43
What are the major components of Comprehensive Income? How is Comprehensive income calculated?
Net Income + Other Comprehensive Income (OCI): 1. Revenues/Expenses 2. Gains/Losses 3. Cumulative accounting adjustments 4. Reclassifications adjustments 5. Non-owner changes in equity.
44
What items are considered cumulative accounting adjustments?
Foreign Currency Translation Adjustments Unrealized gains on AFS Securities Minimum Pension Liability adj for defined benefit plans
45
What is the purpose of a reclassification adjustment?
Avoids double counting items that were included in both Net Income and OCI. Ex: AFS Securities previously included in OCI are now sold at a loss and reported on the Income Statement.
46
Where is Comprehensive Income reported?
Reported in a Single or Combined Income Statement.
47
What disclosures on accounting policies are required in financial statements?
1. Accounting Principles used 2. Basis of Consolidation 3. Inventory Pricing Methods 4. Depreciation Method 5. Amortization of Intangibles
48
What are some major risks and uncertainties that must be disclosed?
1. Nature of Operations 2. Use of Estimates and listing of Significant Estimates 3. Concentration vulnerability
49
Under Cash Basis Accounting how are Revenue and Expenses recognized?
Revenue is recognized with cash inflow and expenses are recognized with cash outflow
50
What is an advantage of Modified Cash Basis Accounting?
It avoids the complexities of GAAP but provides more information that Cash Basis Accounting.
51
What are the advantages of the Small and Medium Sized Entity (SME) Framework?
1. It simplifies reporting and disclosures for small co's 2. Reduces Book vs Tax differences 3. Avoids FV measurements (uses historical cost instead)
52
What are the two options for Income Taxes under the Small and Medium Sized Entity Framework?
Deferred Taxes Method and Taxes Payable Method.
53
What are the two options for Startup Costs under the Small and Medium Sized Entity Framework?
Expensed or Amortized (15 years).
54
How is Goodwill treated under the Small and Medium Sized Entity Framework?
Amortized (15 years).
55
Total asset turnover =
Net sales/average total assets.
56
Return on assets =
(Net income +interest exp)/average total assets.
57
Return on common shareholders equity =
(Net income-preferred dividends)/average CS equity.
58
Pe ratio =
Market price per common share/earnings per share.
59
Dividend yield =
Dividend per common share/market price per common share.
60
Profit margin on sales =
Net income / sales
61
Who developed the framework for Small and Medium Sized Entities? Is it GAAP?
The AICPA developed the framework for SMEs. It is not GAAP.
62
Who developed the Public Company Framework? Is it GAAP?
The FASB developed the Public Company Framework. It is GAAP.
63
What is the required personal financial statement? What categories is it composed of?
Statement of Financial Condition. It is comprised of: 1. Current Assets 2. Current Liabilities 3. Net Worth
64
What three things does GAAP address?
1. Recognition 2. Measurement 3. Disclosure
65
What are the 7 reports contained in the general purpose external financial report?
1. Income statement 2. Statement of Comprehensive Income 3. Balance Sheet 4. Statement of Changes in Owners Equity 5. Statement of Cash Flows 6. Footnote Disclosures 7. Auditor's Opinion
66
For a note payable, what should interest expense reflect (i.e. what rate is used)?
The market rate of interest on the date of issuance.
67
For a note payable, what should interest payable reflect (i.e. what rate is used)?
The stated rate on the face of the note.
Financial Accounting and Reporting
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