FAR F1 Flashcards

CPA Studying - FAR - FR - M1-M4

Under U.S. GAAP, what is considered a full set of Financial Statements

Statement of Financial Position (Balance Sheet)

Statement of Earnings (Income Statement)

Statement of Comprehensive Income

Statement of Cash Flows

Statement of Owner’s Equity

What is a classified balance sheet

Separates assets and liabilities into current and non-current

What is the purpose of the Income Statement

Becker:

To provide information about the uses and funds in the income process, the uses of funds that will never be used to earn income, the sources of funds created by those expenses, and the sources of funds not associated with the earnings process

Me:

Show where revenues, expenses, gains, and losses come from and how they are used

What are the uses of the income statement

Determine profitability

Determine value for investment purposes

Determine creditworthiness

May also be used to predict information on future cash flows

Costs

An amount expended for items such as capital assets, services, and merchandise received.

The amount actual paid for something

Unexpired Costs

Costs that will expire in future periods and be charged against revenues for future periods

Revenues

Reported in the gross amount of consideration to which an entity expects to be entitled in exchange for specified goods and services

Expenses

Costs reported in their gross amounts that only benefit the current period or the allocation of unexpired costs to the current period

Gains

Reported in net amounts, from either the recognition of an asset not in the ordinary course of business or without the insurance of an expense

Losses

Reported in net amounts, and is the cost expiration either not in the ordinary course of business or without the incurrence of an asset

Where should unusual, infrequent, or unusually infrequent income/loss be reported? Where should it be disclosed

Reported separately as part of income from continuing operations.

Should be disclosed on the face of the income statement or in the subsequent footnotes

How does a Multiple-Step Income Statement work? What is a benefit of this

Reports operating revenues and expenses separately from nonoperating revenues and expenses, and other gains and losses

The benefit of this is enhanced user information, allowing for data for analytical ratios

How does a Single-Step Income Statement work? What is a benefit of this

Summarized all revenues + gains, and all expenses + losses, into sum amounts and presents the income from continuing operations.

A benefit is it does not display one type of revenue/gain or expense/loss as more important than another

What type of expired costs does each listed unexpired cost become

Unexpired Costs

• Inventory

• Unexpired (Prepaid) Cost of Insurance

• Net Book Value of Fixed Assets

• Unexpired cost of Patents

Expired Costs

• Inventory → COGS

• Unexpired (Prepaid) Cost of Insurance → Insurance Expense

• Net Book Value of Fixed Assets → Depreciation Expense

• Unexpired cost of Patents → Amortization Expense

What is a discontinued operation

A component of an entity, a group of components of an entity, or a business or nonprofit activity that is classified as for sale or has been disposed of

What items can be contained in discontinued operations

• Impairment loss (both initial and subsequent decreases/increaes)

• Gain or loss from actual operations

• Gain or loss on disposal

How are discontinued operations stated on the income statement

They are reported separately below continuing operations, net of tax, in the period they occur

Provide examples of a strategic shift that could have a major effect on financials and operations, resulting in a discontinued operation

Disposal of a major geographic area

Disposal of a major equity method invesetment

Disposal of a major line of business

Exchange Rates

The price of one unit of a currency in units of another currency

The rate at which two currencies are equal

Identify and explain the two ways exchange rates are express

Direct Method: the domestic price of one unit of another currency

Ex. one euro costs $1.47

Indirect Method: the foreign price of one unit of the domestic currency

Ex. 0.68 euro buys $1.00

Currency Exchange Rate

Current exchange rate is the exchange rate at the current date, or for immediate delivery of currency, often referred to as the spot rate

Denominated or Fixed in a Currency

A transaction is denominated or fixed in the currency used to negotiate and settle transaction, either in U.S. dollars or a foreign currency

Comprehensive Income

The change in equity (net assets) of a business enterprise during a period from transactions and other events and circumstances form non-owner sources. It includes all changes in equity during a period except those resulting from investments by owners and distributions to owners

Net Income

Includes income from continuing operations and discontinued operations

Other Comprehensive Income

Revenues, expenses, gains, and losses that are included in comprehensive income but excluded from net income under U.S. GAAP; PUFI

What does PUFI stand for

Pension Adjustments

Unrealized Gains and Losses (Available-for-Sale Debt Securities and Hedges)

Foreign Currency Exchange

Instrument-Specific Credit Risk

Pension Adjustment

Under U.S. GAAP, certain gains and losses must be recognized in other comprehensive income in the year the change occurs. These gains and losses are included in the other comprehensive income until recognized as pension expense on the income statement