Becker F2 Flashcards

List the steps associated with the five-step approach to revenue recognition

1) Identify the contract with the customer

2) identify the separate performance obligations in the contract

3) Determine the transaction price

4) Allocate the transaction price to the separate performance obligations

5) Recognize the revenue when or as the entity satisfies each performance obligation

What criteria must be met in order to recognize revenue on a contract?

1) all parties have approved the contract

2) the rights of each party have been identified 

3) Payment terms can be identified

4) Future cash flows are expected to change as a result of the contract

5) It is probable that the entity will collect substantially all the consideration

What criteria must be met in order for a performance obligation to be considered distinct?

1) the promise to transfer the good/service is separately identifiable from others goods or services in the contract

2) The customer can benefit from the good/service independently or when combined with the customers own available resources

Define the transaction price when recognizing revenue

It is the amount of consideration an entity expects to receive in exchange for transferring goods/ services to a customer

What factors should be accounted for when determining the transaction price?

Variable consideration, significant financing, non-cash considerations, consideration payable to the customer

Describe how allocation works when a contract contains more than one performance obligation.

the overall contract transaction price should be allocated among each obligation based on the stand alone selling price expected for satisfying each unique obligation.

Describe how revenue recognition differs when performance is satisfied over time versus at a point in time

revenue is recognized based on measuring progress toward completion using either output or input methods when the obligation is satisfied over time. The customer must obtain control of the asset to recognize the revenue in a point in time

Identify two methods of revenue recognition for long-term construction-type contracts under US GAAP

over time or at a point in time

For long-term construction-type contracts, when are losses recognized?

immediately when discovered

State the formula for recognizing the gain/loss on long-term construction-type contracts over time

total cost to date / total estimated cost of contract * total estimated gross profit - gross profit recognized to date

Distinguish between the treatment of costs incurred in obtaining a contract as assets or as expenses

if an entity expects to recover these costs through the performance of the contract, the entity will treat them as assets. if the costs are incurred regardless of whether the contract is obtained they are treated as expenses

How do control and revenue recognition differ when an entity acts as a principal versus when it acts as an agent 

a principal has control over the good/service prior to transfer, agent does not have control

Describe the accounting treatment for forwards and call options related to repurchase agreements

Repurchase price < original price

Repurchase price >= original selling price

What criteria must be met in order for a customer to obtain control in a bill-and-hold arrangement?

there must be substantive reason for the arrangement, the products is ready to be transferred to the customer, the seller cannot use the product

Define a consignment arrangement.

it exists when a dealer/distributer is tasked by an entity with selling the entity’s products to customers

Identify indicators of a consignment arrangement.

the entity controls the product, the dealer/distributer does not have an obligation to pay the entity for the product, the entity has the authority to require the return of the product or transfer it to another party

When is a warranty considered a separate performance obligation within a contract?

if the customer has the option to purchase a warranty separately or if the warranty provides a service that is beyond the assurance that the product will comply with the agreed-upon specification

Describe refund liabilities and when it is appropriate to book them.

the amount of money that an entity does not expect to be entitled to receive. Should be recognized when customers have a right to return and the entity anticipates having a return portion of the consideration already received from customers

How is a change in an accounting estimate reported?

prospectively

How is a change in accounting principle reported?

cumulative effect of change is included in the retained earnings statement as an adjustment of the beginning retained earnings balance of the earliest year presented. Prior period statements are restated if presented

What are the special exceptions to the general rule for the reporting of changes in an accounting principle? How are these exceptions reported?

changes where it is impracticable to estimate the cumulative effect adjustment, are accounted for prospectively

Name the three types of accounting changes.

change in accounting principle, change in accounting estimate, change in accounting equity

Under U.S. GAAP, how is a change in the accounting entity reported?

all current and prior financial statements presented are restated

How are error corrections reported?

as prior period adjustments to retained earnings and all comparative financial statements presented are restated

What four situations require adjusting journal entries in order to properly present financial statements on the accrual basis

1) cash is received before the performance obligation is met (deferred revenue)

2) cash is paid before the expense is incurred (prepaid expenses)

3) cash is received after the performance obligation has been met (receivables)

4) cash is paid after the expense has been incurred (accrued expenses)

What is the journal entry to record the earning of deferred revenue?

DR: Deferred revenue

 CR: Revenue

What are the three rules for recording adjusting journal entries?

1) must be recorded by the end of the entity’s fiscal year

2) they never involve the cash account

3) All will hit one income statement account and one balance sheet account

Identify the contents of the Summary of Significant Accounting Policies note to the financial statements

measurement bases used in preparing financial statements, specific accounting principles and methods used

What are the U.S. GAAP disclosure requirements for risks and uncertainties?

nature of operations, use of estimates in preparing financial statements, significant estimates, current vulnerability due to certain concentrations

What is a subsequent event and what are the two categories of subsequent events?

an event or transaction that occurs after the balance sheet date but before the financial statements are issued or available to be issued. The two types are recognized and unrecognized subsequent events

Define fair value.

The price to sell and asset or transfer a liability in an orderly transaction between market participants at the measurement date

Describe the valuation techniques that can be used to measure the fair value of an asset or liability

Market approach, income approach, cost appraoch

Describe the hierarchy of fair value inputs. Which inputs have the highest priority?

1) level 1 inputs - quoted prices in active markets for identical assets or liabilities

2) level 2 inputs - inputs other than quoted market prices that are directly observable

3) level 3 inputs - unobservable inputs that are based on assumptions or the best available information

What are the general guidelines for OCBOA financial statement presentation?

different titles from accrual basis, explain changes in equity accounts, statement of cash flows not required, disclosures similar to GAAP, equivalent to accrual basis income statement and balance sheet

How is gross margin calculated?

Sales (net) - COGS / Sales (net)

How is profit margin calculated?

net income / sales (net)

How is return on equity (ROE) calculated?

net income / average total equity

How is return on assets (ROA) calculated?

net income / average total assets

What is the operating cash flow ratio formula?

cash flow from operations / ending current liabilities

What is the current ratio formula?

Current assets / current liabilities

What is the quick ratio formula?

cash and cash equivalents + Short term marketable securities + receivables (net) / Current liabilities

How is days in inventory calculated?

ending inventory / (cogs/365)

How is days sales in accounts receivable calculated?

ending accounts receivable (net) / (sales (net) / 365)

How is days of payables outstanding calculated?

Ending accounts payable / (COGS / 365)

What is the cash conversion cycle formula?

Days in inventory + Days sales in accounts receivable - Days of payables outstanding

What is the debt-to-equity ratio formula?

Total liabilities / Total equity

What is the total debt ratio formula?

Total liabilities / total assets

What is the times interest earned formula?

Earnings before interest and taxes (EBIT) / interest expense