Becker CPA FAR

Name the single source of authoritative nongovernmental U.S. GAAP.

The FASB Accounting Standards Codification (ASC)

what is the private company council?

- The Financial Accounting Foundation (FAF) created the Private Company Council (PCC) to improve standard setting for privately held companies in the U.S.

- The goal of the PCC is to establish alternatives to U.S. GAAP, where appropriate, to make private company financial statements more relevant, less complex, and cost beneficial.

- Accounting alternatives for private companies are incorporated into the relevant sections of the ASC.

the internal financial reporting standards include what standards?

all four are included:

- internal accounting standards (IAS)

- International Financial Reporting Standards (IFRS)

- IFRIC interpretations

- SIC interpretations

Who are the primary users of general purpose financial reports?

Existing & potential:

- investors

- lenders

- other creditors

Name the fundamental qualitative characteristics of useful financial information.

relevance & faithful representation

Name the three elements of relevance.

Predictive value, Confirming value, and Materiality

Name the three elements of faithful representation.

- neutrality

- completeness

- freedom from error

Name the enhancing qualitative characteristics of financial information.

comparability, verifiability, timeliness, & understandability

Name the pervasive constraint on the information provided in financial reporting.

Cost constraint:

the benefits of reporting financial information must be greater than the costs of obtaining & presenting the information

According to SFAC No. 5, what should a full set of financial statements include?

- statement of financial position (the BS)

- statement of earnings (the IS)

- statement of comprehensive income

- statement of Cash Flow

- Statement of changes in owners' equity

List the 10 elements of financial statements according to SFAC #6

CREG:

Comprehensive income; Revenues; Expenses & Gains

and

Losses

Assets

Lbts

Equity (of net assets)

Investment by owners

Distributions to owners

Name the five elements of present value measurement per SFAC #7.

Estimate of future cash flow

expectations about timing Variations of future cash flows

Time value of money (the risk-free rate of interest)

The price for bearing Uncertainty

Other factors (eg. liquidity issues & market imperfections)

Describe the expected cash flow approach for present value computations.

consider a range of possible CF & assigns a (subjective) probability to each CF in the range to determine the weighted avg, or "expected," future CF

Name the expense that each of the following unexpired costs turn into as they expire:

1. Inventory

2. Unexpired (prepaid) cost of insurance

3. Net book value of fixed assets

4. Unexpired cost of patents

1. COGS

2. insurance expense

3. depre exp

4. amort exp

are gains and losses on the disposal of assets shown on a "gross basis" (ie. where both the sale proceeds and the net book value of the disposed asset are reported) or on the "net basis" (ie. where only the difference bt the sale price and the net book value of the disposed asset is reported)?

gains & loses are reported at their net amounts (ie. proceeds less net book value)

how does a "multiple-step" income statement differ from a "single-step" income statement"?

a multiple-step IS reports operating revenues & expenses separately from non-operating revenues & expenses & other gains & losses. On a single-step income statement's presentation of income from continuing operations, total expenses are subtracted from total revenues without separation bt operating & non-operating revenues & expenses

What is meant by a "classified" BS?

a classified BS distinguishes current & non-current assets & lbts

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

- step 1: identify the contract with the customer

- step 2: identify the separate performance obligation in the contract

- step 3: determine the transaction price

- step 4: allocate the transaction price to the separate performance obligations

- step 5: recognize revenue when or as the entity satisfies each performance obligation

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

- all the parties have approved the contract & are committed to performing their obligations

- the rights of each party are identified

- future CFs are expected to change as a result of the contract (commercial substance)

- it is probable that the entity will collect substantially all of the consideration

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

- the promise to transfer the good/service is separately identifiable from other goods or services in the contract

- the customer can benefit from the good/service independently or when combined with the customer's own available resources

what is the transaction price & what factors should be accounted for when determining the transaction price?

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

The price should take into account (if applicable):

- variable consideration

- significant financing

- noncash consideration

- consideration payable to the customer

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

for contracts with 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 (along with applying any discounts and/or variable consideration)

describe how revenue recognition differs when performance is satisfied over time vs. at a point in time

Revenue is recognized based on measuring progress toward completion using either output or input methods when the performance obligation is satisfied over time

In order to recognize revenue when performance is satisfied at a point in time, the customer must obtain control of asset

distinguishing bt the treatment of cost 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 vs when it acts as an agent

a principal has control over the goods/service prior to transfer & revenue equal to expected gross consideration will be recognized.

an agent does not have control, and revenue equal to the agent's fee/commission will be recognized

describe the accounting treatment for forwards and options related to repurchase agreements

FORWARD OR CALL OPTIONS

- repurchase price < original price (lease)

- repurchase price ≥ original selling price (financing arrangement)

PUT OPITON

- repurchase < original selling price

- customer has a significant economic incentive to exercise the right (lease)

- customer does not have significant economic incentive (sale with a right of return)

- repurchase price ≥ original selling price

- repurchase price ≥ expected market value fo the asset (financial arrangement)

- repurchase price ≤ expected market value of the asset & customer does not have a significant economic incentive to exercise the right (sale with a right of return)

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

- there must be a substantive reason for the arrangement

- the product is separately identified as belonging to the customer

- the product is ready (in its current condition) for transfer to the customer

- the entity (seller) cannot use the product or direct it to another customer

define a consignment arrangement, & identify indicators of such an arrangement

A consignment arrangement exists when a dealer/distributor is tasked by an entity with selling the entity's products to customers.

indicators of consignment arrangements include:

- the entity controls the product until a specified event occurs (such as a sale to a customer)

- the dealer/distributor does not have an unconditional obligation to pay the entity for the product

- the entity has the authorization to require the return of the product or transfer the product to another party

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

if a 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 agreed-upon specifications, the warranty will be treated as a separate performance obligation.

A portion of the overall transaction price should then be allocated to the warranty obligation

describe refund lbts & when it is appropriate to book them

A refund lbty represents the amount of money an entity does not expect to be entitled to receie. Refund lbts should be recognized in situations in which customers have a right to return and the entity anticipates having to return a portion of the consideration already received from customers.

Identify two methods of revenue recognition for long-term construction-type contracts under U.S. GAAP and IFRS.

US GAAP

- percentage of completion

- completed contract

IFRS

- percentage of completion

- cost recovery

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

immediately when discovered, regardless of the method used for revenue recognition

State the formula for recognizing the gain/loss on long-term construction-type contracts under the percentage-of-completion method.

(total cost to date / total estimated const of contract) x total estimated gross profit - gross profit recognized to date

When are profits recognized under the cost recovery method?

profits are recognized only after all costs have been recovered

Name the types of entities that may be considered for reporting according to the rules for discontinued operations

- component of an entity

- group of components of an entity

- business

- nonprofit activity

in reporting discontinued operations, how is a "component" of an entity defined under US GAAP & IFRS?

1. an operating segment

2. a reportable segment

3. a reporting unit

4. a subsidiary

5. an asset group

define the following terms as they are used in reporting discontinued operations:

Business

Nonprofit activity

- a business is an integrated set of activities and assets that is conducted and managed for the purpose of providing a return to investors or other owners, members, or participants.

- a nonprofit activity is an integrated set of activities and assets that is conducted and managed for the purpose of providing benefits, other than goods or services at a profit, to fulfill an entity's purpose or mission

what conditions must be present for a disposal to be reported in discontinued operations?

a disposal of component, group of components, business activity, or nonprofit activity is reported in discontinued operations if the disposal represents a strategic shift that has or will have a major effect on a entity's operations & financial results

The gain (loss) from discontinued operations can consist of...

an impairment loss, gain (loss) from actual operations, & a gain (loss) on disposal

How do we account for subsequent increases in the fair value of a discontinued component?

a gain is recognized for the subsequent increase in FV minus cost to sell (but not in excess of the previously recognized cumulative loss). The gain is reported in the period of increase

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 financial 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. eg. a change to LIFO form another method of inventory pricing under US GAAP or a change in depreciation methods.

Such exceptions are accounted for prospectively, like a change in accounting estimate

name the three types of accounting changes

-Change in an accounting principle

-Change in an accounting estimate

-Change in accounting entity

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

all current and prior period f/s presented are restated

How are error corrections reported?

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

Define comprehensive income.

Change in equity (net assets) that results from transactions and other events and circumstances from nonowner sources

identify six items included in OCI.

PUFIER

Pension adj

Unrealized gains & losses on AFS debt securities.

Foreign currency translation adj & gain/losses on foreign currency transaction that are designed as economic hedges of a net investment in a foreign entity

Instrument-specific credit risk for lbts (using FV) & their changes in FV.

Effective portions of CF hedges

Revaluation surpluses (IFRS only)

List the two formats acceptable for reporting comprehensive income. How does this compare with IFRS?

- Statement of comprehensive income (single-statement approach)

- statement of income followed by separate statement of comprehensive income (two statement approach)

US GAAP & IFRS both allow the same two presentations

List some disclosure requirements for comprehensive income.

- tax effects of each component included in current "OCI"

- changes in the accumulated balances of components of "OCI"

- total accumulated OCI

- reclassification adjs bt OCI & NI

what four situations require adjusting JEs in order to properly present f/s on the accrual basis?

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

2. cash is paid before the expense is incurred

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 earnings of deferred revenue?

dr. deferred revenue

cr. revenue

what are the three rules for recording adjusting JEs?

1. adjusing JEs must be recorded by the end of the entity's fiscal year, before the preparation of f/s

2. adjusting JEs never involve the cash account

3. all adjusting entries will hit one IS account & one BS account

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

- measurement bases used in preparing f/s

- specific accounting principles & methods used

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

- nature of operations

- use of estimates in preparing the f/s

- significant estimates

- current vulnerabilities due to certain concentrations

under what circumstances is an entity considered a going concern?

an entity is considered to be a going concern if it is reasonably expected to remain in existence & be able to settle all its obligations for the foreseeable future

what is management's responsibility to evaluate a co's ability to continue as a going concern?

management must evaluate whether there is substantial doubt about an entity's ability to continue as a going concern for a reasonable period fo time not to exceed one year beyond the issuance date of the f/s

under what conditions would substantial doubt exist?

substantial doubt exists when relevant conditions and events, considered in the aggregate, indicate it is probable (defined as "likely to occur") that the entity will not be able to meet its obligations as they become due within one year from the f/s issuance date (in contrast to the BS date)

what factors should management consider in evaluating whether there is substantial doubt about an entity's ability to continue as a going concern?

- the entity's current financial condition

- the entity's obligations due or anticipated in the next year

- the funds necessary to maintain operations in the next year

- both internal & external matters indicating financial difficulties for the entity

if there is substantial doubt about an entity's ability to continue as a going concern, management should then consider whether the entity has plans to mitigate these conditions & alleviate the substantial doubt. The mitigating effect should be evaluated on the basis of what two conditions?

- whether it is probable that the plans will be effectively implemented

- whether it is probable that the implemented plans will be successful in mitigating the adverse conditions

what are the 3 possible outcomes of management's evaluation of the analysis of mitigating factors?

no substantial doubt exists, in which case no disclosures are required & f/s are prepared using the going concern basis of accounting

- substantial doubt is alleviated, in which case the f/s are prepared using going concern basis, with certain disclosures required

- substantial doubt is not alleviated, in which case the f/s are prepared using the going concern basis, with certain disclosures required

what disclosures are required when substantial doubt is alleviated?

1. the primary conditions or events that initially raised substantial doubt are the entity's ability to continue as a going concern

2. management's evaluation of the significance of those conditions or events in relation to the entity's ability to meet its obligations

3. management's plans that alleviate the substantial doubt

what disclosures are required when substantial doubt is not alleviated?

- the fact that there is substantial doubt about the entity's ability to contnue as going concern within one year of the f/s issuance date.

- the primary conditions or events that raise substantial doubt about the entity's ability to continue as a going concern.

- management's evaluation of the significance of those conditions or event in relation to the entity's ability to meet its obligations

- management's plans that are intended to mitigate the adverse conditions or events

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

an event or transaction that occurs after the BS date but before the f/s are issued or are available to be issued.

1. Recognized subsequent events: provide additional info about the conditions that existed at the BS date.

2. Non-recognized subsequent events: provide info about conditions that occurred after the BS date & did not exist on the BS date

define fair value

Fair value is the price to sell an 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.

1. Market approach: uses prices & other relevant information from market transactions involving identical or comparable assets or lbts to measure FV.

2. Income approach: converts future amounts, including CFs or earnings, to a single discounted amount to measure the FV of assets or lbts.

3. Cost approach: uses current replacement cost to measure the FV of assets.

Describe the hierarchy of FV inputs. Which inputs have the highest priority?

1. Level 1 Inputs: Quoted prices in active market for identical assets or lbts.

2. Level 2 inputs: inputs other than quoted market prices that are directly or indirectly observable for an asset or lbt.

3. Level 3 inputs: unobservable inputs for he asset or lbty that reflect the entities' assumption & are based on the best available information.

Noe: Level 1 inputs have the highest priority

Name the four required disclosures for segments of an enterprise.

- operating segments

- products & services

- geographic areas

- major customers

what are characteristics of an operating segment?

- the nature of the products & services;

- the nature of the production processes;

- the type of class of customer for the products & services

the methods used to distribute the products or provide services

- if applicable, the nature of the regulatory environment (eg. banking, insurance, or public utilities)

Name two quantitative thresholds used in identifying reportable operating segments.

- 10% "size" test

- 75% "reporting sufficiency" test

describe the 10 percent test for identifying reportable segments

- Revenue: reported revenue, including both sales to external customers & intersegment sales or transfers, is 10% or more of the combined revenue, internal & external, of all operating segments

- Reporte profit or loss: the absolute maount of its reported profit or loss is 10% or more of the greater, in absolute amount, of:

- the combined reported loss of all operating segments that did not report a loss

- the combined reported loss of all operating segments that did report a loss

- Assets: assets are 10% more of the combined assets of all operating segments

Note: must meet only one of the above

what is the 75% test for identifying reportable segment?

combined external (consolidated) revenue of all reportable segments must be at least 75% of the total consolidated revenue of the entity

The practical limit is 10 segments, but this is not a precise limit

What are the disclosure requirements for reportable operating segments?

- identify factors

- products or services

- profit or loss details

- asset details

- lbty details (IFRS only)

- measurement criteria

- reconciliations

Describe the Form 10-K and the Form 10-Q. What level of assurance must be provided with the financial statements submitted in these forms?

Form 10-k: Filed annually by US registered companies. Includes a summary of financial data, MD&A, & audited f/s prepared using US GAAP.

Form 10-Q: filed quarters by US registered companies. Includes unaudited f/s, interim MD&A, & certain disclosures

what are the guidelines for interim reporting?

-Use same accounting principles that were used in the most recent annual report.

-Allocate expenses to the interim period benefited.

-Revenues are recognized in the period in which they are earned and realized/realizable.

-A total for comprehensive income in condensed financial statements of interim periods.

What income tax rate is used in interim financial reporting?

use the best estimate of effective tax rate to be applicable for full fiscal year on quarterly statements

what are the general guidelines for OCBOA f/s presentations?

- different titles from accrual basis f/s

- required f/s are the equivalent of the accrual basis BS & IS

- f/s should explain changes in equity accounts

- a SOCF is not required

- disclosures should be similar to GAAP f/s disclosures

define working capital

working capital = current assets - current lbts

how is the current ratio computed?

current assets / current liabilities

How is the quick ratio computed?

(Cash + Net receivables + Short-term investments) / Current liabilities

in creating a new partnership interest with an investment of additional capital, what three methods can be used?

- exact method

- bonus method

- goodwill method

Describe the exact method of creating a new partnership interest with an investment of additional capital.

the purchase price equals the BV of the capital account purchased.

- no adjustment to the existing partners' capital accounts

- no goodwill or bonus

describe the bonus method of creating a new partnership interest with an investment of additional capital

New partner's capital account = (A+B+C) x C's % of ownership.

Excess of new partner's contribution over capital interest received is bonus to the old partners.

Excess of capital interest received over new partner's contribution is a bonus to the new partner

Describe the goodwill method of creating a new partnership interest with an investment of additional capital.

- goodwill is recognized based on the total value of the partnership implied by the new partner's contribution.

- goodwill is shared by the existing partners using the agreed profit/loss ratio

describe the bonus method of withdrawal of a partner

- the difference bt the bal of the withdrawing partner's capital account & the amount that person is paid is the amount of the bonus.

- the bonus is allocated amount the remaining partners' capital accounts in accordance with their remaining profit and loss ratios

Describe the goodwill method of withdrawal of a partner.

the partners may elect to record the implied goodwill in the partnership based on the payment to the withdrawing partner. The amount of the implied goodwill is allocated to all of the partners in accordance with their profit & loss ratios.

After allocating goodwill, the bal in the withdrawing partner's capital account should equal the final distribution to the withdrawing partner

In liquidating a partnership, what is the order of preference?

- creditors

- loans & advances to partners

- capital accounts of partners.

Remember that all losses must be provided for before disposal; that is, maximum potential losses before distribution of cash

Define cash and cash equivalents

-Cash includes both currency and demand deposits with banks and/or other financial institutions.

-Cash equivalents include short-term, highly liquid investments that are both readily convertible to cash and so near their maturity when acquired by the entity (90 days or less from the date of purchase) that they represent insignificant risk of changes in value.

name two methods of accounting for the write-off of uncollectible accounts

Direct write-off:

dr. bad debt exp

cr. a/r

weaknesses: bad debts are not matched to sales, & a/r are overstated. Not GAAP.

Allowance method:

dr. allowance for uncollectible accounts

cr. a/r

Strengths: Matches bad debts with credit sales. a/r fairly stated. Required by GAAP

name two methods for estimating uncollectible accounts

- percentage of a/r at year-end

- aging of a/r at year-end

Using the allowance method, give the two journal entries to provide for and then write off an uncollectible account.

Provide for:

dr. bad debt exp

cr. allowance for uncollectible accounts

Write-off:

dr. allowance for uncollectible accounts

cr. a/r

what is the difference between factoring with recourse and without recourse?

With Recourse:

the factor may return the account to the coif it proves to be uncollectible. Potential lbty and risk of loss remains with the co.

Without Recourse:

the factor assumes the risk of loss if the account is uncollectible

At what value should non-interest bearing promissory notes be recorded?

at present value of all future payments required by the note. The payments should be disclosed at the market interest rate.

notes receivable may be discounted "with" or "without" recourse. What is the difference?

Discounting with recourse:

The holder remains contingently liable

Discounting without recourse:

The holder assumes no further lbty after discounting

Describe the computational steps required in "discounting a note".

1. compute maturity value (remember to included interest to maturity)

2. compute the "discount" (remember to use maturity value)

3. get proceeds by subtracting discount from maturity value

4. compute interest income as the difference bt proceeds and face of note

When does the title to goods pass for each of the following?

FOB destination

FOB shipping point

COD

Consigned goods

- FOB destination: when received by buyer

- FOB shipping point: when given to a common carrier

- Consigned goods: when sold to a 3rd party by consignee

Describe an inventory consignment arrangement. Also, how are the consigned goods carried on the parties' balance sheets?

Consignor gives goods to Consignee for sale to 3rd parties. Title to the goods remains with the consignor; therefore the consigned items stay on the BS of the consignor

How is net realizable value calculated in the lower of cost and net realizable value method?

NRV is the net selling price less completion & disposal costs

under US GAAP, how is market calculated in the lower of cost or market method?

In the lower of cost or market method, "market" generally means current replacement cost, provided the current replacement cost does not exceed the market ceiling or fall below the market floor.

- Ceiling: NRV (estimated net selling price less completion & disposal costs)

- Floor: NRV minus normal profit margin

Explain the difference between the periodic and perpetual inventory methods

Periodic:

- the qty of inventory is determined only by physical count.

- ending inventory is physically counted & priced.

Perpetual:

- inventory is updated for each purchase & for each sale

- keeps a running total of inventory balances