uWorld CPA - FAR - Ch.1 - General purpose accounting (for profit entities)

Measurement basis of Inventory

Lower of Cost or Market / NRV (Replacement cost)

Measurement basis of PPE / Intangibles

Historical Cost and Depreciated/amortized historical cost

Is inventory and prepaid expenses current assets or noncurrent?

Current assets

(able to be converted to cash within 1 year or operating cycle, whichever longer)

Unmailed checks are considered

Cash

Overdrafts are reported as

Current liability or may be netted against bank account asset

Unearned rent is

liability

Accumulated other comprehensive income/loss items (DENT)

D - Derivative cash flow hedges
E - Excess adjustment for pension PBO and FV of plan assets
N - Net unrealized holding gains/ (loss) on AFS debt securities
T - Translation adjustments for foreign currency.

Construction in progress

A current asset account where costs and profits from LT contracts are incurred and accumulated.

Are deferred income tax liability current or long term liabilities?

Long term

Do all highly valuable resources must be reported as assets?

No. Assets must be certain of a future benefit. (e.g. R&D may be highly valuable but future benefit is unknown)

Can assets with restrictions be still reported as assets?

Yes

Discounts on bond payables

Contra liability to bonds payable, net them up.

Where is Other Comprehensive Income reported?

statement of comprehensive income

Where is Accumulated Other Comprehensive Income reported?

statement of financial position

Are deferrals concerned with future or past cash receipts and payments?

past

accruals are future.

What are the 3 principles of accrual accounting expense recognition?

Cause and effect (e.g. COGS)

Systematic and rational allocation (e.g. Depreciation)

Immediate recognition (e.g. R&D)

What is additional paid in capital?

Difference between par or stated value and original issue price.

What costs are included in discontinued operations?

Disposal loss (including severance pay and other expenses directly related to disposal) and segment's operating loss

Where are gains/losses from result of exchange rate change be reported on?

As a component of income from continuing operations (Transaction gain/loss)

Difference between translation and transaction

Translation: Convert financial statements expressed in foreign currency to statements in domestic currency. Reports in OCI.

Transaction: Actual transactions. Reports in income from continuing operations

What's the correct format of a direct quotation to buy a foreign currency?

(domestic currency) per (foreign currency)

e.g. $0.01 per 1 JPY (yen)

Foreign currency will be whole number.

Net income includes

Operating income, non operating income, related tax impacts.

net income + other comprehensive income = ?

Comprehensive income

Statement of comprehensive income will include net income and OCI.

Comprehensive income includes

Changes during a period for: (DENT)

Derivative cash flow hedges

Excess pension liability adjustments to recognize funded status of plan

Net unrealized gains/losses for available-for-sale debt securities

Translation (not transaction) adjustments for oreign currency items (including reclass)

Are OCI items reported net of tax?

YES

Are unrealized gains on trading securities OCI items?

No

How do you calculate net income if you're given beginning retained earnings, dividends, and ending retained earnings?

Ending retained earnings
+ Dividends
- beginning retained earningts
= net income for the year


Net income increases retained earnings
dividends paid reduces retained earnings

Does OCI (net income) include gain from sale of equipment?

Yes

Is the difference between accumulated or projected benefit obligation and fair value of pension plan assets included in OCI?

Projected

What do "income from continuous operations" include?

Gain/loss on disposal of plant asset

Unrealized gain/loss on investment trading debt securities

Realized gain/loss on investment debt securities

Effect of change in estimate of useful life in plant asset

Income tax expense

Restructuring charges

Loss from effect of new regulation or law

components of shareholder equity (CPA RAT NO)

C - Capital stock at par

P - preferred stock at par

A - additional paid in capital in excess of par


R - Retained earnings

A - accumulated OCI

T - treasury stock (contra equity)

No - Noncontrolling minority interest

Where is discontinued operation gain/loss placed under?

After income from continuing operations

Extraordinary items...

aren't classified separately.

Exit and disposal activities not in connection with a component of the entity that qualifies for discontinued operations should be reported under

unusual or infrequent income/loss in income from continuing operations.

What's financing activities?

Related to issuing/ repaying debt or equity (issue stock/ debt)

Changes in your own debt and equity

Debt: Use of proceeds from borrowings to finance the company (bonds payable, notes payable, mortgage payable) and principal repayments of debt

Equity: Cash flows to equity owners (issuance, reaccquisition of company stock, dividends paid)

What kind of activity is dividend inflows from investments?

Operating activities

Operating activities are related to income statement items

What kind of activity is interest paid?

Operating activity

Because it's a necessary business expense and it appears on income statement.

What kind of activity is income from trading securities?

Operating

What kind of activity is income from sale of available for sale or held to maturity investments?

Investing

Investing activities: (LIP)

L - Lender loans to others (if you're borrowing, it's financing) Principal received is investing inflow. Interest = operating.
I - Investments (acquisition/disposal) in others (LT assets, held to maturity or avail for sale) + intangibles (buy copyright), proceeds from corporate life insurance policies
P - PPE major repairs (capitalized)

Investing inyourself or others.

Indirect method in finding net cash provided / used by operating activities

Net income per income statement

PLUS Noncash items that decrease net income (depreciation, amortization expense (e.g. bond discounts), loss on sale of assets, warranty expense, bad debt expense)

MINUS noncash items that increase net income (equity in earnings from investee, amortization of bond premium, gains from sales of assets)

PLUS decreases in current assets
MINUS increases in current assets (inverse relationship)

PLUS increases in current liabilities
MINUS decreases in current liabilities (direct relationship)

EQUAL net cash provided or used by operating activities.

Note: Be careful not to include financing/investing activities in here. (e.g. increase in nontrade notes payable isn't included in "increase in liabilities")

Is cash flow per share reported on statement of cash flows on indirect method?

No. Such information could be misinterpreted as amounts paid out as dividends. Earnings per share are disclosed on income statement.

Are cash flows netted?

No

What is a decrease in accounts receivable in indirect method?

Increase to net income, because accounts receivable is a current asset (PLUS decreases in current assets)

In indirect method, suppose you sell an asset with carrying value of $500,000 for $400,000. What is the effect to operating cash flow statement?

$100,000 addition to net income, because it's a $100,000 loss from sale of an asset.

What kind of activity is dividends paid to shareholders (dividend outflow)?

Financing activity

If inflow it's operating.

In indirect method, which statement of cash flow is interest paid reported?

In a supplemental schedule

Supplemental schedules include Interest paid and Income taxes paid.

Which statement of cash flow is amortization of bond premium reported?

Operating activities

Which statement of cash flow is gain from early extinguishment of debt reported?

Operating activities

Summary of things to do when consolidating financials?

Eliminate investment in subsidiary account

Eliminate 100% of subsidiary equity account

Set up noncontrolling interest account, adjust for % of income and dividends

Set up net assets excess FV over CV and record depreciation on excess FV over CV

Record goodwill and impairment of goodwill

Eliminate intercompany transactions (receivables, payables, dividends, sale of inventory / PPE / Bonds)

In consolidated financials, how would you determine goodwill if you were given carrying amount of assets and total purchase price of stock?

Total purchase price of stock

MINUS carrying value of assets

EQUALS goodwill

Information that is useful but NOT INTEGRAL (ie. necessary) to present financial position fairly are reported in

Supplementary information to financial statements

Is information relating to the effect of changing prices integral / necessary to present financial position fairly?

No. It's current cost accounting, it's optional.

When information is integral to present financial position fairly, where should it be reported?

Body or notes to the financial statements

Is MD&A part of financial statements?

No

What is an increase in current cost (constant dollars)? What about Nominal dollars.

Increase in current cost after eliminating any increase caused by inflation.

If it's nominal dollars, it's including any increase caused by inflation.

To find out the increase caused by inflation only, subtract constant dollars from nominal dollars.

When do you disclose management's intended plans to alleviate doubt of going concern?

When the doubt still exists / has not been alleviated.

A monetary asset in time of inflation will create a purchasing power...

loss, because the cash value of the resource remains the same while it's actual value is devalued due to inflation

A monetary liability in time of inflation will create a purchasing power...

gain, because the cash value to pay out remains the same while the actual value is devalued due to inflation.

What is this?

Required additional financial / nonfinancial information that is part of the issued financial statements. Examples include accounting policies, valuations, subsequent events.

Notes to the financial statements.

What are the required disclosures for PPE?

Methods used for computing depreciation

Depreciation expense for period

Accumulated depreciation

Carrying value for each major class (land, building, equipment)

Which of the following does NOT require disclosure about risks/uncertainties?

A. Nature of operations
B. Use of estimates in preparation of financials
C. Current vulnerability due to possible recession
D. Current vulnerability due to concentration of risk

C. Current vulnerability due to possible recession.

What are the 4 required disclosures for risks and uncertainties?

Nature of operations

Use of estimates

Certain significant estimates

Current vulnerability associated with certain concentrations

Single step income statement approach

Revenues / gains (include unusual/infrequent, unrealized gains, interest income, net sales)
- expenses (Cogs, SGA, interest, unrealized/infrequent loss)
= income before tax
- provision for income tax
= income from continuing operations
+/- discounted operations net of tax
= net income

Puts all revenues and most gains together / all expenses most losses together.

Discontinued operations reported separately

Multi step income statement approach

Net sales
- COGS (beg inv, net purch incl freight in, end inv)
= GP
-Selling exp (sale salaries, commission, advertising, freight out, lease/rent exp occupied by sales dept)
-Gen Admin (officer salaries, accounting legal, insurance)
= Operating income

+/- Non - operating items (interest, dividend, translation, unrealized, unusual, foreign currency pl, etc)
= income before tax
-provision for income tax
= income from continuing operations
+/- discontinued operations (net of tax)
= net income

What happens if domestic currency weakens?

More dollars are required to buy one unit of foreign currency
If you have a receivable denominated in foreign currency, it's a gain
If you have a payable denominated in foreign currency, it's a loss

Reverse effects when domestic currency strengthens.

Measured initially between sale date (when you fulfill order and receivable is recorded) and balance sheet date, then again between collection date and balance sheet date.

If you enter into a forward contract to sell 100,000 euros and the rate was $0.90 on Dec 12, and then on Dec 31 the rate changes to $0.93, on Dec 31 what do you recognize as income or loss?

$3,000 loss

Note: Spot rate not used in problem.

You plan to discontinue operations at a division in year 2

Estimated year 2 Operating loss: $500,000
Proceeds from disposal of division assets: $300,000 below carrying value
Year 1 operating loss actual: $1,400,000
Tax rate: 30%

What's year 1's loss from discontinued operations?

$1,400,000
+ 300,000
= $1,700,000
* (1 - 0.3)
= $1,190,000

Do unrealized holding gain on available for sale debt securities go on income statement?

No.

They go to Other comprehensive income (DENT)

D - Derivative cash flow hedges
E - Excess adjustment of pension PBO and FV of plan assets at year end
N - Net unrealized holding gains and losses on available for sale securities
T - Translation adjustments from foreign currency

Is foreign currency translations part of net income?

No. Transactions are.

Is gain on early retirement of bond payable a part of net income?

Yes

What do 1 / 0.90 mean in terms of foreign currency exchange

Indirect quotation of exchange rate expressed in canadian dollars, One canadian dollar can be exchanged for 90 cents of US money

Estimated disposal gain vs loss. Are they both recognized equally?

No

Estimated gains are never recognized. Only actual gains are recognized in actual disposal year.

Estimated disposal losses are recognized immediately.

Operating gains/losses recognized in year incurred.

When computing gain/loss from discontinued operations, do you need to factor in income tax?

yes

You put up an advertisement for 5 years. How is this presented on income statement?

Selling / admin expense, over 5 years (depreciated from cost)

Gain on retirement of bonds payable.

Is this Operating, investing, financing, or neither?

Operating Inflow

Purchase equipment in exchange for note payable

Is this operating, investing, financing, or neither?

Neither (no cash was exchanged)

You repaid principal on a loan to the bank.

Is this operating, investing, financing, or neither?

Financing

Proceeds / repayment of long term debt are financing activities.

You acquire shares in another company for $20,000.

Is this operating, investing, financing, or neither

Investing.

Financing relates to YOUR OWN equity. Investments in others are investing activities.

Purchasing commercial paper issued by another company that matures in 60 days is considered

Operating, investing, financing, or neither?

Neither.

Statement of cash flows relate to cash and cash equivalents (short term, highly liquid investments readily convertible to cash and <3 mo maturity from purchase date)

In this case, it's a conversion of cash to cash equivalent, therefore doesn't represent any real change in total cash/cash equivalent.

Is amortization of bond discount added or subtracted from net income using indirect method?

Added

Bond premium amortization is subtracted.

You acquire 90% of CompanyX, which also happens to have $10,000 of liabilities.

What amount of the liabilities do you absorb onto your books in consolidation?

$10,000 (all of it)

Intercompany bonds

May occur on the date of a business combination or subsequent to business combination

Continue to exist of the separate firms, but for consolidated purposes have been constructively retired (NOT written off)

Can result in recognition of gain/loss for consolidating purposes. (premium and discounts are eliminated, which cause recognition of gain/loss)

You have $80,000 in common stock equity. You acquire 90% of CompanyX, which has $50,000 in stockholder's equity for $60,000. The fair value of the noncontrolling interest of CompanyX is $10,000. After the consolidation, what's the amount of stockholder equity including noncontrolling interest you need to report?

$90,000

$80,000
+ 10,000
= 90,000

In consolidated balance sheets, subsidiary equity is eliminated because it's under parent control. The portion of equity NOT eliminated is noncontrolling interest, which is reported under equity section of consolidated balance sheet.

(Note: if dividends are declared by subsidiary, the parent will need to report the NCI portion of the dividends)

In a business combination, what do you combine and eliminate?

Combine assets and liabilities

Eliminate parent investment account, subsidiary equity, and intercompany transfers

What is the ownership % threshold to report investments as consolidated in consolidated financial statements?

>50%

If you report in equity method, does that mean you're consolidated?

No. Need 50%, not always consolidated. Also can own 90% and still not be consolidated.

Finding goodwill amount from a consolidation


Example: acquire company for $3,750,000
Subsidiary CV of net assets: $3,000,000
FV of subsidiary PPE exceed carrying amount by $475,000

What's goodwill?

Purchase price to acquire (consolidate) subsidiary
- identifiable assets (carrying value)
- Excess of FV over CV for others (ppe, intangibles)
= Goodwill

$3,750,000
-3,000,000
-475,000
= 275,000

You're companyA. You acquire CompanyB in October 1.

From Jan 1 - Oct 1, CompanyA's profit was $125,000. CompanyB's profit was $40,000.
From Oct 1 - EoY, CompanyA's profit was $30,000, CompanyB's profit was ($15,000) (loss).

What's the income Company A should recognize on their EoY consolidated financials?

Only account for subsidiary income POST acquisition (after oct 1)

CompanyA's $125,000 + $30,000
+ CompanyB's ($15,000 loss)
= $140,000

True/false. Subsidiary's declared dividends are eliminated and not reported on consolidated financial statements of retained earnings.

True

Noncontrolling interest in net assets in consolidated balance sheet

FV of non controlling interest
+ NCI share of net income from subsidiary
- NCI share of dividends from the subsidiary
= NCI in net assets

True/false. If ending inventory is overstated, cost of goods sold is understated.

True