FAR Final Review Lecture Notes

Comprehensive vocabulary and formula flashcards covering Financial Accounting and Reporting (FAR) concepts including financial statements, revenue recognition, inventory, leases, and governmental accounting.

Impairment loss (Discontinued Operations)

Calculated as $NRV - \text{Book value}$, where $NRV = \text{Fair value} - \text{cost to sell}$. The loss can be reversed but cannot exceed its original book value.

Diluted EPS (Earnings Per Share)

$\frac{\text{Income avail. To CS shareholders} + \text{Interest on dilutive securities}}{WACSO}$ (assuming all dilutive securities are converted to CS).

Treasury Stock Method (Additional shares outstanding)

$\text{Number of shares} - \frac{\text{number of shares} \times \text{exercise price}}{\text{Avg. market price}}$. Options are only dilutive if average market price of CS is greater than the exercise price.

Book value per common share

$\frac{\text{Common shareholders' equity}}{\text{Common shares outstanding}}$, where Common shareholders' equity is Total equity minus preferred stock (at greater of call price or par) and cumulative preferred dividends in arrears.

Treasury Stock: Cost Method

Treasury shares are recorded and carried at their reacquisition price. Gain or loss is determined only when shares are reissued or retired; APIC-TS is credited for gains and debited for losses.

Treasury Stock: Legal (Par/stated) Method

Treasury stocks are recorded by reducing par value and APIC received at the time of sale. Treasury stock is debited for its par value, and APIC-CS is debited for the pro rata share of the original issue price.

STAR (Revenue Recognition)

The five-step identification process: 1. Identify the contract, 2. Identify the Separate performance obligations, 3. Determine the Transaction price, 4. Allocate the transaction price, and 5. Recognize revenue when or as the entity satisfies each PO.

Performance Obligation: Distinct Criteria

A promise is distinct if 1. The goods/services are separately identifiable (they do not integrate or customize) and 2. The customer can benefit from the resource independently or combined with available resources.

Output Methods (Revenue Recognition)

Revenue recognition based on value to the customer of goods and services transferred, such as units produced or milestones achieved.

Input Methods (Revenue Recognition)

Revenue recognition based on the entity's efforts toward the satisfaction of the PO relative to total expected inputs, such as costs incurred or resources consumed.

Percentage of Completion (Construction)

Calculated as $\frac{\text{Total cost to date}}{\text{Total estimated cost of contract}}$. Profit to date is the % completion multiplied by total estimated gross profit.

Change in Accounting Estimate

Accounted for through prospective application, which does not affect previous periods or retained earnings but may require disclosure for effects on current income and per-share info.

Change in Accounting Principle

Accounted for through retrospective application by adjusting beginning retained earnings (net of tax). Exceptions requiring prospective treatment include changing to LIFO or changing depreciation methods.

Gross profit margin

$\frac{\text{Sales (net)} - \text{COGS}}{\text{Sales (net)}}$.

Quick ratio

\frac{\text{Cash & cash equivalents} + \text{Net receivables} + \text{ST marketable securities}}{\text{current liabilities}}. Higher is generally better for liquidity.

Cash conversion cycle

$\text{Days in AR} + \text{Days in inventory} - \text{Days in AP}$.

BINS (Bank Reconciliation Book Adjustments)

Adjustments made to the book balance including: +Bank Collections, +Interest revenue, -NSF, and -Service charges.

Factoring without recourse

A true sale where the factor assumes the risk of any losses on collections and the sale is final.

Lower of Cost and NRV

Requirement for any inventory method other than LIFO or the retail method; $NRV = \text{Net selling price} - \text{costs to complete and dispose}$.

Lower of Cost or Market

Requirement for LIFO and retail inventory methods, where Market is the middle value of: 1. Market ceiling (NRV), 2. Market floor ($NRV - \text{normal profit margin}$), and 3. Replacement cost.

Dollar value LIFO ending inventory

$\text{Beginning inventory} + (\text{Change in inventory} \times \text{price index})$, where the price index is $\frac{\text{Ending inventory at CY cost}}{\text{Ending inventory at base year cost}}$.

Capitalization of interest

Interest capitalized on money actually spent (not just borrowed), using the lower of actual interest cost or avoidable interest (computed by applying rates to the weighted average amount of accumulated expenditures).

PP&E Impairment Test

Compare undiscounted future cash flows to net carrying value. If negative, the impairment loss is calculated as $\text{Fair value} - \text{net carrying value}$.

Finance Lease: OWNES Criteria

A lease is a finance lease if any one of the following is met: Ownership transfer, Written option to purchase (reasonably certain), NPV of payments \text{≥ } 90\text{%} of fair value, Economic life term \text{≥ } 75\text{%}, or Specialized asset.

REPORT (Lessee Lease Payments)

Components included in lease payments: Required fixed payments, Exercise option (assured), Purchase price (lessor option), Only indexed/rate variables, Residual guarantee (likely), and Termination penalties (assured).

Trading Securities

Debt securities generally classified as current assets, reported at fair value, with unrealized gains and losses reported in net income.

Available for Sale (AFS) Securities

Debt securities reported at fair value with unrealized gains and losses reported in Other Comprehensive Income (OCI).

Held to Maturity (HTM)

Debt securities for which the corporation has positive intent and ability to hold to maturity; reported at amortized cost.

CAR-IN-BIG (Consolidations)

Acronym for steps in consolidation entry: Eliminate Common stock, APIC, and Retained earnings of sub; Eliminate Investment in sub and create Noncontrolling interest; adjust Balance sheet to FV, record Identifiable intangibles, and record Goodwill.

Exact Method (Partnerships)

A method where the purchase price is equal to the book value of the capital account purchased; total new equity is $\frac{\text{Existing equity}}{1-x}$ where $x$ is the new partner's percentage.

SOME (NFP Donated Services)

NFP services recognized as revenue only if they require: Specialized skills, are Otherwise needed, are Measurable, and are recognized Easily (at fair value).

GRaSPP (Governmental Funds)

Funds using modified accrual and current financial resources focus: General fund, Special Revenue fund, Debt Service fund, Capital Projects fund, and Permanent fund.

SE (Proprietary Funds)

Funds using full accrual and economic resources focus: Internal Service funds and Enterprise funds.

CIPPOE (Fiduciary Funds)

Funds using full accrual: Custodial funds, Investment trust funds, Private purpose trust funds, and Pension (and Other Employee benefit) trust funds.

60-Day Rule (Governmental Revenue)

In modified accrual accounting, available revenue is that which is collectible within the current period or generally within 60 days after year-end to pay current liabilities.

Asset Retirement Obligation (ARO)

Obligations related to the retirement of tangible long-lived assets, recognized as a liability at fair value when incurred.

Amortization of Intangible Assets

The systematic allocation of the cost of an intangible asset over its useful life.

Impairment Loss (Long-Lived Assets)

Recognized when the carrying amount of a long-lived asset exceeds the sum of the undiscounted cash flows expected from its use and eventual disposition.

Unearned Revenue

Liabilities for amounts received before goods or services are provided, recognized as revenue when earned.

Operating Income

Revenue from operating activities minus operating expenses. A key indicator of a company's operational efficiency.

Debt to Equity Ratio

A measure of a company's financial leverage, calculated as total liabilities divided by total equity.

Liquidity Ratios

Metrics used to measure a company's ability to pay off its short-term liabilities, including current ratio and quick ratio.

Return on Assets (ROA)

A measure of a company's profitability relative to total assets, calculated as net income divided by average total assets.

Deferred Tax Liability

A tax obligation that is expected to be settled in the future, arising when taxable income is higher than accounting income.

Tangible Asset

Physical assets that can be touched and measured, such as machinery, buildings, and land.

Performance Obligation: Distinct Criteria

A promise is distinct if 1. The goods/services are separately identifiable (they do not integrate or customize) and 2. The customer can benefit from the resource independently or combined with available resources.

Gross profit margin

$\frac{\text{Sales (net)} - \text{COGS}}{\text{Sales (net)}}$.

Finance Lease: OWNES Criteria

A lease is a finance lease if any one of the following is met: Ownership transfer, Written option to purchase (reasonably certain), NPV of payments $\text{≥ } 90\%$ of fair value, Economic life term $\text{≥ } 75\%$, or Specialized asset.

Star (Revenue Recognition)

The five-step identification process: 1. Identify the contract, 2. Identify the Separate performance obligations, 3. Determine the Transaction price, 4. Allocate the transaction price, and 5. Recognize revenue when or as the entity satisfies each PO.

Dollar value LIFO ending inventory

$\text{Beginning inventory} + (\text{Change in inventory} \times \text{price index})$, where the price index is $\frac{\text{Ending inventory at CY cost}}{\text{Ending inventory at base year cost}}$.

Treasury Stock: Cost Method

Treasury shares are recorded and carried at their reacquisition price. Gain or loss is determined only when shares are reissued or retired; APIC-TS is credited for gains and debited for losses.

Lower of Cost or Market

Requirement for LIFO and retail inventory methods, where Market is the middle value of: 1. Market ceiling (NRV), 2. Market floor ($NRV - \text{normal profit margin}$), and 3. Replacement cost.

Change in Accounting Estimate

Accounted for through prospective application, which does not affect previous periods or retained earnings but may require disclosure for effects on current income and per-share info.

Quick ratio

The quick ratio, also known as the acid-test ratio, is a liquidity measure that evaluates a company's ability to meet its short-term obligations without relying on the sale of inventory. It is calculated using the formula: $\frac{\text{Cash and cash equivalents} + \text{Net receivables} + \text{Short-term marketable securities}}{\text{Current liabilities}}$. A higher quick ratio indicates a stronger liquidity position, suggesting that the company can effectively cover its current liabilities with its most liquid assets.