2
Q
How should changes in accounting principles be implemented?
A
Changes in accounting principles require retrospective application:
- Adjustments to prior periods
- Modifications to retained earnings
Example:
Switching from LIFO to FIFO.
3
Q
Is converting from LIFO to FIFO a change in principle or estimate, and how is it executed?
A
Switching from LIFO to FIFO represents a change in accounting principle and is applied retrospectively.
4
Q
How are changes in accounting estimates handled?
A
A change in an accounting estimate is applied prospectively, meaning no adjustments are made to past financial statements.
5
Q
Does altering the depreciation method from straight-line to double-declining balance constitute a change in principle or estimate, and how is it applied?
A
Changing depreciation methods is considered a change in accounting estimate and is applied prospectively.
6
Q
What is the procedure for correcting an accounting error?
A
The cumulative effect of the error is adjusted to the beginning balances of assets and liabilities in the earliest period presented in comparative statements. Details must be disclosed in the footnotes.
7
Q
List the criteria for a prior period adjustment.
A
- Material effect
- Identifiable in prior periods
- Could not be estimated previously
8
Q
How is a transition from a non-GAAP to a GAAP method recorded?
A
This transition is treated as a correction of an accounting error. The cumulative effect is adjusted to the beginning balances of assets and liabilities in the earliest period presented, and the correction must be disclosed in the footnotes.
9
Q
What is the recording method for a change in entity?
A
A change in entity is recorded retrospectively. All prior periods presented for comparison must reflect the change, and disclosures should be made regarding the shift to consolidated statements.
10
Q
What is the main goal of accounting?
A
The primary objective of accounting is to measure income, which assesses a firm’s operational efficiency.
11
Q
What is the most authoritative accounting guidance?
A
The FASB Codification encompasses all authoritative accounting pronouncements.
12
Q
Identify the two levels of authority within the FASB codification.
A
- Authoritative
- Non-Authoritative
13
Q
In what way does managerial accounting differ from financial accounting?
A
Managerial accounting emphasizes timeliness and is not required to adhere to GAAP.
14
Q
Which financial documents must be submitted to the SEC?
A
The SEC mandates the filing of:
- Form 10-K: Annual, audited
- Form 10-Q: Quarterly, reviewed
15
Q
What is the emphasis of financial reports for individual entities?
A
The focus is on the needs of users to aid in decision-making and assessments regarding the company, rather than evaluating the economy.
16
Q
What are the primary constraints on financial reporting?
A
Primary constraints include:
- Cost vs. Benefit
- Materiality
17
Q
What are the secondary constraints on financial reporting?
A
Secondary constraints involve:
- Consistency (Year vs. Year)
- Comparability (Company vs. Company)
18
Q
Enumerate the qualitative characteristics of financial reporting.
A
Financial reporting’s qualitative characteristics are Relevance and Faithful Representation.
Relevance includes:
- Predictive Value: Future Trends
- Confirming Value: Past Predictions
- Materiality: Potential user impact
Faithful Representation entails:
- Completeness: No crucial omissions
- Neutrality: Unbiased information
- Free from Error: No significant errors
19
Q
What are the enhancing qualitative characteristics of financial reporting?
A
Enhancements include:
- Comparability: Facilitates comparisons across periods
- Verifiability: Consistent conclusions across evaluators
- Timeliness: Information availability for decision-making
- Understandability: Ease of comprehension
20
Q
How does conservatism influence accounting transaction recording?
A
In uncertain situations, conservatism opts for the choice that does not overstate the company’s financial status.
21
Q
Define an accrual.
A
It refers to revenue earned or expenses incurred, without corresponding cash transactions yet.
22
Q
What is the definition of a deferral in accounting?
A
A deferral involves cash being received or paid but not yet recognized as revenue or expense.
23
Q
When is an item recognized in accounting?
A
Recognition occurs when an item is recorded and included in the financial statements.
24
Q
List the five steps in the revenue recognition process (COPAS).
A
- Contract: Identify the contract with a customer
- Obligation: Identify separate performance obligations
- Price: Determine the transaction price
- Allocation: Allocate the transaction price to separate performance obligations
- Satisfaction: Recognize revenue when/as a performance obligation is satisfied
25
Q
What are the five elements of a contract needed for revenue recognition?
A
- Commercial substance
- Identified rights to goods/services
- Approval and commitment by each party
- Defined payment terms
- Probable collection
26
Define a gain in accounting terms.
A gain represents an increase in equity from activities or events that are not part of the business's primary operations and can be either operating or non-operating.
27
How would you define a loss in accounting?
A loss is a reduction in equity due to activities or events that are not core to the business's primary operations, and it can be either operating or non-operating.
28
What does the term 'operating cycle' refer to?
The operating cycle is the average duration required to convert materials or services into cash.
29
How is sales revenue calculated from cash basis income?
Utilize the mnemonic **SPEAR-BAR**:
Sales (customer payments) + Ending Accounts Receivable - Beginning Accounts Receivable = Sales Revenue on an Accrual Basis
30
How do you derive COGS from cash basis accounting?
Use the mnemonic **CRAP-I**:
Cash Remitted (paid) + Increase in Accounts Payable - Increase in Inventory = COGS on an Accrual Basis
31
What is the reporting method for discontinued operations and when are they applicable?
Discontinued operations are reported net of tax after continuing operations. They apply when a company decides to stop operating a business segment, representing a strategic shift significantly affecting operations and financials, including income or loss from the period plus gain or loss from disposal.
32
What are the three conditions for disposal assets in discontinued operations?
Disposal assets must be:
- Held for sale
- Sold
- Disposed of in another manner
33
In what ways are unusual or infrequent items reported?
Unusual or infrequent items can be reported in the income statement above income from continuing operations or in the footnotes.
34
What is constant dollar accounting?
Constant dollar accounting adjusts assets to maintain consistent purchasing power in light of inflation, using the Consumer Price Index (CPI).
35
When should expenses be recognized?
Expenses are recognized when incurred and should be accrued if not yet paid.
36
Define accrued expenses.
Accrued expenses are those incurred but not yet paid. They include:
- Product costs: Matched with associated revenues upon recognition (e.g., sales commission)
- Period costs: Amortized and recognized over time
37
What major items are classified under General & Administrative (G&A) expenses?
G&A expenses include:
- Salaries of office staff
- Rent for office/building
- Office supplies
## Footnote
Sales staff salaries and portions of the building assigned to sales should be allocated to selling expenses, not G&A.
38
What are business start-up costs?
Start-up costs are one-time expenses incurred when opening a new business and are expensed as incurred.
39
Under what conditions is interest not expensed?
Interest on projects intended for internal use, such as software development, is capitalized instead of being expensed.
40
What are the main components of Comprehensive Income?
Comprehensive Income includes:
- Net Income
- Other Comprehensive Income (OCI), comprising revenues, expenses, gains, losses, cumulative accounting adjustments, reclassification adjustments, and non-owner changes in equity.
41
What items are considered cumulative accounting adjustments?
Cumulative accounting adjustments include:
- Foreign Currency Translation Adjustments
- Unrealized Gains on Available-for-Sale (AFS) Debt Securities
- Minimum Pension Liability Adjustments for defined benefit plans
42
Where can you find Comprehensive Income reported?
Comprehensive income appears in either a single or combined statement of income.
## Footnote
FAR topic
43
List the necessary disclosures for accounting policies in financial statements.
- Accounting principles applied
- Consolidation methods
- Inventory valuation techniques
- Depreciation approach
- Amortization of intangible assets
44
What disclosures are required for Revenue Recognition?
- **Customer Contracts**: Contract balances
- **Balances**: Opening/closing for receivables, contract assets, liabilities
- **Balance Changes**: From mergers, adjustments, impairments, time
- **Performance Obligations**: Contract completion, payment terms, goods/services nature, refund/warranty duties, judgments, contract costs
45
Identify key risks and uncertainties that need disclosure.
- Business nature
- Estimation use and major estimates
- Concentration risks
46
Under Cash Basis Accounting, when are revenue and expenses acknowledged?
Revenue is recognized upon cash receipt, and expenses upon cash payment.
47
Can Cash Basis Accounting be used for tax filings?
Yes, it is permissible for tax returns.
48
Does GAAP allow Cash Basis Accounting?
No, GAAP mandates the use of Accrual Accounting.
49
What is a benefit of using Modified Cash Basis Accounting?
It simplifies financial reporting compared to GAAP while providing more detail than Cash Basis.
50
Is Modified Cash Basis compliant with GAAP?
No, GAAP requires Accrual Accounting.
51
Enumerate the three valid methods for Income Tax Basis Accounting.
- Cash Basis
- Accrual Basis
- Hybrid Method
52
What benefits does the Small and Medium Sized Entity Framework offer?
- Eases reporting/disclosures for smaller firms
- Lessens Book vs Tax discrepancies
- Avoids Fair Value measurements (*Historical Cost*)
53
What are the two tax options under the Small and Medium Sized Entity Framework?
- Deferred Taxes Method
- Taxes Payable Method
54
What are the two approaches for handling Startup Costs in the Small and Medium Sized Entity Framework?
- Expense immediately
- Amortize over 15 years
55
How is Goodwill accounted for in the Small and Medium Sized Entity Framework?
Goodwill is amortized over 15 years.
56
Define a Development Stage Entity.
An entity still in its formation phase, not yet engaging in main operations or generating substantial revenue.
57
What is the primary advantage of accounting standards for Development Stage Entities?
They reduce costs without compromising the utility of financial statements.
58
Identify the three main fund types in governmental accounting.
- Governmental
- Proprietary
- Fiduciary
59
Which two bases of accounting are utilized in governmental accounting?
- Accrual basis: Focus on current economic resources (revenues when earned)
- Modified accrual basis: Focus on current financial resources (revenues when available and measurable)
60
What does a budget appropriation signify?
It is the maximum authorized expenditure amount for a specific budget item.
61
Define an encumbrance in accounting.
An encumbrance records a commitment to purchase, reserving funds for that purpose.
62
What is the initial budgetary entry in governmental accounting?
**Dr** Estimated Revenues Control
**Cr** Appropriations Control
**Dr/Cr** Budgetary Fund Balance (*plug*)
63
Describe the final budgetary entry for closing purposes.
**Dr** Appropriations Control
**Dr/Cr** Budgetary Fund Balance (*plug*)
**Cr** Estimated Revenues Control
64
List the categories of governmental funds.
- General Fund
- Special Revenue Fund
- Permanent Fund
- Capital Projects Fund
- Debt Service Fund
65
Define the General Fund.
The General Fund serves as the primary operating fund for government entities.
- Records key revenues: *Taxes; Tickets; Fines; Licenses*
- Records significant expenses: *Police; Education; Fire Department*
66
What distinguishes a Special Revenue Fund?
A Special Revenue Fund is allocated for a designated purpose, such as street maintenance.
67
Identify the characteristics of a Permanent Fund.
A Permanent Fund is legally restricted where only the earnings support programs, while the principal remains untouched.
68
What is the purpose of a Capital Projects Fund?
The Capital Projects Fund is used for acquiring and constructing facilities.
69
Explain the function of a Debt Service Fund.
The Debt Service Fund is used for repaying long-term debt and associated interest.
70
Name the financial statements issued in Governmental Accounting.
- Balance Sheet
- Statement of Revenues, Expenditures & Changes in Fund Balance
71
When is revenue recognized in Governmental Accounting?
Revenue is recognized when it is both available and measurable, regardless of when it is expended.
72
Define Derived Tax Revenue.
Derived Tax Revenue comes from activities such as:
- Sales tax (*e.g., buying vehicles*)
- Income tax (*e.g., employment income*)
73
What is Imposed Tax Revenue, and when is it recorded?
Imposed Tax Revenue is assessed simply due to the existence of an item.
It is recorded as revenue when budgeted.
## Footnote
*Example:* Property tax on a vehicle (even if unused); real estate tax.
74
List the types of Proprietary Funds.
- Internal Service Funds: Serve other governmental units (*e.g., motor pool*)
- Enterprise Funds: Provide goods/services to external users (*e.g., postal services*)
75
What are the types of Fund Balances?
- Restricted: Limited by contributor
- Committed: Limited by government
- Assigned: Intended for a particular purpose
- Unassigned: Available for spending
- Non-spendable: Not in a spendable form
76
Enumerate the types of Fiduciary Funds.
- Custodial Fund: Government acts as custodian
- Pension Trust Fund: Trustee for a pension plan
- Investment Trust Fund: Trustee over investments
- Private Purpose Trust: Benefits specific individuals/entities
77
How are assets and liabilities displayed on the Statement of Net Position?
- Assets (*Current & Non-Current*)
- Deferred Outflows of Resources
- Liabilities (*Current & Non-Current*)
- Deferred Inflows of Resources
78
In a governmental Statement of Net Position, how are capital assets presented?
Capital assets are shown net of debt:
*Asset Cost - Accumulated Depreciation - Asset Liabilities = Net Assets*
79
How is infrastructure reported on a governmental Statement of Net Position using the modified approach?
Infrastructure is reported at cost without accumulated depreciation.
80
How is a Statement of Net Position organized?
It is divided into Governmental Activities and Business Activities.
81
Describe how activities are categorized in a Statement of Activities.
Activities are divided by function. If distinguishable from the rest of the government entity, a **discreet presentation** is required. If not, a **blended presentation** is used. Component units are reported in the **Entity-Wide** Financial Statements, not in the Fund Financial Statements.
82
What is the main purpose of governmental accounting?
To supply information that aids various users, including:
- Costs of services
- Revenue adequacy to cover costs
- Financial status of the entity
83
Which financial reports are necessary for Defined Benefit Pension plans?
- Statement of Fiduciary Net Position
- Statement of Changes in Fiduciary Net Position
84
Identify the elements of the Statement of Fiduciary Net Position for Defined Benefit Pension Plans.
- Assets
- Deferred Outflows
- Liabilities
- Deferred Inflows
- Fiduciary Net Position
85
What constitutes the Statement of Changes in Fiduciary Net Position for Defined Benefit Pension plans?
Additions (Contributions and Net Investment Income) minus Deductions (Benefit Payments and Administrative Expenses) equals Net Change in Fiduciary Net Position
86
List the contents required in the notes of financial statements for Defined Benefit Pension Plans.
- Types of Benefits
- Plan Member Classes
- Board Information
- Investment Policies
- Fair Value Determination
87
Which body provides the highest authority for international accounting standards?
The International Accounting Standards Board (**IASB**)
88
Where should management first seek guidance on international recognition and accounting policies?
The International Financial Reporting Standards (**IFRS**) issued by the IASB.
89
What framework assists in developing international accounting standards?
The **IASB** Framework aids in forming standards for international accounting.
## Footnote
The framework is not a standard itself and does not override the authority of any standard.
90
What is the goal of the IFRS framework?
To provide users with comprehensive information on international accounting practices.
91
Which accounting basis is permitted under IFRS?
Only the **Accrual** Basis of Accounting is accepted under IFRS.
92
Identify the Qualitative Characteristics of accounting information in IFRS.
The characteristics are Relevance and Faithful Representation.
**Relevance** includes:
- Predictive Value
- Confirming Value
**Faithful Representation** involves:
- Completeness
- Neutrality
- Free from Error
93
What are the Enhancing Characteristics according to IFRS?
- Comparability
- Verifiability
- Timeliness
- Understandability
94
How does **comparability** differ between GAAP and IFRS?
IFRS requires prior year comparative information. GAAP mandates consistent preparation for multiple years but does not require prior year comparative statements.
95
What is the Pervasive Constraint in IFRS?
Cost versus Benefit
96
What items are considered reporting elements under IFRS?
- Asset
- Liability
- Equity
- Income
- Expense
97
What are the recognition criteria for IFRS financial statements?
- Probable future economic benefit
- Measurability with reliability
## Footnote
If not reliably measurable, the **Cost Recovery Method** is used.
98
What type of financial statement is required for the initial IFRS reporting period?
A complete comparative statement using IFRS.
99
If IFRS was adopted in June 2018 for December 31, 2018, financial statements, what is the Date of Transition?
January 1, 2017, as a full year of comparative statements is necessary from the prior year.
100
Where are IFRS adoption adjustments reflected in financial statements?
Within the entity's retained earnings or equity.
101
What financial statements does IFRS mandate?
- Statement of Comprehensive Income
- Statement of Changes in Equity
102
In IFRS, what does the term 'income' include?
It includes both **revenue** and gains.
103
What term does IFRS use for 'Net Income'?
IFRS uses the term **profit**.
104
How are gains treated under IFRS?
Gains are treated like revenue and are not separately listed on financial statements.
105
In IFRS, how are losses categorized on financial statements?
Losses are treated as **expenses** and are **separately** displayed on financial statements.
106
What is the difference in refinancing current liabilities between IFRS and GAAP?
Under **IFRS**, execution of the refinancing agreement before the balance sheet date is required to classify as non-current. **GAAP** only requires intent to refinance.
107
How does GAAP classify contingent liabilities?
- Probable
- Reasonably Possible
- Remote
## Footnote
Under IFRS, they are classified as a **provision** if probable and measurable.
108
List items recorded on the Income Statement under IFRS.
- Income
- Finance Costs
- Tax Expense
- Discontinued Operations
- Profit or Loss
- Non-controlling interest in Profit or Loss
- Net profit or loss attributable to equity
109
How can interest expense be classified in an IFRS statement of cash flows?
It can be classified as either Operating or Financing, and once chosen, all future costs must be consistently classified.
110
Where must significant non-cash transactions be reported in IFRS?
They must be disclosed in the notes to the financial statements.
111
What financial statements are necessary for not-for-profit organizations?
- Statement of Financial Position
- Statement of Activities
- Statement of Cash Flows
112
What are the main sections of a Statement of Financial Position?
- Assets
- Liabilities
- Net Assets
- With Donor Restrictions
- Without Donor Restrictions
113
What are the major sections in a Statement of Activities for non-profits?
- Revenues
- Expenses (only deducted from Unrestricted Revenues)
- Gains and Losses
- Changes in Net Asset classes
- With Donor Restrictions
- Without Donor Restrictions
114
What are the features and main classifications of a Statement of Cash Flows for not-for-profits?
Both direct and indirect methods are acceptable.
- Operating Activities (Unrestricted Revenues and Expenses)
- Investing Activities
- Financing Activities (Endowments and restricted contributions)
115
How are expenses classified in the Statement of Activities?
- Functional Expense
- Program Services
- Support Services
- Natural Expense
- Salaries
- Rent
- Utilities
- Supplies
116
Which financial statements do non-governmental hospitals need to prepare?
- Balance Sheet
- Statement of Operations
- Statement of Changes in Net Assets
- Statement of Cash Flows
- Financial Statement Notes
117
Which accounting basis is used for revenue and net assets in non-profits?
**Accrual basis** is used.
## Footnote
Only external parties can impose restrictions on assets. Internally designated assets remain unrestricted.
118
What defines unrestricted assets or revenue?
No conditions or restrictions are placed on their use by the entity.
## Footnote
Assets designated internally by management are still classified as unrestricted.
119
When are contributions recognized as revenue?
In the year they are **received**, not when spent, and recorded at Fair Value on the receipt date.
120
Under what conditions are services considered contributions?
- If the organization would have otherwise paid for them
- If they enhance the value of a non-monetary asset
121
Is charity care revenue for hospitals?
No, it is only disclosed in the financial statement notes.
122
How are unconditional pledges to donate recorded in financial statements?
They are recognized as **revenue** in the year the pledge is made; pledges for future years are considered Restricted.
## Footnote
Classified under ASC 958 for not-for-profit entities.
123
From which type of revenues should expenses be deducted?
Expenses are deducted only from Unrestricted Revenues, not from Restricted Revenues or Assets.
## Footnote
Pertains to non-profit accounting principles.
124
Describe the properties of Restricted Assets or Revenue.
Usage is limited to a **future** time and may transition to Unrestricted. Unrestricted promises, including multi-year, not yet received are time-restricted and marked as **Restricted Assets**. Multi-year contributions are recorded at the **present** value.
125
What defines an endowment's characteristics?
The **investment** use is restricted, while the **income** may be restricted or unrestricted. It must be controlled by the receiving entity (**Quasi Endowment**) to be recorded in unrestricted net assets, otherwise, a memo entry is made.
126
List the disclosure requirements for an Underwater Endowment.
- Fair Value of Funds
- Original Gift Amount or Required
- Funding Level
- Deficiency Amount
- Governing Board Policies
127
Under what conditions is an art collection donation not recognized as an asset?
It is not recognized if held for display or education, or if proceeds from sale are used to acquire similar items.
128
When both Restricted and Unrestricted Assets are available, which is utilized first?
Restricted Assets are used prior to Unrestricted Assets.
## Footnote
Guidance under not-for-profit accounting standards.
129
How should a refundable advance be recorded in a not-for-profit's accounts?
It is recorded as a **liability**. It becomes unconditional once the likelihood of the condition not being met is remote.
130
In a not-for-profit, how is depreciation expense allocated?
Depreciation expense is proportionally assigned to various functions.
## Footnote
Follows FASB ASC 958-360.
131
Identify the activities included under operating activities in the Statement of Cash Flows.
Operating activities encompass:
- Cash received from customers
- Interest and Dividends
- Trading Debt Securities
- Cash paid to Vendors and Suppliers
- Interest
- Taxes from Operating Activities
132
What items are categorized under investing activities in the Statement of Cash Flows?
- **Cash received:**
- Sale of PP&E
- Sale of Investments
- Loan Principal
- **Cash paid:**
- Loans
- Acquisitions
- AFS or HTM Debt Securities
- Taxes from Investing Activities
- Trading Debt Securities
133
What transactions are part of Financing Activities in a Statement of Cash Flows?
Financing activities include:
- **Cash received:**
- Issuance of Stock
- Issuance of Debt
- **Cash paid:**
- Dividends
134
Describe the indirect method for preparing a Statement of Cash Flows.
The direct method commences with **Income from Continuing Operations** and adjusts for changes in accounts like A/R, A/P, Inventory, and non-cash revenues, expenses, gains, and losses.
135
Explain the Indirect Method for a Statement of Cash Flows.
The Indirect Method begins with **Net Income** and adjusts for changes in accounts like A/R, A/P, Inventory, and non-cash revenues, expenses, gains, and losses.
136
How is basic Earnings Per Share (EPS) determined?
(Net Income - Preferred Dividends) divided by Average Common Shares Outstanding.
## Footnote
For cumulative preferred stock, deduct the dividend whether declared or not.
137
When a stock split or dividend occurs, which date is used for EPS calculations?
For EPS calculations, treat stock splits or dividends as if they occurred at the **beginning of the year** regardless of the actual issue date.
138
For which components must EPS be disclosed?
EPS must be disclosed for **Income** from Continuing Operations and Net Income. Other components like discontinued operations can be shown in the Financial Statements or notes.
139
Under what conditions do stock options increase shares outstanding?
Stock options increase shares outstanding only if they are **dilutive**, meaning their exercise price is less than the market value. If not, they are excluded from the calculation.
140
How is EPS affected when considering convertible bonds?
[Net Income + Bond Interest (Net of Tax)] divided by (Average Common Stock Shares + Convertible Equivalents). Bond interest is added back because conversion eliminates bond interest expense. Contingent Issue Agreements are included in Diluted EPS if the contingency is met.
141
What is the primary objective of segment reporting?
To provide information about the different types of business activities and economic environments in which an entity operates.
## Footnote
Segment reporting helps investors and analysts evaluate a company's performance, risks, and opportunities in different areas of its operations.
142
# True or False:
Interim financial reports must be as comprehensive as annual financial statements.
FALSE
## Footnote
Interim financial reports are typically condensed and provide less detail than annual financial statements, but they must still comply with applicable accounting standards.
143
# Fill in the blank:
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an \_\_\_\_\_\_ transaction between market participants.
orderly
## Footnote
An orderly transaction assumes exposure to the market for a period that allows for normal marketing activities, contrasting with a forced or distressed sale.
144
List the three levels of fair value hierarchy.
* Level 1: Quoted prices in active markets for identical assets or liabilities
* Level 2: Observable inputs other than quoted prices
* Level 3: Unobservable inputs
## Footnote
The fair value hierarchy prioritizes the inputs to valuation techniques used to measure fair value, with Level 1 being the most reliable and Level 3 the least.
145
What adjustment might be required in interim financial reporting compared to annual reporting?
Adjustments for seasonal or cyclical revenue patterns.
## Footnote
Interim financial reports may require adjustments to reflect the seasonal or cyclical nature of some businesses, ensuring that revenue and expenses are appropriately matched.
CPA (2) FAR
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