What is the primary objective of accounting?
The primary objective of accounting is to measure income, which measure’s a firm’s efficiency.
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What is the most authoritative set of accounting pronouncements?
The FASB Codification - All pronouncements fall under the FASB Codification umbrella.
What are the two levels of authority within the FASB codification?
The two levels of authority within the FASB codification are:
- Authoritative
- Non-Authoritative
How does managerial accounting differ from financial accounting?
Managerial Accounting has a “timeliness” focus.
Managerial Accounting is not required to follow GAAP
Which financial reports are required to be filed with the SEC?
SEC requires the following financial reports:
- Form 10K - Annual and Audited
- Form 10Q - Quarterly and Reviewed
What is the focus of financial reports for individual companies?
Focus is on the needs of users to help them make decisions and assessments about the company.
It does not make assessments of the economy.
What are the Primary Constraints of Financial Reporting?
The primary constraints of financial reporting are:
- Cost vs. Benefit
- Materiality
What are the Secondary Constraints of Financial Reporting?
The secondary constraints of financial reporting are:
- Consistency - Year vs. Year
- Comparability - Company vs. Company
What are the Qualitative Characteristics of Financial Reporting?
The qualitative characteristics of financial reporting are Relevance and Faithful Representation.
Relevance - Makes a difference to the user. It includes:
- Predictive Value - Future Trends
- Confirming Value - Past Predictions
- Materiality - Could affect user decisions
Faithful Representation includes:
- Completeness - Nothing omitted that would impact the decision-making of a user
- Neutrality - Information is presented without bias
- Free from Error - No material errors or omissions
What are the Enhancing Qualitative Characteristics of Financial Reporting?
The Enhancing Qualitative Characteristics of Financial Reporting are:
- Comparability - Allows users to compare different items among various periods
- Verifiability - Different people would reach a similar conclusion on the information presented
- Timeliness - Information is made available early enough to impact the decision making of users
- Understandability - Information is easy to understand
How does Conservatism affect the recording of accounting transactions?
When an estimate is necessary due to uncertainty, conservatism chooses the best option that won’t overstate the financial position of the company.
What is an accrual?
Accrual is Earned (Revenue) or Incurred (Expense) but no Cash Receipt/Outlay yet.
What is a deferral?
Deferral is Cash Receipt/Outlay but not Earned (Revenue) or Incurred (Expense).
What is recognition in accounting?
When an item is recorded and included in the financial statements.
Describe fair value with respect to an asset.
With respect to an asset, fair value is the price you would receive if you sold the asset.
- It assumes asset is at its highest and best value.
- It assumes asset is sold at its most advantageous market to get the best price possible.
What market assumptions are made in a fair value assessment?
In a fair value assessment, the following market assumptions are made:
- Buyer and Seller are not Related.
- Buyer and Seller are Knowledgeable.
- Buyer and Seller are able to transact - i.e. This isn’t a hypothetical transaction for Fair Value measurement purposes. The buyer actually does have the $10M to purchase the asset you’re trying to value at $10M.
- Buyer and Seller are both motivated to buy/sell.
What items are included in a Level 1 input in the fair value hierarchy?
Level 1 input in the fair value hierarchy includes price quotes or market prices.
For example, NYSE or NASDAQ.
What items are included in a Level 2 valuation input?
Level 2 valuation input includes:
- Interest Rates
- Prime Rate
What items are included in Level 3 inputs of the fair value hierarchy?
Level 3 inputs include:
- Unobservable inputs such as assumptions or forecasts
- Lowest priority for valuation
Note: See FAR NINJA Notes for New Level 3 Disclosure Requirements
What are acceptable valuation techniques for fair value?
- Market approach - uses market transactions and prices to value the asset
- Income approach - uses present value discounts earnings
- Cost approach - uses replacement cost to value the asset
What are current assets?
Current assets include:
- Cash
- Inventory or Assets expected to be converted or consumed during a business’ operating cycle
- Receivables expected to be collected in 12 months or less
What are current liabilities?
Current liabilities are liabilities that will use current assets during the present operating cycle.
What is an accrued liability?
Accrued liability is an expense that has been incurred but not paid.
Example: rent payable
What are the 5 Revenue Recognition steps (COPAS)?
- Contract - Identify the Contract with a Customer
- Obligation - Identify Separate Performance Obligations
- Price - Determine Transaction Price
- Allocation - Allocate Transaction Price to the Separate Performance Obligations
- Satisfaction - Recognize Revenue when/as the entity Satisfies a Performance Obligation
What are the 5 contract elements Revenue Recognition?
- Commercial Substance
- Rights to Goods/Services Identified
- Approval & Commitment by Each Party
- Payment Terms Identified
- Collection is Probable
What is a gain?
A gain is an increase in equity from an activity or event that is not central to the main activities of the business.
It can be operating or non-operating.
What is a loss?
A loss is a decrease in equity from an activity or event that is not central to the main activities of the business.
It can be operating or non-operating.
What is an operating cycle?
Operating cycle refers to the average time it takes to turn materials or services into cash.
What is the present value of future cash flows?
Valuation method - the current value of a future amount of money using a specific interest rate.
What is historical cost?
Asset Cost net of depreciation and amortization
What is a replacement cost?
How much it would cost to reacquire an asset today.
(Entrance Cost)
What is a market cost?
Market cost refers to the sale price of an asset.
(Exit Cost)
What is Net Realizable Value?
Sale Price of an Asset - Selling/Disposal Fee
How do you calculate sales revenue starting from cash basis income?
Mnemonic: SPEAR-BAR
Sales (i.e. Customer Payments)
+ Ending Accounts Receivable
- Beginning Accounts Receivable
= Sales Revenue on an Accrual Basis
How do you calculate COGS starting from Cash Basis?
Mnemonic: CRAP-I
Cash Remitted (i.e. paid)
+ Increase in Accounts Payable
- Increase in Inventory
= COGS on an Accrual Basis
How are discontinued operations reported? When are they used?
- Reported Net of Tax after Continuing Operations.
- Company decides to cease operating a segment of its business (represents a strategic shift and has major effect on operations and financials)
- Includes Income (or loss) from the period plus the gain (or loss) from disposal
For discontinued operations, what are the three requirements for disposal assets?
Disposal assets must be:
- Held for Sale
- Sold
- or Disposed of another way
How are Unusual or Infrequent items reported?
Unusual or Infrequent items are reported in two ways:
- Income Statement above Income from Continuing Operations, or
- Footnotes.
Retrospective or Prospective Treatment is allowed.
What is constant dollar accounting?
Constant dollar accounting adjusts assets to reflect a consistent level of purchasing power due to inflation.
It uses the Consumer Price Index (CPI).
When are expenses recognized?
Expenses are recognized when they are incurred; accrue if not yet paid.
What are accrued expenses?
Accrued expenses are those incurred but not paid.
- Product costs - Expenses should be matched with associated revenues as they are recognized (sales commission on a used car sale)
- Period costs - Expenses amortized and recognized with the passage of time
When should impaired assets be written down to fair value and expensed?
Immediately.
What major items should be classified under General & Administrative (G&A) expenses?
G&A expenses should include:
- Office staff salaries
- Office/building rent
- Office supplies
Note: Sales staff salaries and portions of the building assigned to Sales should be allocated to Selling Expense not G&A.
What are business start-up costs?
Start-up costs are one-time costs for opening a new business.
They are expensed as they are incurred.
When is interest not expensed?
Interest on projects (software) for internal use is not expensed but is instead capitalized.
What are the major components of Comprehensive Income?
Net Income + Other Comprehensive Income (OCI):
- Revenues/Expenses
- Gains/Losses
- Cumulative accounting adjustments
- Reclassifications adjustments
- Non-owner changes in equity
What items are considered cumulative accounting adjustments?
Cumulative accounting adjustments include:
- Foreign Currency Translation Adjustments
- Unrealized gains on AFS Debt Securities
- Minimum Pension Liability adjustment for defined benefit plans
Where is Comprehensive Income reported?
Comprehensive income is reported in a Single or Combined Income Statement.
What disclosures on accounting policies are required in financial statements?
- Accounting Principles used
- Basis of Consolidation
- Inventory Pricing Methods
- Depreciation Method
- Amortization of Intangibles
What are the required Revenue Recognition disclosures?
- Contracts with Customers - Contract Balances
- Opening/Closing Balances - Receivables, Contract Assets, Contract Liabilities
- Changes in Contract Asset & Liability Balances due to Business Combinations, Catch-Up Adjustments, Impairment, Time Frame
- Performance Obligations - Typical Contract Satisfaction, Payment Terms, Nature of Goods/Services, Refund/Warranty Obligations, Significant Judgments, Cost to Obtain/Fulfill Contracts
What are some major risks and uncertainties that must be disclosed?
The following risks and uncertainties must be disclosed:
- Nature of Operations
- Use of Estimates and listing of Significant Estimates
- Concentration vulnerability
Under Cash Basis Accounting, how are Revenue and Expenses recognized?
Revenue is recognized with Cash Inflow.
Expenses are recognized with Cash Outflow.
Is Cash Basis Accounting ok for Tax Returns?
Yes.
Is Cash Basis Accounting GAAP?
No. GAAP uses Accrual Accounting.
What is an advantage of Modified Cash Basis Accounting?
It avoids the complexities of GAAP but provides more information than Cash Basis Accounting.
Is Modified Cash Basis GAAP?
No. GAAP uses Accrual Accounting.
What are the three acceptable options for Income Tax Basis Accounting?
The three acceptable options for Income Tax Basis Accounting are:
- Cash Basis
- Accrual Basis
- Hybrid Method
What are the advantages of the Small and Medium Sized Entity Framework?
The advantages of the Small and Medium Sized Entity Framework include the following:
- Simplifies reporting and disclosures for small companies
- Reduces Book vs Tax differences
- Avoids Fair Value measurements (Historical Cost)
What are the two options for Income Taxes under the Small and Medium Sized Entity Framework?
The two options for Income Taxes under this framework are:
- Deferred Taxes Method
- Taxes Payable Method
What are the two options for Startup Costs under the Small and Medium Sized Entity Framework?
The two options for Startup Costs under this framework are:
- Expensed
- Amortized (15 years)
How is Goodwill treated under the Small and Medium Sized Entity Framework?
It is amortized (15 years).
What is a Development Stage Entity?
A company that is still in the formation stage and hasn’t yet begun principal operations or produced significant revenue.
What is the key benefit of the accounting rules for Development Stage Entities?
It saves cost without sacrificing financial statement usefulness.
