Your SlideShare is downloading. ×
Financial Accounting and Reporting 1
Financial Accounting and Reporting 1
Financial Accounting and Reporting 1
Financial Accounting and Reporting 1
Financial Accounting and Reporting 1
Financial Accounting and Reporting 1
Financial Accounting and Reporting 1
Financial Accounting and Reporting 1
Financial Accounting and Reporting 1
Financial Accounting and Reporting 1
Financial Accounting and Reporting 1
Upcoming SlideShare
Loading in...5
×

Thanks for flagging this SlideShare!

Oops! An error has occurred.

×
Saving this for later? Get the SlideShare app to save on your phone or tablet. Read anywhere, anytime – even offline.
Text the download link to your phone
Standard text messaging rates apply

Financial Accounting and Reporting 1

813

Published on

0 Comments
0 Likes
Statistics
Notes
  • Be the first to comment

  • Be the first to like this

No Downloads
Views
Total Views
813
On Slideshare
0
From Embeds
0
Number of Embeds
0
Actions
Shares
0
Downloads
7
Comments
0
Likes
0
Embeds 0
No embeds

Report content
Flagged as inappropriate Flag as inappropriate
Flag as inappropriate

Select your reason for flagging this presentation as inappropriate.

Cancel
No notes for slide

Transcript

  • 1. Financial Accounting and Reporting 1 Errata and Explanation/Additional Clarification 2008 Edition On-Line Update Last Updated March 1, 2008 Section A: TEXT, LECTURE and FLASHCARD ERRATA Item A.1 Page F1-11, Item E.1. Comprehensive Income The text should be corrected as follows: Comprehensive income includes all differences between the beginning equity balance sheet and the ending equity balance sheet other than transactions with owners (i.e. net income plus other comprehensive income). Item A.2 Page F1-35, Item D.2. Required Disclosures The text should be corrected as follows: The accumulated balances of components of "Other Comprehensive Income" (e.g., pension funded status changes, unrealized holding gains/losses on securities, foreign currency items, and the effective portion of cash flow hedges). Item A.3 Page F1-41, Item D.2. 75% "Reporting Sufficiency" Test The text should be corrected as follows: If the total of external (consolidated) revenue reported by operating segments constitutes less than 75% of combined external (consolidated) revenue, additional operating segments need to be identified as reportable segments, even if they do not meet the above three tests, until at least 75% of combined external (consolidated) revenue is included in reportable segments. The practical limit to the number of segments is 10, which is not a precise limit. Item A.4 Flashcard FARE 1-1, Basic Framework The mnemonic on the front of the flashcard should read "BOSSII," not "BOIS," and the back of the flashcard should list the following six most authoritative sources of GAAP: Accounting Research Bulletins APB Opinions FASB Statements of Financial Accounting Standards FASB Staff Positions FASB Interpretations FASB Statement 133 Implementation Issues 1
  • 2. Item A.5 Flashcard FARE 1-27, Comprehensive Income The front of the flashcard should be corrected as follows: Identify three four items included in Other Comprehensive Income. Section B: PASSMASTER, SIMULATIONS, & QUIZZES ERRATA Item B.1 F1 Online Quiz Question #2, CPA-05058 Question: Which of the following sources of accounting literature has the same level of authority as the Statements of the Financial Accounting Standards Board? a. AICPA Accounting Research Bulletin b. AICPA Accounting Standards Board Executive Committee Practice Bulletins c. FASB Technical Bulletins. d. AICPA Statements of Position Explanation (should be corrected as shown): Choice "a" is correct. AICPA Accounting Research Bulletins carry the same level of authority as FASB Statements. The most authoritative literature is included in four six sources of standards abbreviated by the mnemonic BOIS BOSSII as follows: B Accounting Research Bulletins O Accounting Principles Board Opinions S FASB Statements of Financial Accounting Standards S FASB Staff Positions I FASB Interpretations I FASB Statement 133 Implementation Issues Each source of standards relates to a period of time in which a particular authoritative body was charged with developing accounting principles, starting with the AICPA in the 1930s and most recently with the FASB beginning in 1973. Other literature provides guidance. Item B.2 Class Question 11, CPA-00071 Question: Which of the following statements is correct regarding accounting changes that result in financial statements that are, in effect, the statements of a different reporting entity? a. Cumulative-effect adjustments should be reported as separate items on the income statement in the year of change b. No restatements or adjustments are required if the changes involve consolidated methods of accounting for subsidiaries. c. No restatements or adjustments are required if the changes involve the cost or equity methods of accounting for investments. d. The financial statements of all prior periods presented should be restated. 2
  • 3. Explanation (should be corrected as shown): Choice "d" is correct. Financial statements of all prior periods presented should be restated when there is a "change in entity" such as resulting from: 1. Changing companies in consolidated financial statements. 2. Consolidated financial statements vs. Previous individual financial statements. Choice "a" is incorrect. Cumulative-effect adjustments are reported in the retained earnings statement in the year of change. Choice "b" is incorrect. Restatements are required for changes in entity (of subsidiaries). Choice "c" is incorrect. Restatements are required for changes of GAAP involving the cost or equity methods of accounting for investments. Per GAAP, changes involving the cost and equity methods of accounting for investments are not considered to be changes in accounting principle. A change from the cost method to the equity method does require restatement; however, a change from the equity method to the cost method does not require restatement and is accounted for prospectively. Comment: The explanation is correct in Passmaster, but not correct in the textbook. Item B.3 Class Question 16, CPA-00127 Question: The following information pertains to revenue earned by Timm Co.'s industry segments for the year ended December 31, 1990: Sales to unaffiliated Intersegment Total Segment customers sales revenue Alo $ 5,000 $3,000 $ 8,000 Bix 8,000 4,000 12,000 Cee 4,000 - 4,000 Dil 43,000 16,000 59,000 Combined 60,000 23,000 83,000 Elimination - (23,000) (23,000) Consolidated $ 60,000 - $ 60,000 In conformity with the revenue test, Timm's reportable segments were: a. Only Dil. b. Only Bix and DIl. c. Only Alo, Bix and Dil. d. Alo, Bix, Cee and Dill. Explanation (should be corrected as shown): Choice "b" is correct. Only Bix and Dil. Total sales to unaffiliated customers $ 60,000 Intersegment sales 23,000 Total combined sales $ 83,000 × 10% Minimum reportable segment $ 8,300 Only Bix and Dil qualify as reportable segments. When using revenues as a criteria, a segment must include at least 10% of combined revenues, including intersegment sales. 3
  • 4. Bix and Dil division revenues exceed $8300 while Alo and Cee division revenues do not. Additionally, Bix and Dil together account for more than 75% of Timm's total sales to unaffiliated customers (external sales) so no additional reportable segments need to identified. Item B.4 Question CPA-00011 Question: In the hierarchy of generally accepted accounting principles, APB Opinions have the same authority as AICPA: a. Statements of Position b. Industry Audit and Accounting Guides. c. Issues Papers. d. Accounting Research Bulletins. Explanation (should be corrected as shown): Choice "d" is correct. AICPA Accounting Research Bulletins, FASB Standards, FASB Staff Positions, FASB Statement 133 Implementation Issues, FASB Interpretations, and APB Opinions and Interpretations are the most authoritative sources of generally accepted accounting principles. Choice "a" is incorrect. AICPA Statements of Position, AICPA Accounting and Auditing Guides, and FASB Technical Bulletins are secondary sources of generally accepted accounting principles. Choice "b" is incorrect. AICPA Statements of Position, AICPA Accounting and Auditing Guides, and FASB Technical Bulletins are secondary sources of generally accepted accounting principles. Choice "c" is incorrect. AICPA Issues Papers and Practice Bulletins, FASB Concepts Statements, and other authoritative pronouncements are tertiary sources for generally accepted accounting principles. Item B.5 Question CPA-00038 Question: How should the effect of a change in accounting principle that is inseparable from the effect of a change in accounting estimate be reported? a. As a component of income from continuing operations. b. By restating the financial statements of all prior periods presented. c. As a correction of an error. d. By footnote disclosure only. Explanation (should be corrected as shown): Choice "a" is correct. When the effect of a change in accounting principle is inseparable from the effect of a change in accounting estimate, the reporting treatment for the overall effect is as a change in estimate. Thus, the effect is reported prospectively as a component of income from continuing operations. Under SFAS No. 154, this type of change is now called a change in accounting estimate affected by a change in accounting principle. Choice "b" is incorrect. Restatement of all prior periods is the retroactive accounting treatment that is applied to the correction of an error and the retrospective accounting treatment given to changes in accounting principle. However, a change in accounting principle that is inseparable 4
  • 5. from the effect of a change in accounting estimate is now treated as a change in accounting principle estimate. Choice "c" is incorrect. Correction of an error is given retroactive treatment as a prior period adjustment to retained earnings with restatement of prior periods. This is not the treatment appropriate for the effect of a change in accounting principle that is inseparable from the effect of a change in accounting estimate. Choice "d" is incorrect. While footnote disclosure is always appropriate for an accounting change, such disclosure alone is never the appropriate accounting treatment. Item B.6 Question CPA-00090 Question: On August 31, 1992, Harvey Co. decided to change from the FIFO periodic inventory system to the weighted average periodic inventory system. Harvey is on a calendar year basis. The cumulative effect of the change is determined: a. As of January 1, 1992 b. As of August 31, 1992 c. During the eight months ending August 31, 1992, by a weighted average of the purchases. d. During 1992 by a weighted average of the purchases. Explanation (should be corrected as shown): Choice "a" is correct, as of January 1, 1992, the beginning of the year. Rule: The cumulative effect of a change in accounting principle equals the difference between retained earnings at the beginning of period of the change the earliest year presented and what retained earnings would have been if the change was applied to all affected prior periods. We are assuming based on the answer options given that Harvey is not presenting comparative financial statements. Choice "b" is incorrect. The cumulative effect of the change is not determined as of the date the decision is made. Choices "c" and "d" are incorrect. The cumulative effect of the change is not determined by a weighted average. Item B.7 Question CPA-00206 Question: Several sources of GAAP consulted by an auditor are in conflict as to the application of an accounting principle. Which of the following should the auditor consider the most authoritative? a. FASB Technical Bulletins b. AICPA Accounting Interpretations c. FASB Statements of Financial Accounting Concepts d. AICPA Technical Practice Aids Explanation (should be corrected as shown): Choice "a" is correct. The most authoritative pronouncements (first floor) are FASB statements, FASB interpretations, FASB Staff Positions, FASB Statement 133 Implementation Issues, AICPA APB opinions, and AICPA accounting research bulletins. When these pronouncements do not provide appropriate guidance, the next level of pronouncements (second floor) are AICPA 5
  • 6. industry audit and accounting guides, AICPA statements of position, and FASB technical bulletins. Choice "b" is incorrect. AICPA accounting interpretations are not as authoritative as FASB technical bulletins, since they are on the fourth floor. Choices "c" and "d" are incorrect. FASB concepts statements and AICPA technical practice aids are among the least authoritative of accounting literature (fifth floor). Section C: TEXT AND LECTURE ADDITIONAL OR ENHANCED INFORMATION Section D: PASSMASTER, SIMULATIONS, & QUIZZES ADDITIONAL OR ENHANCED INFORMATION Item D.1 Question CPA-00191 The following question needs to be amended/clarified for the effect of SFAS No. 153 (see lecture F-2): Question Under FASB Statement of Financial Accounting Concepts #5, which of the following items would cause earnings to differ from comprehensive income for an enterprise in an industry not having specialized accounting principles? a. Unrealized loss on investments in noncurrent marketable equity securities available for sale. b. Unrealized loss on investments in current marketable equity securities held for trading. c. Loss on exchange of similar assets. d. Loss on exchange of dissimilar assets. Explanation Choice "a" is correct. Unrealized loss on investments in marketable equity securities available for sale would cause earnings to differ from comprehensive income for an enterprise in an industry not having specialized accounting principles. Rule: FAC 5 defines "earnings" for a period to exclude certain cumulative accounting adjustments and other non-owner changes in equity (such as changes in market value of marketable securities available for sale) that are included in comprehensive income for a period. Note the "similar assets" and "dissimilar" assets wording in Choices "c" and "d." As is discussed in lecture F2, this wording is obsolete with the publication of SFAS No. 153 on Nonmonetary Assets. Theoretically, however, this wording could still be used in wrong choices. At the time this question was originally written, the wording was not obsolete. 6
  • 7. Item D.2 Question CPA-00192 There is absolutely nothing wrong with this question or answer, but people occasionally ask for more information. Question FASB's conceptual framework explains both financial and physical capital maintenance concepts. Which capital maintenance concept is applied to currently reported net income, and which is applied to comprehensive income? Currently reported Comprehensive net income income a. Financial capital Physical capital b. Physical capital Physical capital c. Financial capital Financial capital d. Physical capital Financial capital Explanation Choice "c" is correct. Financial capital - Financial capital. Financial capital maintenance is considered to be an element of both "currently reported net income" and "comprehensive income." This was a rare instance in which this type of information was asked on the exam. Comments Here are some paragraphs from CON No. 6, which provides definitions for financial capital and physical capital (Paragraphs 71 and 72, bold added): A concept of maintenance of capital or recovery of cost is a prerequisite for separating return on capital from return of capital because only inflows in excess of the amount needed to maintain capital are a return on equity. Two major concepts of capital maintenance exist, both of which can be measured in units of either money or constant purchasing power: the financial capital concept and the physical capital concept (which is often expressed in terms of maintaining operating capability; that is, maintaining the capacity of an enterprise to provide a constant supply of goods or services). The major difference between them involves the effects of price changes on assets held and liabilities owed during a period. Under the financial capital concept, if the effects of those price changes are recognized, they are called "holding gains and losses" and are included in return on capital. Under the physical capital concept, those changes would be recognized but called "capital maintenance adjustments" and would be included directly in equity and would not be included in return on capital. Under that concept, capital maintenance adjustments would be a separate element rather than gains and losses. The financial capital concept is the traditional view and is generally the capital maintenance concept in present primary financial statements. Comprehensive income as defined in paragraph 70 is a return on financial capital. CON No. 6 is the only place where these two terms are defined. As is indicated in the answer, these definitions are certainly not a big item on the CPA exam. 7
  • 8. Item D.3 Financial 1 Simulation: Research Tab WALK-THROUGH There are several issues we have discovered with this simulation. First, the solution indicates that the answer can be found in APB 30, Paragraph 19. The question is “Determine the proper financial statement presentation for gain or loss on extinguishment of long-term debt.” However, Paragraph 19, as reproduced below, would not be beneficial in answering the question because it does not even mention extinguishment of long-term debt: “Judgment is required to segregate in the income statement the effects of events or transactions that are extraordinary items (as required by paragraph 11). The Board concludes that an event or transaction should be presumed to be an ordinary and usual activity of the reporting entity, the effects of which should be included in income from operations, unless the evidence clearly supports its classification as an extraordinary item as defined in this Opinion. “ Paragraph 20 does specify the normal unusual and infrequent criteria, but does not mention the extinguishment of long-term debt either. Third, even if APB 30 Paragraph 19 were the right answer, there is nothing in the answer explanation to say how one gets to that paragraph in the first place. So how do we arrive at the answer? [Note that the remaining discussion assumes that you are working along in the Research Question Tab.] Let’s try a key word of “extinguishment” in Original Pronouncements for FASB Statements. That word is not a word that is used extensively in the authoritative literature, so it should give us something. It does. It gives 10 different hits (results) with the Becker database, many of which can be eliminated just by looking at them. Normally, in a Research question (1) results that say “Appendix” can be ignored or at least placed way down the possible answer list in priority; (2) SFAS appendices provide rationale/justification, examples, history, implementation guidance, pronouncements that have been changed, and the like, but do provide the rules; and (3) the rules are in the body of the statement itself. There aren't any of those here, so that rule does not appear to do any good. Normally, in a Research question, results that say “Summary” can also be ignored (as long as the detail shows up in the list, which they do for this question). The summaries at the front of Statements are reasonably short, and the detail is in the body of the statement itself. Take those two off the list. Normally, in a Research question, results that say “Status” can also be ignored. Take two more off the list. The SFAS No. 64 hit is meaningless, which can be easily seen by clicking on it. Take one more off the list. The SFAS No. 145 hits look promising, because we know that SFAS No. 145 changed the rule that extinguishments of debt are automatically extraordinary, but they look like they are the wrong paragraphs (Paragraph 1 is real close, however). Take two more off the list. What we are left with is SFAS No. 64, SFAS No. 4, and SFAS No. 95. If we look at those, we will find that none of them answer the question. There is nothing left, and we still have no answer. Note that APB 30 does not even show up on the list and that is supposed to be the answer. Should we just admit defeat and skip this question? Hopefully, we have more perseverance than that. We know what the answer is: something like “Gains or losses on extinguishment of long-term debt are included in income from continuing operations unless those gains and losses are unusual and infrequent, in which case they are extraordinary items.” In a Research question, we should always try to figure out what the answer is before we start the research so that we will know what we are looking for when we see it. None of the hits that we looked at really answer the question although some certainly include certain aspects of the answer. Unfortunately, the problem is actually with the contents of the Becker database. The Becker database does not contain all of the authoritative literature that will be available on the CPA exam. In this case, it is unfortunate that this particular question was included, as the literature we 8
  • 9. have available is not sufficient to answer the question. However, let's go through what would happen if a full research tool (as is available on the CPA exam) were used. Trying the same keyword of “extinguishment” in a full service such as RIA produces 30 hits in Original Pronouncements in FASB Statements. Since we already know that SFAS No. 145 changed the classification of extinguishments, let’s look at it. In the summary of SFAS No. 145, we find the following (bold added): “Under Statement 4, all gains and losses from extinguishment of debt were required to be aggregated and, if material, classified as an extraordinary item, net of related income tax effect. This Statement eliminates Statement 4 and, thus, the exception to applying Opinion 30 to all gains and losses related to extinguishments of debt (other than extinguishments of debt to satisfy sinking-fund requirements—the exception to application of Statement 4 noted in Statement 64). As a result, gains and losses from extinguishment of debt should be classified as extraordinary items only if they meet the criteria in Opinion 30. Applying the provisions of Opinion 30 will distinguish transactions that are part of an entity’s recurring operations from those that are unusual or infrequent or that meet the criteria for classification as an extraordinary item.” That is what we are looking for! Remember that the question was, “Determine the proper financial statement presentation for gain or loss on extinguishment of long-term debt.” If the Becker database had included a little more of the Summary, or had included the appropriate detail paragraphs, it would have had what we needed. The real rules are in Paragraph 1 of SFAS No. 145 as follows (bold added): “FASB Statement No. 4, Reporting Gains and Losses from Extinguishment of Debt, was issued in 1975. Statement 4 required that gains and losses from extinguishment of debt that were included in the determination of net income be aggregated and, if material, classified as an extraordinary item, net of related income tax effect. Statement 4 also required certain disclosures for those items. At the time Statement 4 was issued, the Board concluded that classifying gains and losses from extinguishment of debt as extraordinary items represented a practical and reasonable solution to the issues regarding income statement classification of those gains or losses. However, the Board indicated that that solution was not intended to be permanent.” and in Paragraph 7a as follows: “APB Opinion No. 30, Reporting the Results of Operations—Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions. In the last sentence of paragraph 20, as amended by FASB Statement No. 141, Business Combinations, the phrase (1) Classifications of gains or losses from extinguishment of debt pursuant to paragraph 8 of FASB Statement No. 4, Reporting Gains and Losses from Extinguishment of Debt is deleted.” It does not appear that there is really any one specific paragraph that provides the full answer that is needed to answer this Research question. So what about the Current Text part of the pronouncements? It does not get much better there. If we use the key word “extinguishment” again, it gives us 16 hits, one of which is in Paragraph L35 Liabilities: Extinguishment. Paragraph .105 is as follows: “The difference between the reacquisition price and the net carrying amount of the extinguished debt shall be recognized currently in income of the period of extinguishment as [a] loss or gain and identified as a separate item [refer to paragraph .106 below]. Gains and losses shall not be amortized to future periods.” 9
  • 10. This quote does not necessarily provide the full answer either. But the whole exercise does provide a little more insight into the Research process on the CPA exam. It is not as easy as it might seem, but then again, it is not impossible either. However, please do not fear the Research questions. We do not expect the answers for the Research questions on the actual CPA exam to be as difficult to arrive at as with some of the questions we have in our homework. The homework is provided to assist you in understanding the process of research, and if it is slightly more difficult than on the CPA exam, then you will have been well trained! Note that, in this Research questions, there were only 10 hits, a number that is manageable even if we had to read (or at least scan) all of them starting with the first one. However, in many Research questions, there are more hits. Regardless, it is always good to try to eliminate some of them if we can. This approach is basically the same approach to use with multiple-choice questions: if you are not sure which one is correct, see if you can eliminate some of the wrong ones. At least you can cut down your odds of guessing. If you work enough Research questions, and there are a number of them in the homework, you will become as comfortable with them as you are with the multiple-choice questions. You do not want your exam to be the first time you have worked a Research question. Depending on the specific question, there are various approaches to finding the answers to Research questions. We have included these comments in the various on-line updates to demonstrate most or all of the possible approaches. Item D4 Financial Online Quiz #1, Question 6 The answer to this question is a little bit misleading. The question and answer are as follows: Question Dingo Dog Food is a component of Conglomeration, Inc. and has been losing $50,000 per month. On April 1, 20X3 Conglomeration's management committed to a plan for immediate sale of Dingo and fully expected to find a buyer for the component by March of 20X4. The book value of the component's assets is $800,000, while the fair market value of the assets is $650,000. Conglomeration sold Dingo on February 28, 20X4 for $550,000. Conglomeration's loss from discontinued operations before consideration of taxes for the year ended December 31, 20X3 would be: a. 600,000 b. 750,000 c. 850,000 d. 950,000 Explanation Choice "b" is correct. Conglomeration would compute the loss from discontinued operations based upon the anticipated operating losses for the 20X3 year, and the loss on disposal as of the end of the 20X4 year, as follows: Dingo Dog Food Analysis of Discontinued Operations 20X3 20X4 Loss from operations 50,000 50,000 Months of operation 12 2 10
  • 11. Annual loss from operations 600,000 100,000 Book value of assets 800,000 650,000 Fair market value of assets 650,000 550,000 Impairment loss 150,000 Loss on disposal 100,000 . Loss from discontinued operations 750,000 200,000 Choice "a" is incorrect. Conglomerated would include all 12 months of operating losses in its 20X3 financial statements, not 9 months as implied by this answer ($50,000 × 9 = $450,000; $450,000 + $150,000 = $600,000). Choice "c" is incorrect. Conglomerated would only consider the 20X3 loss and would not include the 20X4 actual loss on disposal. Choice "d" is incorrect. Conglomerated would only consider the 20X3 loss and would not include the combined loss on operations for the 20X4 interim period or the actual loss on disposal, as implied by this answer. Comments There is really nothing "anticipated" about the 20X3 losses. To prepare the 20X3 financial statements, the company is at the end of 20X3. Thus, at that point, the 20X3 losses would be "actual" losses and would be included in the 20X3 loss from discontinued operations. The 20X4 losses would still be anticipated at that point and would thus not be included in the 20X3 loss from discontinued operations. GAAP accounting requires that operating losses related to discontinued operations are reported in the period incurred. EDITORS' NOTES Note: From time to time, we issue a PassMaster updater that updates your PassMaster questions and answers. Normally, error corrections to at least some of the question are included in the updater. Thus, if you have run the updater (no updater exists for the 2007 Version as of this date), some of the errors discussed above may already have been corrected. We do not update the online documents when a PassMaster updater is available because not everybody runs them (although they should). Also, if you are still using the 2006 Version of the text and PassMaster, there may be some items that were corrected/clarified in the 2007 Version and, thus, will not appear in this online update. Some of the Items above have come from our internal review process, some have come from questions and comments from Becker instructors around the world, and some have come from questions asked by various candidates, either from Becker Profhelp or in online or live classes. We wish to thank all of these individuals as a group for their efforts to improve our materials. 11

×