Accounting ReferenceFlashcards
Flashcards
A question on the front, a short answer behind it, and the standard it rests on. Press a question to turn the card.
5 cards
Fundamentals
What does double-entry bookkeeping keep true?
Every transaction is recorded as equal debits and credits, so assets always equal liabilities plus equity.
Rests on: FASB Concepts Statements
What does a trial balance that balances prove?
Only that the arithmetic of posting is right — not that any entry went to the right account or the right period.
Rests on: Practice
When does accrual accounting record revenue?
As control of the goods or services passes to the customer, whether or not cash has moved.
Rests on: FASB Concepts Statement 8
Where does a cash flow statement on the indirect method start?
With net income. It adds back non-cash charges such as depreciation and adjusts for changes in working capital to reach cash from operations.
Rests on: FASB ASC 230
Why is a manual journal entry the highest-risk entry in a ledger?
Nothing outside the books forces it to be right, so each one needs support and, where the team allows, a reviewer other than its author.
Rests on: Practice
7 cards
The Month-End Close
When is a period locked at the end of a month-end close?
Once every account has a supported balance and management has reviewed the completed close checklist.
Rests on: Practice
Do deposits in transit and outstanding checks need a journal entry?
No. They are timing differences on the bank's side; the bank's fees, interest and returned items are what get entered in the ledger.
Rests on: Practice
What is the difference between an accrued expense and a prepaid expense?
An accrued expense is a cost incurred but not yet billed, held as a liability; a prepaid expense is paid now for a future benefit, held as an asset and released to expense on a schedule.
Rests on: FASB ASC 340-10 (prepaid expenses); ASC 405 (liabilities)
When is a balance sheet account substantiated?
When a document outside the ledger supports its balance: a statement, a contract, a subledger, an aging or a roll-forward from last month's supported balance.
Rests on: Practice
For revenue cut-off, what decides which period a sale belongs to?
The transfer of control to the customer. Shipping terms are evidence of it rather than the answer.
Rests on: FASB ASC 606-10-25-30
When is paid time off that employees have earned accrued as a liability?
When it is for work already done, it vests or carries forward, payment is probable and the amount can be reasonably estimated.
Rests on: FASB ASC 710-10-25
Why is booking a payment processor's deposit as revenue wrong?
The deposit is net of fees, refunds, chargebacks and any reserve, so it understates sales and hides the fees. Gross sales go through a processor clearing account instead.
Rests on: FASB ASC 606
6 cards
Revenue Recognition
What are the five steps of ASC 606?
Identify the contract; identify its performance obligations; determine the transaction price; allocate it to the obligations on relative standalone selling prices; recognize revenue as each obligation is satisfied.
Rests on: FASB ASC 606
Is cash a customer pays before the work is delivered revenue?
No. It is a liability until the company performs. Invoicing is not revenue, and collecting is not revenue.
Rests on: FASB ASC 606-10-45
When does a company report revenue gross rather than net?
When it controls the good or service before it transfers to the customer, as the principal. An agent that arranges for another party to provide it reports its fee net.
Rests on: FASB ASC 606-10-55-36 to 55-40
When may sales commissions be expensed rather than capitalized?
Under a practical expedient, when the amortization period would be one year or less. Otherwise the incremental costs of obtaining a contract are capitalized when the company expects to recover them.
Rests on: FASB ASC 340-40
How is a setup fee on a subscription usually recognized?
Usually not as a separate performance obligation: it is recognized over the term, or over the longer period the customer is expected to renew when the fee gives it a material right to renew without paying it again.
Rests on: FASB ASC 606 (606-10-55-50 to 55-53 for upfront fees)
What happens when a construction contract is expected to lose money?
The whole loss is recorded as soon as it is evident.
Rests on: ASC 605-35-25-45 to 25-49
4 cards
Leases and Fixed Assets
Which leases may a lessee keep off the balance sheet under ASC 842?
Short-term leases it elects, by class of asset, to exclude: a term of twelve months or less, counting renewals it is reasonably certain to take, with no purchase option it is reasonably certain to exercise.
Rests on: FASB ASC 842
How does a finance lease's cost differ from an operating lease's?
A finance lease front-loads its cost as interest and amortization, which sit below EBITDA; an operating lease records one straight-line cost within operating expenses.
Rests on: FASB ASC 842
What discount rate does a lessee use to measure a lease?
The rate implicit in the lease when it is known, otherwise the incremental borrowing rate; a private company may elect a risk-free rate by class of asset.
Rests on: FASB ASC 842
When is a group of long-lived assets written down for impairment?
When events suggest its carrying amount may not be recoverable and it fails a test against the undiscounted cash flows it is expected to produce. It is written down to fair value, with no later reversal.
Rests on: FASB ASC 360
4 cards
Cash and Forecasting
How can a profitable company run out of cash?
By growing its working capital faster than its earnings.
Rests on: Practice
What is runway?
Cash divided by the monthly net burn.
Rests on: Practice
What is the difference between a budget and a reforecast?
A budget is the plan for the year, set once; a reforecast updates the expected outcome as the year runs, and variances are explained against both.
Rests on: Practice
What two errors does cash applied to the wrong invoice create?
An overdue invoice that was paid, and a credit balance that was not.
Rests on: Practice
4 cards
Lenders and Covenants
Whose definition of EBITDA is a covenant calculated on?
The credit agreement's, not the company's own. Trailing twelve months is the usual window.
Rests on: Practice; credit agreements define their own
Why is covenant headroom watched every month?
Because a breach discovered at quarter-end is a negotiation held from weakness.
Rests on: Practice; the credit agreement governs
Does a covenant breach that makes a loan callable make the debt current?
Yes, the whole balance, unless before the statements are issued the lender waives its right to demand repayment for more than one year from the balance sheet date, or a cure within a grace period is probable. A short waiver is not enough.
Rests on: FASB ASC 470-10-45-1 and 45-11
How are debt issuance costs presented?
As a deduction from the debt, amortized to interest expense; the costs of a line of credit may be carried as an asset.
Rests on: ASC 835-30
4 cards
Selling Your Company
What does a quality of earnings report analyze?
Whether reported earnings are sustainable: it normalizes EBITDA for non-recurring items, owner compensation and run-rate changes, tests revenue, and examines working capital and debt-like items.
Rests on: Practice
What does the working capital peg do in a sale?
It sets a normal level of net working capital, and the price moves if the closing balance is above or below it.
Rests on: Practice; the purchase agreement governs
Which items are usually argued over as debt-like in a cash-free, debt-free deal?
Deferred revenue, accrued bonuses, unpaid taxes, customer deposits, unfunded obligations and finance leases.
Rests on: Practice; the purchase agreement governs
How does a business combination differ from an asset acquisition in the accounts?
A business combination is measured at fair value, recognizes goodwill and expenses the transaction costs; an asset acquisition allocates its cost on relative fair values, recognizes no goodwill and capitalizes the transaction costs.
Rests on: FASB ASC 805
4 cards
Audit Readiness
What separates an audit, a review and a compilation?
An audit gives an opinion based on testing evidence, a review gives limited assurance from inquiry and analytical procedures, and a compilation gives no assurance at all. All three are attest engagements from the company's independent accountants; the company gets ready for one and is supported through it by its own accountants.
Rests on: AICPA AU-C (audits); SSARS AR-C 80 (compilations) and AR-C 90 (reviews)
What is a PBC list?
The prepared-by-client request list for an audit: the trial balance and ledger detail, reconciliations, agings, roll-forwards, agreements, schedules and minutes, ending with a management representation letter.
Rests on: AICPA AU-C standards; practice
What is performance materiality?
A lower threshold than overall materiality, which an auditor uses for testing. Overall materiality is based on a benchmark such as revenue, assets or earnings.
Rests on: AICPA AU-C 320
Which events after the balance sheet date are recognized in the statements?
Those that give evidence of a condition that existed at the balance sheet date. Events that arose afterwards are disclosed when leaving them out would make the statements misleading.
Rests on: FASB ASC 855-10
3 cards
Controls and Fraud
What is a compensating control?
A documented control, usually owner review, used where there are too few people to separate duties.
Rests on: COSO framework; practice
Where does fraud happen, according to the fraud triangle?
Where pressure, opportunity and rationalization meet. Opportunity is the part controls remove.
Rests on: AICPA AU-C 240
Why is changing a vendor's bank details restricted?
It is the step fraud goes through, so it is restricted and verified by calling a known number.
Rests on: Practice
3 cards
Multi-Entity and Consolidation
What does consolidation eliminate?
Intercompany balances, sales and profit in inventory, so the group reports only its dealings with the outside world.
Rests on: FASB ASC 810
Can sister companies under one owner share a set of books?
No. Each legal entity keeps its own complete set of books, and money that moves between them runs through intercompany accounts that agree on both sides.
Rests on: Practice
What does a related-party disclosure include?
The nature of the transactions, the amounts and any balances outstanding.
Rests on: FASB ASC 850
2 cards
Reporting to Stakeholders
What makes a KPI useful?
A written definition, a named source, an owner and a cadence — and it reconciles to the financial statements where it can.
Rests on: Practice
What does a board package add to a management package?
The metrics, the forecast and the decisions being asked for, beside the closed month's statements and commentary.
Rests on: Practice
3 cards
Entity and Tax Basics
Is an LLC a tax status?
No, it is a legal form. By default a single-member LLC is disregarded and a multi-member LLC is taxed as a partnership, but either can elect to be taxed as a corporation or, with an S election, as an S corporation.
Rests on: Treas. Reg. 301.7701-3
Is sales tax collected from customers revenue?
Not when the company elects to present it net, as most do: it is a liability owed to the taxing authority.
Rests on: ASC 606-10-32-2A
Who owes Arizona's transaction privilege tax?
The seller. It is a tax on the privilege of doing business there, owed whether or not it was passed on to the customer.
Rests on: A.R.S. Title 42, chapter 5
3 cards
Equity and Startup Financing
Is an owner's draw an expense?
No. It is taken out of equity, like a distribution, not charged against profit.
Rests on: FASB ASC 505
How is a stock option to be settled in shares expensed?
At its grant-date fair value, over the period the employee must work to earn it, with a credit to equity, even though no cash leaves the company.
Rests on: FASB ASC 718
Is a typical SAFE equity?
Usually not. Because a liquidity or dissolution event can require the company to pay cash, a typical SAFE is a liability carried at fair value until it converts, though its terms decide.
Rests on: FASB ASC 480-10
6 cards
Other Standards and Estimates
Is LIFO permitted?
Under US GAAP, yes; under IFRS, no.
Rests on: FASB ASC 330 (IAS 2 prohibits LIFO)
Is goodwill amortized?
Not by default under GAAP, where it is tested for impairment at least annually; a private company may instead elect to amortize it over ten years, or a shorter period it can justify.
Rests on: FASB ASC 350
When is a loss from a lawsuit accrued?
When it is probable that a liability has been incurred and the amount can be reasonably estimated. A reasonably possible loss is disclosed rather than accrued.
Rests on: FASB ASC 450-20
When is a deferred tax asset reduced by a valuation allowance?
When it is more likely than not that some of it will not be realized.
Rests on: FASB ASC 740
When does the allowance for credit losses on a receivable begin?
From the day the receivable is recorded, for the losses expected over its life — not when the customer is already late.
Rests on: FASB ASC 326-20
Is a guarantee of somebody else's debt disclosed when the chance of paying is remote?
Yes. It is disclosed with its term, the most the company could have to pay and what would trigger payment, even when the chance of paying is remote.
Rests on: FASB ASC 460-10
4 cards
Industries and Special Situations
What are a nonprofit's two classes of net assets?
With donor restrictions and without donor restrictions. Amounts are reclassified from the first to the second as each restriction is met.
Rests on: FASB ASC 958
Where does the difference from translating a foreign subsidiary go?
To other comprehensive income, accumulating in equity as the cumulative translation adjustment until the subsidiary is sold or substantially liquidated.
Rests on: FASB ASC 830
How are research and development costs treated under US GAAP?
Expensed as incurred, except equipment and materials with alternative future uses, which are capitalized.
Rests on: FASB ASC 730
When is unbilled work a receivable rather than a contract asset?
When only the passage of time stands between it and payment. When payment depends on something else, such as a milestone, it is a contract asset.
Rests on: FASB ASC 606
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