Intermediate Accounting Practice flashcards
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32 cards. Read the term and the definition here. The deck at the top of this page is optional.
- Materiality
- Information is material if omitting or misstating it could influence decisions of primary users. It is entity-specific, based on size and nature, and is a matter of professional judgment.
- Faithful representation
- A fundamental qualitative characteristic requiring information to be complete, neutral, and free from material error, depicting the economic substance of the transaction rather than merely its legal form.
- Fair value hierarchy
- Level 1 uses quoted prices for identical assets in active markets; Level 2 uses observable inputs other than Level 1; Level 3 uses unobservable inputs reflecting the entity's own assumptions.
- Five-step revenue model
- Identify the contract, identify performance obligations, determine the transaction price, allocate the price to obligations, and recognize revenue when or as each obligation is satisfied.
- Performance obligation
- A promise to transfer a distinct good or service, or a series of distinct goods or services that are substantially the same and have the same pattern of transfer.
- Variable consideration constraint
- Variable consideration is included in the transaction price only to the extent it is highly probable or probable (depending on framework) that a significant revenue reversal will not occur.
- Principal versus agent
- A principal controls the good or service before transfer and recognizes gross revenue; an agent arranges for another party to provide it and recognizes only its commission or fee.
- Bank reconciliation
- A schedule reconciling the bank statement balance to the book cash balance by adjusting for deposits in transit, outstanding checks, bank errors, service charges, NSF checks, and unrecorded collections.
- Allowance method
- Receivables are reported net of an estimated uncollectible amount. Bad debt expense is recognized in the period of sale or via aging analysis, not when specific accounts are written off.
- Net realizable value
- Estimated selling price in the ordinary course of business less estimated costs of completion and estimated costs necessary to make the sale; used as the inventory measurement floor under IFRS.
- Double-declining balance
- An accelerated depreciation method applying twice the straight-line rate to the declining book value each period, with depreciation stopped when book value reaches residual value.
- Recoverability test
- US GAAP impairment test comparing an asset's carrying amount with the sum of undiscounted expected future cash flows; impairment is measured as carrying amount less fair value.
- Value in use
- The present value of estimated future cash flows expected from an asset's continued use and eventual disposal; compared with fair value less costs of disposal under IFRS impairment.
- Borrowing cost capitalization
- Interest directly attributable to acquiring, constructing, or producing a qualifying asset is capitalized as part of its cost; capitalization ends when the asset is substantially ready for its intended use.
- Held-to-maturity securities
- Debt securities the entity has the positive intent and ability to hold until maturity, measured at amortized cost; sales before maturity may taint the classification.
- Equity method
- Applied when an investor has significant influence, generally 20 to 50 percent ownership. The investment is adjusted for the investor's share of investee earnings and dividends received.
- Effective interest method
- Interest expense or income equals the carrying amount times the market rate; the difference between that amount and the cash coupon amortizes premium or discount each period.
- Finance lease criteria
- US GAAP tests: ownership transfer, bargain purchase option, term of 75 percent or more of life, present value of 90 percent or more of fair value, or specialized asset.
- Lease liability measurement
- The present value of lease payments not yet paid, discounted using the rate implicit in the lease or, if not readily determinable, the lessee's incremental borrowing rate.
- Deferred tax liability
- A liability for taxable temporary differences, such as accelerated tax depreciation, measured at enacted future tax rates and reversed when the difference turns around.
- Valuation allowance
- A contra deferred tax asset reducing it to the amount more likely than not to be realized, based on evidence including projected future taxable income and reversal of existing differences.
- Permanent difference
- An item affecting taxable income but never reversing, such as municipal bond interest or fines; it changes the effective tax rate but creates no deferred tax.
- Projected benefit obligation
- The actuarial present value of all benefits earned to date under a defined benefit plan, using assumed future compensation levels and discount rates.
- Funded status
- The difference between the fair value of plan assets and the projected benefit obligation; a net liability is reported when the obligation exceeds plan assets.
- Corridor amortization
- US GAAP method amortizing the excess of unrecognized pension gain or loss over 10 percent of the greater of plan assets or the benefit obligation, divided by average remaining service.
- Treasury stock cost method
- Repurchased shares are recorded at cost and reduce total equity. Reissuance above cost credits additional paid-in capital; below cost debits APIC, then retained earnings.
- Basic EPS
- Net income less preferred dividends, divided by the weighted-average number of common shares outstanding during the period, time-weighted for share issuances and repurchases.
- Treasury stock method
- Assumes option proceeds are used to buy shares at the average market price; incremental shares equal options exercised minus shares assumed repurchased, included in diluted EPS.
- Share-based compensation
- Equity-classified awards are measured at grant-date fair value and expensed over the requisite service period; liability-classified awards are remeasured at fair value each period.
- Operating cash flow
- Cash flows from transactions reported in net income, including cash from customers, payments to suppliers and employees, interest, and dividends received under US GAAP.
- Indirect method
- A cash flow presentation starting with net income, adding back noncash items, removing gains and losses on disposals, and adjusting for changes in working capital accounts.
- DuPont analysis
- Return on equity is decomposed into net profit margin times total asset turnover times the equity multiplier, separating profitability, asset efficiency, and financial leverage.