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CPA FAR Exam > CPA FAR Becker Wk 4 > Flashcards

CPA FAR Becker Wk 4 Flashcards

1
Q

inventories

A

items held for resale that are considered current assets

includes any goods and materials in which the company has legal title (follows possession of the goods)

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2
Q

finished goods

A

Retail: inventory that is resold in substantially the same form which it was purchased

manufacturing: production inventory that is complete and ready for sale

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3
Q

Manufacturing: raw materials (freight in)

A

inventory that is held for use in the production process

freight in = COGS

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4
Q

Manufacturing: WIP work in progress

A

inventory that is in production but incomplete

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5
Q

Goods in transit: FOB shipping point

A

buyer gets the title when the seller loads the goods to the common carrier (truck) even though the buyer does not have possession yet => buyer gets the inventory

Buyer includes inventory in transit; seller excludes inventory in transit/records sale

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6
Q

Goods in transit: FOB destination

A

seller loads the goods into the truck=> seller retains inventory until goods are received by the buyer from the common carrier

buyer excludes inventory in transit=> reaches destination and is included by buyer/excluded by seller and records sale when reaches destination

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7
Q

Title passes from seller to buyer:

A

in the manner and under the conditions explicitly agreed on by the parties

if not agreed ahead of time, title passes from seller to buyer at the time and place where the seller’s performance obligation regarding delivery of goods is complete

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8
Q

consigned goods

A

in consignment agreement, seller (consignor) delivers goods to an agent (consignee) to hold and sell on the consignor’s behalf

until item is sold= title remains with consignor

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9
Q

valuation of inventory

A

per US GAAP, inventory must be stated at cost (price paid or consideration given to acquire the asset)

*includes freight in=> once sold goes to COGS

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10
Q

departures from cost basis

A

precious metals (gold and silver) and farm products (meat, agricultural products) are value at NRV, net realizable value (selling price less cost to sell)

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11
Q

NRV

A

NRV, net realizable value (selling price less cost to sell)

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12
Q

LIFO or retail

A

lower of cost or market

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13
Q

FIFO or weighted average

A

lower of cost or NRV is used for all inventory that is costed using FIFO or weighed average

NRV= net selling price less cost to complete and dispose of inventory (Ex cost of commission paid to broker)

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14
Q

Calculating lower of cost or market

A
  1. replacement cost= cost to purchase the item as of valuation date
  2. market floor= NRV less normal profit margin
  3. middle value: NRV less cost less normal profit margin
  4. lower of the original cost vs middle value

Replacement costs:
maximum = ceiling
minimum= floor

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15
Q

lower of cost or market: journal entry

A

write down:
DR inventory loss due to decline mkt value (reduction profit, RE, SE)
CR inventory (reduces asset)

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16
Q

Periodic inventory

A

for periodic, debit purchases not inventory

physical count required at end of period to calc COGS

Inventory available for sale determined by adding beg inventory and goods purchased

quantity of inventory is determined only by physical count: quarterly, semiannually, annually at end of period

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17
Q

Periodic inventory: determining COGS

A

Beg inventory
+ purchases
=cost of goods available for sale
less ending inventory
=COGS

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18
Q

what if ending inventory is overstated?

A

COGS understated
Profits/Net income overstated
Retained earnings overstated
Equity overstated

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19
Q

Perpetual inventory

A

the inventory record for each item of inventory is updated for each purchase and each sale as they occur

Buying inventory:
DR inventory
CR cash

selling inventory:
DR COGS
CR inventory

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20
Q

Specific identification method

A

cost of each item in inventory is uniquely ID’d to that item

the cost follows the physical flow of the item in and out of inventory to COGS

the method is used for physically large or high value items

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21
Q

FIFO: first in, first out

A

can be used both periodic and perpetual systems with similar results

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22
Q

weighted average method

A

follows periodic system only

end of period, the average cost of each item in inventory is the weighted average of the costs of all items in inventory

weighted average cost per unit=
total inventory costs available/total # units available

particularly suitable for homogenous products

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23
Q

moving average method

A

follows perpetual system only

computes weighted cost after each purchase

moving average cost per unit=
total cost of inventory available after each purchase/
total units available after each purchase

more current than weighted average

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24
Q

LIFO: last in, first out

A

can be used both periodic and perpetual systems with different results

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25
Q

dollar value LIFO

A

inventory is measured in dollars and adjusted for changing price levels using price index

price index may be supplied or may have to be manually calculated:
Price index=
end inventory at current year cost/end inventory at base year cost

if prices are rising, then price index > 1

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26
Q

Price index (used dollar value LIFO)

A

price index may be supplied or may have to be manually calculated:
Price index=
end inventory at current year cost/end inventory at base year cost

if prices are rising, then price index > 1

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27
Q

gross profit method

A

used for interim financial statements as part of periodic inventory system

inventory is valued at retail

gross profit % is known and is used to calc cost of sales

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28
Q

Firm purchase commitments: rule of conservatism

A

when buying inventory, if prices are rising=> company may stockpile inventory or enter purchase commitments

stockpile = pay storage costs

purchase commitments = forward contract (sign contract and lock in prices) If prices go down = loss

*conservatism= if loss is probable and estimable= book it

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29
Q

Purchase commitments

A

purchase commitments = forward contract (sign contract and lock in prices) If prices go down = loss

*conservatism= if loss is probable and estimable= book it

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30
Q

PPE Property, plant and equipment

A

fixed assets which are acquired for use in operations and are not intended for resale

Fixed assets = LT physical assets (land, buildings, equipment)

shown separately on B/S at historical cost

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31
Q

PPE- fixed assets

A

Land= property and not depreciated
Buildings= plant, factory, warehouse, office, etc; depreciated
Equipment= machinery, tools, furniture, fixtures, etc; depreciated

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32
Q

accumulated depreciation

A

contra asset that serves as an offset to certain asset accounts

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33
Q

Net book value (net debit)

A

cost (debit balance) less accumulated depreciation (credit balance)

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34
Q

PPE: property - land and land costs

A

land purchased for the purpose of building construction that includes all costs incurred up until excavation for the new bldg

land is not depreciated

Land costs:
purchase price
broker’s commissions
title, recording, and legal fees
draining swamps and clearing brush/trees
site development (grading mountain tops, filling holes, leveling)
existing obligations assumed by buyer (mortgage, back taxes)
cost of removing old building
less salvage (sale of existing bldgs, timber, pipe, etc)

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35
Q

land improvements

A

land improvements are depreciable:
fences
water systems
sidewalks
paving
landscaping
lighting
interest costs during construction should be added to land improvements

36
Q

PPE: plant and building costs

A

cost of buildings (plant) includes:
purchase price
deferred maintenance (repair charges neglected from previous owner)
alterations and improvements
architect’s fees
digging hole for foundation
construction period interest (potentially)

37
Q

basket purchase of land and building

A

land = not depreciated
building= depreciated

basket purchases of land and building require the allocation of the purchase price based on the ratio of appraised values of the individual items

38
Q

PPE: cost basis of equipment

A

equipment includes office equipment, machinery, furniture, fixtures and factory equipment

cost includes all expenditures related directly to the acquisition or construction of the equipment:
invoice price
less cash discounts/other discounts
add freight in (and insurance while in transit and under construction)
add installation charges (including testing and preparation for use)
add sales tax and federal excise taxes
possible addition of construction period interest

39
Q

Equipment costs: capitalized or expensed

A

General rule: capitalized as an asset on B/S and depreciated over useful life
expensed on I/S in some cases

Additions that increase quantity of the fixed assets are capitalized:
DR Asset
CR AP

Improvements (betterments) improve quality of fixed assets and are capitalized

replacements occurs when substituting new/similar asset for old one = capitalized

40
Q

Equipment costs: ordinary repairs

A

regular repair and maintenance are expensed

41
Q

Equipment costs: extraordinary repairs

A

repairs for increasing the life, usefulness, quality = capitalize

42
Q

Costs to capitalize

A

construction of a fixed asset will incorporate the following costs:
direct materials
direct labor
repair/maintenance expenses that add value to the fixed asset by increasing its life, quality, usefulness
overhead
construction period interest (during construction, not before or after)

43
Q

construction period interest

A

General rule = expense as incurred

Exception: construction period interest should be capitalized to fixed assets

construction period interest (during construction, not before or after) = part of cost of producing a fixed asset =capitalized

44
Q

when depreciating an asset..

A

Depreciation: consider the date- compute for full or partial year depending on asset purchase date

when the asset is sold, revise depreciation to reflect the purchase date before calc of NBV then calc gain or loss

45
Q

What is depreciation?

A

a systemic and rational way to allocate the cost of items over the period in which they help generate revenue

this applies to matching principle for depreciation, amortization, and depletion of items not held for sale=> they are used in the business

46
Q

tangible assets are:

A

depreciated over their useful life

47
Q

intangible assets are:

A

amortized over their legal or contractual life

Ex patent, copyright, trademark

48
Q

natural resources are:

A

depleted

49
Q

depreciable base

A

historical cost less salvage value

50
Q

Depreciation: salvage value and estimated useful life

A

must be disclosed in the footnotes of the financial statements

51
Q

salvage or residual value

A

a reasonable estimate of the amount that will be realized at the end of the useful life of a depreciable asset

this is the minimum NBV that you can have on the B/S

assets should not be depreciated below salvage or residual value

52
Q

estimated useful life

A

period over which the asset’s cost will be depreciated

usually stated in periods of time such as years or months

Prospective: revisions must be accounted for as a change in estimate (do not restate prior years)

53
Q

straight line depreciation

A

Depreciation= Cost less salvage value/estimated useful life

an equivalent amount of deprec exp is recorded each period

54
Q

depreciable base

A

cost less salvage value

eventual total accumulated depreciation

55
Q

sum of the years’ digits depreciation

A

accelerated method of depreciation with more depreciated in early years (early years = increased exp which lowers over time)

lowers NBV faster

Depreciable expense=
(cost less salvage) * remaining life asset/sum of years’ digits

Ex 4 year useful life = 4 + 3 + 2 + 1 = 10
first year = 4/10 * depreciable base
second year = 3/10 * depreciable base
third year = 2/10 * depreciable base
last year = 1/10 * depreciable base

56
Q

Units of production method

A

also known as productive output

relates annual depreciation to estimated production capability of an asset and is expressed as rate per unit or rate per hour

(cost less salvage)/estimated # units or hours =
rate/unit or rate /hour

rate per unit * # units produced = depreciation expense

this converts depreciation from a fixed cost to a variable cost

57
Q

DDB, double declining balance

A

used for instances of rapid obsolescence

DDB = 2/useful life

to calc depreciation:
depreciation expense = 2 * 1/N * NBV

NBV = cost less accumulated deprecation

cost less salvage = maximum AD (floor NBV)

there is no allowance for salvage and the asset should not be depreciated below salvage value

58
Q

Journal entry: sale of an asset during its useful life

A

DR Cash
DR accum deprec of sold asset
CR sold asset at cost
CR (credit or debit) gain or loss

revise depreciation to the date of the sale

59
Q

journal entry: total and permanent impairment

A

DR accumulated depreciation per records
DR loss due to impairment
CR Asset at full cost

60
Q

Accumulated depreciation

A

AD= normal credit balance, contra asset

debit: disposals and write offs

credit: current year depreciation expense

61
Q

depletion

A

is the allocation of the cost of wasting natural resources such as oil, gas, timber and minerals to the production process

purchase cost includes:
any expenditures necessary to purchase the asset
restoration costs
costs to prepare the land for the removal of resources (drilling costs or costs for tunnels/shafts for the oil industry)
costs to prepare the asset for harvest (lumber industry)

residual value: monetary worth of the depleted asset after resources have been removed (like salvage value)

depletion base = cost less residual value

62
Q

impairment of PPE

A

the carrying amounts of fixed assets held for use and to be disposed of need to be reviewed whenever events or changes in circumstances indicate that the carrying value may not be recoverable

63
Q

Impairment: test for recoverability - step 1

A

when a fixed asset is tested for impairment, the FCF expected to result from the use of the asset and its eventual disposition need to be estimated

if the sum of the undiscounted expected FCF is less than the carrying amount, an impairment loss needs to be recognized

64
Q

Impairment: calculation of the impairment loss - step 2

A

impairment loss is calculated as the amount by which the carrying amount exceeds FMV of the asset

undiscounted net FCF = net carrying value
positive= no impairment loss

negative = impairment
if impairment= treat assets held for use and assets held for disposal accordingly

65
Q

Impairment: assets held for use

A

Impairment: calc FCF or PV of FCF for net carrying value
1. write asset down
2. depreciate new cost
3. restoration Not permitted

66
Q

Impairment: assets held for disposal

A

Impairment: calc FCF or PV of FCF for net carrying value
Impairment loss + cost of disposal = total impairment loss

  1. write asset down
  2. No depreciation taken
  3. restoration IS permitted
67
Q

Intangible assets

A

long lived legal rights and competitive advantages developed or acquired by business enterprise

typically acquired to:
be used in operation of the business
provide benefits over several accounting periods

68
Q

Intangible assets: manner of acquisition - purchased

A

purchased intangible assets:
acquired from other enterprises or individuals should be recorded as an asset at cost
legal and registration fees incurred to obtain an intangible asset should also be capitalized

69
Q

Intangible assets: manner of acquisition - internally developed assets

A

internally developed assets = R&D expense when incurred, US GAAP prohibits capitalization of R&D

exception= certain costs associated with internally developed intangibles that are specifically identifiable can be capitalized such as legal fees and registration fees

Ex trademarks, goodwill from advertising, cost of developing, maintaining or restoring goodwill

70
Q

Intangible assets: manner of acquisition - internally developed assets (exceptions to expensing)

A

exception= certain costs associated with internally developed intangibles that are specifically identifiable can be capitalized

Ex
legal fees
registration fees
consulting fees
legal fees/costs of successful defense the asset
design costs such as those for a trademark
other direct costs to secure the asset

71
Q

Intangible assets: expected period of benefit

A

finite vs indefinite life

classification depends on whether economic life can be determined or is indeterminable

finite life when estimable

indeterminable = indefinite or infinite life

72
Q

classification of intangible assets

A

record the cost of intangible assets acquired from other enterprises or individuals in an arm’s length (participants act independently) transaction of assets

cost is measured = cash paid + PV liabilities + FMV stock

by amount of cash disbursed or FMV of other assets distributed
PV of amounts to be paid for liabilities incurred and
fair value of consideration received for stock issued

73
Q

Intangible assets: amortization

A

straight line method should be applied unless other method is demonstrated as more appropriate

should be adequately disclosed in notes to financial statements

expenses that increase the life of the intangible assets require an ADJ to calc annual amortization

patent = amortized over the shorter of estimated life or remaining legal life

74
Q

Intangible assets: amortization and change in useful life

A

if useful life is reduced or extended, the remaining NBV is amortized over new useful life

patent = amortized over the shorter of estimated life or remaining legal life

75
Q

sale of intangible assets

A

selling price = cash flow investing less NBV at time of sale

gain or loss = nonoperating section of I/S

determine gain or loss = compare carrying value at date of sale with selling price

76
Q

valuation of intangible assets

A

finite life intangible assets are reported at cost less amortization and impairment

indefinite life intangible assets are reported at cost less impairment = no amortization

77
Q

Impairment: finite life intangible assets

A

2 steps
1. recoverability test: carrying amount of the asset is compared with the sum of undiscounted cash flows expected to result from the use of the asset and its eventual disposition

*when testing indefinite life intangible assets, use fair value vs sum of undiscounted FCF

  1. if the carrying amount exceeds the total undiscounted FCF, then the asset is impaired and an impairment loss equal to the difference between carrying amount of the asset and its fair value is recorded

if fair value not given, use PV of FCF

held for use= no restorations allowed
held for disposal= restorations allowed, no amortization taken

78
Q

Intangibles: Purchased software

A

finite life, identifiable, intangible asset

recorded B/S at purchase price

Rule of conservatism: amortized over shorter of legal life (contractual term of the asset) or the economic life (period over which CF is provided by the asset)

79
Q

Intangibles: Cloud computing arrangement (CCA)

A

involves paying a vendor a fee in exchange for the right to use software over the internet

the vendor is responsible for hosting the software on its computing infrastructure

80
Q

Intangibles: Cloud computing arrangement (CCA) 3 phases

A
  1. preliminary project phase
    determine system requirements for software
    at this phase: costs are expensed as incurred
  2. application development phase
    work performed to customize or change infrastructure or configurations
    **Expense= training, manual data conversion, maintenance costs, support costs
    **capitalize= implementation costs involving software, software licensing, third party software development fees, external materials, coding fees, testing fees
  3. post implementation phase
    software has been placed in service, maint fees, add’l training, enhancements, upgrades
    expense costs incurred at this phase
81
Q

Intangibles: testing purchased software and CCA costs for impairment

A

use two step impairment test

if sum of undiscounted FCF below carrying value:
asset is impaired and impairment loss = fair value less carrying amount

82
Q

Intangibles: franchise accounting

A

franchise: finite life, intangible, identifiable

initial franchise costs are capitalized

ongoing or continued franchise costs are expensed as incurred

83
Q

Intangibles: franchise accounting for franchise fees

A

PV of amount paid by franchisee is capitalized +
cash paid + PV note issued + FMV any stock issued

recorded as intangible asset B/S

amortization over expected period of benefit (expected life of franchise)

84
Q

Intangibles: franchise accounting for continuing franchise fees

A

expense as incurred

usually calc on % franchise revenues

services may include mgmt training, promotion, legal assistance

85
Q

intangibles: start up costs

A

expenses incurred in formation of corp= expensed when incurred

considered organizational costs including one time activities (org new entity, opening new facility, introduce new product)

do not include: ongoing customer acquisition, bus M&A, improve quality of existing products

CPA FAR Exam (25 decks)

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