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Flashcards in CPA FAR Deck (95):
1

Which costs are inventoriable?

Purchases - Net of Discounts, Freight, Warehouse expenditures

2

When does ownership of goods transfer when shipped FOB Shipping Point?

FOB Shipping Point puts the inventory into the hands of the buyer from the loading dock

3

When does ownership transfer when goods are sent FOB Destination?

FOB Destination keeps the items in the seller's inventory until it reaches the buyer

4

Which costs are non-inventoriable?

Sales Commissions

Interest on liabilities to vendors

Shipping expense to customers

5

When are discounts recorded under the gross method?

Under the gross method, discounts are recorded only when used.

6

Under the net method, when are discounts recorded?

Under the net method, discounts are recorded whether used or not.

Unused discounts are allocated to financing expense.

7

How is gross margin calculated?

Gross Margin : Sales - COGS (BI + P - EI)

8

Describe the periodic inventory system.

Inventory is counted at certain times throughout the period

Weighted-average cost flow method is used.

9

Describe the perpetual inventory system.

Inventory count continually updated

Uses a moving-average cost flow method

10

In periods of rising prices, under which cost flow system would ending inventory be the same under both periodic and perpetual inventory methods?

Under the FIFO system, periodic and perpetual inventory methods will both have the same ending inventory.

11

How is inventory turnover calculated?

COGS / Average Inventory

12

How is Average Day's Sales in inventory calculated?

365 / Inventory Turnover

13

Under a consignment system, who holds the consigned goods in inventory?

The CONSIGNOR holds the consigned items in their inventory count. The cost includes the shipping to the consignee.

14

Under a consignment system, does the consignee hold consignment inventory in their own inventory?

No. Consignment goods are maintained in the inventory of the consignor, not the consignee.

15

What effect does overstatement or understatement of inventory have on ending retained earnings?

Misstatement of beginning inventory does NOT have an effect on ending retained earnings.

Misstatement of ENDING inventory does have an effect on retained earnings.

16

How does misstatement of ending inventory effect Ending Retained Earnings?

EI Over : COGS Under : ERE Over

EI Under : COGS Over : ERE Under

17

Which costs are included in COGS first under the FIFO (first in first out) system?

The first (oldest) inventory you have in stock is the first inventory you record for COGS purposes. If your oldest inventory on the shelf cost you $1 when you bought it, COGS is $1

This is just for inventory pricing. It has nothing to do with physically selling the oldest item on the shelf - It is purely for accounting purposes

18

Which costs are included in COGS under the LIFO (last in first out) system?

The last (newest) inventory you have in stock is the first inventory you record for COGS purposes. If your newest inventory on the shelf cost you $1.50 when you bought it, COGS is $1.50

19

How is Weighted Average Cost Per Unit calculated under a weighted average inventory system?

COGAS / Total Units : Weighted Average Cost Per Unit

20

How does FIFO's COGS relate to LIFO's in a time of changing prices?

FIFO's relationship to COGS will be opposite LIFO's relationship to COGS in periods of falling/rising prices.

21

How do FIFO and LIFO change in a period of rising prices?

FIFO has the Lowest COGS

FIFO is a cat that sees a mouse starts Low and is Rising

If COGS is Low, that means EI is High

22

How do FIFO and LIFO change in a period of falling prices?

FIFO has the Highest COGS

Remember: FIFO, that silly cat, got High from Catnip and is Falling off the couch

If COGS is High, that means EI is Low

23

Under a Lower of Cost or Market, how are the benchmarks calculated?

Market Ceiling : Net Realizable Value : Selling Price - Selling Costs

Market : Replacement Cost

Market Floor : Net Realizable Value - Normal Profit

24

How are Available-For-Sale securities recorded on the Balance Sheet?

At Fair value as either Current or Non-current assets.

25

How are Available-For-Sale security Unrealized G/L treated?

Included in OCI (Other Comprehensive Income)

26

How are Unrealized G/L for Available-For-Sale securities that are reclassified to Held-to-Maturity or Trading Securities treated?

HTM - Stockholder's Equity
/ Trading Securities - Current Period.

27

How are Held-to-Maturity securities recorded on the Balance Sheet?

Amortized cost as Current or Non-current assets.

If reclassified as AFS - Unrealized G/L go to Stockholder's Equity

If reclassified as Trading Securities - Unrealized G/L recognized in Current Period

28

How are Held-to-Maturity securities Unrealized G/L treated?

Trick question - Unrealized gains or losses are not applicable because they are HTM


29

How are Trading Securities recorded on the Balance Sheet?

At Fair Value as a Current Asset

Unrealized gains/losses are recorded on the Income Statement

If they are reclassified as held-to-maturity or available-for-sale- there is no effect upon transfer.

30

How are Trading Securities Unrealized G/L treated?

Recorded on the Income Statement

If they are reclassified as HTM or AFS - there is no effect upon transfer.

31

How is a Capital Lease recorded?

Capitalize at cost: Asset & Liability Recorded at Present Value of Future Lease Payments

32

What footnote disclosures are required for a Capital Lease?

Future minimum rental commitments

By year - for 5 years

All remaining years as a group

33

What are the requirements for a Capital Lease for a lessor?

Same as for lessee (Title- BPO or Substance)- PLUS:

Collectability of lease payments is predictable

No uncertainties about the lessor reimbursing the lessee for costs incurred

34

What are the characteristics of an Operating Lease for a lessee?

Risk of ownership does NOT pass

No asset or liability is recorded on the financial statements

Leasehold improvements - capitalized and depreciated over the lesser of lease life or leasehold improvement's life.

35

What are the characteristics of an Operating Lease for a LESSOR?

Rent revenue recorded

Leased property remains an asset and depreciated by lessor

If payments fluctuate over the term of the lease- rent revenue recognized on a straight line basis

36

What are the characteristics of a Direct Financing Lease?

Interest Revenue (or expense for lessor) decreases with passage of time

Principal amount increases with each payment

Carrying amount of Lease decreases

37

How is a sale-leaseback recorded?

Any profit on the sale is deferred and amortized

Exception: If PV of lease payments is 10% or less of the asset's FMV- the gain is recognized

If PV of lease payments is greater than 10% of FMV and the lease is operating- all of the gain is recognized except the amount of the PV of the lease payments

38

What are the characteristics of lease payments under an annuity due situation?

Payments begin at the start of the lease period

Think: Rent/Mortgage payments are Due at the first of the month

39

What are the characteristics of lease payments under an ordinary annuity situation?

Payments begin after the end of the first year

Think: An annuity that pays you at the end of each year

40

What are the characteristics of a Capital Lease for a lessee?

Risk of ownership passes to lessee by:
Title,
Bargain Purchase Option (BPO),
Substance - Lease is more than 75% of asset's useful life or PV of minimum lease payments are more than 90% of fair value

41

Which financial statements are required for not - for - profit organizations?

Statement of Financial Position

Statement of Activities

Statement of Cash Flows

Statement of Functional Expense (Volunteer Health Organizations Only)

42

What are the major classifications found on a Statement of Financial Position?

Similar to Balance Sheet:

Assets
Liabilities
Net Assets
Unrestricted Assets
Permanently Restricted Assets
Temporarily Restricted Assets

43

What are the major classifications in a Statement of Activities?

Similar to an Income Statement - organization - wide:

Revenues
Expenses - ONLY deducted from Unrestricted Revenues
Gains and Losses
Changes in Net Asset classes
Unrestricted
Permanently Restricted
Temporarily Restricted

44

What are the characteristics of a Statement of Cash Flows for not - for - profits? What are the major classifications?

Both direct and indirect methods are OK

Operating Activities - Unrestricted Revenues and Unrestricted Expenses

Investing Activities

Financing Activities - Endowments and restricted contributions


45

Which organizations are required to present a Statement of Functional Expenses?

Volunteer Health Organizations

46

Which statements are required for non - governmental hospitals?

Balance Sheet
Statement of Operations
Statement of Changes in Net Assets
Statement of Cash Flows
Financial Statement Notes

47

Which basis of accounting is used for revenues and net assets?

Accrual basis of accounting is used

Only external parties can restrict the use of assets (permanent or temporary)

Assets earmarked internally by management are still classified as unrestricted

48

What are the characteristics of unrestricted assets or revenue?

No restrictions or conditions placed on entity in order to use the resources

Note: assets earmarked internally by management are still unrestricted

49

When are revenues on contributions recognized?

Revenues on contributions are recognized in the year received - not the year the contribution is spent and are recorded at Fair Value on the date received

50

When are services rendered considered contributions?

If the organization would have otherwise paid for them

or

They increase the value of a non - monetary asset

51

Is hospital charity care revenue?

NO.

It is disclosed in the notes to the financial statements only.

52

How are unconditional pledges to contribute recorded?

Classified as revenue in the current year only - multi - year future contributions fall under Temporarily Restricted.

53

Which revenues are expenses deducted from?

Expenses ONLY deducted from Unrestricted Revenues - not Temporary or Permanently Restricted Revenues/Assets

54

What are the characteristics of temporarily restricted assets/revenue?

Use is restricted to a future time - which could then convert to unrestricted - Class: Temp. Restricted Revenue

Unrestricted contributions promised (including multi - year contributions) - but not yet received are actually restricted by time and are therefore classified as Temporarily Restricted Assets - Multi - year contributions are recorded at the present value of the future contributions

55

What are the characteristics of an endowment?

Use of investment is restricted - but income from investment could be either restricted or unrestricted

Must be under control of receiving entity (Quasi Endowment) in order to be recorded in unrestricted net assets

Otherwise - a memo entry is recorded

56

When is the donation of an art collection recognized as a contribution or asset?

Not recognized as assets or contribution revenue if they are held of display or education' or their sale results in the purchase of similar items

57

When both Temporarily Restricted Assets and Unrestricted Assets are available for use - which assets are used first?

Temporarily restricted assets are used before Unrestricted assets.

58

How is a refundable advance recorded by a not for profit?

Classified as a Liability

Promise to contribute assets pending on certain conditions being met

Becomes unconditional once the possibility that it won't happen is remote

59

How are investments recorded and valued in not - for - profit accounting?

Fair Value is mostly used

Exception - Equity method used when significant influence exists

60

How are scholarships recorded?

As a reduction of revenue - netted against college's tuition

61

How is depreciation expense recorded by a not - for - profit?

Depreciation expense is allocated proportionately to various functions

62

How are capital contributions with a mortgage attached recorded in a partnership for financial statement purposes?

Calculating the capital balance when property contributed has a mortgage results in the FV of the Asset being netted against the Liability

63

If no goodwill is recorded upon admission of a new partner - which method is used for recording the new partner's interest?

The bonus method:

Old Partnership Equity
+ New Partner Contribution
: New Partnership Equity
x New Partner %
: New Partner Equity Amount

New Partner Contribution
- New Partner Equity Amount
: Bonus to Prior Partners using same allocation as P/L

64

If goodwill is recorded upon admission of a new partner - how is the partner's interest recorded?

Using the goodwill method:

New Contribution / New Equity % : Partnership Value

Implied Value of Partnership
- Capital Accounts of all partners
: Goodwill to Old Partners

Under the Goodwill Method - the new Partner is paying an amount for a certain percentage stake in the partnership. For instance if they pay $1000 for a 25% stake - then it is assumed that the Partnership is worth $4 -000 ($1 -000/25%)

65

At what value should assets contributed to a partnership be recorded? What value for liabilities assumed by the partnership?

Fair Value for assets contributed.

Present value of remaining cash flows for liabilities assumed.

66

What items are included in operating activities on the Statement of Cash Flows?

Cash received from Customers- Interest & Dividends- Trading Securities

Cash paid to Vendors- Suppliers- Interest- Taxes- Trading Securities

67

What items are included in investing activities on a Statement of Cash Flows?

Cash received: Sale of PP&E- Sale of Investments- Loan Principle

Cash paid: Loans- Acquisitions- AFS or HTM Securities- Taxes- Trading Securities

68

What items are included in Financing Activities in a Statement of Cash Flows?

Cash received: Issuance of Stock- Issuance of Debt

Cash paid: Dividends

69

What is the direct method for a Statement of Cash Flows?

Starts with Income from Continuing Operations

Adjusts for changes in accounts like A/R- A/P- Inventory and non-cash revenues- expenses- gains- losses

If used- the Indirect Method must also be shown

70

What is the Indirect Method for a Statement of Cash Flows?

Starts with Net Income

Adjusts for changes in accounts like A/R- A/P- Inventory and non-cash revenues- expenses- gains- losses

71

When common stock and preferred stock are issued in a lump sump purchase- how is APIC allocated?

APIC for each is allocated by its respective % of the total FMV of the shares x the proceeds.

72

When is APIC recorded on a stock subscription?

APIC increases on date subscription is recorded - not on the date paid for or issued

73

To what extent is retained earnings restricted if legally restricted due to Treasury Stock?

It will be restricted to the extent of the balance in the Treasury Stock account.

74

When are dividends in arrear recorded for cumulative preferred stock?

They are not accrued until declared.

75

When are dividends in arrears included as a disclosure and not an accrual in the financial statements?

If a year passes and no Cumulative Preferred Stock is declared- then the dividends in arrears are included as a disclosure - not an accrual in the Financial Statements.

76

What is the gain or loss when a non-monetary asset is distributed to a shareholder?

The gain or loss is the difference between the FMV of the asset distributed at the date of distribution and its carry amount on the company's books

77

What is the effect on retained earnings when a non-monetary asset is distributed to a shareholder?

The effect on Retained Earnings is the Carrying Amount of the asset

RE will be debited when the dividend is declared for the FMV of the asset- which is more (or less) than the carrying amount

Gain/Loss recorded when the asset is distributed will offset the original effect of the debt to RE and will be a wash

The net effect of the entry is that RE will decrease by the CV of the asset

78

When is Retained Earnings debited for FMV of Stock for a stock dividend?

When Stock Dividend is less than 25% of Common Stock outstanding

79

When is Retained Earnings debited for Par Value for a stock dividend?

When Stock Dividend is greater than 25% of common stock outstanding

80

What is the effect of a stock dividend or a stock split on total shareholder equity?

Stock dividends and stock splits both have no effect on Total Shareholder Equity

81

What is the affect on APIC from a stock split?

Stock splits only affect par value - APIC remains the same.

82

When is compensation expense recorded at the time of grant for a stock option?

Compensation expense is recorded at the time of grant if options are exercisable immediately

They are based on past service.

Expense recognized : FV Stock Option x # of Shares

83

What interest rate is used to discount stock options?

The risk-free interest rate

84

What date is used as the measurement date for share-based payments classified as liabilities?

The settlement date.

85

How are compensation costs for share-based payments classified as liabilities measured?

Compensation costs for share-based payments classified as liabilities are measured by the change in the fair value of the instrument for each reporting period

86

What is the net increase to shareholder equity in a reorganization where a company pays cash and issues stock to satisfy unsecured creditors?

Net increase to SHE : Gain on settlement of debt + Credit to SHE from stock issuance

87

What is the primary purpose of a quasi-reorganization?

To eliminate a deficit balance in RE by restating its assets to Fair Value

It does not directly protect a company from its creditors

88

How is return on Common Stockholder's Equity calculated?

(Net Income - P/S Dividends) / Average Common Stockholders Equity

Note: Average CSE : Common Stock + RE

89

How is book value per share of common stock calculated?

Total Common Stock
- Total Preferred Stock
- P/S Dividends in Arrears
- P/S Liquidation Premium
:Total Book Value

Book Value per Share : Total Book Value / Shares outstanding

90

How is the dividend per share payout ratio calculated?

Dividends per share / earnings per share

91

How is basic Earnings Per Share (EPS) calculated?

(Net Income - Preferred Dividends) / Average C/S Outstanding

Note - If cumulative- subtract the P/S dividend regardless of whether or not they're declared.

92

For EPS purposes- which date is used for calculation purposes when a stock split or stock dividend has occurred?

For EPS purposes- treat C/S stock splits or stock dividends as if they occurred at the beginning of the year- regardless of when actually issued during the year

93

For which areas is EPS required to be shown?

EPS is only required to be shown for Income from Continuing Operations and Net Income.

All others (discontinued operations- extraordinary items) can be shown on the Financial Statements or in the notes

94

When do stock options increase share outstanding?

Only if they are dilutive.

Their exercise price is LESS than the market value

If not- you ignore them in the calculation

95

How is EPS calculated when convertible bonds are taken into consideration?

[Net Income + Bond Interest (Net of Tax)] / (Average Common Stock Shares + Convertible Equivalents)

Bond interest is added back because if converted- there would be no bond interest expense

Contingent Issue Agreements are included in Diluted EPS if contingency is met