F3 Flashcards
(154 cards)
1
Q
what is a cash equivalent?
A
short-term highly liquid investment that is readily convertible to cash and has an original maturity of 90 days or less from the date of purchase
2
Q
what are 8 examples of cash and cash equivalents?
A
coins/currency
checking and savings accounts
money market funds
deposits held as compensating balances that are NOT legally restricted
bank checks
commercial paper
treasury bills
certificates of deposit
3
Q
what needs to be disclosed in the footnotes for restricted cash?
A
nature, amount, and timing of restrictions
4
Q
how is restricted cash classified?
A
if the restriction is associated with a current asset or liability then it is a current asset
if the restriction is associated with a noncurrent asset or liability then it is a noncurrent asset
5
Q
what are the 2 general forms of bank reconciliations?
A
simple reconciliation
reconciliation of cash receipts and disbursements
6
Q
what are the 4 book adjustments (BINS) and how does they relate to the book balance?
A
bank collections -> add to books
interest income -> add to books
non-sufficient funds (NSF) -> deduct from books
service charges -> deduct from books
7
Q
what are the 3 steps in a simple bank reconciliation?
A
1) perform the BINS on books balance
2) add deposits and subtract outstanding checks from bank balance
3) bank balance per bank stmt is reconciled to true balance
8
Q
what is commonly used for a reconciliation of cash receipts and disbursements?
A
four-column reconciliation
9
Q
what is the objective of the four-column reconciliation?
A
reconcile any differences between:
the amount the depositor has recorded as cash receipts and…
the amount the bank has recorded as deposits
10
Q
what are the 4 columns in the four-column reconciliation?
A
1) last month’s balance
2) this month’s receipts
3) this month’s payments
4) this month’s balance (simple bank rec)
11
Q
is cash in a bond sinking fund restricted or unrestricted cash?
A
restricted
12
Q
how should balance totals for different banks be accounted for when one has a negative position?
A
separately
the negative one will be classified as a liability
13
Q
what reduces accounts receivable at time of sale?
A
sales returns and allowances
sales discounts
14
Q
what are the 2 methods used to record sales and related receivables?
A
gross method
net method
15
Q
what are the two methods to estimate the expected credit loss over the life of a receivable?
A
direct write off method (used for tax, not accepted by GAAP)
current expected credit loss (CECL) model
16
Q
what does factoring with recourse mean?
A
the transferor retains the risk of credit loss since the factor has an option to resell any uncollectible receivables back to the seller
17
Q
what does factoring without recourse mean?
A
it is a sale of a receivable and the assignee assumes the risk of loss
AR is removed from the books
18
Q
what does discounting a note receivable with recourse mean and what are the 2 options for reporting it?
A
a contingent liability is created for the transferor
1) reported on BS with a corresponding contra-account mentioning the note has been discounted to a third party
2) removed from the BS and a contingent liability is disclosed in the footnotes
19
Q
what does determining the proceeds from discounting a note receivable require and how is it reported on the FS?
A
deducting the banker’s discount (interest) from the maturity value of the note
should be removed from the BS as it is a sale
20
Q
what 3 things are used to calculate the banker’s discount when discounting a note receivable?
A
using the maturity value, discount rate, and time left to maturity
21
Q
what are the 4 key attributes of AR?
A
oral promise
current asset
sources (trade receivables or nontrade receivables)
measures (NRV)
22
Q
what are trade receivables?
A
AR from purchases of the company’s goods or services
23
Q
what 2 reasons are sales discounts offered for?
A
encourage prompt payments for a sale
avoid spending time chasing payments
24
Q
what does the gross method for recording sales discounts do?
A
ignores the offered discount on the sale
25
if the payment is received within the discount period for the gross method what happens?
record the difference between the receivables and the discount and the following JE
DR: cash
DR: sales discount (contra-revenue)
CR: AR
26
what does the net method for recording sales discounts do?
assumes the discount is offered on a sale
record net revenue and receivables
27
if the payment is not received within the discount period for the net method what happens?
record additional revenue by crediting "sales discount not taken" account
28
Trade discounts are...
offered for bulk buying
quoted as a %
applied one at a time
use only net method
29
what is the current expected credit loss (CECL) method?
reflects the amount an entity expects to collect from its customers and includes consideration of customer credit risk
30
what is the direct write off method?
waits for the AR to be uncollectible before writing off
used by the IRS and is a non-GAAP method
31
why is the direct write off method not accepted by GAAP?
does not match the bad debt expense with revenue
AR is always overstated
no allowance count
no attempt made to account for unknown bad debts which should be included in FS
32
the balance in the allowance for uncollectibles should be based on:
past experience
current conditions
future expectations
33
what are the two things included in the amount of credit loss expense recognized in net income?
an estimate of the expected credit loss for each sale recognized
adjustment for changes to the estimate of expected credit losses
34
what is the JE for amounts collected that were written off under the direct write off method?
DR: cash
CR: uncollectible accounts recovered (revenue account)
35
what is the JE for amounts collected that were written off under the CECL method?
DR: cash
CR: AFDA
36
what occurs if AR is used for pledging?
company pledges that it will use proceeds from AR to pay the loan
requires footnote disclosure only
AR is not adjusted and not taken off the books
37
factoring of AR is considered...
the sale of receivables
converting receivables to cash
38
what is the JE for factoring without recourse?
DR: cash
DR: due from factor (factor's margin)
DR: loss on sale of receivable
CR: AR
39
what is due from factor?
considers the risk taken on by the factor as it protects the factor against sales returns, discounts, allowances, and customer disputes
is similar to a security deposit held by the factor
is paid back when the factor collects all of the AR
is forfeited if the receivables are not fully collected
40
what are the 2 treatments for factoring with recourse?
sale -> there needs to be some recognition of this recourse
borrowing -> similar to pledging, where receivables act as collateral
41
what are the 3 things that must be met for a factor with recourse to be considered a sale?
1) the transferor's obligation for uncollectible accounts can be reasonably estimated
2) the transferor surrenders control of the receivables to the buyer
3) the transferor cannot be required to repurchase the receivables (may be required to replace them with new receivables)
42
if any of the conditions are not met to treat a factor with recourse as a sale then how is it treated?
as a loan
43
what is securitization?
1) AR is transferred to a different entity
2) the entity then sells securities that are collateralized by the AR
3) investors receive cash as the AR are paid
44
a subledger is used...
to record and store detailed information, which is summarized in the control account in the GL
who owes them, how old is each equipment item, how is each PPE item being depreciated, etc.
45
what does the control account in the GL reflect?
single line totals for items such as:
trade receivables, inventory, PPE, AP, accrued liabilities
46
what are the 2 options if a discrepancy is found between GL and subledger?
1) if GL is wrong then an AJE will be recorded
2) if subledger is wrong then updates will be made to it
47
what is a note receivable and what are 3 characterisitics?
written promises to pay a debt
writing is called a promissory note
can be a CA or a NCA depending on when it will be collected
it is measured at PV
48
how is the PV of a note receivable calculated?
PV = face value - unearned interest
49
what are the 4 steps to calculate the amount of a discounted note without recourse?
1) calculate the maturity value
2) calculate the bank discount
3) compute the amount paid by the bank for the note (step 1 - step 2)
4) determine the interest income (or expense) (step 3 - face value of note)
50
what are the 3 steps that occur if a discounted note with recourse is dishonored?
1) contingent liability removed
2) notes receivable dishonored should be recorded to the estimated recoverable amount of the note
3) a loss is recognized if the estimated recoverable amount is less than the amount required to settle the note and any penalties
51
what is the JE for a discounted note with recourse that is dishonored?
DR: discount on notes receivable (removes contingent liability)
DR: dishonored notes receivable (the amount you did not receive)
DR: loss on discounted note receivable (dishonored note receivable - discount on note receivable)
CR: original note receivable
52
what is the discount always applied to on the proceeds from the bank?
the maturity value
NOT the face value
53
what are the 4 types of inventory?
retail
raw materials
work in process
finished goods
54
inventory account valuations should include...
all the costs necessary to make the inventory ready for the intended use (sale)
55
what are the 2 methods used to show a write down of inventory?
lower of cost or market (LCM)
lower of cost or NRV
56
what 2 inventory methods is LCM used for?
LIFO or retail inventory method
57
what is different between the periodic and perpetual inventory system in regards to recording purchases?
perpetual records purchases with a debit to inventory
periodic records purchases with a debit to purchases
58
in a period of rising prices what inventory method will have the highest inventory, lowest COGS, and highest NI? Lowest?
highest -> FIFO
lowest -> LIFO
59
what are firm purchase commitments and how do losses work?
enter into a forward contract to lock in prices to purchase a specified amount of goods at some time in the future
however, if prices go down and the contracted price exceeds the market price and if it is expected that losses will occur when the purchase is made then you have to record the loss immediately
60
inventory are items held for...
resale
61
for inventory stored in a public warehouse, what warrants the ownership of inventory?
the owner of the inventory has a warehouse receipt signifying ownership even though they do not have physical possession
62
who has ownership of inventory in a mandatory buyback?
the seller even though the title has passed to the buyer
63
for inventory sold through installment sales (sold on credit) who has ownership of it?
buyer has possession and seller has legal title but it depends on if we can reasonably estimate uncollectible debts?
if % of uncollectible debts can be estimated, include in the buyer's inventory
if % of uncollectible debts cannot be estimated, include in the seller's inventory
64
what are 2 departures from cost basis for valuing inventory?
precious metals and farm products are valued at NRV (selling price - cost to sell)
lower of cost or market & lower of cost or NRV
65
how are losses on inventory dealt with?
should be booked immediately
if material: record the loss separately in the IS and disclose in the notes
if immaterial: increase COGS
66
are reversals of inventory allowed under GAAP?
no
67
what is the market ceiling?
NRV
68
what is the market floor?
market ceiling - normal profit margin
69
what is the replacement cost?
cost to purchase the item as of the valuation date
70
how do you calculate the market (middle) value for the lower of cost or market method?
choose the middle number of the market ceiling, market floor, and replacement cost
or:
NRV - cost - normal profit margin
71
what are 4 characteristics of periodic inventory?
debit purchases when buying inventory
physical count of ending inventory is required at end of period to calculate COGS
GAFS = BI + purchases
quantity of inventory is determined only by a physical count (at least annually)
72
what is perpetual inventory?
inventory record for each item is updated for each purchase and sale as they occur
73
what are the JEs for periodic inventory when buying and selling?
buying:
DR - purchases
CR - cash or AP
selling:
DR - cash or AR
CR - sales
74
what are the JEs for perpetual inventory when buying and selling?
buying:
DR - inventory
CR - cash
selling
DR - COGS, cash/AR
CR - inventory, sales
75
what is a modified perpetual system?
perpetual record of quantities only not costs
76
what are the 6 inventory valuation methods?
specific identification
FIFO
weighted average (periodic system)
moving average (perpetual system)
LIFO
dollar-value LIFO (need a price index)
77
what is the formula for price index in dollar value LIFO?
EI at current year cost / EI at base year cost
78
what is the difference between moving average and weighted average?
in moving average you compute the weighted average cost after each purchase
79
what is the LIFO conformity rule?
if you use LIFO for tax purposes, it must be used for GAAP FS
80
why would you want to use LIFO for tax purposes?
during times where prices are increasing, using LIFO means higher COGS which means lower NI which means less income tax expense
81
if prices are rising, then the price index is?
greater than 1
82
what is the gross profit method in inventory valuation?
used for interim FS as part of the *periodic inventory system*
inventory is valued at retail
gross profit % is known and is used to calculate COGS
83
how do understatements and overstatements of beginning and ending inventory relate to COGS?
understatement of BI means understatement of COGS because there is an understatement of GAFS and vice versa for overstatement
overstatement of EI means understatement of COGS and vice versa for understatement
84
how does interest on an inventory loan affect inventory cost?
no effect because interest is a period expense
85
what classifies as an inventoriable cost that can be capitalized?
any cost required to get an inventory item in a state where it is ready to be sold
ex. raw materials, direct labor, factory overhead, carrying costs, freight-in, insurance
86
how are donated fixed assets recorded?
at fair value and a gain or revenue is recognized as equal to that value
DR: fixed asset at FMV
CR: gain
87
how do you deal with "basket purchases" of land and buildings?
allocate the purchase price based on the ratio of the appraised value of the individual items
88
how do you deal with repairs on equipment?
ordinary repairs to maintain the equipment are expensed
extraordinary repairs (overhauls and major replacements) should be capitalized
89
what are the 3 costs the historical cost of PPE incorporates?
obtaining the asset
transporting the asset to its intended location
getting the asset into the condition necessary for its intended use
90
land includes all costs incurred up until what for the new building?
excavation: digging the foundation begins the cost of the building
91
what 7 costs are included in historical cost of land?
purchase price
brokers' commission
title, recording, and legal fees
draining swamps and clearing of brush and trees
site development (filling holes, leveling, grading mountain tops)
existing obligations assumed by the buyer (mortgages, back taxes)
costs of removing an old building
92
how do you deal with proceeds from sale of existing buildings and natural resources from the land?
subtract from historical cost
93
are land improvements subject to depreciation?
yes
94
what are 6 costs included to the cost of buildings (plant)?
purchase price
deferred maintenance (repair charges neglected from previous owner)
alterations and improvements
architects' fees
digging a hold for the foundation
construction-period interest (potentially)
95
what are 5 examples of equipment?
office equipment
machinery
furniture
fixtures
factory equipment
96
what are the 6 costs related directly to the acquisition or construction of the equipment?
invoice price
less cash discounts or other discounts (if any)
add freight-in (and insurance during transit and construction)
add installation charges (including testing and preparation for use)
add sales and federal excise taxes
possible addition of construction period interest
97
what are the 3 examples of equipment repairs that are capitalized?
addition
improvement
replacement
"if it is AIR we capitalize it"
98
what is JE for a replacement of equipment when the carrying value is known and what is this method known as?
DR: new asset
CR: cash
DR: loss
CR: net book value of old asset
## Footnote
component method
99
what is the JE for a replacement of equipment when the carrying value is unknown?
extend asset's life through the improvement or replacement
DR: accumulated depreciation (for cost of improvement or replacement)
CR: cash/AP
100
what are the 2 ways to capitalize an asset in terms of equipment?
increase the asset (know carrying value)
decrease accumulated depreciation (don't know carrying value)
101
what are the 5 costs capitalized when you construct a fixed asset?
1) direct materials
2) direct labors
3) repairs and maintenance expenses that add value to the asset by increasing its life, quality, or usefulness
4) overhead
5) construction period interest during construction (when applicable)
102
what is the method used to capitalize construction period interest and is it used on expenditures or on capitalized interest?
weighted average method on expenditures
based on what you spent and weighted based on months it was outstanding just like
WACSO
103
what are the 3 elements included when calculating construction period interest?
weighted average amount of accumulated expenditures multiplied by the appropriate interest rate
total capitalized interest costs cannot exceeds total interest costs actually incurred
do not reduce capitalizable interest by income received on the unexpended portion of the loan
104
what are the 2 rules to remember when capitalizing interest?
1) only capitalize interest on money actually spent, not on total money borrowed
2) amount of capitalized interest is lower of:
- actual interest costs incurred
- computed capitalized interest (avoidable interest)
105
what are the 3 conditions necessary to be present for capitalization of interest period to begin?
1) expenditures for asset have been made (ex. attorney or architect hired)
2) activities (ex. filing permits) that are necessary to get the asset ready for its intended use are in progress
3) interest cost is being incurred
106
how do delays of construction impact capitalization of interest?
ordinary delays (ex. waiting for inspection) do not impact the capitalization of interest period
intentional delays (ex. waiting for market to improve) will cause the capitalization of interest period to stop
107
what are 3 things repairs/improvements on fixed assets can do in order to be considered extraordinary?
they are additions
benefit several periods
improve efficiency
108
how should assets purchased requiring fixed payments extending beyond one year be valued?
at present value of all future payments
109
what is avoidable interest when calculating construction period interest?
the interest that would not have been incurred if the construction project had not taken place
equal to interest capitalized if this is less than the interest incurred for all borrowings
110
what is interest expense for the year when construction period interest is capitalized?
total interest incurred for all borrowings - capitalized interest
111
what does functional depreciation arise from?
the obsolescence or inadequacy of the asset to perform efficiently
112
what are the 2 types of depreciation?
physical
functional
113
what are the 2 methods used to account for depreciation?
component
composite
114
what is component depreciation?
separate depreciation of each part of an item of PPE that is significant to the total cost of the fixed asset
ex. machine and motor for the machine are depreciated separately
115
what is composite depreciation?
process of averaging economic lives of a number of PPE units and depreciating the entire class of assets over a single life
116
what is the JE for an asset sold off under composite depreciation method?
DR: cash for selling price
DR: accumulated depreciation (difference)
CR: machine (historical cost)
117
what is formula for average economic life under composite depreciation?
depreciable base / total annual depreciation
118
what are the 4 types of depreciation methods?
straight line
double declining balance
sum of years digits
units of production
119
when would straight line depreciation be acceptable?
when service potential declines over time
120
what is formula to calculate annual depreciation under sum of years digit method?
(cost - salvage value) x (remaining life of asset / sum of years digits)
121
what is formula to calculate sum of years digits?
(N x (N + 1)) / 2
N = estimated useful life
122
what is formula to calculate annual depreciation under units of production?
(cost - salvage value) / estimated units or hours = rate per unit or hour
rate per unit x number of units produced = dep. exp
123
when would units of production depreciation be acceptable?
when service production declines with use
124
when would declining balance depreciation be acceptable?
when the asset is subject to rapid obsolescence
125
what is formula to calculate annual depreciation under declining balance?
this is for double declining balance...
(cost - accumulated depreciation) x (1/N) x 2
126
should an asset be depreciated below its salvage value in declining balance method?
no
127
what is the JE for a total and permanent impairment of PPE?
DR: accumulated depreciation
DR: loss due to impairment (the difference)
CR: asset at full cost
128
what are the 4 things that should be disclosed in the FS or in the notes for depreciable assets and depreciation?
1) depreciation expense for the period
2) balance of major classes of depreciable assets by nature or function
3) accumulated depreciation allowances by classes or in total
4) methods used in computing depreciation
129
what is depletion?
the allocation of cost of wasting natural resources such as oil, gas, timer, and minerals to the production process
130
what are the 4 costs included in purchase costs for natural resource fixed assets?
any expenditures necessary to purchase the asset
restoration costs
costs to prepare the land for removal of resources (drilling costs, tunnel, shafts)
costs to prepare the asset for harvest (lumber industry)
131
what are the 2 methods for depletion?
cost depletion (GAAP)
percentage depletion (tax purposes only, not GAAP)
132
how do you calculate unit depletion rate under cost depletion method?
depletion base / estimated recoverable units
133
when should impairment tests be performed for tangible and intangible assets?
whenever events or changes in circumstances indicate that the carrying amount may not be recoverable
134
what is the test for recoverability in regards to impairment of PPE?
if the sum of the undiscounted future cash flows is less than the carrying amount, an impairment loss needs to be recognized
135
what are the 3 characteristics of impairment loss for assets held for use?
write asset down
depreciate/amortize new cost prospectively
restoration NOT permitted
136
what are the 3 characteristics of impairment loss for assets held for disposal?
impairment loss + cost of disposal = total impairment loss
1) write asset down
2) no depreciation/amortization taken
3) restoration permitted
137
what is the difference in regards to cash flows for test for recoverability and calculating the impairment loss?
undiscounted future cash flows for test for recoverability
use FV or discounted PV future net cash flows for calculating impairment
138
how are identifiable intangible assets with finite lives amortized?
over the shorter of the estimated economic life or legal life
139
what are 3 examples of identifiable and finite intangible assets?
patents
copyrights
franchise
140
what are 4 examples of indefinite and not specifically identifiable intangible assets?
goodwill
trademarks
licenses
crypto assets
141
what are intangible assets?
long lived legal rights and competitive advantages developed or acquired by a business that are usually used in operations and provide benefits over several accounting periods
142
are legal and registration fees for intangible assets whether they are acquired or internally developed always capitalized?
yes
143
how are costs of intangible assets internally developed accounted for?
expensed when incurred
144
what are 5 examples of costs that can be capitalized for internally developed intangible assets?
legal fees
registration or consulting fees
legal fees or costs related to a SUCCESSFUL defense of the asset
design costs (ex. trademark)
other direct costs to secure the asset
145
what is formula for the capitalization cost of intangible assets acquired?
cash paid + PV of liabilities + FMV (stock)
146
how are crypto assets measured?
similar to indefinite intangible assets
measured at fair value each reporting period with changes of remeasurement reflected in NI
147
what is the difference between testing finite vs. infinite intangible assets for the recoverability test in impairment?
finite: undiscounted future cash flows (same as tangible asset)
infinite: fair value
148
what are the 3 phases of cloud computing agreements (CCA)?
preliminary project phase
application development phase
post implementation phase
149
what is the preliminary project phase in a CCA and is it capitalized?
involves determining the system requirements for software
expensed as incurred
150
what is the application development phase in a CCA and is it capitalized?
involves work performed to customize or change infrastructure or configurations
depends on the cost...
- capitalize implementation costs, licensing, development fees, materials, coding and testing fees
- expense training, manual data conversion, maintenance and support costs
151
what is the post implementation phase in a CCA and is it capitalized?
begins when the software is placed into service
expensed as incurred
152
how are franchise costs recorded from franchisee perspective?
initial franchise costs are capitalized
ongoing or continuing franchise costs are expensed as incurred
finite and identifiable intangible asset
153
what is the formula for determining the present value of the amount paid by a franchisee that is capitalized?
cash paid + PV of any note issued + FMV of stock issued
154
what are start up costs?
expenses incurred in the formation of a corporation and should be expensed when incurred
## Footnote
considered organizational costs
