F3 - Assets and Related Topics Flashcards
Are cash equivalents determined by the months to maturity from their date of purchase or the reporting date?
Cash equivalents must mature within 3 months from their PURCHASE date. Months to maturity from the reporting date does not matter.
What is a Certificate of Deposit?
A certificate of deposit (CD) is a bank account with a maturity date and usually a high yield.
What is a bank draft?
Basically a check from the bank that cannot bounce. It is also called a bank check, banker’s draft, or teller’s check.
Is a check (yet to be deposited) with a date subsequent to the reporting date but within 3 months a cash equivalent?
No. Post-dated checks with a date AFTER the reporting date are NOT cash equivalents.
What is a depository account? Is it a cash equivalent?
Yes. A depository account is usually just a standard bank account such as a checking or savings account, or a CD.
Bank Reconciliations:
If a bank account is overdrawn, can it be netted against a positive account balance at the SAME bank?
Yes.
Note: if a bank account is overdrawn and there are no other accounts at that bank, the negative amount should be recorded as a liability. It CANNOT be netted against another bank’s accounts.
Cash and Cash Equivalents:
If a check is cut with a date prior to the reporting date, but not disbursed until AFTER the reporting date, should it be included in cash?
Yes. If the check has not been disbursed, the check date does not matter. It should NOT be subtracted from cash as an outstanding check.
Is cash in a bond sinking fund account cash/a cash equivalent?
No. Cash in a bond sinking fund account is restricted cash.
What is factoring?
Basically “selling” trade accounts receivable to a third party.
In regard to “factoring” what does with recourse and without recourse mean?
When a company sells its trade receivables to a factor, “with recourse” means the seller retains risk of credit losses and “without recourse” means the seller does NOT bear the risk of credit losses (I.e. the risk is transferred to the factor.)
What does it mean to “discount” a notes receivable?
“Discounting” a note receivable just means to “sell” it — similar to “factoring” trade receivables.
What does it mean to “discount” a notes receivable?
“Discounting” a note receivable just means to “sell” it — similar to “factoring” trade receivables.
What are the four steps to use when dealing with discounting a note receivable?
- Calculate the maturity value.
- Calculate the bank discount on the payoff at maturity.
- Compute the amount paid by the bank for the note.
- Determine the interest income (expense) by subtracting the face value of the note from the amount paid by the bank for the note.
What exactly does it mean when a bank asks for a % discount when purchasing a note receivable — also called the “effective interest rate”?
Of the note’s maturity value, the buyer wants a percentage for as long as they are holding the note.
Ex. If the note matures in 30 days, and its maturity value is $1,000.00, and the bank is asking for a 12% discount (or effective rate), then 12% x $1,000 x 30/360 = $10
Amount paid by bank = $1,000 (maturity value) LESS $10 discount = $990.
If the face value of the note was $950, then $990 LESS $950 =$40 is the amount of total interest that was received by the seller of the note.
When calculating net sales for NEW sales during a period, should it use actual returns during the period (on prior sales) or estimated future returns of current period sales?
When calculating net sales ON NEW SALES for a period, It should use estimated future returns on current period sales.
Net Sales on new sales = Current period sales LESS sales returns allowance (on current period sales)
Under CECL, how does allowance for loan loss function?
The allowance essentially acts in place of a ‘bad debt expense’ account when actual write-offs (or bad debt collections) occur. The bad debt expense is estimated at each reporting period, and the allowance fluctuates in “real-time”.
CECL:
What is the % of sales approach to estimating allowance for credit losses?
The % of sales approach estimates credit losses based on actual sales during the period.
CECL:
What is the % of receivables approach to estimating allowance for credit losses?
The percentage of receivables approach calculates allowance for credit losses based on ending AR for the period.
Can the allowance for credit losses have a debit (negative) balance?
Yes. This will often be adjusted to be a credit (positive) though at the end of the period once credit loss estimates are reassessed.
Trade Receivables:
What is the main difference between “factoring” and “discounting” when it comes to converting receivables to cash?
Factoring is basically selling accounts receivables whereas discounting is basically selling notes receivables.
Trade Receivables:
When a factor purchases a trade receivable, is the receivable recorded at face value or cost?
The receivable is recorded at face value.
Bank Reconciliations:
When preparing a bank reconciliation, if you know a check outstanding at month end (say, Dec 31st) was voided in the subsequent month (say, Jan 5th), should it be subtracted from the bank balance at month-end or added back to the book balance?
The voided check can be considered an “error” and added back to the book balance, NOT subtracted from the bank balance. Perhaps the check was made in error or was a duplicate, etc.
Inventory:
Is inventory held in consignment recorded by the consignor or the consignee?
Inventory held on consignment is recorded by the consignor NOT the consignee.
Inventory:
What is the difference between FOB Shipping point and FOB destination?
FOB Shipping Point - Ownership of goods transfers when an order is shipped.
FOB Destination - Ownership transfers when goods are received.
NOTE: A given exam question might refer to an entity purchasing goods AND shipping goods, so be careful about how to account for FOB Shipping Point/ FOB Destination.
