F3 Assets and Related Topics

Question 1

Accounts Receivable Analysis

Answer 1

AR = 
Beginning Balance 
\+ Credit Sales
 - Write-Offs 
- Cash Collection
- Converted to notes
= Ending Balance

Question 2

Discount recording

Answer 2

DR Cash
DR Sales discount taken
CR Accounts Receivable

Question 3

JE for sales returns and Allowances

Answer 3

DR Sales Returns and allowances (Contra-sale account)

CR Accounts Receivable

Question 4

Estimating Uncollectible AR

Answer 4

AR should be presented on the BS at their “Net Realizable Value” meaning Gross - Allowance = NRV

Question 5

Two methods of recognizing Uncollectible AR?

Answer 5

• Direct Write-off: not GAAP

- Allowance : GAAP

Question 6

Two methods of recognizing Uncollectible AR?

Answer 6

- Direct Write-off: not GAAP
DR  Bad Debt Expense
CR  Accounts Receivable
- Allowance : GAAP
DR  Bad Debt Expense
CR  Allowance

DR Allowance
CR Accounts Receivable

Question 7

Write-off of AR under GAAP

Answer 7

No Effect on IS or BS (total assets)

Question 8

Inventory - Revenue recognition rule?

Answer 8

1. The sales price is substantially fixed at the date of sale;
2. The buyer assumes all risk of loss because the goods are in buyer’s possession;
3. The buyer has paid some form of consideration;
4. The product sold is substantially complete; and
5. The amount of future returns can be reasonably estimated

Question 9

Valuation of inventory

Answer 9

US GAAP requires that inventory be stated at cost except for precious metals and Farm products which are valued at “Net Realizable Value”.

Question 10

Loss of Cost or Market, and Lower of Cost and Net Realizable Value?

Answer 10

In the ordinary course of business, when the utility of goods is no longer as great as their cost (Loss on sale expected), a departure from the cost basis principle of measuring inventory is required.
Under US GAAP, the write-down of inventory is usually reflected in COGS unless if the amount is material in which case the loss should be identified separately in the income statement. IFRS do not specify where an inventory write-down should be reported on the IS.

Question 11

Reversal of Inventory write-downs?

Answer 11

US GAAP = NO,

IFRS = YES

Question 12

Market Value?

Answer 12

Market Value = Middle Value
Under US GAAP, Market value is the median (middle value) of an inventory item’s replacement cost, its market ceiling, and its market floor.

Question 13

Replacement cost?

Answer 13

Replacement cost is the cost to purchase the item of inventory as of the valuation date.

Question 14

Market Ceiling?

Answer 14

Market Ceiling = NRV: is an item’s net selling price less cost to complete and dispose (called the Net Realizable Value)

Question 15

Market floor?

Answer 15

Market floor = NRV - Profit: is the market ceiling less a normal profit margin.

Question 16

Periodic Inventory System vs. Perpetual Inventory System?

Answer 16

. Periodic Inventory System = 1 JE at the time of sale
    DR  CASH            
    CR  Sales
. Perpetual Inventory System = 2 JE at the time of sale
   DR CASH
   CR Sales
   DR COGS
   CR Inventory
1 JE at time of Purchase for both
. Periodic Inventory System
   DR Purchases
   CR  Cash
. Perpetual Inventory System
   DR Inventory
   CR Cash

Question 17

US GAAP vs IFRS?

Answer 17

US GAAP = FIFO, LIFO

IFRS= Only FIFO, LIFO is prohibited.

Question 18

Weighted Average Method?

Answer 18

Weighted Average Method = Periodic : is determined by dividing the total costs of inventory available by the total number of units of inventory available.

Question 19

Moving Average Method?

Answer 19

Moving Average Method = Perpetual : computes the weighted average cost after each purchase

Question 20

In Period of rising prices, LIFO method results in the lowest ending inventory, the highest COGS, and the lowest net income…

Answer 20

If LIFO is used for Tax purposes, it must also be used in GAAP financial statements (LIFO conformity rule).

Question 21

Perpetual VS Periodic?

Answer 21

. Under FIFO = Same,

. Under LIFO = Perpetual > Periodic