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CPA FAR Review > F4 > Flashcards

F4 Flashcards

Working Capital and Fixed Assets

1
Q

Working Capital is Defined as?

A

Current assets - Current liabilities

Should be Greater > than Zero

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2
Q

The Current Ratio is Defined as?

A

Current Assets / Current liabilities.

It should be > Greater than 1

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3
Q

The Quick Ratio is Defined as?

A

(Cash + Net receivables + Marketable Securities) /Current Liabilities

Contains no inventory!

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4
Q

Current Assets are defined as the larger of?

A

Assets to be consumed in one year

OR

Assets to be consumed in operating cycle.

Whatever is LARGER.

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5
Q

Current Liabilities can be classified as Long-term Liabilities provided that?

A

Actual Refinancing happened prior to the Issuance of the Statements

OR

There is an Agreement (noncancelable) with a lender that has the resource to execute the Agreement.

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6
Q

True or False: Under IFRS, Current liabilities can be reclassified like in GAAP?

A

False

Only classified if the Financing is completed before the Balance sheet date!

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7
Q

Cash and Cash Equivalents: Negotiable Paper (CDs) are considered CE except…?

A

When CDs have a maturity date of over 90 days

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8
Q

What is the CE with Cash Surrender Value (CSV)?

A

CSV of Life Insurance can be current asset or a non-current asset depending on INTENT.

Policy owner intends to surrender policy for its CSV during normal operating cycle = current asset.

Does not intend to surrender as normal then it is non-current asset.

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9
Q

Items that are **NOT **considered Cash Equivalents?

A
  • CD’s over 90 days.
  • Legally restricted deposits (held as compensating balances)

Must report SEPARATELY!

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10
Q

Restricted use cash is…?

A

Cash held aside for a specific use (i.e. purchase of PP&E, Bond Sinking funds)

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11
Q

Disclosures for Restricted Cash: What to do if associated with current Asset/Liability?

A

Classify as current A or L but separate from unrestricted Cash

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12
Q

Restricted cash: If associated with noncurrrent A or L, what do you do?

A

Classify as a noncurrent A or L, but separate from Investments or Other Assets section.

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13
Q

Similar to CSV

In general for Current or Noncurrent assets? Book the…?

A

Intent of the company

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14
Q

Sales Discounts (i.e. 2/10 n/30)

How to account for the sales discount using the Gross method?

A

Assuming customer will not take discount, book adj. later if taken.

  • Dr: Cash $100,000
    • Cr: Sales $100,000
  • Dr: Cash $98,000
  • Dr: Sales discount taken $2,000
    • Cr: Accounts Receivable $100,000
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15
Q

Sales Discounts (i.e. 2/10 n/30)

How to account for the discount using the Net method?

A

Assuming customer WILL take discount.

  • Dr: Cash $98,000
    • Cr: Sales $98,000
  • Dr: Cash $100,000
    • Cr: Sales discount NOT taken $2,000
    • Cr: A/R $98,000

No adj. need when cash is received, recorded as net. Adj. ONLY if sales discount NOT actually taken.

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16
Q

What are Trade Discounts? How do they differ from Speed Discounts?

A

Accounts Receivable is recorded net of sequentially applied discounts on qualifying QUANTITY of purchases.

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17
Q

True or False: The Direct Write Off method is always allowed on GAAP.

A

False!

The direct write-off method is not accrual basis so it is allowed in GAAP.

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18
Q

Company must do what if the pledge (use as collateral) an A/R account?

A

Disclose as a note. No Adjust is to be made.

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19
Q

A sale of A/Rs without recourse is consider to be…?

A

Final. The buyer assumes all the risk and rewards of the asset. Entry:

  • Dr: Cash $1,000,000
  • Dr: Due from Factor or Fees $100,000
  • Dr: Loss on the sale of AR $100,000
    • Cr: Accounts Receivable $1,200,000
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20
Q

3 criteria

A sale of A/Rs with recourse is considered a sale when it meets what Criteria?

A
  • The transferor’s obligation for uncollectible accounts are reasonably estimated.
  • The Transferor surrenders economic benefits of the A/Rs to the buyer.
  • No requirement to repurchase, but may be required to replace with similar A/Rs
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21
Q

Notes Receivable are presented at their?

A

Present Value, Always.

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22
Q

Notes Receivable discounted to a third party?

A

Balance sheet contra account (Notes Receivable Discounted) OR
May be removed from the balance sheet and disclosed as a contingent liability.

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23
Q

Inventory on consignment are excluded or included when?

A

Consignor includes. He still has all risk and loss with goods.

Consignee excludes even though he processes goods.

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24
Q

Valuation of Inventory what is also included in Cost?

A

Costs that provide time or place utility. (Freight in or Freezer)

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25
Q

What are not included in inventory Cost?

A
  • Freight out
  • Market costs.
  • Abnormal Spoilage
  • Idle plant time.
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26
Q

What are the 3 exceptions to LCM (Lower Cost or Market)?

A
  • Gold, Silver and agriculture products
  • Sales price of end product is not affected by its market value.
  • Firm sales contract
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27
Q

LCM may be applied to a single item, a category of items or total inventory. What is the most Conservative approach?

A

Single item is the most conservative.

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28
Q

Inventory write-downs are usually reflected in CoGs unless?

A

The amount is material. Then it is reported separately in the income statement.

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29
Q

True or False: Under US GAAP, reversal of inventory write-downs are allowed.

A

False. They are never allowed on US GAAP.

30
Q

In LCM, the Market value is?

A

The median or middle vale.

It is the middle value of the Replacement Cost, Market Ceiling and Market Floor

31
Q

In LCM, what is the Market Ceiling?

A

Net Selling Price
Less: Costs to complete and dispose the asset (costs include delivery costs and sales commissions)

32
Q

In LCM, what is the Market Floor

A

It the Market ceiling minus the Normal Profit margin.

33
Q

Under IFRS, where are losses from inventory write-downs reported?

A

IFRS does not specify where to put write downs from inventory.

34
Q

What does IFRS allows regarding inventory write-downs?

A

IFRS allows for a reversal of a inventory write-down. The reversal is limited to the amount of the write-down

35
Q

Periodic inventory: what is the formula?

A

Beginning inventory
Plus: Purchases
Equals: Cost of Goods available for sale.
Less: Ending inventory
Cost of Goods Sold

36
Q

What are the advantages of FIFO?

A

The ending balance reflects replacement cost approximately.

Ending inventory are the same whether Perpetual or Periodic.

37
Q

How does FIFO affect Net Income?

A
  • Highest ending inventory.
  • Smallest COGS
  • Highest Net Income
38
Q

What are the advantages of LIFO?

A
  • Better matching of current revenue with current expenses (market price)
39
Q

What are the disadvantages of LIFO?

A
  • Ending balance will not approximate replacement cost.
  • There is distortion if sales exceed current production.
  • Digging into a previous LIFO layer.
40
Q

How does LIFO affect Net Income?

A
  • Lower ending inventory
  • Higher COGS
  • Lower net income
41
Q

Dollar value LIFO, what is the formula for the price index?

A

Ending inventory at current year cost
Divided by: EI at base year cost
Price Index

42
Q

Firm purchase Commitments: If the sale price exceeds the market price, then?

A

Losses expected to occur at the time of sale should be recognized at the decline in price.

43
Q

IFRS revaluation must be applied when to which Balance Sheet items?

A

All items in a classes of fixed assets. Not to individual fixed assets.

44
Q

Revaluation losses (FV < CV) are recognized on the income statement unless?

A

The Revaluation loss reverses a previously recognized revaluation gain.

45
Q

Revaluation Gains are reported in OCI unless they?

A

Reverse an amount up to the a previously recognized Revaluation loss.

46
Q

Cost of equipment includes?

A
  1. Invoice Price of Equipment
  2. Less cash discounts/other discounts
  3. Freight-in and Insurance in-transit
  4. Sales and Federal Excise Taxes
  5. Installation charges (testing, prep for use)
  6. (Time and place utility)
47
Q

For an Improvement or Replacement: if the carry value of an old asset is known and the life of an asset is extended, how do you account for a improvement/replacement?

A
  • If carrying value of old asset is known, remove it and recognize any gain/loss.
  • If carrying value of old asset is unknown and:
    • Asset life is extended
    • Dr: Accumulated Depr.
    • Usefulness of asset increased, capitalize the cost
48
Q

What does the cost of the land include as a SUBTRACTION?

A

The proceeds from the sale of salvaged materials.

49
Q

What does the cost of a building include?

A
  • Purchase price, etc…
  • Alterations and improvements
  • Architect’s fees
  • Possible addition of construction period interest
  • All repairs due to the negligence of the previous owner (deferred maintenance)
50
Q

Separate accounts

When preparing the land for a building costs, what cost are charged the Building and Land accounts?

A
  • Filling a hole is charged to the Land account
  • Digging a hole for a foundation is charged to the Building account.
51
Q

Basket purchase of a land and building. How to value the land and the building?

A

Take the percentage of each and multiply to get the amount paid for land and building.

52
Q

Under the cost model, Investment property is report at what amount?

A

Historical Cost less accumulated depreciation. Fair value must be disclosed!

53
Q

Under the Fair Value model, Investment property is report at what amount?

A

The fair value and the asset is not depreciated.

54
Q

Under the fair value model, routine revaluations in the asset are report as gains and losses on what?

A

The Income Statement.

55
Q

In order to capitalize interest costs, you do not capitalize interest costs on?

A
  • On inventory normal manufactured.
  • Fixed Assets purchased before the construction,
  • During intentional Delays of Construction.
56
Q

You can capitalize interest costs on?

A
  • Special order goods (on hand for sale to customers)
  • Ordinary delays of construction.
57
Q

If there is a new asset with specific new borrows, the capitalized interest is equal to?

A

The amount of interest incurred on the New Borrowing.

58
Q

If the accumulated costs for the construction exceed the New Borrowings, the interest cost on the excess should be computed using what?

A

The Weight Average interest rate for other borrowings.

59
Q

Interest costs capitalized must not exceed what amount?

A

The total amount of interest expense incurred in the period.

60
Q

What are the advantages to Component Depreciate?

A

It is more accurate because different components have different useful lives

Repair and maintenance costs would be more accurate because components replaced would be excluded .

61
Q

True or False: IFRS does not require Component Depreciation?

A

False. IFRS requires Component depreciation.

Components that are replaced should be derecognized.

62
Q

A group or composite asset is retired.

How are the losses or gains treated when the the Average Service Life of the asset has not been reached?

A

The gains or losses are absorbed in the Accumulation Depreciation account.

63
Q

What is the Sum of the Year’s Digit Formula?

A

S = [N x ( N+1 )] / 2

64
Q

When the allowance method of recognizing uncollectible accounts is used, how would the collection of an account previously written off affect A/R and the allowance for uncollectible accounts?

A

A/R: No Effect
Allowance for Uncollectible Accounts: Increase

To restore the account previously written off:

  • Dr: A/R
    • Cr: Allowance

To record the cash collection on the account:

  • Dr: Cash
    • Cr: A/R
65
Q

It is REAL property.

How to compute depletion on land?

A
  • Residual Value (subtract)
  • Extraction/Development Cost
  • Anticipated Restoration Cost
  • Land Purchase Price
66
Q

What does Cost of the Land include?

A
  1. Purchase price
  2. Brokers’ commissions
  3. Title and recording fees
  4. Legal fees
  5. Draining of swamps
  6. Clearing of brush and trees
  7. Site development (filling in/leveling land)
  8. Existing obligations assumed by buyer (mortgages)
  9. Cost to tear down an old building
  10. Less: Proceeds from sale of existing buildings, standing timber, etc…

DOES NOT INCLUDE EXCAVATING/DIGGING!

Land Improvements are depreciable

67
Q

Shipping costs incurred by a consignor on transfer of goods to a consignee should be considered as:

A

Inventory cost to the consignor.

68
Q

3 Types

What is the Allowance Method?

A
  1. % of Sales - emphasize matching I/S approach
  2. % of A/R at YE - balance sheet approach
  3. Aging of Receivables - emphasize asset valueation NRV balance sheet approach
69
Q

A/R to Cash

What is factoring receivables?

A

Process which company converts its receivables to cash by assigning them to a factor (with or without recourse).

This would alter the timing of the cash flows already recorded on books.

(Discounting is converting notes receivable not A/R to cash)

70
Q

What is LIFO reserve?

A

Difference between inventory on LIFO method vs. any other cost method.

71
Q

3

Methods of Depletion

A
  1. Cost - dividing current estimated recoverable units into unrecovered costs (less SV) = cost depletion rate% x units produced
  2. Percentage - based on % of sales
  3. Unit Rate - depletion recognized per unit extracted
72
Q

Formula

How to calculate & use Depletion Base?

A

Cost to purchase property

Plus: Development costs to prep land for extraction

Plus: Estimated restoration costs

Less: Residual value of land after resources are extracted

Unit Depletion = Depletion base / Estimated recoverable units

CPA FAR Review (10 decks)

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