Flashcards in F4 - Working Capital and Fixed Assets Deck (42):
Define working capital.
Current assets - Current liabilities
How is the current ratio computed?
Current assets/Current liabilities
How is the quick ratio computed?
(Cash + Net receivables + Short-term investments) / Current liabilities
Current assets are defined as...
Those resources that are reasonably expected to be realized in cash, sold, or consumed (prepaid items) during the normal operating cycyle of a business or one year, whichever is longer.
Current liabilities are defined as...
Obligations whose liquidation is reasonably expected to require the use of current assets or the creation of other current liabilities.
When are a short-term obligations be included in noncurrent liabilities?
If the enterprise intends to refinance the debt on a long-term basis and the intent is supported by the ability to do so as evidenced by:
~Actual refinancing prior to the issurance of the financial statements, or
~Existence of a noncancelable financing agreement from a lender having the financial resources to accomplish the refinancing.
Define cash and cash eqivalents.
~Cash includes both currency and demand deposits with banks and/or other financial institutions.
~Cash equivalents include short-term, highly liquid investments that are both readily convertible to cash and so near their maturity when acquired by the entity (90 days or less from date of purchase) that they represent insignificant risk of changes in value.
Name two methods of accounting for uncollectivle accounts.
Dr. Bad debt expense
Cr. Accounts receivable
Weaknesses: Bad debts are not matched to sales and accounts receivable are overstated. Not GAAP.
Dr. Allowance for uncollectible accounts
Cr. Accounts receivable
Strengths: Matches bad debts with credit sales. Account receivable fairly stated. Required by GAAP.
Name three methods for estimating uncollectible accounts.
~Percentage of credit sales
~Percentage of accounts receivable at year-end
~Aging or accounts receivable at year-end
Using the allowance method, give the two journal entries to provide for and then to write off an uncollectible account.
Dr. Bad debt expense
Cr. Allowance for uncollectible accounts
Dr. Allowance for uncollectible accounts
Cr. Accounts receivable
What is the difference between factoring with recourse and without recourse?
The factor may return the account to the company if it proves to be uncollectible. Potential liability and risk of loss remains with the company.
The factor assumes the risk of loss if the account is uncollectible.
State the three conditions that must exist for control of a financial asset to be considered surrendered.
~The transferred assets have been isolated from the transferor;
~The transferee has the right to pledge or exchange the assets; and
~The transferor does not maintain control over transferred assets under a repurchase agreement.
If control of a financial asset is surrendered, what is the accounting treatment of the transfer?
No Continuing Involvement:
Recorded as a sale with appropriate reduction in receivables and recognition of any gain or loss.
~Asset for which there is no retained interest is recorded as a sale using the financial-components approach.
~ Assets for which there is retained interest is carried on the books of transferor and allocated a book value based on relative value of all transferred assets at the date of transfer.
If control of a financial asset is not surrendered, what is the accounting treatment of the transfer?
~Account for transfer as a secured borrowing with pledged collateral.
~Recognize the appropriate asset/libility amounts and interest revenue/expense amounts.
At what value should non-interest bearing promissory notes be recorded?
At the present value of all future payments required by the note. The payments should be discounted at the market interest rate.
Notes receivable may be discounted "with" or "without" recourse. What is the difference?
Discounting with Recourse:
The holder remains contingently liable.
Discounting without Recourse:
The holder assumes no further liability after discounting.
Describe the computational steps required in "dscounting a note."
1. Compute maturity value (remember to include interest to maturity).
2. Compute the "discount" (remember to use maturity value).
3. Get proceeds by subtracting discount from maturity value.
4. Compute interest income as difference between proceeds and face of note.
When does the title to goods pass for each of the following?
F.O.B. shipping point
~F.O.B. destination--When received by buyer.
~F.O.B. shipping point--When given to a common carrier.
~C.O.D.--When received and paid for by buyer.
~Consigned goods--When sold to a third party by consignee.
How is market calculated in the U.S. GAAP lower-of-cost-or-market method?
Market generally means current replacement cost, providing the current replacement cost does not exceed the market ceiling or fall below the market floor.
~Ceiling--Net realizable value (estimated net selling price less completion and disposal costs).
~Floor--Net realizable value minus normal profit margin.
How is net realizable value calculated in the IFRS lower-of-cost-or-net-realizable-value method?
Net realizable value is the net selling price less completion and disposal costs.
Explain the difference between periodic and perpetual inventory methods.
~The quantity of inventory is determined only by physical count.
~Ending inventory is physically counted and priced.
~Inventory is updated for each purchase and for each sale.
~Keeps a running total of inventory balances.
Name several cost flow methods for inventory.
LIFO (unit and dollar value)
Weighted average (associated with periodic)
Moving average (associated with perpetual)
Dollar value LIFO/Cost
Name several retail inventory methods.
~Dollar value LIFO/Cost
When are losses on firm purchase commitments recognized?
Losses are recognized in the period when the price declines.
Dr. Estimated loss on purchase commitment
Cr. Estimated liability on purchase commitment
Describe an inventory consignment arrangement. Also, how are the consigned goods carried on the parties' balance sheets?
Consignor gives goods to consignee for sale to third parties. Title to the goods remains with the consignor; therefore the consigned items stay on the balance sheet of the consignor.
During periods of rising prices, the use of LIFO versus FIFO has what effect on the valuation of ending inventory and reported net income? Which inventory method is prohibited under IFRS?
Both ending inventory and net income will be lower when LIFO is used during a period of rising prices.
LIFO = Lowest
LIFO is prohibited under IFRS.
Give some examples of capitalizable costs for:
Acquisition of equipment
Acquisition of building
Acquisition of Equipment:
Purchase price, freight-in, installation, testing, taxes, less any cash discounts allowed.*
Acquisition of Building:
Purchase price, deferred maintenance, alterations, improvements, architect's fees.*
* If equipment or building is constructed by company, capitalized cost could include construction period interest.
How is fixed-asset carrying value computed under U.S. GAAP and IFRS?
Carrying value = Historical Cost - Accumulated Depreciation - Impairment
~Under IFRS, carrying value can be calculated using the U.S. GAAP method above or can be calculated using the revaluation model.
~Revaluation Model Carrying Value = Fair Value on Revaluation Date - Subsequent Accumulated Depreciation - Subsequent Impairment.
~Revaluation gains are reported in OCI.
~Revaluation losses are reported on the income statement
Describe the proper accounting for ordinary versus extraordinary repairs.
Ordinary repairs are expensed as repair and maintenance. They do not increase the life or utility of the asset. Extraordinary repairs either increase the life or utility of the asset. If the extraordinary repair increases the life of the asset, it is recorded by reducing accumulated depreciation. If the extraordinary repair increases the utility of the asset, it is capitalized to the fixed asset account.
Give examples of costs to be capitalized as land.
~Closing costs, such as real estate broker commissions, legal fees, escrow fees, title guarantee insurance.
~Any mortgages, liens, or encumbrances on the land which the buyer assumes.
~Preparation costs, such as surveying costs, leveling costs, tree removal.
~Cost of razing an existing building, in getting land into condition for intended use.
~Improvements with indefinite life.
~Less: Proceeds from sale of assets on land.
Note: Excavating costs for a building and cost of improvements with a definite life are not included in land.
How is investment property defined and reported under IFRS?
Investment Property--Land and/or buildings held to earn rental income or for capital appreciation is reported using one of two models:
Carrying Value = Historical Cost - Accumulated Depreciation
Fair Value Model:
Reported at fair value and not depreciated. Gains and losses from fair value adjustments are reported on the income statement.
State two rules concerning capitalizing interest.
~Only capitalize interest on money actually spend, not on amount borrowed.
~The amount of capitalized interest is the lower of:
* Actual interest cost incurred, or
* Computed capitalized interest (avoidable interest).
For capitalizing interest, when does the capitalization period begin?
Begins when three conditions are met:
~Expenditures for the asset have been made.
~Activities that are necessary to get the asset ready for its intended use are in progress.
~Interest cost is being incurred.
Ending when the asset is substantially complete and ready for its intended use.
Name the most common depreciation methods. Give the basic formula for calculating each method.
(Cost - Salvage) / useful life
sum of years = n(n+1)/2
(Cost - Salvage) x (Years remaining) / (Sum of years)
2 x Straight-line rate x net book value of asset*
*No deduction for salvage to determine the depreciable base. Depreciate down to salvage value.
Units of Production:
(Cost - Salvage) / estimated hours x Actual hours for period.
Explain the different approaches to depreciation under IFRS and U.S. GAAP.
Under IFRS, the depreciation method used should match the expected pattern of fixed asset consumption. (Not required under U.S. GAAP.)
Under IFRS, component depreciation is required. (Not required under U.S. GAAP.)
State the rules for computing depletion on natural resources.
Remember it is REAL property.
Residual value (subtract)
Anticipated restoration cost
Land purchase cost
(Cost of Land + Extraction development costs + Anticipated restoration costs - Residual Value / Estimated recoverable units) x Units extracted = Depletion
What assets are subject to the impairment test?
~Long-lived assets, specific identifiable intangibles, and related goodwill to be held and used.
~Long-lived assets and specific identifiable intangibles slated for disposal.
~Certain assets of a rate-regulated entity.
Note: The test must be done at least annually.
Describe the impairment test for recoverability under U.S. GAAP?
If the sum of the undiscounted expected future cash flows is less than the carrying amount, an impairment loss needs to be recognized.
Name the two rules for performing impairment calculations under U.S. GAAP.
Use the undiscounted future net cast flows. An impairment loss exists if total undiscounted cash flows are less than the carrying value.
Amount of impairment:
Use the fair value of asset:
Impairment loss = Fair value - Carrying value
How is impairment evaluated under IFRS?
Under IFRS, impairment exists if the carrying value of the fixed assets exceeds the higher of:
~Fair value - Costs to sell
~Value in use (present value of future cash flows)
How is the impairment loss reported in the financial statements?
As a component of income from continuing operations before income taxes.
The carrying amount of the asset is reduced.