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Flashcards in FAR Chapter 3 Deck (33):

Cash equivalents

Mature 90 days or less from date of purchase - excludes legally restricted deposits

Restricted cash has been set aside for specific purpose

If you wrote a check but didn't mail - the cash for that check should be included on your GL balance because you did not mail the check


2 forms of bank reconciliations

Simple: reconcile both book and bank balance to a common "true" balance

Reconciliation of cash receipts and disbursements: 4 column reconciliation


Trade Receivables vs. Non-trade Receivables

Trade Receivables: for purchases of the Company's goods and services

Non-trade Receivables: from persons other than customers, such as advances from employees or tax refunds


Blank Analysis Format (BASE formula)


+ AR -
Beg. Balance Write offs
Credit sales Conversions to notes
Cash collected

Ending Balance


Recording Sales

Gross Method vs Discount Method

Gross Method: records the A/R ignoring the discount. If discount is later taken, DEBIT Sales Discount (contra-revenue) for the discount amount

Net Method: records the A/R as if discount was taken. If discount is later not taken , CREDIT Sales Discount Not Taken (revenue)


Sales Returns and Allowance

Used when passed experience shows that a material % of receivables are returned

Dr. Sales returns and allowance (contra sales)
Cr. A/R


2 Methods for Estimating Uncollectible A/R

Direct write off (not GAAP): only books an entry when it is determined that the account won't be collected

Dr. Bad debt expense
Cr. A/R

Allowance method (GAAP): based on past experience (% of sales, % of A/R, aging of receivables). Come up with an estimate and accrue for it.


Allowance Method GAAP - 3 options

% of Sales: focuses on matching, the calculation is in addition to whatever you had as beginning balance

Dr. Bad debt expense
Cr. Allowance for uncollectible accounts

% of A/R: calculation is the ending balance, bad debt expense is a plug (manipulated), consider what you had in beginning balance

Aging of Receivables: calculates the ending balance in the allowance


Write off of a specific A/R and subsequent collection

- no effect on I/S or B/S
- the only thing that changes is the form of total assets (although total assets is still the same)

Dr. Allowance for doubtful accounts
Cr. A/R

Subsequent collection - Direct write off (not GAAP)
Dr. Cash
Cr. Uncollectible account recovered

Subsequent collection - Allowance method (GAAP)
Dr. A/R
Cr. Allowance for uncollectible accounts

Dr. Cash
Cr. A/R


Factoring A/R without recourse - sale is final and signee has all risk

Dr. Cash 94
Dr. Due from factor 1
Dr. Loss on sale of A/R 5
Cr. A/R 100


Factoring A/R with recourse - could be a sale or borrowing

To be considered a sale it must meet these requirements

1. Seller's obligation for uncollectible can be reasonably estimated
2. Seller surrenders control
3. Seller cannot be required to re purchase the A/R, but may be required to replace the A/R with other A/R

If any of these are not met then it is treated like a loan and is disclosed (just as if it was pledged)


Notes Receivables - Valuation

Face Value
(-) Unearned Interest = PV goes on books

Notes may be discounted/sold in order to get cash


Discounting Notes Receivables

With recourse (they can come back to you):
Dr. Cash
Cr. Note receivable discounted

Without recourse (can't come back to you):
Dr. Cash
Dr. Loss
Cr. Note receivable


Goods in Transit

- FOB Shipping Point: Title passes to buyer when seller delivers the goods to a common carrier

- FOB Destination: Title passes to buyer when buyer receives the goods

If seller sends nonconforming goods, title never passed to buyer and goods should be included in seller's inventory


Valuation of Inventory

- Stated at cost which includes freight-in
- Exception: precious metals and farm products, which are stated at net realizable value (selling price - disposal cost)


Recognizing Loss of Inventory

- GAAP: write down recognized on COGS, unless material, if material then do it separately
- IFRS: allows reversal of the write off


Valuing Inventory

IFRS: use lower of cost and net realizable value. No LIFO.
GAAP: use lower of cost and net realizable value if using FIFO or weighted average

NRV: selling price - cost to complete

GAAP: use lower of cost of MARKET for retail and LIFO


Periodic Inventory System vs. Perpetual

No matter what you use, ending inventory is the same

- Quantity of inventory is determined by physical count
- 1 journal entry at time of sale
- COGS is squeezed

Beginning inventory (+)
Purchases =
Cost of goods available for sale (-)
Ending inventory per physical count

Perpetual: 2 journal entries at the time of sale as inventory is constantly being updated on the system


Recording a Sale - Periodic vs. Perpetual

Dr. Cash
Cr. Sales

Dr. Cash
Cr. Sales

Cr. Inventory


Recording a Purchase - Periodic vs. Perpetual

Dr. Purchase
Cr. Cash

Dr. Inventory
Cr. Cash


Weighted Average Method

This is periodic

Total cost of inventory available / total number of units of inventory available


Moving Average Method

This is perpetual

Calculates weighted average cost after each purchase


Valuation of Fixed Assets

Revaluation must be done to asset class, no cherry picking

GAAP: historical cost including bringing it to the location and getting it ready to work.

IFRS: allows revaluation model
- initial revaluation loss goes to I/S
- if revaluation loss reverses a previous gain then on OCI

-initial revaluation gain goes to OCI
- if revaluation gain reverses a previous loss then on I/S


Cost of Land

Land is not depreciated and cost includes: purchase price, commissions, title recording and legal fees, draining of swaps, cutting trees, demolition of previous building, less proceeds from sale of existing building

Land improvements are depreciated and include: fences, water systems, sidewalks, paving, landscaping, lightning


Depreciation - Sum of the Years Digits

Ex: 3 years is 6 (1+2+3) so depreciate as follows
1st year = (3/6) x depreciable base
2nd year = (2/6) x depreciable base
3rd year = (1/6) x depreciable base


Impairment Loss

US GAAP prohibits reversal of intangible asset unless the asset is held for sale

Goodwill: if FV < carrying value, record impairment loss on I/S

Recoverability test is performed on intangibles with limited life by comparing undiscounted future cash flows to carrying value. If carrying value is greater perform FV test

Impairment loss = carrying value - FV


Impairment Loss - IFRS

Loss exists when carrying value exceeds recoverable amount

Recoverable amount is the greater of:
- Asset FV less cost to sell
- PV of future cash flows (value in use)

Reversal of a prior impairment loss is allowed and increases I/S


Nonmonetary exchange

- Has commercial substance: recognize gain or loss based on difference between FV and book value of asset given up

- Lacks commercial substance: no gain or loss is recognized. If small boot is received then a proportion of the gain is recognized. If boot received or paid > 25%, both parties recognize gain/loss

- conservatism: recognize loss when BV > FV of asset given up


Nonmonetary Exchange - IFRS

Characterized as:
-Dissimilar: gain/loss recognized
-Similar: no gain recognized (loss is b/c of conservatism)


Intangible Assets

(Patents, copyrights, franchises, trademarks, and goodwill)

- If purchased: capitalize at cost
- If developed: expense, except legal feels to a successful defense, registration, consulting, design

Amortize only if it has a FINITE life


Intangible Assets - IFRS

Can be reported under the cost of revaluation model

- Cost Model: reported at cost, amortized if finite life, and tested for impairment

- Revaluation Model: at cost but re-evaluated to FV and revaluation date used for subsequent amortization, if finite life, and impairment testing

- Revaluation Loss: on I/S, if reversing a gain then OCI

- Revaluation Gain: OCI, if reversing a loss then I/S


Research and Development

- GAAP: expense except if they have an alternate future use or if the costs were undertaken on behalf of others

- IFRS: expense research costs and capitalize development costs


Computer Software Development Costs

Capitalize costs incurred after technological feasibility has been established

Amortization expense is the greater of:
- % of revenue (like % of completion)
- straight line

If software is for internal use capitalize once technological feasibility has been established. If later you decide to sell it use cost recovery system and then the rest is revenue