FAR CPA Lessons 65 - 86 Flashcards
(86 cards)
1
Q
Define restricted cash.
A
Cash accounts with legal restrictions (listed separate from cash on the balance sheet)
certificate of deposit, compensating balances, bond sinking fund, other funds that are restricted for specific purposes like escrow
2
Q
Define cash equivalents
A
An item that is so near cash that it is included in cash - short term, highly liquid, readily convertible to known amounts of cash and bears no risk from interest rate changes (Originally 90 days or less)
US Treasury bills, commercial paper, and money market funds, Bank depository account
3
Q
Define cash
A
cash that is available to meet current operating expenses and obligations as they arise.
Coin or Currency, Petty Cash, Cash in bank, Checks, money orders
4
Q
Define compensating balances.
A
This is a minimum balance that must be maintained by the firm in relation to a borrowing. Such a balance increases the effective rate of interest on the borrowing and reduces the risk to the lender.
5
Q
List two main internal controls over cash.
A
- Separation of duties associated with: custody, recording, and reconcilaitions
- Bank Reconciliation
6
Q
How are Bank Overdraft fees dealt with?
A
A bank overdraft is a liability unless the right of offset is permitted by the same bank as the overdraft
7
Q
Define monetary asset
A
an asset with fixed nominal (stated) value. The nominal value of a monetary asset does not change with inflation. Cash is the most “monetary“ of all assets.
8
Q
Bank Reconciliation Benefits
A
- Enable a periodic comparison of the bank account balance and cash balance
- Help identify errors in the firm’s records or bank records
- Establish the correct ending cash balance
- Provide information for adjusting entries
- Help reduce cash theft by employees if the reconciler does not have access to cash records or does not have access to cash
9
Q
Define Simple Bank Recs
A
Explains the difference between the balance per books and the balance per bank at the end of the month. 3 Formats:
- Bank to book
- Book to bank
- Bank and book to true balance
10
Q
Define Bank to book
A
The starting point is the balance per bank. All adjustments are made to this balance to arrive at the balance per book.
11
Q
Define Book to bank
A
The starting point is the balance per book. All adjustments are made to this balance to arrive at the balance per bank.
12
Q
Define Bank and book to true balance
A
In this format, the bank balance and the book balance are separately reconciled to the true cash balance, which is reported in the balance sheet.
13
Q
What are the differences between US GAAP and IFRS for bank rec purposes?
A
NONE
14
Q
What are the 4 types of receivables
A
Accounts Receivable
Notes Receivable
Trade Receivable
NonTrade Receivable
15
Q
Define Accounts Receivable
A
An account receivable is usually related to the sale of goods to customers or the provision of services to customers. The length of time related to this claim is very short, 30 to 90 days
16
Q
Define Notes Receivable
A
Often related to noncustomer transactions. Examples include:
- the sale of noncash assets
- lending transactions
- the conversion of other receivables.
A note receivable is usually related to a longer time frame than an account receivable, and due to that fact, all notes have an interest element.
17
Q
Define Trade Receivable
A
Another name for customer accounts receivable.
18
Q
Define NonTrade Receivable
A
Those receivables created in noncustomer transactions.
19
Q
Factors affecting the net realizable value of receivable accounts
A
- Trade (quantity) discounts
- Cash (sales) discounts
- Sales returns and allowances
- Noncollectible accounts
20
Q
Define the gross method for accounts receivable
A
records receivables at gross invoice price (before cash discount)
21
Q
Define the net method for accounts receivable
A
which records receivables at net invoice price (after cash discount)
22
Q
What are the main differences of the recognition criteria between GAAP and IFRS?
A
Accounts receivable (and revenue) can be recognized if there is a firm sales commitment and the recognition criteria have been met.
23
Q
What are the two methods to account for bad debt expense
A
- direct write-off method
2. allowance method
24
Q
Explain the direct write-off method
A
his method records bad debt expense only when a specific account receivable is considered uncollectible and is written off. It can be used only when the firm is unable to estimate uncollectible accounts receivable reliably.
25
Explain the allowance method
Records an estimate of bad debt expense at the end of each year in an adjusting entry. Required under GAAP if uncollectible accounts are probable and estimable.
26
What is the direct write-off method not considered in accordance with GAAP?
records bad debt expense only when a specific account receivable is considered uncollectible and is written off. The direct write-off method is not considered in accordance with GAAP unless there is no basis for estimating bad debts.
27
Define bad debt expense
an expense account - AR are recorded bad debt expense only when a specific account receivable is considered uncollectible and is written off
28
Define Allowance for Doubtful Accounts
contra to accounts receivable. he allowance for doubtful accounts is recorded at year-end because the identity of the specific accounts that will be uncollectible and written off in a later period is unknown.
29
How is Implicit interest computed?
Using the present value of the future cash flow s- this is also called discounting a note
30
Interest-Bearing Notes Receivable
he interest element is explicitly stated.
31
Non-Interest Bearing Note Receivable
The interest element is not explicitly stated. The amount of cash to be collected from a non-interest-bearing note is the face amount of the note.
32
List the three criteria for the transfer of AR to qualify as a sale.
1. The transferred assets have been isolated from the transferor, even in bankruptcy.
2. The transferee is free to pledge or exchange the assets.
3. The transferor does not maintain effective control over the transferred assets either through an agreement that allows and requires the transferor to repurchase the assets or one that requires the transferor to return specific assets.
33
Define what is meant by selling AR with recourse and without recourse.
If the transaction is completed with recourse, the transferor is responsible for nonpayment on the part of the original maker of the receivable. This means that if the maker (original debtor) defaults, the original creditor must assume all the payments on the receivable.
If the transaction is completed without recourse, the transferor is not responsible for nonpayment on the part of the maker of the receivable. Typically, nonrecourse transfers are accounted for as sales because control has passed to the transferee (financial institution).
34
Identify the major differences between U.S. GAAP and IFRS accounting for transfer of AR.
U.S. GAAP focuses on whether control has shifted from the transferor to the transferee. IFRS focuses on whether the transferor has transferred the rights to receive the cash flows from the receivable and whether substantially all the risk and rewards of ownership were transferred.
Criteria for Transfer under IFRS 39
1. If the entity transfers substantially all the risks and rewards of ownership, the transfer is treated as a sale.
2. If the entity retains substantially all the risks and rewards of ownership, the transfer is treated as a secured borrowing.
3. If neither conditions 1 or 2 hold, the entity accounts for the transaction as a sale if it has transferred control and as a secured borrowing if it has retained control.
35
Define what is meant by selling AR with aNotification or Non-Notification Basis
If the transaction is completed on a notification basis, the maker of the receivable is informed of the transaction and typically is instructed to make payments to the third party.
If the transaction is completed on a non-notification basis, the maker of the receivable is not informed of the transaction and continues to make payments to the original creditor.
36
Describe the difference between factoring with and without recourse.
Factoring without recourse
is usually accounted for as a sale because the factor has no recourse against the transferor if there is a default on the receivables.
When receivables are factored with recourse, the seller (transferor) bears the cost of bad debts as well as the cost of sales adjustments.
37
Describe the difference between assigning and pledging AR.
When accounts receivable are assigned, the borrower assigns rights to specific accounts receivable as collateral for a loan. The lender has the right to seek payment from these receivables should the borrower (original creditor for the accounts receivable) default on the loan. The borrower reclassifies the receivables as accounts receivable assigned, a subcategory of total accounts receivable.
Pledging of accounts receivable is less formal than assignment. Rights to specific receivables are not noted as collateral, and accounts receivable are not reclassified. Neither the accounting for the receivables nor the loan is affected by the pledge.
38
Define when a note receivable is impaired.
A loan is impaired when the present value of the future cash flows expected to be collected is less than the carry value
39
How do you book an impairment loss?
Debit bad debt expense and credit a contra-receivable account
40
Explain the interest method for impairment losses
The interest method recognizes interest revenue each year until the note is collected because the note was written down to present value when the impairment was recorded. The estimated future cash flows to be received include interest, which is recognized over the remaining term of the note.
41
Explain the cost recovery method for impairment losses
The cost recovery method recognizes interest revenue only after cash equal to the new carrying value is collected.
42
List the three basic components of manufacturing inventory.
1. Finished goods inventory
2. Work-in-process inventory
3. Raw materials inventory
43
Define FOB shipping point
FOB shipping point means title passes at the shipping point (the selling company's warehouse), therefore the goods belong to the purchaser as soon as it is loaded on a common carrier.
44
Define FOB destination
FOB destination means that title to the goods transfers to the buyer when the goods reach the destination.
45
Define Inventory
For a typical business entity inventory includes property held for resale, property in the process of production, and property consumed in the process of production
46
Which types of costs should be included in inventory?
```
Freight
Insurance in transit
Taxes paid on acquisition of inventory
Material handling costs
Packaging Costs
Purchase discounts
Returns & Allowances
```
47
What are the four manufacturing input costs?
Fixed Overhead
Direct Material
Direct Labor
Variable Overhead
48
What is cost flow assumption?
The financial reporting issue is how to assign inventory costs to cost of goods sold
49
What are the two methods inventory quantities can be tracked?
Periodic System - Periodically the number of units is counted
Perpetual system - the number of units is continuously updated
50
What is a periodic accounting system?
In a periodic accounting system the entity periodically takes a physical count of ending inventory. A value is then assigned to those goods on hand.
```
Beginning Inventory
+ Net Purchases
= Goods available for sale
- Ending inventory
= Costs of goods sold
```
51
How do you calculate net purchases for inventory?
```
Gross purchases
+ Transportation (freight in)
- Purchase returns and allowances
- Purchase discounts
= Net Purchases
```
52
What are the four costs flow assumption to assign value to ending inventory?
1. LIFO
2. FIFO
3. Weighted Average
4. Specific Identification
53
What is the cost flow assumption equation?
Beginning Inventory + Net Purchases = Ending Inventory + Cost of Goods Sold
54
How do you calculate cost of goods sold for inventory?
```
Beginning Inventory
+ Net Cost of Purchases
= Goods Available for Sale
− Ending Inventory
= Cost of Goods Sold
```
55
Explain how to compute a moving average - which inventory system is this for?
Only used for the perpetual inventory system
Rather than having a single weighted average cost per until for the accounting period, the company computes a new weighted average after every purchase. The inventory sold between purchases is valued based on the last weighted average computed.
56
What are the main differences between the perpetual inventory system and the periodic inventory system?
The perpetual lsystem uses the inventory account rather than purchases for the acquisition of inventory and adjustments such as returns and discounts
Perpetual system records cost of goods sold at the time of a sale rather than at the end of the period
57
What are the three important points of emphasis for FIFO
1. the flow of costs is the same as the physical flow of goods for most firms.
2. the balance sheet valuation of inventory is an approximation to current cost, which is considered more relevant than historical cost.
3. the matching of revenues and expenses on the income statement is not considered ideal. Frequently, a company will be matching the revenues of the current year with the cost of merchandise acquired in a prior accounting period.
58
What are the three important points of emphasis for LIFO
1. the matching of revenues and expenses on the income statement is significantly improved over FIFO. That is, the income statement involves the matching of revenues of the current year with the cost of merchandise acquired in the current year
2. there are usually income tax advantages associated with that choice. In periods of rising prices, LIFO will result in a higher cost of goods sold and a lower tax burden
3. the balance sheet presentation of inventory is less than ideal. For the company employing LIFO, inventory on the balance sheet typically reflects the cost of the “oldest“ merchandise included in the company's inventory records. This means the balance sheet does not reflect the current cost of inventory and often times, means the inventory is undervalued on the balance sheet.
59
What is phantom or illusory profits related to inventory?
The term used because LIFO tends to minimize inventory profits
60
What is LIFO liquidation?
A LIFO liquidation is that part of current-period cost of goods sold represented by the cost of goods acquired in prior years. It occurs when more goods are sold than purchased in a year.
61
Why should LIFO liquidations be avoided?
1. It will likely increase taxable invoice (The earlier purchases using cost less so the cost of goods sold is lower)
2. The liquidation distorts the relationship between current sales and current cost of goods sold. The larger the liquidation, the worse the distortion.
62
What are the advantages of dollar value LIFO over quantity of goods LIFO
- Reduces the effort of the liquidation problem
- Allows companies to use FIFO internally
- Reduces clerical costs
63
How do you calculate conversion index?
Ending Inventory in current-year dollars / Ending Inventory in Base-Year Dollars
64
What are base-year dollars?
The specific price level for the pool in effect at the beginning of the year in which the firm adopted LIFO
65
Explain margin on sales versus margin on cost
Margin on Sales = (Sales − Cost of Goods Sold)/Sales
Margin on Cost = (Sales − Cost of Goods Sold) / Cost of Goods Sold
66
Gross Margin Method to value ending inventory.
Beg. Inventory + Net Purchases = End. Inventory + Cost of Goods Sold
Beg. Inventory + Net Purchases = End. Inventory + Sales (Cost/Sales)
67
Relative Sales Value Method to value ending inventory.
Firms may buy different types of inventory in a bulk order. Cost is recorded for each item based on it relative saves value to the total sales value of the group
68
Retail Inventory Method
This method is used by retailers to estimate ending inventory at cost. Most retailers know the markup on the inventory items and are able to count ending inventory at retail prices
69
What are the three calculations used for retail inventory method?
1. Ending inventory at retail is calculated or counted at year-end
2. the cost-to-retail ratio is calculated
3. the ending inventory at retail is multiplied by the cost-to-retail ratio to arrive at estimated inventory at cost
70
What are the five variations of the retail inventory method?
1. FIFO
2. FIFO, LC-M
3. Average
4. Average, LC-M (*conventional retail inventory method)
5. Dollar-Value LIFO Retail
71
What are the steps to compute the dollar value LIFO retail method?
1. DV LIFO is first applied to inventory at retail only
2. The FIFO retail method (not LC-M; i.e., subtracting markdowns when computing C/R) cost-to-retail ratio is applied to this retail layer yielding the increase in cost at current prices.
3. This cost layer is added to beginning inventory at DV LIFO cost to yield ending inventory at DV LIFO cost.
72
direct method of Lower of Cost or Market—Journal Entry
Any holding loss (difference between a higher cost and a lower market value) related to inventory is simply included in cost of goods sold. It is directly included in cost of goods sold.
73
indirect method of Lower of Cost or Market—Journal Entry
any holding loss related to inventory is separately identified in a contra inventory account with separate disclosure of the holding loss. Cost of goods sold does not include the holding loss under this method.
74
How do you determine the market value of inventory?
Market is replacement cost limited to
Ceiling—which is net realizable value (selling price less selling costs and costs to complete).
Floor—which is net realizable value less normal profit.
75
If beginning inventory is understated what other account must also be understated
Cost of goods sold
76
If ending inventory is understated what account must be overstated?
Cost of goods sold
77
Explain what to do with losses when the commitment contract can be modified.
the loss is required to be footnoted as a contingent liability, but is not accrued in the accounts because the loss is not probable given that the contract can be revised.
78
Explain what to do with losses when the commitment contract cannot be modified.
the loss must be accrued because the loss is probable and estimable.
79
Identify the major differences in the accounting for inventory under IFRS versus U.S. GAAP.
- IFRS - Lower of cost or net realizable value (LC-NRV) only while under GAAP (LC-M) or LC-NRV
- IFRS - Same cost formulas must be used for inventory with a similar nature and use while under GAAP this is an option
- IFRS - Reversal of write down to net realizable value permitted while under GAAP it is prohibitied
- IFRS - LIFO prohibited while under GAAP it is permitted
- IFRS - Cost flow assumption mirrors physical flow while under GAAP it is does not
80
How should a segregated bank account be reported for on the balance sheet?
Separate from other bank accounts as a noncurrent asset
81
Under the allowance method - what is the journal entry to write off accounts receivable?
debit the allowance for uncollectible accounts and credit accounts receivable
82
Under the allowance method - what is the journal entry to account for a payment from a customer for an account previously written off?
1. reinstate the account receivable - debiting accounts receivable and crediting the allowance for uncollectible accounts.
2. Cash collection - debiting cash and crediting accounts receivable.
83
Notes discounted with recourse create:
contingent liabilities equal to the maturity amount
84
How is a loan impairment recorded?
reducing the net book value of the receivable to the present value of probable future cash inflows, discounted at the original rate in the receivable.
85
For COGS which inventory method most closely approximates actual?
LIFO
86
For Ending Inventory which inventory method most closely approximates actual?
FIFO
