FAR Deck 2 Flashcards
(30 cards)
When is an entity considered a going concern?
An entity is considered a going concern if it is reasonably expected to remain in existence and to be able to settle all its obligations for the foreseeable future. Management is required to evaluate whether there is substantial doubt about an entity’s ability to continue as a going concern within one year after the date that the financial statements are issued.
What is the difference between US GAAP and IFRS guidance for consideration of a going concern? What method of accounting should be used under GAAP for an entity that is not considered a going concern??
IFRS does not offer guidance on the basis of accounting to use in the case of a imminent liquidation. US GAAP provides specific guidance about preparing financial statements and necessary disclosures when liquidation is imminent/about to happen (liquidation basis of accounting)
GAAP should use the liquidation basis of accounting for a entity that is not a going concern
When is there substantial doubt about an entity continuing as a going concern?
When relevant conditions and events indicate it is probable that the entity will not be able to meet its obligations as they come due within one year from the date the financial statements are issued.
Relevant likelihood- Probable
Relevant time period- one year
relevant date- one year from the date FS issued as opposed to the date stated on the BS
When is dollar value LIFO used?
When product lines are subject to specific price increases.
Dollar Value LIFO, Finding Annual Cost Index
EOY Inventory Cost
/Base Year Inventory Cost
Perpetual VS Periodic Inventory Systems
Perpetual counts as inventory goes in and comes out (real time). Periodic counts inventory at a specific time EOP, EOY,EOM etc.
During a period of inflation will Perpetual and Periodic using LIFO and FIFO end with the same ending inventory?
FIFO- YES
LIFO- No because of the timing of removing cost from inventory. Periodic inventory cost are removed at EOY. Perpetual latest cost are assumed at time of each sale
Is freight in capitalized as part of inventory?
Yes it is capitalized
When the allowance method of bad debt expense is used the allowance would decrease when?
When a specific uncollectible account is written off under the allowance method of recognizing bad debt expense, the “allowance for bad debt” account would decrease.
What is included in cash and cash equivalents?
The term cash and cash equivalents includes: currency, coins, checks received but not yet deposited, checking accounts, petty cash, savings accounts, money market accounts, and short-term, highly liquid investments with a maturity of three months or less at the time of purchase such as U.S. treasury bills
Debt Ratio Formula?
Total Liabilities/Total Assets
In order to conform to GAAP, financial statements for public business enterprises must do what?
Report segment information about a company’s major customers if that customer provides 10% or more of the combined revenue, internal and external, of all operating segments.
Describe Impairment Losses?
Impairment losses are shown as a component of income from continuing operations, before tax. To determine whether an impairment loss exists, undiscounted future cash flows are compared to carrying value. If an impairment loss exists, then the fair value of the asset can be used to determine the amount of the loss to be recognized.
An old building being actively marketed for sale will be valued at?
The lower of its book value or net realizable value (fair value less the costs to sell).
Fair value
Uses current market values as the basis for recognizing certain assets and liabilities. Fair value is the estimated price at which an asset can be sold or a liability settled in an orderly transaction to a third party under current market conditions.
Net Realizable
Fair Value Less the cost to sell
In Nonmonetary exchanges what is commercial substance?
In order to have commercial substance:
MCQ Triggers: “Lacks Commercial Substance, Will not generate future cash flows”
1. Risk timing and expected cash flow from asset transferred differs significantly from the risk, timing and amount of the expected future cash flows from the asset received.
2. The entity specific value(based of companies expectations of value of the asset not market place) of the asset differs significantly(in relations to the fair value of the assets exchanged) from the asset transfered
ABC exchanges a truck with a carrying value of $12k and a fair value of $20k for a truck and $4k cash. The fair value of the truck received was $16k. At what amount should ABC record the truck received in exchange under GAAP?
Cash (Boot) received so a proportional gain is recognized: DR Cash $4000 DR New Truck $9600 (Plug) CR Gain on Exchange $1600 CR Old Truck(net) $12,000
Nonmonetary Exchange with commercial substance
Gains and losses are recognized based on the difference between fair value and the book value of the old asset(giving up). Either use the fair value of the asset surrendered or the fair value of the asset received whichever is more evident as the value for the exchange.
When are gain/losses recognized in all nonmonetary exchanges?
When book value of old asset exceeds the fair value of the old asset. An assets cash equivalent price is the assets fair value. Assets should not be valued more than fair value so when book value exceeds fair value the asset should be recorded at the lower fair value. When a loss is recorded the asset received is recorded at the book value of the asset given up plus an cash paid minus any cash received minus the loss recognized. Gains/losses are recognized immediately
Nonmonetary Exchange with boot received
All realized losses are fully recognized immediately(GAAP)
Exchange for similar asset-Realized gain partially recognized (only because it stays non monetary under the <25% rule)
Campbell and Highway Exchanged Trucks: Campbell also paid highway $700 Campbell Truck: Original Cost $23,000 Accumulated Dep: ($20,000) Fair Value- $5000 Highway Truck: Original Cost $23500 Accumulated Dep: ($19,900) Fair Value: $5700 What is new book value for Campbell?
New Book:
DR New Truck $3700(Plug Figure)
DR Accumulated Dep $20,000
CR Old Truck $23000
CR Cash $700
You can back into the New truck total based on the other given numbers
When does a nonmonetary exchange become a monetary exchange?
When the boot exceeds 25% of the total consideration. Total consideration would be the cash paid plus the fair value. Parties on both sides of the exchange would recognize all gains and losses
What is the formula to calculate the percentage of a gain in a non monetary/monetary exchange?
$-Paid by payor
/ Total FV-Of payors offering (Asset + Cash)
