Formulas

Question 1

Single-Step Income Statement

The single-statement approach will show totals for revenues and expenses, as well as net income, Earnings before income and taxes are only shown.

Answer 1

All Revenues & Gaines
- All Expenses and losses
————————————————————
Pretax Income
- Income Tax Expense
————————————————————
= Net Income

Question 2

Multiple-Step Income Statement

The two-statement approach to displaying comprehensive income will begin with net income, and then will most likely show each component of other comprehensive income on an after-tax basis. So unrealized holding losses on available-for-sale debt securities will be shown net of tax. the two-statement approach only shows net income.

Answer 2

Sales
- Cost of goods sold
______________________________________________________________________________________________
Gross Profit
- Operating Expenses* (SG&A, depreciation, amortization, R&D, ETC.)*
______________________________________________________________________________________________
Operating Income* (Performance from the core business, sustainable) *
- Nonoperating (gains) & (losses) *(REGL from the sale of noninventory, write-downs, write-
offs, etc.) *
______________________________________________________________________________________________
Pretax income *(Income from continuing operations before tax) *
- Income tax expense
_______________________________________________________________________________________________
Net Income *(Income from continuing operations after tax) *
+/- Discontinued operations (net of tax)
________________________________________________________________________________________________
Net Income

The value comes from being able to see how well a company is doing in terms of its core business. Your bottom-line accounts for income from continuing & discontinued operations.

Question 3

REGL

Items ON Income Statement

Answer 3

• Revenues
• Expenses
• Gains
• Losses

*Revenue & Expenses are either operating or non-operating
*Gains & Losses are non-operating items reported at net amounts (net gains or net losses)

Question 4

PUFI

Items NOT on Income Statement

Net of Tax
Before related tax effects

Answer 4

Pension Adjustment in funded status:
G/L, prior service costs, net transition assets/liab

Unrealized G/L fr Available-for-Sale Debt Securities & hedges
* moving from “held-to-maturity” to “AFS” debt security.
* Not for “trading” securities -> I/S
* Not for avail-for-sale EQUITY securities

Foreign Currency Items
a. Translation method = CTA / Cumulative
Translation Adjustment
b. Remeasurement Method = g/l on I/S!! – excluded from Other Comp Income!

Instrument-Specific Credit Risk

Question 5

Comprehensive Income

Answer 5

A. Net Income = REGL
B. OCI = PUFI (gains & losses that go directly to equity and are not included in net income)
______________________________________________________________________________________________________
A + B = Comprehensive Income

Note: CI is not the same as OCI

Question 6

Ending Accumulated Other Comprehensive Income

Answer 6

Beginning of the year accumulated other comprehensive income
+/- PUFI Adjustments
+/- Reclassification adjustments (if any)

Question 7

Common Shareholders’ Equity

Numerator for Book Value Per Share

Answer 7

Assets - Liabilities - Preferred equity - Dividends in arrears

Dividends in Arrears - only exisit if the company has cumulative preferred stock, such that if a dividend in a particular year to the preferred stockholders was not paid, it accumualtes. So the dividends in arrears, while it’s not a liability, it reduces the equity available to the common stockholders. We isolate in the numerator common stockholders equity.

Question 8

Common Shares Outstanding

Denominator for Book value Per Share

Answer 8

Number of shares issued - Number of shares repurchased

Question 9

Book Value per Share

Answer 9

Common Shareholders’ equity
___________________________________
Common Shares Outstanding

Question 10

Additional Shares outstanding

Answer 10

Number of shares - ( Number of shares x Exercise price / Average market price)

Question 11

Retained Earnings

Notice how any prior period adjustments and retrospective accounting changes go striaight to Retained Earnings

Answer 11

Net income/loss
- Dividends (cash, property, and stock) declared
+/- Prior period adjustments
+/- Accounting changes reported retrospectively

-accumulated earnings or losses during the lifetime of the corporation that have not been paid out as dividends

Question 12

Ending Retained Earnings

Use Retained Earnings flashcard to figure out how to get begining retain

Answer 12

Current year change in retained earnings + Beginning retained earnings

Question 13

Basic EPS

Answer 13

Income available to common shareholders
_________________________________________________
Weighted average number of common shares outstanding

Question 15

EPS

Earnings Per Share

Answer 15

Net Income - Preferred dividends
________________________________________
Weighted Average common Shares Outstanding (WASCO)

Question 16

Diluted EPS

Answer 16

Income available eto the common stock shareholders + Intereset on dilutive securites
______________________________________________________________________________________________
Weighted average number of common shares
(assuming all dilutive securities are converted to common stock)

Question 17

WASCO

Weighted average number of common shares outstanding

Answer 17

Shares outstanding at the begninning of the period
+ Shares sold during the period (on a time-weighted basis)
- Shares reacquired during the period (on a time-weighted basis)
+ Stock dividends and stock splits (retroactively adjusted)
- Reverse stock splits (retroactively adjusted)

Question 18

OCBOA

Answer 18

Other Comprehensive Basis of Accounting

Widely understood special purpose framework

Question 19

Times Interest Earned

Times interest earned is also known as the interest coverage ratio.

Answer 19

Income before interest expense/ Intereset Expense

or

Earnings before interest and taxes / Interest Expense

Question 20

Profitability Ratios

Profitabilty Ratios are easures of success or failure of an enterprise for a given time period

Answer 20

1. Gross (Profit) Margin
2. Profit Margin
3. Return on Sales
4. Return on Assets (ROA)
5. Dupont Return on Assets
6. Return on Equity
7. Operating Cash Flow Ratio

Question 21

Gross (Profit) Margin

Profitability Ratio

Answer 21

Sales (Net) - Cost of goods sold / Sales (Net)

Question 22

Profit Margin

Profitability Ratio

Answer 22

Net Income / Sales (Net)

Question 23

Return on Sales

Profitability Ratio

Answer 23

Income before interest income, interest expense, and taxes / Sales (Net)

Question 24

Return on Assets (ROA)

Profitability Ratio

Answer 24

Net Income / Average Total Assets

Question 25

DuPont Return on Assets | Profitability Ratio

Answer 25

Profit Margin x Asset turnover ## Footnote Note that this ratio uses both profit maring and the asset turnover. This ratio allows for increased analysis of the changes in the percentages. The profit margin indicates the percentage return on each sale, and the assets turnover indicates the effective use of assets in generating that sale

Question 26

Return on Equity | Profitability Ratio

Answer 26

Net Income / Average total equity

Question 27

Operating Cash Flow Ratio | Profitability Ratio

Answer 27

Cash flow from operations / Current Liabilites

Question 28

Liquidity Ratios ## Footnote Liquidity Ratios are measures of a firms short-term ability to pay maturing obligations

Answer 28

1. Current Ratio 2. Quick Ratio 3. Accounts Receivable Turnover 4. Days Sales in Accunts Receivable 5. Days Turnover 6. Days in Inventory 7. Accounts Payable Turnover 8. Days of payables outstanding 9. Cash Conversion Cycle

Question 29

Current Ratio | Liquidity Ratios

Answer 29

Current Assets / Current Liabilities

Question 30

Quick Ratio | Liquidity Ratios

Answer 30

Cash and cash Equivalents +Short-term marketable securities + Receivable (Net) ____________________________________ Current liabilities

Question 31

Accounts Receivable Turnover | Liquidity Ratios ## Footnote This ratio indicates the receivables quality and indicates the success of the firm in collecting outstanding receivables. Faster turnover gives credibility to the current and acid-test ratios

Answer 31

Sales (Net) / Average Accounts Receivable (net) ## Footnote Turnover ratios generllay use average balance [i.e., (bneg balance + ending balance) / 2] for balance sheet components. However, on some recent CPA Exam questions, candidates have been instructed to use year-end balances instead. Please be sure to read the questions carefully to determine the appropriate method to use. The ratios given in this module match th emost recent Ratio's provided by the AICPA as an exhibit on task-based simulations requiring ratio calculation

Question 32

Days sales in Accounts Receivable | Liquidity Ratios

Answer 32

Ending Accounts Receivable (Net) ____________________________ Sales (Net) / 365 ## Footnote This ratio indicates the average number of days required to collect Accounts Receivable

Question 33

Inventory Turnover | Liquidity Ratios

Answer 33

Cost of goods sold / Average Inventory ## Footnote This measure of how quick inventory is sold is an indicator of enterprise performance. The higher the turnover, in general, the better the performace.

Question 34

Days in Inventory | Liquidity Ratios

Answer 34

Ending Inventory ________________________ Cost of good sold / 365 ## Footnote This ratio incidcates the average number of days required to sell inventory

Question 35

Accounts Payable Turnover | Liquidity Ratios

Answer 35

Cost of goods sold / Average Accounts payable ## Footnote This ratio indicates the number of times trade payables turn over during the year. A low turnover may indicate a delay in paynent, such as from a shortage of cash

Question 36

Days of Payables Outstanding | Liquidity Ratios

Answer 36

Ending Accounts Payable _____________________________ Cost of goods sold / 365 ## Footnote This ratio indicates the average length of time trade payables are outstanding before they are paid

Question 37

Cash Conversion Cycle | Liquidity Ratios

Answer 37

Days sales in accounts receivable + Days in inventory - Days of payables outstanding ## Footnote This ratio indicates the average length of time it takes from when the company pays cash for an invetory purcahse to when the company receives cash from a sale

Question 38

Solvency Ratios ## Footnote Solvency Ratios are measures of security or protection for long-term creditors/investors

Answer 38

1. Debt-to-Equity 2. Total Debt Ratio 3. Equity Multiplier 4. Times interest Earned

Question 39

Debt-to Equity | Solvency Ratios

Answer 39

Total Liabilites / Total Equity ## Footnote This ratio indicates the degree of protection to creditors in case of insolvency. The lower this ratio the better the company's position

Question 40

Total Debt Ratio | Solvency Ratios

Answer 40

Total liabilites / total Assets ## Footnote This debt ratio indicates taht approximately half of the assets are financed by creditors

Question 41

Equity Multiplier | Solvency Ratios

Answer 41

Total Assets / Total Equity

Question 42

Times Interest Earned | Solvency Ratios

Answer 42

Income before interest expense and taxes / interest Expense or Earnings before interest and taxes / Interest Expense ## Footnote This ratio reflects the ability of a company to cover interest charges. It uses income before interest and taxes to reflect the amount of income available to conver interest expense

Question 43

Performance Metrics ## Footnote Per formance meetrics are measures used to evaluate operating performace and elements of a company's stock performance from the prespective of current and potential investors

Answer 43

1. EBITA (Earnings Before Intereset, Tax, Depreciation, and Amortization) 2. Earnings per share 3. Price-to-Earnings Ratio 4. Dividend Payout 5. Asset Turnover

Question 44

EBITA (Earnings Before Intereset, Tax, Depreciation, and Amortization) | Performance Metrics ## Footnote Useful when comparing performace, excluding impact of financial levearge and depreciation expense which is dependent on age of assets, methods, and estimates

Answer 44

1. Top-down: Sales -Cost of goods sold -Operating expenses (excluding depreciation and amortization) 2. Bottom-up: Net Income + Income tax expense + Interest expense + Depreciation and amortization ## Footnote EBITA can be calculated from the income statement using either a "top-down" or "bottom-up" approach.

Question 45

Earnings Per share | Performance Metrics

Answer 45

Income available to common shareholders / Weighted average common shares outstanding

Question 46

Price-to-Earnings Ratio | Performance Metrics

Answer 46

Price per share / Basic Earnings per share ## Footnote The statistic indicates the investment potential of an enterprise; a rise in this ratio indicates taht investors are pleased with the firms opportunity for growth

Question 47

Dividend Payout | Performance Metrics

Answer 47

Cash dividends / Net Income ## Footnote This ratio indicates the portion of current earnings being paid out to dividends. (Alternatively, calculated dividend payout as Dividends per share / Earnings per share)

Question 48

Asset Turnover | Performance Metrics

Answer 48

Sales (Net) / Average Total Assets ## Footnote This ratio is an indicator of how GI makes effective use of its assets. A high ratio indicates effective assets used to generate sales.

Question 49

Average total assets

Answer 49

Sales (Net) / Total Asset Turnover

Question 50

Straight-Line Depreciation ## Footnote Estimated useful life is usually stated in periods of time, such as year or months

Answer 50

Cost - Salvage Value / Estimated useful life

Question 51

Sum-of-the-Year's-Digits Depreciation | Rarely tsted for assets longer than 5 years

Answer 51

1. N x (N + 1) / 2 = Sum-of-the-years digits 2. Depreciation Expense = (Cost - Salvage value) x Remaining life of asset / Sum-of-the-years' digits | Where: N = Estimated useful life ## Footnote Figure out #1 to work out formula #2

Question 52

Units-of-Production Depreciation (Productive Output) ## Footnote Converts depreciation from a fixed cost to variable costs

Answer 52

1. Cost - Salvage Value (equals depreciable base)/ Estimated units or houirs = Rate per unit or hour 2. Rate per unit (or hour) x Number of units produced (or hours worked/usage) = Depreciation Expnese | #2. (converts depreciation from a fixed cost to variable costs ## Footnote Figure out #1 to work out formula #2

Question 53

Double-Declining-Balance (DDB) ## Footnote The only method that ignore salvage value in the annual calculation of depreciation are the declining balance meethods. Salvage value is used as the limitation on total depreciation.

Answer 53

2 x 1/2 x (Cost - Accumulated Depreciation) E.g., If useful life (N) = 150%; DDB = 1.5/N If useful life (N) = 125%; DDB = 1.25 / N | If useful life (N) ## Footnote Most common is DDB 125%, 150%, etc.

Question 54

Sale of an Asset During its useful Life ## Footnote 4.1 Disposals

Answer 54

DR Cash Received from Sale XXX DR Accumulated Depreciation of sold asset: XXX CR Sold Asset at cost XXX Cr/DR The difference is gain/losses XXX

Question 55

Write-off Fully depreciated Assets ## Footnote 4.2 Disposals

Answer 55

DR Accumulated depreciation (100 percent) XXX CR Old asset at full cost (100 percent) XXX

Question 56

Impairment Loss

Answer 56

Fair Value - Carrying Value ## Footnote Under U.S. GAAP, impairment analysis begins with a test for recoverability in which the net carrying value of the asset is compared to the undiscounted cash flows expected from the asset. If the net carrying value exceeds the undiscounted cash flows, then an impairment loss is recorded equal to the difference between the carrying value and fair value of the asset. In this problem, the carrying value of $250,000 is greater than the undiscounted future cash flows of $240,000, so an impairment loss must be recorded.

Question 57

Total & Permanent Impairment ## Footnote 4.2 Disposals

Answer 57

DR Accumulated Depreciation per records XXX DR Loss due to impairment (the difference) XXX CR Asset at full costXXX

Question 58

Total Depletion ## Footnote 6.3 Calculation of Depletion

Answer 58

Unit depletion rate x Number of units extracted

Question 59

Unit depletion rate ## Footnote 6.3.1 Calculation of Depletion

Answer 59

Depletion base / Estimated recoverable units

Question 60

Depletion Base ## Footnote 6.3.2 Calculation of Depletion

Answer 60

Cost to purchase property + development costs to prepare the land for extraction + any estimated restoration costs - residual value of land after the resources (e.g., mineral ore, oil, etc.) are extracted

Question 61

REAL | When computing depletion on land, remember it is REAL property

Answer 61

Residual Value (subtract) Extraction/development cost Anticipated restoration cost Land purchase price

Question 62

Franchise Fee Journal Entry ## Footnote 4.2 Franchisee Accounting

Answer 62

DR Franchises xxx DR Discount on notes payable (contra-liability) xxx CR Notes Payable xxx CR Cash xxx

Question 63

OWNES ## Footnote 3.3 Lessee Decision Tree

Answer 63

**O** - **Ownership** of the underlyng asset transfers from the lessor to the lessee by the end of the lease term. **W** - The lessee has the **written option** to purchase the underying aset; the option is on ethat the lessee is "reasonably certain" to exercise. **N** - The **net present** value of all lease payments and any guaranteed residual value equals or exceeds substantially all of the underlying asset's fair value. **E** - The term of the lease represents the major part of the **economic life** remaining for the underlying asset. **S** - The asset is **specialized** such that it will not have an expected, alternative use to the lessor when the lease term ends. ## Footnote Financial Lease: AT least one of the OWNES criteria is met. Operating lease: None of the OWNES creiteria are met.

Question 64

Reporting an Operating Lease (Lessee's Books) ## Footnote 5.1 Operating lease Journal Entry Lessee's Books

Answer 64

**1. Initial Entry:** DR ROU Asset XXX CR Lease Liability XXX **2. Subsequent Entries** DR Lease Expense XXX CR Cash/Lease liability XXX DR Lease Liability XXX CR Accumulated amortization -- ROU Asset XXX

Question 65

Reporting a Finance Lease (Lessee's Books) ## Footnote 5.2 Finance Lease Journal Entry

Answer 65

**1. Initial Entry:** DR ROU Asset XXX CR Lease liability XXX **2. Subsequent Entries:** DR Interest Expense XXX DR Lease Liability XXX CR Cash/lease payable XXX DR Amortization Expense XXX CR Accumulated Amortization-ROU Asset XXX ## Footnote Unlike with operating (capital) leases, the amortization of the ROU asset for a finance lease will be expensed based on how the entity recognizes amortization expense on similar assets.

Question 66

Three main journal entries are used to account for an equity method investment ## Footnote 2.1 Equity Method Accounting

Answer 66

1. Journal Entry to record investment at cost (FV of consideration plus legal fees) DR Investment in investee XXX CR Cash XXX 2. Journal Entry to rrecord interest in the investment by the investor's share of the earnings of investee: DR Investment in investee XXX CR Equity in earnings/investee income XXX (Equity in earnings is reported as income on the income statement) 3. Journal entry to record decrease int he investment by the invstor's ahre of the cash dividends from the investee: DR Cash XXX CR Investment in investee XXX

Question 67

BASE ## Footnote F5 M2

Answer 67

**Begining** balance **Add:** Investor's share of investee's earnings (like bank interest; it is income when earned, not when taken out). **Subtract:** Investor's share of investee's dividends (like bank withdrawls; and it is not income) **Ending** balance. ## Footnote An easy way to remember the GAAP accounting rules for the equity method is to think of it as a bank account and use your BASE account analysis:

Question 68

MIC | * Let’s get on the “MIC” ## Footnote FV Measurement: Valuation Techniques

Answer 68

**M – Market Approach:** uses prices and other relevant information from market transactions (exchanges) involving IDENTICAL or COMPARABLE assets/liabilities **I – Income** Approach: Converts future amounts, including cash flows or earnings to a single discounted amount to measure FV *Can be applied to assets or liabilities *Discounted CF Approach  PV of Future Cash Flows **C-Cost Approach:** Uses current replacement cost to measure the FV of assets

Question 69

Leases: Classification

Answer 69

**Finance Lease-->Lessee and Sales-Type Lease --> Lessor** **OWNES** O – Ownership W – Written Option to Purchase N – NPV of all Lease Pmts ≥ Asset’s Fair Value * ≥ 90% E – Economic Life of asset is represented in major part of lease term * ≥ 75% S – Specialized Asset Operating Lease for lessee if meets 0 of those **Direct Financing ->Lessor** Meets none of **“OWNES”** Meets Both of **“PC”** * P - PV of lease pmts ≥ Assets Fair Value * ≥ 90% C – Collection is Probable **Operating lease --> Lessor** None of **“OWNES”** 0 – 1 of **“PC”**

Question 70

Leases: Lease Payments for the Lessee

Answer 70

1. Lessee will “REPORT N GO” for the lease payments Included in Lease Payment: *R – Required contractual fixed payments *E – Exercise Option (reasonably assured) *P – Purchase Price at the end *O – Only indexed or rate variable payments *R – Residual guarantees likely to be owed *T – Termination Penalties reasonably assured 2. Option to Include: *N – Non-lease components 3. Excluded from Lease Payments: *G – Guarantees of lessor debt by lessee *O– Other Variable lease payments

Question 71

CAR IN BIG (The CAR I am IN is BIG!) | Completely Eliminated (Even if don’t own 100%) ## Footnote Consolidations: Adjustments for External Reporting

Answer 71

**Sub’s Stockholder’s Equity:** C - Common Stock A - APIC R – Retained Earnings **Parent’s Investment:** I – Investment in Sub * Parent’s Investment is eliminated N – Non-controlling Interest * Created if 100% is not owned **Adjustments:** B – Balance sheet of sub * Adj to FV at the acquisition date * 100% of assets and liabilities I – Identifiable Intangible Assets of the Sub * Recorded at FV G – Goodwill (Gain) * Plug figure to make JE Balance * Goodwill  Debit * Gain  Credit

Question 72

SOME | F6-M3 * Recognize “SOME” of the services at FV ## Footnote Not-For-Profit: Donated Services Contribution of service that do not enhance nonfinancial assets are recognized only SOME of the time

Answer 72

o S – Specialized skills are required and possessed by the donor o O - Otherwise needed by the organization o M – Measurable o E – Easily (at FV) ## Footnote JE: DR Expense or asset CR Contributions - without donor restrictions

Question 73

Contributions without Donor Restrictions ## Footnote F6-M3

Answer 73

Pledges without donor restriction (with impled time restriction and thus initially recognized as donor-restricted): DR Pledge receivable-with donor restriction CR Allowance for doubtful accounts CR Contributions-with donor restriction Later, when collected, assets with donor restrictions are adjusted: DR Cash-with donor restriction CR Pledge receivable-with donor restriction DR Satisfaction of time restriction-with donor restriction CR Cash-with donor restriction Assets without donor restrictions: DR Cash-without donor restriction Cr Satisfaction of time restriction-without donor restriction Collection of the pledge satisfies the time restriction and results in a reclasssification

Question 74

Donor-Restricted Support (Contributions with Donor Restrictions) ## Footnote F6-M3

Answer 74

Increases to net assets with donor restrictions: DR Pledge receivable-with donor restrictions CR Allowance for doubtful accounts CR Donor-restricted support Later, after receivable is collected and when money is spent on restricted purpose, net assets with donor restrictions will be reduced: DR Reclassification-satisfaction of donor restriction CR Cash-with donor restrictions Net assets without donor restrictions are simultaneously increased and decreased: DR Cash-without donor restrictions CR Reclassification-satisfaction of donor restriction DR Operating expnese CR Cash-without donor restrictions

Question 75

Contribution Revenue | Fundraising

Answer 75

Total Contribution received < Fair value of premiums > ## Footnote The general rule, for CPA exam questions, for amounts recognized as contributions received thruogh fundraising appeal is:

Question 76

Gross revenue from tution and fees | Industry-Specific Revenue Recognition ## Footnote F6-M3

Answer 76

Assessed student tuition and fees < Canceled classes > ## Footnote Scholarships, tuition waivers, and similar reductions are considered either expenditures or a separately displayed allowance reducing revenue. Student tution and fees are reported at the gross amount. Many prior CPA exam questios have required students to compute gross revnue from tution and fee's.

Question 77

Government: Three Funds

Answer 77

MAC-GRaSPP - Governmental Funds SE - Proprietary Funds CIPPOE - Fiduciary Funds

Question 78

GRaSPP | Government Funds ## Footnote F6-M6

Answer 78

**General** Special **Revenue** **and** Debt **Service** Capital **Projects** **Permanent**

Question 79

MAC-GRaSPP | Governmenttal Funds ## Footnote To remember the differences in focus and Accouting

Answer 79

**Modified** **Accrual** accounting **Current** financial resources measurement focus **GRaSPP**

Question 80

SE-CIPPOE

Answer 80

**Service** (internal) **Enterprise** **Custodial** **Investment** trust **Private** purpose trust **Pension** ( and Other Employee benefit) trust ## Footnote The economic resources measurement focus and full accrual basis of accounting is used for both government-wide financial statements as well as the fund presentations of the figuciary and proprietary funds

Question 81

SCARE | Proprietary and fiduciary funds ## Footnote To remember the differences in focus and Accouting

Answer 81

o S – SE o C – CIPPOE o A – Accrual Accounting o R – Record non-current assets and liabilities o E – Economic resources measurement focus

Question 82

FED | Not-For-Profit: Underwater Endowment Funds ## Footnote F6-M4

Answer 82

* Must disclose how hard it will be for their intended beneficiaries to be “FED” o F – FV of fund o E – Endowment gifts original amount o D – Deficiency amount ## Footnote Underwater endowmenets must disclose how hard it will be for their intended beneficiaries to be FED

Question 83

U R MICE | * Characteristics in Financial Reporting ## Footnote Government: Financial Reports

Answer 83

 U - Understandability  R – Reliability  M – Makes a difference – Relevance  I – In Timeliness  C – Consistency year over year  E – Entity to entity comparability

Question 84

Two Rules concerning Capital Interest | F3.M4

Answer 84

Rule 1: Only capitalize interest on money actually spent, not on the total amount borrowed Rule 2: The amount of capitalized interest is the lowe of : 1. Actual interest cost incurred, or 2. computed capitalized interest (avoidable interest)

Question 85

Interest Expnese | F4.M5 ## Footnote Effiective Interest method

Answer 85

Carrying value at the beg of the period x Effective (market) interest rate

Question 86

Amortization of the discount | F4.M5 ## Footnote Effiective Interest method

Answer 86

eInterest Expenese - Interest Payment

Question 87

Amortization of the premium | F4.M5 ## Footnote Effiective Interest method

Answer 87

Interest Payment - Interest Expense

Question 88

Effiective Interest method | F4.M5

Answer 88

Income Satement -> Net carrying value x Effective interest rate = Interest Expense Balance sheet-> Bond Face x Coupon Rate = (Interest Payment) Difference -> Amortization

Question 89

Price Index | F3-M4

Answer 89

Ending Invetory at current year cost / ending inventory at base year cost

Question 90

LIFO to FIFO

Answer 90

Change in Principle, use retrospective approach

Question 91

FIFO to LIFO

Answer 91

Change in estimate, use prospective approach

Question 92

Cost of goods Sold (Periodic System) | F3 M3 ## Footnote Periodic Inventory

Answer 92

Beg inventory + Purchases = COG available for sale - Ending Inventory (physical count)

Question 93

Cost of Goods Purchased (Periodic System) | F3 M3 ## Footnote Periodic Inventory

Answer 93

Gross Purchases - Purchase returns and/or Purchase discounts + Freight in

Question 94

Periodic Inventory

Answer 94

1. Must do 2. Periodically 3. Buyer pays the freight JE when **buying** Inventory: DR Purchases CR Cash or AP JE when **selling** inventory: DR Cash or AR CR Sales

Question 95

Perpetual Inventory

Answer 95

1. Can do 2. Random or cyclically JE when **buying** Inventory: DR Inventory CR Cash or AP JE when **selling** inventory: DR Cash or AR CR Revenue DR COGS CR Inventory

Question 96

Capitalized Interest "Key Rules" | F3 M4

Answer 96

Rule #1 Only capitalize interest on money spent not on total amount borrowed Rule #2 The amount capitalized interest is the lower of: *Actual interest cost incurred, or * Computed capitalized interest (avoidable interest)