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Flashcards in General Knowledge Deck (51)

What is the Three-Month Rule for securities

Highly liquid securities with ORIGINAL maturity dates of three months or less are treated as cash.


Bad Debts - Direct Write-Off Method

- No entry for bad debts until customer actually defaults.
- At default, the customer's account is written off.
- Theoretically weak, matching issue
- Only allowed if bad debt expense is immaterial


Income Statement Approach

- Matching Concept
- Estimate of bad debt expense is based on the income statement
- Allowance account balance has no bearing on the amount of adjustment


3 types of Investments

- Held-to-Maturity
- Trading Securities
- Available-for-Sale Securities


What is Held-to-Maturity Securities

- Debt securities only
- Mgt has both intent and ability to hold the securities to maturity
- Classified on BS based on maturity date
- Carry on balance sheet at amortized cost


What is Trading Securities

- Equity or Debt securities held primarily for sale in the near term
- Classified on BS as current
- Carried on BS at FMV
- Unreal holding gains/losses belong on the income statement


What is Available-for-sale Securities

- Debt or Equity securities not classified as either HTM or Trading
- Debt is classified on BS by maturity date
- Equity securities are classified by mgt's intent
- Carried on BS at aggregate FMV
- Unreal G/L go directly to SH equity (other comprehensive income)


What is Derivatives

Investment that derives its value from something else (asset or liability)


What is Hedging

Strategy of investing in a derivative to counterbalance the potential loss from another security or transaction


What is Non-Hedge Derivatives

- Record on BS as asset or liability at FMV
- Report unrealized G/L on IS


What is Fair Value Hedge

Protects against potential loss from the change in an asset's or liabilities's FMV
- Record on BS as asset or liability at fair market value
- Report unrealized holding G/L on IS


What is Cash-Flow Hedge

Protects against potential loss from an asset's or liability's future cash flow
- Record on BS as asset or liability
- Unreal G/L depend on whether hedge is effective
- Effective cash flow hedges counterbalance losses elsewhere
- Ineffective cash flow hedges are reported on the IS


What is Weighted Average

The weighted average cost per unit must be calculated. The ending inventory valuation is equal to the number of units in ending inventory multiplied by the WA cost per unit. Likewise, the cost of goods sold for the period is equal to the number of units sold multiplied by the WA cost per unit.


Weighted Average Cost Per Unit =

Cost of Goods /
Number of Units



Assumes ending inventory contains the most recently acquired units



Assumes ending inventory contains the oldest inventory layers


How to Calculate Cost of Goods Sold

Beginning Inventory
+ Net Cost of Purchases
= Goods available for Sale
- Ending Inventory
=Cost of Goods Sold


How does dollar value LIFO work?

Inventory accounted for in layers. Base year layer accounted for in base year prices, while current year layer accounted for in current prices.


What are the three criteria for prior period adjustments?

(1) effect of the adjustment is material to income from continuing operations; (2) adjustment can be identified with a prior period; and (3) amount of the adjustment could not be estimated in prior periods


How do you calculate the PV of a bond?

PV of one dollar at yield rate times face value of bond add that to face value times stated rate times PV of ord annuity of $1.00 at yield rate


For long-term Construction type contracts when are losses Recognized

Losses are recognized Immediately When Discovered, regardless of the method used for revenue recognition


When Should the costs of developing computer software for resale, lease, or licensing be capitalized under U.S. GAAP

After Technological Feasibility has been established and before the product is released for sale


Goodwill is defined as

The Excess of the Fair Value of a Subsidiary over the Fair Value of the Subsidiary's Net Assets


What is the accounting treatment for Costs of Maintaining or developing Goodwill

These costs can not be capitalized, they must be expensed


What are the 5 conditions for Revenue Recognition When the Right of Return Exists

The Sales Price is Substantially Fixed at the time of sale

The Buyer Assumes All Risks of Loss

The Buyer has paid consideration

The Product sold is substantially complete

The Amount of Future Returns can be Reasonably Estimated


The four Criteria that Must be Met Before Revenue can be recognized includes

Persuasive Evidence of an Arrangement Exists(Contract)

Delivery has occurred or services have been rendered

The Price is Fixed and Determinable

Collection is Reasonably Assured


Common Revenue Recognition Criteria under IFRS Include

Revenues and costs can be Reliably Measured
It is Probable that Economic Benefits will flow to the entity


What are the Criteria for revenue recognition under GAAP

Earned and Realized or Realizable


State Two Types of Foreign Currency Transactions

Operating Transactions such as importing exporting borrowing lending or investing activities

Forward Exchange contracts, which are agreements to exchange two different currencies at a specific future date and at a specific rate


Where are Translation Adjustments reported in the financial statements

Translation Gains and Losses are reported in OCI and are treated as Unrealized Gains and Losses


Identify the Exchange Rate to be used when Remeasuring different components of the Balance Sheet

Monetary items, use the current exchange rate

Nonmonetary items, use the historical rate


Identify the Exchange Rate to be used when Remeasuring different components of the Income Statement

Balance Sheet Related Items, use the Historical rate
Non Balance Sheet Related Items, use the Weighted Average Rate


Identify the Exchange Rate to be used when Translating different components of the Balance Sheet

Current Exchange Rate for Assets and Liabilities
Historical Rate for Common Stock and APIC


Identify the Exchange Rate to be used when Translating different components of the Income Statement

Weighted Average Rate for Revenue and Expenses


When is the Re-measurement Method Used

The Reporting Currency is the Functional Currency
The Financial Statements must be restated in the entity's functional currency prior to translating from the functional currency to the reporting currency


What is the Re-measurement Method

It is when we Restate the Financial Statements from the Foreign Currency to the Entity's Functional Currency


When is the Translation Method Used

To Restate Financial Statements Denominated in the Functional Currency to the Reporting Currency


Under GAAP what is an Entity's Functional Currency

The Currency of the Primary Economic Environment in Which the Entity Operates. All of the Following Conditions must be met

The Foreign Operations are Relatively Self-Contained and integrated within the country

The Day-To-Day Operations do not depend on the parent's or investor's functional currency

The local economy of the foreign entity is not highly inflationary


What are Non-monetary Items

Assets and Liabilities that Fluctuate in Value with Inflation and Deflation
For Example, Inventory, PP & E, Capital Stock
These items need to be restated in constant dollars


What are Monetary Items

Assets and Liabilities that are fixed in amount by contract or in terms of number of dollars

Examples include cash, accounts receivable, accounts payable

These are already stated in constant dollars


How are gains and losses on Nonmonetary exchanges recognized under IFRS

Exchanges of Similar Assets, no gains, losses in full
Exchanges of Dissimilar Assets, Gains and Losses in Full


How are gains and losses on nonmonetary exchanges such as Commercial Substance recognized under GAAP

Always Recognize Gains and Losses equal to the difference between the Fair Value of what was given up and the book value of what was given up


How is Goodwill Impairment Analyzed under IFRS

Under IFRS Impairment Testing is done at the Cash Generating Unit level using a one step test that compares the carrying value of the CGU to the CGU's recoverable Amount

Losses are allocated to goodwill then on a pro rata basis to the other CGU assets


How is Goodwill Impairment Analyzed under GAAP

Two Step Process at the Reporting Unit

1. Compare the Fair Value with the units Carrying Value, including Goodwill

2. Compare the Implied Fair Value to the units Carrying Value


What is the Calculation for Impairment Loss under GAAP

Carrying Value minus the Fair Value


What is the Calculation for Impairment Loss under IFRS

Carrying Value minus the Recoverable Amount


Define Accounting Error

An error in recognition, measurement, presentation or disclosure in the financial statements.

IE.... mathematical mistakes, mistakes in applying GAAP, or oversight of facts that existed when the financial statements were prepared.

A change in accounting principle from non-GAAP to GAAP is also a correction of an error


Accounts INCREASED with a DEBIT

D-Dividends (Draws)

DEAL increase with a Debit


Accounts INCREASED with a CREDIT

S-Stockholders' (Owners's) Equity

GIRLS increase with a Credit


REV is recognized when:

+Signed Contract
+Services rendered or delivery
+Fixed or determinable price
+Collection is reasonably assured


EXP is recognized when:

+Economic benefit is consumed or asset uses future benefit
*EXP can be matched to REV (COGS)
*EXP can be matched to period (depreciation)
*EXP expensed as incurred (salaries of admin employees)