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Flashcards in Notes on Parts Already Studied - Carrie's Deck Deck (53):

How should long-term receivables be valued on the financial statements?

PV of future cash flows


How should bonds payable be valued on the financial statements?

PV of future cash flows


How should short-term payables be valued on the financial statements?

Historical cost


Who issues ASUs, and what are the steps in the process?


1. Adds project to agenda
2. Conducts research and issues discussion memo
3. Public hearing
4. Issues Exposure Draft
5. Modifies ED
6. Finalizes and issues ASU


When discussing accrual accounting, accumulated depreciation is what type of entry? (accrual or deferral)

Deferral (like unearned revenue and prepaid assets)


If a deferral entry is made and a subsequent entry must be made related to the first, is that second entry a deferral or an accrual?

It would be a deferral, just like the first entry


What are the 4 divisions of the SEC?

a. The Division of Corporate Finance – compliance and filings
b. The Division of Enforcement – investigates violations
c. The Division of Trading and Markets – secondary markets
d. The Division of Investment Management – investment advisor oversight


What are the filing time frames for different-sized public companies?

a. Large accelerated filer: 10-Q 40 days, 10-K 60 days
b. Accelerated filer: 10-Q 40 days, 10-K 75 days
c. Non-accelerated filer: 10-Q 45 days, 10-K 90 days

Note: 10-Q’s aren’t audited, only reviewed by the auditor


What does Regulations S-X govern? How about Regulations S-K?

Regulations S-X govern financial items; S-K is non-financial items


What items are recognized in OCI?

OCI includes unrealized G/L, unrecognized pension and postretirement benefit costs and gains, foreign currency translation adjustments, deferred G/L from derivatives


In the Statement of Cash Flows, in which section would cash flows from taking out a mortgage go?

Trick question - no cash involved


In the Statement of Cash Flows, in which section would cash flows from retiring a bond go?

All financing - no interest involved


In the Statement of Cash Flows, in which section would cash flows from payment on a capital lease go?

Financing and operating (for the interest portion)


In the Statement of Cash Flows, in which section would cash flows from funding pensions go?



ROA is calculated as:

NI/avg total assets

PM * Total asset turnover
(NI/sales) * (sales/avg total assets)


What are the drivers of PM?

Various expense %s

(specific expense)/sales


What are the drivers of asset turnover?

Each individual asset turnover ratio

Sales/avg bal of specific asset


What is another name for the current ratio?

Working capital ratio


What is the formula for Days in operating cycle?

# days sales in A/R + #of day’s sales in inventory

Measures the time to go from cash to cash


What is the formula for the Times Interest Earned Ratio?

= (Net Income + Interest Expense + Income Tax) / Interest Expense

Or EBIT/Interest Exp


What is the formula for the Times Preferred Dividend Earned Ratio?

= Net Income / Annual Preferred Dividend Obligation


What is the formula for Securities Defensive-Interval Ratio?

= (Quick Assets) / Average Daily Cash Expenditures


What is the formula for the Dividend payout ratio?

= common dividends/net income


What is the formula for Return on total assets?

= (net income + after-tax interest expense)/average total assets


What is the formula for cash collections on A/R?

= sales – increase in A/R – write-offs


What is the LIFO reserve account?

The LIFO reserve is a contra inventory account that will reflect the difference between the FIFO cost and LIFO cost of its inventory when switch from FIFO to LIFO. Using this contra-account keeps you from changing the inventory balance directly.


Why are LIFO liquidations bad?

LIFO liquidations (selling layers bought in previous years) should be avoided since the main purpose of LIFO is tax minimization and matching current costs and revenues, and liquidations screw these up.


How does IFRS differ from GAAP with respect to inventory valuation?

IFRS - can't use LIFO; must use a cost flow that mirrors physical flow


For lower of cost or market, market is calculated using a range under GAAP (the middle value of the replacement cost, the NRV, and the NRV less a normal profit margin). How does IFRS differ?

IFRS does lower of cost or NRV (normal profit margin and replacement cost are ignored)

Reversal of a write-down to NRV is permitted under IFRS


The retail inventory method is used by retailers to estimate ending inventory at cost. What is the formula?

= EI (retail) * cost-to-retail ratio

Cost to retail ratio = cost of goods available for sale/retail price of goods available for sale

You can use EI at cost to calculate COGS

Retail price of goods available for sale is calculated differently depending on which method you use; average LCM is most common (average means beginning inventory is used, LCM means net markdowns are excluded) and is called the conventional retail method


When would you record a loss on a purchase commitment?

Only record a loss on a purchase commitment if the contract cannot be modified


When discounting a note, the amount you receive is equal to:

Total value of the note (principal + interest) * the discount (time-weighted for how many months are left until maturity) = cash received

You calculate your loss based on how much you had earned in interest (plus your principal) compared to how much the bank paid in cash


How are costs of razing a building and proceeds from selling scrap treated?

The costs of razing buildings are added to the capitalized cost of the LAND and any proceeds from the building are subtracted


When is interest during construction expensed, and when is it capitalized?

If something is manufactured for use by a company, interest on any financing during construction is capitalized. However, if the company is making the item to sell, the interest is expensed.


When would you impair an intangible?

Even when both the market value and present value of the future cash flows are less than book value, as long as the total sum of future cash flows exceeds book value, no impairment is recorded


Is redeemable preferred stock (callable preferred stock) considered an equity security?



What info do you need on the date of purchase in order to apply the full equity method for the investment?

When applying the full equity method for an investment in another company, you must know BV and FMV of the assets on the date of purchase. You need to amortize the excess of FMV over BV of the assets and net it against income from the investment.


How should stock investments be reported when you own less than 20% of the company (equity method isn't appropriate)?

You have two options for how to record it: cost method or fair value method. Use cost if stock isn’t publicly traded. Use FV if it is, and classify as either available for sale or trading. (HTM only exists for bonds.)


How should life insurance proceeds be recognized in the financials?

Recognize the proceeds less the cash surrender value in the income statement. The cash surrender value represents a reduction to insurance expense in past years (didn't get to deduct it).


What are the rules for amortizing a trademark?

If a trademark is expected to last indefinitely, no book amortization is taken


How are start-up costs treated?

Costs of start-up activities, including organization costs, should be expensed as incurred


How is goodwill tested for impairment?

Goodwill is tested for impairment at the reporting unit level.

Do qualitative assessment (is it more likely than not impaired?) and then quantitative if needed.


What is the formula for goodwill?

Goodwill = Purchase price – FMV of net identifiable assets (or FMV of equity)


When must you elect the FV option for a new investment?

On the date the investment is first recognized, not when you create the statements


Do we take transportation or transactions costs into account when determining the most advantageous market and the exit price?

Transaction cost – no

Transportation cost – yes

Note that the transportation costs should NOT be used when computing the exit price, though


Are prepaid taxes a current asset?

Only the portion leftover when you subtract current income tax expense


What is the purpose of reporting comprehensive income?

To summarize the changes in equity from all non-owner sources.


If a repair is made to a piece of equipment and accumulated depreciation is consequently debited, what is the effect on the Statement of Cash Flows?

A cash outflow in the investing (not operating) section


Amortization of a bond premium is treated how in the operating section of the Statement of CF?

It is subtracted (discount amortization is added back)


What two things must be disclosed in the supplemental notes when using the indirect method to present the Statement of CF?

• Income taxed paid
• Interest payments


Which financial statement title should not be used under the cash basis of accounting?

The title Income Statement should be replaced by the title Statement of Cash Receipts and Cash Disbursements


How does dollar value LIFO differ from traditional LIFO?

Dollar value LIFO reduces the liquidation effect by reporting first in FIFO and then converting that to LIFO

Thus, it also allows companies to use FIFO for internal info

This combo saves costs because FIFO is preferred internally and LIFO is preferred for external reporting


How does dollar value LIFO work?

Inventory pools

Conversion index = ending inventory in CY dollars/ending inventory in base year dollars

Multiply the conversion index by the amount of the new layer (in base year dollars) to convert to dollar value LIFO