1/9/19 Deck Flashcards
reporting in RE for changes in entity, estimate, & error (AP change)
Change in est = prospective
Change in entity = restate
Error = PPA (restate)
Notes to FS disclosures (relevant to decision makers & integral part of FS)
- change in SE
- contingency
- off BS contracted obligations
- pension plan
- post BS but before FS issued
- related party
- significant est/risk
- products, customers’ geography
What is included in total revenues and total expenses & losses
Total revenue = R & G
Total expenses & losses =
expenses, losses, and ITE
HFS criteria:
- Mgt commits to a plan to sell component
- available for immediate sale in its present condition
- active program to locate buyer is initiated
- sale of component is probable & sale is expected to be completed in 1 year
- sale of component is actively marketed
When a component is classified as HFS:
- an impairment analysis of the component must be conducted
- is considered discont’d op’s, also discont’d if it has been disposed of
- once class’d as HFS, it is measured at LC-NRV
disposal of component/group is reported as discont’d op’s if:
represents strategic shift or will have major effect on entity’s operations and financial results
- strategic shift examples:
- disposal of a major geographic area
- disposal of major equity method investment
- disposal of major line of business
Comparative vs. Noncomparative FS for change in AP:
- Comparative: diff b/w BB RE and RE if retro’ly applied to all prior affected periods
- Noncomparative: diff b/w BB RE in first period presented and RE if retro’ly applied to all prior periods
change in AP (net tax) GR:
One acceptable method of acct (GAAP to GAAP or IFRS to IFRS)
Because new method presents the fin info more fairly than old method
Exception: change in dep to LIFO (inseparable from change in est)
- change in est = prospective
- change in entity = restate BB RE
- error correction = PPA & restate BB RE
change in AP (net tax) GR:
One acceptable method of acct (GAAP to GAAP or IFRS to IFRS)
Because new method presents the fin info more fairly than old method
Exception: change in dep to LIFO (inseparable from change in est)
- change in est = prospective
- change in entity = restate BB RE
- error correction = PPA & restate BB RE
Selling Expenses:
- freight out
- sales salaries & commissions
- advertising
G&A expenses:
- general OH
- officer’s salaries
- accounting & legal fees
- insurance
non-op expenses: [separate line items]
- auxilliary activities (non-related)
- interest exp
- gains and losses
change in estimate:
- depreciation method
- UL of depreciable asset
- residual value
- BD %
- loss accruals
neither a change in AP or estimate: [prospective]
- change from FV method to equity method (due to increase in ownership)
- adopt new equity method as of date investment qualifies as equity method
- retro adj not req’d (cost of acq’ing add’l int in investee is added to CV of prev’ly held investment)
- if investment was prev’ly accounted for as AFS, recognize the “un” G/L from AOCI
- adopting pension plan for all employees
rules for AJE:
- never involves cash
* all AJE will hit 1 IS account and 1 BS account
key financial ratios are:
- liquidity ratio (WC, QR, CaR)
- activity ratio (AR TO, A TO, Inv TO, days sales AR & Inv TO in days, days in Inv, AP TO, etc)
- coverage ratio (DER, times int earned, Op CF/total debt, equity multiplier)
- profitability ratios (not key); return on sales, ROA, ROE, NPM
- investor ratios (EPS, PER, div payout ratio)
liquidity ratios:
- WC = CA - CL
- WC ratio = CA/CL
- QR (acid) = CA-inv/CL [no PPD/inv]
- CaR (most liquid) = (CA - inv - AR)/CL
Activity ratios:
- AR TO = NS/ avg AR
- AR TO days = 365/AR TO
- days sales in AR = EB AR/(NS/365)
- Inv TO = COGS/avg Inv
- Inv TO days = 365/inv TO
- days in Inv (#days to sell) = EI/(COGS/365)
- AP TO = COGS/avg AP
- days payable o/s = EB AP/(COGS/365)
- Cash conversion cycle = days in AR + days in inv + days in AP (lower the better)
- operating cycle = AR TO days + inv TO days (less is better)
- WC TO = NS/avg WC
- total A TO = NS/avg A
Activity ratios:
- AR TO = NS/ avg AR
- AR TO days = 365/AR TO
- days sales in AR = EB AR/(NS/365)
- Inv TO = COGS/avg Inv
- Inv TO days = 365/inv TO
- days in Inv (#days to sell) = EI/(COGS/365)
- AP TO = COGS/avg AP
- days payable o/s = EB AP/(COGS/365)
- Cash conversion cycle = days in AR + days in inv + days in AP (lower the better)
- operating cycle = AR TO days + inv TO days (less is better)
- WC TO = NS/avg WC
- total A TO = NS/avg A
Profitability ratios:
- return on sales = EBIT/NS
- ROA = NI/avg A
(DuPont same thing; NPM * total A TO) - ROE (ROCE) = NI/ SE
- NPM = NI/NS
Coverage Ratios:
- DER = L/SE
- DAR = L/A
- times int earned (int coverage ratio) = (EBIT + int exp)/int exp
- op CF/L = op CF/L
- Equity multiplier = A/E
Investor ratios:
- EPS = (NI-PD)/WACSO
- PER = price per share/ basic EPS
- div payout ratio = CD/NI
examples of CE’s:
- coin+currency on hand (petty cash)
- checking & savings accounts
- MMF
- deposits held as compensating balances (not restricted)
- negotiating paper (traveler’s checks, bank drafts, cashier’s checks, T-bills, certificate of deposit (OG maturity <90 days)
*NOT legally restricted deposits held as comp balances
2 forms of bank reconciliations:
- simple reconc:
- goal is to calculate “true balance”
- bank add it LOC (deposit - o/s checks)
- svc charges, errors, and NSF deduct from books & bank collections, errors, and interest income add to books
- steps = book bal adj’d to reflect correct bank bal, after adj’d book bal, it will equal true bal, then bank bal per bank statement is reconc’d to true bal
- reconc of CR & CD:
- shows proof of proper recording of cash transactions
perpetual vs periodic inventory:
- perpetual: running total of inventory (updated)
* periodic: no running total & COGS cannot be det’d til end of period when inv counted (includes purchases)
inventory valuation methods: [GAAP vs IFRS]
- GAAP: LCM using LIFO/retail inventory method
* IFRS: LC-NRV using FIFO/WA method
how to calculate LCM:
- ceiling = NRV
- replacement cost = given
- floor = NRV - NPM
Inventory Costing Methods:
- FIFO: EI & COGS are same under perpetual or periodic
- sell old; higher EI, CA, RE
- highest EI & highest NI
- LIFO: (US) tax advantage (better matching); need to use LIFO conformity rule (on FS as well)
- lowest EI & lowest NI
WA - used with periodic inventory:
WA cost per unit = COGAFS/# units available for sale
MA - used with perpetual inventory:
- unit cost changes each time there is a new purchase
* calculate new MA after every purchase (total COGAFS/# units)
DV LIFO:
- computed internally or obtained from external sources
- PI = EI CY/EI BY
- PI*layer = Y1 layer
- Y1 layer + Y1 DV LIFO = EB Y1 DV LIFO
conventional retail method:
*at cost: BI + purch = AFS
- at retail:
- BI + purch + markups = AFS
- AFS - sales - markdowns = EI retail
- cost AFS/retail AFS = cost/retail ratio
- cost/retail ratio * EI retail = EI LCM
sales w/ ROR:
- GR: if goods are sold w/ ROR, they should be included in seller’s inv if amt of goods likely to be returned cannot be est’d
- if amt of goods likely to be returned CAN be est’d, transaction will be recorded as sale w/ allowance for est’d returns
- revenue from sales transaction w/ ROR should be recog’d at time of sale only if crtierias are met:
- SP substantially fixed at date of sale
- buyer assumes all ROL
- buyer has paid some form of consideration
- product sold is substantially complete &
- amt of future returns can be reasonably est’d (rev recognition rule)
exceptions to cost basis:
- precious metals & farm products:
- valued at NRV
*LCM and LC-NRV is used when loss on sale is expected
reversal of write-downs (GAAP vs IFRS):
- GAAP = no
* IFRS = yes (limited to amount of OG write-down)
Inventory write-down JE:
Dr Inv loss due to decline in MV
Cr Inv
Periodic vs. Perpetual JE for purchases:
*Periodic:
Dr Purchases
Cr Cash
*Perpetual:
Dr Inventory
Cr Cash
Specific Identification:
takes precedence over any other inventory costing method (cost of each item is uniquely identified)
- usually for HV items or physically large
Firm PC’s:
- legally enforceable agreements to purchase a specific amount of goods at some time in the future
- must be disclosed in FS or notes
- if price > MV and expected that loss will occur when purch is made, the loss should be recog’d at time of decline in price (conservatism)
FOB destination & shipping point costs:
- destination = packaging, shipping, & handling (seller)
* shipping = shipping cost is buyer’s cost
Ordinary vs. Extraordinary repairs:
- ordinary = expensed
* extraordinary = cap as inventory ONLY IF it increases usefulness of asset
land improvements:
fences, sidewalks, landscaping, etc
Building costs:
excavation & forward
land improvements:
fences, sidewalks, landscaping, lighting, paving, int costs during construction period, etc
land costs:
all costs up to excavation (includes razing & real estate taxes in arrears)
under IFRS, component depreciation is required (more accurate):
separate significant components of FA’s w/ diff lives should be recorded and dep’d separately; CV of components that are replaced should be derecog’d
Interest on Self-Constructed Assets:
- cap those interests on these assets based on (WAAE*int rate); cannot exceed actual interest costs; leftover is int exp
- this is an exception (permit filed & during construction for use in biz)
- we capitalize interest LOWER of actual int costs incurred or computed cap’d int (avoidable interest)
- interest on inventory routinely mfg’d is not cap’d
Depreciation methods:
- SOY digits: rate = remaining life/SOY digits [n(n+1)/2]
- (cost - SV) * rate = DE
- DDB = highest DE initially, SL = lowest initially
*UOP:
Step 1 :
(cost-SV)/ units per hr = rate per unit/hr
Step 2:
rate per unit/hr * # units produced/hr worked = DE
valuation of donated FA’s:
Dr FA (FMV) Cr Gain on nonreciprocal transfer
for a damaged portion of a Building that is known & uninsured:
recognize loss to CV of damaged portion & capitalize refurbished costs
WA int rate calculation:
[(6/14)8%] + [(8/14)9%] = 8.57%
disclosures for depreciable assets and DE should be made in FS or notes:
- DE for period
- balance of major classes of depreciable assets
- AD allowances y classes/total
- methods used by major classes in computing DE
bond discount vs. premium rates:
*discount: effective rate > stated rate
(investors pay less than face value)
*premium: effective rate < stated rate
(investors pay more than face value)
bond discount vs. premium rates:
*discount: effective rate > stated rate
(investors pay less than face value)
*premium: effective rate < stated rate
(investors pay more than face value)
**bonds issued at par: effective rate = stated rate
JE for premiums & discounts:
- premiums: Cr premium b/c pay more cash (Dr)
* discounts: Dr discount b/c pay less cash (Dr)
amortization of bond premiums & discounts:
- SL is tolerable under GAAP but forbidden under IFRS
* effective int method is used for GAAP + IFRS (bond amort table)
effective interest method:
- BS: bond face * coupon rate = interest paid (I/P)
- IS: NCV * effective int rate = interest expense
**int paid - int exp = amortization; all amort goes toward the face
retirement of bonds:[IS g/l]
*retiring premium bond: Dr B/P Dr premium (Dr loss) Cr Cash (Cr gain)
*retirement discount: Dr B/P (Dr loss) Cr discount Cr Cash (Cr gain)
imputing interest:
N/R & N/P are recorded as PV when interest rate is not stated or when stated interest rate is unreasonably low
- diff b/w face & PV of note is recorded as a discount and amortized over life of the note (SL)
trouble debt restructuring:
debtor is relieved of its obligation to creditor ONLY BY:
- paying the creditor
- being released of debt judicially or by creditor (considered debt is extinguished by placing cash in an irrevocable trust is NOT GAAP for extinguishment)
Trbl Debt Restructuring accounting:
by Debtor:
[transfer of assets]:
FV asset transferred
= G/L; asset marked to MV thru IS
CV payable
= Gain (concession G)
[transfer of Equity]:
CV payable
= Gain
[Mod of Terms]:
debtor accounts for effects prospectively & does not show CV or gain UNLESS
[CV > total FCF]
by Creditor:
BDE is recog’d for diff b/w loan amount & FV of item being received and/or PV of expected CF discounted at loans’ historical effective int rate
Trbl Debt Restructuring accounting:
by Debtor:
[transfer of assets]:
FV asset transferred
= G/L; asset marked to MV thru IS
CV payable
= Gain (concession G)
[transfer of Equity]:
CV payable
= Gain
[Mod of Terms]:
debtor accounts for effects prospectively & does not show CV or gain UNLESS
[CV > total FCF]
by Creditor:
BDE is recog’d for diff b/w loan amount & FV of item being received and/or PV of expected CF discounted at loans’ historical effective int rate
Permanent Differences:
[subtracted from FI to get TI]
- tax-exempt interest (muni/state bonds)
- life insurance proceeds on officer’s key man policy (proceeds from term life insurance on death of officer)
- nondeductible portion of meal & entertainment exp
- DRD for corporations
- excess % depletion over cost depletion
[added from FI to get TI]
- life insurance premiums when corporation is beneficiary
- certain penalties, fines, bribes, kickbacks, etc
Temporary Differences:
* DTL: [income later] -installment sales -contracts (% vs completed) - equity method (undistr'd dividends) -"un" G/L (til sec's sold)
[expense 1st]
- DE & amortization
- PPD exp/ins (cash basis for tax; recognize all 1st year)
DTA:
[income now]
-PPD (unearned) rent/int/royalties
[exp later]
- BDE (allow vs direct WO)
- est’d L & warranty exp
- start-up expenses (ACTUALLY IS no diff if amount is <5k b/c of tax rules)
as of 2018, no NOL CB is allowed, but NOL CF is allowed infinitely
* NOL CF may require a VA (gift cert) limited to 80% of expected TI
JE to record DTA for CF:
Dr DTA
Cr Tax Benefit (reduces book loss)
**calculation:
NOL CF - (CY loss*80% expected NY income) = CF that will not be used (unusable)
as of 2018, no NOL CB is allowed, but NOL CF is allowed infinitely
* NOL CF may require a VA (gift cert) limited to 80% of expected TI
JE to record DTA for CF:
Dr DTA
Cr Tax Benefit (reduces book loss)
calculation:
ITB = [NY NI80%]TR+[NY NI80%]TR]
- until all of CF is used
as of 2018, no NOL CB is allowed, but NOL CF is allowed infinitely
* NOL CF may require a VA (gift cert) limited to 80% of expected TI
JE to record DTA for CF:
Dr DTA
Cr Tax Benefit (reduces book loss)
calculation:
ITB = [NY NI80%]TR+[NY NI80%]TR]
- until all of CF is used
- leftover CF is VA (using future year TR)
PBO & ABO: (GAAP)
- PBO = future salary levels
- ABO = actuarial PV CY & PY levels
**DBO = IFRS (similar to PBO in GAAP)
for the AGE in “SIR AGE”, JE for each year exp: [for net loss & gains]
[net loss]
Dr Net Per Pen Cost (AGE)
Cr OCI
Dr DTB-OCI
Cr DTB-IS
[net gain]
Dr OCI (AGE)
Cr DTE-IS
Dr DTE-IS
Cr DTE-OCI
S of “SIR AGE” is recorded as OpEx on IS; JE:
Dr comp exp
Cr pension benefit A/L
IR of “SIR AGE” is recorded:
"R": (actual > expected) [CY] Dr pension ben A/L Cr OCI [NY] Dr OCI Cr Net Per Pen Cost
IR of “SIR AGE” is recorded: [net IR]
“I”:
Dr Net Per Pen Cost
Cr Pen Ben A/L
"R": (actual > expected) [CY] Dr pension ben A/L Cr OCI [NY] Dr OCI Cr Net Per Pen Cost
JE for contribution to a plan:
Dr Pension Ben A/L
Cr Cash
amortization of existing net obl/NA at implenetation “E” of SIRAGE:
[+amort of obligation]
[-amort of NA]
calculation:
PBO - FV = initial unfunded/ / 15Y or avg emp job life (greater of) = min amortization
DBPP disclosures should include:
-funded status of plan (face of BS)
- amt of Net Per Pen Cost for the period
FV Plan Assets
corridor approach “G”: [use market-related value of assets]; if not present, use FV plan assets
unrecog’d G/L - 10% PBO/FV (greater) = excess;
*excess / avg svc life = amort’d G/L
**if 10% PBO/FV > unrecog’d G/L, then no amortization will be taken
corridor approach “G”: [use market-related value of assets]; if not present, use FV plan assets
unrecog’d G/L - 10% PBO/FV (greater) = excess;
*excess / avg svc life = amort’d G/L
**if 10% PBO/FV > unrecog’d G/L, then no amortization will be taken
a company providing HC benefits for its retirees should disclose:
- assumed HC cost trend rate used to measure the expected cost of benefits covered by the plan (actuarial assumptions)
- APBO
a company providing HC benefits for its retirees should disclose:
- assumed HC cost trend rate used to measure the expected cost of benefits covered by the plan (actuarial assumptions)
- APBO
TS cost method:
[both methods] *initial JE issuance: Dr Cash SP Cr CS par Cr APIC-CS
[cost method]; resell
*repurchase JE:
Dr TS (cost)
Cr Cash
*resell above JE:
Dr Cash SP
Cr TS (cost)
Cr APIC-TS (SP-cost)
*resell below JE: [loss is APIC-TS+RE SP - cost] Dr Cash SP Dr APIC-TS (if any) Dr RE (plug) Cr TS (cost)
TS par method:
[both methods] *initial JE issuance: Dr Cash SP Cr CS par Cr APIC-CS
[par method]; repurch
*repurch above issue price JE: Dr TS (par-CS) Dr APIC-CS (par) Dr RE (issue-PP) Cr Cash (PP)
*repurch below issue price JE: Dr TS (par-CS) Dr APIC-CS (par) Cr Cash (PP) Cr APIC-TS (issue-PP)
*resell JE:
TS par method:
[both methods] *initial JE issuance: Dr Cash SP Cr CS par Cr APIC-CS
[par method]; repurch
*repurch above issue price JE: Dr TS (par-CS) Dr APIC-CS (par) Dr RE (issue-PP) Cr Cash (PP)
*repurch below issue price JE: Dr TS (par-CS) Dr APIC-CS (par) Cr Cash (PP) Cr APIC-TS (issue-PP)
*resell above/below JE:
Dr Cash (SP)
Cr TS (par-CS)
Cr APIC-CS (plug)
TS par method:
[both methods] *initial JE issuance: Dr Cash SP Cr CS par Cr APIC-CS
[par method]; repurch
*repurch above issue price JE: Dr TS (par-CS) Dr APIC-CS (par) Dr RE (issue-PP) Cr Cash (PP)
*repurch below issue price JE: Dr TS (par-CS) Dr APIC-CS (par) Cr Cash (PP) Cr APIC-TS (issue-PP)
*resell above/below JE:
Dr Cash (SP)
Cr TS (par-CS)
Cr APIC-CS (plug)
cost vs par method (RE & APIC comparison):
compared to cost method, par method will report lower amount for APIC & same amount for RE if:
- repurch TS > par but
cost vs par method (RE & APIC comparison):
compared to cost method, par method will report lower amount for APIC & same amount for RE if:
- repurch TS > par but
CD JE’s:
Declaration date:
Dr RE
Cr D/P
record date:
NO JE
Pmt date:
Dr D/P
Cr Cash
property div JE:
Dr RE (FMV) Cr FA
Stock div:
less than 20-25%: Dr RE (FMV) Cr CS (par) Cr APIC (plug)
greater than 20-25%:
Dr RE (par)
Cr CS
Stock div:
less than 20-25%: Dr RE (FMV) Cr CS (par) Cr APIC (plug)
greater than 20-25%:
Dr RE (par)
Cr CS
liquidating dividends:[div in excess of RE]; Dividends > RE
no JE for pure liquidating div
*liquidating div with excess: Dr RE (80%) Dr APIC (20% - ROC) Cr Cash (100%)
liquidating dividends:[div in excess of RE]; Dividends > RE
- no JE according to final review?
- pure liquidating dividend: No JE
*liquidating div with excess: Dr RE (80%) Dr APIC (20% - ROC) Cr Cash (100%)
stock splits/reverse splits:
no JE
retirement of TS:
[cost method] Dr CS (par) Dr APIC-CS (SP-par) Dr RE (plug) Cr TS (cost)
[par method]
Dr CS (par)
Cr TS
donated TS:
Dr Donated TS (FMV)
Cr APIC
*if sold: Dr Cash (SP) (Dr APIC if sold less than FMV) (Cr APIC if sold greater than FMV) Cr Donated TS (BV or FMV)
RE calculation:
BB
+NI/
+/- PPA
+/- Acct changes (cumu effect)
+ adjustment from “quasi-reorg”
= EB RE
3 main differences of NFP’s compared to commercial entities:
- contributions revenue; providers do not expect commensurate/proportionate return
- operating purposes is to provide services/mission of the NFP
- absence of ownership interest (no equity)
basic FS’s for NFPs:
-statement of fin pos (BS)
-statement of activities (IS)
-statement of CFs
[notes are included]
NFP’s are required to disclose functional expenses to present program & support categories to analyze expenses by object (natural class’n):
- program svc:
- activities the org is chartered
- universities (edu & research)
- hospitals (patient care & training)
- union (labor negotiations & training)
- day care (child care)
- support services:
- fundraising (cost to maintain a donor list for contributions)
- mgt. & G&A exp (soliciting membership dues)
- membership dvp (soliciting prospective members, brochure costs)
classification of gov expenditures:
- function/program = elderly, drug, addiction, edu programs
- org unit = police, fire dept, (public safety functions)
- activity = drug & highway (under police org unit)
- character = current expend, cap outlay, debt svc, intergov
- object classes = chart of accounts (S&G exp, etc)
