Assets & Related Topics Flashcards
Would Marketable Equity and Debt securities be included in Cash and Cash Equivalents?
No. Even though Marketable Equity and Debt securities are liquid, they would not be included in Cash and Cash Equivalents, as they would be considered investments.
How is Bad Debt Expense for the year calculated?
Bad Debt Expense is typically a plug number that is calculated, based on the expected ending balance of the Allowance for Doubtful accounts, based on the calculation methodology relative to outstanding AR -
For example -
- 10% of all outstanding AR would be considered ADA
- Ending AR is $600,000.
- ADA Opening Balance is $40,000
- In this case, the Bad Debt Expense = ($600,000 x 10%) - $40,000 = $60,000 - $40,000 = $20,000
What is the normal balance for Allowance for Doubtful Accounts (ADA), and how does it impact Bad Debt Expense calculations?
Normal balance for ADA is a credit balance (positive). So if the balance is a credit (negative) then the Bad Debt Expense has to first bring the amount to 0, then add further to get to the desired ADA balance
What is the difference between Factoring and Discounting?
Factoring is the process by which Accounts Receivable is collected quicker by involving a third party.
Discounting is the same thing, but for Notes Receivable instead
Should temporary inventory losses be recognized in interim statements?
No, only inventory losses that are considered permanent should be recognized in interim statements, based on the lower of cost or market approach
How is the lower of Cost or Market determined?
- Cost is simply the current cost of the item.
- Market is determined as the middle value between:
A. Replacement Cost
B. Market Ceiling, AKA NRV, which is Market Price less Cost to Sell
C. Market Floor - which is NRV less expected Profit
Cost is then compared to Market (using the middle value above), and the lower of the 2 numbers is used for the inventory valuation
In an inflationary economy, assuming constant inventory quantities, which inventory costing method will result in lower inventory turnover?
Inventory turnover formula -
Cost of Goods Sold / Average Inventory
Low turnover would result from either higher inventory cost (denominator), or lower COGS (numerator), or both
In LIFO, the inventory left on the books is the more recent, higher priced items.
At the same time COGS is lower because the inventory in COGS is the lower priced, older inventory.
Therefore LIFO is what will lead to a lower inventory turnover
Which inventory costing method leads to lower tax burden?
- Lower tax burden would be a result of a lower net income.
- In turn, lower net income means lower COGS
- Lower COGS means the inventory in COGS would be lower priced, while the cost of ending inventory would be higher
The costing method that gives this combination is LIFO.
Lower tax burden means lower taxes paid to the government, which in turn also means a higher amount of cash
How do you calculate Dollar Value LIFO?
- Take the current year’s amount and divide it by the YoY price increase
- For example, if the price increase was 10%, divide that number by 1.1
- That new number is what the current year item would cost in the base year
- Take the difference between the 2
- Take that number and multiply it by the difference, to get the amount with increase
Example:
What securities would be considered Cash and Cash Equivalents?
Any items that have a maturity of 3 months or less, when originally purchased, regardless of what the current maturity at the time of the question is.
For example, if there is a 6, or 12 month interest bearing note, that has 3 months left, this would still not be considered in cash and cash equivalents
Also cash that is set aside for a specific purpose (restricted cash) would also not be included in cash and cash equivalents
What items do you consider when reconciling a bank statement balance?
Only checks outstanding and deposits in transit are book items yet to be reflected on bank statements
What items are included in Land costs?
Land costs include the cost of the land itself, plus any costs associated with preparing the land for its intended use (registration, title insurance and legal fees can also be included. Clearing and grading is another example)
However, digging to pour foundation is a building construction cost, NOT land cost
How to determine if interest from loan to build an asset is capitalizable?
If the amount is said to be used continuously throughout the year, you just take the amount and divide by 2.
If separate amounts are used throughout the year, example explains best:
- Jan 1 - $100,000 of loan used in construction
- April 1 - $200,000 of loan used
- Sep 1 - $400,000 used
Weighted average to use for interest capitalization calc:
$100K x (3/12) + $300K x (5/12) + $700K x (4/12)
= $25K + $125K + $233.33K
= $233.33K
Further, if the loan is only for say $400K, and the rest would be assumed to be financed by other debt, so you calculate the $400K at the loan’s rate, and the remaining $158.33K at the other debt’s interest rate
Also, cost of appraisal of a purchased asset is a capitalizable cost
Should salvage value be considered when using Double Declining Balance method of amortization / depreciation?
- Salvage value should not be deducted when determining the depreciable base using DDB method
- HOWEVER, in the final year, depreciation expense can ONLY be recognized to the difference between the remaining NBV and the salvage value
What is the calculation used to determine the depleciable base for natural elements?
The depleciable base is calculated as:
Cost of depleciable asset
+ costs to prepare the land for extraction
+ costs to restore the land to prior use after completion
- value land can be sold for after extraction is complete (salvage value)
That deplaciable base is then divided by the expected extraction (in tons, or whatever unit of measure) to get the depletion cost per unit
