Chapter 4: Inventory, Working Capital, Fixed Assets Flashcards
Working capital formula? What does this measure?
WC = CA - CL
Measures solvency of company (ability to pay debt)
What are current assets?
Cash & short term liquid investments convertible to cash with original maturity of 90 days or less
How do you treat the following bank rec items:
1) Deposit is transit
2) Outstanding checks
3) bank service charges
4) bank collections
5) errors
6) NSF
7) interest income
1) add to bank
2) subtract from bank
3) subtract from book
4) add to book
5) fix
6) subtract from book
7) add to book
What are accounts receivables?
oral promises to pay debts
Which items increase A/R? Decrease A/R?
Increase: Beg balance, credit sales
Decrease: write offs, conversion to note, cash collections
How are A/R presented on the B/S?
Net Realizable Value
What is the difference between gross method & net method of A/R?
Gross method: ignore potential discount
Net method: assume discount is going to occur
When is a return/allowance applied prematurely?
If past experience shows a material % of returns that are reasonably estimated and accrued
What are the two uncollectable A/R methods?
Direct write off method and allowance method
What is a pledging assignment? What type of disclosure needs to be in FS?
Company uses existing A/R as collateral for a loan
Footnote disclosure only
What is factoring? What is the difference between recourse & non-recourse?
Company converts A/R to cash by selling them to a factor
Recourse = the A/R can be sold back to the original owner
Without recourse = buyer responsible for A/R collection
What is a Note Receivable? How is this valued?
Written promises to pay debts
PV of Future CF
How to calculate discount given to buyer of a N/R:
1) Calculate interest on face value
2) Calculate total maturity value (Face + interest)
3) Multiply #2 by the buyers discount rate * the amount of time buyer holds the note
How is the allowance for uncollectable accounts for the year calculated using the aging method?
multiplying receivables by the uncollectible percentage
What is the current ratio formula?
= Current Assets / Current Liabilities
What is the quick ratio formula?
= Cash + Net Receivables + Marketable Securities / Current Liabilities
How do you value donated fixed assets? What’s the JE for obtaining donated fixed assets?
Records at FMV - incidental costs
DB Fixed Asset (FMV)
CR Gain on nonreciprocal transfer
What are the two methods & their formulas under IFRS for valuation of fixed assets?
Cost Model = HC - Accum. Depr. - Impairment
Revaluation Model = FV at revaluation date - subsequent accum. dep. - subsequent impairment
How do you treat revaluation losses? revaluation gains? impairment?
Losses = I/S Gains = OCI Impairment = 1st reduce OCI gain then put on I/S as loss
What disclosure must occur when valuing fixed assets at FMV? At what level do revaluing fixed assets occur on?
1) HC equivalent must be disclosed
2) Class of fixed assets NOT individual assets
How do you treat the following to fixed assets:
1) Additions
2) Improvements/replacements
3) Ordinary repair
4) Extraordinary repair
1) Capitalize
2) Increase life: Reduce Accum. Depreciation
2) Increase usefulness: Capitalize
3) Expense
4) Increase life: Reduce Accum. Depreciation
4) Increase usefulness: Capitalize
What are considered land costs (not depreciable)?
purchase price broker fee title fee legal clearing brush & trees existing obligations (mortgages, back taxes) tearing down old building (razing) Filling in hole (grading) LESS proceeds from sale of old building
What are considered land improvements (are depreciable)?
Fences water systems sidewalks paving landscaping lighting
What are considered building costs?
purchase price
repair charges to building (deferred maintenance)
architect fees
digging hole for building (excavation)
How do you separate purchase price when land and building is bought together?
Allocate purchase price based on the ratio of values for each item
What is a Investment property (IFRS)? What is included in the cost? Which costs are capitalized?
1) Land or buildings held for rent income or capital appreciation
2) purchase price and other expenses directly related to purchase
3) adding to property, replacing part of property, service the property
How are investment property measured after initial purchase? What are the disclosures associated with these models? How is G/L recognized?
Cost Model = HC - Accum. Dep.
Reval. Model = FMV
When cost model is used the fair value of the assets must be disclosed
G/L recognized in earnings
When do you capitalize construction period interest? When do you not?
1) Producing any fixed assets during construction, special order goods, ordinary delays
2) Inventory regularly manufactured, intentional delays, fixed assets held before or after construction period
What are the main rules concerning computing capitalized interest costs?
1) only capitalize interest on money actually spent (not total amount borrowed)
2) Amount of capitalized interest is the LOWER of:
A) Actual interest cost incurred for period OR
B) Avoidable Interest = average accumulated expenditure * interest rate
What disclosures must be int he FS related to capitalizing construction interest costs?
Total interest cost incurred during period
Capitalized interest costs for the period
What is the formula for sum-of-years-digits depreciation method? How do you calculate the sum of years digits quickly?
= Cost - salvage value * (remaining life of asset / sum of years digits)
= N * (N + 1) / 2
where N is estimated useful life of asset
What is the formula for double declining balance? What do you ignore within formula?
= 2 * 1 / N * (Cost - Accum. Depreciation)
Ignore Salvage Value
What is the units-of-production formula?
Rate per unit or hour = (Cost - Salvage Value) / Estimated units or hours
Depreciation Expense = Rate per unit or hour * # of units or hours worked
What is the formula for unit depletion rate? What makes up the depletion base?
= (Depletion base / Estimated recoverable units)
"REAL" - residual value \+ extraction/development cost \+ anticipated costs \+ land purchase price
Under which depreciation methods would accumulated depreciation at the end of the assets life equal the original cost?
NONE - Asset should never be depreciated below salvage value
Under FOB shipping point, when does title pass to the buyer? Who usually pays for shipping? Where is this cost included?
Title passes to buyer when seller delivers goods to carrier.
Buyer pays becuase it’s buyers inventory.
Cost is freight-in (inventory)
Under FOB destination, when does title pass to the buyer? Who usually pays for shipping? Where is this cost included?
Title passes to buyer when buyer receives goods
Seller pays becuase it’s sellers inventory.
Freight-out (selling expense)
What happens when the seller ships the wrong goods? or when the goods are not picked up by the carrier?
Goods are included in seller’s inventory upon rejection.
Goods are included in seller’s inventory until picked up
What happens when the sales with a right to return are not estimated? When they are estimated?
Treated as no sale, include in seller’s inventory.
Treated as sale and allowance for estimated returns created.
In a consignment arrangement, who has title of goods if they aren’t sold? When is revenue recognized?
Title of goods stays with consignor.
At what value is inventory usually accounted for under GAAP? What makes up this value?
Cost
Cost is usually purchase price/consideration given
At what value is precious metals and farming equipment valued at?
NRV which is selling price - costs to sell/disposal
When using lower of cost or market, how is the write down (loss) classified on the books? Can you reverse this write down under GAAP?
COGS, unless amount is material (then loss should be identified separately in IS)
Cannot reverse write down.
What is Market Value? Replacement Cost? Market Ceiling? Market Floor? (GAAP)
Median value
Cost to purchase item right now
NRV which is selling price - cost to sell/dispose
NRV - profit margin on sale
What is the perpetual inventory formula for finding COGS? What is the disadvantage of the perpetual method?
Beginning Inventory + Purchases = COGAFS - Ending Inventory = COGS (Plug)
COGS includes inventory shortages & cost of inventory sold
How is the perpetual inventory COGS calculated?
Recorded after each sale
Under FIFO & LIFO, what happens to ending inventory, COGS, gross profit in rising prices?
Price UP = EI UP = COGS DOWN = GP UP
Price UP = EI DOWN. = COGS UP = GP DOWN
What is the LIFO conformity rule?
If LIFO is used for tax purposes, it must also be used in the GAAP Financials.
What is the price index formula for dollar value LIFO?
Ending inventory at base year cost
Estimates of price-level changes for specific inventories are required for which of the following inventory methods?
Dollar-Value LIFO
During a purchase commitment to buy inventory, where the current value is below the price agreed upon, what is the accounting treatment?
Describe contract in notes of FS
Recognize loss on I/S
Liability for loss on B/S
How do you find the weighted average of inventory units?
After each purchase you find the weighted average unit cost.
Take the total cost / total # of units.
What is the LIFO reserve? What is the JE to increase this account?
Difference between LIFO inventory versus any other method.
DB COGS
CR LIFO Reserve
What’s the formula for the Allowance for uncollectable accounts?
Beginning Balance \+ Uncollectable Account expense (bad debt exp) \+ Recovery of previous write offs - write offs = Ending balance
What is the JE to write off uncollectable account?
DB Uncollectable account
CR Accounts receivable
