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FAR > CPA FAR > Flashcards

CPA FAR Flashcards

1
Q

Which costs are inventoriable?

A

Purchases - Net of Discounts, Freight, Warehouse expenditures

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2
Q

When does ownership of goods transfer when shipped FOB Shipping Point?

A

FOB Shipping Point puts the inventory into the hands of the buyer from the loading dock

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3
Q

When does ownership transfer when goods are sent FOB Destination?

A

FOB Destination keeps the items in the seller’s inventory until it reaches the buyer

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4
Q

Which costs are non-inventoriable?

A

Sales Commissions

Interest on liabilities to vendors

Shipping expense to customers

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5
Q

When are discounts recorded under the gross method?

A

Under the gross method, discounts are recorded only when used.

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6
Q

Under the net method, when are discounts recorded?

A

Under the net method, discounts are recorded whether used or not.

Unused discounts are allocated to financing expense.

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7
Q

How is gross margin calculated?

A

Gross Margin : Sales - COGS (BI + P - EI)

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8
Q

Describe the periodic inventory system.

A

Inventory is counted at certain times throughout the period

Weighted-average cost flow method is used.

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9
Q

Describe the perpetual inventory system.

A

Inventory count continually updated

Uses a moving-average cost flow method

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10
Q

In periods of rising prices, under which cost flow system would ending inventory be the same under both periodic and perpetual inventory methods?

A

Under the FIFO system, periodic and perpetual inventory methods will both have the same ending inventory.

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11
Q

How is inventory turnover calculated?

A

COGS / Average Inventory

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12
Q

How is Average Day’s Sales in inventory calculated?

A

365 / Inventory Turnover

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13
Q

Under a consignment system, who holds the consigned goods in inventory?

A

The CONSIGNOR holds the consigned items in their inventory count. The cost includes the shipping to the consignee.

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14
Q

Under a consignment system, does the consignee hold consignment inventory in their own inventory?

A

No. Consignment goods are maintained in the inventory of the consignor, not the consignee.

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15
Q

What effect does overstatement or understatement of inventory have on ending retained earnings?

A

Misstatement of beginning inventory does NOT have an effect on ending retained earnings.

Misstatement of ENDING inventory does have an effect on retained earnings.

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16
Q

How does misstatement of ending inventory effect Ending Retained Earnings?

A

EI Over : COGS Under : ERE Over

EI Under : COGS Over : ERE Under

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17
Q

Which costs are included in COGS first under the FIFO (first in first out) system?

A

The first (oldest) inventory you have in stock is the first inventory you record for COGS purposes. If your oldest inventory on the shelf cost you $1 when you bought it, COGS is $1

This is just for inventory pricing. It has nothing to do with physically selling the oldest item on the shelf - It is purely for accounting purposes

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18
Q

Which costs are included in COGS under the LIFO (last in first out) system?

A

The last (newest) inventory you have in stock is the first inventory you record for COGS purposes. If your newest inventory on the shelf cost you $1.50 when you bought it, COGS is $1.50

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19
Q

How is Weighted Average Cost Per Unit calculated under a weighted average inventory system?

A

COGAS / Total Units : Weighted Average Cost Per Unit

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20
Q

How does FIFO’s COGS relate to LIFO’s in a time of changing prices?

A

FIFO’s relationship to COGS will be opposite LIFO’s relationship to COGS in periods of falling/rising prices.

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21
Q

How do FIFO and LIFO change in a period of rising prices?

A

FIFO has the Lowest COGS

FIFO is a cat that sees a mouse starts Low and is Rising

If COGS is Low, that means EI is High

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22
Q

How do FIFO and LIFO change in a period of falling prices?

A

FIFO has the Highest COGS

Remember: FIFO, that silly cat, got High from Catnip and is Falling off the couch

If COGS is High, that means EI is Low

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23
Q

Under a Lower of Cost or Market, how are the benchmarks calculated?

A

Market Ceiling : Net Realizable Value : Selling Price - Selling Costs

Market : Replacement Cost

Market Floor : Net Realizable Value - Normal Profit

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24
Q

How are Available-For-Sale securities recorded on the Balance Sheet?

A

At Fair value as either Current or Non-current assets.

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25
Q

How are Available-For-Sale security Unrealized G/L treated?

A

Included in OCI (Other Comprehensive Income)

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26
Q

How are Unrealized G/L for Available-For-Sale securities that are reclassified to Held-to-Maturity or Trading Securities treated?

A

HTM - Stockholder’s Equity
/ Trading Securities - Current Period.

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27
Q

How are Held-to-Maturity securities recorded on the Balance Sheet?

A

Amortized cost as Current or Non-current assets.

If reclassified as AFS - Unrealized G/L go to Stockholder’s Equity

If reclassified as Trading Securities - Unrealized G/L recognized in Current Period

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28
Q

How are Held-to-Maturity securities Unrealized G/L treated?

A

Trick question - Unrealized gains or losses are not applicable because they are HTM

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29
Q

How are Trading Securities recorded on the Balance Sheet?

A

At Fair Value as a Current Asset

Unrealized gains/losses are recorded on the Income Statement

If they are reclassified as held-to-maturity or available-for-sale- there is no effect upon transfer.

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30
Q

How are Trading Securities Unrealized G/L treated?

A

Recorded on the Income Statement

If they are reclassified as HTM or AFS - there is no effect upon transfer.

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31
Q

How is a Capital Lease recorded?

A

Capitalize at cost: Asset & Liability Recorded at Present Value of Future Lease Payments

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32
Q

What footnote disclosures are required for a Capital Lease?

A

Future minimum rental commitments

By year - for 5 years

All remaining years as a group

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33
Q

What are the requirements for a Capital Lease for a lessor?

A

Same as for lessee (Title- BPO or Substance)- PLUS:

Collectability of lease payments is predictable

No uncertainties about the lessor reimbursing the lessee for costs incurred

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34
Q

What are the characteristics of an Operating Lease for a lessee?

A

Risk of ownership does NOT pass

No asset or liability is recorded on the financial statements

Leasehold improvements - capitalized and depreciated over the lesser of lease life or leasehold improvement’s life.

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35
Q

What are the characteristics of an Operating Lease for a LESSOR?

A

Rent revenue recorded

Leased property remains an asset and depreciated by lessor

If payments fluctuate over the term of the lease- rent revenue recognized on a straight line basis

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36
Q

What are the characteristics of a Direct Financing Lease?

A

Interest Revenue (or expense for lessor) decreases with passage of time

Principal amount increases with each payment

Carrying amount of Lease decreases

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37
Q

How is a sale-leaseback recorded?

A

Any profit on the sale is deferred and amortized

Exception: If PV of lease payments is 10% or less of the asset’s FMV- the gain is recognized

If PV of lease payments is greater than 10% of FMV and the lease is operating- all of the gain is recognized except the amount of the PV of the lease payments

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38
Q

What are the characteristics of lease payments under an annuity due situation?

A

Payments begin at the start of the lease period

Think: Rent/Mortgage payments are Due at the first of the month

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39
Q

What are the characteristics of lease payments under an ordinary annuity situation?

A

Payments begin after the end of the first year

Think: An annuity that pays you at the end of each year

40
Q

What are the characteristics of a Capital Lease for a lessee?

A

Risk of ownership passes to lessee by:
Title,
Bargain Purchase Option (BPO),
Substance - Lease is more than 75% of asset’s useful life or PV of minimum lease payments are more than 90% of fair value

41
Q

Which financial statements are required for not - for - profit organizations?

A

Statement of Financial Position

Statement of Activities

Statement of Cash Flows

Statement of Functional Expense (Volunteer Health Organizations Only)

42
Q

What are the major classifications found on a Statement of Financial Position?

A

Similar to Balance Sheet:

Assets
Liabilities
Net Assets
Unrestricted Assets
Permanently Restricted Assets
Temporarily Restricted Assets

43
Q

What are the major classifications in a Statement of Activities?

A

Similar to an Income Statement - organization - wide:

Revenues
Expenses - ONLY deducted from Unrestricted Revenues
Gains and Losses
Changes in Net Asset classes
Unrestricted
Permanently Restricted
Temporarily Restricted

44
Q

What are the characteristics of a Statement of Cash Flows for not - for - profits? What are the major classifications?

A

Both direct and indirect methods are OK

Operating Activities - Unrestricted Revenues and Unrestricted Expenses

Investing Activities

Financing Activities - Endowments and restricted contributions

45
Q

Which organizations are required to present a Statement of Functional Expenses?

A

Volunteer Health Organizations

46
Q

Which statements are required for non - governmental hospitals?

A

Balance Sheet
Statement of Operations
Statement of Changes in Net Assets
Statement of Cash Flows
Financial Statement Notes

47
Q

Which basis of accounting is used for revenues and net assets?

A

Accrual basis of accounting is used

Only external parties can restrict the use of assets (permanent or temporary)

Assets earmarked internally by management are still classified as unrestricted

48
Q

What are the characteristics of unrestricted assets or revenue?

A

No restrictions or conditions placed on entity in order to use the resources

Note: assets earmarked internally by management are still unrestricted

49
Q

When are revenues on contributions recognized?

A

Revenues on contributions are recognized in the year received - not the year the contribution is spent and are recorded at Fair Value on the date received

50
Q

When are services rendered considered contributions?

A

If the organization would have otherwise paid for them

or

They increase the value of a non - monetary asset

51
Q

Is hospital charity care revenue?

A

NO.

It is disclosed in the notes to the financial statements only.

52
Q

How are unconditional pledges to contribute recorded?

A

Classified as revenue in the current year only - multi - year future contributions fall under Temporarily Restricted.

53
Q

Which revenues are expenses deducted from?

A

Expenses ONLY deducted from Unrestricted Revenues - not Temporary or Permanently Restricted Revenues/Assets

54
Q

What are the characteristics of temporarily restricted assets/revenue?

A

Use is restricted to a future time - which could then convert to unrestricted - Class: Temp. Restricted Revenue

Unrestricted contributions promised (including multi - year contributions) - but not yet received are actually restricted by time and are therefore classified as Temporarily Restricted Assets - Multi - year contributions are recorded at the present value of the future contributions

55
Q

What are the characteristics of an endowment?

A

Use of investment is restricted - but income from investment could be either restricted or unrestricted

Must be under control of receiving entity (Quasi Endowment) in order to be recorded in unrestricted net assets

Otherwise - a memo entry is recorded

56
Q

When is the donation of an art collection recognized as a contribution or asset?

A

Not recognized as assets or contribution revenue if they are held of display or education’ or their sale results in the purchase of similar items

57
Q

When both Temporarily Restricted Assets and Unrestricted Assets are available for use - which assets are used first?

A

Temporarily restricted assets are used before Unrestricted assets.

58
Q

How is a refundable advance recorded by a not for profit?

A

Classified as a Liability

Promise to contribute assets pending on certain conditions being met

Becomes unconditional once the possibility that it won’t happen is remote

59
Q

How are investments recorded and valued in not - for - profit accounting?

A

Fair Value is mostly used

Exception - Equity method used when significant influence exists

60
Q

How are scholarships recorded?

A

As a reduction of revenue - netted against college’s tuition

61
Q

How is depreciation expense recorded by a not - for - profit?

A

Depreciation expense is allocated proportionately to various functions

62
Q

How are capital contributions with a mortgage attached recorded in a partnership for financial statement purposes?

A

Calculating the capital balance when property contributed has a mortgage results in the FV of the Asset being netted against the Liability

63
Q

If no goodwill is recorded upon admission of a new partner - which method is used for recording the new partner’s interest?

A

The bonus method:

Old Partnership Equity+ New Partner Contribution
: New Partnership Equity
x New Partner %
: New Partner Equity AmountNew Partner Contribution - New Partner Equity Amount
: Bonus to Prior Partners using same allocation as P/L

64
Q

If goodwill is recorded upon admission of a new partner - how is the partner’s interest recorded?

A

Using the goodwill method:

New Contribution / New Equity % : Partnership Value

Implied Value of Partnership - Capital Accounts of all partners
: Goodwill to Old Partners

Under the Goodwill Method - the new Partner is paying an amount for a certain percentage stake in the partnership. For instance if they pay $1000 for a 25% stake - then it is assumed that the Partnership is worth $4 -000 ($1 -000/25%)

65
Q

At what value should assets contributed to a partnership be recorded? What value for liabilities assumed by the partnership?

A

Fair Value for assets contributed.

Present value of remaining cash flows for liabilities assumed.

66
Q

What items are included in operating activities on the Statement of Cash Flows?

A

Cash received from Customers- Interest & Dividends- Trading Securities

Cash paid to Vendors- Suppliers- Interest- Taxes- Trading Securities

67
Q

What items are included in investing activities on a Statement of Cash Flows?

A

Cash received: Sale of PP&E- Sale of Investments- Loan Principle

Cash paid: Loans- Acquisitions- AFS or HTM Securities- Taxes- Trading Securities

68
Q

What items are included in Financing Activities in a Statement of Cash Flows?

A

Cash received: Issuance of Stock- Issuance of Debt

Cash paid: Dividends

69
Q

What is the direct method for a Statement of Cash Flows?

A

Starts with Income from Continuing Operations

Adjusts for changes in accounts like A/R- A/P- Inventory and non-cash revenues- expenses- gains- losses

If used- the Indirect Method must also be shown

70
Q

What is the Indirect Method for a Statement of Cash Flows?

A

Starts with Net Income

Adjusts for changes in accounts like A/R- A/P- Inventory and non-cash revenues- expenses- gains- losses

71
Q

When common stock and preferred stock are issued in a lump sump purchase- how is APIC allocated?

A

APIC for each is allocated by its respective % of the total FMV of the shares x the proceeds.

72
Q

When is APIC recorded on a stock subscription?

A

APIC increases on date subscription is recorded - not on the date paid for or issued

73
Q

To what extent is retained earnings restricted if legally restricted due to Treasury Stock?

A

It will be restricted to the extent of the balance in the Treasury Stock account.

74
Q

When are dividends in arrear recorded for cumulative preferred stock?

A

They are not accrued until declared.

75
Q

When are dividends in arrears included as a disclosure and not an accrual in the financial statements?

A

If a year passes and no Cumulative Preferred Stock is declared- then the dividends in arrears are included as a disclosure - not an accrual in the Financial Statements.

76
Q

What is the gain or loss when a non-monetary asset is distributed to a shareholder?

A

The gain or loss is the difference between the FMV of the asset distributed at the date of distribution and its carry amount on the company’s books

77
Q

What is the effect on retained earnings when a non-monetary asset is distributed to a shareholder?

A

The effect on Retained Earnings is the Carrying Amount of the asset

RE will be debited when the dividend is declared for the FMV of the asset- which is more (or less) than the carrying amount

Gain/Loss recorded when the asset is distributed will offset the original effect of the debt to RE and will be a wash

The net effect of the entry is that RE will decrease by the CV of the asset

78
Q

When is Retained Earnings debited for FMV of Stock for a stock dividend?

A

When Stock Dividend is less than 25% of Common Stock outstanding

79
Q

When is Retained Earnings debited for Par Value for a stock dividend?

A

When Stock Dividend is greater than 25% of common stock outstanding

80
Q

What is the effect of a stock dividend or a stock split on total shareholder equity?

A

Stock dividends and stock splits both have no effect on Total Shareholder Equity

81
Q

What is the affect on APIC from a stock split?

A

Stock splits only affect par value - APIC remains the same.

82
Q

When is compensation expense recorded at the time of grant for a stock option?

A

Compensation expense is recorded at the time of grant if options are exercisable immediately

They are based on past service.

Expense recognized : FV Stock Option x # of Shares

83
Q

What interest rate is used to discount stock options?

A

The risk-free interest rate

84
Q

What date is used as the measurement date for share-based payments classified as liabilities?

A

The settlement date.

85
Q

How are compensation costs for share-based payments classified as liabilities measured?

A

Compensation costs for share-based payments classified as liabilities are measured by the change in the fair value of the instrument for each reporting period

86
Q

What is the net increase to shareholder equity in a reorganization where a company pays cash and issues stock to satisfy unsecured creditors?

A

Net increase to SHE : Gain on settlement of debt + Credit to SHE from stock issuance

87
Q

What is the primary purpose of a quasi-reorganization?

A

To eliminate a deficit balance in RE by restating its assets to Fair Value

It does not directly protect a company from its creditors

88
Q

How is return on Common Stockholder’s Equity calculated?

A

(Net Income - P/S Dividends) / Average Common Stockholders Equity

Note: Average CSE : Common Stock + RE

89
Q

How is book value per share of common stock calculated?

A

Total Common Stock
- Total Preferred Stock
- P/S Dividends in Arrears
- P/S Liquidation Premium
:Total Book Value

Book Value per Share : Total Book Value / Shares outstanding

90
Q

How is the dividend per share payout ratio calculated?

A

Dividends per share / earnings per share

91
Q

How is basic Earnings Per Share (EPS) calculated?

A

(Net Income - Preferred Dividends) / Average C/S Outstanding

Note - If cumulative- subtract the P/S dividend regardless of whether or not they’re declared.

92
Q

For EPS purposes- which date is used for calculation purposes when a stock split or stock dividend has occurred?

A

For EPS purposes- treat C/S stock splits or stock dividends as if they occurred at the beginning of the year- regardless of when actually issued during the year

93
Q

For which areas is EPS required to be shown?

A

EPS is only required to be shown for Income from Continuing Operations and Net Income.

All others (discontinued operations- extraordinary items) can be shown on the Financial Statements or in the notes

94
Q

When do stock options increase share outstanding?

A

Only if they are dilutive.

Their exercise price is LESS than the market value

If not- you ignore them in the calculation

95
Q

How is EPS calculated when convertible bonds are taken into consideration?

A

[Net Income + Bond Interest (Net of Tax)] / (Average Common Stock Shares + Convertible Equivalents)

Bond interest is added back because if converted- there would be no bond interest expense

Contingent Issue Agreements are included in Diluted EPS if contingency is met

FAR (19 decks)

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