CPA FAR - In My Words - Set1

Question 1

What is the gross profit formula?

Answer 1

Net sales - COGS = Gross profit

Question 2

Accumulated other comprehensive income (AOCI) *What’s the definition and where is this reported?

Answer 2

reported as equity on the balance sheet!! Sum of OCI in all periods (current and prior)

Question 3

Other comprehensive income (OCI) *What’s the definition and where is this reported?

Answer 3

changes in equity related to fair value gains and losses. To determine OCI, need to know the 5 categories of income that are aggregated each period!

Can be reported on income statement or the statement of comprehensive income

FYI: Aggregate = process of collecting data from multiple financial accounts into a single place

Question 4

What are the components of other comprehensive income?

Answer 4

DENT:

Derivative cash flow hedges

Excess adjustment on defined benefit pension plans

Net Unrealized gains and losses on available-for-sale debt securities

Foreign currency translation adjustments

Question 5

Revenue: How to convert Cash to Accrual basis?

Answer 5

Think of (SPEAR-BAR):
Sales (i.e. Customer Payments)
+ Ending Accounts Receivable
– Beginning Accounts Receivable
Sales Revenue on an Accrual Basis

Question 6

How to calculate COGS from Cash Basis?

Answer 6

Think of (CRAP-I):

Cash Remitted (i.e. paid – made acronym easier)
+ Increase in Accounts Payable
– Increase in Inventory
COGS on an Accrual Basis

Question 7

How is accretion expense calculated for the yr related to asset retirement obligation?

Answer 7

Asset retirement obligation (ARO) is called the accretion expense, and it’s calculated from the credit adjusted risk-free interest rate and the fair value of the ARO (example: 100,000 ARO X 10% credit adjusted risk free interest rate = 10,000)

Question 8

What is the straight line depreciation formula?

Answer 8

Cost - Salvage Value/useful life

Question 9

Double declining balance depreciation method/formula?

Answer 9

Annual depreciation expense = carrying value* x 2/useful life
*Carrying value = cost - accumulated depreciation

Question 10

Revised depreciation expense: straight line method formula/method (when the useful life and/or salvage value changes in subsequent period)

Answer 10

Cost-salvage value/useful years = annual depreciation expense THEN CALCULATE new annual depreciation expense:

Carrying value (cost - accumulated depreciation up to date of revision) - new salvage value/remaining life in yrs

Question 11

What is the Quick Ratio formula? (3 different ways to calculate)

Answer 11

Liquid assets/current liabilities

Question 12

When to recognize revenue for long term contracts?: Over time VS At a point in time?

Answer 12

Over time: As progress is made toward completing the performance obligation

At a point in time: When the performance obligation is complete!

FYI: Loses are recognized immediately

Question 13

What is the AR turnover formula? (in days)

Answer 13

AR turnover = Net credit sales/Average net receivables*

*Average net receivables = (Beg receivables + ending receivables)/2

AR turnover in days= 365/AR turnover

Definition - The average number of days that it takes for customers to pay their receivables

Question 14

Interest paid vs interest expense (for bonds)

Answer 14

Interest paid - Depends on the amount and rate on the bond (it has nothing to do with premiums or discounts)

Interest expense - Depends on carrying amout which is: the bond amount +/- the premium discount - amortization x effective (market) interest rate

Question 15

Amortization of internally developed commercial software costs (software amortization expense):

Straight line method VS Relative sales approach

Answer 15

Straight line method: Carrying value (CV)/Remaining useful life

Relative sales approach: CV x Current period sales/Current period sales + Estimated future sales

Question 16

What amount of foreign currency transaction gain or loss should a company include in income from a forward contract?

Answer 16

When a company enters into a forward contract On Jan 1, Yr 1 to sell “euros” in 90 days, this means that this original contract is still in force even if the rate changes. If the rate increases from 0.10 (on Jan 1 yr 1) to 0.15 (on Jan 15th yr 1) then it’s still a loss because the company is forced to sell euros for less than they’re currently worth.

Question 17

Available for sale debt securities - How to report decrease in fair value?

Answer 17

Report in Income from continuing operations
Measure investment at Fair value, using a contra-asset account

Things to remember:
Available-for-sale debt securities are carried at fair value (FV). Any decline in FV due to credit risk is reported as a credit loss expense in income. The security is reported at FV on the balance sheet using a contra account

Question 18

2 parts in one:
Formula to figure out ending Carrying value?
Formula for figuring out historical cost?

Answer 18

Historical cost - Net unrealized loss reported in AOCI = Ending Carrying Value

What’s the historical cost of AVS?

Historical cost = Ending CV + Net unrealized loss on AVS (reported in AOCI)

Question 19

Amortization expense of intangible asset w/ finite useful life:
(What’s the formula?)

Answer 19

Amortization expense = Cost (purchase price) - Residual value*/Useful life

*Residual value is the amount the business expects to receive for an asset (minus any disposal costs) at the end of the asset’s useful life

• Example: “You signed a contract to sell the asset for $10,000 in 10yrs”….$10,000 is the residual value

Question 20

Revenue is money received from normal business operations! What are some examples?

Answer 20

sales, interest, and dividend income

Question 21

Foreign Operations: Foreign Currency Exchange Transactions: These transactions are typically recorded at the transaction date exchange rate!

Exchange gains & losses: Describe the increase VS decrease rates

Answer 21

If the exchange rate increases - Receivables have an exchange gain & payable have an exchange loss

If the exchange rate decreases - Receivables have an exchange loss and payables have an exchange gain

Question 22

Modified accrual approach (governmental accounting)

Answer 22

Revenues are recognized in a government unit’s general fund when they are measurable and available to spend

Question 23

There are two types of hedges:

fair value hedge and cash flow hedges!

Describe them both

Answer 23

Fair value hedges deal with fluctuations in the contracting of existing assets and liabilities. These changes are booked on the income statement

Cash flow hedges deal with future contracts. These changes are booked in OCI

Question 24

Which currency rate should be used when a british owned subsidiary of a US parent company reports statements in their local currency? (british pound)

Answer 24

When you’re converting the income statement to US dollars, use the average rate !

If the subsidiary’s functional and local currency is the British pound, the income statement will need to be translated/converted to US dollar (parent’s company reporting currency) using the average exchange rate
​​​​​​​
Things to remember:
When preparing consolidated financial statements (F/S) for a foreign subsidiary, the parent company translates the subsidiary’s F/S from the local currency to the parent’s reporting currency. Income statement items use a weighted average exchange rate (except for gains and losses on fixed asset transactions)

Question 25

Effective interest method

Answer 25

Interest expense is directly determined based on book value x market interest rate (this amount might be more or less than the stated yield, depending on whether the debt was issued at a premium or discount)

Question 26

Calculating accretion expense

Answer 26

This is calculated by using the credit adjusted risk-free interest rate and the fair value of the ARO (example 100,000 x 10%)

FYI: ARO definition (asset retirement obligation)
When there will be a large disposal or cleanup cost at the end of an asset’s useful life , and it’s a liability that increases over the life of the asset

Question 27

Allowance method

Answer 27

The allowance method is consistent with US GAAP because it provides for matching of current year credit sales with the estimated uncollectible expenses from those sales

Question 28

Cash in Bond sinking fund

Answer 28

This is considered a long-term asset , even tho it’s cash because it’s being held to retire bonds , which are long-term liabilities (don’t include this when calculating cash & cash equivalents)

Question 29

For allowance for doubtful accounts, if the BEG bal, ending bal and accounts written off were given and they want you to solve for bad debt expense:

Answer 29

The beginning bal - the amount written off will bring the allowance account down. Use the ending balance given to solve for the adjustment. The adjustment increases the allowance account (CR) and increases bad debt expense (DR)

Question 30

Solving for COGS by using gross profit:

Answer 30

If gross profit is 20%, then COGS must be 80% of sales
(example 80% x 200,000 sales = 160,000 COGS)
This can be added to the ending inventory to calculate the total avail for sale! you can then solve for purchases by subtracting the BEG inventory !

TIP: Keep in mind that This calculation is used when purchases are not known. Sometimes the exam makes you work backward. If purchases were given, cost of goods sold would have been calculated the normal way as follows:

Beg inventory + purchases = total avail for sale - ending inventory = COGS