F3 Flashcards
Cash and Cash equivalent
-checking Accounts
-Money Market
-Anything else the company classifies as cash equivalent
Book or GL reconciliation
Bank service charge
NSF checks
recording error
credit memos
interest income
Cash and Cash equivalent def.
Cash is defined as unrestricted cash and cash equivalents are defined as short-term, liquid investments that are near maturity (within three months).
bond sinking fund is restricted cash.
Cash on Balance Sheet
Overdraft or negative balances should be reported as a current liability and not cash.
Checkbook balance (plus any checks not disbursed as of end of year). not bank statement balance.
Bank to Book
Add deposits in transit
subtract outstanding checks
discount vs. maturity
Maturity less the discount to record proceeds received. The discount is always applied on the maturity value and not face value.
When computing net sales for new sales made during aonth:
Subtract the amount that is expected to be returned from the total of sales.
Write-off uncollectible account
Has no effect on net income and decreases allowance for uncollectible account and AR remains the same.
Write off entry:
Debit allowance for uncollectible account
Credit AR
No effect on Net Income or Total Assets.
Entry to record uncollectible accounts
Allowance Method (No effect on Net Income or working Capital, as AR remains the same):
Debit Allowance for doubtful accounts and credit AR
Decreases both AR/Allowance for uncollectible accounts.
Direct-write off method (Net Income is reduced and working capital is reduced):
Debit bad debt expense and credit AR
The allowance method (used to match expenses with revenues and to record proper carrying amount for AR) is consistent with accrual accounting and direct write off method is not.
Aging methodTo find balance of uncollectible accounts at year end
The balance in the allowance account is determined by multiplying receivables by the uncollectible percentage.
The existing balance in the allowance account is used to determine bad debt expense for the year. You would subtract or add any existing balance in the account from balance in the allowance account.
recognizing bad debt expense
Allowance for bad debt would decrease when an uncollectible account is written off.
previously written off account is collected:
Debit Cash and credit allowance for bad debt (increase)
Account previously written off becomes collectible:
Debit AR and Credit Allowance for bad debt (increase)
Provision for uncollectible account is recorded:
Debit provision for bad debt and credit allowance for bad debt (increase)
Transfer of receivables
The factor(buyer) records the gross amount purchased and records fee as a gain.
Allowance method for Entry to write-off an uncollectible account:
Debit Allowance for uncollectible account and credit AR. No effect on Net Income.
To find amount to be reported as cash:
Any checks that haven’t been disbursed or mailed should be added back to checkbook balance.
Bank statement balance should not be reported as cash.
amortization expense
if the sum of discounted expected (future) cash flows is less than the carrying amount, an impairment loss or expense needs to be recognized. No expense is recognized if the cash flow will be generated indefinitely at the current level for tangible and intangible assets.
Debit to an asset account
-Purchase of a trademark is an intangible asset recorded as a debit to the appropriate asset account.
–Internally generated goodwill is never recognized as an asset; cost should be expensed when incurred.
– R&D cost are not capitalized. Expensed as incurred.
–Only the cost of a successful defense is capitalized and recorded to an asset account. Costs of an unsuccessful defense are expensed.
– Litigation costs would be capitalized only if the patent right is successfully defended (debit the patent account and amortize it). It would be expensed if defense is unsuccessful.
legal costs to successfully defend a patent should be capitalized and amortized over the lesser of the patent’s useful economic life or its legal life.
Research and development costs are expensed when incurred under U.S. GAAP.
Amortization should be on a straight-line basis over the lesser of the patent’s useful economic life or its legal life.
If the useful life is expected to be infinite, then there would be no amortization.
Expenses that qualify for asset capitalization under GAAP:
-Legal costs associated with obtaining a patent on a new product, successfully defending patent rights.
Do not include amount used to develop a new idea in capitalized amount.
–Costs of testing a prototype and modifying design, development costs, cost of materials used in prototype are related to R&D and must be expense
Periodic Inventory system
Estimate inventory and COGS in interim financials. Use Gross profit method
–Periodic inventory system does not continuously update inventory amounts throughout the year.
Perpetual Inventory system
–Continuously updates inventory quantity and calculates COGS at the time of sale. Does not use prior period information.
Retail method calculates COGS and ending inventory by calculating cot to retail ratio based on beg. inventory and current year purchases.
Sale of consignment inventory
Revenue is recognized when the goods are sold to a third party.
-Freight is a cost of inventory and expensed when inventory is sold. Freight, commissions and advertising are expenses.
while an agent (consignee) will hold and sell goods on behalf of the consignor, until the inventory is sold, the seller (consignor) will include in his/her inventory because title and risk of loss are retained by the consignor.
The goods should be included in the COGS of the consignor only when sold.
How much should the inventory account be reduced by:
Goods held on consignment do not belong to the company (not included in inventory).
Subtract markup price and goods held on consignment.
Market value is less than purchase price of an inventory
Describe the nature of the contract in the footnotes to the financials, recognized a loss in the income statement and recognized a liability for the accrued loss.
