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F3 Flashcards

1
Q

what is a cash equivalent?

A

short-term highly liquid investment that is readily convertible to cash and has an original maturity of 90 days or less from the date of purchase

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2
Q

what are 8 examples of cash and cash equivalents?

A

coins/currency
checking and savings accounts
money market funds
deposits held as compensating balances that are NOT legally restricted
bank checks
commercial paper
treasury bills
certificates of deposit

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3
Q

what needs to be disclosed in the footnotes for restricted cash?

A

nature, amount, and timing of restrictions

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4
Q

how is restricted cash classified?

A

if the restriction is associated with a current asset or liability then it is a current asset
if the restriction is associated with a noncurrent asset or liability then it is a noncurrent asset

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5
Q

what are the 2 general forms of bank reconciliations?

A

simple reconciliation
reconciliation of cash receipts and disbursements

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6
Q

what are the 4 book adjustments (BINS) and how does they relate to the book balance?

A

bank collections -> add to books
interest income -> add to books
non-sufficient funds (NSF) -> deduct from books
service charges -> deduct from books

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7
Q

what are the 3 steps in a simple bank reconciliation?

A

1) perform the BINS on books balance
2) add deposits and subtract outstanding checks from bank balance
3) bank balance per bank stmt is reconciled to true balance

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8
Q

what is commonly used for a reconciliation of cash receipts and disbursements?

A

four-column reconciliation

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9
Q

what is the objective of the four-column reconciliation?

A

reconcile any differences between:
the amount the depositor has recorded as cash receipts and…
the amount the bank has recorded as deposits

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10
Q

what are the 4 columns in the four-column reconciliation?

A

1) last month’s balance
2) this month’s receipts
3) this month’s payments
4) this month’s balance (simple bank rec)

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11
Q

is cash in a bond sinking fund restricted or unrestricted cash?

A

restricted

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12
Q

how should balance totals for different banks be accounted for when one has a negative position?

A

separately

the negative one will be classified as a liability

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13
Q

what reduces accounts receivable?

A

credit losses
sales returns and allowances
sales discounts

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14
Q

what are the 2 methods used to record sales and related receivables?

A

gross method
net method

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15
Q

what are the two methods to estimate the expected credit loss over the life of a receivable?

A

direct write off method (used for tax, not accepted by GAAP)
current expected credit loss (CECL) model

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16
Q

what does factoring with recourse mean?

A

the transferor retains the risk of credit loss since the factor has an option to resell any uncollectible receivables back to the seller

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17
Q

what does factoring without recourse mean?

A

it is a sale of a receivable and the assignee assumes the risk of loss
AR is removed from the books

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18
Q

what does discounting a note receivable with recourse mean and what are the 2 options for reporting it?

A

a contingent liability is created for the transferor

1) reported on BS with a corresponding contra-account mentioning the note has been discounted to a third party
2) removed from the BS and a contingent liability is disclosed in the footnotes

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19
Q

what does determining the proceeds from discounting a note receivable require and how is it reported on the FS?

A

deducting the banker’s discount (interest) from the maturity value of the note

should be removed from the BS as it is a sale

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20
Q

what 3 things are used to calculate the banker’s discount when discounting a note receivable?

A

using the maturity value, discount rate, and time left to maturity

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21
Q

what are the 4 key attributes of AR?

A

oral promise
current asset
sources (trade receivables or nontrade receivables)
measures (NRV)

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22
Q

what are trade receivables?

A

AR from purchases of the company’s goods or services

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23
Q

what 2 reasons are sales discounts offered for?

A

encourage prompt payments for a sale
avoid spending time chasing payments

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24
Q

what does the gross method for recording sales discounts do?

A

ignores the offered discount on the sale

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25
if the payment is received within the discount period for the gross method what happens?
record the difference between the receivables and the discount and the following JE DR: sales discount (contra-revenue) CR: AR
26
what does the net method for recording sales discounts do?
assumes the discount is offered on a sale record net revenue and receivables
27
if the payment is not received within the discount period for the net method what happens?
record additional revenue by crediting "sales discount not taken" account
28
Trade discounts are...
offered for bulk buying quoted as a % applied one at a time use only net method
29
what is the current expected credit loss (CECL) method?
reflects the amount an entity expects to collect from its customers and includes consideration of customer credit risk
30
what is the direct write off method?
waits for the AR to be uncollectible before writing off used by the IRS and is a non-GAAP method
31
why is the direct write off method not accepted by GAAP?
does not match the bad debt expense with revenue AR is always overstated no allowance count no attempt made to account for unknown bad debts which should be included in FS
32
the balance in the allowance for uncollectibles should be based on:
past experience current conditions future expectations
33
what are the two things included in the amount of credit loss expense recognized in net income?
an estimate of the expected credit loss for each sale recognized adjustment for changes to the estimate of expected credit losses
34
what is the JE for amounts collected that were written off under the direct write off method?
DR: cash CR: uncollectible accounts recovered (revenue account)
35
what is the JE for amounts collected that were written off under the CECL method?
DR: cash CR: AFDA
36
what occurs if AR is used for pledging?
company pledges that it will use proceeds from AR to pay the loan requires footnote disclosure only AR is not adjusted and not taken off the books
37
factoring of AR is considered...
the sale of receivables converting receivables to cash
38
what is the JE for factoring without recourse?
DR: cash DR: due from factor (factor's margin) DR: loss on sale of receivable CR: AR
39
what is due from factor?
considers the risk taken on by the factor as it protects the factor against sales returns, discounts, allowances, and customer disputes is similar to a security deposit held by the factor is paid back when the factor collects all of the AR is forfeited if the receivables are not fully collected
40
what are the 2 treatments for factoring with recourse?
sale -> there needs to be some recognition of this recourse borrowing -> similar to pledging, where receivables act as collateral
41
what are the 3 things that must be met for a factor with recourse to be considered a sale?
1) the transferor's obligation for uncollectible accounts can be reasonably estimated 2) the transferor surrenders control of the receivables to the buyer 3) the transferor cannot be required to repurchase the receivables (may be required to replace them with new receivables)
42
if any of the conditions are not met to treat a factor with recourse as a sale then how is it treated?
as a loan
43
what is securitization?
1) AR is transferred to a different entity 2) the entity then sells securities that are collateralized by the AR 3) investors receive cash as the AR are paid
44
a subledger is used...
to record and store detailed information, which is summarized in the control account in the GL who owes them, how old is each equipment item, how is each PPE item being depreciated, etc.
45
what does the control account in the GL reflect?
single line totals for items such as: trade receivables, inventory, PPE, AP, accrued liabilities
46
what are the 2 options if a discrepancy is found between GL and subledger?
1) if GL is wrong then an AJE will be recorded 2) if subledger is wrong then updates will be made to it
47
what is a note receivable and what are 3 characterisitics?
written promises to pay a debt writing is called a promissory note can be a CA or a NCA depending on when it will be collected it is measured at PV
48
how is the PV of a note receivable calculated?
PV = face value - unearned interest
49
what are the 4 steps to calculate the amount of a discounted note without recourse?
1) calculate the maturity value 2) calculate the bank discount 3) compute the amount paid by the bank for the note (step 1 - step 2) 4) determine the interest income (or expense) (step 3 - face value of note)
50
what are the 3 steps that occur if a discounted note with recourse is dishonored?
1) contingent liability removed 2) notes receivable dishonored should be recorded to the estimated recoverable amount of the note 3) a loss is recognized if the estimated recoverable amount is less than the amount required to settle the note and any penalties
51
what is the JE for a discounted note with recourse that is dishonored?
DR: discount on notes receivable (removes contingent liability) DR: dishonored notes receivable (the amount you did not receive) CR: original note receivable CR: loss on discounted note receivable (dishonored note receivable - discount on note receivable)
52
what is the discount always applied to on the proceeds from the bank?
the maturity value NOT the face value
53
what are the 4 types of inventory?
retail raw materials work in process finished goods
54
inventory account valuations should include...
all the costs necessary to make the inventory ready for the intended use (sale)
55
what are the 2 methods used to show a write down of inventory?
lower of cost or market (LCM) lower of cost or NRV
56
what 2 inventory methods is LCM used for?
LIFO or retail inventory method
57
what is different between the periodic and perpetual inventory system in regards to recording purchases?
perpetual records purchases with a debit to inventory periodic records purchases with a debit to purchases
58
in a period of rising prices what inventory method will have the highest inventory, lowest COGS, and highest NI? Lowest?
highest -> FIFO lowest -> LIFO
59
what are firm purchase commitments and how do losses work?
enter into a forward contract to lock in prices to purchase a specified amount of goods at some time in the future however, if prices go down and the contracted price exceeds the market price and if it is expected that losses will occur when the purchase is made then you have to record the loss immediately
60
inventory are items held for...
resale
61
for inventory stored in a public warehouse, what warrants the ownership of inventory?
the owner of the inventory has a warehouse receipt signifying ownership even though they do not have physical possession
62
who has ownership of inventory in a mandatory buyback?
the seller even though the title has passed to the buyer
63
for inventory sold through installment sales (sold on credit) who has ownership of it?
buyer has possession and seller has legal title but it depends on if we can reasonably estimate uncollectible debts? if % of uncollectible debts can be estimated, include in the buyer's inventory if % of uncollectible debts cannot be estimated, include in the seller's inventory
64
what are 2 departures from cost basis for valuing inventory?
precious metals and farm products are valued at NRV (selling price - cost to sell) lower of cost or market & lower of cost or NRV
65
how are losses on inventory dealt with?
should be booked immediately if material: record the loss separately in the IS and disclose in the notes if immaterial: increase COGS
66
are reversals of inventory allowed under GAAP?
no
67
what is the market ceiling?
NRV
68
what is the market floor?
market ceiling - normal profit margin
69
what is the replacement cost?
cost to purchase the item as of the valuation date
70
how do you calculate the market (middle) value for the lower of cost or market method?
choose the middle number of the market ceiling, market floor, and replacement cost or: NRV - cost - normal profit margin
71
what are 4 characteristics of periodic inventory?
debit purchases when buying inventory physical count of ending inventory is required at end of period to calculate COGS GAFS = BI + purchases quantity of inventory is determined only by a physical count (at least annually)
72
what is perpetual inventory?
inventory record for each item is updated for each purchase and sale as they occur
73
what are the JEs for periodic inventory when buying and selling?
buying: DR - purchases CR - cash or AP selling: DR - cash or AR CR - sales
74
what are the JEs for perpetual inventory when buying and selling?
buying: DR - inventory CR - cash selling DR - COGS, cash/AR CR - inventory, sales
75
what is a modified perpetual system?
perpetual record of quantities only not costs
76
what are the 6 inventory valuation methods?
specific identification FIFO weighted average (periodic system) moving average (perpetual system) LIFO dollar-value LIFO (need a price index)
77
what is the formula for price index in dollar value LIFO?
EI at current year cost / EI at base year cost
78
what is the difference between moving average and weighted average?
in moving average you compute the weighted average cost after each purchase
79
what is the LIFO conformity rule?
if you use LIFO for tax purposes, it must be used for GAAP FS
80
why would you want to use LIFO for tax purposes?
during times where prices are increasing, using LIFO means higher COGS which means lower NI which means less income tax expense
81
if prices are rising, then the price index is?
greater than 1
82
what is the gross profit method in inventory valuation?
used for interim FS as part of the *periodic inventory system* inventory is valued at retail gross profit % is known and is used to calculate COGS
83
how do understatements and overstatements of beginning and ending inventory relate to COGS?
understatement of BI means understatement of COGS because there is an understatement of GAFS and vice versa for overstatement overstatement of EI means understatement of COGS and vice versa for understatement
84
how does interest on an inventory loan affect inventory cost?
no effect because interest is a period expense
85
what classifies as an inventoriable cost that can be capitalized?
any cost required to get an inventory item in a state where it is ready to be sold ex. raw materials, direct labor, factory overhead, carrying costs, freight-in, insurance

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