F3 Flashcards
If you cut a check, but don’t mail it, is it still your cash?
Yes.
A company had two bank accounts:
1 = $500,000 balance 2 = ($250,000)
What should the entity report as cash on it’s balance sheet?
$500,000. The negative cash amount in account 2 should be reported as a current liability.
What is the gross method of A/R? What do the entries consist of?
Record A/R w/o consideration of a discount being taken advantage of. If the discount is later taken advantage of, adjust to contra revenue Sales Discounts.
What is the net method of A/R? What do the entries consist of?
Takes into account the discount being taken advantage of by a customer when initially recording A/R on a sale. If the customer does not end up taking advantage of the discount, use the revenue acct “Sales discounts not taken”
How are receivables valued on the balance sheet?
At NRV.
A/r
Allowance
=Net
Which of the following methods is GAAP compliant?
a. ) Direct write off method
b. ) Allowance method
Allowance method.
What would be the JE to record a write off for a specific receivable? (allowance method)
DR: Allowance
CR: A/R
What would be the JE to record to collect A/R previously written off?
DR: A/R
CR: Allowance
DR: Cash
CR: A/R
What does it mean to pledge A/R?
Have your A/R take collateral for something.
Ex: Loan from BofA, pledging receivables in case you can’t pay back loan.
What does it mean to factor receivables?
What does it mean to have recourse? Or not have recourse?
Sell receivables for cash.
Recourse means you could still be responsible and held at risk for the receivables you sold, non-recourse you have no risk once you factor.
What is the JE to record write off for a specific receivable? (direct write off method)
DR: Bad Debt Exp
CR: A/R
Explain FOB shipping point
Seller transfers ownership of the merchandise once it leaves their shipping dock.
Who pays for shipping cost in FOB shipping point?
The buyer, since the goods are technically transferred to the seller as soon as they leave the sellers dock.
Explain FOB destination
Seller transfers ownership of goods as soon as they reach the destination (sellers dock)
Who pays for shipping costs in FOB destination?
The seller, since the goods are still in their possession as they are being shipped.
In consignment transactions, who is the consignor? Who is the consignee?
The consignor is the person who’s merchandise is being sold, the consignee is the person selling it for them collecting a fee.
In both GAAP & IFRS, can you reverse inventory writedowns?
GAAP = NEVER IFRS = LIMITED TO PREVIOUS WRITE DOWN
Which inventory system, period or perpetual, uses the purchases account and why?
Periodic inventory systems use a purchases account to account for all additions to inventory during the year. At the end of the year, a physical inventory is done to determine the COGS:
Beg. Inv.
+Purchases
(Ending Inventory)
=COGS
When purchasing inventory in a perpetual system, what is the JE?
DR: Inventory
CR: A/P or Cash
When selling inventory in a perpetual system, what is the JE?
DR: COGS
CR Inventory
DR: A/R or Cash
CR: Revenue
When selling inventory in a periodic system, what is the JE?
DR: A/R or Cash
CR: Revenue
Which inventory cost flow method does IFRS not allow?
LIFO
Why would an entity want to do a FIFO cost flow method for inventory?
Higher & healthier financial ratios. Lower COGS which leads to higher net income. Higher inventory on balance sheet bc selling off old cheap items first, and what is left in inventory is the more expensive ones.
How do you find the weighted average of inventory? What method needs to be used?
Periodic method must be used.
$ COGAF / # of units AFS = $ per unit
$ per unit X units at physical inventory = $ End. Inv.
How do you find the moving average of inventory? What method needs to be used?
Perpetual system must be used. (info wouldn’t be available for periodic)
How do you go about calcualting a moving average for inventory?
Must calculate a weighted average after each purchase. (need to see example). Pg 11 lecture in F3 M3.
Why would an entity want to do a LIFO cost flow method for inventory?
Lower net income = lower taxes to pay. Since your COGS includes the highest priced items, it will be larger - reducing your NI.
How do you find the price index needed to find Dollar Value LIFO?
Current Year Ending Inv. / Base Year Ending Inv.
Then take price index and multiply by inventory added in that period (revalue)
WHAT A MESS - NEED TO REVIEW AND MASTER.
Are excavation costs part of land costs to capitalize?
NO, part of the building cost.
Are costs to raze a building on the land part of the land costs?
YES.
What amount of interest can be capitalized during construction?
The amount of interest on $ spent, borrowed, and during the term of construction, not just borrowed.
How do you calculate depreciation for sum-of-the-years-digits?
(cost-salvage) * (remaining life/sum of years)
Sum of years for 5 yr life = (1+2+3+4+5= 15)
Which depreciation method ignores salvage value?
Double Declining Balance.
How would you find depreciation exp for the CY under units-of-production?
(Cost-Salvage) / Estimated Units Life
Rate per unit * Units used in Current period = depreciation exp.
What is the calculation to depreciate using double declining balance?
2/Useful Life * NBV of Asset @ beg. of period
What are some differences when it comes to depreciation between IFRS & GAAP?
Under IFRS, depreciation method used should reflect the expected pattern of fixed asset consumption (just like inventory).
Under GAAP, use whichever method you want but stay consistent (just like inventory)
When disposing of a fixed asset, what would the JE look like?
DR: Cash (received)
DR: Accum. Depreciation (plug figure)
CR: Asset (historical cost)
Under composite & group depreciation, what depreciation method is used and how is it calculated?
Straight line depreciation is used for both, by taking the average useful life of all the assets & depreciate entire balance over that life.
Under which depreciation method would accumulated depreciation equal the original cost of the asset with a salvage value?
None of them, if accumulated depreciation equals original cost, the asset would be depreciated to $0. Assets should never be depreciated below salvage value.
IFRS requires component depreciation, what does that mean?
Each component of an asset may have different lives and costs (inspection fees, parts, etc).
Those different components are depreciated separately and add up to total depreciation exp for the year.
If an impairment loss occurs on an asset, what is the JE?
DR: Impairment expense
CR: Accumulated Depreciation
Brings down the NBV of the asset while maintaing the historical cost & recognizing the exp on the income statement.
How would you find “composite life” for a group of assets?
Take sum of all depreciable bases (cost less SV) and divide by sum of depreciation exp for each one.
Sum of depreciable base / Sum of Depr. Exp.
How are ARO’s (asset retirement obligations) treated?
Added to depletion base of asset.
If a nonmonetary exchange has commercial substance or future cash flows change, how are G/L’s treated?
Gains & Losses recognized.
Under IFRS, nonmonetary exchanges with similar assets being exchanged treats G/L’s as:
car for a car.
Gain = not recognized Loss = recognzied
Under IFRS, nonmonetary exchanges with dissimlar assets being exchanged treats G/L’s as:
car for a builiding.
G/L’s recognized.
If a nonmonetary exchange lacks commercial substance and BOOT is paid, how is the loss treated?
Loss is always recognized.
If the FCF’s will not significantly change, does a nonmonetary transaction have/lack commercial substance?
Lacks.
Costs required to maintain goodwill should be treated as:
Expense as incurred.
What is the correct treatment under GAAP for R&D costs?
Expense as incurred, DO NOT CAPITALIZE.
Legal fees and other costs associated with registering a patent are capitalized.
What is the proper treatment for start-up & organizational costs?
Expense as incurred.
Under IFRS, what is the treatment for research and development costs?
Research = EXPENSE Development = CAPITALIZE
How should the initial fee of a franchise be accounted for?
Amortized over the life, continuing fee should be expensed as incurred.
If a trademark has a life of 10 years but is expected to be renewed, should you amortize over the life?
No, do not amortize as long as it will be renewed indefinitely.
When do carrying amounts of intangibles need to be reviewed?
- ) Annually
2. ) After triggering events
When testing for impairment, what is used to determine if there is an impairment loss needed to be booked?
- ) Carrying Value of the Asset
- ) Undiscounted expected future cash flows from the asset
(Will you ever recover your $??)
When is a subsequent reversal of an impairment loss permitted under U.S GAAP?
Only when they are held for disposal. If held for continuing use, reversal is prohibited.
Under IFRS, why would an asset be impaired?
Carrying Value - Recoverable amount = Balance left
Recoverable amount = Greater of:
a. ) FV - costs to sell
b. ) PV of FCF while in intended use
Is a reversal of a previous impairment loss permitted under IFRS?
Yes, to the extent it was written down by. Any gain in excess goes to OCI.
Under GAAP, how are the sum of the undiscounted cash flows and FV of the asset used to determine the amount of an impairment loss?
First determine if the sum of the undiscounted cash flows is less than the carrying value.
If it is, then to find the amount of the impairment loss:
FV - Carrying Value = Impairment Loss
How is the cost of equipment used in R&D that will have alternative future uses handled?
Capitalized and depreciated over it’s useful life.
A consignor ships goods to a consignee to sell, how should those costs be treated?
Added to the cost of inventory.
If you go to court to defend an intangible asset (trademark), what happens when you lose? What happens if you win?
What is the treatment of the $ you pay to the law firm?
If you lose, you have to expense the cost.
If you win, you can add the legal fee to the asset to be capitalized.
What does it mean to factor your AR without recourse?
True sale - remove AR from books its not yours anymore and you aren’t liable if customers don’t end up paying.
*Don’t forget about any fees and due to factors if they choose to retain a % during the factoring
What does it mean to factor your AR with recourse?
You can treat as a true sale and remove the AR from your books if and only if:
- ) Reasonably estimate seller’s obligation if factor can’t collect (recourse liability)
- ) Seller must surrender control
- ) Seller cannot be obligated to repurchase
*if one of the above are not met - treat as a loan
Name a method of writing off AR that is not GAAP compliant, show the JE of a write off using this method, and explain why not GAAP compliant.
Direct write-off method.
DR Bad Debt Exp
CR AR
*Violates the matching principle. The bad debt expense and the revenue recorded initially from the receivable would not be recorded in the same period.
Correct way:
DR Bad debt expense
CR Allowance (at the time of sale)
Need to write this off now?
DR Allowance
CR AR (net - no change to NRV)
Show the JE to record a specific write off of an accounts receivable (the correct way)
DR Allowance
CR AR
Show the JE to pledge AR
No JE - only footnote disclosure telling the readers why youre AR is now collateral for something (loan, etc)
For agricultural products and precious metals, inventory is stated at what price on the balance sheet, and when is revenue recognized
For agricultural products and precious metals, inventory may be stated above cost (net selling price less cost of disposal) and revenue is recognized when produced and not when sold
What assumption is underlying in the moving average method of inventory cost flow?
Perpetual system is used (constantly updating the moving average after sales & purchases)
Should a consignor include the cost of shipping goods to a consignee in the cost of the inventory on consignment?
Yes.
Consignor should include shipping costs to consignee, as well as warehousing costs before the goods are transferred to the consignee.
How do you recognize a loss on a purchase commitment contract?
Determine exposure remaining (units mandated to purchase in future) X Expected loss per unit = Loss as of today
DR Estimated Loss on purch. commit
CR Estimated Liability on purch. commit
*must disclose description of the losses
How would you define the net realizable value of inventory?
Selling price - Costs to get ready = NRV
*Costs to get ready (disposal, transportation, completion)
How do you know when to use lower or cost of market under US GAAP?
Lower of cost or market - Only when using LIFO
Lower of cost or NRV - Only when using FIFO or Weighted Average
How do you know when to use lower or cost or market under IFRS?
IFRS DOES NOT use lower of cost or market. (GAAP - LIFO only)
They only use LOWER OF COST OR NRV!!!
Why doesn’t IFRS allow LIFO as a cost flow assumption related to inventory?
B/c LIFO does not generally relate to actual flow of goods in a company (usually selling older stuff first - FIFO)
Does GAAP have any requirements if you use LIFO for tax purposes?
Yes - must be consistent between tax & GAAP. So if you use LIFO for tax, must also use for GAAP
*Pick your poison between lower taxes (LIFO), or higher net income (FIFO), can’t have best of both worlds
What is a LIFO layer?
If sales exceed production (or purchases) for a given period, LIFO will result in a distortion of net income b/c old inventory costs (called LIFO layers) will be matched with current revenue
Does FIFO periodic = FIFO perpetual?
Does LIFO periodic = LIFO perpetual?
FIFO = same for periodic and perpetual
LIFO = NOT THE SAME (b/c of LIFO layers)
What is dollar value LIFO (conceptually)?
Inventory is measured in dollars and adjusted for changing price levels.
In normal LIFO, inventory is measured in units and is priced at unit prices.
What are excavation costs a part of?
Cost of a building. (not land)
When you purchase equipment, how does it get presented on the statement of cash flows?
Investing outflow
How would you book an improvement to a piece of equipment?
What about a repair (ordinary) to equipment?
Improvement -
DR Equipment (capitalize)
CR AP
Ordinary repair -
DR R&M expense
CR AP
What is avoidable interest?
Capitalized interest (from constructing a FA and capitalizing interest incurred as cost of construction)
Would you include transit insurance in the cost of a machine while its being delivered to you?
YES - any cost incurred to acquire and make ready a plan asset is capitalized.
What is unique about group depreciation in terms of early disposal of an asset?
No G/L recognized - will get absorbed into accum. depreciation:
DR Cash (received)
DR Accum Depr (plug)
CR Asset (cost)
Which depreciation methods are used for the following:
a. ) Group depreciation
b. ) Composite depreciation
a. ) SL
b. ) SL
*group depr, is for a group similar assets and composite depr. is for a collection dissimilar assets
What is a major difference between GAAP & IFRS regarding nonmonetary exchanges?
GAAP: Recognizes a gain based on if a transaction has commercial substance, if it does not must determine if cash was received and how much in relation to total consideration received.
IFRS: nonmonetary exchanges are either similar or dissimilar.
Similar = No gain recorded ever (lacks com. substance) Dissimilar = Gain recognized (commercial substance)
Under IFRS, what is the accounting treatment for R&D costs?
Research = expense as incurred
Development = capitalize (expense under GAAP)
How do you write an asset back up after its been impaired in a prior year under GAAP?
GAAP does not allow the write up of an asset after its been impaired (rule of conservatism). Only one exception: if the asset is held for disposal
IFRS allows a write up, but not larger than the previous write down. Any other write up with be deferred in OCI as a revaluation surplus.
How do you know when an asset is impaired under IFRS?
BV - Recoverable amount = Loss? (impairment)
If the book value is larger than the “recoverable amount” (Larger of: FV-Cost to sell or Present Value of Future cash flows), then the asset is impaired and an impairment loss needs to be recorded. Also, consider using
How do you know when an asset is impaired under GAAP?
3 tests
0 - Triggering event for indefinite?
1 - BV - Undiscounted Future cash flows = Loss? (move to step 2 if loss)
2 - FV - BV = impairment loss
