F3 Flashcards
Cash Reconciliation - Bank adjustments
- In transit deposits (not yet in bank) - add
- Outstanding / unrecognized cut checks - deduct
- Bank Errors - fix
Cash reconciliation - book adjustments
- EFT (electronic funds transfer unrecorded) (add)
- Bank Service charges (deduct)
- Accountant Error (fix)
- NSF check (bounced) - deduct
- Earned interest - add
Money market account
Cash
AP checks recorded on 12/31 but not mailed until Jan 15 - reconciled in reporting period or next year?
Next year
Checkbook vs Bank Bal - given no other info, which should you assume is correct on 12/31?
Book balance, once finally adjusted, will not equal bank balance. Assume book bal is correct because bank balance will lack checks in transit
Is a 90 day certificate of deposit a cash equivalent?
Yes
Is a post dated check from customer a cash equivalent?
If dated AFTER the balance sheet date, no - otherwise yes
What must you be careful of with bank rec questions?
Are you reconciling the bank bal. vs the book bal. - different items for each category
AR vs Note Receivable
AR is an ORAL promise, note is a WRITTEN promise
Sales discounts gross Method expectation of customer payment
Expect customer to NOT take discount
Sales discounts NET Method expectation of customer
You expect customer to TAKE the discount
Sales discounts gross method vs net method special accounts
Gross: Sales discounts taken
Net: Sales discounts NOT taken
Is a sales / cash discount a speed or qty discount?
Speed
What type of discount is a trade discount?
Qty / volume / economies of scale discount
What methods can be applied to trade discounts?
Net only
What is the general rule for expected sales returns?
Do not journalize UNLESS % of returns is MATERIAL and can be REASONABLY ESTIMATED
How to journalize sales returns and allowances?
Sales returns and allowances
AR
What kind of account is sales returns and allowances?
Contra Revenue
What is the direct write off method for uncollectible AR and what is it used for?
No Allowance for Doubtful Accts, only write off to bad debt expense when uncollectible. NOT GAAP. Used for tax purposes.
What is the allowance method and what is it used for?
Used for GAAP. Record bad debt expense and CR allowance for Doubtful, write off to allowance for Doubtful
Difference between income statement Approach and b/s approach in calculating allowance for Doubtful ending balance?
I/S - calculate the delta first
B/S - calculate the ending bal. first
Certificate of deposit
A bank account where you agree to leave your money in and can’t withdraw until x date. Why done? Better interest rate
How is cash paid for a cash equivalent recorded on statement of cash flows?
It isn’t. It’s exchanging cash for cash basically. Net zero change
What is the effect on writing off AR in GAAP on b/s and I/s?
No change. Offsets
Pledging - what is and how to report?
AR as collateral, report via note disclosure only
Factoring AR
Selling AR
Factoring with recourse
If Customer doesn’t pay, it comes back on you. Can either by treated as a sale or as pledging
When is factoring with recourse a sale?
- Due from factor can be reasonably estimated
- Transferor surrenders control (factor can sell)
- Transferor is not required to buyback uncollected Receivables, but may be required to replace with similar AR
What two ways can factoring with recourse be reported?
As a sale (if it meets all 3 requirements) or as a pledge (notes only)
How is factoring without recourse journalized?
Cash
Due from factor
Loss on sale of AR
AR
Securitization of AR
AR sold to a trust hat sells securities that are collaterized by AR. As AR is paid, investors receive cash back
What is present value?
Face amount
Less unearned interest
= PV
Discounting notes Receivable
Sell notes Receivable with or without recourse
How are notes Receivable discounted journalized?
Cash
Notes Receivable Discounted
-or-
Cash
Notes Receivable*
*note disclosure of contingent liability
What kind of asset is notes Receivable discounted?
Contra-asset / contra-AR
A method estimating uncollectible accounts that emphasizes asset valuations rather than income
measurement
Aging of Receivables
How to solve for cash received on note discount
Note maturity value * months remaining on term of note / 12 * bank effective interest rate = cash received from bank
What is the note discount when notes are sold?
The interest the bank gets on the note (the interest the seller doesn’t get to keep)
Solving for the maturity value of a note at x% interest with n equal payments
Must calculate with ordinary annuity. Face / ordinary annuity at x% = equal pmts * n periods = maturity amount
Sales returns and allowances is what kind of account?
Contra-sales (IS)
Sales returns and allowances JE
Sales returns and allowances
AR
Non-conforming goods
Wrong stuff - Doesn’t belong to buyer
If likelihood that goods will be returned cannot be estimated, how accounted for?
Kept in seller’s inventory until right to return elapsed. Sale NOT finalized
Revenue Recognition rule for right to return - when can revenue be recognized?
- Sales price is substantially fixed
- Buyer assumes risk of loss
- Buyer has paid
- Product sold is substantially complete
- Future returns estimatable
Public Warehouses - how to tell ownership?
Owner has warehouse receipt
Sales with mandatory buyback (financing) - who has possession of inventory?
Seller even though title has passed
Installment sale where seller retains legal title as security for the loan - who has the good?
If % of uncollectible debts cannot be estimated keep in sellers inventory
When replacement cost has gone down for a good - what is the exception to revaluing inventory?
If cost is recoverable and an approx. normal profit can be recognized during the ordinary course of biz, then value at cost
Precious metals and farm products are valued at
Net realizable value
When is inventory revalued?
A loss on sale is expected
How to recognize a loss on revaluation of inventory
GAAP: If material, unusual item, else expense to COGS.
IFRS: doesn’t specify
Can revaluation loss (write downs) be reversed under GAAP?
Generally no
Can revaluation loss (write downs) be reversed under IFRS?
Generally yes, limited to amount of previous write down
Net realizable value
What you can sell it for less costs to complete / sell
Periodic account only
Purchases (instead of inventory)
IFRS inventory valuation method
All are Lower of Cost or NRV
Does inventory valuation method have to match actual inventory flows?
GAAP - no
IFRS - yes
Is LIFO allowed under IFRS?
No
Periodic = perpetual under which method?
FIFO
During periods of rising prices which inventory method values inventory the lowest?
LIFO
L = lowest
If inventory is valued lower then COGS is valued
Higher
If inventory is valued higher then
COGS is valued lower
Firm purchase commitment
Agreement to purchase a specified amt of goods at some future date
Must be disclosed
When to recognize a loss on firm purchase commitment?
When price declines (upon discovery)
Are temporary declines in inventory value expected to reverse by end of annual period recognized as a loss?
No, not in interim statements
What goods can be valued at above cost in inventory?
Precious metals and agricultural goods
Is shipping and handling incurred in connection with goods shipped FOB destination?
No - sale is assumed to occur on customer’s shipping dock. Seller records these are fright out selling charges
Is shipping and handling incurred in connection with goods shipped FOB shipping point?
Yes - buyer is responsible for getting the goods to the necessarily location in the necessary condition to sell. These extra costs are rolled into cost of inventory (FREIGHT IN)
If beg. Bal inventory is understated then COGS is
Understated because the prior period COGS was overstated - this will correct as an understatement in the current period
Which inventory method most closely approximates current cost for COGS?
LIFO b/c the last in item (current cost) gets charged to COGS
Which inventory method most closely approximates current cost for inventory?
FIFO b/c the what’s left in inventory is in their for the “first time”
LIFO memory tool
Long life
Inventory has a “long life” with LIFO because old stock keeps getting shoved to the back by new
FIFO memory tool
First time in inventory
When inventory is destroyed what method can be used to determine cost of destroyed inventory?
Gross profit Method
A dollar value LIFO “LAYER” represents what?
A layer of inventory from that year, I.e. The remaining delta of that year. Be careful reading. Are you dealing with a layer or aggregate balance (end bal for that year)
Under a moving average inventory, what cost is used for COGS?
The moving average cost
When is the moving average cost of inventory calculated?
After each purchase
Disadvantage of periodic inventory system is
Includes cost of inventory sold and shortages b/c COGS is a plug
What is the JE for loss on purchase commitments?
Estimated Loss on purchase commitment
Estimated Liability on purchase commitment
Which inventory costing method maximizes profits in periods of rising prices?
FIFO
If total inventory is used to apply lower of cost or NRV, how determined?
Pick lower of Total inventory cost or total inventory at NRV
Why do perpetual and periodic NOT equal under LIFO?
Because under periodic LIFO assumes the oldest inventory is still there, but if there was a big sale in the middle of the month and then a big purchase periodic would be majorly off due to its assumptions
Are HC and Replacement Cost the same thing?
No!
What is the JE for donated fixed assets?
Fixed Asset (FV)
Gain on nonreciprocal transferRevaluation loss that reverses a gain
Offset the OCI revaluation surplus instead of recording on IS
Can the revaluation method be used on one asset but not another?
They must be applied to item classes (all items within that class) instead of individual items. Example: furniture and fixtures
With revalued items under IFRS what also must be disclosed?
Historical cost equivalent
Can a revaluation gain be reported on the IS?
Yes, but only to the extent of reversing a previously recognized loss
What happens if a revalued asset becomes impaired?
Reverse the revaluation surplus to zero and the excess is reported on the IS
What are considered land costs?
Any costs to bring the land to the condition necessary for use (up to excavation of building)
How are interest costs for and during the construction period for land improvements be recognized?
Capitalized via the weighted average of accumulated expenditures
Land vs Land Improvements depreciation
Land is NOT depreciated but land improvements are (paving / water systems / lighting / landscaping / etc.)
Digging a hole for a foundation is a ____ cost?
Building
Filling in a hole is a ____ cost?
Land
Basket purchase of land and buildings
Allocate purchase price based on ratio of appraised values
How is a replacement of a fixed asset recognized where the asset’s carrying value is known?
Remove old asset and recognize any gain or loss. Capitalize new asset to asset account
How is a replacement of a fixed asset recognized where the asset’s carrying value is unknown and assets life is extended?
Debit Accumulated Depr for the cost of improvement / replacement
If usefulness of asset is increased by an improvement, how recorded?
Capitalize to the asset account
How are repairs capitalized?
They AREN’T - they are expenses to repair and maintenance UNLESS extraordinary, in which case they are treated as an improvement
How to recognize additions to fixed asset?
Capitalize
If assets life is extended vs assets usefulness is increased - how is Recognition different?
Extension of life = reduce AD
Usefulness increased = capitalize
When does capitalizing interest end?
Asset is substantially complete and ready for intended use
If there is an intentional delay in construction - should interest still get capitalized?
No
If a building suffers uninsured damage that is repaired - how recorded?
Like a replacement. Take a loss on the damage and capitalize the repair costs
For machinery held for sale - should interest costs be capitalized?
Interest for machinery held for sale CANNOT be capitalized. Must be for entity’s use as a fixed asset
What is the depreciation basis for leasehold improvements on a lease?
The lessor of the estimated useful life or the remaining term of the lease
If a note is issued to finance a fixed asset - what is the capitalized cost of the fixed asset?
Present value of the note - why? Removes interest so that it’s not capitalized
Can a revaluation reversal occur in separate years?
Yes, a loss on the X1 income statement can be reversed on the X2 income statement. Any excess is OCI as revaluation surplus
What’s an alternative to the weighted average of accumulated expenditures to find out the capitalizable interest expense?
JTD Construction in progress balance that month * the interest rate * 1/12 = the max interest that can be capitalized JTD for that month. Add all the months together to find the total
Proceeds from the sale of a building on land purchased should be
Deducted from the cost of the land
Should building modification costs be capitalized?
Yes - additions are capitalized
Should the depreciation method reflect the expected pattern of fixed asset consumption?
GAAP - not required
IFRS - yes
Should the depreciation method reflect the expected pattern of fixed asset consumption?
GAAP - not required
IFRS - yes
Component Depreciation - who requires?
IFRS not GAAP
What is composite depreciation?
Depreciating an entire class of assets over a single life
Composite depreciation asset Retirement entry
If the average service life for the group has not been reached when an asset in the group is retired, instead of a gain of loss, offset the AD account for that amount
Sum of year’s digits depreciation method
Numerator = remaining life Denominator = sum of years digits
Which depreciation method does NOT factor salvage value?
Double declining balance. Instead don’t depreciate past salvage value
Which depreciation method does NOT factor salvage value?
Double declining balance. Instead don’t depreciate past salvage value
Depreciation necessary Disclosures
- depreciation expense
- Balance of major classes of depreciable assets by nature and function
- Accumulated depreciation allowances by classes or in total
- Methods used by class for depreciation
Land capitalized cost
Residual value
Extraction / development cost
Anticipated restoration cost
Land purchase price
Commercial Substance
Future cash flows are impacted as a result of transaction
Nonmonetary transactions w/ commercial substance
gain / loss measurement basis
Fair value of assets GIVEN UP vs book value - exclude cash exchanged
Boot
Cash or other assets added to an exchange to make exchange more fair
IFRS non-monetary exchange rules vs GAAP
Dissimilar Assets? Recognize gain like GAAP commercial substance
Similar assets? No gain
When to use rules of exchange lacking commercial substance?
a. Exchange lacks commercial substance
b. Fair values NOT determinable
c. Exchange is to facilitate sales
Lacking commercial substance exchanges, no boot
No gain
Lack commercial substance
Boot <25% PAID
No gain
Lacking commercial substance,
Boot <25% RECEIVED
Gain is proportional
Lacking commercial substance, boot >25%
Monetary exchange
Lacking commercial substance
Loss
Recognize loss
Involuntary Conversion
Gain / loss recognized and deferred tax asset / Liability created
What non-monetary exchange measures the exchange based on the reported amount of the nonmonetary asset surrendered (not its fair value)
Lacking commercial substance
When boot is <25%, when is a gain recognized?
When RECEIVED
Recognize and Receive both start with “R”s
Sale of asset - where to put in statement of cash flows?
Cash received for sale for non-operating asset -> investing activity
Should composition of fixed assets be reported in the summary of significant accounting policies?
No
What is carrying value?
Depreciable base + salvage value - accumulated depreciation
How does impairment of an asset affect depreciation?
The new depreciable base of the asset is used with a new remaining life
Group vs composite depreciation
Group - similar assets
Composite - dissimilar
How do additional expenditure effect depletion amount per unit?
Create a new depreciation rate
Depletion items sold vs depletion items produced
Only depletion items SOLD cause depletion expense
What depreciation method would leave accumulated Depr equal to original cost at the end of the asset’s estimated useful life?
If the item has salvage value? None. It would leave AD equal to the depreciable base
If nonmonetary exchange occurs, goods received is the recorded at ____ ?
Fair value of assets surrendered
Involuntary gains requiring entity to purchase another asset - should the gain be netted against the cost of the new asset?
No!
How are involuntary gains / losses recorded?
NBV netted against any costs associated with the transaction - NOT fair value
Is sum of years digits recursively applied to carrying balance or applied to depreciation base?
Not recursively applied to balance
Which of the following use strait-line depreciation?
Group / Composite?
Both
When a fixed asset in use is impaired, what account is used as the offset of the loss?
Accumulated Depreciation
What are the two biggest gotchas for depreciation questions?
a) double declining balance does NOT remove salvage value
b) Asset acquired after January 1st
How to find the “composite life” for a composite depreciation of a group of assets?
Sum of total depreciation base / sum of strait line depreciation per year = composite life
Is depletion the same thing as depreciation?
No
Higher book value results in ____ gain and ____ loss
Choose increased or decreased
Decreased gain and increased loss
Lower book value results in ____ gain and ____ loss
Choose increased / decreased
Increased gain and decreased loss
Which results in higher book value with no salvage? Sum of years digital or double declining balance?
Sum of years digits. Double declining balance is the fastest depreciation method
Which Depr. Method results in the highest carrying value? Sum of years digits or strait line?
Strait line is the slowest depreciation method, therefore results in the highest carrying value. That means decreased gains and increased losses
Should the market value at the end of a lease term be considered “salvage”?
No - depreciate over the lower of the lease term or estimated life. Ignore estimated market value at the end of the lease term
Intangible assets
Long lived legal rights or competitive advantages acquired
Legal and registration fees to acquire an intangible are expenses or capitalized?
Capitalized
Intangible assets created internally are (expenses or capitalized)?
General Rule: Expensed. Same as R + D.
Some exceptions
Captalizable intangible costs
a. Legal fees and other costs related to SUCCESSFUL DEFENSE of an asset
b. Registration or consulting fees
c. Design costs (e.g. of a trademark)
d. Other direct costs to secure an asset
When is an intangible amortized?
When it has a finite life
GAAP and IFRS R + D cost
IFRS: can capitalize development cost
GAAP: must be expensed
When to amortize goodwill?
Do NOT amortized goodwill
IFRS vs GAAP intangible revaluation difference
IFRS can report with revaluation model instead of cost model
Initial franchise fees are …
Capitalized for franchisee
Continuing franchise fees are…
Expenses as incurred
Start up costs are…
Expenses as incurred
Start up costs tax rules
$5K deducted, balance amortized over 15 years
Exceptions to expensing R + D under GAAP
R + D is for a customer = inventory
R + D assets have an ALTERNATE use
Not R + D item examples
the following are NOT R + D:
- market research
- quality control testing
- reformulation of chems
Computer software to be sold costs
After technological feasibility is established, capitalize until product is ready for sale. Amortize after product is ready for sale (greater of strait line or % of revenue)
Software costs internal use
After technological feasibility established, capitalize. Once done, Amortize strait line
How is revenue recognized if software developed for internal use is sold to outsiders?
Do not recognize a profit until all cost is recovered
IFRS software costs
Research is expenses and development is capitalized
R + D done for you by a third party is
Expensed
Maintenance of goodwill - expense or capitalize?
Expense
Internally generated goodwill is expensed or capitalized?
Expensed
Only goodwill generated in an arms length transaction is capitalized
Organizational costs are expensed or capitalized?
Expensed!
Tax: deducted in later years for tax purposes
Staff training and salaries related to an acquisition of a patent are expensed or capitalized?
Expensed
Goodwill can only be created
When purchased
(Acquired company’s fair value of net assets
R + D goal
Generate NEW products / services / techniques
If equipment for R + D has NO alternate use it should be
Expensed immediately, NOT capitalized over life of the project
Redesign of an product prerelease is a ____ expense?
R + D
What are the two steps for impairment?
Step 1: will we recover our investment eventually? (Sum of undiscounted cash flows compared to carrying amount. If not, go to step 2
Step 2: CV less FV = operating loss
Difference between intangible impairment GAAP vs IFRS
IFRS only has step 2.
GAAP: finite life? Two step. Infinite? Step 2 only
Is restoration of impairment permitted?
Asset held for disposal: yes
Asset held for use: no
Held for sale or disposal differences with impairment vs held for use?
a. Can restore value
b. Total carrying loss includes cost to dispose asset
What is the recoverability test?
For impairment, can we recover our return on investment? (Undiscounted future cash flows vs carrying value)
How to calculate IFRS impairment loss?
Carrying value is compared to recoverable amount. Recoverable amount is the greater of net realizable value (fair value - disposal cost) or present value of future cash flows (value of asset in use)
Does preferred stock have voting rights?
No
For dollar value lifo, if you have the index and current ending balance, how do you determine the base price ending balance?
Current price ending balance / index
For dollar value lifo how do you calculate the current value lifo delta?
Current ending bal / index = base ending bal
Less base beg bal = base delta
Base delta * index = dollar value lifo delta
Beg bal + dollar value lifo delta = end bal dollar value lifo
For moving average how do you calculate the average?
Beg inventory balance + purchase / beg units + purchased units = current moving average
Recalculated each purchase and each issue
How to calc weighted average periodic
Total cost / total units = weighted average
COGS? = weighted average * units sold
End inventory? = weighted average * units in ending inventory
Is beg inventory balance used in the determination of weighted average?
Yes
Difference for when average calculated for weighted and moving are calculated
Weighted = once a month Moving = each purchase
What three columns do you need for dollar value lifo?
Base year / current year / dollar value lifo
How to calculate the floor for lower of cost or market
NRV - ( selling price * profit margin )
Selling price * profit margin = profit margin for the product
FOB destination - goods are in transit. Who reports the inventory, customer or seller?
Seller owns the inventory until customer takes control as loading dock
Group depreciation and composite depreciation are depreciated with which depreciation method?
Strait line
Would a new engine be considered a repair or an extraordinary repair (capitalizable)
It’s capitalizable because it increases the utility of the vehicle
When boot is received along with an asset is it added to the book value of the asset?
No - it’s recorded as cash:
Cash
Asset
Asset that was given up
Gain (depending on boot % received)
If boot was PAID and exceeds 25% of total consideration, is a gain recognized?
Yes
If the CEO spent 30 hours personally overseeing an R&D project is that time R&D expense?
If tracked - yes
Under the revaluation model for a finite life intangible, is it amortized?
Yes, amortized every year and any revaluation gain / loss will be the new basis of amortization for the next year
Amortization expense for a patent credits accumulated amortization - patents or is a direct reduction of patent cost?
Accumulated Amortization - Patents
If the recoverability test fails and there is impairment, what is the first question one must ask before calculating impairment?
Held for disposal or held for use?
If disposal, disposal costs added to impairment
Name an example under GAAP when an impairment can be recovered if the value of the asset goes up?
The imputed asset is held for sale or disposal. Recovery can only be made to the extent of the original impairment
If something has NOT reached technological feasibility, is it research or development?
Research
Technological feasibility demarcates what?
The transition into the development phase of R&D
What you must be most careful with bank refs
Was it a customer’s check (did we receive) or was it our check (did we pay)?
Does accrued property tax on land when land is purchased get added to the capitalized land cost?
Yes
Does freight in get a speed discount?
No - freight is paid separately to the freight company, so the speed discount doesn’t apply UNLESS the freight company offers one too
Do discounts gets added to inventory?
Yes, items purchased are net of discounts
Warehouse rent - period cost or inventoriable cost?
Unless it’s manufacturing, period cost
How to use selling price to determine cost of goods sold?
Selling price * ( 1 - gross profit % )
If inventory will be 90% impaired on Jan 1, Y2 - do we record the impairment on Y2 or Y1’s books?
Y1’s books to match the impairment loss to the period in which the cost incurred
Weighted average of accumulated expenditures. How is the interest rate figured for the excess amount of specific borrowings less the weighted average of accumulated expenditures?
Weighted average of other borrowings of the company
