F3 - Assets and Related Topics Flashcards
1
Q
F3M1
A
overview of cash and equivalents
2
Q
What does cash and equivalents include?
A
ST, highly liquid investments:
- readily convertible to cash
- has an original maturity of 90 days or less from the date of purchase
3
Q
What are examples of cash + equivs?
A
petty cash, deposits, coin, checking/savings accts, negotiable paper
4
Q
What are not examples of cash + equivs?
A
- maturity date of more than 90 days
-legally restricted items, - bounced check,
- not mailed in time period
5
Q
What are NSFs?
A
are nonsufficient fund, the check will bounce
6
Q
What are bank reconciliations?
A
They explain the difference btw the cash bal reported by bank and cash bal per the depositor/s books
The goal is to calc the “true balance”
7
Q
Equation for Bank Stmt Balance
A
Beginning Balance
D +deposits in transit
O -outstanding checks
a any error adjustments
= adjusted true cash balance
8
Q
Equation for Book Balance
A
Beginnning Balance
B +bank collections
I +interest received from bank
N -nsf checks
S -service charges
a - adjustment for errors
= adjusted true cash balance
9
Q
F3M2
A
Trade Receivables
10
Q
What is A/R?
A
an oral promise,
its a current asset,
two sources, trade or non trade
measurable by net realizable value
11
Q
What is NRV?
A
net realizable value is the balance of accounts receivable adjusted for allowances that may be uncollectible, sales discounts, and sales returns
12
Q
What is the account analysis mneumonic?
replacement for T charts
A
B (beginning bal)
A (add)
S (subtract)
E (ending bal)
13
Q
What are the two methods for accounting for sales discounts?
A
Gross method and Net Method
14
Q
what does 2/10, n/30 mean?
A
Pay 98% in 10 days, gives a 2% discount
Pay 100% in 30 days
15
Q
Gross Method Sales Discount and what is the JE with and without discount taken
A
- ignore the offered discount on sale
- if payment is received within the discount period: (1) record the difference btw the receivables and the discount
(2) a sales discount (contra -rev) account is debited to reflect the sales discount
Sale JE
A/R
Sales
Discount taken JE
Cash
Sales discounts taken
A/R
Discount not taken JE
Cash
A/R
16
Q
Net Method Sales Discount
A
- assume the discount is offered on a sale
- record net rev and receivables
- if payment is not received within the discount period:
(1) record additional rev
(2) credit “sales discount not taken”
account (supplemental rev account)
Sale JE
A/R
Sales
With discount taken JE
Cash
A/R
Not discount taken JE
Cash
A/R
Sales discounts not taken (difference)
17
Q
Trade discounts are
A
- offred for bulk buying
- quoted as a %
- applied one at a time
- recorded only using net method
18
Q
What are the methods of recognizing uncollectible A/R?
A
Current Expected Credit Loss (CECL) Method
Direct Write-off Method (not GAAP)
19
Q
Direct Write-off Method (not GAAP)
A
- waits for A/R to be uncollectible before writing off
- this method is only used by GAAP
20
Q
Current Expected Credit Loss (CECL) Method (allowance method)
A
- Estimates losses before they occur and records them in the period of sale.
- reflects the amount an entity expects to collect from its customers and includes consideration of customer credit risk
- accepted by GAAP
21
Q
Allowance Method JE
A
Dr. Credit Loss Expense
Cr. Allowance for Credit Losses
Adjusted when accounts are written off:
Dr. Allowance for Credit Losses
Cr. Accounts Receivable
22
Q
JE for Direct Write-off Method
A
Bad Debts Expense
Accounts Receivable
23
Q
What is credit loss expense? Where is it recognized?
A
its the expense estimated to reflect expected uncollectible from credit sales.
its recorded in the income stmt and allowance for credit loss is recorded as a contra asset to accounts receivable on the bal sheeet
24
Q
What is Aging Schedule of Trade Receivables?
A
A report that categorizes accounts receivable based on the length of time they have been outstanding. It helps assess a company’s credit risk, estimate bad debts, and apply the allowance method for doubtful accounts.
25
Structure of Aging Schedule
0–30 days (current)
31–60 days
61–90 days
Over 90 days (high risk of default)
Total amounts in each bucket help determine collectibility.
26
Aging of Accounts Receivable (Balance Sheet Approach)
focuses on asset valuation (estimates allowance for credit losses).
Accounts receivable are categorized by age, and an estimated percentage is applied to each age bucket.
The calculated total is the ending balance in the allowance account, so adjustments are made accordingly.
27
Percentage of Sales Method (Income Statement Approach)
Focuses on income measurement (estimates credit loss expense).
A fixed percentage of total credit sales is recorded as credit loss expense.
The estimated amount is added to the existing allowance balance.
28
Allowance for Doubtful Accounts (AFDA) & Bad Debt Expense Formula
Estimated Bad Debt = (A/R in each bucket * uncollectible %)
Adjusting Entry = Bad Debt Expense=Required AFDA−Existing AFDA balance
29
Factoring of A/R, what is it? What does it mean with and without recourse?
Selling an A/R as collateral
With Recourse (Seller retains risk) → Treated as a loan unless certain conditions are met.
Without Recourse (Buyer assumes risk) → Treated as a sale, and accounts receivable are removed from the balance sheet.
30
Factoring without Recourse JE
Cash (what they pay now)
Due from factor (what they pay later)
Loss on sale of receiavble (loss incurred on sale)
A/R Write off original A/R
31
Factoring with Recourse JE
32
Factoring with recourse : sale requirement
1. the transferor (seller) obligation for uncollectible can be reasonably estimated
2. transferor surrenses control of receivable to buyer
3. transferor cannot be required to repurchase receivable, they can choose to replace with new receivable
if any is not met it is a loan not a sale
33
What is a note receivable?
a promise to pay
promissory note
long term or short term
present value
34
Discounting N/R with recourse Steps
1) Calcualte the maturity value of not by
add interest to the face amt of the note
2) Calculate the discount on the payoff value at maturity
3) Compute the amt paid by the bank for the note
step 1 - bank discount = amt paid by bank
4) How much interest income do we get
subtract the face value of note from the amount paid by the bank for note
35
Dishonored Discount N/R
original b/r on books
- discount on n/r
-dishonored n/r
= Loss
36
F3M4
PP&E Cost Basis
37
What is PPE?
are fixed assets in operations not for resale
38
Historical Cost is
the price of obtaining asset and bringing it tothe location and condition necessary for intended use
39
Donated Fixed Assets are recorded
at FV with incidental costs incurred
its considered as a gain on income stmt
Fixed asset (FMV)
Gain on nonreciprocal transfer
40
Property Costs
all costs incurred up to excavation for new building are considered land costs
includes purchase price, broker's commissions, title and recording fees, demolition less sale on existing building
building cost; digging hole for foundation
41
Plant Costs
Includes purchase price, repairs neglected from previous, additions/improvements
land cost: filling in hole or leveling
42
Equipment Cost
Invoice price
-discounts
+freight in (and insurance in transit)
+installation charges
+sales/excise taxes
43
Additions to PPE do what
AIR
they increase quanityu of fixed assets and are capitalized
Asset
Cash/A/P
44
Improvements/Replacements do what
AIR
they are capitalized to fixed asset acct are substituted for old assets.
If CV of old asset is known, remove it and recognize any G/L cap the cost of improve/place to asset act
If CV of old asset is unknown and the asset's life is extended
Acc. depr
Cash/A/P
45
Repairs do what
AIR
ordinary repairs should be expenses as repair and maintenance. Extroadinary repairs should be capitalized
46
Fixed Assets constructed by a company cost includes
direct labor, repairs and maintenance, overhead, constrctuion period interest
47
Capitalization of interest costs
Interest costs may be capitalized as part of the cost of a constructed asset if certain conditions are met. Cost of assets includes all expenditures necessary to bring to intended use.
Rule 1: only capitalize interest on money actually spent, not on total amt borrowed
Rule 2: the ammt of capitalized interest is lower of 1) actual interest cost incurred or 2) computed capitalized interest
48
Capitalization Period
Cap Period Begins when
- expenditures for the asset have been made
-activitives necessary to get the asset ready for iindtended use are in progress
- interest cost is being incurred
cap period ends when the asset is substantially completed ready for intended use
49
Avoidable interest
refers to the amt of interst that could have been avoided if the funds were not borrowed for construction. This interest may be capitalized
50
Weighted Average accumulated expenditures
calculation
Capitalized interest is based on the weighted - average of ACC. construction, no necessarily the total amt borrowed
each expenditures is multiplied by the portion of the year that was outstanding and then these amts are summed
for expenditures made uniformly throughout the year, the simple avg of ACC exp can be used
calc [(debt1/total debt) *int rate] +[(debt2/total debt) *int rate]
51
Interest Rate to use
1. If there is a loan specifically for the asset, the interest rate on that loan is used
2. If the avg ACC expenditures exceed the specific new borrowings, interesting the excess is computed based on the int. rate for other borrowings of the company
3. When borrowing are not tied specifically to the construction, a weighted average interest rate of the company other borrowings is used
calc [(debt1/total debt) *int rate] +[(debt2/total debt) *int rate]
52
Leasehold improvements are capitalized and then amortized over
the lesser of the life of the improvements or the remaining term of the lease
53
F3M3
Inventory
54
Types of Inventory
Retail Inventory
Raw Material
Work In Progress
Finished Goods
55
FOB Shipping Point means
The title passes to the buyer when the seller delivers goods to a common carrier
56
FOB Destination means
The title passes to the buyer when the buyer receives the goods from the common carrier
57
Shipment of nonconfirming goods fob is
to the seller upon rejection of the buyer
58
Cosigned Goods
title directly passes to third party buyer cosignee
59
If there is a required buyback who has ownership in inv?
the seller
60
For installation sales, who has ownership of the inventory?
can we reasonably estimate uncollectible debt?
if no, include in seller's inv
if yes, include in buyer's inv
61
Inv should be stated at its
cost
62
Methods used to determine the cost of inv include
FIFO
LIFO
Average Cost
Retail Inv Method
63
Precious Metals and Farm Products are valued at
NRV
net seeling prices less costs of disposal
64
Lower of Cost or Market, and Lower of Cost and NRV means
that the utility of the goods is no longer as great as their cost and departure from cost basis is necessary.
65
If a loss in inventory is material
report on a separate line item on income stmt
66
If a loss in inventory is immaterial
increase COGS
67
Reverals of writeoffs are
prohibited by GAAP
68
Lower of Cost or NRV Calc
FIFO
Step 1: calc NRV
selling price - cost to sell
Step: compare to cost given, pick the lower of
69
Lower of Cost or Market
Average Cost
used for LIFO or retail inv method
1) Replacement Cost
2) Calc Celing: NRV (selling price - cost to sell)
3) Market Floor: NRV - normal profit margin
4) Find middle value of the three, that's the market value
NRV - cost - normal profit margin
choose lower one of middle value or cost
70
Journal Entry for Lower of Cost or Market Loss
Inventory Loss due to decline in market value
Inventory
71
substantial and unusual losses from the subsequent measurement of inv
small lossses are
should be disclosed in the the fin stmts
small losses from a decline in value are included in COGS
72
Types of Inventory Systems
Periodic Inv
Perpetual Inv
73
Periodic Inventory
- physical count at end of accounting period
-when buying inv, debit purchases
74
Perpetual Inventory
-when you buy invenotory , you debit inv, credit cash
- when you sell iv, you credit inc, and debit COGS
75
Inventory Formula
Beginning Inv
+Purchases
= COGS available
-Ending INV
= COGS
76
Periodic If ending inv is overstated?
COGS is understated which means profits are overstated which means RE are overstated which means equity is overstated
77
Periodic Journal Entry when selling inv
cash or a/r
sales
78
Perpetual Inv JE buying Inv
Debit : Inventory
79
Perpetual Inv JE selling Inv
DR Cash or A/R
CR Revenue
DB COGS
CR Inventory
80
Cost Flow Assumptions of Inventory
Specific Identification
FIFO
Weighted Avg
Moving Avg
LIFO
Dollar-value LIFO - need a price index
81
Specific Identification Cost Flow
- cost of each item in inv is uniqly identified
- for large or high value items
82
FIFO
where first costs inventoried are the firsts costs transferred to COGS.
selling old, ending inv is new
in periods of rising prices, fifo method results in highest value ending inv, lowest COGS and highest Net income
83
Weighted Avg Cost Flow
periodic system
avg cost per unit = total inv costs available / total # of units available
take the weighted avg and multiply by the FIFO method end inv and COGS
suitable for homogeneuos products
84
Moving Avg Cost Flow ???
perpetual
add together to determine the total cost of goods in inv before sale
then
avg cost per unit = total inv costs available / total # of units available
then multiply by units sold
calc purchases and inv balance
85
LIFO Perpetual and periodic
sell newest, ending inv is old
if used for tax purposes, it shows the gov
: higher cost of goods sold and reduced taxable info
if used for tax purposes it must be used for gap financial stmts
if there are rising prices, the LIFO method results in lowest ending inv, the highest costs of goods sold and lowest net income
perpetual is calculated after each batch
periodic is calcualted after entire period
86
Dollar Value LIFO
ending inv at current year cost/ ending inv at base cost year
if prices are rising, then price index is > 1
multiply price index by layer
calc column for base year, at current year cost, and dollarvalue lifo
87
Gross Profit Method
- interim and for periodic inv system
beginning inv
+purchases
=COGS available for sale
-COGS
=ENDING INV
COGS = sales * COGS %
88
Rule of Conservatism
book anticpiated losses immediately
89
firm purchase commitments
a forward contract is a legally enoracable agreement to purchase a specified amt of goods at some time in future
if prices go up, you have profit
if prices go down you have. loss
90
frieght in does what frieght out does what
frieght in inncreases cogs, frieght out is a selling exp
91
F3M5
PPE Depreciation, Disposal and Impairment
92
Depreciation is
a systematic and rational to allocation the cost of item of the period in which they help generate rev
for times not held for sale but are used in business
93
Tangible Items are
Intangible Items are
Depreciated
Amortized
94
Physical Depreciation is
wear and tear
95
Functional Depreciation
arises form absolescence or inadequacy of the asset to perform effeciently
96
What is salvage value and useful like, and what must be done to it
must be disclosed to footnotes when calc depreciation
Salvage Value = Reasonable estimate of amt that will be realized at the end of the useful life of depreciation asset
Usefull life = period over which an asset's cost will be depreciated
Revision are change in estimate
97
Depreciable Base =
historical cost - salvage value
98
For assets place in service during the year, the depreciation must be computed
for a partial year rather than full year
99
If a company chooses a higher salvage value for an asset,
that will reduce the depreciable base, resulting in less depreciaton expense
100
If a company assigns a longer usefil life or higher salvage value..
its annual depreciation expense will be reduced
101
Component Depreciation
it means you depreciate of each part of an item of PPE that is significant to the total cost of the fixed asset
can do but not must do
102
Composite Depreciation
depreciating all the assets over one single life
103
how to calc single life amt if you wanted to do composite depreciation without composite amt
calc single life and add all of the annual depreciations for each component depreciation
104
straight-line depreciation equation
(cost - salvage vlaue)/estimated useful life
105
if method of depreciation may change but
is use prospectively
106
the accumulation of depreciation is accomplished using a contra-account such as
accumulated depreciation or allowance for depreciation
107
When the asset is placed in service in a certain year depr exp
is typically taken for a portion of the year
108
half year convention
is another option chosen for assets place in service during the year
this is when 1/2 year's depreciation is taken both in the year of acq and the year of disposal
109
no depreciation in the acq year
and a full year of depr in the disposal year, and vice versa
110
when do you use straight line depreciation
when service potential declines overtime
111
What is sum of years digits depreciaiton?
the accelerated method that provides higher (lower) depreciation exp in early (later years)
112
What is sum of years digits depreciation equation?
(cost - salvage) * (remaining life of asset /sum of years digits)
113
sum of digits denominator equation
s= n*(n+1) /2
n = estimated useful life
114
units of production depreciation
used to calc depr when service production declines with use
115
units of production equation
(cost - salvage value) / estimated units or hours = rate per unit or hour
rate per unit * # of units produced = depreciation expense
116
double declining balance depreciation
there are 125% or 150%, its used when the asset is subject to rapid obsolescence
117
double declining balance depreciation equation
calculate the maximum depreciation, last year cannot exceed it
DDB = 2/N
if N = 150%, DDB = 1.5/N
DDB * (Cost - Acc depr)
118
JE for sale of asset during useful life
cash received from sale
acc depr of sold asser
sold asset at cost
the difference is gain/loss
119
JE to write off of a fully depreciated asset
ACC Depr
Old ASSET at full cost
120
Total and permanent impariement JE
ACC depr
Los die to impairement ( the difference)
Asset at full cost
121
PPE Disclosure
depr exp for period
balacne of major casses of depr
depr meethod
acc depr allowances by classes or in total
122
PPE Depletion
is the allocation of the cost of wasting natural resources such as oil, gas, timber and minerals
purcahse cost includes
- expenditures
- restoration costs
- costs to prepare the land for the removal of resources
- costs to prepare the asset for harvest (lumber industry)
123
residual value is
monetary worth of a depleted asset after resources have been removed (like salvage value)
124
What is depletion rate is acceptable by GAAP?
Cost depletion rate is computed by dividing the current estimated recoverable units into unrecovered cost (less salvage)
125
Cost depletion rate
is computed by dividing the current estimated recoverable units into unrecovered cost (less salvage)
cost depletion rate is multiplied by units produced to allocate the costs to production
126
Test for Recoverability
if the sum of the undiscounted expecred future cash flows is less than the carrying amount, an impairment loss needs to be recognized
127
Calculation of Impairment Loss
the impairment loss is a calculated as the amount by which the carrying amt exceeds the FV of the asset
if it is positive there is no impairement loss , if its negative, there is impairment loss
128
If there is an impairement and its for an asset held for use
FV or PC future neet cash flows
= impairment
129
depletion base equation
purchase price + development costs + estimatimated restoration costs - expected salvage value.
130
depletion per ton equation
depletion base / amt of tons
131
depletion exp equation
depletion per ton * tons sold
132
subsequent reversal of an impairment loss is
prohibited under U.S. GAAP (unless the asset is held for disposal).
133
If there is an impairement and its for an asset held for disposal
FV or PC future neet cash flows
= impairment
+cost of disposal
= total impairment loss
134
impairment loss is equal to
CV -FV of assets
135
F3M6
Intangibles with Finite Lives
136
intangible assets are
long-lived legal rights and competitive advantages developed or acquired by a business enterprise
137
Cost of intangible assets not acquired from others should
be expensed when incurred
138
Intangible assets with finite lives are
are amortized using the straight-line method, unless another method is deemed more appropriate.
139
Intangible Assets with Finite Lives Amortization is recorded over
the shorter of the asset’s estimated useful life or its remaining legal life
140
Net Book Value (NBV) of a Patent =
Original Patent Cost – Amortization
141
Gain on Sale of a Patent =
Sale Price – Net Book Value
142
Legal costs to register or successfully defend a patent are
capitalized and amortized.
143
Legal costs for an unsuccessful defense are
expensed immediately.
144
Research & development (R&D) costs for a new product idea are
expensed, not capitalized.
145
Trademarks: If expected to be renewed indefinitely,
no amortization is recorded.
146
Franchise Costs: Amortized using
the straight-line method.
147
Organizational Costs: for intangible assets are
Expensed immediately under GAAP.
Deducted over time for tax purposes.
148
Acquired Intangible Assets are
Recorded at purchase price or fair value, whichever is clearer.
Legal & registration fees are capitalized.
149
Recoverability Test (for finite-life intangibles):
Compare undiscounted future cash flows to carrying value.
If carrying value exceeds cash flows, a fair value test is performed.
150
Crypto Assets
Classified as indefinite-lived intangible assets if they do not provide enforceable rights or claims to an underlying good.
Their value resides on a distributed ledger.
