F3 (Cash+CE, Inventory, PPE: cost basis)

Question 1

examples of CE’s:

Answer 1

• coin+currency on hand (petty cash)
• checking + savings accounts
• MMF
• deposits held as compensating balances (not restricted)
• negotiating paper (traveler’s checks, bank drafts, cashier’s checks, T-bills, certificate of deposit (OG maturity <90 days)

*NOT legally restricted deposits held as comp balances

Question 2

2 forms of bank reconciliations:

Answer 2

• simple reconc:
• goal is to calculate “true balance”
• bank add it LOC (deposit - o/s checks)
• svc charges, errors, and NSF deduct from books and bank collections, errors, and interest income add to books
• steps = book bal adj’d to reflect correct bank bal, after adj’d book bal, it will equal true bal, then bank bal per bank statement is reconc’d to true bal
• reconc of CR and CD:
• shows proof of proper recording of cash transactions

Question 3

perpetual vs periodic inventory:

Answer 3

• perpetual: running total of inventory (updated)

* periodic: no running total and COGS cannot be det’d til end of period when inv counted (includes purchases)

Question 4

inventory valuation methods: [GAAP vs IFRS]

Answer 4

• GAAP: LCM using LIFO/retail inventory method

* IFRS: LC-NRV using FIFO/WA method

Question 5

how to calculate LCM:

Answer 5

• ceiling = NRV
• replacement cost = given
• floor = NRV - NPM

Question 6

Inventory Costing Methods:

Answer 6

• FIFO: EI and COGS are same under perpetual or periodic
• sell old; higher EI, CA, RE
• highest EI and highest NI
• LIFO: (US) tax advantage (better matching); need to use LIFO conformity rule (on FS as well)
• lowest EI and lowest NI

Question 7

WA - used with periodic inventory:

Answer 7

WA cost per unit = COGAFS/# units available for sale

Question 8

MA - used with perpetual inventory:

Answer 8

• unit cost changes each time there is a new purchase

* calculate new MA after every purchase (total COGAFS/# units)

Question 9

DV LIFO:

Answer 9

• computed internally or obtained from external sources
• PI = EI CY/EI BY
• PI*layer = Y1 layer
• Y1 layer + Y1 DV LIFO = EB Y1 DV LIFO

Question 10

retail method:

Answer 10

*at cost: BI + purch = AFS

• at retail:
• BI + purch + markups = AFS
• AFS - sales - markdowns = EI retail
• cost AFS/retail AFS = cost/retail ratio
• cost/retail ratio * EI retail = EI LCM

Question 11

sales w/ ROR:

Answer 11

• GR: if goods are sold w/ ROR, they should be included in seller’s inv if amt of goods likely to be returned cannot be est’d
• if amt of goods likely to be returned CAN be est’d, transaction will be recorded as sale w/ allowance for est’d returns
• revenue from sales transaction w/ ROR should be recog’d at time of sale only if crtierias are met:
• SP substantially fixed at date of sale
• buyer assumes all ROL
• buyer has paid some form of consideration
• product sold is substantially complete and
• amt of future returns can be reasonably est’d (rev recognition rule)

Question 12

exceptions to cost basis:

Answer 12

• precious metals and farm products:
• valued at NRV

*LCM and LC-NRV is used when loss on sale is expected

Question 13

reversal of write-downs (GAAP vs IFRS):

Answer 13

• GAAP = no

* IFRS = yes (limited to amount of OG write-down)

Question 14

Inventory write-down JE:

Answer 14

Dr Inv loss due to decline in MV

Cr Inv

Question 15

Periodic vs. Perpetual JE for purchases:

Answer 15

*Periodic:
Dr Purchases
Cr Cash

*Perpetual:
Dr Inventory
Cr Cash

Question 16

Specific Identification:

Answer 16

takes precedence over any other inventory costing method (cost of each item is uniquely identified)
- usually for HV items or physically large

Question 17

Firm PC’s:

Answer 17

• legally enforceable agreements to purchase a specific amount of goods at some time in the future
• must be disclosed in FS or notes
• if price > MV and expected that loss will occur when purch is made, the loss should be recog’d at time of decline in price (conservatism)

Question 18

FOB destination & shipping point costs:

Answer 18

• destination = packaging, shipping, and handling (seller)

* shipping = shipping cost is buyer’s cost

Question 19

Ordinary vs. Extraordinary repairs:

Answer 19

• ordinary = expensed

* extraordinary = cap as inventory ONLY IF it increases usefulness of asset

Question 20

land improvements:

Answer 20

fences, sidewalks, landscaping, etc

Question 21

land costs:

Answer 21

all costs up to excavation (includes razing and real estate taxes in arrears)

Question 22

Building costs:

Answer 22

excavation and forward

Question 23

under IFRS, component depreciation is required (more accurate):

Answer 23

separate significant components of FA’s w/ diff lives should be recorded and dep’d separately; CV of components that are replaced should be derecog’d

Question 24

Depreciation methods:

Answer 24

• SOY digits: rate = remaining life/SOY digits [n(n+1)/2]
• (cost - SV) * rate = DE
• DDB = highest DE initially, SL = lowest initially

*UOP:
Step 1 :
(cost-SV)/ units per hr = rate per unit/hr

Step 2:
rate per unit/hr * # units produced/hr worked = DE

Question 25

Interest on Self-Constructed Assets:

Answer 25

• cap those interests on these assets based on (WAAE*int rate); cannot exceed actual interest costs; leftover is int exp
• this is an exception (permit filed and during construction for use in biz)
• we capitalize interest LOWER of actual int costs incurred or computed cap’d int (avoidable interest)
• interest on inventory routinely mfg’d is not cap’d

Question 26

valuation of donated FA’s:

Answer 26

Dr FA (FMV)
Cr Gain on nonreciprocal transfer

Question 27

for a damaged portion of a Building that is known and uninsured:

Answer 27

recognize loss to CV of damaged portion and capitalize refurbished costs

Question 28

WA int rate calculation:

Answer 28

[(6/14)8%] + [(8/14)9%] = 8.57%

Question 29

disclosures for depreciable assets and DE should be made in FS or notes:

Answer 29

• DE for period
• balance of major classes of depreciable assets
• AD allowances by classes/total
• methods used by major classes in computing DE