F4 Flashcards
Working Capital and Fixed Assets
Working Capital is Defined as?
Current assets - Current liabilities
Should be Greater > than Zero
The Current Ratio is Defined as?
Current Assets / Current liabilities.
It should be > Greater than 1
The Quick Ratio is Defined as?
(Cash + Net receivables + Marketable Securities) /Current Liabilities
Contains no inventory!
Current Assets are defined as the larger of?
Assets to be consumed in one year
OR
Assets to be consumed in operating cycle.
Whatever is LARGER.
Current Liabilities can be classified as Long-term Liabilities provided that?
Actual Refinancing happened prior to the Issuance of the Statements
OR
There is an Agreement (noncancelable) with a lender that has the resource to execute the Agreement.
True or False: Under IFRS, Current liabilities can be reclassified like in GAAP?
False
Only classified if the Financing is completed before the Balance sheet date!
Cash and Cash Equivalents: Negotiable Paper (CDs) are considered CE except…?
When CDs have a maturity date of over 90 days
What is the CE with Cash Surrender Value (CSV)?
CSV of Life Insurance can be current asset or a non-current asset depending on INTENT.
Policy owner intends to surrender policy for its CSV during normal operating cycle = current asset.
Does not intend to surrender as normal then it is non-current asset.
Items that are **NOT **considered Cash Equivalents?
- CD’s over 90 days.
- Legally restricted deposits (held as compensating balances)
Must report SEPARATELY!
Restricted use cash is…?
Cash held aside for a specific use (i.e. purchase of PP&E, Bond Sinking funds)
Disclosures for Restricted Cash: What to do if associated with current Asset/Liability?
Classify as current A or L but separate from unrestricted Cash
Restricted cash: If associated with noncurrrent A or L, what do you do?
Classify as a noncurrent A or L, but separate from Investments or Other Assets section.
Similar to CSV
In general for Current or Noncurrent assets? Book the…?
Intent of the company
Sales Discounts (i.e. 2/10 n/30)
How to account for the sales discount using the Gross method?
Assuming customer will not take discount, book adj. later if taken.
- Dr: Cash $100,000
- Cr: Sales $100,000
- Dr: Cash $98,000
- Dr: Sales discount taken $2,000
- Cr: Accounts Receivable $100,000
Sales Discounts (i.e. 2/10 n/30)
How to account for the discount using the Net method?
Assuming customer WILL take discount.
- Dr: Cash $98,000
- Cr: Sales $98,000
- Dr: Cash $100,000
- Cr: Sales discount NOT taken $2,000
- Cr: A/R $98,000
No adj. need when cash is received, recorded as net. Adj. ONLY if sales discount NOT actually taken.
What are Trade Discounts? How do they differ from Speed Discounts?
Accounts Receivable is recorded net of sequentially applied discounts on qualifying QUANTITY of purchases.
True or False: The Direct Write Off method is always allowed on GAAP.
False!
The direct write-off method is not accrual basis so it is allowed in GAAP.
Company must do what if the pledge (use as collateral) an A/R account?
Disclose as a note. No Adjust is to be made.
A sale of A/Rs without recourse is consider to be…?
Final. The buyer assumes all the risk and rewards of the asset. Entry:
- Dr: Cash $1,000,000
- Dr: Due from Factor or Fees $100,000
- Dr: Loss on the sale of AR $100,000
- Cr: Accounts Receivable $1,200,000
3 criteria
A sale of A/Rs with recourse is considered a sale when it meets what Criteria?
- The transferor’s obligation for uncollectible accounts are reasonably estimated.
- The Transferor surrenders economic benefits of the A/Rs to the buyer.
- No requirement to repurchase, but may be required to replace with similar A/Rs
Notes Receivable are presented at their?
Present Value, Always.
Notes Receivable discounted to a third party?
Balance sheet contra account (Notes Receivable Discounted) OR
May be removed from the balance sheet and disclosed as a contingent liability.
Inventory on consignment are excluded or included when?
Consignor includes. He still has all risk and loss with goods.
Consignee excludes even though he processes goods.
Valuation of Inventory what is also included in Cost?
Costs that provide time or place utility. (Freight in or Freezer)
What are not included in inventory Cost?
- Freight out
- Market costs.
- Abnormal Spoilage
- Idle plant time.
What are the 3 exceptions to LCM (Lower Cost or Market)?
- Gold, Silver and agriculture products
- Sales price of end product is not affected by its market value.
- Firm sales contract
LCM may be applied to a single item, a category of items or total inventory. What is the most Conservative approach?
Single item is the most conservative.
Inventory write-downs are usually reflected in CoGs unless?
The amount is material. Then it is reported separately in the income statement.
True or False: Under US GAAP, reversal of inventory write-downs are allowed.
False. They are never allowed on US GAAP.
In LCM, the Market value is?
The median or middle vale.
It is the middle value of the Replacement Cost, Market Ceiling and Market Floor
In LCM, what is the Market Ceiling?
Net Selling Price
Less: Costs to complete and dispose the asset (costs include delivery costs and sales commissions)
In LCM, what is the Market Floor
It the Market ceiling minus the Normal Profit margin.
Under IFRS, where are losses from inventory write-downs reported?
IFRS does not specify where to put write downs from inventory.
What does IFRS allows regarding inventory write-downs?
IFRS allows for a reversal of a inventory write-down. The reversal is limited to the amount of the write-down
Periodic inventory: what is the formula?
Beginning inventory
Plus: Purchases
Equals: Cost of Goods available for sale.
Less: Ending inventory
Cost of Goods Sold
What are the advantages of FIFO?
The ending balance reflects replacement cost approximately.
Ending inventory are the same whether Perpetual or Periodic.
How does FIFO affect Net Income?
- Highest ending inventory.
- Smallest COGS
- Highest Net Income
What are the advantages of LIFO?
- Better matching of current revenue with current expenses (market price)
What are the disadvantages of LIFO?
- Ending balance will not approximate replacement cost.
- There is distortion if sales exceed current production.
- Digging into a previous LIFO layer.
How does LIFO affect Net Income?
- Lower ending inventory
- Higher COGS
- Lower net income
Dollar value LIFO, what is the formula for the price index?
Ending inventory at current year cost
Divided by: EI at base year cost
Price Index
Firm purchase Commitments: If the sale price exceeds the market price, then?
Losses expected to occur at the time of sale should be recognized at the decline in price.
IFRS revaluation must be applied when to which Balance Sheet items?
All items in a classes of fixed assets. Not to individual fixed assets.
Revaluation losses (FV < CV) are recognized on the income statement unless?
The Revaluation loss reverses a previously recognized revaluation gain.
Revaluation Gains are reported in OCI unless they?
Reverse an amount up to the a previously recognized Revaluation loss.
Cost of equipment includes?
- Invoice Price of Equipment
- Less cash discounts/other discounts
- Freight-in and Insurance in-transit
- Sales and Federal Excise Taxes
- Installation charges (testing, prep for use)
- (Time and place utility)
For an Improvement or Replacement: if the carry value of an old asset is known and the life of an asset is extended, how do you account for a improvement/replacement?
- If carrying value of old asset is known, remove it and recognize any gain/loss.
- If carrying value of old asset is unknown and:
- Asset life is extended
- Dr: Accumulated Depr.
- Usefulness of asset increased, capitalize the cost
What does the cost of the land include as a SUBTRACTION?
The proceeds from the sale of salvaged materials.
What does the cost of a building include?
- Purchase price, etc…
- Alterations and improvements
- Architect’s fees
- Possible addition of construction period interest
- All repairs due to the negligence of the previous owner (deferred maintenance)
Separate accounts
When preparing the land for a building costs, what cost are charged the Building and Land accounts?
- Filling a hole is charged to the Land account
- Digging a hole for a foundation is charged to the Building account.
Basket purchase of a land and building. How to value the land and the building?
Take the percentage of each and multiply to get the amount paid for land and building.
Under the cost model, Investment property is report at what amount?
Historical Cost less accumulated depreciation. Fair value must be disclosed!
Under the Fair Value model, Investment property is report at what amount?
The fair value and the asset is not depreciated.
Under the fair value model, routine revaluations in the asset are report as gains and losses on what?
The Income Statement.
In order to capitalize interest costs, you do not capitalize interest costs on?
- On inventory normal manufactured.
- Fixed Assets purchased before the construction,
- During intentional Delays of Construction.
You can capitalize interest costs on?
- Special order goods (on hand for sale to customers)
- Ordinary delays of construction.
If there is a new asset with specific new borrows, the capitalized interest is equal to?
The amount of interest incurred on the New Borrowing.
If the accumulated costs for the construction exceed the New Borrowings, the interest cost on the excess should be computed using what?
The Weight Average interest rate for other borrowings.
Interest costs capitalized must not exceed what amount?
The total amount of interest expense incurred in the period.
What are the advantages to Component Depreciate?
It is more accurate because different components have different useful lives
Repair and maintenance costs would be more accurate because components replaced would be excluded .
True or False: IFRS does not require Component Depreciation?
False. IFRS requires Component depreciation.
Components that are replaced should be derecognized.
A group or composite asset is retired.
How are the losses or gains treated when the the Average Service Life of the asset has not been reached?
The gains or losses are absorbed in the Accumulation Depreciation account.
What is the Sum of the Year’s Digit Formula?
S = [N x ( N+1 )] / 2
When the allowance method of recognizing uncollectible accounts is used, how would the collection of an account previously written off affect A/R and the allowance for uncollectible accounts?
A/R: No Effect
Allowance for Uncollectible Accounts: Increase
To restore the account previously written off:
- Dr: A/R
- Cr: Allowance
To record the cash collection on the account:
- Dr: Cash
- Cr: A/R
It is REAL property.
How to compute depletion on land?
- Residual Value (subtract)
- Extraction/Development Cost
- Anticipated Restoration Cost
- Land Purchase Price
What does Cost of the Land include?
- Purchase price
- Brokers’ commissions
- Title and recording fees
- Legal fees
- Draining of swamps
- Clearing of brush and trees
- Site development (filling in/leveling land)
- Existing obligations assumed by buyer (mortgages)
- Cost to tear down an old building
- Less: Proceeds from sale of existing buildings, standing timber, etc…
DOES NOT INCLUDE EXCAVATING/DIGGING!
Land Improvements are depreciable
Shipping costs incurred by a consignor on transfer of goods to a consignee should be considered as:
Inventory cost to the consignor.
3 Types
What is the Allowance Method?
- % of Sales - emphasize matching I/S approach
- % of A/R at YE - balance sheet approach
- Aging of Receivables - emphasize asset valueation NRV balance sheet approach
A/R to Cash
What is factoring receivables?
Process which company converts its receivables to cash by assigning them to a factor (with or without recourse).
This would alter the timing of the cash flows already recorded on books.
(Discounting is converting notes receivable not A/R to cash)
What is LIFO reserve?
Difference between inventory on LIFO method vs. any other cost method.
3
Methods of Depletion
- Cost - dividing current estimated recoverable units into unrecovered costs (less SV) = cost depletion rate% x units produced
- Percentage - based on % of sales
- Unit Rate - depletion recognized per unit extracted
Formula
How to calculate & use Depletion Base?
Cost to purchase property
Plus: Development costs to prep land for extraction
Plus: Estimated restoration costs
Less: Residual value of land after resources are extracted
Unit Depletion = Depletion base / Estimated recoverable units
