F4 Flashcards
Define working capital.
Current assets - current libilities
How is the current ratio computed?
Current assets / Current liabilities
How is the quick ratio computed?
(Cash + Net receivables + short term investments) / Current liabilities
Current assets are defined as…
Those resources that are reasonably expected to be realized in cash, sold, or consumed (prepaid items) during the normal operating cycle of a business or one year whichever is longer
Current liabilities are defined as…
Obligations whose liquidation is reasonably expected to require the use of current assets or the creation of other current liabilities
When can a short-term obligation be included in noncurrent liabilities?
If the enterprise intends to refinance the debt on a long term basis and the intent is supported by the ability to do so as evidenced by:
- Actual refinancing prior to the issuance of the financial statements, or
- Existence of a noncancelable financing agreement from a lender having the financial resources to accomplish the refinancing.
Define cash and cash equivalents.
- Cash includes both currency and demand deposits with bank and/ or other financial institutions
- Cash equivalents included short-term, highly liquid investments that are both readily convertible to cash and so near their maturity when acquired by the entity (90 days or less from date of purchase) that they represent insignificant risk of changes in value
Name two methods of accounting for the write-off of uncollectible accounts
Direct write-off:
DR Bad debt expense
CR Accounts receivable
Weakness: bad debts are not matched to sales and accounts receivable are overstated. Not GAAP.
Allowance method:
DR Allowance for uncollectible accounts
CR Accounts receivable
Strengths: matches bad debts with credit sales. Accounts receivable fairly stated. Required by GAAP.
Name three methods for estimating uncollectible accounts.
- percentage of credit sales
- percentage of accounts receivable at year-end
- aging of accounts receivable at year-end
Using the allowance method, give the two journal entries to provide for and then to write off an uncollectible account.
Provide for:
DR Bad debt expense
CR Allowance for uncollectible accounts
Write-off:
DR Allowance for uncollectible accounts
CR Accounts receivable
What is the difference between factoring with recourse and without recourse?
With Recourse:
The factor may return the account to the company if it proves to be uncollectible. Potential liability and risk of loss remains with the company
Without Recourse:
The factor assumes the risk of loss if the account is uncollectible
State the three conditions that must exist for control of a financial asset to be considered surrendered.
- The transferred assets have been isolated from the transferor;
- The transferee has the right to pledge or exchange the assets; and
- The transferor does not maintain control over transferred assets under a repurchase agreement
If control of a financial asset is surrendered, what is the accounting treatment of the transfer?
No Continuing Involvement:
Record as a sale with appropriate reduction in receivables and recognition of any gain or loss
Continuing Involvement:
- asset for which there is no retained interest is recorded as a sale using the financial-components approach
- Assets for which there is retained interest is carried on the books of transferor and allocated a book value based on relative value of all transferred assets at the date of transfer.
If control of a financial asset is not surrendered, what is the accounting treatment of the transfer?
- Account for transfer as a secured borrowing with pledged collateral.
- Recognize the appropriate asset/liability amounts and interest revenue/expense amounts.
At what value should non-interest bearing promissory notes be recorded?
At present value of all future payments required by the not. The payments should be discounted at the market interest rate.
Notes receivable may be discounted “with” or “without” recourse. What is the difference?
Discounting with recourse:
The holder remains contingently liable
Discounting without recourse:
The holder assumes no further liability after discounting
Describe the computational steps required in “discounting a note”
- Compute maturity value (remember to include interest to maturity)
- Compute the “discount” (remember to use maturity value)
- Get proceeds by subtracting discount from maturity value
- Compute interest income as difference between proceeds and face of note.
When does the title to goods pass for each of the following? FOB destination FOB shipping point COD Consigned goods
- FOB destination - When received by buyer
- FOB shipping point - When given to a common carrier
- COD - When received and paid for by buyer
- Consigned goods - When sold to a third party by consignee
How is market calculated in the US GAAP lower-of-cost-or-market method?
Market generally means current replacement cost, provided the current replacement cost does not exceed the market ceiling or fall below the market floor.
- ceiling - net realizable value (estimated net selling price less completion and disposal costs.)
- Floor - net realizable value minus normal profit margin.
How is net realizable value calculated in the IFRS lower-of-cost-or-net-realizable value method?
Net realizable value is the net selling price less completion and disposal costs.
Explain the difference between periodic and perpetual inventory methods
Periodic:
- the quantity of inventory is determined only by physical count.
- ending inventory is physically counted and priced
Perpetual:
- inventory is undated for each purchase and for each sale
- keeps a running total of inventory balances
Name several cost flow methods for inventory
Specific identification
FIFO
LIFO (unit and dollar value)
Average - weighted average (associated with periodic)
moving average (associated with perpetual)
Gross profit
Retail - conventional retail
cost retail
FIFO/ Cost
LIFO/ Cost
Dollar value LIFO/ CostName several retail inventory methods
- conventional retail
- cost retail
- FIFO/ Cost
- LIFO/ Cost
- Dollar value LIFO/ Cost
When are losses on firm purchase commitments recognized?
Losses are recognized in the period when the price declines
DR. Estimated loss on purchase commitment
CR. Estimated liability on purchase commitment
Describe an inventory consignment arrangement. Also, how are the consigned goods carried on the parties’ balance sheets?
Consignor gives goods to consignee for sale to third parties. Title to the goods remains with the consignor; therefor the consigned items stay on the balance sheet of the consignor.
During periods of rising prices, the use of LIFO versus FIFO has what effect on the valuation of ending inventory and reported net income? Which inventory method is prohibited under IFRS?
Both ending inventory and net income will be lower when LIFO is used during a period of rising prices.
LIFO = Lowest
LIFO is prohibited under IFRS
Give some examples of capitalizable costs for:
- Acquisition of equipment
- Acquisition of building
- Acquisition of equipment - purchase price, freight-in, instillation, testing, taxes, less any cash discounts allowed.
- Acquisition of building - purchase price, deferred maintenance, alterations, improvements, architect’s fees
NOTE - if equipment or building is constructed by company, capitalized cost could include construction period interest.
How is fixed-asset carrying value computed under US GAAP and IFRS?
US GAAP:
carrying value = historical cost - accumulated depreciation - impairment
IFRS:
- under IFRS, carrying value can be calculated using the US GAAP method above or can be calculated using the revaluation model.
- Revaluation model carrying value = fair value on revaluation date - subsequent accumulated depreciation - subsequent impairment
- revaluation gains are reported in OCI
- revaluation losses are reported on the income statement
Describe the proper accounting for ordinary versus exrtaordinary repairs.
Ordinary repairs are expensed as repair and maintenance. They do NOT increase the life or utility of the asset.
Etraordinary repairs either increase the life or utility of the asset. If the extraordinary repair increases the life of the asset, it is recorded by reducing accumulated depreciation. If the extraordinary repair increases the utility of the asset, it is capitalized to the fixed asset account.
Give examples of costs to be calculated as land
- acquisition price
- closing costs, such as real estate broker commissions, legal fees, escrow fees, title guarantee insurance
- any mortgages, liens, or encumbrances on the land which the buyer assumes
- Preparation costs, such as surveying costs, leveling costs, tree removal
- cost of razing an existing building, in getting land into condition for intended use
- improvements with indefinite life
- Less: proceeds from sale of assets on land
NOTE: Excavating costs for a building and cost of improvements with a definite life are not included in land
How is investment property defined and reported under IFRS?
Investment property - land and/or buildings held to earn rental income or for capital appreciation is reported using one of two models:
1. cost model:
carrying value = historical cost - accumulated depreciation
- Fair value model:
Reported at fair value and not depreciated. Gains and losses from fair value adjustments are reported on the income statement
State two rules concerning capitalizing interest.
- only capitalize interest on money actually spent, not on amount borrowed
- the amount of capitalized interest is the lower of:
- actual interest cost incurred, or
- computed capitalized interest (avoidable interest)
For capitalizing interest, when does the capitalization period begin?
Begins when three conditions are met:
- expenditures for the asset have been made
- activities that are necessary to get the asset ready for its intended use are in progress
- Interest cost is being incurred
Ends when the asset is substantially complete and ready for its intended use
Name the most common depreciation methods. Give the basic formula for calculating each method.
Straight-line:
(cost - salvage) / useful life
Sum-of-the-years’ digits:
sum of year = n(n+1) / 2
(cost -salvage) x (years remaining) / (sum of years)
Double declining balance:
2 x straight line rate x net book value of assets
(note - no deduction for salvage to determine the depreciable base. Depreciate down to salvage value)
Units of production:
(Cost - Salvage) / Estimated hours x actual hours for period
Explain the difference approaches to depreciation under IFRS and US GAAP
Under IFRS, the depreciation method used should match the expected pattern of fixed asset consumption. (nor required under US GAAP)
Under IFRS, component depreciation is required. ( not required under US GAAP)
State the rules for computing depletion on natural resources
remember it is REAL property
Residual value (subtract)
Extraction/ development cost
Anticipated restoration cost
Land purchase price
[ (cost of land + extraction development + anticipated restoration costs - residual value) / (estimated recoverable units) ] x units extracted = Depletion
What assets are subject to the impairment test?
- Long-lived assets, specific identifiable intangibles, and related goodwill to be held and used.
- long-lived assets and specific identifiable intangibles slated for disposal.
- certain assets for a rate-regulated entity
NOTE - the test must be done at lease annually
Describe the impairment test for recoverability under US GAAP
if the sum of the undiscounted expected future cash flows is less than the carrying amount, an impairment loss needs to be recognized.
Name the two rules for performing impairment calculations under US GAAP
Determining Impairment:
Use the undiscounted future net cash flows. An impairment loss exists if total undiscounted cash flows are less than the carrying value.
Amount of Impairment:
Use the fair value of asset -
Impairment loss= fair value - carrying value
How is impairment evaluated under IFRS?
Under IFRS, impairment exists if the carrying value of the fixed assets exceeds the higher of:
- Fair value - cost to sell
- Value in use (present value of future cash flows)
How is the impairment loss reported in the financial statements?
As a component of income from continuing operations before income taxes.
The carrying amount of the asset is reduced
Is restoration of impairment losses permitted under US GAAP and IFRS?
US GAAP:
restoration (reversal of impairment losses) is permitted for assets held for sale.
restoration is prohibited for assets held for use
IFRS:
Restoration is always permitted.
