F4: Working Capital and Fixed Assets Flashcards

1
Q

Working Capital

A

current assets - current liabilities

  • measure of solvency of a company
  • ability to pay debt as due
  • ST financial risk
  • the bigger the ratio, the less risk
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2
Q

Current Assets

A

reasonably expected to be realized in cash, sold, or consumed during the normal operating cycle of a business or one year, whichever is longer

  • cash
  • trading securities
  • other ST investments
  • cash surrender value of life insurance* (if surrendered w/i operating cycle or year)
  • receivables
  • inventories
  • prepaid expenses
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3
Q

Current Liabilities

A

require use of current asset or creation of other current liabilities

  • used for matching principle
  • w/i normal operating cycle or one year, whichever longer
  • ST payables
  • current portion of LT debt
  • cash dividends payable, declared
  • accrued liabilities
  • payroll liabilities
  • taxes payable
  • advances from customers
  • deferred/unearned revenue in general
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4
Q

Short Term Obligations Expected to be Refinanced*

Current Liabilities

A

under GAAP, ST obligation may be excluded from current liabilities and included in long-term liabilities if company intends to refinance it on LT basis + shows ability by:

  • actual refinancing prior to issuance of FSs or
  • existence of noncanclable financing agreement from a lender having the financial resources to accomplish refinancing

dr: ST liab, cr: LT liab

GAAP vs IFRS

  • under IFRS, ST obligations expected to be refinanced can not be classified as LT
  • must wait til actual refinancing agreement
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5
Q

Cash and Cash Equivalents

305

A

cash + ST highly liquid investments w ORIGINAL maturity 90 days or less

  • coin and currency on hand including petty
  • checking and savings accts
  • money market funds
  • *deposits held as compensating balances that are NOT legally restricted
  • negotiable paper: bank checks, commercial paper, treasury bills, certificates of deposits <90 days, etc

Not Cash or Cash Equiv

  • certificates of deposit w original maturity >90 days
  • legally restricted compensating balances* w lending institution
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6
Q

Restricted or Unrestricted

Cash and Cash Equivalents

A

Restricted: set aside for specific use or purpose

  • nature, amt, and timing of restrictions should be disclosed in footnotes
  • if restriction associated w current asset or liability, classify as current asset but separate from unrestricted cash
  • if associated w noncurrent asset or liab, classify as noncurrent but separate from Investments or Other Assets

Unrestricted: used for all current operations

examples F4-5

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7
Q

Bank Reconciliations

Cash and Cash Equivalents

A
  1. Simple Reconciliation- goal: calculate “true balance”
    - deposits in transit: add to bank
    - outstanding checks: subtract from bank
    - service charges: subtract from book
    - bank collections: add to book
    - errors: either side, fix it
    - non-sufficient funds (NSF): subtract from book
    - interest income: add to book
    reconciled “true” balance should appear on BS as “Cash and Cash Equivalents”
    - book balance is adjusted to reflect corrections by bank
  2. Reconciliation of Cash Receipts and Disbursements
    - aka four-column reconciliation or proof of cash
    - serves as proof of proper recording of cash transactions
    - need bank reconciliation info for present and prior month
    - goal: reconcile differences b/w mat depositor has recorded as cash receipts and amt bank has recorded as deposits
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8
Q

Accounts Receivable

310

A

oral promises to pay debts and GR classified as current assets
- classified as either trade or nontrade receivables

add:

  • beginning AR
  • credit sales

subtract:

  • write offs
  • conversions to notes
  • cash collected
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9
Q

Net Realizable Value of AR*

Accounts Receivable

A

the balance of the AR acct adjusted for allowances for receivables that may be uncollectible, sales discounts, and sales returns and allowances
- gross amount of AR would be misleading

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10
Q

Valuation of AR w Discounts and Returns

Accounts Receivable

A

Sales or Cash Discounts (speed): generally based on % of the sales price (e.g. 2/10 n/30) 2 methods of calculation

  1. Gross Method
    - records sale w/o regard to discount
    - if payment received in discount period, a ‘sales discount taken’ (contra revenue) account is debited to reflect the discount
  2. Net Method
    - records sales and AR net of discount
    - adjustment not needed if payment received w/i discount period
    - if payment received after, a ‘sales discount not taken’ account (revenue) must be credited

Trade Discounts (quantity): quoted in percentages

  • sales revenue and AR are recorded net of trade discounts
  • applied sequentially

Sales Returns and Allowances

  • expected exchanges do not affect sales, inv., or COGS GR: wait until actual
  • goods returned are deductions from AR and sales
  • Exception: if past experience show that a material % of receivables are returned, a ‘Sales Returns and Allowances’ (contra sales) should be established
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11
Q

Estimating Uncollectible AR*

Accounts Receivable

A

2 methods of recognizing uncollectible AR

  1. Direct Write-Off Method
    - not GAAP, used for tax
    - wait until actually uncollectible
    - dr: bad debt expense, cr: AR
    - AR overstated bc uncollectible not accted for
  2. Allowance Method (GAAP)
    - based on past experience
    - 3 methods
  3. % of Sales Method
    - IS approach, emphasizes matching
    - dr: bad debt expense, cr: allowance for doubtful accts
    - write offs would decrease
  4. % of AR at Year End
    - BS approach
    - amt of estimated allowance calculated is the ending balance that should be in the allowance for doubtful accts on the BS
    - the difference b/w unadjusted balance and desired ending balance is debited to bad debt expense
  5. Aging of Receivables Method
    - BS approach, emphasizes asset valuation NRV
    - schedule prepared categorizing accts by time outstanding w each category’s dollar amt multiplied by a % representing uncollectibility based on past experience
    - sum of product for each aging category is desired ending balance in allowance acct
    - bad debt expense is plug like % of AR
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12
Q

Bad Debt Expense

Accounts Receivable

A

usually includes 2 items:

  • provision made during the period and
  • adjustment made at year-end to increase/decrease the balance in the allowance for uncollectible accounts, if needed
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13
Q

Write-Off of a Specific Account Receivable

Accounts Receivable

A
  • under allowance method (GAAP) since direct write off is now allowed
  • dr: allowance for doubtful accts, cr: AR
  • AR down, allowance down, equals no change in NRV
  • doesn’t touch IS through bad debt expense
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14
Q

Subsequent Collection of AR Written Off

Accounts Receivable

A

depends upon method of acct used

Direct Write-Off Method

  • tax, not GAAP
  • dr: cash, cr: uncollectible accts recovered (revenue acct)

Allowance Method

  • reverse write-off (dr: AR, cr: allowance for uncollectible accts)
  • then, dr: cash, cr: AR

Allowance for Doubtful Acct Analysis Format

  • plug n chug
  • F4-15
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15
Q

Pledging (Assignment)

Accounts Receivable

A

company uses existing AR as collateral for a loan

  • company retains title but pledges that it’ll use the proceeds to pay the loan
  • requires only note disclosure
  • AR not adjusted
  • dr: cash, cr: note payable
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16
Q

Factoring of AR*

Accounts Receivable

A

process which a company can convert it’s receivables into cash by assigning them to a factor either with or without recourse
- customer may or may not be notified

Without Recourse

  • true sale
  • sale is final and assignee (the factor) assumes risk of any loss on collections
  • dr: cash, Due from Factor, Loss on Sale of Receivables, cr: AR
  • due from factor is factor’s security, proceeds retained by factor to protect against sales returns, discounts, allowances, and customer disputes

With Recourse

  • could be sale or loan
  • factor has option to resell any uncollectible receivables back to seller
  • sale if: then treat like w/o recourse
    a. seller’s obligation for uncollectible accts can be reasonably be estimated (due from)*
    b. seller surrenders control
    c. seller not required to repurchase the receivables, but may be required to replace the receivables w other similar receivables
  • if any ^ are not met, transfer treated as a loan (dr: cash, cr: note payable) and footnote
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17
Q

Notes Receivable

A

written promises to pay a debt, writing is called a promissory note

  • classified same as AR
  • either current or LT depending on when collection is
  • PV future cash flows
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18
Q

Valuation and Presentation

Notes Receivable

A

for FS purposes, unearned interest and finance charges are deducted from face amount of note (PV future cash flows)

  • if note is non-interest bearing or interest rate is below market, value determined by imputing the market rate of interest and using the effective interest method
  • interest bearing promissory notes issued in an arms-length transaction are presumed to be issued at market rate of interest
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19
Q

Discounting NR

Notes Receivable

A

when holder endorses the note (with or w/o recourse) to a third party and receives cash

  • amt received by holder determined by applying “discount rate” to maturity value of the note
  • diff b/w amt of cash received and maturity value of the note is the “discount”
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20
Q

NR with and w/o Recourse

Notes Receivable

A

With Recourse

  • holder remains contingently liable
  • dr: cash, cr: ‘Notes Receivable Discounted’ (contra asset) or ‘Note Receivable’ + contingent liability disclosed in the notes to the FS

Without Recourse

  • true sale
  • holder assumes no further liability
  • dr: cash, dr: loss, dr: possibly factor, cr: note receivable

good example F4-19

Dishonored Discounted NR~

  • when disc. NR is dishonored, contingent liability removed by dr: NR Discounted, cr: NR
  • NR Dishonored should be recorded to the estimated recoverable amount of the note
  • loss is recognized if estimated recoverable amt is less than amt required to settle the note + any penalties
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21
Q

Transfers and Servicing of Financial Assets~

A

objective: recognize only assets entity has control over (+ related liabilities incurred) and derecognize (remove previously recognized items) assets when control has been surrendered and liabilities extinguished

Financial Components Approach

  • basis for GAAP rules for trans. and serv. of FA
  • financial assets and liabs may be divided into many components that have diff. acct methods applied to them

Definition of Surrender of Control: 3 conditions must all be met

  1. transferred assets isolated from transferor
  2. transferee has right to pledge or exchange assets and
  3. transferor does not maintain control over assets under a repurchase agreement

Control is Surrendered- No Cont. Involvement
- if 3 conditions are met and no continuing involvement, entire transfer is recorded as a sale

Control is Surrendered- Cont. Involvement

  • if 3 conditions met and cont. involvement, the transfer is a sale using the financial components approach
  • assets divided into sold and not and gain/loss recorded for sold items
  • any retained interests in assets are carried on books of transferor (including servicing assets) and allocated at BV based on relative fair value of all transferred assets at date of transfer

No Control Surrendered

  • accounted for as secured borrowing w pledge collateral
  • accounting for the collateral (non cash) depends whether debtor has defaulted and whether secured party has ability to sell or re-pledge the collateral

Servicing Assets and Liabilities

  • if entity a party of servicing contract, record servicing asset or liab for the contract
  • contract (asset or liab) will then be amortized in proportion to est.net servicing income (or loss)
  • FV will be determined at regular intervals throughout life of contract and contract assessed for impairment based on that FV
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22
Q

Types of Inventory Held for Resale

Inventories

A

inventories must be periodically counted, valued, and recorded in the books. GR: 4 types

  1. Retail Inventory
    - finished goods only
  2. Raw Materials Inventory
    - held for use in production process
  3. Work in Process Inventory (WIP)
    - in production but incomplete
  4. Finished Goods Inventory
    - production inventory that’s complete and ready for sale
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23
Q

Goods and Materials Included in Inventory

Inventories

A

GR: any goods and materials in which company has legal title should be included in inventory
- legal title typically follows possession of goods

Goods in Transit

  • read carefully if “we” are buyer or seller
  • title passes under conditions agreed upon, but if none then based on delivery
  • FOB Shipping Point: buyer pays, buyer’s inventory, freight in added to cost of inventory
  • FOB Destination: seller pays, seller’s inventory, freight out is selling expense

Shipment of Non-conforming Goods

  • title reverts to seller upon rejection by buyer
  • even if buyer possess goods before retuning, goods are seller’s inventory

Sale w Right to Return

  • GR: goods in seller’s inventory if amt of goods likely to be returned can not be estimated
  • if you can reasonably estimate the returns, record sale w allowance for estimated returns recorded if:
    a. sales price subs. fixed at date of sale
    b. buyer assumes all risk of loss bc goods in possession
    c. buyer paid consideration
    d. product subs. complete and
    e. amt of future returns can be reasonably estimated*

Consigned Goods

  • seller/consignor delivers goods to agent/consignee to hold and sell on consignor’s behalf
  • consignor’s inventory bc title and risk of loss retained
  • inventory cost includes shipping cost to consignee
  • subtract commission expense and advertising for NI

Public Warehouses
- inventory of comp holding warehouse receipt

Sales w Mandatory Buyback
- seller includes goods in inventory even tho title passed to buyer

Installment Sales

  • if seller sells on installment but retains legal title as security, goods included in seller’s inventory if % of uncollectible debts can not be estimated
  • if can estimate, record as sale and record allowance for uncollectible debts
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24
Q

Valuation of Inventory GR

A

GR: GAAP requires inventory be stated at cost, if sold at a profit in ordinary course of business
- no loss recognized even tho replacement or reproduction costs are lower

Exceptions: Selling Price < Cost = loss (in another card)

methods to determine cost of inventory: FIFO, LIFO, average cost, and retail inventory method
- IFRS doesn’t permit LIFO

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25
Q

Departure from Cost Basis- Exceptions

Valuation of Inventory

A

Lower of Cost or Market and Lower of Cost and NRV

  • when utility of goods is no longer as great as their cost
  • state goods at market value or NRV
  • purpose: reducing inventory to lower of cost or market or lower of cost and NRV is to show probably loss sustained (conservatism) in the period in which the loss occurred (matching principle)

Pass Key**

  • Acct Standards Update: all inventory not costed using LIFO or retail inventory method should be measured at lower of cost and net realizable value
  • if using LIFO or retail, measured at lower of cost or market
  • IFRS, all inventory at lower of cost and NRV

Precious Metals and Farm Products

  • valued at NRV: net selling price less costs of disposal
  • when inventory stated at value above cost, fully disclose in FS

Recognize Loss in Current Period
- under GAAP, write-down of inventory is reflected in COGS unless amt is material, then loss identified separately in IS in unusual/infrequent

Reversal of Inventory Write-Down

  • GAAP, reversals of write-downs prohibited
  • IFRS, allowed but limited to amt of original write down

Exceptions~

  • lower of cost or market and lower of cost and NRV do not apply when:
  • subsequent sales price of end product is not affected by market value or
  • company has a firm sales price contract
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26
Q

Lower of Cost or Market

Valuation of Inventory

A

LIFO or Retail Inventory Method

  • GAAP only
  • may be applied to single item, category, or total inventory, if method most clearly reflect periodic income
  • separately applying LCM to each item results in most conservative ending inventory

Market Value

  • middle value of item’s replacement cost, market ceiling, and market floor
  • replacement cost: cost to purchase as of valuation date
  • market ceiling: NRV = net selling price less costs to complete and dispose
  • market floor: market ceiling - normal profit margin

JE for write-downs
dr: inventory loss due to decline in market value, cr: Inventory

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27
Q

Lower of Cost and Net Realizable Value

Valuation of Inventory

A

not LIFO or Retail Inventory

  • GAAP and IFRS
  • may be applied to single item, category, or total inventory

NRV

  • net selling price less costs to complete and dispose of the inventory
  • same as market ceiling
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28
Q

Disclosure

Valuation of Inventory

A
  • when losses are both substantial and unusual from application of LCM, amt of loss is disclosed in income from cont. ops. in IS and identified separately from COGS
  • if small loss, include in COGS
  • consistency must be applied in valuation and method disclosed in FS
  • if significant change in measurement of inventory, disclose
29
Q

Periodic Inventory System*

A

quantity of inventory determined by physical count, at least annually

  • uses purchases
  • units of inventory and associated costs are counted and valued at the end of the acct period
  • COGS determined by “squeezing” diff b/w beginning inventory + purchases - ending inventory, based on physical count

disadvantage: shortages “lumped in” w COGS

*
Beginning Inventory
\+ purchases (net of returns and discounts)
= cost of goods available for sale
- ending inventory (physical count)
= COGS
  • if ending inventory is wrong, know effects on COGS and GP/NI
30
Q

Perpetual Inventory System*

A

inventory record is updated for each purchase and each sale as they occur, instead of waiting for end of period

  • actual COGS is recorded w each sale
  • keeps a running total of inventory balances
  • no purchases, uses inventory
31
Q

Hybrid Inventory Systems~

A

Units of Inventory on Hand- Quantities Only

  • perpetual record of quantities only
  • aka modified perpetual system

Perpetual w Periodic at Year End
- most comps that maintain perpetual inventory still perform either complete periodic physical inventories or test count inventories on a random basis

32
Q

Primary Inventory Cost Flow Assumptions

A

under GAAP, cost flow assumption used by a company is not required to have a rational relationship w the physical inventory flows

  • primary objective: selection of method that will most clearly reflect periodic income
  • general acceptance of FIFO, LIFO, and weighted average cost bc it can be hard to identify and match specific costs w items sold

IFRS vs GAAP*

  • IFRS doesn’t use LIFO bc rarely reflects actual flow
  • specific identification used whenever possible
  • requires use of same cost flow assumption for all inventories having similar nature and use to the entity
33
Q

Specific Identification Method

A

cost of each item in inventory is uniquely identified to that item

  • cost follows physical flow of item in and out of inventory to COGS
  • usually used for physically large or high value items and allows for greater opportunity for manipulation of income
  • no estimates
34
Q

FIFO

A

first costs inventories are first costs transferred to COGS

  • ending inventory increases when prices are rising
  • COGS decreases when prices are rising, thus profit increases, thus tax liability increases
  • ending inventory and COGS are the same* whether periodic or perpetual inventory system is used
  • so use periodic since it’s faster and easier
35
Q

Weighted Average Method

A

periodic, at the end of the period

total cost of inventory available/total units available = avg cost per unit (remember beg. inventory included in both)

  • avg cost per unit * # of units sold = COGS
  • avg cost per unit * # of units unsold = value of ending inventory
36
Q

Moving Average Method

A

computes the weighted average cost after each purchase

  • by dividing total cost of inventory available after each puchase by total units available after each purchase
  • perpetual inventory system is necessary
  • more current than weighted average
37
Q

LIFO

A

last costs inventoried are first costs transferred to COGS

  • ending inventory decreased
  • COGS increases, so profit decreases, and taxable income decrease
  • doesn’t related to actual flow of goods in a comp
  • not permitted under IFRS
  • LIFO conformity rule: if LIFO is used for tax, it must also be used for GAAP financial statements

LIFO FS Effects

  • generally better matches expenses against revenues
  • LIFO eliminates holding gains and reduces net income during inflation
  • if sales > production/purchases, LIFO will result in distortion of NI bc old inventory costs (layers) will be matched w current revenue
  • susceptible to income manipulation by intentionally reducing purchases in order to use old layers at lower costs

LIFO layers
- unlike FIFO, LIFO periodic =/= LIFO perpetual

38
Q

Dollar-value LIFO

A

inventory is measured in dollars (instead of units) and adjusted for changing price levels
- estimate of change in price levels required (either given or you find it)

Internally Computed Price Index

  • price index = EI at current year cost/ EI at base year cost
  • multiply price index by base year cost
  • by accumulated costs*

Price Index Supplied
- multiply by base year

39
Q

Firm Purchase Commitments

A

legally enforceable agreement to purchase a specified amt of goods at some time in the future

  • all material firm purchase commitments must be disclosed in FS or notes
  • if contracted price > market price and it’s expected that losses will occur, loss should be recognized at the time of decline in price
  • description of losses recognized on these commitments must be disclosed in the current period’s IS

dr: estimated loss on purchase commitment, cr: estimated liability on purchase commitment

40
Q

Characteristics and Classifications of Fixed Assets

360

A

Characteristics

  • acquired for use in operations and not for resale
  • long term in nature and subject to depreciation (except land)
  • possess physical substance

Classification: must be shown on BS (or footnotes) at original cost

  • land (property)
  • building (plant)
  • equipment
  • accumulated depreciation (contra-asset), may be combined for two or more assets
41
Q

Valuation of Fixed Assets under GAAP

A

Historical Cost

  • basis for valuation of purchased fixed assets
  • cash or cash equivalents to obtain asset and bring it to location and condition necessary for intended use

Donated Fixed Assets

  • recorded at FMV along w incidental costs incurred
  • recognition of gain on IS
  • dr: fixed asset (FMV), cr: gain on nonreciprocal transfer
  • in unusual or infrequent in cont. ops
42
Q

Valuation of Fixed Assets under IFRS*

A

Cost Model*

  • historical cost - accum. depr. - impairment
  • like GAAP

Revaluation Model*

  • a class of fixed assets, at cost initially then revalued to FV less subsequent accum. depr and impairment
  • revaluations must be made frequently
  • when FV differs materially from carrying value, a further revaluation is required
  • must be applied to all items in a class of fixed assets, not to individual assets
  • when fixed assets are recorded at FV, the Cost Model must be disclosed
Revaluation Losses
- income statement
Revaluation Gains
- OCI
- if reversals of losses and gains, first bring IS or OCI down to 0
43
Q

Cost of Equipment

A

include: price, less discounts, add freight in and insurance while in transit and in construction, installation charges, testing and preparation for use, cost to rearrange, taxes, possible addition of construction period interest

Additions
- capitalize

Improvements and Replacements

  • capitalize
  • if carrying value of old asset is known, remove it and recognize any gain or loss
  • if CV of old asset is unknown and:
    a. asset’s life is extended, dr: accum. depr for cost of the improvement/replacement
    b. the usefulness (utility) of the asset is increased, capitalize the cost of the improvement/replacement

Repairs

  • ordinary repairs get expensed
  • extraordinary repairs are capitalized treated as addition, improvement, or replacement as appropriate
44
Q

Cost of Land

A

all costs incurred up to excavation for the building are land costs
included: price, brokers’ commissions, title and recording fees, legal fees, draining of swamps, clearing of brush and trees, site development (filling in or leveling is not digging the hole), existing obligations assumed, costs of razing old building LESS*: proceeds from sale of existing buildings, timber, etc

Land Improvements

  • are depreciable
  • fences, water systems, sidewalks, paving, landscaping, lighting

Interest Costs
- interest costs during construction should be added to land improvement based on weighted avg of accumulated expenditures*

45
Q

Cost of Buildings

A

includes: price, repair charges neglected by previous owner, alterations and improvements, architect’s fees, possible addition of construction period interest from construction loan, refurbishing
- excavation forward

46
Q

Basket Purchase of Land and Building

A

allocate purchase price based on ratio of appraised value of individual items

47
Q

Investment Property (IFRS only)

A

if for rental or to flip, reported as investment property

  • includes property under construction for future use as investment property
  • GAAP doesn’t include definition or set of acct rules for investment property

Cost of Investment Property

  • price
  • expenses directly related to purchase

Capitalize

  • additions
  • replacements
  • costs to service the property
  • expense: ordinary repairs, day to day servicing, labor, etc

Investment Property Measurement Models

  1. Cost Model: reported on BS at historical cost less accum. depr.
    - when cost model used, FV must be disclosed
  2. FV Model: reported at FV and not depreciated
    - best evidence of FV is active market for similar property
    - once adopted, FV measurement must be applied consistently until disposed of or no longer classified as investment
    - gain or loss from revalue is recognized in earnings in period
48
Q

Fixed Assets Constructed by a Company

A

costs include:

  • DM and DL
  • repairs and maintenance expenses that add value
  • OH
    • include construction period interest on construction loans
  • do not include profit
49
Q

Capitalization of Interest Costs

A

an exception since interest is GR expensed as incurred as a period cost

Construction Period Interest
- capitalized based on weighted avg of accum. expenditures as part of cost of producing fixed assets

Do Not Capitalize Interest Cost

  • on inventory routinely manufactured (capitalize interest on special order goods)
  • on fixed assets held before or after construction (during only)
  • during intentional delays in construction (do capitalize during ordinary delays)

Computing Capitalized Cost

  • apply an interst rate to weighted avg amt of accumulated expenditures for qualifying assets
  • interest rate: rate on construction loan
  • interest rate on excess expenditures: general debt, weighted average interest rate
  • not to exceed actual interest costs
  • do not reduce capitalizable interest by income received on the unexpended portion of the loan

Capitalization of Interest Period

  • begins when 3 conditions are present:
    a) expenditures for the asset have been made (building decision has been made)
    b) activities necessary to get asset ready for use is in progress (permits filed)
    c) interest cost is being incurred
  • continue as long as 3 conditions present
  • ends when asset is substantially complete and ready for intended use

Pass Key:

  1. only capitalize interest on money actually spent, not on the total amt borrowed
  2. the amt of capitalized interest is the lower of:
    a) actual interest cost incurred or
    b) computed capitalized interest (avoidable interest)

Disclose in FS:

  • total interest cost incurred during the period
  • capitalized interest cost for the period, if any
50
Q

Composite vs Component Depreciation

A

Advantages of Component Depreciation

  • depreciation expense more accurate
  • repair and maintenance expense more accurate

Component Depreciation

  • not available for MACRS bc generally higher
  • available for straight line
  • IFRS requires component depreciation*

Composite or Group Depreciation

  • averaging economic lives of a number of units and depreciating the entire class of assets over a single life
  • simplified record keeping
  • no gain or loss when one asset in the group is retired/sold, gain or loss is in accum. depr.*
  • avg composite life = total depreciable cost / total annual depreciation of each individual
  • avg composite rate = total annual depreciation / total gross cost (not depreciable cost)
  • group is for similar assets and composite is for dissimilar assets
  • both group and composite based off straight line depreciation
51
Q

Straight Line Depreciation

A

(cost - salvage value) / estimated useful life

- careful of how much of the year it’s in use

52
Q

Sum of the Year’s Digits Depreciation

A

one of the accelerated methods

  • higher depreciation in earlier years
  • (cost - salvage value) * (remaining life of asset / SYD)
  • SYD = (n*n+1) / 2
53
Q

Declining Balance Depreciation

A

asset subject to rapid obsolescence

  • most common accelerated method
  • only one that doesn’t use depreciation base, uses NBV instead
  • depreciation = NBV * (straight line * wtv declining balance)
  • but max AD = cost - SV, so last year of depr. need to stop at depreciable base
54
Q

Units of Production Depreciation

A

service potential declines w use (instead of w time)

  • rate per unit/hour = (cost - salvage value) / estimated units/hours
  • rate per unit/hour * # of units/hours produced/worked = depreciation expense
55
Q

Depletion

A

allocation of cost of wasting natural resources
- purchase cost: any expenditures to purchase and then to prepare land for removal of resources
- residual value: similar to salvage value
- depletion base
2 methods
1. Cost Depletion (GAAP)
- unrecovered cost less residual value / estimated recoverable units = rate
- depletion for the year: rate * # of units extracted
- COGS depletion: rate * # of units sold
- remainder goes into inventory as DM

56
Q

deferred tax liability

A
  • arising from depreciation: is noncurrent liability
  • deferred tax liability that is not related to an asset and expected to reverse in the next operating period is current liability
57
Q

post dated checks

A
  • dated after the BS date: are not cash and cash equivalent
58
Q

Ratios

A

working capital: current assets - current liabilities

current ratio: current assets / current liabilities

quick ratio: (cash + net receivables + marketable securities) / current liabilities

59
Q

LIFO reserve account

A

is the difference between inventory on LIFO vs any other cost method
- credit balance

60
Q

inventory turnover ratio

A

COGS / average inventory

61
Q

permanent impairment/depreciation

A

when a permanent depreciation occurs, book value is reduced and loss is recorded as a credit to accumulated depreciation

62
Q

Retail Method

A

perpetual system that records inventory at retail and converts to cost through cost-to-retail ratio
- depends on cost flow assumption LIFO FIFO etc

63
Q

Cost to Retail

A

cost to retail ratio: inventory available cost / inventory available retail = %

64
Q

Conventional Retail Method

A
  • approximates results that would be obtained by taking physical inventory and pricing goods at lower of cost or market
  • includes markups and markup cancellations in cost-to-retail ratio, excludes markdowns and markdown cancellations
65
Q

LIFO Application of Retail Method

A
  • approximates original cost of merchandise
  • net markups and net markdowns included in cost to retail
  • beginning inventory is excluded
  • lifo layer added: multiply by cost to retail ratio
  • lifo layer depleted: multiply by beg inv cost/beg inv retail
  • add or subtract lifo layer as necessary
66
Q

Cost Retail Inventory Method

A
  • cost to retail ratio includes markups and markdowns
  • beg. inventory is included, unlike LIFO
  • lower of cost or market
67
Q

FIFO/Cost Retail Inventory

A
  • cost to retail ratio includes markups and markdowns
  • excludes beg. inventory, like LIFO
  • multiply cost to retail % * ending inventory at retail to get EI cost
68
Q

LIFO/Cost Retail Inventory

A
  • cost to retail: beg inv cost/beg inv retail = %

- % * ending inv. retail = beg inv cost

69
Q

Retail Method Additional Rules

A
  • freight costs added to cost of purchases, but not retail
  • purchase returns and allowances reduce both cost and retail purchases
  • sales returns and allowances reduce sales
  • employee discounts reduce retail sales, but not cost
  • shrinkage is diff b/w book ending inventory and amt per physical count