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Financial Accounting > F4 - Working Capital & Fixed Assets > Flashcards

F4 - Working Capital & Fixed Assets Flashcards

1
Q

What is working capital ?

A

Used often to measure the solvency of the company,

Current assets - Current liabilities

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2
Q

Financial ratios calculations;

A

Current ratio = current assets /current liabilities
Quick ratio = (Cash + net receivables - marketable securities) / current liabilities
* Bigger the ratio, lower the risk

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3
Q

What is cash surrender value of life insurance

A

The sum of money an insurance company will pay to the policy holder in the event his policy is voluntarily terminated before its maturity or the insured event occurs.

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4
Q

Sources of current liabilities

A

1) Arise from regular business operations.

2) To meet cash needs through bank loans.

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5
Q

Classification of short-term obligation expected to be refinanced

A

Under GAAP, short term obligation may be excluded from CL and included in NTL if the company intends to refinance it on a long-term basis and the intent is supported by the ability.
under IFRS it is not allowed.

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6
Q

Deferred tax liability treatment & classifications

A

Classified under CL unless it is related to asset expense (depreciation) it will be considered NCL

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7
Q

Cash equivalent definition

A

Includes short-term, highly liquid investments that are readily convertible to cash & so near that their original maturity is 90 days or less.

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8
Q

Examples of cash & cash equivalent

A

1) Checking account
2) Saving account
3) Money market fund
4) Compensating balance
5) Negotiable papers

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9
Q

Examples of NON cash & cash equivalent

A

1) Post dated check from customer because it is dated after B/S date.
2) Sinking fund because it is considered restricted cash.

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10
Q

Bank reconciliations adjustments related to bank account

A

1) Deposit in transit - add to balance

2) Outstanding checks - subtract from balance

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11
Q

Bank reconciliations adjustments related to book account

A

1) Service charges - subtract
2) Bank collections - add
3) NSF - subtract
4) Interest income - add
* Negative book balance (Overdraft) will be considered as CL

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12
Q

A/R & Note Receivables

A

A/R is an oral promises to pay debt, while note receivable is a written promise to pay debt

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13
Q

A/R balance calculation

A

Beginning
+ Credit Sales
= available
- write off, convert to note, net cash collections (cash collections - unearned fees)

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14
Q

Year end uncollectable account expense calculation

A

Ending A/R - Beg A/R

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15
Q

A/R NRV calculation

A

Gross A/R

- Allowances ( uncollectible, sales discount, sales returns & allowances)

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16
Q

Disadvantages in using direct write off method (Not GAAP)

A

A/R is always overstated because no allowance is considered nor included in B/S.
Dr/ Bad debt expense
Cr/ A/R

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17
Q

Allowance A/R methods (GAAP)

A

1) Percentage of sales; after sales transaction a percentage is debited to bad debt expense and credited to allowance of doubtful account.
2) Percentage of A/R at year end; estimated allowance is ending A/R multiplied by allowance percentage.
3) Aging of A/R; balance of allowance account is determined by multiplying receivables by uncollectible percentage.

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18
Q

Uncollectible account expense formula

A

Beg balance
+ uncollectible account expense
- write offs
= ending

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19
Q

A/R write off under allowance method GAAP

A

Journal entry don’t affect I/S
Dr/ allowance
Cr/ A/R

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20
Q

Does collections of previously written off accounts affect A/R

A 
No, because written off reversal will increase allowance and don't affect A/R example;
To restore written of account:
Dr/ A/R
   Cr/ allowance
To record cash collection:
Dr/ Cash
    Cr/ A/R
* using one entry will be:
Dr/ Cash
    Cr/ allowance
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21
Q

Accounts that affect allowance balance

A

1) Recoveries increase allowance

2) Write off decrease allowance

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22
Q

Pledging A/R

A

Using existing A/R as collateral for a loan while the company retains title of the A/R but uses its proceeds to pay the loan.

Only footnote is required

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23
Q

Factoring A/R kinds

A

1) Without recourse; the sale is final and the factor (buyer) assumes all risk of any losses on collections
2) With recourse; the factor has an option to re-sell any uncollectable receivables back to the seller

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24
Q

Factor with recourse treatments

A

1) Treat as loan
2) Treat as sale; several conditions should be met:
a. Transferor obligation for uncollectible accounts can be reasonably estimated
b. Transferor surrenders control of future economic benefit of receivable to the buyer.
c. Transferee cant oblige transferor to repurchase the receivables, but may be required to replace the receivables with other similar receivables.

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25
Q

Discount a note receivable example

A

P.19 or 275

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26
Q

Goods in transit consist of:

A

1) F.O.B Shipping point; title of inventory passes to the buyer when the seller delivers the goods to the carrier.
Freight in is added to buyer inventory cost same as shipment.
2) F.O.B destination; title of inventory passes to the buyer when the buyer receives the goods from the carrier.
Freight out is selling expenses & the seller pays for packaging, shipping & handling fees.

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27
Q

Conditions to be met in order posses legal title of inventory

A

1) Shipment of non-conforming goods
2) Sales with right of return
3) Cosigned goods.
4) Public warehouse
5) Sales with a mandatory buyback
6) Installment sales.

28
Q

Shipment of Non conforming goods

A

If the seller ships wrong goods, the title revert back to the seller upon rejection by the buyer

29
Q

Sales with right to return

A

It is usually included in seller inventory if the amount of the goods likely to be returned Cannot be estimated.

if the amount of goods can be estimated, the inventory will be included in buyer inventory & the seller keeps an allowance for estimated returns.

30
Q

Cosigned goods

A

Inventory recorded in seller balance even freight in is added to the inventory seller cost.

Seller should exclude any markup on selling price to record inventory at cost.

Title passes directly to a third party at point of sale.

31
Q

Public warehouse

A

inventory should be included in the company holding warehouse receipt

32
Q

Installment Sales

A

If the seller sells goods on am installment basis but retains legal title as security for the loan, the goods should be included in the seller inventory if the percentage of uncollectible debts Cannot be estimated.

33
Q

Inventory costs includes

A

1) Units cost; includes material and labor incurred to bring a product to a sealable condition.
2) Freight in
3) Insurance cost.

34
Q

Inventory valuation basis

A

1) Cost
2) Lower cost or Market; may be applied to a single item (will result in most conservative ending inventory), category or total inventory.
3) NRV for precious metals & farm products.

35
Q

What does market includes in lower cost or market phrase includes

A

The middle of:

1) Replacement cost
2) Market celling ( NRV)
3) Market floor ( NRV - profit margin)

36
Q

Where does inventory write down is usually reflected under GAAP & IFRS

A

If the amount is small it will be reflected in COGS as:
Dr/ COGS
Cr/ Inventory
Otherwise it should be identified separately in I/S

37
Q

Reversal of inventory write down

A

It is prohibited under GAAP, while it is allowed under IFRS if the increase is up to previous write down.

38
Q

What will happen if Beg inventory decrease & Ending inventory increase

A

COGS will decrease by both amounts; example:

Beg decreased by 26 K & Ending increase by 52 K, total impact on COGS will be 72 K total understatement.

39
Q

FIFO method

A

COGS and Ending inventory under periodic or perpetual are the same.

FIFO approximates current costs to inventory that’s why In period of inflation ending inventory will be HIGH, COGS will be LOW which will increase net income.

40
Q

Weighted Average method

A

Used for homogenous products & in PERIODIC inventory system

41
Q

Moving Average method

A

Computed weighted average cost after each purchase to apply new price on next sales transaction, used under PERPETUAL inventory system

42
Q

LIFO method

A

Generally better matches expenses against revenues because it matched current cost with current revenues.

LIFO approximates current costs to COGS that’s why in period of inflation ending inventory will be LOW, COGS will be HIGH which will decrease net income (Lowest = LIFO).

It is not permitted under IFRS, used for tax purposes & in GAAP F/S

43
Q

LIFO Layers

A

An additional layer is created in any year where ending inventory is higher than beginning inventory.
The additional layer is priced at latest cost when it was created.

44
Q

What is LIFO reserve account

A

Is the difference between inventory using LIFO method and any other method when shifting to LIFO ( Contra inventory account)

45
Q

comparison of FIFO & LIFO

A

Ending inventory & COGS will be the same under periodic or perpetual.
P.30 or 286.

46
Q

Dollar-value LIFO

A

Inventory is measured in dollars & is adjusted for changing in price levels - estimate of change in price level is required.

Price index = Ending inventory at current cost / Ending inventory at base year cost.

47
Q

Firm purchase commitment

A

Legally enforced agreement to purchase specific amount of goods at some time in the future at a price determined today.

Loss will incur if contracted price exceeded market price. & loss should be recognized at the time of decline price for the whole contracted period.

Loss on purchase commitment is recognized at B/S as liability;
Dr/ Estimated loss on purchase
Cr/ Estimated liability on purchase

48
Q

Valuation of fixed assets under IFRS

A

All items in a class of fixed assets must be revalued (Land, Building, Equipment) - Not revalue individual fixed assets in a class.

Fixed assets is revalued at FV then reported at fair value less subsequent accumulated depreciation & impairment.

49
Q

Improvement & Replacements treatment

A

Both should be capitalized either by reducing accumulated depreciation if asset life is increased or by removing old asset & recognize gain/loss then capitalize any improvement or replacement if asset usefulness is increased.

50
Q

Lease hold improvements

A

Capitalized then amortized over the LESSER of the life of improvement or remaining term of the lease

51
Q

In case of Flood or Fire treatment

A

NBV of fixed assets lost in flood, fire .. should be removed from accounts & loss is recognized (adjusted by any insurance proceeds).

The cost of replacement assets are charged (capitalized) to the fixed assets account.

52
Q

Cost of Land

A

All cost incurred up to excavation (Digging for new building).

Excavation cost is excluded from Land cost.

53
Q

Interest cost incurred in Land

A

Interest cost to acquire Land should be expensed.

Interest cost during construction period should be capitalized to Land cost

54
Q

Investment Property (IFRS only)

A

Land or building held by an entity or by a lease under a capital lease TO earn rentals or for capital appreciation (A rise in value of an asset based on a rise in market price)

Includes property UNDER construction or development for future use as investment property.

Depreciated under cost model while NOT depreciated under FV model.

Revaluation gain should be reported in I/S, while other fixed assets NOT classified as investment property should be reported under OCI

55
Q

Capitalization of interest cost

A

Should be capitalized for interest incurred DURING construction period based on weighted avg. of accumulated expenditures (Based on amounts of money paid for construction - Material, Labor & Overhead - NOT based on amount borrowed.

56
Q

Amount of interest to be capitalized

A

1) Capitalize interest on money actually spent on the project, Not on total amount borrowed
2) The amount to be capitalized the is Lower of:
a. Actual interest cost incurred (all interest incurred by the company during the year)
b. Avoidable interest.

Dr/ Asset
Cr/ Interest cost

Example P.42 or 298

57
Q

Calculating interest to be capitalized using Note payable instead of cash

A

We should calculate present value of annual payments using present value of annuity factor then multiply the result by market interest rate.

58
Q

Depreciation Expense

A

Is applied on long-lived assets that are not held for sale in ordinary course of business.

Any mis-calculation or non recorded depreciation in any period it will not be added to current year depreciation expense, the amount will be adjusted in current year retained earning (Prospectively)

59
Q

Component & Composite depreciation

A

Component is required under IFRS which individually depreciate each item in the asset I;e machine cost 20 K & the machine includes cylinder cost 10 K & inspection cost 5 K, depreciation will be counted for 10 K cylinder cost over its useful life, inspection cost over useful life & remaining of asset cost 5 K over its useful life.

Composite averages the economic lives of numbers of property units & depreciates the entire class of assets over a single life

60
Q

Composite depreciation calculations

A

1) Avg. composite life = Depreciable base / annual depreciation.
2) Avg. composite rate = annual depreciation / Total cost

61
Q

How to calculate depreciation after impairment

A

Example; Depreciable base = 250, useful life = 10
beginning of year 5 an impairment loss of 30 recognized
250/10 = 25 then 4*25 = 100
new depreciable base; 250 - 100 = 150
new depreciable base after impairment; 150 - 30 = 120
Useful life will be based on remaining life of 10 year which will be 6 year
120 / 6 = 20 $ per year

62
Q

How to calculate depreciation incase of useful life is extended

A

Example; Depreciable base = 48 , useful life = 12
beginning of year 6 the company extended useful life by 3 years.
Old depreciation; 48 / 12 = 4 , 4*5 = 20
new depreciable base; 48 - 20 = 28
remaining life; (12-5) + 3 = 10
New depreciable base & new useful life = 28 / 10

63
Q

Basic Depreciation methods calculation

A

1) Straight Line = ( Cost - Salvage value ) / useful life; reflects on assets service potential declines over passage of time.
2) Sum of years digit = (N*(N+1)) / 2
3) Declining balance= 2 * 1/ N * (cost - accumulated depreciation); reflects on assets subject to rapid obsolescence & assets incurring increasing repairs & maintenance with use.
4) units of production = ( cost - salvage value ) / units or hours; to be used when total number of units to be produced can be reasonably estimated.

N = Useful Life

64
Q

Gain/Loss realized from sale of an asset

A

Sale of an old asset & purchase on new one will fall under continuing operations in the I/S

65
Q

What is depletion

A

Cost of wasting natural resources such as oil, gas ..
purchase cost includes any expenditure necessary to purchase & then prepare the land for the removal of resources such as drilling cost.

66
Q

Depletion calculations

A

1) Depletion Base = Cost of land + Development cost + Restoration - residual value
2) Unit Depletion = Depletion Base / estimated recoverable amount.

Financial Accounting (7 decks)

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