Far 1 Flashcards
What is the general rule to convert from cash to accrual
Add decreases in CL
Add increases in CA
Subtract increases in CL
Subtract decreases in CA
What process would you use to convert from accrual to cash? Example: How much sales revenue would KAT company report under the cash basis of accounting?
Sales revenue (reported in the income statement) $100
AR - beginning balance $10
AR - ending balance $15
Allowance for uncollectible accounts - beginning balance ($5)
Allowance for uncollectible accounts - ending balance ($10)
Write-offs of $5
Under the cash basis of accounting, sales equal cash collections
Step 1: Set up a T-account for cash collected on AR
Step 2: Work bottom up to solve for cash collected
Ending AR $15
Plus: Write-offs +5
Less: Sales revenue -100
Less: Beginning AR -10
Cash collected $90
**The info on the allowance account is meant to distract you.
Explain the primary characteristics
Relevance: Information is relevant if it makes a difference to decision-makers. Information is relevant when it has: 1. Predictive value 2. Confirmatory value, or both 3. Materiality
Faithful representation: Information is: 1. Complete 2. Neutral 3. Free from material error
Explain the enhancing characteristics
These are complementary to the primary characteristics and enhance the decision usefulness of financial reporting information that is BOTH relevant and faithfully represented.
- Comparability
- Verifiability
- Timeliness
- Understandability
Explain when relevance and faithful representation differ
Relevance over faithful representation - for example, the pervasive use of accounting estimates (depreciation, bad debt expense, pension estimates) is an example of emphasizing relevance over faithful representation. Reasonable approximations, although not perfectly reliable, are preferred by financial statement users to either (1) perfect information issued too late to make a difference, or (2) no information at all.
Faithful representation over relevance - for example, the use of historical cost as a valuation base
Name some of the instruments not eligible for fair value option
- Assets held for pension benefits
2. Leased assets & liabilities
What items are included in other comprehensive income?
- Unrealized gains and losses on AFS securities
- Adjustments in pension liability
- Foreign currency translation adjustments
- Deferrals of certain gains or losses on hedge accounting.
What are the cash inflows from operating activities (direct method)?
*Think income statement Cash collected from: 1. Customers 2. Dividends (from investments) 3. Interest (interest income)
What is the cash outflows from operating activities (direct method)?
*Think income statement Cash paid to/for: 1. Suppliers (for goods/services and operating expenses) 2. Employees (payroll expenses) 3. Interest (interest expenses) 4. Income taxes
What are the cash inflows from investing activities?
*Think noncash assets
Cash received from:
1. Sale of long-term assets
2. Collection of loan principal
3. Disposal of debt and equity securities (of others, e.g., held-to-maturity or available-for-sale classifications)
4. Sale of other productive assets (e.g., patent or equipment; but not Inventory)
What are the cash outflows from investing activities?
*Think noncash assets
Cash paid to:
1. Purchase long-term assets
2. Lend money (to others)
3. Invest in debt and equity securities (of others, e.g., held-to-maturity or available-for-sale classifications)
4. Purchase other productive assets (e.g., patent or equipment; but not Inventory)
What are the cash inflows from financing activities?
*Think how an entity is financed
Cash received from:
1. Sale of (own) stock
2. Borrowing money (bonds, notes, etc.)
What are the cash outflows from financing activities?
*Think how an entity is financed Cash paid to/for: 1. Repurchase own (Treasury) stock 2. Payback lenders (principal only) 3. Payment of dividends
How should the amortization of a bond discount on long-term debt be reported in a Statement of Cash Flows prepared using the indirect method?
Bond discount:
Interest expense > Cash paid for interest
Since interest expense reduces NI in the income statement, that means that you must add back the bond discount to NI in the statement of cash flows (indirect method).
Example J/E:
Interest expense XX
Bond discount XX
Cash XX
How should a gain from the sale of used equipment for cash be reported in a Statement of Cash Flows using the indirect method?
Since the gain (a non-cash transaction) would be added on the Income statement to arrive at NI, you would subtract it on the Statement of Cash Flows.
On December 30, 2005, Vida Co. had cash of $200,000, a current ratio of 1.5:1 and a quick ratio of .5:1. On December 31, 2005, all cash was used to reduce accounts payable.
How did these cash payments affect the ratios?
The numerator and denominator of both ratios are reduced by $200,000 as a result of the transaction. Cash is included in both current and quick assets (current assets that are highly liquid), the numerators of the two ratios. Accounts payable is a part of current liabilities, which is the denominator of both ratios.
The current ratio exceeds 1.00 before the transaction. Reducing the numerator and denominator the same amount causes the denominator to fall a greater percentage than the numerator. Thus, the ratio increases. Example: if the ratio were $900,000/$600,000 before the transaction; after the transaction, the ratio is $700,000/$400,000, a higher ratio. The quick ratio is less than 1.00 before the transaction. Thus, the ratio decreases. Example: if the ratio were $300,000/$600,000 before the transaction, after the transaction the ratio is $100,000/$400,000, a lower ratio.
Bank reconciliation
Balance Per Bank, November 30, 20X7 XX \+ Deposits in Transit + X \+ Cash on Hand + X − Outstanding Checks − X ± Errors made by Bank ± X True Cash XX
Book reconciliation
Balance Per Book, November 30, 20X7 XX \+ Interest Earned + X \+ Note Collected + X − Service Charges − X − NSF Check − X ± Errors in Firm's Records ± X True Cash XX
On December 29, 2017, AB Co. sold a debt security investment that had been purchased on January 4, 2016. AB owned no other securities. An unrealized loss was reported in the 2016 Income Statement. A realized gain was reported in the 2017 Income Statement.
Was the debt security classified as available-for-sale (AFS)?
No, because the unrealized gains and losses are recognized in the Income Statement. Unrealized gains and losses on available-for-sale securities are recognized in owners’ equity, not earnings.
The interest capitalization period begins when, and continues as long as, all three of the following conditions are met:
- Expenditures for the asset have been made.
- Activities necessary to get the asset ready for its intended use are in progress.
- Interest cost is being incurred.
The capitalization period begins when activities necessary to construct the building commence and ends when the building is substantially complete. Interest capitalized relating to the land becomes part of the cost of the building because the land is being developed together with the building. Even though land itself is not depreciable, the interest cost connected to the land is capitalized as part of the cost of the building and depreciated.
