FAR (1st Deck) Flashcards
The 5000 checkbook balance needs to exclude the Check payable for 2000 which it already did so we are good there.
The Check Payable Deposited Dec 15th was included in book BUT it needed to be excluded since the check was redeposited on Jan 2nd and cleared on the 9th.
The Check drawn needed to be added back because even though it was recorded on the book it needed to be added back send the check wasn’t mailed until Jan 10.
Answer is: 5000 - 500 + 300 = $4800
How would you calculate for this? (note: the goal is to help you think on how to solve these kind of problems.)
Net Income = 35000 + Interest Expense=(7000 x (1-.30)
Outstanding Shares = 10000 + 2000=(200x20x1/2) = 12,000
We have to take half the year cause that is when they can convert the bond into outstanding shares.
[(35k+(7K x(1-.30))] / 12000 shrs = $3.33
A company completes construction of a $400 million offshore oil platform and places it into service on January 1. State law requires that the platform be dismantled and removed at the end of its useful life, which is estimated to be 10 years. The company estimates that the cost of dismantling the platform will be $20 million. The discounted value of the liability is $9 million using the company’s credit-adjusted risk-free rate. The company has already capitalized the $400 million construction cost of the platform. What amounts should the company record as liability and expense when the asset is placed into service?
Note: the goal of this question into a FC is to get you to think about how the problem can be given and also get you to dissect the information and understanding.
$9M is the Liability and Expense is $0.
There are two types of expense to take into consideration for AROs:
Depreciation Expense:
Starts when asset is placed in service
Includes the $409M ($400M + $9M ARO)
Spread over 10 year useful life
Example: ~$40.9M annual depreciation
Accretion Expense:
Starts immediately
Increases liability from $9M to $20M
Recorded annually
Like interest expense
Example: Year 1 = $9M × 8.3% = ~$747K
Example:
Year 0 (Initial):
Record $9M liability
NO expense yet
Year 1-10 (Each Year):
Record depreciation expense
Record accretion expense
Year 10 (Retirement):
Pay $20M to dismantle
Liability is now fully accreted
Key Point: Expenses are recognized gradually over asset’s life, NOT all at retirement date.
10,000 shares @ $10 par value
What is the stock split effect on a 5 for 1?
After 5-for-1 split:
1. Shares: MULTIPLY by 5
10,000 × 5 = 50,000 shares
2. Par Value: DIVIDE by 5
$10 ÷ 5 = $2 par value
KEY POINT: Total par value stays the same!
- Before: 10,000 × $10 = $100,000
- After: 50,000 × $2 = $100,000
Think: Like breaking a $5 bill into five $1s
A company purchased $10,000 of merchandise inventory on May 1. The terms of the purchase were 2/10, net 30. The company would pay what amount on May 9?
Let me solve this step by step.
1) Terms 2/10, net 30 means:
- 2% discount if paid within 10 days
- Full amount due within 30 days
2) May 9 is within the 10-day discount period, so the 2% discount applies
3) Calculation:
* Original amount: $10,000
* Discount = $10,000 × 2% = $200
* Amount to pay = $10,000 - $200 = $9,800
Therefore, if the company pays on May 9, they would pay $9,800.
A lease is classified as a finance lease because it contains a purchase option that is reasonably certain to be exercised. Over what period of time should the lessee amortize the leased property?
Since a purchase option is reasonably certain to be exercised, the short of the lease term or useful life is irrelevant. Therefore the amortization is based on economic life of the asset.
Think: There is no need to amortize since we are going to buy and fully use up the asset.
After speaking to the company’s sales manager, a customer placed a large order. The customer has no immediate need for the products, so the customer asked the company to wait 60 days before delivering the products. In this case, the company should recognize revenue for the sale when the order is
- Delivered to the customer
- Other not receiving benefit from the goods
- Obtain the benefit (Cash) from the good/services in form of cash flow (Inflows)
Note: This question is trying to get you to understand when revenue is recognizable.
Cash Balance Sheet Items - What to Include?
Starting Point: Checkbook Balance
ADD:
Checks written but not mailed (still have control) Any cash/items under company’s control
SUBTRACT:
NSF checks (bounced checks)
Non-cash items (like stamps)
Post-dated checks (not current assets)
Key Rule: “If you still have control of it, count it!”
Encumbrances would appear in each of the following funds
Only governmental funds (eg, capital projects, special revenue, general fund) use modified accrual accounting and are required to report budgetary accounts (eg, encumbrances)
Generally how do you find current liability?
AP
+ Unsecured Notes due within next year
+ Senior bonds due within next year
+ Contingent Liab.
+ Accrued Expenses
= Current Liability.
How do you calculate for Current Liabilities?
+ Account Payable
+ Accrued Exp
+ Unsecured Notes (w/in next year)
+ Senior Bonds (w/in next year)
+ Contigent Liab (w/in next year)
= Current Liabilities
How do you determine the accretion expense?
At the beginning of the year, the carrying value of an asset was $1,000,000 with 20 years of remaining life. The fair value of the liability for the asset retirement obligation was $100,000. At year end, the carrying value of the asset was $950,000. The risk-free interest rate was 5%. The credit-adjusted risk-free interest rate was 10%. What was the amount of accretion expense for the year related to the asset retirement obligation?
In this scenario, the FV of the ARO is $100,000 and the credit-adjusted risk-free interest rate is 10%. Therefore, the accretion expense is $10,000 ($100,000 × 10%).
How do you determine the gain/loss on discontinued operation?
Discontinued Operation Gain/Loss + Gain/Loss from sale
How do you determine the net cash provided by operating on statement of cash flow?
Net Income
+ Deprec/Amortization/Losses on Sale of Assets
- Equity Earnings/Amortization of Bond Prem/Gains on Sale of Assets
+ Increase in Liab/ - Decrease in Liab.
+ Decrease in Assets/ - Increase in Assets
= Net Cash provided (used) by operating activities
Think: when you sell Assets you gain cash, or when liability goes up your cash is increase or reserve from being spent until later!
How do you find COGS with Sales and Gross Profit Margin?
If they were to ask you to find Purchases how would you do that?
You take the Net Sales x Gross profit % = Gross profit in $
Sales - Gross profit in $ = COGS
To find purchases:
You would need the Beg & End Inv and find COGS
Purchases = COGS + End Inv - Beg Inv
How do you find Discontinued Operation Net of Tax?
Segment Oper. Loss for Year
- Expected Loss on Disposal of Assets
= Discontinued Operations (before tax)
- Tax Effect/Benefit (25% x Disc. Oper.)
= Discontinued Operation (net of tax)
How do you find Total Current Assets?
Cash
+ AR (Net)
+ Inventory
+ Investment in Trading Securities
+ Prepaid Expenses
+ ST Investments
+ CIP in Excess of Billings (Entitled to future pmts)
= Total Current Assets
How should warranty expense be accounted for based on what?
It should be expense based on the = estimated cost of the warranty repairs x % of sales.
So if est. cost was 2% of sales then that is considered the cost that should be reported for that year.
How to calculate year-end Asset Retirement Obligation (ARO) balance?
257,000 Beg Bal
-87,000 Payment
68,000 Discount CF Est.
26,000 Accretion Expense
264,000 Ending ARO
Understand that ARO is a liab, so when you have more expenses or discount you have to increase the liability on the asset when it comes time to retire it you pay that amount. Keep in mind that installment payments can be made in order to reduce the ARO liability.
ARO is recorded as a liability because it’s a future payment the company is legally required to make. The corresponding debit when setting up an ARO usually goes to increase the cost of the asset itself (which is then depreciated over time).
Lino Co.’s worksheet for the preparation of its Year 3 statement of cash flows included the following:
Accounts receivable decrease $10,000
Allowance for credit losses increase 1,200
Prepaid rent expense decrease 800
Accounts payable increase 7,000
Lino’s Year 3 net income is $95,000. What amount should Lino include as net cash provided by operating activities on the statement of cash flows?
Net Income 95,000
AR Decrease 10,000 Cash was collected
Allow. for Cr Losses Increase 1200 Add since this is a noncash expense no cash moved yet so we have to add it back to net income
Prepaid Rent Exp 800
Add: Used up something we paid earlier, cash already went out! So now we adding it back or we double counting.
AP Increase 7,000 Got something we havent paid for yet
114,000
- Net income $60,000
- Beginning accounts receivable 125,000
- Ending accounts receivable 90,000
- Credit sales 75,000
- Customer accounts written off during the year 5,000
How would you determine the cash received from customer for the year with the above info?
125000 Beg AR
75000 Credit Sales
-5000 Write off
??? Less:Collections
90000 Ending AR
+90000+5000-75000-125000 = 105,000 Collections
Oak Co. leased equipment for its entire nine-year useful life, agreeing to pay $50,000 at the start of the lease term on December 31, Year 1, and $50,000 annually on each December 31 for the next eight years. The present value on December 31, Year 1, of the nine lease payments over the lease term, using the rate implicit in the lease, which Oak knows to be 10%, was $316,500. The December 31, Year 1, present value of the lease payments using Oak’s incremental borrowing rate of 12% was $298,500. Oak made a timely second lease payment. What amount should Oak report as finance lease liability in its December 31, Year 2, balance sheet?
On December 31, Year 1, Roe Co. leased a machine from Colt for a 5-year period. Equal annual payments under the lease are $100,000 (including $5,000 annually allocated to taxes and insurance) and are due on December 31 of each year. The first payment was made on December 31, Year 1, and the second payment was made on December 31, Year 2. The five lease payments are discounted at 10% over the lease term. The present value of minimum lease payments at the inception of the lease and before the first annual payment was $417,000. The lease is appropriately accounted for as a finance lease by Roe. In its December 31, Year 2, balance sheet, Roe should report a lease liability of
