FAR - 2 Flashcards
Concepts and Main Ideas
What’s account literature is included in the FASB Accounting Standards Codification?
- Financial Accounting Standards Board
- Emerging Issues Task Force Abstracts
- Accounting Principles Board Opinion
- Accounting Research Bulletins
- Accounting Interpretations
- AICPA Statements of Position
- AICPA Audit and Accounting Guides
- Practice Bulletin
Does NOT include AICPA Statements of Auditing Standards.
If company elects to use cash-basis accounting for tax purposes and accrual for its financial statements. What do they report as sales in its IS under the accrual method?
When converting cash sales to accrual sales, sales must be adjusted for net change in AR.
So if AR decrease from Y1 to Y2 by (20,000) then subtract it from sales in current year (Y2).
If AP decreases then increase accrual income.
What is the effect of NI and OE if a company cannot determine beginning balance for supplies?
NI - Overstated
OE - No Effect
NI is overstated because (Supplies expense = Beg + Purchase - End) so Beg is 0 then expense is understated meaning NI over.
OE no effect.
What is the different between the Direct and Indirect Method of the Cash Flow Statement? Give an example.
2) In indirect, how should an increase in inventories be presented?
3) In Indirect, a loss on sale of machinery should be presented as?
Only difference is in the operating section other than that the same.
Direct - each line is a “direct” statement showing cash paid of received like “cash paid to suppliers”
Cash R from customers 800 Cash P to suppliers (200) Cash P to employees (150) Cash R for interest 20 Net Cash provided by operating activities
Indirect - starts with net income and works backwards to “cash provided by operating activities”. With items being Increases/Decreases in accounts like AR, Inventory, AP IN ADDITION to noncash items like depreciation expense/gain/loss on sale of equipment
Net income 50 Depr. expense 10 Decr. AR 5 Incr. Inv (20) Gain on sale of equipment (3) Net cash provided by operating activities
2) Deduction to NI (reason b/c NI is at top in indirect so when inventory increases, inventory sold is less than purchased)
3) Addition to NI (the loss decrease NI but does not reduce cash. therefore the loss must be added back to NI to determine cash flow from investing.
ABC exchanges equipment with DEF. ABC’s asset had BV of 80,000 (cost 120,000; Dep 40,000) and FV 100,000. ABC also gave 30,000 as part of exchange. DEF property had FV 120,000 (Cost 150,000 and Dep 40,000). Commerical transaction.
What will ABC and DEF record on its books? And journal entry?
ABC will record 130,000 (total FV given up) on its books. DEF will record 90,000 (120 - 30).
ABC:
Equipment (rec) 130
Acc Dep 40
Equipment (exch.) 120
Cash 30
Gain 20
DEF
Equipment (rec.) 90
Acc Dep 40
Cash 30
Equipment (exch) 150
Gain 10
** equipment (exchanged) is always what the original COST was***
Assets held for sale? How to record?
If CV 200, FV 180 and costs to sell 10?
Assets are “held for sale” when management has active plan to sell the asset, highly probably within 1 year. Kept on books at lower of CV or NRV.
1) NOT depreciated
2) Listed under “Other Assets” and not included in PPE (Don’t trust)
3) Valued at NRV
So, write down equipment to 170,000 and recognize a loss of 30,000.
How are equity securities recorded?
JE at 1) 1,000 purchase 2) FV increase to 1,250 3) Receive dividends of 50 4) Investment worth 950 5) Security sold for $900
Equity recorded at FV. Dividends received in net income.
1) Investment 1,000
Cash 1,000
2) Investment 250
Unrealized Gain 250
3) Cash 50
Dividend Income 50
4) Unrealized loss 300
Investment 300
5) Cash 900
Realized loss 50
Investment 950
What are the steps to a multi-step income statement? And multi-step vs single step income statement?
Sales (COGS) = Gross Income (SG&A expenses) (Depreciation) = Operating Income (+/-Misc rev, exp, gains, losses, int income) =Income before tax (Income tax expense) = IFCO (+/- IFDO) = Net Income
Single is very simplified. Just lumps rev/gains together and exp/losses together.
General Rule to convert from Cash Net Income to Accrual Net Income?
Add: decreases in liabilities/increases in assets
Subtract: increases in liabilities/decreases in assets
T-account (equation) to analyze Accounts Payable?
Beginning AP + Accrual purchases - cash payments = Ending AP
Accounts Receivable T-account equation
Beg. Balance + Credit Sales - Collections (usually what question needs) - write-offs = Ending Balance
What are gains
Gains are increases in equity (net assets) from incidental or peripheral transactions affecting an entity.
what is realization?
when revenues and gains are realized when products (goods and services), are exchanged for cash or claims to cash.
What is the Statement of Comprehensive Income? And what does a piece of it include? And how is it disclosed?
- All changes in net assets of an entity during a period EXCEPT those resulting from investments by owners and distribution from owners.
- NI + OCI = Comprehensive Income
“Other Comprehensive Income” items:
- Unrealized gains/losses on AFS securities
- Unrecognized gains/losses pension costs
- Foreign currency translation adjustments
- Unrealized gains/losses effective CF derivative transactions
- Error corrections/loss from discontinued operations
Represented:
1) At the bottom of the IS, continue from NI and add other comprehensive income; OR
2) In a separate statement, start with NI and add other comprehensive income
AcidTest (quick) ratio?
(Cash + Net Receivables + Marketable Securities) / Current Liabilities
Inventory Turnover
COGS / Avg. Inventory
- Ratio of COGS to average inventory.
**COGS = Beg Inv + Purchases - End Inv. **
Inventory equation
Beg inv + puchaese = Ending Inv + COGS
Accounts Receivable Turnover?
Credit Sales / Avg. AR
Operating cycle in days?
(365/AR Turnover) + (365/inventory turnover)
Return on equity?
NI / Avg Owners Equity
Profit Margin on sales?
NI / Sales
Dividend payout ratio?
Common dividends / NI
Earnings per share? Where is it represented?
(Net Income - Preferred Dividends) / Weighted Shares Outstanding
- EPS is calculated on income before discontinued operations, or net income
Capital Balance?
Beg Capital + Investments + Income - Drawings = End Capital
Company was awarded damages of $75mn for patent infringement suit brought on by competitor. Accrual & disclosure, disclosure, or neither?
Both Accrual and disclosure
Former employee has brought on a wrongful-dismissal suit against previous employer. Company’s lawyers believe the suit to be without merit. Accrual & disclosure, disclosure, or neither?
Neither Accrual nor disclosure
Company has outstanding purchase orders in ordinary course of business for purchase of raw materials for manufacturing process. Market price is currently higher than the purchase price and is not anticipated to change within a year. Accrual & disclosure, disclosure, or neither?
Neither Accrual nor disclosure
Government contract completed during year 2 is subject to renegotiation. Although the company estimates that it is reasonably possible that a refund of 200-300mn may be required by the gov, but it does not wish to publicize the possibility. Accrual & disclosure, disclosure, or neither?
Disclosure only
Company has been notified by a governmental agency that is will be held responsible for cleanup of toxic materials at a site company formerly conducted operations. Company estimates that its probable that its share of remedial action will be $500mn. Accrual & disclosure, disclosure, or neither?
Both Accrual and disclosure
Company redeemed its outstanding bonds and issued new bonds with lower rate of interest. The reacquisition price was in excess of the carrying value amount of the bonds. Accrual & disclosure, disclosure, or neither?
Disclosure only
Allowance for Doubtful Accounts equation? And how does it work?
Ending Balance for Allowance Doubtful Accounts = Beg Balance + Recoveries of bad debt written off in prior years + Current year’s bad debt expense
(uncollectible) - write-offs of uncollectible.
Bad Debts Expense is the loss from extending credit to customers and is usually an estimated amount based on a company’s credit sales.
What happens when parent company uses the cost method vs equity method on its books to carry its investment of its subsidiary? How are dividends on those investments recognized? Is Goodwill amortized?
1) Under the cost method:
- Investment - the parent recognizes only its share of the subsidiary’s dividends declared.
- Dividends - recorded as dividend revenue
2) Under equity method:
- Investment - investor recognizes its share of investee earnings (used when company has 30% or above ownership) ie ownership x earnings
- Dividends - common stock dividends treated as return on capital. Only preferred dividends recognized as dividend revenue.
- Only income increases the investment account
3) Goodwill is never amortized but only assessed at least annually for impairment at the REPORTING level
Dividends never increases investment account under either method
1) Under with of the following will the methods of carrying a subsidiary on its books, will the carrying value of the investment normally change following a combination? (cost/equity - yes/no)
2) Will the method used by a parent to carry an its books its investment in the subsidiary affect the consolidated process or the final consolidated financial statements?
3) What is the acquisition date called in a combination?
1) Cost method does not change after a combination
1) Equity changes as the equity in the subsidiary changes
2) whatever method used (cost, equity, other) that a parent uses to carry its subsidiary on its books will affect the consolidating process BUT NOT the final consolidated financial statements
3) Closing date
Cost-Benefit
is what it is called when the cost of information exceeds its benefit, it should not be reported, even if it might be useful.
The SEC is comprised of five commissioners, appointed by the President of the United States, and five divisions. Which of the following divisions is responsible for overseeing compliance with the securities acts?
- Division of Corporate Finance.
- Division of Enforcement.
- Division of Trading and Markets.
- Division of Investment Management.
- Division of Corporate Finance.
What are the 3 criteria for an operating segment to be reportable?
- segment revenue is 10% or more of total revenue for all reported operating segments,
- segment profit or loss is 10% or more of total profit
- segment assets are 10% or more of total assets of all operating segments.
Which of the following methods (cost or equity) would an investor use to account for an investment in an entity in which they have significant influence, under IFRS and GAAP?
Under US GAAP, only the equity method may be used.
Under IFRS, either method can be used.
Under the allowance method, not the direct write off method, what happens when an account is written-off. What does it NOT have effect on?
- account written off, the journal entry is:
allow. for uncollectible acc xxxx
AR xxxx - If collected, an entry is made to reinstate the account receivable by:
AR xxxx
allow. for uncollectible acc xxxx
THEN
Cash xxxx
AR xxxx
Because it has been collected so we get cash
AR - no change (since it was written off to Allowance
NI - No change
Assets - No change
No impact on Balance sheet or IS when AR is written off under allowance method
LIFO under Perpetual and periodic inventory system? What does it mean and how to solve the below?
January
1/1 Purchased 2000 @ 1
1/17 Sold 1200
1/28 Purchased 800 @ 5
What would be the difference if using average-cost method?
For example, if 1/1 had a beg balance of 200 @ 4.
Perpetual LIFO because it is assigned after EACH sale. Last item purchased is the first one sold.
Periodic is calculating LIFO at the end of the month or quarter.
Perpetual:
800 x 5 = 4,000
800 x 1 = 800
Periodic:
1600 x 1 = 1600
you calculate what is left over not what is sold.
Average
- requires a new unit cost to be calculated every time inventory is purchased. So for this problem it would be total cost of 2,800 ((200x4) + 2000)) divided by 1200 = 2.3 per unit so use that.
Perpetual
800 x 2.3 = 1,840
200 x 2.3 = 460
800 x 5 = 4000
When should loss/gain contingencies be accrued?
How do you record contingency liabilities that are probable under IFRS?
A loss contingency can be accrued IF:
1) Probable
2) Amount of loss is reasonable estimated
Contingent gains are not recognized in the accounts, but only footnoted
IFRS
They consider it a PROVISION instead of a liability
Also, if they give you a range say loss is 2mn to 3mn you accrue the middle 2.5mn instead of the lower value.
What costs should be capitalized in PPE?
What are required footnote disclosures on PPE?
What costs are capitalized in intangible assets?
What costs are capitalized for software development?
Property, Plant and Equipment
1) Cost getting the land ready for use (development)
- Cost of the land
- RE taxes in arrears
- Attorney fees for title search / insurance
- Shipping / Installation / Testing
2) Cost to Increase useful life
3) Cost to increase efficiency
Required Disclosures:
- Range of useful lives
- Depreciation Methods
- Accumulated depreciation
Intangible
- Successful defense in lawsuit
- Registration costs
Software
- i.e. Write the code (nothing else)
- Capitalize costs for creating software ONCE it has reached technological feasibility.
- Anything before is R and D
What are the accelerated depreciation methods?
Asset Cost: 10,000
4 year life
Salvage value: 2,000
Double Declining Balance:
SL - 25%
25% x2 = 50%
10,000 x 50%
*no salvage value)
Sum-of-the-years:
(4/10) x (10,000 - 2,000)
1) How to record impairment loss for equipment under both IFRS and US GAAP? Is restoration of loss allowed?
2) Under IFRS how are changes in FV recorded?
IFRS
- If the CV is greater than recoverable cost - Impairment is the difference (one step process)
- *BUT recoverable cost is the greater of FV less cost to sell (MV) or value in use (discounted cash flows). **
- Reversal of loss is allowed even for entire class of assets held for use or disposal.
- Any increase in FV above original cost is recorded in OCI (revaluation surplus).
GAAP
- If undiscounted cash flows is below CV THEN subtract fair value from CV to get impairment loss.
- Reversal of loss is NOT allowed.
How to report on the balance sheet a long-term bond investment? Held-to-maturity.
What are HTM debt securities carreid on balance sheet? How are gains/loss in FV reflected and where?
- Have to remember how to calculate bond interest revenue and amortization
Discount amortization = Interest revenue - state interest at par
And what you do is add that discount amortization amount to the price that the bond was purchased at (the discount). This increases the cost of the discounted bond until it finally reaches parity at maturity.
- HTM carried at amortized cost
- Unrealized gains/losses are note reported
When are AFS gains and losses NOT recorded in OCI in the equity section of the Balance sheet?
And what are AFS and Trading securities carried at?
- When firm elects to use the FV option. Any unrealized gains/loss are recorded in earnings for the period.
- Gains/loss appear on OCI (net tax) BUT on the balance sheet they are recorded at FV
**AFS and trading are carried at FV on the BALANCE SHEET **
Accrued Interest Payable T-Account
Beg Balance + Interest Expense - Interest Payable = End Balance
How is warranty expense recorded in JE?
For example, if company estimates that warranty costs are 4% of sales how do you record and how does it work?
If estimates that warranty costs are 4% of sales then:
Warranty Expense xxxx
Warranty Liability xxxx
Above is the recorded entry for the estimate
Once they actually incur warranty costs (people bring in defected devices) then:
Warranty Liability xxxx
Cash, parts etc xxxx
You borrowed $1,000,000 on a 9% note payable. You paid the first of four quarterly payments of $264,200 when due on December 30. In December 31, balance sheet, what amount should World report as note payable?
You’re looking to solve for what note payable is worth on 12/31. But you have to remember you need to figure out what the quarterly payments are WITHOUT interest (as interest is given to you).
The value of the note payable is the entire amount of 264,200 (which includes interest) MINUS interest. Then subtract that amount for the initial amount borrowed and that is what its worth.
Interest = 22,500 (.09 x 1/4 x 1mn)
Payment of principal = 241,700 (264,200 - 22,500)
Note Payable value = 758,300 (1,000,000 - 241,700)
How to record a discount on a bond sold to an investor that wants a higher yield because i’m riskier? they want 12% when stated interest is 10%. Value of bond is 96.54 and Par is 100. Effective interest is at 12% is 5.79 while stated is 5.
Value of Bond = PV of Principal + PV of interest
Entry at issue date:
Cash 96.54
Discount 3.46
Bond Payable 100
Amortization:
Interest Exp 5.79
Discount .79
Cash 5.00
At maturity:
Bond Payable 100
Cash 100
discount/premium on bond is a contra account. So slowly over the life of the bond you eliminate that discount/premium so that at maturity bonds value is 100
TIP: Interest exp = Yield x bond discount (Not PAR)
How to calculate the PV of bond and PV of ordinary annuity? If issue price is 5% and market rate is 8%
TIP: When they give you a table ONLY look at numbers on the MARKET/EFFECTIVE yield rate because you’re discounting it at current market prices.
1) Take issue price x PV at 8%.
2) Take bond cash payment (price x 5%) x PV of ordinary annuity at 8%
JE for early retirement of debt? And what can you calculate in the problem initially?
Bonds Payable xxx (FV Bonds)
Premium xxx (unamortized)
Loss
Bond issue costs
Discount
Cash MV
Gain
- Only thing you’re changing is whether it is at a Discount/premium and solving for gain or loss. Cant have both a discount and premium in same entry. **
- if they give you an effective rate method, you calculate the unamortized discount/premium is subtract the PV of the bond (BV) from the FV.
Troubled Debt Restructuring. What happens to debtor during the settlement (not modification)?
How do you know if restructuring was a troubled debt restructure?
Is it appropriate for a debtor to recognize a gain?
Because they cant pay, they are giving the credit an asset or equipment. SO…
1) Compare the CV to the MV of that asset you’re giving the creditor to see if there’s a gain/loss on disposal
2) Compare that gain or loss to the carrying value of the debt.
If PV of restructured flows using original interest is less than BV of debt at date of restructure
Yes, when carrying amount EXCEEDS the total future cash payments specified by the new terms
