FAR 3 Flashcards
Bad Debt Expense Direct Write Off Method-
This method records bad debt expense only when a specific account receivable is considered uncollectible and is written off. It can be used only when the firm is unable to estimate uncollectible accounts receivable reliably. Most large firms do not use this method,
Bad Debt Expense The Allowance Method-
The allowance method is the method of choice for most large firms and is required under GAAP if uncollectible accounts are probable and estimable. This method records an estimate of bad debt expense at the end of each year in an adjusting entry. An allowance (contra accounts receivable) is created at that time and reduces net accounts receivable. Thus, both income and net accounts receivable are reduced in the year of sale by the estimate of uncollectible accounts on the year’s sales.
Equity Securities-
Securities representing ownership interest or right to acquire or dispose of ownership interest. Includes: common stock, preferred stock (except redeemable, stock warrants, call options/rights, put options.
Debt Securities-
Securities representing the right of buyer/holder (creditor) to receive from the issuer (debtor) a principal amount at a specified future date and (generally) to receive interest as payment for providing use of funds. Includes: bonds, notes, convertible bonds/notes, redeemable preferred stock.
Joint Venture-
An association of two or more entities that exercise joint control over an undertaking for profit generally set up for a limited purpose, a limited time, or both.
Intangible Assets-
Long-term operational assets that lack physical substance or presence, but are currently used in the operation of a business and have a useful life extending more than one year from the balance sheet date.
Goodwill-
The result of a business combination that is measured as the difference between the fair market value of the acquired company as a whole (the acquiree) and the fair market value of the identifiable net assets (assets-liabilities). The fair market value of the acquiree as a whole is often greater than the fair market value of the identifiable net assets. Goodwill is the excess of the fair market value of the entity as a whole over the fair market value of its identifiable assets.
Liabilities-
Represent outsider claims to a firm’s assets or are enforceable claims for services to be rendered by the firm.
A deferred revenue-
A liability recognized when the cash is received before the service is provided or before the goods are shipped to customers.
Bond-
A bond is a financial debt instrument that typically calls for the payment of periodic interest (although a zero coupon bond pays no interest), with the principal being due at some time in the future. The bondholder (creditor or investor) pays the issuing firm an amount based on the stated and market rates of interest and receives interest and the face amount in return, over the bond term.
Owners’ Equity-
The owners’ equity accounts represent the residual interest in the net assets of an entity that remain after deducting its liabilities.
Total Owners’ Equity=
Total Assets-Total Liabilities
Variable-Interest Entity (VIE)-
A VIE is a legal entity which by design either:
1) Cannot finance its activities without additional subordinated financial support (i.e., its expected losses exceed its total equity investment at risk.) or,
2) Its equity holders, as a group, do not have the direct or indirect ability to make decisions about the VIE’s activities.
A “derivative” is a financial instrument (or other contract) with all 3 of the following elements:
1) It has one or more underlyings, and one or more notional amounts.
2) It requires no initial net investment
3) Its terms require or permit a net settlement
Basic EPS (BEPS)-
Includes only actual common shares outstanding.
