FAR 3 - Assets and Related Topics Flashcards
Restricted Cash
Cash that has been set aside for a specific use or purpose
Bank Rec: things to adjust on the bank balance
+Deposits in Transit
-Outstanding Checks
Bank Rec: things to adjust on the book balance
-Service charges \+Bank collections \+/- Errors -Non-sufficient Funds (NSF) \+Interest Income
Reconciliation of Cash Receipts and Disbursements
Four-column reconciliation. Object is to reconcile any differences between the amount the depositor has recorded as cash receipts and the amount the bank has recorded as deposits
Cash in money market account
Considered cash/cash equivalent on balance sheet
Accounts Receivable T account
(Debit normal balance) Beg balance \+Credit Sales -Write offs -accounts converted to a note -cash collected =Ending balance
AR with sales (speed) discount methods (2/10 n/30)
1) Gross Method - book full sale, take out out discount if payment is made within the discount period
2) Net Method - Book sale assuming the discount will be taken, credit “sales discounts not taken” as revenue if payment not received within the discount period
* See page F3-11 for example
Methods to estimating uncollectible AR
1) Direct Method - NOT GAAP. Bad debt is recognized when the account become uncollectible
2) Allowance Method - a percentage of AR is estimated to be uncollectible each period - better satisfies the matching principle
Allowance for Doubtful Accounts T account
(Credit normal balance) Beg balance \+Recoveries \+CY Bad Debt Expense -Write offs =Ending balance
Allowance Method methods
1) Percentage of AR at year end
2) Aging of Receivable method - % uncollectible based on age outstanding
Entry to Write off AR
Dr ADA
Cr AR
*To restore previously written off account just flip entry
Pledging
The process of using existing AR as collateral for a loan. **Requires footnote disclosure only
Factoring AR
1) Without Recourse - seller is not liable for any AR not collected. Sale is final
2) With Recourse - has an option to re-sell any uncollectible receivables back to the seller (Booked as sale or disclosed as pledge)
JE: Dr Cash Dr Due from factor (factor security, will get back if AR is received by factor) Dr Loss on sale of receivable Cr AR
Discounting (factoring) a note at a bank
1) Calculate maturity value (P + interest)
2) Calculate the bank discount on the payoff value at maturity (bank discount rate x time remaining x MATURITY value)
3) Compute amount paid by bank (maturity value - banks discount or Step 1 - Step 2)
FOB Shipping Point
Title passes when goods are given to carrier (ex. UPS). Buyer pays shipping which is added to cost of inventory (aka CAPITALIZE)
FOB Destination
Title passes when the buyer receivers the goods from the carrier. Shipping is a selling expense to the seller
Consigned Goods
The consignor retains title of goods even though they are not in their possession. Included in consignors inventory
NRV
Selling price - Costs of Completion
Market Value
Middle value of replacement cost, market ceiling and market floor
Market Ceiling
NRV
Market Floor
NRV - Normal profit
When to use lower of cost and NRV
FIFO / WA
When to use lower of cost and market
LIFO / Retail Method
COGS Formula for Periodic Inventory
Beg inventory \+Purchase =Cost of goods available for sale -Ending inventory (physical count) =Costs of good sold
Periodic vs Perpetual System differences
Periodic
1) 1 JE at time of sale ( Cash / Sales)
2) Purchases are recorded by debiting purchases
3) Used for weighted average method
Perpetual
1) 2 JE at time of sale (Cash / Sales, COGS / Inventory)
2) Debit inventory when purchases are made
3) Used for moving average method
FIFO periodic vs perpetual
Will result in SAME ending inventory and cost of goods sold (LIFO will NOT)
Theory of FIFO vs LIFO
In a period of rising prices FIFO will result in lower COGS, higher inventory and higher NI. LIFO will result in higher COGS, lower inventory and lower NI. LIFO is better for tax purposes. Also matches expenses and revenues better.
Dollar-Value LIFO Price Index
End. Inv. at current year cost / End. Inv. at base year costs (C/B)
**Multiply BASE YEAR by index to get your dollar-value LIFO amount
COGS percentage
1 - gross profit percentage. Multiply by Sales to get COGS
Land Improvements
Capitalize!
Fences, Water systems, Landscaping
Land Costs vs Building Costs
All costs up to excavation for the new building are land costs. Proceeds from sale of existing building reduce LAND COSTS.
Land cost: filling in a hole or leveling
Building cost: digging a hole for the foundation
Equipment Repairs
- Ordinary repairs should be expensed as repair and maintenance
- Extraordinary repairs should be capitalized
Rules about capitalized interest
1) Only capitalize interest on money actually spent (accumulated expenditures), not total amount borrowed
2) The amount of capitalized interest is the lower of actual interest cost and computed capitalized interest
3) Capitalize during construction period (after expenditures for the asset have been made - building decision made)
4) Disclose Interest cap and capitalized interest in financials
Sum of the Years Digits Depreciation
(Cost - Salvage) x Remaining life / Sum of the years digits
SUM digits = n(n+1)/2
*This method front loads depreciation in the early years
Double declining balance depreciation
2 x 1/N x (Cost - accumulated depreciation)
*Only method that ignores salvage value in annual calculation. Salvage value is used as the limitation to total depreciation
Depletion
Unit depletion rate x Number of units extracted
*Unit depletion rate = Depletion base / Estimated recoverable units
**Depletion base = Cost to purchase property + development costs to prepare for extraction + Restoration costs - residual value
(R E A L)
Commercial Substance
Future cash flows change as a result of the nonmonetary transaction. Gains and Losses are always recognized in full
Nonmonetary transaction fair value assumption
The fair value of assets given up is assumed to be equal to the fair value of assets received, including any cash given or received in the transaction aka
Fair value given = fair value received
How to find G/L in nonmonetary transaction
FAIR VALUE of asset given (old) - BOOK VALUE of asset given (old) [BV = Cost - AD]
Exchanges Lacking Commercial Substance
4 possibilities of how to handle:
1) No cash is received = no gain recognized
2) Cash is paid = no gain (if less than 25%)
3) Cash is received = proportion of gain recognized (if less than 25%)
4) Cash is 25% or more of total consideration = gains and losses are recognized in full
- Total consideration = FV of asset giving cash
- The new machine value on the books is always a plug figure
Internally developed intangible assets
Expensed, except successful legal defense, registration or consulting fees or design costs
Patent amortization
Amortized over the shorter of its estimated life or remaining legal life
Franchise Fees
Initial fee - intangible asset and amortize
Continuing fees - expense as incurred
R&D Costs
EXPENSED, except
1) tangible assets that have alternative future uses (capitalize and depreciate)
2) R&D costs taken on behalf of others under contractual agreement (inventory)
Items not considered R&D
1) Routine periodic design changes
2) Marketing research
3) Quality control testing
Software Development Costs
Expense until technological feasibility (upon completion of a detailed program design), capitalize until the product is released for sale
*amortize by the greater of percentage of revenue (like step 2 in percentage of completion) and straight line
Impairment of Intangible Assets (other than Goodwill)
Two step process:
1) Compare carrying amount to the sum of undiscounted cash flows
2) If carrying amount > undiscounted cash flows, impairment has occurred. Impairment loss is equal to fair value (or discounted cash flows) - carrying value
* If indefinite life, skip step 1
Where do you report an impairment loss
Continuing operations before income taxes, unless the impairment loss is related to discontinued operations
Impairment of assets held for use
Fair value - carrying value
1) Amortize/Depreciate new cost
2) Restoration not permitted
Impairment of assets held for disposal
Fair value - carrying value + cost of disposal
1) No amortization/depreciation taken
2) Restoration permitted
