FAR 4

Question 1

Working Capital equation

Answer 1

Current Assets - Current Liabilities

Solvency - ability to pay debt as due

Question 2

Current Ratio equation

Answer 2

Current Assets / Current Liabilities

Question 3

Quick Ratio equation

Answer 3

(Cash + Net Receivables + Marketable securities) / Current Liabilities

Question 4

Current Assets

Answer 4

Cash, Trading Securities, Receivables, Inventory, Prepaid Expenses, CSV Life Insurance can be

Question 5

Short term obligations reclassified to LT

Answer 5

Under US GAAP, a ST obligation may be excluded from CL and included in noncurrent debt if company intends to refinance it on LT basis and intent is supported by ability to do so
IFRS, NOT classified as noncurrent

Question 6

Cash and equivalents

Answer 6

Convertible to cash within 90 days, coin, checking, saving, money market, negotiable paper
Legally restricted deposits NOT cash

Question 7

Accounts Receivable

Answer 7

Oral promises to pay, net realizable value adjusted for allowances

Question 8

Estimating Uncollectible AR

Answer 8

Direct Write Off Method - NOT GAAP
Allowance Method - GAAP, accrual
% of Sales Method - I/S approach
% of AR at Year End - B/S approach
Aging of Receivables Method - B/S approach

Question 9

Factoring of AR

Answer 9

Without recourse - true sale

With recourse - loan with footnote or sale

Question 10

Notes Receivable

Answer 10

Written promises to pay, PV Future Cash Flows

Question 11

Inventory

Answer 11

Retail - Finished goods only

Raw, WIP, Finished Goods - Manufacturing

Question 12

FOB Shipping Point - seller delivers to carrier

Answer 12

Buyer’s Inventory

Freight In and added to cost of inventory

Question 13

FOB Destination - buyer receives goods from carrier

Answer 13

Seller’s Inventory

Freight out and selling expense

Question 14

Inventory

Answer 14

GAAP requires stated at cost EXCEPT when sell at loss. Then lower cost or market. Reversal of inventory write downs are prohibited.

Question 15

Inventory Market Value

Answer 15

GAAP market value - middle value between replacement cost, ceiling, and floor.
IFRS lower of cost or NRV - NRV is market ceiling under GAAP.

Question 16

Periodic Inventory System

Answer 16

use purchases, determined by count at end of period, COGS plug
BI + Purchases = COGAFS - EI = COGS

Question 17

Perpetual Inventory System

Answer 17

no purchases, each item updated for purchase and sale,

Question 18

LIFO

Answer 18

Prohibited under IFRS, if tax = financials, prices go up, EI down, profit and taxable income go down

Question 19

FIFO

Answer 19

EI and COGS are SAME whether perpetual or periodic used. Prices go up, EI up, Profit and Tax Liability go up.

Question 20

Dollar-value LIFO

Answer 20

measured in dollars and adjusted for changing price levels. Price index = EI at current year cost / EI at base year cost. Multiply price index by layer added

Question 21

Fixed Assets under GAAP

Answer 21

at Historical cost (purchase price) unless donated (at FMV)

Question 22

Fixed Assets under IFRS

Answer 22

at cost to acquire then use cost model or revaluation model
Cost = cost - AD - impairment
Revaluation = class of FA revalued frequently to FV then reported at FV-AD and impairment

Question 23

Capital lease criteria for Lessee

O
W
N
S

Only one required!

Answer 23

• Ownership transfers at end of lease
• Written option for bargain purchase
• Ninety 90% of leased property FV <= PV of lease payments
• Seventy five 75% of asset economic life committed in lease term