FAR Chapter 3 Flashcards
Cash equivalents
Mature 90 days or less from date of purchase - excludes legally restricted deposits
Restricted cash has been set aside for specific purpose
If you wrote a check but didn’t mail - the cash for that check should be included on your GL balance because you did not mail the check
Blank Analysis Format (BASE formula)
Beginning
Add
Subtract
=Ending
+ AR -
Beg. Balance Write offs
Credit sales Conversions to notes
Cash collected
Ending Balance
Recording Sales
Gross Method vs Discount Method
Gross Method: records the A/R ignoring the discount. If discount is later taken, DEBIT Sales Discount (contra-revenue) for the discount amount
Net Method: records the A/R as if discount was taken. If discount is later not taken , CREDIT Sales Discount Not Taken (revenue)
Sales Returns and Allowance
Used when passed experience shows that a material % of receivables are returned
Dr. Sales returns and allowance (contra sales)
Cr. A/R
2 Methods for Estimating Uncollectible A/R
Direct write off (not GAAP): only books an entry when it is determined that the account won’t be collected
Dr. Bad debt expense
Cr. A/R
Allowance method (GAAP): based on past experience (% of sales, % of A/R, aging of receivables). Come up with an estimate and accrue for it.
Allowance Method GAAP - 3 options
% of Sales: focuses on matching, the calculation is in addition to whatever you had as beginning balance
Dr. Bad debt expense
Cr. Allowance for uncollectible accounts
% of A/R: calculation is the ending balance, bad debt expense is a plug (manipulated), consider what you had in beginning balance
Aging of Receivables: calculates the ending balance in the allowance
Write off of a specific A/R and subsequent collection
- no effect on I/S or B/S
- the only thing that changes is the form of total assets (although total assets is still the same)
Dr. Allowance for doubtful accounts
Cr. A/R
Subsequent collection - Direct write off (not GAAP)
Dr. Cash
Cr. Uncollectible account recovered
Subsequent collection - Allowance method (GAAP)
Dr. A/R
Cr. Allowance for uncollectible accounts
Dr. Cash
Cr. A/R
Factoring A/R with recourse - could be a sale or borrowing
To be considered a sale it must meet these requirements
- Seller’s obligation for uncollectible can be reasonably estimated
- Seller surrenders control
- Seller cannot be required to re purchase the A/R, but may be required to replace the A/R with other A/R
If any of these are not met then it is treated like a loan and is disclosed (just as if it was pledged)
Notes Receivables - Valuation
Face Value (-) Unearned Interest = PV goes on books
Notes may be discounted/sold in order to get cash
Discounting Notes Receivables
With recourse (they can come back to you):
Dr. Cash
Cr. Note receivable discounted
Without recourse (can’t come back to you):
Dr. Cash
Dr. Loss
Cr. Note receivable
Goods in Transit
- FOB Shipping Point: Title passes to buyer when seller delivers the goods to a common carrier
- FOB Destination: Title passes to buyer when buyer receives the goods
If seller sends nonconforming goods, title never passed to buyer and goods should be included in seller’s inventory
Valuation of Inventory
- Stated at cost which includes freight-in
- Exception: precious metals and farm products, which are stated at net realizable value (selling price - disposal cost)
Recognizing Loss of Inventory
- GAAP: write down recognized on COGS, unless material, if material then do it separately
- IFRS: allows reversal of the write off
Valuing Inventory
IFRS: use lower of cost OR net realizable value. No LIFO.
GAAP: use lower of cost OR net realizable value if using FIFO or weighted average
GAAP: use lower of cost OR MARKET for retail and LIFO
- Cost is simple (just the $ cost)
- Market: choose middle number between
1) Replacement cost
2) NRV (selling - cost to complete)
3) Floor (NRV - normal profit)
Periodic Inventory System vs. Perpetual
No matter what you use, ending inventory is the same
- Quantity of inventory is determined by physical count
- 1 journal entry at time of sale
- COGS is squeezed
Beginning inventory (+) Purchases = Cost of goods available for sale (-) Ending inventory per physical count = COGS
Perpetual: 2 journal entries at the time of sale as inventory is constantly being updated on the system
Recording a Sale - Periodic vs. Perpetual
Periodic
Dr. Cash
Cr. Sales
Perpetual
Dr. Cash
Cr. Sales
Dr. COGS
Cr. Inventory
Recording a Purchase - Periodic vs. Perpetual
Periodic:
Dr. Purchase
Cr. Cash
Perpetual
Dr. Inventory
Cr. Cash
Weighted Average Method
This is periodic
Total cost of inventory available / total number of units of inventory available
Moving Average Method
This is perpetual
Calculates weighted average cost after each purchase
Valuation of Fixed Assets
Revaluation must be done to asset class, no cherry picking
GAAP: historical cost including bringing it to the location and getting it ready to work.
IFRS: allows revaluation model
- initial revaluation loss goes to I/S
- if revaluation loss reverses a previous gain then on OCI
- initial revaluation gain goes to OCI
- if revaluation gain reverses a previous loss then on I/S
Cost of Land
Land is not depreciated and cost includes: purchase price, commissions, title recording and legal fees, draining of swaps, cutting trees, demolition of previous building, less proceeds from sale of existing building
Land improvements are depreciated and include: fences, water systems, sidewalks, paving, landscaping, lightning
Depreciation - Sum of the Years Digits
Ex: 3 years is 6 (1+2+3) so depreciate as follows
1st year = (3/6) x depreciable base
2nd year = (2/6) x depreciable base
3rd year = (1/6) x depreciable base
Impairment Loss
US GAAP prohibits reversal of intangible asset unless the asset is held for sale
Goodwill: if FV < carrying value, record impairment loss on I/S
Recoverability test is performed on intangibles with limited life by comparing undiscounted future cash flows to carrying value. If carrying value is greater perform FV test
Impairment loss = carrying value - FV
Impairment Loss - IFRS
Loss exists when carrying value exceeds recoverable amount
Recoverable amount is the greater of:
- Asset FV less cost to sell
- PV of future cash flows (value in use)
Reversal of a prior impairment loss is allowed and increases I/S
Nonmonetary exchange
- Has commercial substance: recognize gain or loss based on difference between FV and book value of asset given up
- Lacks commercial substance: no gain or loss is recognized. If small boot is received then a proportion of the gain is recognized. If boot received or paid > 25%, both parties recognize gain/loss
- conservatism: recognize loss when BV > FV of asset given up
Nonmonetary Exchange - IFRS
Characterized as:
- Dissimilar: gain/loss recognized
- Similar: no gain recognized (loss is b/c of conservatism)
Intangible Assets
Patents, copyrights, franchises, trademarks, and goodwill
- If purchased: capitalize at cost
- If developed: expense, except legal feels to a successful defense, registration, consulting, design
Amortize only if it has a FINITE life
Intangible Assets - IFRS
Can be reported under the cost of revaluation model
- Cost Model: reported at cost, amortized if finite life, and tested for impairment
- Revaluation Model: at cost but re-evaluated to FV and revaluation date used for subsequent amortization, if finite life, and impairment testing
- Revaluation Loss: on I/S, if reversing a gain then OCI
- Revaluation Gain: OCI, if reversing a loss then I/S
Research and Development
- GAAP: expense except if they have an alternate future use or if the costs were undertaken on behalf of others
- IFRS: expense research costs and capitalize development costs
Computer Software Development Costs
Capitalize costs incurred after technological feasibility has been established
Amortization expense is the greater of:
- % of revenue (like % of completion)
- straight line
If software is for internal use capitalize once technological feasibility has been established. If later you decide to sell it use cost recovery system and then the rest is revenue
