FAR Deck 3 Flashcards
Through Ch 7: PPE
Construction in Progress (CIP) Formula/Calculation
CIP = Construction expenses + Gross Profit/loss
GP = CIP - Construction expenses
Construction in progress
Construction in progress is costs (incurred to date) plus the profit for the year.
If construction in progress exceeds billings on long-term contracts, a current asset is reported.
If construction in progress is less than billings on long-term contracts, a current liability is reported.
Progress billing
Progress billings are not used in calculating income from construction contracts.
Billings do not trigger income recognition because they are not dependent on when the performance obligation is satisfied.
The Lower of Cost or Market
Use for LIFO or retail inventory method
The lower of cost or market (LCM) rule applies only to inventory accounted for under the LIFO or retail inventory method.
LMC compares the cost with the current marekt value.
Although market value is usually replacement cost, it is subjected to a ceiling and floor limitation.
Market value is subject to a ceiling (NRV) and floor (NRV - Profit Margin) liminationl
Ceilng and Floor Calcuations for Inventory
Ceilng : is NRV (sales price - cost required to complete the inventory and disposal costs), which is the maximum amount that may be reported as market.
Floor : (NRV - Profit Margin) is the lowest amount that may be reported as market.
**A shortcut to determine market value is to arrange the replacement cost, ceiling and floor in numercial order and select the value in the middle.
Weighted Average Cost Calculations
Step 1:
Average cost per unit = Cost of beg inventory + Cost of purchaeses /
Beginning inventory units + Units purchased
(Periodic purchases includes all purchases in the period and Perpetual only includes purchases since the last calculation)
Step 2:
Cost of goods sold = # of units sold x Average cost per unit
Ending inventory = # of units remaining at end of period X Average cost
per unit
Lower of Cost or NRV (LCNRV)
Use for FIFO, Weighted Average and Moving Average
This method compares COST (purchase price) with NRV (sales price less costs to complete the inventory and disposal costs).
If cost exceeds the replacement costs and replacment costs exceeds NRV (sales price less disposal costs), then cost is greater than NRV.
Calculation of new moving average unit cost
Cost of the units purchases + Cost of units in inventory /
New total # of units
Two Systems for keeping track of inventory
- Periodic : The ending inventory is determined at the end of the accounting period
- Perpetual : The inventory is updated each time there is a sale or purchase
Under FIFO, the earliest goods purchased are considered the first goods sold. EI will made up of the most recent purchases.
- If prices are increases (inflation)
a) Periodic FIFO determines EI in reverse chronological order, starting
with the most recent, higher costs. This will result in higher EI costs
b) Perpetual FIFO updates the EI continuoulsy, resulting in EI comprosing the most recent, highter costs each time Therefore EI will be thesame amount whether a perpetual or period system is used.
Under LIFO, the most recent purchaes are the first good sold. EI will be made up of the oldest purchases (sometimes including beginning inventory).
- If prices are increases (inflation)
a) Periodic LIFO determines EI in chronological order, starting with the older, lower costs.
b) Perpetual LIFO updates EI continuously. As a result, some of the earlier purchases (at lower costs) could be sold. Therefore perpetual LIFO will result in different EI.
Impact of inventory errors on COGS and net income
Under the periodic system, COGS has an inverse relationship to COGS.
If ending inventory is understated by an amount, COGS will be overstated by that amount.
Therefore if COGS is overstated by an amount, net income will be understated.
Ultimately if expenses are overstated, net income will be understated.
Net carrying value of an Accounts Receivable
Accounts Receivable
Less: Allowance for credit losses (increases on credit side, write-off or decreases on the debt side).
=
Net carrying value
Solvency Ratios
Long-term debt-equity ratio :
Total L/T debt / Total Equity
Debt-to-equity :
Total Debt / Total equity
Total Debt Ratio
Total debt / Total Assets
Financial Leverage Ratio :
Total Assets / Total equity
Purchased financial asset with credit deterioration (PCD)
If purchase price is GREATER THAN OR EQUAL TO Face Value, no allocation required
If Purchase Price is LESS THAN Face Value
- If insiginificant amount of PCD, record at amortized cost
- If more than insignificant amount of PCD, allocate between credit and market risk
Inital cost equals : Purchase Price + Credit Risk
or
Face Value - Discount
Effects of ending inventory errors
Ending inventory
Dollar-Value LIFO (DVL)
STEP 1 : Convert (deflate) current ending inventory to base year dollars
Current year ending inventory / Current Price Index
*If index is not given, it can be calculated as :
Current Ending Inventory / Current ending inventory in base year dollars
SETP 2 : Determine new LIFO layer
Step 1 - Prior year inventory in base year dollars
STEP 3 : Restate (inflate) new layer from base year dollars to current year dollars
Step 2 X Current Price Index
SETP 4 : Determine new DVL ending inventory
Prior DVL Layers + Step 3
COGS + PROFIT = SALES TO DATE
Calculation of Cost Depletion : Activity Method
STEP 1 : Volume in Units
Units remaining to be extracted at the beginning of year*
*For the first year, this equals total units to be extracted
STEP 2 : Depletion cost per unit
Depletion base** / Units from Step 1
** Depletion base for the first year is total cost less salvage value. In subsequent years, this amount s reduced by depletion taken previously.
STEP 3 : Depletion (charged to inventory)
Per-unit cost from Step 2 X Units extracted
Depletion expense : transferred from inventory when sold
Per-unit cost from Step 2 X Units Sold
Depletion
Depletion is used to allocate the cost (ie. matching principle) of the natural resource over its useful life based on the units extracted.
Depletion is recorded as inventory and then charged to the cost of sales when the extracted units are sold.
Weighted Average Accumulated Expenditures (WAAE)
Each months expendtiure X Months outstanding / 12 months*
*If construction begins or ends during the year, use the # of application months
Cost of land
Purchase Price* \+ Delinquent taxes \+ Surveying \+ Clearing, grading, landscaping \+ Costs of razing existing building on land - Proceeds from the sale of scrap materials = Cost of land
*Includes any existing building that is to be demolished
Asset Retirement Obligation (ARO)
An asset retirement obligation represents a future liability associated with retirement of an asset used in operations.
Initially the ARO is recorded at FV of the liability.
The FV usually equals the PV (ie discounted cash flows) of the future payments to be made to satisify the obligation.
A periodic accretion expense is recorded (each accounting period) to increase the liability to its future value. No accretion expense is recorded when the asset is placed in service.
Generally the credit-adjusted risk-free rate is used to calculate that expense.
When recording an ARO, the liability is offset by capitalizing (increasing) the asset.
Determining recognized gain:
Nonmonetary exchange that lacks commerical substance
If cash received is GREATER THAN OR EQUAL TO 25% of the total consideration received, you must treat as a monetary exchange and ALL gain is recognized.
If cash received is LESS THAN 25% of the total consideration received thatn recognize gain based on the following calculation.
Cash Received / Cash received + FV* of asset received X Total gain
*Note : For exchanges, FV is the same as fair market value.
Impairment
Impairment is the decline in value or usefulness of a long-lived asset held for use in a business.
A long-lived asset is impaired if the sum of the undiscounted cash flows expected to result from the use and disposition of the asset is less than the CV (recoverability test).
The impairment loss is calculated as the excess CV (carrying value) over the fair value (FV) of the asset.
Recording a nonmonetary exchange with commercial substance
STEP 1 - Record asset received : Record at FV of asset given up + cash paid ( - cash received).
If not known:
- Use FV of asset received or - CV of asset given up + cash paid ( - cash received)
STEP 2 - Remove asset given up : Remove cost and any related accumulated depreciation
STEP 3 - Recognize gain or loss : Difference between Step 1 and Step 2 (balancing amount (i.e. plug) in journal entry.
Note: The FV of the asset received is used ONLY if the FV of the asset given up is unknown.
Double declining balance depreciation method
Annual depreciation expense = Carrying value X 2/useful life
This method multiplies the asset’s new carrying value (cost - accumulated depreciation) each period by double the straight-line rate or 2/Useful life.
Ex. DDB rate for an asset w/a 10 year life is 2/10 or 20%
Salvage value is ignorned, however an asset cannot be depreciated below salvage value:
Expenditures to make assets ready for use (SPITT)
S : Shipping (freight-in0
P : Purchasing
I : Installation
T : Taxes
T : test runs
