FAR F3 Flashcards
What are cash & cash equivalents defined as?
Cash is defined as actual “unrestricted” cash and cash equivalents are defined as short-term, liquid investments that are so near maturity (original maturity date was within three months of the purchase date) that the risk of changes in the value because of interest rate changes is insignificant.
A bank draft is
a payment that is like a check, but its amount is guaranteed by the issuing bank.
A Commercial paper is
an unsecured, short-term debt instrument issued by corporations. ( Included in C&CE).
Marketable equity security & Marketable debt security are classified as:
investments and would be included in the investments line.
Simple Bank Reconciliation:
1- Book Adjustments:
BINS, add BI subtract NS.
B: Bank Collections (+)
I: Interest Income (+)
N: NSF Checks (-)
S: Service Charge (-)
2- Bank Adjustments:
DO, add D subtract O
D: Deposits in Transit (+)
O: Outstanding Checks (-)
- Errors are added or deducted depending on the cause of error.
What is pledging of accounts receivable?
A pledge of accounts receivable simply involves the use of the receivables as collateral for a loan. The receivables remain on the company’s books and the company continues to service the receivables. When the cash proceeds are received by the company, a credit is recorded to notes payable. Pledging of receivables as collateral only requires note disclosure.
What is factoring of accounts receivable?
Factoring involves a company converting its receivables into cash by assigning them to a “factor” either with or without recourse. factoring without recourse, meaning the sale is final and the factor assumes the risk of any losses.
A method of estimating uncollectible accounts that emphasizes asset valuation rather than income measurement is the allowance method based on:
Aging the receivables.
The net realizable value of receivables is
Account receivable account adjusted for allowances for receivables that may be uncollectible, sales discounts, and sales returns and allowances.
What is the gross method of recording discounts on receivables?
The gross method records a sale without regard to the available discount. If payment is received within the discount period, a sales discount (contra-revenue) account is debited to reflect the sales discount.
What is the net method of recording discounts on receivables?
The net method records sales and accounts receivable net of the available discount. An adjustment is not needed if payment is received within the discount period. However, if payment is received after the discount period, a sales discount not taken account (revenue) must be credited.
What is the difference between sales discounts and trade discounts?
Sales discounts are generally based on a percentage of the sales price, and recognized by either the gross or the net method. Trade discounts are quantity discounts and are recognized at net.
What are the two methods of recognizing uncollectible accounts receivable?
The direct write-off method & the allowance method. However, only the allowance method is consistent with accrual accounting (and thus acceptable for GAAP).
What are the two methods of estimating uncollectible or doubtful accounts under the allowance method?
percentage of accounts receivable method (balance sheet approach) & Aging of receivables method
Sales return allowance is a
contra-revenue account.
Allowance for uncollectible/doubtful accounts is a
contra-asset account.
uncollectible accounts recovered is a
revenue account.
How to calculate the discounting of a note receivable?
- Calculate the maturity value of the note by adding the interest to the face amount.
- Calculate the bank discount on the payoff value at maturity.
- Compute the amount paid by the bank for the note by subtracting the bank’s discount from the maturity value.
- Determine the interest income (or expense) by subtracting the face value of the note from the amount paid by the bank.
The uncollectible (bad debts) expense is best calculated using BASE, which is:
B Beginning balance, allowance for uncollectible accounts
A Add Uncollectible accounts expense
S Substract Accounts written off
E Ending balance, allowance for uncollectible accounts
Bren Co.’s beginning inventory at January 1, Year 3, was understated by $26,000, and its ending inventory was overstated by $52,000. As a result, Bren’s cost of goods sold for Year 3 was:
A. Understated by $78,000.
B. Overstated by $78,000.
C. Understated by $26,000.
D. Overstated by $26,000.
Answer:
A. Understated by $78,000
Explanation:
Beginning Inventory + Purchases − Ending Inventory = Cost of Goods Sold
Adjustments:
Understated beginning inventory: $26,000
Overstated ending inventory: $52,000
Impact on Cost of Goods Sold:
Understated COGS = $26,000 + $52,000 = $78,000
Therefore, the cost of goods sold is understated by $78,000.
What is the difference in inventory valuation using the LIFO method under perpetual and periodic inventory systems?
- Perpetual LIFO: Updates inventory and COGS continuously with each sale or purchase. The most recent purchases before each sale are used to calculate COGS.
- Periodic LIFO: COGS is calculated only at the end of the period. The most recent purchases at the end of the period are used to calculate COGS for all sales during the period.
This can lead to different COGS and ending inventory values between the two methods.
F.O.B. Shipping Point vs F.O.B. Destination
F.O.B. Shipping Point: Buyer takes ownership once goods leave the seller’s location. Buyer pays shipping and bears the risk during transit.
F.O.B. Destination: Seller retains ownership until goods reach the buyer’s location. Seller pays shipping and bears the risk during transit.
Consignment Inventory is:
Consignment Inventory: Goods held by a consignee are not counted in their inventory because ownership remains with the consignor until sold. The consignee holds and sells the goods on behalf of the consignor.
What are inventoriable costs, and how do they differ between manufactured and retail inventory?
Inventoriable Costs: Include all costs necessary to prepare inventory for sale, such as raw materials, direct labor, and factory overhead for manufactured goods.
Manufactured Inventory: Costs include raw materials, direct labor, and factory overhead.
Retail Inventory: Costs typically include the purchase price and costs to get goods ready for sale, like shipping and handling.
Key Difference: Manufactured inventory includes production costs, while retail inventory includes purchase and acquisition costs only.
How is inventory reported under the “lower of cost or market” rule, and what values are considered to determine market value?
Inventory is reported at the lower of cost or market. Market value is determined by taking the middle value of:
Replacement cost Market ceiling (Net Realizable Value) Market floor (Market ceiling minus a normal profit margin)
The inventory is recorded at this market value if it is lower than the cost.
For which inventory valuation methods is the “lower of cost or market” (LCM) rule specifically applied under GAAP?
The LCM rule is specifically applied to the Last-In, First-Out (LIFO) and retail inventory methods under Generally Accepted Accounting Principles (GAAP).
How is inventory valued under FIFO and Weighted Average Cost methods under GAAP?
Under GAAP, inventory is valued at the lower of cost or net realizable value (NRV), which is the estimated selling price minus the costs of completion and sale.
What is the fundamental equation for inventory calculation?
Beginning inventory + Purchases − Cost of goods sold = Ending inventory
What must be recognized when the current market value of inventory is less than the fixed purchase price in a purchase commitment?
When the current market value of the inventory is less than the fixed purchase price in a purchase commitment, the loss must be recognized at the time of the decline in price, a liability must be recognized on the balance sheet and a description of the losses must be described in the footnotes.
