FAR ( Working Capital) Flashcards
Trade discount
Trade discount are applied sequentially
A/R should be presented on the B/S at their net realizable value
Sales return and allowance
If past experience shows that a material percentage of receivables are returned an allowance for sales returns should be established
Direct write off Method ( not GAAP)
Under the direct write off method, the account is written off and the bad debt is recognized when the accounts becomes uncollectible.
J/E to record the account balance of 10k as un-collectible
Dr. Bad debt Expense 10k
Cr. A/R 10k
J/E to sales return
Dr. Sales return and allowance (contra sales)
Cr. A/R
Allowance Method (GAAP)
The allowance for un-collectbles should be based on past experience. A percentage of each periods sales or ending accounts receivable is estimated to be uncollectible.
The credit is made to a valuation account such as allowance for uncollectible accounts
Percentage of Sales Method - Income statement approach
Under the percentage of sales method, a percentage of each is debited to the account “Bad debt expense” and credited to the account “Allowance for doubtful accounts”
Percentage of accounts receivable at year end - B/S approach
Uncollectible accounts may also be estimated as a certain percentage of accounts receivable at year end.
In percentage of accounts receivable at year end BAD DEBT EXP is a Plug
Pledging (Assignment)
A/R is collateral for a loan and Pledging requires only note disclosure
Factoring of Accounts Receivable
If a sale is non recourse, it means the sale is final and the assignee assumes the risk of any losses on collation.
J/E record to factor A/R without recourse Dr. Cash Dr. Due from factor Dr. Loss on sale of receivable Cr. A/R
Factoring A/R
If a sale is on recourse basis, it means that the factor has an option to re-sell any uncollectible receivables back to seller
Notes Receivable-present value
Notes receivable are written promise to pay debt and the writing is called a promissory not. it can be C/A or a long term asset
Sales with a right to Return
If goods are sold but the buyer has the right to return the goods, the goods should be included in the seller’s inventory if the amount of the gods likely to be return cannot be estimated
If the amount of goods likely to be returned can be estimated, the transaction will be recorded as a sale with an allowance for estimated returns recorded
Precious Metal and Farm Products
Gold, silver and other precious metals, and meat and some agricultural products are valued at NET REALIZABLE VALUE.
NRV= SP - Cost of disposal
Lower of Cost or Market ( US GAAP)
In the ordinary course of business, when the utility of goods is no longer as great as their cost, a departure from the cost basis principle of measuring inventory is required
Under US GAAP
Under US GAAP, the term “market” in the phrase “lower of cost or market” generally means current replacement cost (whether by purchase or reproduction), provided the current replacement cost does not exceed NRV or fall below NRV reduced by normal profit margin
Cost under IFRS
IFRS require inventory to be reported at the lower of cost or NRV
NRV = under IFRS is the same as the Market ceiling under US GAAP
IFRS allow the reversal of inventory write downs for subsequent recoveries of inventory value. The reversal is limited to the amount of the original write down and is recorded as a reduction of total inventory costs on the I/S in the period of reversal.
Dollar Value LIFO ( Price index )
Price index = Ending inventory at current year cos divide by Ending inventory at base year cost
Precious Metals and Farm Products
Gold, Silver and other precious metals and meat and some agricultural products are valued at Net realizable value which is net selling price less costs of disposal
Cost Model (IFRS)
Fixed assets are reported at historical cost adjusted for accumulated depreciation and impairment
Cost model carrying value = Historical cost - Accumulated depreciation - Impairment
Revaluation Model
A class of fixed assets is revalued to fair value and then reported at fair value less subsequent accumulated deprecation and impairment
Revaluation modle carrying value = FV at revaluation date - subsequent accumulated depreciation - Subsequent impairment
Land Improvement are depreciable such as
Fences water systems Sidewalk Paving Landscaping Lighting
Investment property (IFRS only )
Under IFRS, land or building held by an entity or by a less under a finance (capital) lease to earn or for capital appreciation are classified and reported as investment property
Investment property Measurement Models
Fair Value Model
Under the Fair Value Model, Investment property is reported on the B/S at Fair Value and is not depreciated.
Construction period interest
Should be capitalized as part of the cost of producing fixed assets such as
- Building , machinery , or land improvements, constructed or produced for others or to be used internally
- Fixed assets intended for sale or lease and constructed as discrete project such as Real estate projects
- Land improvements - If a structure is placed on the land, charge the interest cost to the structure
Capitalization of Interest period
Begins when three condition are present
- Expenditures for the asset have been made
- Activities that are necessary to get the asset ready for its intend use are in progress
- Interest cost in being incurred
Continues as long as the three conditions are present.
No gain or loss is recognized when one asset is the group is retired
When a group or composite asset is sold or retired, the A/D is treated differently than the A/D of a single asset.
Functional Depreciation
Functional depreciation arises from obsolescence or inadequacy of the asset to perform efficiently. Obsolescence may result from diminished demand for the product that the depreciable asset produces
Sum of the years’ Digits
The Sum of the years digits method is one of the accelerated method of depreciation that provides higher depreciation expense in the early year and lower charges in the later year.
Formula
Depreciation expense = Cost - Salvage value X remming life of asset divided by Sum of the years’ digits .
Double declining method
Formula for DDM
Dep Exp = 2X1/N X NBV (Cost - A/D)
Mas A/D = Cost - SV
Units of producition
The units of production method relates depreaction to the estimate production capability of the an asset and is expressed in a rate per unit or hour
The Formula is
Cost - SV/ Estimate units or hours = Rate per unit or hour
Rate per unit or hour X # of units produced or hours worked = Dep Exp
Depletion
Depletion is the allocation of the cost of wasting natural resources such as oil, gas, timber and mineral to the production process
Depletion base = Cost - Residual value
Percentage depletion ( tax only)
It is based on a percentage of sales. It is allowed by Congress as a tax deduction to encourage exploration in very risky businesses
Percentage depletion can exceed cost depletion
It is limited to 50% of net income from the depletion property computed before the percentage depletion allowance
Unit Depletion Base
Cost of purchase property
Plus development cost to prepare the land
Plus Any estimated restoration cost
Less Residual value of land after the resources
When computing depletion on land, remember it is Real property
Residual Value (Subtract)
Extraction/development cost
Anticipated restoration cost
Land purchase price
Fixed asset impairment
The carrying amounts of Fixed assets held for use and to be disposed of need to be reviewed at least annually or whenever events or changes in circumstances indicate that the carrying amount may not be recoverable
Gross profit Method
The gross profit method is used for interim F/S as part of periodic inventory system. Inventory is valued at retail, and the average gross profit percentage is used to determine the inventory cost for the interim F/S
