FAR4 Flashcards
Current Assets
Those resources that are reasonably expected to be realized in cash, sold, or consumed (prepaid items) during the normal operating cycle of a business or one year (whichever or longer)
Cash surrender value of life insurance
Can be either current or non-current asset depending on intent. If the policy owner intents to surrender the policy for its cash surrender value during the normal operating cycle it will be a current asset
Current Liabilities
Are obligations expected to be required to cover expenditures within the year
Refinanced Short-Term Obligations
A short-term obligation may be excluded from current liabilities and included in noncurrent debt if = intent and ability to refinance long term (can’t under IFRS - must wait)
Cash and Cash Equivalents
Original maturity of 90 days or less
Cash and Cash Equivalents vs. not for Compensating Balances
yes - if not legally restricted
no - if legally restricted
Bank Reconciliation, per Bank
(+) Deposits in Transit
(-) Outstanding Checks
Bank Reconciliation, per Books
(+) Bank Collections, Interest Income
-) Service Charges, Non-sufficient Funds (NSF
Accounts Receivable
Beginning Balance
(+) Credit Sales
(-) written off, convert to note, cash collected
= Ending Balance (NRV)
Gross Method Discounts
Records a sale without regard to the discount.
Payment received within the discount period, a DR: sale discount account (contra revenue)
Net Method Discounts
Records sales and A/R net of the discount.
Payment received after the discount period, a CR: sales discount NOT taken account (rev)
Trade Discounts
Sales revenue and A/R are recorded net of trade discounts. Applied sequentially
Direct Write-Off Method
Not GAAP, used for tax purposes (does not properly match the bad debt expenses with revenue)
Allowance Method
Normal credit balance:
Beginning Balance (credit)
Add (credit): current year BDE
Subtract (debit): write offs
Ending Balance (credit)
Allowance Method - % of Sales
I/S approach - emphasizes matching
Allowance Method - % of A/R
B/S approach - the amount of estimated allowance calculated is the ending balance that should be in the AFDA on the b/s
Allowance Method - Aging of A/R
Emphasizes asset valuation NRV
Balances by due date x Estimated % uncollectible = Estimated Uncollectible Account
Write-off of a Specific A/R
DR: AFDA (decrease)
CR: A/R (decrease)
I/S no effect and B/S affect in form, not on books - no change
Restore account previously written off
DR: A/R
CR: Allowance for uncollectible accounts
No changes in current assets, only in form
DR: Cash
CR: A/R (decrease)
Pledging (assignment)
Footnote - uses existing A/R as collateral but retains title to the receivables
DR: Cash
CR: Notes Payable
Factoring - Without Recourse
True Sale and transfer risk to buyer DR: Cash DR: Due from factor (security) DR: Loss on sale of receivables CR: Accounts Receivable
Factoring - With Recourse
Sale: factor has an option to re-sell any uncollectible receivable back to the seller
- uncollectible accounts reasonably estimated
Loan (A/R as collateral): Footnote
F.O.B. Shipping Point
Title passes to the buyer when the seller delivers the goods to a common carrier. Included in inventory upon shipment
F.O.B. Destination
Title passes to the buyer when the buyer receives the goods from the common carrier
Sale with a Right to Return
Cannot be estimated - no sale, should be included in seller’s inventory
Can be estimated - record sale with an allowance for estimated returns
Consigned Goods
The seller should include the goods in its inventory (+ shipment costs) until sold to 3rd party buyer where a sale is recognized then
Valuation of Inventory
at cost
Exception: selling price
LIFO or Retail Inventory Method
Either Lower of Cost of Market (LCM)
IFRS and FIFO, Weighted avg, etc. Inventory (not LIFO or Retail)
Measured at Lower of Cost and Net Realizable Value (NRV)
Write down of Inventory
Reflected in decreased COGS = increased Profit
If material, then the loss should be identified separately in the I/S
Reversal of Inventory Write-Downs
GAAP - prohibited
IFRS - allowed to the extent of the original write down
Lower of Cost or Market (LCM) - GAAP only
Market Value = middle value between Replacement Cost, Market Ceiling, and Market Floor
Market Ceiling or NRV
Net selling price - costs to complete = NRV
Market Floor
Market Ceiling (NRV) - normal profit margin
JE to record the write-down to a separate account
Inventory loss due to decline in market value
Inventory
Disclosure of losses
Losses both substantial and unusual from LCM is disclosed in the income from continued operations in the I/S and identified separately
Periodic Inventory Method
Beginning Inventory \+ Purchases = COGAFS - Ending Inventory = COGS
Valued at end of the period
Perpetual Inventory System
Updated for each purchase and each sale as they occur
FIFO
First In, First Out
Prices rising = decrease COGS = increase Profit
Ending inventory and COGS are the same under both periodic and perpetual
Weighted Average Method
Usually periodic: total costs of inventory available / the total # of units of inventory available
Moving Average Method
Perpetual: computes the weighted average cost after each purchase
LIFO
Last In, First Out: (not permitted under IFRS)
Prices rising = increase COGS = decrease Profit
LIFO conformity Rule
Used for tax purposes, but then must also use for GAAP Financial Statements
Dollar-value LIFO
Measured in Dollars and adjusted for changing price levels: either Internally computed Price Index: EI at c/y cost / EI at base yr cost
OR Price Index is supplied
Cost of a machine
Include all costs that are reasonable and necessary to get the asset in the condition or location for its intended use
Capitalized interest
Lesser of the total interest incurred
or the avoidable interest
Machine costs capitalized
Any cost incurred to acquire and make ready a plant asset is capitalized
Excavation costs
Treated as part of the cost of the building
Capitalized Interest costs
Borrowed funds (not used) = expense
Borrowed funds (weighted average of accumulated expense) = capitalize during and expense after construction
Excess (above amount borrowed) expenditures (weighted average interest rate) = capitalize during and expense after construction
Investment Property, IFRS
Defined as land and buildings held to earn rentals or for capital appreciation
Estimated restoration costs
Added to the depletable base of the natural resource.
In this way, the amount of depletion charged to expense over the life of the mining operation will include the restoration costs
Long-Lived Asset is Impaired
Undiscounted expected future cash flows
Impairment loss, IFRS
Fair value less costs to sell - Carrying value
Subsequent Reversal of an Impairment Ioss
Prohibited under U.S. GAAP.
Impairment loss is permitted under IFRS.
Valuation of Fixed Assets (GAAP and IFRS)
Historical Cost or purchase price
cost model CV = historical cost - A/D - impairment
Donated Fixed Assets
Fixed Asset (FMV) xx
Gain on nonreciprocal transfer xx
Unusual and infrequent
Valuation of Fixed Assets (IFRS)
Revaluation model carrying value = FV at revaluation date - subsequent A/D - subsequent impairment
Revaluations made frequent;
When fixed assets reported at FV, historical costs equivalent must be disclosed
Revaluation Model
Revaluation Losses - I/S
Revaluation Gains - OCI
Impairment = OCI decreases to zero then loss in I/S
Cost of Equipment
Capitalize: Additions (increase quantity/increase usefulness) and Extraordinary repair (increases usefulness)
Expense: ordinary repair
Reduce A/D: Improvements, repairs, and extraordinary repairs that increase life
Cost of Land
All costs incurred up to excavation (digging = building)
Cost of Building
Excavation going forward
“Backet purchase” of land and building
Allocate the purchase price based on the ratio of appraised value of individual items
Straight-line Depreciation
Cost - Salvage Value/Estimated useful life
*service potential declines with time
Sum-of-the-Years Depreciation
S = N x (N + 1)/2 n = estimated useful life
cost - salvage value) x (remaining life of asset/sum of the years digits
Double-Declining Balance Depreciation
2 x 1/N x (cost - accumulated depreciation)
- ignores salvage value, but maximum accumulated depreciation = cost - salvage value
- asset subject to rapid obsolescence
Units of Production Depreciation
Cost - Salvage Value/Estimated units of hours
= Rate per unit or hour
Rate per unit x # of units produced
= Depreciation Expense (variable cost)
*service potential declines with use
Depletion Base
Cost to purchase the property - Estimated net residual value remaining after all resources have been removed from the property
Calculate Depletion
Unit Depletion (depletion base/est. recoverable units) x units extracted
COGS Depletion = unit depletion x units sold
