Financial Accounts Flashcards
Cash
Balance Sheet term must = what’s used on Statement of Cash Flows
Doesn’t include:
- CDs
- Restricted Funds (Sinking Funds)
- Post-dated checks from customers
- Checks mailed after balance sheet date
Overdrafts can only be offset against accounts at same bank, otherwise CL
Cash Adjustments
Adjustments to Bank Balance
- Deposits in transit
- Outstanding checks
- Cash on hand
- Errors made by bank
Adjustments to Book Balance
- Interest earned
- Service charges
- NSF checks
- Note collected directly by bank
- Errors made by firm
Types of Receivables
- A/R - customer transactions, 30-90 days & no interest
- N/R - non-customer transaction, has interest
- Trade Receivable - same as A/R
- Non-trade Receivable - non-customer transaction
A/R Valuation
Measured at Net Realizable Value (amount expected to be collected)
Discounts:
- Trade/Quantity - included in gross #
- Cash/Sales - included in net #
Gross Method - includes trade/quantity discount:
Cash XXX
Sales Discounts (contra-sales acct) XXX
A/R XXX
Net Method - gross method + cash/sales discount:
Cash XXX
Sales Discounts Forfeited (misc. revenue acct) XXX A/R XXX
A/R, beginning balance
+ sales
- write-offs
- customer collections
A/R, ending balance
Uncollectible A/R:
Direct Write-Off
Not GAAP, so only used when can’t estimate uncollectible A/R
When a specific A/R is considered uncollectible
AJEs:
Deemed Uncollectible:
Bad Debt Expense XXX
A/R XXX
Previous Write-off Collected:
Cash XXX
Bad Debts Recovered (misc. revenue acct) XXX
Uncollectible A/R:
Allowance Method
Required by GAAP
Records an estimate of Bad Debt Expense at EOY
AJEs:
- EOY adjustment:*
- sets up the CY allowance:*
Bad Debt Expense XXX
Allowance for Doubtful Accounts XXX
- Write-off uncollectible accounts:*
- decreases the allowance for the amount deemed uncollectible*
Allowance for Doubtful Accounts XXX
A/R XXX
Previous write-off collected:
A/R XXX
Allowance for Doubtful Accounts XXX
Cash XXX
A/R XXX
Uncollectible A/R:
Allowance Approaches
Income Statement
Determines Bad Debt Expense
Based on % of credit sales
Balance Sheet
Determines ending Allowance for Doubtful Accounts balance
Based on % or aging schedule
Exam Trick: watch for debit beg. balances for Allowance for Doubtful Accounts
Notes Receivable
valued at PV of Future Cash Flows
Interest-bearing = interest explicitly stated
N/R Face Value
Sales Face Value
Non-interest-bearing - interest included in face value
N/R Face Value * PV Factor of 1
Sales Face Value \* PV Factor of 1
Interest Calculation = Current N/R Bal * Interest Rate * (# yearly pmts/12)
Selling Receivables
Control must be transferred, otherwise considered borrowing
Discounting for Sale =
Maturity Value (Principal + Interest) * Discount Rate * (# remaining months/12)
IFRS - sale criteria complex, so usually borrowing
Factoring, Assignment, & Pledging
Factoring
Original creditor sells A/Rs as normal part of business & pays them a fee
Assignment
Assigns rights to specific A/Rs as collateral
Pledging
A/Rs transferred in bulk to a trustee & used for loan payments in event of default
no journal entries required, just a footnote requirement
Loan Impairment
Receivable must be written down if current value > market value
Interest Method
Recognizes interest each year until the note is collected
Cost Recovery Method
Interest only recognized after cash equal to the new carrying value collected
Inventory
Ending Inventory = any merchandise that belongs to the business, regardless of location
- FOB Destination* = title transfers @ destination
- FOB Shipping Point* = title transfers when shipped
Includes all costs incurred to get the merchandise to the seller’s premises & ready for sale, except for interest
Beginning Inventory
+ Purchases
= COGS Available for Sale
- COGS
= Ending Inventory
Inventory:
Cosignment Arrangements
Cost of inventory & transportation to cosignee included in cosignor’s ending inventory
Cosignor = owner of the inventory
Cosignee = temporary holder of inventory while trying to sell
Inventory:
Periodic Inventory System
Physical count of inventory done periodically and books adjusted accordingly
Merchandise Inventory (End) XXX
Purchase Returns & Allowances XXX
Purchase Discounts XXX
COGS (last amount t/b computed) XXX
Merchandise Inventory (Beg) XXX Purchases & Other Accounts XXX
Cost Flow Assumptions
- Specific Identification
- Weighted Average = COGAFS / # units AFS
- FIFO
- LIFO - reflects old pricing & isn’t reliable
Inventory:
Perpetual Inventory System
Phsyical count of inventory done at EOY to determine if any adjustments are needed
Cost Flow Assumptions
- Specific Identification
- Moving Average - computes new weighted average after every inventory purchase
- FIFO - same result as periodic
- LIFO - uses most recent cost info, vs periodic using YE cost info
Inventory:
Dollar-Value LIFO
Applies LIFO using pools of inventory & allows companies to use FIFO internally
Calculation
- Convert EOY Inv to base-year $
- Determine CY Layer in base-year $
- Convert CY Layer to CY$
- Compute EOY Inv = Beg DV LIFO Inventory (base-year $) + CY Layer in CY$
EOY Inv CY$
/ index (EOY Inv CY$/EOY Inv Base$)
= EOY Inv base$
-BOY Inv base$
= CY Layer base$
* index
= CY Layer CY$
+ BOY Inv
= Ending Inventory
Inventory:
Lower of Cost or Market
Market = replacement cost, subject to ceilings & floors
- Ceiling* = Net Realizable Value = sales price - cost to complete & sell inventory
- Floor Value* = Net Realizable Value - normal profit margin
Direct Method
Mark-down recorded in COGS
Allowance Method
Loss recorded
Inventory:
Gross Margin
Can only be used for internal estimation purposes & when they have a consistent gross margin percentage
Apply cost % to sales to estimate COGS to get to ending inventory #
Gross Margin % = gross margin / sales
Margin on Cost = gross margin / COGS
Inventory:
Retail Inventory
Estimates ending cost inventory using ending retail inventory
- Determine ending retail inventory
- Calculate cost-to-retail ration = (COGAFS @ Cost - markdowns) / (COGAFS @ Retail - markdowns)
- Apply cost-to-retail ratio to ending inventory
FIFO doesn’t include beginning inventory in cost-to-retail ratio
FIFO LCM doesn’t include beginning inventory or markdowns in cost-to-retail ratio
Cost Retail
X X Beginning Inventory
X X Purchases
X Freight-In
(X) (X) Purchase Returns
X Markups
_ X X Abnormal shortage_
Cost of Goods Available for Sale
(X) Markdowns
(X) Sales
X Sales Returns
(X) Employee Discounts
_ (X) Normal Shortage_
Ending Inventory
Inventory:
Dollas-Value LIFO Retail
- Figure CY ;ayer
- Calculate cost-to-retail ratio
- Apply cost-to-retail ratio to CY layer
- Add CY retail layer to BOY retail inventory
Inventory:
IFRS Differences
Cost-flow assumption must match physical flow
LIFO disallowed
Lower of Cost or Net Realizable Value
Can reverse write-down of inventory
Property, Plant, & Equipment
Criteria
Currently used in operations
Useful life > 1
Tangible asset
Categories
Plant & Equipment/Depreciable Assets
Land Improvements
Land
Natural Resources/Depletable Assets
Capitalizing Costs
Criteria
Increase useful life
Increase productivity or efficiency
Acquisition costs & costs incurred to get ready for use capitalized
If constructed by company for own use, recognize loss if cost of construction > market value
PP&E:
Interest Capitalization
Capitalized only during construction period on assets:
- constructed for enterprise’s own use
- intended for sale/lease constructed as discrete projects
Capitalized interest can’t > actual interest
Average Accum. Expenditures * Interest Rate
AAE = amount of annual debt that could’ve been avoided = expense * (# months/12)
Interest Rate Methods
Weighted Average = average yearly debt * total annual interest
Specific Method = (construction debt * construction interest) + [(AAE - construction debt) * average interest]
Accelerated Depreciation Methods
Declining Balance
Book Value / (2 or 1.5/N)
*always make sure book value > salvage value
Sum of Years’ Digits
years remaning / sum of # years remaining
Partial Year
1st year: depreciation rate * (# months held / 12)
2nd year: [depreciation rate * (remaining 1st year months/12)] + [depreciation rate * (#months held in 2nd year/12)]
Investments:
No Significant Influence
Debt security or < 20% ownership of equity security
Held to Maturity
debt security - intent & ability to hold to maturity
valued at amortized cost [(stated rate * face value) - (yield rate * book value)]
Trading
debt & equity securities - make ST profits
valued at FV
unrealized gains/(losses) reported on income statement
Available for Sale
debt & equity securities
valued at FV
unrealized gains/(losses) reported in OCI (permanent losses included in income)
Investments:
Significant Influence
21 - 50% ownership, or < 20% but has other significant influence
Amount Paid
Goodwill (not amortized)
% Ownership of FV of Net Assets
Increase in asset value (depreciate accordingly)
% Ownership of BV of Net Assets
% of investment income, increase investment & net income
% of dividend income , decrease investment & increase cash - doesn’t hit income statement
Depreciation on purchased assets, decrease investment
Investments:
Control
> 50% ownership, creates Parent/Sub Relationship
Default valuation = Equity Method
Can choose Cost Method
MUST consolidate financial statements
Investments:
Joint Ventures
2 or more entities that have joint control and are set-up for a limited purpose/time/both for making profits
Investment recorded @ carrying value of assets contributed
Investment XXX
Assets Contr. XXX
Formal accounting only needed for corporate JVs
Non-Variable Interest Entity or Minority Beneficiary uses Equity Method
Otherwise consolidate
Investments:
Stock Dividends, Splits, & Rights
Stock Dividends
dividend payment using shares, not cash
DOESN’T = DIVIDEND INCOME
Investment not adjusted, since cost didn’t change; just disclose additional shares
Stock Splits
receive additional shares
treat same as stock dividends
Stock Rights
right to purchase additional shares at an option price
cost of original shares allocated between shares & rights
Intangible Assets
Sources:
Acquired
Internally Developed - registration fees & legal costs capitalized, everything else expensed immediately (including start-up & organizational costs)
Lifes:
Definite - has set legal/useful/economic life; amortize
Indefinite - no limits to the life/renewable; don’t amortize
Impairment - can’t be reversed
- Definite:*
1. If BV > recoverable cost (sum of remaining cash inflows); impaired
2. Impairment Loss = BV - FMV - Finite:*
1. BV > FMV; impaired & diff = impairment loss
Intangible Assets:
Life Insurance Policies
Revenue = Proceeds - Cash Surrender Value @ DOD
Annual premium expense reduced by increase in cash surrender value
Intangible Assets:
Goodwill Impairment
Book Value > Fair Value
Tested annually or when other factors indicate impairment
Calculation:
Qualitative Assessment “Pre-Step”:
Determines whether it’s more likely than not that the BV > FV
- Quantitative Assessment:*
1. Compute goodwill using current FVs
2. If new goodwill < originally booked goodwill; impaired
3. Impairment loss = loss from continuing operations
