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FAR Review > Financial Accounts > Flashcards

Financial Accounts Flashcards

1
Q

Cash

A

Balance Sheet term must = what’s used on Statement of Cash Flows

Doesn’t include:

  1. CDs
  2. Restricted Funds (Sinking Funds)
  3. Post-dated checks from customers
  4. Checks mailed after balance sheet date

Overdrafts can only be offset against accounts at same bank, otherwise CL

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2
Q

Cash Adjustments

A

Adjustments to Bank Balance

  1. Deposits in transit
  2. Outstanding checks
  3. Cash on hand
  4. Errors made by bank

Adjustments to Book Balance

  1. Interest earned
  2. Service charges
  3. NSF checks
  4. Note collected directly by bank
  5. Errors made by firm
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3
Q

Types of Receivables

A
  1. A/R - customer transactions, 30-90 days & no interest
  2. N/R - non-customer transaction, has interest
  3. Trade Receivable - same as A/R
  4. Non-trade Receivable - non-customer transaction
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4
Q

A/R Valuation

A

Measured at Net Realizable Value (amount expected to be collected)

Discounts:

  1. Trade/Quantity - included in gross #
  2. 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

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5
Q

Uncollectible A/R:

Direct Write-Off

A

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
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6
Q

Uncollectible A/R:

Allowance Method

A

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
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7
Q

Uncollectible A/R:

Allowance Approaches

A

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

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8
Q

Notes Receivable

A

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)

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9
Q

Selling Receivables

A

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

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10
Q

Factoring, Assignment, & Pledging

A

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

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11
Q

Loan Impairment

A

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

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12
Q

Inventory

A

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

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13
Q

Inventory:

Cosignment Arrangements

A

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

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14
Q

Inventory:

Periodic Inventory System

A

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

  1. Specific Identification
  2. Weighted Average = COGAFS / # units AFS
  3. FIFO
  4. LIFO - reflects old pricing & isn’t reliable
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15
Q

Inventory:

Perpetual Inventory System

A

Phsyical count of inventory done at EOY to determine if any adjustments are needed

Cost Flow Assumptions

  1. Specific Identification
  2. Moving Average - computes new weighted average after every inventory purchase
  3. FIFO - same result as periodic
  4. LIFO - uses most recent cost info, vs periodic using YE cost info
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16
Q

Inventory:

Dollar-Value LIFO

A

Applies LIFO using pools of inventory & allows companies to use FIFO internally

Calculation

  1. Convert EOY Inv to base-year $
  2. Determine CY Layer in base-year $
  3. Convert CY Layer to CY$
  4. 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

17
Q

Inventory:

Lower of Cost or Market

A

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

18
Q

Inventory:

Gross Margin

A

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

19
Q

Inventory:

Retail Inventory

A

Estimates ending cost inventory using ending retail inventory

  1. Determine ending retail inventory
  2. Calculate cost-to-retail ration = (COGAFS @ Cost - markdowns) / (COGAFS @ Retail - markdowns)
  3. 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

20
Q

Inventory:

Dollas-Value LIFO Retail

A
  1. Figure CY ;ayer
  2. Calculate cost-to-retail ratio
  3. Apply cost-to-retail ratio to CY layer
  4. Add CY retail layer to BOY retail inventory
21
Q

Inventory:

IFRS Differences

A

Cost-flow assumption must match physical flow

LIFO disallowed

Lower of Cost or Net Realizable Value

Can reverse write-down of inventory

22
Q

Property, Plant, & Equipment

A

Criteria

Currently used in operations

Useful life > 1

Tangible asset

Categories

Plant & Equipment/Depreciable Assets

Land Improvements

Land

Natural Resources/Depletable Assets

23
Q

Capitalizing Costs

A

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

24
Q

PP&E:

Interest Capitalization

A

Capitalized only during construction period on assets:

  1. constructed for enterprise’s own use
  2. 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]

25
Q

Accelerated Depreciation Methods

A

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)]

26
Q

Investments:

No Significant Influence

A

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)

27
Q

Investments:

Significant Influence

A

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

28
Q

Investments:

Control

A

> 50% ownership, creates Parent/Sub Relationship

Default valuation = Equity Method

Can choose Cost Method

MUST consolidate financial statements

29
Q

Investments:

Joint Ventures

A

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

30
Q

Investments:

Stock Dividends, Splits, & Rights

A

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

31
Q

Intangible Assets

A

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
32
Q

Intangible Assets:

Life Insurance Policies

A

Revenue = Proceeds - Cash Surrender Value @ DOD

Annual premium expense reduced by increase in cash surrender value

33
Q

Intangible Assets:

Goodwill Impairment

A

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

FAR Review (1 decks)

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