Financial Statement Accounts 1 Flashcards
List the items that are not included in cash.
COD, legally restricted compensating balances, restricted cash funds, post-dated checks received, checks written but not sent, advances to employees, and postage stamps.
What does separation of duties accomplish?
Makes it more difficult for employees to perpetrate fraud and gain access to the firm’s cash.
Describe bank overdraft rules.
Overdrafts can be offset against cash in the same bank, but if the bank has insufficient cash at the same bank, it is reported as a current liability.
Define “cash equivalents”.
Treasury obligations (bills, notes, and bonds), commercial paper (very short-term corporate notes), and money market funds.
Define “monetary assets”.
An asset with fixed nominal value.
What effect do overdrafts have in International Financial Reporting Standards (IFRS)?
They can be subtracted from cash, rather than classified as a liability.
Define “compensating balance”.
A minimum balance that must be maintained by the firm in relation to a borrowing. Classified as current or non-current based on related loan classification.
List the items included in cash.
Coin and currency, petty cash, cash in bank, and negotiable instruments such as ordinary checks, cashier’s checks, certified checks, and money orders.
List the adjustments made to book balance to arrive at the bank balance.
Interest Earned; Note Collected; Service Charges; NSF Checks; Errors in company’s records.
List the three types of bank reconciliations.
Bank to Book; Book to Bank; Bank and Book to True.
What does cash on hand reflect?
Petty cash on hand and undeposited cash receipts.
List the adjustments made to a bank balance to arrive at book income.
Deposits in Transit; Cash on Hand (deposited cash receipts, not petty cash); Outstanding Checks. Bank Errors.
What does an NSF check represent?
“Non-sufficient funds” checks received from customers.
What is a deposit in transit?
Deposits made by a company that have not cleared the bank as of the bank statement date.
What are outstanding checks?
Checks written and mailed by the company which have not cleared the bank by the bank statement date.
What other name is used for customer accounts receivable?
Trade Receivable.
List the characteristics of accounts receivables.
Typically related to customer contracts; Short time frame; Typically no interest element.
Does International Financial Reporting Standards (IFRS) permit recognition of accounts receivable when there is a firm sales commitment?
In some instances when the recognition criteria have been met.
What is the measurement attribute of accounts receivable?
Net realizable value.
How are receivables accounted for using the gross method?
Records receivables at gross invoice price (before cash discount).
Define “contra to sales”.
Sales discounts.
What factors affect receivable valuation?
Trade discounts; Sales discounts; Sales returns and allowances; Uncollectible accounts.
List the two methods of accounting for accounts receivables.
Gross Net.
List the characteristics of notes receivables.
Typically non-customer transactions; Longer time frame; Have an interest element.
Are notes receivable typically related to customer transactions?
No, they are not typically related.
Describe the Direct Write-Off Method for Bad Debts.
Direct write off records bad debt expense only when a specific account receivable is considered uncollectible and is written off. Direct write-off method is rarely used.
Which method of accounting for uncollectible accounts receivable is required if uncollectible accounts are probable and estimable?
The Allowance method.
What is the preferred method of accounting for uncollectible accounts receivable?
Allowance method.
Describe the Allowance Method of Accounting for Bad Debts.
Determine the amount uncollectible and provide an Allowance to measure Accounts Receivable at net realizable value.
Describe the income statement approach for bad debts.
Estimates bad debt expense as a percentage of credit sales.
What purpose does analyzing ending accounts receivable serve?
The determination of the needed or desired balance in the allowance account.
Describe the balance sheet approach for calculating an allowance balance.
Applies a percentage to ending accounts receivable.
At what value should a note receivable be recorded?
The present value of all future cash flows.
What do we call the (1) maker and (2) holder of a note?
(1) Maker is the buyer or borrower. (2) The holder is the seller or lender.
How is the present value in a noncash transaction determined?
The fair market value of the noncash asset or of the note receivable, whichever is more readily determinable.
Define “market rate”.
Interest rate used to determine the present value of a note receivable.
Describe the difference between an interest-bearing and a noninterest-bearing note receivable.
Interest-bearing: the amount of cash to be collected from an interest-bearing note is the face amount of the note plus interest; Noninterest-bearing: the face amount of the note includes principal and interest that will be collected at maturity date.
How is the present value in a cash transaction determined?
The amount of cash that exchanged hands.
What are the three conditions of a sale?
(1) The transferred assets have been isolated from the transferor, even in bankruptcy; (2) the transferee is free to pledge or exchange the assets; (3) the transferor does not maintain effective control over the transferred assets through either an agreement that allows and requires the transferor to repurchase the assets or one which requires the transferor to return specific assets.
If three conditions for a sale are not met, what happens?
The receivable remains on the books of the transferor, and the transferor records a liability related to the borrowing transaction.
Define “maker”.
A debtor who has borrowed funds or purchased an asset and provided a note to the original creditor.
Describe a transaction without recourse.
Transferor is not responsible for nonpayment on the part of the maker of the receivable.
Describe a transaction with recourse.
The transferor is responsible for nonpayment on the part of the original maker of the receivable.
What is the International Financial Reporting Standards (IFRS) focus regarding sales or secure borrowing?
Whether the transferor has transferred the rights to receive the cash flows from the receivable and whether substantially all the risk and rewards of ownership were transferred.
Who bears the costs of bad debts when factoring with recourse?
The seller (transferor) bears the cost of bad debts as well as the cost of sales adjustments.
Define “factoring”.
The transferor (original creditor) transfers the receivables to a factor (transferee, a financial institution) immediately as a normal part of business.
What is the accounting treatment when factoring with recourse, as accounted for as a loan?
The transferor maintains the receivables on its books and records a loan and interest expense over the term of the agreement.
What is the accounting treatment when factoring with recourse, as accounted for as a sale?
The entries are similar to factoring without recourse except that the transferor must estimate and record a recourse liability.
Who bears the cost of bad debts when factoring without recourse?
The factor (transferee) bears the cost of uncollectible accounts, but the seller (transferor) bears the cost of sales adjustments.
When a receivable is impaired, what should it be written down to?
The PV of the future cash flows expected to be collected using original effective interest rate for the loan or market value if more determinable.
List the methods through which interest revenue is recognized after a write-down has occurred.
Interest and cost recovery methods.
When does loan impairment occur?
When the creditor believes the loan payments actually to be received have a lower fair value than under the original agreement.
What is the accounting treatment for loan impairments?
The receivable should be written down to: 1. Present value of future cash flows using original effective interest rate, or 2. Market value, if this value can be determined.
How is the loss on impairment accomplished?
With a debit to bad debt expense and a credit to a contra-receivable account.
What inventory costs are required to be capitalized?
All costs necessary to bring the item of inventory to salable condition.
Who is the owner of consigned goods?
The consignor (firm that shipped the inventory to consignee).
What elements affect fixed overhead rates?
Subject to estimation errors and affected by the choice of denominator measure and the budgeting horizon reflected in the denominator.
What merchandise is included in ending inventory?
All owned inventory, regardless of location.
How is the ownership of goods shipped Free On Board (FOB) destination determined?
The seller owns the goods until they reach destination.
Is fixed overhead one of the four manufacturing input costs?
Yes, this is one of the input costs.
What does inventory for a typical business entity include?
Includes property held for resale, property in the process of production, and property consumed in the process of production.
List the differences between moving and weighted average cost flow assumptions.
Moving average computes a new weighted average cost per unit after each purchase of inventory; Moving average results in lower Cost of Goods Sold during period of rising prices.
List the cost flow assumptions of a perpetual inventory system.
Specific Identification; Moving Average; First In First Out (FIFO); Last In First Out (LIFO).
List the differences between periodic and perpetual applications of Last In First Out (LIFO).
In perpetual, each sale is costed with most recent purchase; Perpetual results in a lower Cost of Goods Sold in a period of rising prices.
List the Last In First Out (LIFO) cost flow assumptions.
Ending inventory composed of oldest inventory; Cost of Goods Sold (COGS) composed of newest inventory; Produces lower net income and ending inventory valuation in periods of rising prices.
List the characteristics for the specific identification cost flow assumption.
Specifically identifies cost of each item; Appropriate for large, costly, distinguishable products.
List the weighted average (WA) cost flow assumptions.
Weighted average cost per unit is the average cost of all units held during period; Each item is treated as if costed at WA cost.
What is the calculation for determining Cost of Goods Sold (COGS)?
Beginning inventory + net purchases - ending inventory = COGS (Net Purchases = gross purchases + transportation in ‘Çô purchases returns and allowances ‘Çô purchase discounts).
List the weighted average cost per unit formula.
Cost of goods available for sale/number of units available for sale.
List the weighted average cost per unit formula.
Cost of Goods Available for Sale/Number of Units Available for Sale.
List the First In First Out (FIFO) cost flow assumptions.
Ending inventory composed of units most recently acquired; Cost of Goods Sold (COGS) comprised of oldest units; Most closely matches most firms’ actual physical flows; Produces higher net income and higher valuation of inventory in periods of rising prices.
List the formula for calculating cost of goods sold.
Beginning Inventory + Purchases - Ending Inventory = Cost of Goods Sold.
What does the acronym FIFO mean?
First In First Out.
What account holds inventory acquisition cost during the period under a periodic system?
Purchases.
For which method should an ending inventory count be made?
Both periodic and perpetual.
What inventory system is implied when the moving average cost flow assumption is utilized?
Implies the perpetual inventory system.
What cost flow assumption is the same for both the periodic and perpetual systems?
First In First Out (FIFO).
List the main differences between perpetual and periodic entries.
The use of the inventory account rather than purchases and recording cost of goods sold at sale.
What cost flow assumption utilizes the latest purchases at time of sale?
Last In First Out (LIFO).
List some reasons to avoid Last In First Out (LIFO) liquidation.
Increases taxes; Does not match current period expenses and revenues.
What does Ending Inventory reflect in First In First Out (FIFO)?
Reflects the latest costs.
List the attributes of Last In First Out (LIFO).
Matching of revenues and expenses is significantly improved over FIFO; Income tax advantages associated with LIFO; Balance sheet presentation is less than ideal.
What is the main reason for using Last In First Out (LIFO) in periods of rising costs?
Tax minimization.
What effect does using Last In First Out (LIFO) have on the income statement?
Matching of revenues and expenses on the income statement become significantly improved.
List the attributes of First In First Out (FIFO).
Most closely approximates actual physical flow of goods for most companies; Balance sheet valuation of inventory is at more desired current cost; Matching of revenues and expenses on income statement is not ideal.
List the reasons for a Last In First Out (LIFO) liquidation.
Poor planning; Lack of supply.
Define “base-year dollars”.
Price level for the pool at the beginning of the year Dollar Valued (DV) Last In First Out (LIFO) adopted.
List the advantages of Dollar Valued (DV) Last In First Out (LIFO).
Reduces the effect of the liquidation; Allows companies to use FIFO internally; Reduces clerical costs.
How does the double-extension method affect ending inventory?
The ending inventory is extended at both base year cost and ending current year cost.
List the steps in applying Dollar Valued (DV) Last In First Out (LIFO retail method.
DV LIFO is applied to inventory at retail; FIFO retail method cost/retail ratio is applied to retail layer; Cost layer is added to beginning inventory at DV LIFO cost.
Why would an entity utilize Dollar Valued (DV) Last In First Out (LIFO)?
Reduces the effect of the LIFO liquidation.
List the Dollar Valued (DV) Last In First Out (LIFO) conversion index formula.
Ending Inventory in Current-Year Dollars / Ending Inventory in Base-Year Dollars.
List the steps in Lower of Cost or Market (LCM) analysis.
Compute market value; Value inventory at lower of cost or market.
How is the ceiling value of inventory calculated?
By reducing the sales price by the estimated cost to complete and sell the inventory.
Define “market cost”.
Generally replacement cost, subject to a range of values defined by an established ceiling value and an established floor value.
Generally, what is replacement cost?
Market cost.
List the formula to arrive at net realizable value.
Sales price - estimated cost to complete and sell the inventory.
List the methods of recording Lower of Cost or Market.
Direct method or Allowance method.
How is holding loss reported under the allowance method?
Any holding loss related to inventory is separately identified in a contra inventory account with separate disclosure of the holding loss, holding loss not included in COGS.
How is the cost of ending inventory determined?
Determined by applying one of the four cost flow assumptions .
How is holding loss reported under the direct method?
Any holding loss related to inventory is simply included in cost of goods sold.
What is the basis on which Lower of Cost or Market (LCM) can be applied?
Individual Item, Category, Total Inventory; But must be consistent from year to year.
List the methods used for estimating ending inventory.
Gross Margin method; Retail Inventory method; Dollar Value LIFO Retail method.
List the Gross Margin Percentage formula.
(Sales-Cost of Goods Sold) / sales.
List the formula for ending inventory for the gross margin method.
Beginning inventory + net purchases ‘Çô sales (cost/sales).
What ratio is multiplied to Sales to estimate Cost of Goods Sold (COGS)?
The cost/sales ratio.
Describe the relative sales value method for recording costs.
Cost to be recorded for each item is based on its relative sales value to the total sales value of the group.
List the Margin on Cost formula.
(Sales-Cost of Goods Sold) / Cost of Goods Sold.
Which is always larger, margin on sales or margin on cost?
Margin on cost.
How is Normal Spoilage handled?
Subtracted along with sales from Goods Available for Sale at Retail to arrive at Ending Inventory at Retail.
What is excluded in the cost ratio of the First In First Out (FIFO) Lower of Cost or Market (LCM) Retail Method?
The cost ratio excludes the cost of beginning inventory from the numerator and the retail value of beginning inventory from the denominator. Net markdowns are also excluded from the cost ratio.
What is included in the cost ratio of the Average Retail Method?
The cost ratio includes beginning inventory, along with current period purchases in both the numerator and the denominator of the cost to retail ratio.
The cost ratio includes beginning inventory, along with current period purchases in both the numerator and the denominator of the cost to retail ratio.
Ending inventory at retail is determined; Cost to retail ratio is calculated; #1 x #2 = ending inventory at cost.
What are Net Additional Markups?
A net increase in the original selling price.
What are Net Markdowns?
A net decrease in the original selling price.
What is included in the Average Lower of Cost or Market (LCM) or Conventional Retail Inventory Method cost ratio?
The cost ratio includes beginning inventory, along with current period purchases, in both the numerator and the denominator but excludes net markdowns from the cost ratio calculation.
What is Original Selling Price?
Cost plus initial markup.
What is included in the cost ratio of the First In First Out (FIFO) Retail Method?
The cost ratio excludes the cost of beginning inventory from the numerator and the retail value of beginning inventory from the denominator.
What is in the cost/retail denominator?
Net purchases at retail plus additional markups minus additional markdowns.
List the two steps of Dollar Valued (DV) Last In First Out (LIFO) Retail.
Apply DV LIFO; Multiply by the cost ratio.
What is in the cost/retail numerator?
Net purchases at cost.
If an inventory error is discovered in year two, where is the difference recorded?
Beginning balance of Retained Earnings.
If beginning inventory is understated and purchases and ending inventory are correct, what is the impact on Cost of Goods Sold (COGS)?
The impact on COGS is understated.
In year one of an error, if purchases are understated, what is the impact on Retained Earnings?
The impact on Retained Earnings is overstated.
List the basic inventory equation.
Beginning inventory + net purchases = ending inventory + cost of goods sold.
If an inventory error is discovered in year three, what is the impact on Retained Earnings?
There is no impact on Retained Earnings, the error has self-corrected.
What is the required accounting for a potential loss on a Purchase Commitment when the commitment can be modified?
The loss is required to be footnoted as a contingent liability, but is not accrued in the accounts because the loss is not probable given that the contract can be revised.
What is the required accounting for a potential loss on a Purchase Commitment when the commitment cannot be modified?
The loss must be accrued because the loss is probable and estimable; Inventory is recorded at market, and a loss is recorded for the difference between contract and market; If contract is not executed as of the balance sheet date, loss is recognized and liability established.
Define “Purchase Commitment”.
Type of commitment made when a firm commits to the purchase of materials at a set unit price.
How do we account for the recovery of a Purchase Commitment loss?
A gain to the extent of the previously recognized loss.
If a firm has a Purchase Commitment that cannot be modified and the price declines, what journal entry should be booked?
DR: Loss on Purchase Commitment. CR: Liability on Purchase Commitment.
Can a company following International Financial Reporting Standards (IFRS) standards use Last In First Out (LIFO) cash flow assumptions?
No, the company cannot use Last In First Out (LIFO) cash flow assumptions.
List the three methods of assigning value to inventory under International Financial Reporting Standards (IFRS).
First In First Out (FIFO), specific identification, and weighted average.
How are adjustments for net realizable value applied?
Item-by-item basis.
Under International Financial Reporting Standards (IFRS), is reversal of a write down of inventory permitted?
Yes, it is permitted.
When is inventory reassessed under International Financial Reporting Standards (IFRS)?
At the end of each financial reporting period.
Under International Financial Reporting Standards (IFRS), is inventory reported at lower of cost or market OR at lower of cost or net realizable value?
Lower of cost or net realizable value.
What is the net realizable value as defined by International Financial Reporting Standards (IFRS)?
The estimated selling price in the ordinary course of business less the estimated costs of completion and the estimate costs necessary to make the sale.
List the requirements for inclusion in plant assets.
Currently used in operations; Have a useful life extending beyond one year; Have physical substance.
How do land improvements differ from land?
This asset differs from land in that it has a finite useful life and is depreciated.
List some examples of natural resources.
Items such as gravel pits, coal mines, tracts of timber land, and oil wells.
List the limitation of recorded value of self-constructed assets.
Market value at completion.
List the components of capitalized costs of self-constructed assets.
Labor; Material; Overhead; Interest Cost.
List the general rules on costs to capitalize.
Cash equivalent price; Get ready costs.
What is the general rule for capitalizing expenditures?
Capitalize all expenditures necessary to bring the plant asset to its intended condition and location.
Define “get ready costs”.
All costs incurred to get the asset on the company’s premises and ready for use.
List the considerations that must be given when electing to expense or capitalize an item.
Estimated time benefit; Materiality.
How is the price for group purchases recorded?
Total price is allocated to individual assets.
How is the cash equivalent price in the issuance of securities determined?
In fair value of asset acquired or of securities issued, whichever can be most clearly determined.
Define “cash equivalent price”.
The amount of cash paid for the asset on acquisition date.
How are donated items recorded?
Recorded at fair market value.
What interest rates should be used to determine capitalized interest?
Average interest rate during period or specific interest rate applicable to construction debt.
When are unpaid construction input costs included in Average Accumulated Expenditures (AAE)?
Not until cash is paid.
Define “avoidable interest”.
The amount of interest that would have been avoided had the construction not taken place.
Define “qualifying assets” for interest capitalization.
Assets constructed for an enterprise’s own use or assets intended for sale or lease that are constructed as discrete projects.
What are the two allowed methods to compute total interest to be capitalized?
Weighted Average method and Specific method.
List the interest capitalization formula.
Interest Rate x Average Accumulated Expenditures.
List the two-step process involved in computing capitalized interest.
(1) Compute average accumulated expenditure; and (2) Apply the appropriate interest rate(s).
List the conditions that must exist to capitalize interest.
Qualifying expenditures have been made; Construction is proceeding; Interest cost is being incurred.
If Average Accumulated Expenditures (AAE)
The difference between total interest cost and the amount of interest capitalized.
If the proceeds from a specific construction loan are not fully used for financing construction until well into the construction phase, how is the interest handled?
The interest revenue is reported separately with no effect on interest capitalized.
If Average Accumulated Expenditures (AAE) > total interest bearing debt, what is interest expense for the period?
All interest cost is capitalized and there is no reported interest expense for the period.
Where should the amount of interest paid be disclosed?
In the statement of cash flows, as either part of the statement, as a supplemental schedule or in a footnote.
What is not included in Average Accumulated Expenditures (AAE) until paid in cash?
Any unpaid construction input costs.
If Average Accumulated Expenditures (AAE) > total interest-bearing debt, why is there no interest expense?
All debt could have been avoided if construction had not taken place.
When would you increase the asset’s account basis by the post-acquisition cost?
When the productivity of the asset is enhanced rather than the useful life extended.
What is the useful life for depreciating an addition?
If integral part of old asset, over shorter of addition’s or old asset’s useful life. If not, over addition’s useful life.
List the accounting approaches for post-acquisition expenditures.
Substitution; Increase larger asset account by post-acquisition cost; Debit accumulated depreciation.
What is the general rule on when to capitalize post-acquisition expenditures?
If the asset becomes more productive or if it extends the asset’s life.
How do we calculate the annual straight-line depreciation amount of an asset?
(Cost - Salvage Value) / Useful Life.
Depreciation is included in overhead and allocated to production based on machine hours or direct labor for what type of asset?
Manufacturing assets.
Define “book value”.
Original cost less accumulated depreciation to date.
What type of allocation is depreciation considered?
Systematic and rational allocation of capitalized asset cost to time periods.
List the non-accelerated methods of depreciation.
- Straight-line Method; 2. Service Hours Method; 3. Units of Output Method.
How do we calculate depreciation based on service hours?
Depreciation rate x service hours used; Depreciation rate = (Cost-salvage value) / estimated hours.
What depreciation method is used for group/composite assets?
Straight-line method to groups rather than individual assets.
What depreciation method does not use salvage value?
Double declining balance.
How do we calculate the rate used in double declining balance?
1) Straight-line rate (number of years divided into 1) i.e., if 5 years 1/5 = 20%. 2) Twice the straight-line rate 20% x 2 = 40%.
When is the inventory method of depreciation used?
When the inventory items are smaller homogeneous groups of assets and individual records for the assets are not maintained.
List the depletion rate formula.
(Natural Resources account balance ‘Çô residual value) / (Total estimated units).
What is the classification of natural resources on the balance sheet?
Non-current asset.
What costs are included in the successful efforts method for exploration costs?
Only the cost of successful exploration efforts are capitalized to the natural resources account.
List the type of costs capitalized for natural resources.
Acquisition; Exploration; Development.
List the methods of accounting for exploration costs.
Successful Efforts; Full costing.
Define “depletion”.
Refers to the allocation of the cost of the natural resource to inventory.
What costs are included in the full costing method for exploration costs?
All costs of exploring for the resource are capitalized to the natural resources account.
Under International Financial Reporting Standards (IFRS), is revaluation of Property, Plant, and Equipment (PPE) allowed?
Yes, revaluation is allowed.
Under International Financial Reporting Standards (IFRS) how is interest during construction accounted for?
Expensed or capitalized.
How frequently do companies have to review depreciation policies under International Financial Reporting Standards (IFRS)?
They have to be reviewed annually.
Where is revaluation surplus reported under International Financial Reporting Standards (IFRS) until the Property, Plant, and Equipment (PPE) is sold?
It is reported in Equity.
What happens during the reset method?
Accumulated depreciation is reset to zero by closing it to the building account, and then the building is adjusted for the revaluation.
Under International Financial Reporting Standards (IFRS), what two methods can be used to adjust accumulated depreciation?
The proportional and reset methods.
Define “equity securities.”
Securities representing ownership or right to acquire ownership interest.
List the guidelines for determining no significant influence in an investment.
Investment is: 1. in Debt securities; 2. in Non-voting stock; 3. Temporary in nature; 4. Less than 20% ownership of voting stock.
What is the required accounting treatment when an investor has control of an investee?
Treat as a subsidiary and consolidate investee with investor (consolidated statements).
List the investor’s considerations in selecting the correct accounting for an investment.
- The nature of the investment; 2. The extent of the investment; 3. Management’s intent.
What is the basis for general guidelines for determining the level of influence over an investee?
The nature and extent of ownership.
Define “debt securities.”
Securities representing the right of the Creditor to receive from the Debtor a principal amount at a specified future date and to receive interest as payment for providing use of funds.
