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FAR CPA Exam > Financial Statement Accounts > Flashcards

Financial Statement Accounts Flashcards

1
Q

What adjustments are made against bank balance in a bank reconciliation?

A

Bank Balance
+ deposits in transit
-outstanding checks
+/- Errors made by bank

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2
Q

What adjustments are made against book balance in a bank reconciliation?

A

Book Balance
+ amounts collected by bank
-unrecorded bank charges
+/- errors made when recording transactions

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3
Q

How is the cumulative effect of change from FIFO to LIFO categorized in the income statement?

A

Trick Question! Cumulative effect of change from FIFO to LIFO (or LIFO to FIFO) is considered a change in accounting policy and therefore does not affect current income. It is reported as a direct adj. to Beg. RE balance.

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4
Q

What items are included in Other Comprehensive income under US GAAP?

A
  • Unrealized gains/losses from AFS securities (non trading securities)
  • Unrecognized gains/losses from pension costs
  • Foreign currency translation adjustments
  • Unrealized gains/losses from certain derivative transactions
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5
Q

How can Other comprehensive income be presented under US GAAP?

A

1) One Statement approach. Presented in combination with the income statement.
2) Two Statement approach. Presented as a separate statement of comprehensive income. (First line is Net Income)

NOTE: This change helped align US GAAP more closely with IFRS.

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6
Q

What are the major difference b/t US GAAP and IFRS pertaining to Other Comprehensive Income?

A
  • Under US GAAP not revaluation of PPE through OCI, which is permitted under IFRS
  • Under US GAAP Per share measures are prohibited. Under IFRS not encouraged but also not prohibited.
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7
Q

What is the purpose of reporting Comprehensive Income?

A

The purpose of comprehensive income is to show all changes to equity, including changes that currently are not a required part of net income. Comprehensive income reflects all changes from owner and nonowner sources. The other comprehensive income items are: unrealized G/L on AFS securities, unrealized G/L on pension costs, foreign currency translation adjustments, and unrealized G/L on certain derivative transactions.

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8
Q

How can Change in Owners equity be presented in the Financial statements under US GAAP?

Under IFRS?

A 
US GAAP (3 possibilities)
- In the footnotes
- As a supplemental schedule
- As a separate statement
IFRS
- Must be presented as separate schedule
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9
Q

In which section of the Statement of Cash flows would the purchase of a 3 month treasury bill be reported?

A

NONE. Since a tbill with maturity 3 months or less is considered a cash equivalent itself, the purchase would increase and decrease cash by the same amount.

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10
Q

What cash INflows should be categorized as Operating activities within Statement of Cash flows?

A

+ Collections from customers
+ Interest and dividends RECEIVED
+ Proceeds from sale of trading securities
+Other operating cash inflows

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11
Q

What cash OUTflows should be categorized as Operating activities within Statement of Cash flows?

A
  • Payments for merchandise
  • Payments for expenses
  • Payments for interest
  • Payments for income taxes
  • Payments to acquire trading securities
  • Other operating cash flows
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12
Q

What cash INflows should be categorized as Investing activities within Statement of Cash flows?

A

+ Proceeds from sale of Investments (expect trading securities)
+ Principle collections on loans receivable
+ Proceeds from sale of plant assets

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13
Q

What cash OUTflows should be categorized as Investing activities within Statement of Cash flows?

A
  • Loans made
  • Payments to acquire plant assets
  • Payments to acquire investments (except trading securities)
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14
Q

What cash INflows should be categorized as Financing activities within Statement of Cash flows?

A

+ Proceeds from borrowings

+ Proceeds from issuing stock

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15
Q

What cash OUTflows should be categorized as Financing activities within Statement of Cash flows?

A
  • Debt principle payments
  • Payments to reacquire stock
  • Payments for dividends
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16
Q

In the notes to the financial statements, unconditional purchase obligations should be disclosed for each of how many years following the date of the latest balance sheet?

A

5 Years

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17
Q

What items are added (subtracted) from Net income to determine ‘Cash flows from operating activities?

A 
NET INCOME
- Increases in current assets
\+ Decreases in current assets
\+ Increases in current liabilities
- Decreases in current liabilities
- Gains on sale of investments/PPE
\+ Losses on sale of investments/PPE
- Non cash revenues
\+ Non cash expenses
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18
Q

For first time adopters of IFRS, an entity must present reconciliations of US GAAP to IFRS for which items in the financial statements?

A

1) Equity as of the transition date
2) Equity as of the latest published US GAAP equity
2) US GAAP total comprehensive income

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19
Q

What is the minimum reporting requirements (# of statements) for a company that is preparing its first IFRS financial statements

A

Upon adoption of IFRS, the first set of statements must include three statements of financial position, two statements of comprehensive income, two separate income statements (if presented), two statements of cash flows, and two statements of changes in equity. If filing with the SEC, three years of flow statements are required.

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20
Q

What is the formula to determine amount of cash proceeds received when discounting receivables (to a bank)?

A

1) Compute maturity value of the receivable using the stated interest rate.
2) Less the computed discount using the disc rate

Ex.
Maturity value of the note: $500,000(1.08)
$540,000
Less discount to the bank: $540,000(.10)(6/12)
(27,000)
Equals proceeds to Roth
$513,000

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21
Q

What is the formula to determine Ending accounts receivable?

A

Beginning receivables + accrual revenue - collections - writeoffs = Ending Receivables

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22
Q

What is the journal entry for writing off a specific account receivable under the allowance method?

A

DR. Allowance for Accounts Rec.

CR. Accounts receivable

23
Q

What is the journal entry to recognize the recovery of an account receivable previously written off under the allowance method?

A

DR. Accounts Rec.
CR. Allowance for Accounts receivable
DR. Cash
CR. Accounts Rec.

24
Q

What rate of interest will the creditor use in computing the revised book value of the receivable after the impairment?

A

A loan impairment is recorded by reducing the net book value of the receivable to the present value of probable future cash inflows, discounted at the original rate in the receivable. The original rate is used because the loan continues to exist. The loss to the firm is measured at the rate existing when the original loan was created.

25
Q

What costs are included and excluded from inventory?

A 
INCLUDED:
Purchase returns
Freight-in
Sales tax on acquisition
Packaging costs (for purchased items)
Insurance on transit to consignees*
Transportation to consignees*
* costs to get inventory to saleable position
EXCLUDED:
Freight-Out (This is selling expense)
Interest on purchase (This is financing cost)
26
Q

In periods of rising prices, which inventory method would yield the same cost of goods sold under a perpetual inventory system and periodic inventory system?

A

FIFO. First in, First out.

27
Q

A company decided to change its inventory valuation method from FIFO to LIFO in a period of rising prices. What was the result of the change on ending inventory and net income in the year of the change?

A

Ending Inventory– Decrease

Net Income– Decrease
Under LIFO, cost of goods sold is increased relative to FIFO because the cost of the latest and most costly items are considered sold first.

28
Q

Steps under Dollar value LIFO

A

1) Convert EoY inventory to base year prices..
2) Determine increase in inventory at base year prices
3) Convert increase in inventory to current year prices

29
Q

How to determine whether to write down inventory under “lower of cost or market” and to what value.

A

First, determine if market is less than cost. If so inventory is impaired and must be written down.
Next, need to determine what value to write down to.
1) Ceiling value is net realizable vale. NRV is selling price minus cost to complete.
2) Floor value is NRV minus normal profit margin.
If replacement cost is bt ceiling and floor, that is mkt value, otherwise ceiling or floor.

30
Q

Steps to Gross Margin method to determine ending inventory if not observable.

A

BI + purchases - COGS = Ending inventory

1) Must determine COGS by multiplying ‘cost/sales ratio’ by known sales.
2) If given Margin on sales ratio, set sales to 100 to back into cost. Ex. Margin on sales = 40. Set sales to 100, so cost must be 60. Cost/sales ratio = 60%

If given Margin on COST, set cost to 1 and back into sales. Ex. Margin on cost is 46%. If cost is 1 then sales must be 1.46. Cost/sales ratio is 1/1.46 or 31%.

31
Q

Steps using Conventional Retail Inventory method to determine COGS or ending inventory.

A

1) Calculate ending inventory at retail.
Goods AFS (BI + purchases + freight in - purchase returns + net markups + abnormal shortage) Minus markdowns - sales + sales returns - employee discounts - normal shortage.
2) Calculate cost to retail ratio. Goods AFS under cost divided by Goods AFS under retail.
3) Calculate ending inventory at cost by multiplying (ending inventory at retail) by (cost to retail ratio)

32
Q

Steps using FIFO Retail Inventory method to determine COGS or ending inventory.

A

1) Assume goods in beginning inventory are first sold. Calculate ending inventory at retail.
Goods AFS (BI + purchases + freight in - purchase returns + net markups + abnormal shortage) Minus markdowns - sales + sales returns - employee discounts - normal shortage.
2) Calculate cost to retail ratio. Exclude BI (as these are first sold). Goods AFS (purhcases,- purchase discounts etc) under cost divided by Goods AFS (minus markdowns - employee discounts - normal shortages) under retail.
3) Calculate ending inventory at cost by multiplying (ending inventory at retail) by (cost to retail ratio)

33
Q

How does an understatement of Beginning inventory affect cost of goods sold.

A

Assuming ending inventory is correct, an understatement of BI will lead to an understatement of COGS. It will appear that less goods were sold than actually were.

34
Q

How does an OVERstatement of Ending Inventory affect cost of goods sold?

A

An OVERstatement of EI will lead to an understatement of COGS. It will appear that less goods were sold than actually were because of the false illusion that there are more goods left over than there actually are.

35
Q

What are the major difference between US GAAP and IFRS pertaining to Inventory?

A 
US GAAP
- Lower of cost or market (mkt subject to NRV (ceiling) or NRV- profit margin (floor))
- No reversal of write down
- LIFO permitted
IFRS
- Lower of cost or NRV
- Reversal of write downs permitted
- LIFO Prohibited
36
Q

What costs should be capitalized to PPE and depreciated over the life of an asset?

A
  • TESTING and preparation of machine for use
  • Insurance on machine while in transit
  • Shipping
  • Installation
37
Q

What is the journal entry to capitalize qualifying interest expense on construction projects at year end?

A

DR. Construction in progress

CR. Interest expense

38
Q

What is the formula for “sum of digits” depreciation method?

A

(# years remaining / sum of the years) x (cost - salvage)

*Note: In year one of 5 year life= 5/(5+4+3+2+1)

39
Q

What is the formula for “double declining balance” depreciation method?

A

Double the straight-line rate x net book value (book value - accumulated depreciation)

*Note: Cannot depreciation below salvage value

40
Q

What are the major differences between US GAAP and IFRS as they pertain to Equity Method investments?

A

US GAAP
- Can apply FV option to equity investee
- No requirement for acctg. policies to conform
- Encouraged (not req) to have reporting dates for investor and investee within 3 months
- Recognize investee losses if imminent return to profit assured
IFRS
- Only certain InvestORS (VCs, mutual funds, etc) can apply FVO
- Must have uniform acctg. policies
- Required to have reporting dates for investor and investee within 3 months
- Do not recognize losses
- Impairment amt is CV less Recoverable (not FV) amt.

41
Q

Under equity method accounting, what is the journal entry to record amortization of assets whose FV > BV?

A

DR. Investment Income/Loss
CR. Investment equity method acctg.

*Note: entry is to Investment & investment income accounts NOT amortization expense or Fixed assets

42
Q

Under equity method accounting, how would you account for investment income earned prior to investor acquiring enough shares to obtain significant control.

A

If invest owns non significant interest in an entity, but later obtains a controlling interest, the investor must account for the investment under equity method (from FV). At that point the investor must retroactively adjust equity method income to recognize income earned on investment when only had non significant interest.

43
Q

What is the formula to determine the value attributable to stock options when granted by a company? What is the journal entry to recognize those options?

A

Formula:
FMV of 1 option/ (FMV of 1 stock + FMV of 1 option) X total cost of stock

DR. Investment in rights
CR. Investment in Stock
* No income! Receipt of stock right leads to reallocation of value b/t stock and rights.

44
Q

What is the journal entry to recognize exercise of stock rights?

A

DR. Investment in Stock (plug)
CR. Cash (computed value)
CR. Investment in rights (computed value= FMV of 1 option/ (FMV of 1 stock + FMV of 1 option) X total cost of stock )

45
Q

What amounts are included in payroll expense?

A
  • Employers share of FICA
  • Unemployment taxes (FUTA, SUTA)
  • Other payroll taxes

Note: Employers portion of health insurance expense is included in salary exp not payroll expense

46
Q

How do you determine the amount borrowed for a zero interest bearing Note Payable?

A

Amount borrowed = PV of face amt @ the mkt. rate of interest, for x periods
Ex. $10,000 (pv 1, .05, 5 yrs)
= 10,000 (.7835)= $7,385

DR. Cash 7,835
DR. Discount 2,165
CR. Notes Payable 10,000

47
Q

What is included in bond issue costs and how are they treated?

A
  • include: engraving, printing, legal, underwriter, registration

Bond issuance costs are debited to a Deferred charge account and amortized over life of bond

48
Q

What is the journal entry to recognize issuance of a bond between interest dates?

A 
DR. Cash (PV $1, @ yield, # periods)
DR. Cash interest (face * stated rate for dates bt bond date & issue date)
DR. Discount (plug)
     CR. bond payable (face)
     CR. interest payable 
     CR. premium (plug)

** purchaser must give bond issuer Amt of accr. Interest up front, as will receive full interest on payment dates.

49
Q

How do you determine the amount borrowed for when stated rate of NP is different than the mkt rate?

A

Amount borrowed = (PV of face amt @ the mkt. rate of interest, for x periods) + (PV of interest payments @ stated rate @ mkt rate)
Ex.
$10,000 (pv 1, .07, 5) + .06(10,000) (PVa, .07, 5)
= !0,000 (.71299) + 600(4.10020)= $9,590

50
Q

For a troubled debt restructuring involving only a modification of terms, which of the following items specified by the new terms would be compared to the carrying amount of the debt to determine if the debtor should report a gain on restructuring?

A

The total future cash payments.

Note: NOT the PV of future payments.

51
Q

If a corporation sells some of its treasury stock at a price that exceeds its cost, this excess should be recorded as:

A

A credit to additional paid in capital

52
Q

What financial statements are required for first time IFRS reporters?

A

The company’s first financial statements are required to include:
3 balance Sheets
2 Statements of comprehensive income
2 Income statements
2 cash flow statements
2 statements of change in equityAND an explicit statement regarding compliance with IFRS.

53
Q

On what date would a company record a dividend?

What is the corresponding JE?

A

On the date of declaration

DR. Retained Earnings
CR. Dividend Payable

FAR CPA Exam (4 decks)

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