Green book Flashcards
What are current assets and what is the time frame?
- Cash and cash equivalents (U.S. treasury bills, commercial paper, and money market funds)
- Items to be realized in cash
- Receivables and
- Investments in trading securities
- Items to be sold- inventories; and
- Items to be consumed– supplies, insurance, rent
During the normal operating cycle of the business or 1 yr, whichever is longer
What is the normal operaing cycle of a business?
Cash ⇒ Inventories ⇒ Accounts Receivalbe ⇒ Cash
How does GAAP and IFRS differ in listing current assets on the BS?
- US GAAP lists assets in order of liquidity (CAs above non CAs)
- IFRS lists non CAs above CAs.
What is accrued interest?
Accrued interest is interest that has been earned on a note receivalbe but whcih has not yet been received at the end of the year.
how is interest earned but not received at the end of the year recorded?
DR: Interest receivable
CR: Interest revenue
How is interest revenue calculated?
Principal x rate x time= interest revenue
What are the 2 methods to write off a bad debt?
Direct charge off- the expense is recognized in the year the receivables are written off.
Allowance method- the expense is recognized in the year the credit sales are made. The write off occurs in the period when business is aware of default.
What is the JE for Direct charge off?
DR: Bad debts expense 100
CR: Account receivable 100
*to write off customer’s AR of $100 in Year 2. The credit sale was made in Year 1*
Is direct charge of method acceptable under GAAP?
The direct charge off method is not considered acceptable under GAAP unless the amounts are immaterial.
What is the JE for debt write off under allowance method?
to recognize expense: Year 1
DR: Bad debts expense
CR: Allowance for uncollectible accounts
*to estimate amount of AR that will not be collected as of the end of year 1. The allowance is a contra to AR. the credit sale occurred in Year 1.
Write off: Year 2
DR: allowance for uncollectible accounts
CR: Accounts receivalbe
*to write off customer’s AR in year 2
What is the Net Realizable Value of AR?
AR - the allowance for uncollectible accounts = NRV, the amount of cash expected to be collected from the customrers as of the BS date
How do you record the reinstatement of the customer’s account using Direct charge off method?
DR: AR
CR: Bad debt expense
*basically reverse the write off*
To record collection of the AR
DR: Cash
CR: AR
*cash increases, income increases*
How do you record the reinstatement of a write off using the Allowance Method?
DR: AR
CR: Allowance for uncollectible accounts
To record collection of the AR:
DR: Cash
CR: Accounts Receivalbe
*Cash increases, allowance increases*
What are the 2 methods of estimating bad debts expense when using the allowance method?
- Percentage of sales method (IS approach)
- Aging of AR method (BS approach)
What are the steps in percentage of sales method?
- estimate percentage of credit sales not expected to be collected.
- Apply percentage to net sales/net credit sales.
3. Product of your multiplication is bad debts expense.
- Ignore any balance in the allowance account in making the adjusting entry.
- Stressed IS (matching) over the BS (NRV)
What are the steps in Aging of Accounts Receivable method?
- Estimate percentage of AR not expected to be collected.
- Apply percentage to ending balance in AR
3. Product of your multiplication is the required ending balance in the allowance account
- Bad debts expense for the period is the difference between the required ending balance and the balance before adjustment.
- Stresses the BS (NRV) over the IS.
One method of generating cash from ARs include borrowing. Borrowing assigns the rights to cash collection from specific AR to another party as collateral for a loan. This is referred to as a specific assignment. How is this recorded?
*the AR remain on borrower’s BS, but must be reclassified in the following manner (amount assumed).
DR: AR assigned 2000
CR: AR 2000
The borrowing transaction is recorded as follows, assuming that cash equal to 80% of the assigned accounts is received, less a commission of 5% of the AR assigned.
DR: Cash 1500
DR: Commission expense 100
CR: Notes payable 1600
One other method of generating cash from ARs include transferring AR to another party. These transactions may be accounted for as either a sale or a borrowing depending on whether the transferor surrenders control. How is it recorded if control is surrendered and if control is not surrendered?
If the transferor surrenders control the transaction should be recorded as a sale:
DR: Cash
DR: Loss on factoring
CR: AR
CR: Recourse liability
If control is not surrendered, then it is a borrowing:
DR: Cash
DR: Interest expense
DR: factoring fee
CR: Factor borrowing payable
Factor holdback is the same thing as:
due from factor
How is servicing shown on the financial statements?
On the BS as separate line items for FV amounts and amortization method amounts or display aggregate amounts with FV parenthetical disclosure.
What are the 2 types of subsequent events?
Events that provide additional evidence about conditions that existed at the BS date
Events that provide evidence about conditions that did not exist at the BS date but arise subsequent to the date.
For subsequent events that existed at the BS date requires what?
Requires an adjustment/disclosure to the FS.
For subsequent events that did not exist at the BS date, but arise subsequent to that date, is adjustment to the FS required?
Not required to record an adjustment to the FSs but disclosure is required.
What are cash equivalents?
Short- term, highly liquid investments with maturities less than or equal to 3 months from the date of purchase.
The SEC has the statutory authority to establish accounting rules and regulations for companies with assets of more than?
$10,000,000 and 500 or more shareholders that trade on a national securities exchange.
Corporations that have more than $10,000,000 and 500 more shareholders that trade on a national securities exchange must file?
Such corporations must file an accual form 10 K reports, quarterly form 10-Q reports, and Form 8K when significant accounting matters arise.
What is the 10K due date?
- 60 days after fiscal year end for large accelerated filers (more than $700 million of aggregate worldwide market value of voting and nonvoting common equity)
- 75 days after fiscal year end for accelerated filers (between $70 million and $700 million of aggregated worldwise market value of voting and nonvoting common equity)
- 90 days after fiscal year end for all others
What is form 10Q due?
- 40 days after fiscal quarter end for large accelerated filers and accelerated filers
- 45 days after fiscal quarter end for all others
When is Form 8k due?
Unless stated otherwise, must be filed within 4 business days of the occurrence of a material event.
The primary purpose of a statement of cash flows is to provide relevant info about:
the cash receipts and cash disbursements of an enterprise during a period.
What are operating acitivies on Statement of Cash Flows, give some examples?
- Transactiosn related to the determination of net income (cash received from customers and cash paid to suppliers)
- Cash received from interest
- Cash received from divideds
- Cash received from sale of trading securities
- Cash paid to suppliers for inventory
- Cash paid to employees
- Cash paid for operating expenses
- Cash paid for interest
- Cash paid for taxes (property and income)
- Cash paid for the purchase of trading securities
What are investing activities on Statement of Cash Flows?
Transactions involving non-CAs (making and collecting loans- notes receivable, purchase or sale of a building)
- Proceeds from sales of property, plant and equipment
- Proceeds from sales of available for sale and held to maturity
- Proceeds from collections of loans
- Cash paid for trading securities (depending on maturity)
- Cash paid for property, plant, equipment
- Cash paid for available for sale or held to maturity securities
- Cash paid for business acquisiton
- Cash used to make loans.
What are financing activities on Statement of Cash Flows?
Transactions involving non current liabilities and equity (issueing stock, issuance of a bond, repayment of a long term debt)
- Proceeds from issuing stock
- Proceeds from issuing debt
- Cash paid for dividends
- Cash paid to reacquire treasury stock
- Cash paid to repay loans
Cash received from interest, cash received from dividends, cash paid for interest, cash paid for the purchase of trading securities is in what category?
Operating Activities.
Proceeds from sales of property, plant and equipment, proceeds from sales of AFS and HTM securities, proceeds from collections of loans, cash used to make loans are what kind of activity?
Investing activity
Proceeds from issuiding stock, proceeds from issuing debt, cash paid for dividends, cash paid to reacquire treasury stock, cash paid to repay loans are what kind of activity?
Financing activity.
What are the 2 methods of cash flows?
- Direct method
- Indirect method
If you elect the direct method, you also have to do the:
Indirect method.
What is the major difference between IFRS and US GAAP for Cash Flows?
Interest and dividends received may be reported in operating or investing activities
Interest and dividends paid may be reported in operating or financing
Caveat- must be consistend in reporting
Which method is preferred by FASB?
Direct Method, but must also include the indirect method.
For direct method, what is the formula for cash received from customers?
Net sales
+Beginning Accounts Receivable
- Ending Accounts Receivable
- Accounts Receivable Write Offs.
For direct method, what is the formula for Cash paid to Suppliers?
COGS
+Ending Inventory
+Beginning AP
- Beginning Inventory
- Ending Account Payable
- Depreciation(if manufacturing)
For direct method, what is the formula for Cash Paid for Operating Expenses?
Operating Expenses
+Ending Prepaid Expenses
+Beginning Accrued Expenses Payable (wages payable)
- Beginning Prepaid Expense
- Ending Accrued Expenses Payalbe
- Depreciation/Amortization (if included in operating expenses)
For cash flows under the direct method are gains and depreciation considered?
No, because they are non cash.
For indirect method however, they are reconciled with net income (as a deduction from income)
Cash flows for the indirect method starts with what?
The operating sections tarts with Net Income and reconciles it to net cash provided by operating activities.
What is the classification for current liability?
- the liability must be due within the operating cycle or 1 year, whichever is longer, and
- Be paid with a current asset, or by creating another current liability.
What is a contingency?
A contingency is a situation in which uncertainty of expense or loss exists that will be recolved when one or more events occur or fail to occur in future accounting periods.
What is the Criteria for Accrual for an expense/loss contingency?
An expense/loss contingency should be accrued if both of the following conditions are satisfied as of the BS date.
- It is probably (likely or > 70%) that an asset has been impaired or a liability has been incurred as of the BS date, and
- The amount of the loss can be reasonably estimated.
*Also, if the amount of the accrual is material, the notes should disclose the nature of the expense/loss contingency and the amount accrued. Disclosure is always required for the CPA exam becasue all amounts are material*
Accue, disclose or both?
Probably and estimable
Probable and not estimable
Reasonably possible and estimable/not estimable
Remote and irrelevant.
Accrue and disclose in notes
Do not accrue; only disclose in notes
Do not accrue; only disclose in notes
Do not accrue; no dot disclose in notes.
Some contingencies that are remote are disclosed in the notes. These contingencies are?
- Guarantees of the debts of others
- Agreements to repurchase receivables
- Standby letters of credit for banks.
What is the rule when estimating the loss in a range for GAAP? How does this differ from IFRS?
the amount accrued should be the amount which is a better estimate than any other amount in the range. If no amount in the range is a better estimate than any other amount in the range, then the minimum amount in the range should be accrued. Also the notes should disclose any additional amount of loss that may occur over the amount accrued.
IFRS requires the midpoint of range to be accrued if there is no better estimate than any other amount in the range.
When should an employer accrue an expense and a liability for the cost of future compensated absences?
When all of the following 4 conditions are met:
- The emploee right to receive compensation for future absences is attributed to employee services already rendered.
- The employee right vests (right not contingent upon continued employement) or accumulates (can be carried forward if not used).
- Payment of the compensation is probable
- The amount of the payment is reasonably estimated.
What is the JE for compensated absences that accrue?
DR: Compensation expense
CR: Estimated liability for compensated absences.
How should gain contingencies be accrued?
Never accrue a gain contingency, even if the contingent gain is probable and the amount is reasonably estimated. Gains are recorded when realized/realizable–when an exchange transaction has occurred and the earnings process has been comleted.
When should gain contingencies be disclosed?
Disclosure of a gain contingency can be made if the probability of a gain contingency is reasonably possible.
Can current liabilities at 12/31 Year 1 be reclassified to LT liabilities at 12/31 Year 1 based upon events which occur after 12/31 Year 1 but before the FSs are issued in Year 2? The answer is yes if either of the following events occurs:
- Actual refinancing to LT debt of a CL occurs after the BS date but before the obligation classified as current is due, and before balance sheet is issued. OR
- An agreement is entered into that permits the enterprise to refinance a CL on a LT basis. The agreement is noncancelable and both parties are financially capable of honoring it.
For IFRS: requires actual refinancing before the BS date to classify a maturing liability as non current.
What is the Acid Test (Quick) Ratio?
Cash, Net receivables, Marketable securities ÷ Current liabilities
What is the Current Ratio?
Current Assets ÷ Current Liabilities
What is Receivable Turnover ratio? and turnover?
Net credit sales ÷ Average Net receivables
365/Receivable Turnover
What is inventory turnover formula? and turnover?
COGS ÷Average Inventory
365/Inventory turnover
If you wanted to calculate the number of days’ sales in average receivables or average inventory, how do you calculate that?
365 ÷ Receivable TO
365 ÷ Inventory TO
What is:
Callable bonds?
Convertible bonds?
Debenture bonds?
Mortgage bonds?
Serial bonds?
Term Bonds?
Callable bonds-bodns that the issuer can call (retire) before the maturity date
Convertible bonds-bonds that holder/investor can exchange for stock
Debenture bonds-bonds that are unsecured (no collateral)
Mortgage bonds-bonds that are secured by real estate (collateral)
Serial bonds-bonds with staggered maturity dates
Term Bonds- bonds with single maturity date
In bonds, what is market (effective/yield) interest rate?
the interest rate demanded by investors to invest in the bond and the rate used to calculate the issuer’s interest expense each year. This rate is used to as part of the bond issue price valuation. We discount the bond with this rate.
Discount on bonds results when?
Results when bond valuation is less than the face amount of the bond because the stated rate of interst is lower than the market rate of interest.
Premium on bonds results when?
Results when bond valuation is greater than the face amount of the bond because the stated rate of interest is higher than the market rate of interest.
what are bond issue cost and how should they be treated?
Costs associated with bond issuance such as printing, engraving, legal and accounting fees, and commissions.
Should be amortized/allocated over the life of the bond on a straight line basis.
When the exam asks for the amount of the bond on the BS, what is the answer?
The carrying value is the correct answer.
The value of the bond is comprised of two components:
The PV of the face amount of the bond (a single sum) (Maturity Value x times Present value of 1 based on effective rate of interest and time)
+
The PV of the cash paid each year (an annuity) to investors (Maturity Value x Interest rate=x x times Present value of annuity based on effective rate of interest and time)
Normally a discount has a what kind of balance?
Normally a premium has a what kind of balance?
Discount- debit balance
Premium-credit balance
What are the two methods for bond amortization?
SL and effective interest.
SL is not US GAAP
What does Bond Amortization due and how does it effect the discount or the premium?
Amortization brings the Carrying Value of the bond to face value by the time of maturity.
In the case of a discount, the carrying value will increase each period until face value is reached.
In the case of a premium, the carrying value will decrease each period until the face value is reached.
what is a warrant?
A warrant gives the investor the right to buy a share of sotck at a fixed price.
what are non detachable warrants?
Cannot be separated (detached) from the bond and sold separately in the market. Therefore, no value is assigned to the warrants and all of the bond issuance proceeds are assigned to the bond.
*Record like a regular bond problem
DR: Cash
CR: Bonds Payable
CR: Premium
What are detachable warrants?
Can be separated (detached) from the bond and sold separately in the market. Therefore, the bond issuance proceeds are allocated between the warrants and the bonds using two different methods:
Proportional method
Incremental method
What is the Proportional method and what is needed to be known?
Both the FV of the bonds without the warrants and the FV of the warrants are known:
Bond Allocation=Proceeds x (FV of the bonds without warrants/FV of bonds without warrants + FV of warrants)
Warrant Allocation= Proceeds x (FV of warrants/FV of bonds without warrants + FV of warrants)
What is the incremental method and in what situations is it used?
Either the FV of the warrants is known or the FV of the bonds without the warrants is knwon, but not both.
- Allocate proceeds based upon the FV of the known item and the remainder to the other.
What are the 2 methods for bond conversion?
Book value method- the stock is recorded at the book value of the bonds on the date of conversion. No gain or loss is recognized.
Market value method-the stock is recorded at the market value of the stock and a gain or loss is recognized for the difference between the market value of the stock and the book value of the bonds.
What is RUPA?
Revised Uniform Partnership Act of 1994- a guide to partnerships when no partnership agreement is in effect. Changes UPA by eliminating the dissolution of a partnership requirement when a partner retires.
Partherships have agency relationships, what does that mean?
Each partner acts as an agent for the partnership and is able to conduct business and enter into contracts.
What kind of liability to partners in a partnership have?
Unlimited liability- In general partnerships, the partners have unlimited liability so many partnerships are formed as limited liability partnerships where only the invested capital is at risk of loss.
What are the rules for Initial Partnership Contribution in regards to assets and liabilites received?
If assets and liabilities are contributed, they must be written up to FV. The partners must agree to the percentage of equity that each will have in the partnership and usually, that percentage relates to the amount of capital that each contributes.
If a partner contributes an asset that has a mortgage, what should be done?
FV of the asset - the mortgage= contributed capital.
Distribution of Profits and Losses are distributed how?
Profits and losses are distributed according to the partnership agreement. In absence of the agreement, UPA specifies that profits and losses are to be equally divided among the partners.
When there is a salary agreement between partners, salaries are paid how?
Salaries are paid without consideration to profit or loss of the partnership.
Tend to compensate for personal serivce to the parnership.
How is interest on Capital Balances calculated?
Can be based on the beginning capital balance or on the average balance. Usually a weighted average is used for the latter.
There is usually a stated rate in the parnership agreement.
Is a partnership agreement provides that interest at 10% per year is to be credited to each partner and partners capital balance:
Balance, January 1 $140,000
Additional investment, July 1 $40,000
Withdrawal, August 1 $(15,000)
Balance, December 31 $165,00
what amount of interest should be credited to the partner’s capital account?
1/1 $140000 x 6/12= 70,000
40,000
7/1 $180,000 x 1/12 = 15,000
8/1 (15,000)
12/31 $165,000 x 5/12= 68,750
$153,750
x 10%
15,375
For what reason are bonuses given to the partners and how are they stated?
Given as additional compensation to partners who perform services for the partnership
Stated as a percentage of income before or after the bonus.
What are the two methods that can be used when admitting a new partner?
Bonus method and Goodwill method
For bonus method, to find the new partners fair share of capital, how is that calculated?
(Add existing partners capitals and contributed capital of new partner) x %capital interest of the new partner in the partnership.
For Goodwill method, to find the new partners capital interest, how is that calculated?
For goodwill method (add existing partners cap / by the capital that the existing partners will have after the new partner joins, if new partner is taking 20%, then divide by 80%”)=what the partnership is worth x the 20% of the new partner
What are the statements for Personal Financial Statements?
Which statement is not required?
Statement of Financial Condition
Statement of Changes in Net Worth- Discloses Both Realized and Unrealized Changes
Note: CASH FLOWS STATEMENT IS NOT REQUIRED
What is the rule when estimating loss in a range?
If no amount in range is a better estimate than any other amount in the range, then the minimum amount in the range should be accrued.
However, under IFRS: requires the midpoint of range to be accrued if there is no better estimate than any other amount in a range.
For personal financial statements, do we use the historical cost?
No, assets are valued at FMV.
Personal financial statemetns should report an investment in life insurance in the statement of financial condition as:
Assets for the face amount of the policy less the amount of any loans against it.
How to calculate Interest expense for a bond?
what was paid for the bond x yield rate x (time period example 2/12)
How to calculate interst payable for a bond?
Face value of the bond x stated rate x (time period example 2/12)
