Mixture Flashcards
What are the two classifications of liabilities?
Liabilities are classified as current or long-term.
What are current liabilities?
Obligations the company expects to liquidate through the use of current assets or the creation of other current liabilities.
Give examples of payables from acquisition of goods and services.
Accounts payable, wages payable, and taxes payable.
What are collections received in advance of delivery of goods or services?
Unearned rent revenue and unearned subscriptions revenue.
What are other liabilities that will be liquidated during the reporting cycle?
The portion of long-term bonds to be paid in the current period and short-term obligations arising from the purchase of equipment.
What happens if a company intends to refinance debt?
Liabilities payable within a year are not included in current liabilities if the company intends to refinance the debt through another long-term issue or to retire it out of noncurrent assets.
Is there a prescribed order for current liabilities?
No prescribed order for current liabilities, but common to see notes payable, accounts payable, or short-term debt as the first item.
What is working capital?
Excess of total current assets over total current liabilities.
What are long-term (noncurrent) liabilities?
Obligations a company does not reasonably expect to liquidate within the normal operating cycle.
Give examples of long-term liabilities.
Bonds payable, notes payable, deferred income tax amounts, lease obligations, and pension obligations.
What are the three types of long-term liabilities?
- Obligations from specific financing situations. 2. Obligations arising from the ordinary operations of the company. 3. Obligations that depend on future events.
What type of disclosures do long-term liabilities require?
Long-term liabilities require the most disclosure, including supplementary disclosures related to covenants and restrictions for the protection of lenders.
What are the components of the owner’s equity section of the balance sheet?
Generally 6 sections: Capital Stock, Additional Paid-In Capital, Retained Earnings, Accumulated Other Comprehensive Income, Treasury Stock, Noncontrolling Interest.
What is included in Capital Stock?
Preferred stock, common stock, and paid-in capital.
The par or stated value of the shares issued, along with authorized, issued, and outstanding share amounts are also disclosed.
What is Additional Paid-In Capital?
The excess of amounts paid in over the par or stated value. Subtotals are informative if additional sources of capital are varied and material.
What are Retained Earnings?
The corporation’s undistributed earnings, divided into unappropriated (available for dividend distribution) and restricted (bond indentures or other loan agreements).
What does Accumulated Other Comprehensive Income represent?
The aggregate amount of other comprehensive income items, including unrealized gains or losses on available-for-sale investments and certain derivative transactions.
What is Treasury Stock?
The amount of ordinary shares repurchased, shown as a reduction of stockholders’ equity. It is a contra-equity account.
What is Noncontrolling Interest?
A portion of the equity of subsidiaries not wholly owned by the reporting company.
What is the classification of Investment in a Preferred Stock?
Current asset or Long Term Asset/Investment.
What is the classification of Treasury Stock?
Contra-Equity Account - Stockholders’ Equity.
What is the classification of Common Stock?
Stockholders’ Equity.
What is the classification of Cash Dividends Payable?
Current Liability.
What is the classification of Accumulated Depreciation?
Contra Asset Account to PP&E.
What is the classification of Interest Payable?
Current Liability.
What is the classification of Deficit?
Contra Account in Retained Earnings/Equity.
What is the classification of Trading Securities?
Current Asset.
What is the classification of Unearned Revenue?
Current Liability.
How should an asset be valued upon purchase?
An asset should be valued at the fair value of what was received, whichever is more clearly evident.
What is the accounting treatment for cash discounts on asset purchases?
If companies take the discount, they reduce the value of the asset.
What is a deferred payment contract?
It involves buying an asset and paying for it at a future time, discounting the payment amount back to present value.
How is the asset’s value determined in a deferred payment contract?
The asset’s value is the present value of the future payment.
What is recorded as a discount on notes payable?
The difference between the present value of the asset and the full amount of notes payable.
What is a lump-sum purchase?
Making one payment for many assets, such as buying a restaurant that includes land, building, and equipment.
How do you allocate the cost in a lump-sum purchase?
Use the relative fair value to allocate the cost among the assets.
What is the basis for accounting for exchange transactions?
Assets are ordinarily accounted for based on the value of what is given up or received, whichever is more evident.
What is ‘boot’ in an exchange transaction?
Cash received in an exchange is referred to as ‘boot’.
What defines commercial substance in an exchange?
If future cash flows change as a result of the transaction, it has commercial substance.
How should a company record a new asset if the exchange has commercial substance?
Record the new asset at the fair value of what you gave up.
What should companies do if an exchange has commercial substance?
Recognize gains and losses immediately.
What is the accounting treatment for exchanges with no commercial substance and no cash received?
Defer gains by lowering the cost of the new asset by the gain amount, or use book value plus cash paid to value. Recognize losses immediately.
What is the accounting treatment for exchanges with no commercial substance but cash received?
Recognize partial gain and recognize losses immediately. If cash is more than 25% of the exchange, recognize the entire gain.
What is the formula for recognizing gain when cash is received in an exchange?
Formula: (Cash received)/(Cash received + Fair Value of other Assets Received) x Total Gain = Recognized Gain.
What is the principle of conservatism in accounting?
Deferring gain reduces the cost of an asset, while deferring loss increases the cost of an asset.
How do you determine if there is a gain or loss?
If FV > BV, recognize a gain. If FV < BV, recognize a loss.
How is a gain or loss recorded?
Gain is recorded as a credit, loss is recorded as a debit.
What should be considered when evaluating an asset exchange?
Consider the fair value of the asset given up versus the book value.
What to do when a loss is found in an asset exchange?
Include the entire loss.
How to compute total gain or loss on a transaction?
Amount = difference between FV and BV for the asset given up.
What to do if a gain is found in an exchange with commercial substance?
Recognize the whole gain.
What if the exchange lacks commercial substance and no cash is involved?
No gain is recognized.
What if the exchange lacks commercial substance and cash is given?
No gain is recognized.
What if the exchange lacks commercial substance and cash is received?
Recognize the fair value of the asset received, less the deferred portion of the gain.
What to do if cash received is more than 25%?
Recognize the whole gain.
How should companies account for contributions?
Use the fair value of the asset to establish it on the books and recognize the contribution as revenue.
What is the journal entry for recognizing a contribution?
Debit Asset for Fair Value and credit Contribution Revenue for the same amount.
What to do when a company gives a non-monetary asset?
Record expense at the fair value of the donated asset.
What if the expense at fair value is greater than the asset’s book value?
Record a gain.
What is the purpose of depreciation?
To allocate the cost of an asset to the periods of its useful life in a systematic and rational manner. It is part of the matching principle, which expenses an asset in the period in which it was used.
What types of assets are depreciated?
Tangible assets with limited lives are depreciated.
How does depreciation relate to expenses and revenues?
Depreciation matches expenses against revenues over the periods that benefit from the asset’s use.
What is used for intangible assets instead of depreciation?
Amortization expense is used for intangible assets, but follows the same process.
What is used for natural resources instead of depreciation?
Depletion expense is used for natural resources, but follows the same process.
What is service life?
The time an asset will be used by a company.
What is physical life?
How long an asset will last.
How is depreciation normally computed?
Unless otherwise stipulated, depreciation is normally computed on the basis of the nearest full month.
What is the depreciable base?
Original cost minus salvage value.
What is the asset’s useful life?
The duration an asset will serve the company, which may vary from reality.
Why do companies retire assets?
Companies retire assets for physical factors (casualty, expiration of physical life) and economic factors (inadequacy, supersession, obsolescence).
What must depreciation methods be?
Depreciation methods must be systematic and rational, and you can create your own method.
What is the journal entry for depreciation?
Debit depreciation expense and credit accumulated depreciation contra-asset account.
What is the formula for annual depreciation under the declining-balance method?
Annual depreciation = Beginning Period Book Value x the Rate
The rate = 1/Life x 2
How is partial year depreciation computed?
Depreciation is normally computed on the basis of the nearest full month.
What is the Group Method in depreciation?
Used when assets are similar in nature and have the same useful lives.
What is the Composite Method in depreciation?
Used when assets are dissimilar and have different lives.
How do you compute depreciation using the Composite Method?
Find the average and depreciate on that basis.
Example: Sum straight line depreciation amounts and divide by total original cost.
What is the composite life in depreciation?
The composite life is the total depreciable cost divided by the total annual depreciation.
How should you account for a single asset retired before/after average service life?
Do not book a gain or loss.
What is the Modified Accelerated Cost Recovery System (MACRS)?
MACRS differs from GAAP and is required by the IRS.
What are the key features of MACRS?
- Mandated tax life, generally shorter than economic life.
- Cost recovery on an accelerated basis, using a staggered formula.
- Assigned salvage value of zero.
- Small businesses can fully depreciate equipment in the first year.
How do accelerated depreciation methods affect repair and maintenance costs?
They can offset the effect of increasing repair and maintenance costs as the asset ages.
How are assets recorded in terms of historical cost?
Assets are recorded at historical cost and generally kept at historical cost.
What happens if an asset is impaired?
If an asset is impaired and cannot recover future cash flows, it must be written down.
What is the recoverability test?
Compare carrying value with expected net future cash flows.
What is the fair value test?
Compare fair value with carrying costs.
How do you record an impairment loss?
Debit a loss account and credit accumulated depreciation.
What happens to the carrying amount after an impairment?
The reduced carrying amount becomes the new cost basis, with no restoration in asset held for use.
What are the events leading to asset impairment?
- Significant decrease in fair value of an asset.
- Significant change in the manner of use of an asset.
- Adverse change in legal factors of business climate affecting asset value.
- Accumulation of costs in excess of amount originally expected for acquisition or construction of an asset.
- Projection or forecast that demonstrates continuing losses associated with asset.
What is the first step in measuring impairment under GAAP?
Review events for possible impairment.
What is the recoverability test in GAAP?
If review indicates impairment, apply recoverability test: Sum future cash flows < carrying amount = impairment.
How is impairment loss defined under GAAP?
Impairment loss is the amount by which carrying value exceeds fair value.
How are assets held for use treated in impairment?
Assets held for use (PP&E) are written down. Impairment loss is the excess of carrying value over fair value. Loss is taken and assets are depreciated on new cost basis.
What is the treatment of assets held for disposal?
Impairment loss is the excess of carrying amount over fair value. Report at lower of cost or NRV. No depreciation is taken. Restoration of impairment losses is permitted, only up to original carrying value.
What happens after recording an impairment loss?
The reduced carrying amount becomes the new cost basis. There’s no change in new basis except for depreciation or amortization, or if there are additional impairments.
Is restoration of impairment allowed for assets held for use?
There is no restoration of impairment in assets held for use.
How does measuring impairment under IFRS differ from GAAP?
IFRS is more strict than GAAP, using a one-step fair value test only.
What is depletion in accounting?
Depletion is like depreciation, the process of allocating the cost of natural resources to the period benefitted.
What are the two main features of natural resources?
- Complete removal of the asset.
- Replacement of the asset only by an act of nature.
What is Acquisition Cost?
The price for the land, the right to search, or lease payments for land with productive natural resources. Usually recorded as Undeveloped Property.
What are Exploration Costs?
Tangible equipment costs to find the resource. Can be capitalized if unsuccessful; acquisition is written off as a loss.
What are Development Costs?
Costs to extract resources, including technology/equipment to remove the resource. Tangible equipment costs are not included in the depreciation base unless only for that project.
What are Restoration Costs?
Costs to restore the property to its natural state after extraction.
How to calculate Depletion Expense?
Cost Per Unit x Units Extracted Per Year = Depletion Expense For the Year
(Total Cost - Salvage Value) / Total Estimated Units Available = Cost Per Unit
How to estimate Recoverable Reserves?
Revise depletion rate on a prospective basis: divide remaining cost by new estimate of the recoverable reserves. Effects current and future periods.
What should companies disclose about property, plant, equipment, and natural resources?
The basis of valuation, usually historical cost, along with pledges, liens, and other commitments related to those assets.
What should not be offset against property, plant, equipment, and natural resources?
Liabilities secured by these assets should not be offset against them; report those obligations in liabilities.
What disclosures are required for depreciation?
- Depreciation expense for the period.
- Balance of major classes of depreciable assets, by nature and function.
- Accumulated depreciation.
- General description of depreciation methods for different classes of assets.
What is the Asset Turnover Ratio?
Measures a firm’s ability to generate sales from investment in assets.
Asset Turnover = Net Sales / Average Total Assets
What is the Profit Margin on Sales?
Measures a firm’s ability to generate income from a particular level of sales.
Profit Margin on Sales = Net Income / Net Sales
What does the Rate of Return on Assets measure?
It measures a firm’s success in using assets to generate earnings.
How is the Rate of Return on Assets calculated?
Rate of Return on Assets = Net Income / Average Total Assets (Beg + End / 2)
How is Net Income calculated?
Net Income = Net Sales x Profit Margin On Sales
What is the procedure for changing the depreciation method?
Changes in estimates are accounted for in the current period and future periods. Do not change previously reported results.
For more details, refer to the Farhat video: https://youtu.be/iv2XxyCPLVM
What is the difference between book and tax depreciation?
The difference lies in the timing of depreciation expense on financial statements versus tax return. Timing will differ from year to year but the total will be the same.
What is book depreciation based on?
Book depreciation is based on the matching principle and internal estimates for useful life.
What does IRS depreciation allow?
IRS depreciation allows acceleration of depreciation expense to reduce tax payments in early years of asset life, increasing payments in later years. This is attractive to profitable companies.
What is a likely contentious issue in the future of the conceptual framework?
Fair value measurement and revaluations.
