unit 2 | special accounting topics Flashcards
Recall costing inventory methods:
- Specific identification
- FIFO
- Weighted-average cost
Can change in costing method be implemented?
Yes. As long as it results in more relevant & reliable information.
- Retroactive restatement
- Disclosure in notes
- Increased audit support
Most common issues with inventory
Obsolescence/spoilage, damage, theft
Lower of cost & net realizable value (LCNRV) rule
Requires that inventory owned by the company is measured & presented at either
1. Historical cost
OR
2. Net realizable value (NRV)
Write-down required when NRV < Historical cost (reversal limited to the historical cost)
Net realizable value (NRV)
Selling price of inventory - estimated costs required to make the sale
What is inventory valuation caused by?
Beyond company control, driven by market forces
What are inventory errors caused by?
Directly caused by the company (poor control)
- Often occurs in the process of validating ending inventory
What happens during an inventory error?
- Ending inventory can only be understated or overstated
- Ending inventory errors resolve themselves over the span of 2 periods
Impairment indicators
- Decline in market value
- Asset obsolescence (technology advancement)
- Asset idling
- Physical damage
How to calculate the gain or loss on the disposal of an asset?
- Update accumulated depreciation
- Calculate the carrying value
- Calculate gain/loss
- Record the disposal
Define Impairment
A state when an asset’s carrying value exceeds its recoverable amount
Define Recoverable amount
The greater of:
1. Fair value - costs of disposal
OR
2. Value in use
Define Value in Use
The present value of the estimated future cash flows the asset will generate as a result of its use - costs of disposal
How do you determine impairment?
Compare the recoverable amount with carry value to determine a “write-down” (if less)
When should impairment tests be conducted?
Anytime/only there are indicators of impairment (to write-down the value of an asset)
Does goodwill & certain intangible assets need to be tested for impairment? When?
Yes, annually.
Limitation on the reversal of impairment loss
Reversal amount is limited to asset’s amortized cost at the time of impairment & the impairment loss amount
Define depreciation/amortization
Allocates the depreciable costs of an asset over the asset’s estimated useful life
Double-Declining Balance (DDB) method
Method of depreciation where depreciation is higher in the first years & declines over time
- Calculate total asset acquisition cost
- 1/uselife in years = SL rate
- DDB Rate= SL rate x 2
- DDB rate x beginning of period book value (carrying value)
Define Taxes
A primary source of revenue for the government & key lever in fiscal policy (government implements tax policies & allocate spending)
Income tax
Expense charged by governments on income generated by companies & individuals
(Corporate tax rate < personal tax rates)
Progressive system
Rate of tax paid varies based on income level
Tax installments (why?)
Periodic payments of the company’s estimated total annual income taxes
- To avoid large tax bill at the end of the fiscal year
- Required to companies with higher revenues
Define Goods & Services Tax (GST)
→ Value-Added Tax (VAT)
Tax imposed at each stage of the supply chain (production → distribution → sale to customer)
- HST recoverable > payable → government reimburse
- HST recoverable < payable → remit to government
Describe Deferred Tax Assets & Liabilities
Differences in the calculation of income for accounting & income for tax purposes (BS item, current or non-current)
Why does Deferred Tax Assets & Liabilities exist?
EBT on IS often differ from taxable income reported to CRA
- Common cause of difference due to depreciation methods
CRA name for depreciation on tax returns:
Capital Cost Allowance (CCA)
Property Tax
Expense paid on non-movable property owned by an individual or corporation
- Land or any building on that land
- Collected by municipal government
- Used for funding specific services (libraries, public schools, fire stations, & police services)
How often are property taxes paid?
- Assessed annually as an operating expense
- Typically paid in installments (monthly) → requires property tax liability account
