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42 Cards in this Set
- Front
- Back
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Define working capital
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Current assets - Current liabilities
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How is the current ratio computed?
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Current assets / Current liabilities
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How is the quick ratio computed?
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(Cash + Net receivables + Short-term investments) / Current liabilities
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Current assets are defined as...
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those resources that are reasonably expected to be realized in cash, sold, or consumed (prepaid items) during the normal operating cycle of a business or one year, whatever is longer.
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Current liabilities are defined as...
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Obligations whose liquidation is reasonably expected to require the use of current assets or the creation of other current liabilities
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When can a short-term obligation be included in noncurrent liabilities?
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if the enterprise intends to refinance the debt on a LT basis and the intent is supported by the ability to do so as evidenced by:
- actual refinancing prior to the issuance of the F/S, or - existence of a noncancelable financing arrangement from a lender having the financial resources to accomplish the refinancing |
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Define cash and cash equivalents
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- cash includes both currency and demand deposits with banks and/or financial institutions
- cash equivalents include ST, highly liquid investments that are both readily convertible to cash and so near their maturity when acquired by the entity (90 days or less from date of purchase) that they represent insignificant risk of changes in value |
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Name two methods of accounting for uncollectible accounts
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Direct write-off:
-Bad Debt Expense -----A/R Weaknesses: bad debts are not matched to sales and A/R are overstated. Not GAAP. Allowance method: -Allowance for uncollectible accounts -----A/R Strengths: Matches bad debts with credit sales. A/R fairly stated. Required by GAAP. |
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Name three methods for estimating uncollectible accounts.
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- percentage of credit sales
- percentages of A/R at year-end - aging of A/R at year-end |
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Using the allowance method, give the two journal entries to provide for and then to write off an uncollectible account.
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-Bad debt expense
-----Allowance for uncollectible accts. Write-off: -Allowance for uncollectible accts. ----A/R |
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What is the difference between factoring with recourse and without recourse?
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With recourse:
- the factor may return the account to the company if it proves to be uncollectible. Potential liability and risk of loss remains with the company. Without recourse: - the factor assumes the risk of loss if the account is uncollectible |
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State the three conditions that must exist for control of a financial asset to be considered surrendered.
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- the transferred assets have been isolated from the transferor
- the transferee has the right to pledge or exchange the assets - the transferor does not maintain control over transferred assets under a repurchase agreement |
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If control of a financial asset is surrendered, what is the accounting treatment of the transfer?
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No continuing involvement:
- recorded as a sale with appropriate reduction in receivables and recognition of any gain and loss Continuing involvement: - asset for which there is no retained interest is recorded as a sale using the financial-components approach - assets for which there is a retained interest is carried on the books of transferor and allocated a book value based on relative value of all transferred assets at the date of transfer |
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If control of a financial asset is not surrendered, what is the accounting treatment of the transfer?
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- account for transfer as a secured borrowing with pledged collateral
- recognize the appropriate asset/liability amounts and interest revenue/expense accounts |
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At what value should non-interest bearing promissory notes be recorded?
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at the present value of all future payments required by the note. The payments should be discounted at the market interest rate.
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Notes receivable may be discounted "with" or "without" recourse. What is the difference?
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Discounting with recourse:
- the holder remains contingently liable Discounting with recourse: - the holder assumes no further liability after discounting |
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Describe the computational steps required in "discounting a note."
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1. Compute maturity value (remember to include interest in maturity)
2. Compute the "discount" (remember to use maturity value) 3. Get proceeds by subtracting discount from maturity value 4. Compute interest income as difference between proceeds and face of note |
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When does the title to goods pass for each of the following?
- F.O.B. destination - F.O.B. shipping point - C.O.D. - Consigned goods |
- F.O.B. destination - when received by buyer
- F.O.B. shipping point - when given to a common carrier - C.O.D. - when received and paid for by buyer - Consigned goods - when sold to a third party by consignee |
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How is market calculated in the U.S. GAAP lower-of-cost-or-market method?
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Market generally means current replacement cost, provided the current replacement cost does not exceed the market ceiling or fall below the market floor
- Ceiling - net realizable value (estimated net selling price less completion and disposal costs) - Floor - net realizable value minus normal profit margin |
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How is net realizable value calculated in the IFRS lower-of-cost-or-net-realizable-value method?
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Net realizable value is the net selling price less completion and disposal costs
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Explain the difference between periodic and perpetual inventory methods.
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Periodic:
- the quantity of inventory is determined only by physical cost - ending inventory is physically counted and priced Perpetual: - inventory is updated for each purchase and for each sale - keeps a running total of inventory balances |
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Name several cost flow methods for inventory.
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Specific identification
FIFO LIFO (unit and dollar value) Averaging - weighted average (periodic) - moving average (perpetual) Gross profit Retail - Conventional retail, cost retail, FIFO/cost, LIFO/cost, Dollar value LIFO/cost |
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Name several retail inventory methods.
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Conventional retail, cost retail, FIFO/cost, LIFO/cost, Dollar value LIFO/cost
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When are losses on firm purchase commitments recognized?
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Losses are recognized in the period when the price declines.
-Estimated loss on purchase commitment -----Estimated liability on purchase commitment |
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Describe an inventory consignment arrangement. Also, how are the consigned goods carried on the parties' balance sheets?
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consignor gives goods to consignee for sale to third parties. Title to the goods remains with the consignor; therefore the consigned items stay on the B/S of the consignor
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During periods of rising prices, the use of LIFO versus FIFO has what effect on the valuation of ending inventory and reported net income? Which inventory method is prohibited under IFRS?
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both ending inventory and net income will be lower when LIFO is used during a period of rising prices.
- LIFO is prohibited under IFRS |
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Give some examples of capitalizable costs for:
- Acquisition of equipment - Acquisition of building |
Acquisition of equipment:
- purchase price, freight-in, installation, testing, taxes, less any cash discounted allowed (if equipment or building is constructed by company, capitalized cost could include construction period interest) Acquisition of building: - purchase price, deferred maintenance, alterations, improvements, architect's fees |
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How is fixed-asset CV computed under GAAP and IFRS?
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GAAP:
- CV = Historical cost - A/D - impairment IFRS: - under IFRS, CV can be calculated using the GAAP method above or can be calculated using the revaluation model - Revaluation Model CV = FV on Revaluation Date - Subsequent A/D - Subsequent Impairment - Revaluation gains are reported in OCI - Revaluation losses reported on the I/S |
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Describe the proper accounting for ordinary versus extraordinary repairs.
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- ordinary repairs: expenses as repair and maintenance. They do not increase the life or utility of the asset.
- extraordinary repairs: increase the life or utility of the asset. If it increases the life, reduce A/D. If it increase utility, capitalize to the fixed asset account |
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Give examples of costs to be capitalized as land.
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- acquisition price
- closing costs (broker commissions, legal fees, escrow fees, title guarantee insurance) - any mortgages, liens, or encumbrances on the land which the buyer assumes - preparation costs (surveying costs, leveling costs, tree removal) - cost of razing an existing building, in getting land into condition for intended use - improvements with indefinite life - less: proceeds from sale of assets on land - up to excavation |
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How is investment property defined and reported under IFRS?
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Investment property - land and/or buildings held to earn rental income or for capital appreciation is reported using one of two models:
-Cost model - CV = HV - A/D -FV model - reported at FV and not depreciated. G/L from FV adj. are reported on I/S |
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State two rules concerning capitalizing interest.
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- only capitalize interest on money actually spent, not on amount borrowed
- the amount of capitalized interest is the lower of: --actual interest cost incurred, or --computed capitalized interest (avoidable interest) |
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For capitalizing interest, when does the capitalization period begin?
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begins when three conditions are met:
- expenditures for the asset have been made - activities that are necessary to get the asset ready for its intended use are in progress - interest cost is being incurred ends when the asset is substantially complete and ready for its intended use |
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Name the most common depreciation methods. Give the basic formula for calculating each method.
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Straight-line: (Cost - Salvage) / useful life
Sum-of-the-Years' Digits: (Cost - Salvage) x (Years Remaining) / (Sum of Years) Double-Declining Balance: 2 x Straight-line rate x NBV of asset (depreciate to salvage) Units of Production: (Cost - Salvage) / estimated hours x Actual hours |
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Explain the different approaches to depreciation under IFRS and GAAP.
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For IFRS, depreciation method used should match the expected pattern of fixed asset consumption (not required under GAAP). Also, component depreciation is required (not required under GAAP).
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State the rules for computing depletion on natural resources. (REAL property).
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Residual value (subtract)
Extraction/development cost Anticipated restoration cost Land purchase price (Above total / estimable recoverable units) x Units extracted = Depletion |
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What assets are subject to the impairment test?
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- long-lived assets, specific identifiable intangibles, and related goodwill
- long-lived assets and specific intangibles slated for disposal - certain assets of a rate-regulated entity |
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Describe the impairment test for recoverability under GAAP.
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If the sum of the undiscounted expected future cash flows is less than the carrying amount, an impairment loss needs to be recognized
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Name the two rules for performing impairment calculations under U.S. GAAP.
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Determining impairment:
- use the undiscounted future net cash flows. An impairment loss exists if total undiscounted cash flows are less than CV. Amount of impairment: - use the fair value of asset. Impairment loss = FV - CV |
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How is impairment evaluated under IFRS?
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impairment exists if the CV of the fixed assets exceeds the higher of:
- FV - costs to sell - Value in use (PV of FCF) |
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How is the impairment loss reported in the F/S?
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As a component of income from continuing operations before income taxes.
- carrying amount of the asset is reduced |
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Is restoration of impairment losses permitted under GAAP and IFRS?
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GAAP: permitted for assets held for sale, prohibited for assets held for use
IFRS: Always permitted |
