Intermediate Accounting Exam 2

Current Assets

will be converted to cash or used in operations within one year or operating cycle, whichever is longer (an operating cycle is the time it takes to purchase inventory, produce a product or service, complete the sale, and collect the cash)

Cash

includes cash and cash equivalents (maturities less than or equal to 3 months. e.g., T-Bills, money market funds) that are unrestricted, valued at current market value

Short Term Investments

Trading and available sale portfolios (including CDs), valued at current market value at the balance sheet date. Also called marketable securities

Short Term Receivable

e.g., A/R, post-dated checks, rent receivable, etc.; valued at net realizable value (i.e., gross accounts receivables less allowance for uncollectible accounts).

Inventories

e.g. merchandise, raw materials, work in process, finished goods; valued at lower of cost or market, must disclose cost flow assumption/method (e.g., LIFO, FIFO, weighted/ moving average, dollar value LIFO)

Short Term Prepaids

e.g., insurance, rent, supplies, advances to sales personnel; generally, valued at historical cost

Long-Term Investments and Funds

1. Long-term portion of available for sale portfolio, valued at current market value at the balance sheet date

2. Held to maturity investments in debt, valued at net present value

3. Other miscellaneous investments (e.g., cash surrender value of life insurance policies)

4. Restricted cash (e.g., sinking funds, stock redemption funds, plant expansion funds)

5. Noncurrent notes receivable or long-term advances

6. Land and equipment held for investment purposes or future usage, valued at cost (or, impaired, the lower market value)

Property, Plant, and Equipment (in use)

1. Property, valued at cost (or, if impaired, valued at the lower market value)

2. Plant and equipment, valued at cost net of applicable depreciation (must disclose method and assumptions) (or, if impaired, valued at the lower market value)

3. Natural resources, valued at cost net of applicable depletion (must disclose assumptions) (or, if impaired, valued at the lower market value)

Intangibles

1. Finite-life Intangibles- e.g. patents, franchises, licenses, computer software costs; valued at cost net of amortization (must disclose assumptions) (or, if impaired, valued at the lower market value)

2. Indefinite-life intangibles- e.g., trademarks and acquired brand names, valued at cost (or, if impaired, valued at the lower market value)

3. (Purchased) Goodwill- valued at cost (or, if impaired, valued at the lower market value)

Other Assets

e.g., long-term prepayments (e.g. rent or insurance), deferred tax assets, prepaid pension costs, bond issue costs, idle fixed assets, assets of a discontinued component, customers' security deposits, assets leased to other parties, assets temporarily restricted by foreign countries

Current Liabilities

Will be due within one year or operating cycle, whichever is longer

Short Term Payables

valued at cost, plus accrued interest

Deferred Revenue

i.e., unearned revenue, valued at amount owed

Short Term Portion of Long-term Debt

Valued at net present value

Long-term Liability

Valued at net present value (must disclose significant contract provisions and restrictions, maturities, and 5-year cash flow requirements) or fair value if company elects the fair value option

Other Liabilities

e.g. deferred tax liabilities, liabilities of discontinued component

Contributed (Paid-In) Capital (Stockholders Equity)

Stock (common and preferred) and additional paid-in capital accounts (must disclose the number of authorized, issued, and outstanding shares

Common Stock

Relates to the legal capital (the min. amount of stockholder's equity retained within the company)

Additional Paid-In Capital

Capital in excess of the legal minimum to be retained within the company. Amount received over par value

Preferred Stock

Has different ownership features from common stock

Treasury Stock

Contra equity account (i.e., reduces stockholder's equity) reflecting the cost of reacquired stock

Retained Earnings

If applicable, must disclose free and appropriated amounts and the reason for appropriation

Accumulated Other Comprehensive Income

portion of comprehensive income not attributable to net income. Note that comp. income includes net income (which accumulates in Retained Earnings) and other comprehensive income (which accumulates in this section of owner's equity). Other comp. income relates to equity valuation adjustments for certain assets and liabilities as required by GAAP.

1. Unrealized gains/losses on available for sale securities

2. Foreign currency translation adjustments

3. Certain gains/losses on derivatives

4. Certain pension liability adjustments

Noncontrolling Interests

Arises when parent company owns more than 50% but less than 100% of a subsidiary

Comprehensive income=

Net Income + Other Comprehensive Income

Ending Retained Earnings=

Beginning Retained Earnings+ Net Income-Dividends

Summary of Significant Accounting Policies

FASB requires that significant accounting policies be disclosed (e.g., revenue recognition, basis for consolidation, depreciation and amortization methods, inventory cost methods).

This disclosure is often made in the first footnote of the financial statement.

Fair Value and Risk of Financial Instruments

FASB requires that the FMV of all financial instruments (assets and liabilities) be disclosed whether or not they are reported on the balance sheet

FASB requires derivative financial instruments be reported on the balance sheet (as either assets or liabilities) at FMV

FASB requires many derivative-related footnote disclosures

Loss Contingencies

A condition that exists, at the end of the fiscal period, that gives rise to a possible loss to the company, the amount of which will be determined by a future event

How Likely Is It? Probable (likely)

Reasonably Estimate? Yes

Accrual and Footnote Required

How Likely Is It? Probable (likely)

Reasonably Estimate? No

Footnote disclosure required

How Likely Is It? Reasonably Possible

Reasonably Estimate? Yes

Footnote disclosure required

How Likely Is It? Reasonably Possible

Reasonably Estimate? No

Footnote disclosure required

How Likely Is It? Remote (Slight Chance)

Reasonably Estimate? Yes

Footnote disclosure is not required

How Likely Is It? Remote (Slight Chance)

Reasonably Estimate? No

Footnote disclosure is not required

Gain Contingencies

A condition that exists, at the end of the fiscal period, that gives rise to a possible gain to the company, the amount of which will be determined by a future event

Gain Contingencies- Accounting Treatment

Gain contingencies are not recorded. They may be disclosed in the footnotes only when the probabilities are high that the gain will materialize. *** We only record a gain when it is certain!

We don't care if it says probable. We don't care if it says extremely likely. It has to tell us we're going to absolutely, without a doubt, collect this gain.

Subsequent Events

Occur between a company's balance sheet date and the date the annual report is subsequently issued

Subsequent Events- Accounting Treatment (Type 1)

If the event provides (1) additional evidence about conditions that existed on the balance sheet date and (2) significantly affects estimates within the financial statements, the financial statements must be adjusted. E.g. management learns that an A/R is uncollectible (A/R from a client or customer that goes out of business) , settlement of liability.

Subsequent Events- Accounting Treatment (Type 2)

If the event provides evidence about conditions that did not exist on the balance sheet date, the financial statements are not adjusted. Instead, the info. is disclosed elsewhere. E.g. fire or flood loss, stock or bond issuance, purchase of a business.

If the flood did not exist on the balance sheet, then the flood will be disclosed, but not recorded.

Related Party Transactions

Details of transactions between the company and subsidiaries, management, management's family, etc. must be disclosed.

Comparative Financial Statements Disclosure

3 years for income statement and 2 years for balance sheet

Selected Financial Data Disclosure

Summary financial data for previous 5 years

Managements Discussion and Analysis (MD&A)

Offers management's perspective on the company and "forward-looking" information

Common Stock Market Prices and Dividends Disclosure

High and low stock prices by quarter for 2 years; number of stockholders; dividends paid and dividend restrictions

Working Capital=

Current Assets-Current Liabilities

Current Ratio=

Current Assets/Current Liabilities

Classification: Investments in Marketable Securities

Short-term Investments

Classification: Discount on Bonds Payable

Long-term Liabilities (Contra-account)

Classification: Additional Paid-in Capital on Common Stock

Contributed Capital

Classification: Accounts Receivable

Current Assets

Classification: Notes Payable (due in 5 years)

Long-term liabilities

Classification: Patents (net)

Intangible Assets

Classification: Unrealized Decrease in Fair Value of Available-for-Sale Securities

Accumulated Other Comprehensive Income

Classification: Preferred Stock

Contributed Capital

Classification: Unearned Rent (to be earned in the next 6 months)

Current Assets

Classification: Accrued Pension Cost

Long-term Liabilities

Classification: Trademarks

Intangible Assets

Classification: Deficit

Negative Retained Earnings Balance

Classification: Salaries Payable

Current Liability

Classification: Land

Property, Plant, and Equipment

Classification: Investment in Ace Company Preferred Stock (to be held for 3 years)

Long-term Investments

Classification: Cash

Current Assets

Classification: Bonds Payable (due in 8 years)

Long-term Liabilities

Classification: Machinery

Property, Plant, and Equipment

Classification: Unexpired Insurance

Current Assets

Classification: Franchise (net)

Intangible Assets

Classification: Fund to Retire Preferred Stock

Long-term Investments

Classification: Current Portion of Mortgage Payable

Current Liabilities

Classification: Accumulated Depreciation

Property, Plant, and Equipment (Contra-Account)

Classification: Copyrights

Intangible Assets

Classification: Investment in Held-to-Maturity Bonds

Long-term Investments

Classification: Allowance for Doubtful Accounts

Current Assets (Contra-Account)

Classification: Notes Receivable (due in 3 years)

Long-term Investments

Classification: Property Taxes Payable

Current Liabilities

Classification: Deferred Taxes Payable

Long-term Liabilities

Classification: Additional Paid in Capital on Preferred Stock

Contributed Capital

Classification: Premium on Bonds Payable (due in 8 years)

Long-term Liabilities

Classification: Work in Process

Inventory

Classification: Common Stock, $1 par

Contributed Capital

Classification: Treasury Stock (at cost)

Contributed Capital (Contra-Account)

Classification: Unrealized Increase in Value of Available-for-Sale Securities

Accumulated Other Comprehensive Income

Classification: Income Taxes Payable

Current Liabilities

Classification: Notes Receivable (due in 5 months)

Current Liabilities

Classification: Unearned Rent

Current Liabilities

Classification: Discount on Bonds Payable (long term bonds)

Long-term Liabilities (Contra-Accounts)

Classification: Computer Equipment in the Data Processing Center

Property, Plant, and Equipment

Classification: Furniture

Property, Plant, and Equipment

Classification: Land Held for Future Expansion

Long-term Investments

Classification: Timberland (net)

Property, Plant, and Equipment

Classification: Advances to Sales Personnel

Current Asset

Classification: Idle Machinery

Other Assets

Classification: Raw Materials

Inventory

Classification: Investment in Held to Maturity Bonds

Long-term Investment

Classification: Pollution Control Facilities

Property, Plant, and Equipment

Classification: Donated Capital for Industrial Park Building Site from Toma City

Contributed Capital