FAR ASF F3 & F4

Cash equivalents have maturity dates of

90 days or less

Bank reconciliations steps

DOBINS

Deposits in transit (add to bank)

Outstanding checks (deduct from bank)

Bank collections (add to books)

Interest income (add to books)

Nonsufficient funds (deduct from books)

Service charges (deduct from books)

Net realizable value equation re accounts receivable

Gross amount - adjustments

What does 2/10 net 30 indicate?

Pay 98% in 10 days or 100% in 30 days

Gross method re sales discounts

Assumed people will not take advantage of the discount; if payment is received, record difference between receivables and discount

Net method re sales discounts

Assumes discount is taken advantage of; if payment is not received during discount period, record additional revenue

What are trade discounts?

Discounts on bulk buying; only uses net method

What method of estimating uncollectible accounts receivable is used in GAAP?

Allowance method

Explain allowance method re uncollectible accounts receivable

Current expected credit loss method; based on past, current, and future expectations; a % of ending accounts receivable is estimated to be uncollectible

Current expected credit loss journal entry

DR bad debt expense

CR allowance for uncollectible accounts

Journal entry to write off a specific account receivable

DR allowance for uncollectible accounts

CR accounts receivable

Journal entry if account was written off then they end up paying

DR Accounts receivable

CR allowance for doubtful accounts

DR Cash

CR allowance for doubtful accounts

What is pledging receivables?

When a company uses existing accounts receivable and assigns it as collateral for a loan; only requires footnote disclosure as company retains title to receivables

What is factoring receivables?

A company sells their accounts receivable or converts the receivables to cash

Explain factoring without recourse

Factor (buyer) assumes the risk of the losses on collections and accounts receivables are removed from company’s books

Journal entry for factoring with recourse

DR cash (what factor pays now)

DR *due from factor (what factor pays later)

DR loss on sale of receivable (loss incurred on sale)

CR accounts receivable (write off original accounts receivable)

*due from factor is basically just a security deposit that is held by factor that protects it from sales returns, discounts, and disputes

Explain factoring with recourse

Factor (buyer) has the option resell any uncollectible receivables back to seller

Types of factoring with recourse

1. Sale - there needs to be some recognition of this revenue

2. Borrowing - similar to pledging, receivables act as collateral

What conditions need to be met in order for the factor to be able to resell any uncollectible receivables back to the seller?

1. Transfers obligation for uncollectible accounts can be estimated

2. Transfer surrenders control of receivables to buyer

3. Transfer cannot be required to repurchased the receivables

*if these conditions are met, the favoring is a sale, if not, it’s a loan

What is securitization?

When accounts receivable js transferred to a different entity likr a trust or subsidiary and the entity sells securities that are collateralized by the accounts receivable; investors will receive cash as the accounts receivable is paid

Sub ledger accounts should sum to

General ledger balance

Tests for reconciliation to the general ledger

1. Rouch - test for existence and support (GL to subsidiary ledger)

2. Trace - test for completeness and coverage (subsidiary ledger to GL)

Explain notes receivable

Written promise to pay and measured at present value; interest accrues overtime when money is not received

How is present value measured on a promissory note?

Present value = face value - unearned interest

What two items are deducted from the face amount of the related promissory note?

1. Unearned interest

2. finance charges

Steps to computing a discounted note receivable

1. Compute maturity value (add interest to face amount)

2. Calculate the bank discount on the payoff at maturity

3. 1 - 2 = amount paid by the bank for the note

4. Determine interest income / expense (amount paid from bank - face value)

Installment sales re inventory

Seller retains legal title as loan security; if we can reasonably estimate uncollectible debts, it’s the buyer’s inventory, if not, the seller’s inventory

General rule: inventory is stated at

Cost

What are the exceptions to inventory stated at cost?

Precious metals and farm products are booked at net realizable value (selling price - cost to sell)

When would you use lower of cost or market inventory valuation?

LIFO or retail

When would you use lower of cost and net realizable value inventory valuation?

FIFO or weighted average

Equation for lower of cost or net realizable value

NRV = net selling price - costs to complete and dispose of inventory

Steps for lower of cost or market value

1. Ceiling = estimated selling price (NRV)

2. Floor = NRV - normal profit margin

3. Replacement cost = cost to purchase as of valuation date

4. Lower if original cost vs middle value of ceiling, floor, and replacement

Explain periodic inventory systems

Inventory requires physical count at the end of the period; when inventory is bought, we DR purchases NOT inventory

Explain perpetual inventory systems

Inventory counted throughout the year, it is a more current valuation than periodic; when we buy inventory, DR inventory

Weighted average inventory method

• periodic systems

• At the end of the period, average cost of each item in inventory = weighted average of all items in inventory; use for homogenous products

Moving average inventory method

• perpetual inventory

• More current than weighted average

• Weighted average cost after each purchase

In periods of rising prices, which inventory method shows the lowest net income?

LIFO

Dollar value LIFO

Estimates the changes in price levels from one year to the next; shows inflation / deflation

What is a firm purchase commitment?

When you think prices may rise in the future, sign a contract now to avoid rising prices, but if prices go down, you must book the loss immediately

What is the cost basis for PP&E?

Historical cost

What does historical cost incorporate the costs of?

• Obtaining the asset

• Transporting the asset to intended location

• Getting asset into condition necessary for intended use

When are equipment costs capitalized?

AIR

Additions increase the quantity of fixed assets

Improve quality of fixed assets

Replacement for a new, similar asset is made for an old one

Steps for Weighted average method re interest costs

*Interest is only capitalized if money is spent, not borrowed

1. Weighted average of accumulated expenditures x interest rate (determines capitalized interest costs)

2. Use interest rate paid on borrowings specifically for construction assets

3. If average accumulated expenditures exceeds amount of specific asset construction borrowing, use weighted average method

**Interests costs cannot exceed total interest costs actually incurred*

Straight line depreciation

= cost - salvage value / estimated useful life

Sum of the years digits

= cost - salvage value x (remaining life of useful asset / sum of years digits)

Sum of years digits = estimated useful life x (estimated useful life + 1) / 2

Units of production

= cost - salvage value / estimated units or hours

= rate per unit or hour x # of units of production or hours used

Declining balance

= 2 × 1 / estimated useful life x (cost - accumulated depreciation)

*Salvage value is ignored but an asset should not be depreciated below its estimated salvage value

Sale of an asset during its useful life journal entries

DR Cash

DR Accumulated depreciation of sold asset

CR Sold asset at cost

CR / DR plug for gain or loss

What is residual value?

monetary worth of a depleted asset after resources have been removed; it is similar to salvage value

Explain cost depletion and associated equations

Based on how much of the asset is used and allocates the cost of natural resources over the period they are consumed

cost depletion rate = current estimated recoverable units / unrecoverable

cost of production = units produced x cost depletion rate

Explain percentage depletion method

Based on percentage of sales and typically exceeds cost depletion

What item goes on income statement re depletion?

Only the amounts of units sold are reported as expenses; if there is any remaining value of the asset, it remains on the balance sheet as inventory

Explain the test for recoverability and calculation for impairment of PP&E

1. Compare the carrying amount to the sum of undiscounted cash flows to determine if the asset is impaired; If the carrying amount exceeds the sum of undiscounted cash flows, the asset is considered impaired and must be written down to its fair value.

2. Impairment = carrying amount - fair value

3. If fair value is not given, use he discounted future cash flows

Calculation of impairment of PP&E when the asset is still used

impairment = fair value - net book value

• Write asset down and depreciate the new cost

Calculation of impairment of PP&E when the asset is held for sale

impairment = fair value - net book value + cost to dispose

• Write asset down but do NOT depreciate new cost

When is restoration permitted on impairment of PP&E

When the asset is being held for sale

Examples of finite intangible assets

patents, copyrights, trademarks, etc.

Examples of indefinite intangible assets

goodwill, trade name

Intangible assets re amortization

definite intangible assets - amortized over the shorter of economic life, estimated life, legal / contractual life

indefinite intangible assets - do NOT get amortized

Intangible asset reporting equations

book value (Definite) = cost - amortization - impairment

book value (Indefinite) = cost - impairment

What is the difference between testing for impairment between indefinite and definite lives?

Indefinite lives use fair value to compare to the carrying amount and definite lives use sum of the undiscounted cash flows

Initial franchise costs are..

capitalized

Ongoing or continuing expenses of franchises are..

expense as incurred

Ex: royalties

Royalties re franchises

Ongoing services provided by the franchisor to the franchisee and calculated by a % of franchise revenue

Expenses incurred in formation of a corporation are..

expensed as incurred and classified as organization costs

During periods of rising prices, when FIFO inventory method is used, a perpetual inventory system results in an ending inventory that is higher/lower/equal than in a periodic system

Equal

JE for refinancing

DR short term liability

CR long term liability

Sales taxes are expenses to the company/customer?

Customer

Payroll taxes are expenses to the employee/employer? What are some examples?

Employer; unemployment taxes, FICA, etc.

Payroll deductions are expenses for the employee/employer? What are some examples?

Employee; Medicare, income taxes, health insurance, etc.

What conditions need to be met for accrued vacation to be recorded?

S services have already been rendered by employees

O obligation relates to rights that vest or accumulate

C compensation payment is probable

R reasonably be estimated

Exit or disposal activities

Severance pay, breach of contracts, consolidating facilities, relocating employees, or moving PPE

When should the liability be booked for exit and disposal activities?

When employees are “noticed”

Downsizing or getting rid of a particular location would be booked under what on the income statement?

Income from continuing operations (non-operating expense)

Asst retirement obligations

A legal obligation associated with retirement of tangible long lived asset

What are some examples of asset retirement applications?

Nuclear decommissioning, oil and gas, industry and mining industry

Are asset, retirement, obligations assets, or liabilities? How do you calculate the amount?

They are recorded as a liability for future payment required to clean up, close down, or restore the condition of the asset

liability = amount to be paid in the future x pv factor

What is an asset retirement cost?

An asset account used to capitalize and increase the carrying value of the asset

JE for recording an ARO

Dr asset retirement cost

Cr asset retirement obligation

What is accretion?

An increase in the asset, retirement obligation liability due to the passage of time. Similar to interest on a bond that is amortized over the life of the asset.

Accretion formula

Number of payments x payment amount = amount to be paid in future

At the end of the period that asset retirement obligation liability reported on the balance sheet should be approximately equal to..

The asset retirement obligation to be paid

JE for accretion expense

DR Accretion expense

Cr asset retirement obligation

How does depreciation affect the asset retirement cost asset on the balance sheet?

That decreases the asset retirement cost

how do you record appreciation on an asset retirement cost?

annual depreciation cost = arc / useful life

Dr depreciation expense

Cr accumulated depreciation (arc)

How are upward revisions to estimated cash flows treated?

The liability increases an additional amount will be discounted back using the current or new rate

How are downward revisions to estimated cash flows treated?

Liability decreases, and historical rate is used as the discount rate

When are loss contingencies recorded Or disclosed? When our gain contingencies recorded or disclosed

Loss - Record when loss is probable and estimable, disclose when probable or possible

Gain - Never record, but disclose when gain is probable or possible

When there is a range of probable losses, what should you record?

The highest probability of occurring should be used, and if there is none, then you should choose the least amount possible

What is the exception of a remote loss to be recorded?

DOG Guarantee

D. debt of Guaranteed (Officers, related parties, another company)

O. Obligation of commercial banks under standby letters of credit

G. Guarantees of re-purchase receivables that I’ve been sold or assigned

Do general unspecific business risk like fire, flood, strikes, or war need to be accrued or disclosed?

No loss or disclosure required.

When are warranties booked?

In the year they are Incurred

What are premiums?

Premium is an offer to customers for the purpose of simulating sales like coupons, box top, labels

When is the cost of premiums charged? What is it charged to?

The cost of premiums are charged to sales and periods that benefit from the offer

JE for warranty

Dr estimated warranty expense

Cr warranty liability

what present factor would you use for a principle of a single lump sum payment?

The PV of $1

What present value factor should you use for interest of multiple payments?

The PV of an ordinary / annuity due

when are ordinary annuities paid?

At the end of the month

When are annuity due paid?

At the beginning of the month