FAR M3

• Marketable equity and debt securities are not classified as cash, but investments and would be included in the investments line of the B/S.
• Cash in a bond sinking fund would NOT be considered part of cash and cash equivalents because it is RESTRICTED cash
• A check deposited before the B/S date but returned due to NSF should be EXcluded from the checkbook balance
• A negative balance (aka overdraft) in a bank account should be reported on the B/S as a current liability
• In a bank reconciliation, adjustments from bank to book can be remembered by the acronym DO where D = deposits in transit (+) and O = outstanding checks (-)
• In a bank reconciliation, adjustments from book to bank can be remembered by the acronym BINS where B = bank collections (+, I = interest income (+), N = NSF (-), and S = service charges (-)
• Factoring receivables w/out recourse is a sales transaction, which transfers the risk of uncollectible accounts to the buyer.
• net sales revenue should be recorded as total sales less estimated allowance for sales returns
• When the allowance method of recognizing bad debt expense is used, the allowance would decrease when a specific uncollectible account is written off
• Uncollectible accounts expense calculation:

  BB Allowance for uncollectible accts

  Plus: Uncollectible accts recovered

  Plus: Uncollectible accts expense

  Less: Uncollectible accts written off

  Equals: EB Allowance for uncollectible accts
• When the allowance method of recognizing uncollectible accts is used, the entry to record the write-off a specific acct is:

  Dr. Allowance for uncollectible accts

  Cr. A/R
• A pledging of receivables as collateral does NOT require a journal entry and only requires a note disclosure
• When an interest-bearing note receivable is discounted at a bank, the discount is applied on the maturity value of the note.
• A write-off of a customer's acct receivable would have NO (some, no, significant) impact on net income and total assets because the accts impacted (decrease in both allow. for doubtful accts + A/R) are both asset accounts.
• Only permanent (not temporary) declines in inventory market value should be reflected in interim financial statements in the period incurred
• Weighted avg. COGS formula:

  (Beginning balance inventory + purchased inventory)/Total # of units = cost per unit

  --> cost per unit * # of units sold
• COGS = Sales * COGS percentage [aka 1 - gross profit percentage]
• When the current market value of the inventory is less than the fixed purchase price in a purchase commitment:

  • the loss must be recognized at the time of the decline in price
  • a liability must be recognized on the B/S
  • a description of the losses must be described in the footnotes
• If a seller sells goods on installment but retains legal title as loan security, who should include those goods in inventory on an installment sale?

  • If we CAN reasonably estimate uncollectible debts --> buyer
  • If we CANNOT reasonably estimate uncollectible debts --> seller
• Net realizable value = selling price - cost to sell
• For inventory costed using LIFO or retail inventory methods, use the lower of cost or market valuation of inventory.
• For inventory costed using the FIFO or weighted average methods, use the lower of cost or NRV valuation of inventory.
• Substantial and unusual losses from subsequent measurement of inventory should be disclosed in the financial stmts. Small losses from a decline in value are included in COGS.
• Rule of Conservatism: if a loss is probable and can be reasonably estimated --> book the loss immediately
• A firm purchase commitment, otherwise known as a forward contract, is a legally enforceable agreement to purchase a specified amt of goods at some time in the future
• Lower of Cost or Market steps:

  1. Calculate the market ceiling, or the NRV
  2. Calculate the market floor (NRV - normal profit)
  3. Find the middle value of the ceiling, floor, and replacement cost
  4. Compare the middle value to the actual cost
• Under the perpetual inventory method, COGS is recorded immediately after every sale
• Under the periodic inventory method, COGS is backed into and recorded only after the periodic inventory count takes place
• Which of the following would be reported in the B/S as intangible assets?

  • Derivative securities
  • R&D costs
  • Patents
  • Leasehold improvements

  patents
• If an intangible asset is expected to be renewed indefinitely, there will be (full, reduced, zero) ZERO amortization on the books because amortization is only recorded if the intangible asset has a DEFINITE life
• Purchased intangible assets are recorded at (fair value or cost?) COST
• Legal costs associated w/ SUCCESSFUL outcomes are capitalized as a part of the associated intangible asset, not expensed immediately.

  
  

  Legal costs assoc. w/ UNsuccessfully defending an intangible asset are immediately expensed.
• The recoverability test (compares undiscounted future cash flows to the carrying value of the asset) is only performed on intangible assets w/ a definite life.
• The recoverability test compares undiscounted future cash flows to the carrying value of an intangible asset. If the carrying value is less than the sum of the cash flows, no impairment loss is recorded.
• The amount of capitalized interest is the lower of the computed capitalized interest and the actual interest cost incurred
• Whenever assets are purchased requiring fixed payments extending beyond one year, the assets should be valued at the present value of all future payments
• A building suffered uninsured fire damage. The damaged portion of the building was refurbished with higher quality materials. The cost and related accumulated depreciation of the damaged portion are identifiable.

  
  

  To account for these events, the owner should capitalize the cost of refurbishing and record a loss in the current period equal to the carrying amount of the damaged portion of the building.
• The appropriate date to begin depreciation is the date of (receipt/installation/delivery): INSTALLATION
• The capitalization of interest period begins when expenditures for the asset have been made, activities necessary to get the asset ready for intended use are in progress, and interest cost is being incurred.
• Interest capitalization ends when the asset is substantially complete and ready for the intended use.