CPA Exam – FAR(Questions and Answers)

Cash - ANSWER Money that is FREE and CLEAR and available to be spend in current operations. Not Cash: - ANSWER Security deposits & bond sinking funds Three-Month Rule - ANSWER Highly liquid securities with ORIGINAL ...

Cash - ANSWER Money that is FREE and CLEAR and available to be spend in current operations. Not Cash: - ANSWER Security deposits & bond sinking funds Three-Month Rule - ANSWER Highly liquid securities with ORIGINAL maturity dates of three months or less are treated as cash. Bad Debts - Direct Write-Off Method - ANSWER - No entry for bad debts until customer actually defaults. - At default, the cutomer's account is written off. - Theoretically weak, matching issue - Only allowed if bad debt expense is immaterial Bad Debts - Allowance Method - ANSWER Income Statement Approach Balance Sheet Approach Income Statement Approach - ANSWER - Matching Concept - Estimate of bad debt expense is based on the income statement - Allowance account balance has no bearing on the amount of adjustment Balance sheet reporting: - ANSWER Accounts Receivable Less: Allowance for bad debts = Net realizable value of A/R Balance Sheet Approach - ANSWER - Estimate of bad debt expense is based on the balance sheet - Period sales have no bearing on the amount of adjustment Written-off account later collected - ANSWER Reverse write-off entry. Collect as usual. Assigning Accounts Receivable - ANSWER - Assignment of A/R normally is done with recourse - Assignment usually is done without notification to customers Factoring Accounts Receivable - ANSWER - With or without recourse. Pledging A/R - ANSWER - Use receivables as security for a loan - Requires footnote disclosure Noninterest-Bearing Notes - ANSWER APB 21 requires interest to be inputed - When a note is made under customary trade terms and is due in less than one year, there is no requirement to impute interest to that note. Investments - ANSWER - Held-to-Maturity - Trading Securities - Available-for-Sale Securities Held-to-Maturity Securities - ANSWER - Debt securities only - Mgt has both intent and ability to hold the securities to maturity - Classified on BS based on maturity date - Carry on balance sheet at amortized cost Trading Securities - ANSWER - Equity or Debt securities held primarily for sale in the near term - Classified on BS as current - Carried on BS at FMV - Unreal holding gains/losses belong on the income statement Available-for-sale Securities - ANSWER - Debt or Equity securities not classified as either HTM or Trading - Debt is classified on BS by maturity date - Equity securities are classified by mgt's intent - Carried on BS at aggregate FMV - Unreal G/L go directly to SH equity (other comprehensive income) Derivatives - ANSWER Investment that derives its value from something else (asset or liability) Hedging - ANSWER Strategy of investing in a derivative to counteralance the potential loss from another security or transaction Non-Hedge Derivatives - ANSWER - Record on BS as asset or liability at FMV - Report unrealized G/L on IS Fair Value Hedge - ANSWER Protects against potential loss from the change in an asset's or liabilities's FMV - Record on BS as asset or liability at fair market value - Report unrealized holding G/L on IS Cash-Flow Hedge - ANSWER Protects against potential loss from an asset's or liability's future cash flow - Record on BS as asset or liability - Unreal G/L depend on whether hedge is effective - Effective cash flow hedges counterbalance losses elsewhere - Ineffective cash flow hedges are reported on the IS Foreign currency hedges accounted for as FV hedges - ANSWER - Foreign currency denominated firm commitment hedge - Foreign currency available-for-sale securities hedge Foreign currency hedges accounted for as CF hedges - ANSWER - Foreign currency denominated forecasted transaction hedge - Net investment in foreign operations hedge Inventory - ANSWER Property held for resale, property in the process of production, and property consumed in the process of production Types of Inventory Accounts - ANSWER Manufacturing - Finished goods inventory - Work-in-process inventory - Raw materials inventory Merchandising - Property held for resale Ownership Criteria - ANSWER If merchandise is owned by a business enterprise on the last day of the fiscal year, regardless of location, the merchandise is included in ending inventory. Goods on Consignment - ANSWER Merchandise is always included in the consignor's ending inventory. The merchandise is not included in the ending inventory of the consignees. Periodic Inventory System - ANSWER If business entities elect to employ a periodic inventory system, the beginning inventory balance is reflected in the merchandise inventory account throughout the year. Periodic Systems - ANSWER - Specific Identification - Weighted Average - FIFO - LIFO Specific Identification - ANSWER Somewhat large, distinguishable products Weighted Average - ANSWER The weighted average cost per unit must be calculated. The ending inventory valuation is equal to the number of units in ending inventory multiplied by the WA cost per unit. Likewise, the cost of goods sold for the period is equal to the number of units sold multiplied by the WA cost per unit. Weighted Average Cost Per Unit = - ANSWER Cost of Goods / Number of Units FIFO - ANSWER Assumes ending inventory contains the most recently acquired units LIFO - ANSWER Assumes ending inventory contains the oldest inventory layers Cost of Goods Sold - ANSWER Beginning Inventory + Net Cost of Purchases = Goods available for Sale - Ending Inventory =Cost of Goods Sold Purchases - ANSWER Balance in purchases account + Freight in - Purchases discounts - Purchase returns & allowances Perpetual Inventory System - ANSWER The merchandise inventory account is used to maintain a perpetual record of the net cost of merchandise on hand. Under the perpetual inventory system, the merchandise inventory account has a balance that is changing as the level of inventory changes throughout the accounting period. Perpetual Systems - ANSWER - Specific Identification - Moving Average - FIFO - LIFO Acquisition Cost - ANSWER Includes all costs incurred in getting the merchandise to an entity's location and ready for use Lower of Cost or Market (LCM) - ANSWER Due to conservatism, inventory is shown on the BS at the LCM Market - ANSWER Generally replacement cost, subject to a range of values defined by an established ceiling value and an established floor value. Ceiling Value - ANSWER Net realizable value - reduce the sales price by the estimated cost to complete and sell the inventory Floor Value - ANSWER Net realizable value reduced by the normal profit margin The LCM comparison must be completed on a consistant basis from year to year. - ANSWER The LCM comparison must be completed on a consistant basis from year to year. Holding loss of inventory - ANSWER Direct method - any holding loss related to inventory is simply included in COGS Allowance Method - Identified separately Dollar-Value LIFO - ANSWER - Converts ending inventory in FIFO dollars into LIFO dollars. - Reduces the impact of liquidation problem - Facilitates Internal FIFO use Conversion Index - ANSWER Ending Inv in CY $ / Ending Inv in Base Year $ Estimating Inventory - ANSWER - Gross Margin Method - Retail Inventory Method Gross Margin Method - ANSWER To use the gross margin method, a company must have a consistant gross margin percentage. Retail Inventory Method - ANSWER Ending Inventory @ Retail X Cost Ratio = Ending Inventory Property, Plant, & Equipment - ANSWER Tangible, long-term, operational assets specifically related to the primary business activity or purpose typically referred to as fixed assets. Categories of PPE - ANSWER - Plant & Equipment - Land - Natural Resources Plant & Equipment - ANSWER Buildings, machinery, and equipment: depreciable assets with a finite useful life. Land - ANSWER Land that a company uses for primary business operations. NOT include real estate held for investment purposes. Not depreciated. Natural resources - ANSWER Items such as a gravel it, coal mine, a tract of timber land, and an oil well. Produce income until all the natural resources are extracted and sold. Depletable asset. Acquisition cost - ANSWER The acquisition cost of PP&E includes both the cash equibalent price and all costs incurred to get the asset on location and ready for use. Issuance of Securities for asset - ANSWER The acquisition cost of an asset acquired through the issuance of stocks or bonds is the FMV of the security or the FMV of the asset acquired, whichever can most clearly be determined. Donated Assets - ANSWER Donated assets are recorded at their FMV. Group purchases - ANSWER If a group of fixed assets are acquired in a single transaction, the total negotiated price is allocated to the individual assets acquired based on the respective FMV of the individual assets acquired. Nonmonetary transaction - ANSWER The acquisition is recorded at the FMV of the asset surrendered for the FMV of the asset received, whichever is more clearly determinable. Any gains or losses are recognized regardless of boot. Construction period interest - ANSWER Interest cost is considered a "get ready" cost and is capitalized only during the construction period. Interest capitalization period begins when: - ANSWER - Qualifying expenditures have been made. - Activities necessary to prepare the asset for its intended use are in progress - Interest cost is being incurred. Capitalized Interest = - ANSWER Average Accumulated Expenditures x Interest Rate Interest Rate - ANSWER Weighted average specific rate for specific loans x Weighted average non-specific rate for excess over specific loans Depreciation Causes - ANSWER - Physical Factors (wear & tear) - Functional Factors (obsolescense) Depreciation Calculation Factors - ANSWER - Cost - Estimated useful life - Estimated salvage value Straight line depreciation - ANSWER (Cost - Salvage Value) / Useful life Sum-of-the-years' digits - ANSWER SYD = N(N+1)/2 N=Useful life Depreciation = (N/SYD)(Cost-Salvage Value) Double-Declining Balance - ANSWER Depreciation Expense = Double-Declining Rate x Asset Book Value Depletion - ANSWER (Cost+Restoration Costs-Residual Value) / # of Units Determining Impairment - ANSWER - Estimate the expected future net cash flows of the asset and its eventual disposition. - If the sum of expected future net cash flows is less than the CV of the asset, the asset is impaired. - If the sum of the expected future net cash flows is greater than the CV of the asset, no impairment has occurred. Measurement of Impairment - ANSWER If an impairment is indicated, the loss is measured by the amount by which the CV exceeds its FV Reporting an Impairment - ANSWER Impairment loss is not extraordinary and generally is reported as income from continuring operations. Intangible Assets - ANSWER Long-term operational assets that lack physical substance or presence. Acquisition Cost - Developed Internally - ANSWER Internally developed intangible assets are likely the result of research and development activities which are expensed in the period incurred. Therefore, the capitalized cost of an internally developed intangible asset usually is composed of the legal and other related registration costs. Organization Costs - ANSWER Costs incurred in the initial planning state of a business enterprise and oftentimes, include implementation of an initial business plan. Organization costs typically are amortized over a period of five years. Organization Costs: - ANSWER - Initial Accounting Services - Initial Legal Services - State Incorporation Fees - Expenses of Temporary Directors - Organizational Meetings Deferred Charges - ANSWER Actually long-term prepaid expenses. Deferred charges typically are presented on the BS in conjunction with intangible assets. Deferred Charges: - ANSWER - Prepaid Insurance - Prepaid rent - Machingery rearrangements costs - Deferred income taxes Research & Development Costs - ANSWER Expensed in the period incurred (Labor, material, & overhead) Research - ANSWER An attempt to disover new knowledge Development - ANSWER A translation of knowledge into new plans, new designes, or new products. Computer Software development - ANSWER R&D activities continue until the technological feasibility of the software has been established. The establishment of the technological feasiblity occurs when the program model or working model fo the software is complete. R&D expensed. After feasibilit