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