FAR CPA Review

What is non controlling interest equity?

(1) The amount of non controlling equity interest is (1) the non controlling percentage claim to the subsidiary's book value at the acquisition date, (2) plus (minus) its claim to the unamortized difference between fair values and book values at acquisition, (3) plus its claim to goodwill recognized at acquisition, (4) minus its share of any goodwill/impairment/losses. (1) S's Beg. Net Book Value (2+3) Plus 100% of the differential (4) Goodwill impairment loss (4) Depreciation/amortization of differential = S's adjusted NBV *(NCI % ownership of S) = NCI Equity NCI Equity at the Beginning of the year NCI % of S's NI NCI % of S's dividends (NCI % of Goodwill impairment loss) (NCI % Depreciation/amortization of differential) = NCI Equity at the end of the year

What adjustments to a subsidiary investment on the parent's books are made when equity method of accounting is used?

1. Adjustment for subsidiary's income or loss. 2. The parent's share of dividends declared by the subsidiary. 3. The amortization of any difference between the FV of identifiable assets and the book value of those assets.

What is the criteria for a sale of a note receivable for IFRS?

1. If the entity transfers substantially all the risk and rewards of ownership, the transfer is treated as a secured borrowing. 2. If the entity retains substantially all the risks and rewards of ownership, the transfer is treated as a secured borrowing. 3. If neither conditions are met, the entity accounts for the transaction as a sale if it has transferred control and as a secured borrowing if it has retained control.

What is the mission of FASB?

1. Improve the usefulness of financial reporting 2. Maintain current accounting standards 3. Promptly address deficiencies in accounting standards 4. Promote international convergence of accounting standards 5. Improve the common understanding of the nature and purposes of information in financial reports

What is a transfer with recourse vs. a transfer without recourse? (Notes receivable, typically)

A transfer with recourse requires the original creditor to assume the payments to the third party if the original borrower defaults. A transfer without recourse does not require the original credit to assume the payments to the third party if the original borrower defaults. Typically, a nonrecourse transfer is a sale of the note receivable because control has passed to the transferee.

What type of account is created when revenue is earned before cash is received?

Accrual asset - asset Sales on account, interest, rent

What type of account is created when expense is incurred before cash is paid?

Accrued expense - liability Salaries, wages, interest, taxes

What financial instruments are excluded from cash?

Certificates of deposit, legally restricted compensating balances, and restricted cash funds (such as a bond sinking fund). These amounts are either: not available for the immediate payment of debts, or management's intent is to use these resources for specific purposes. In addition, cash excludes postdated checks received from customers (include these in accounts receivable), advances to employees (a loan to the employee, a receivable), and postage stamps (a prepaid expense)

What financial instruments are considered to be cash?

Coin and currency, petty cash, cash in bank, and negotiable instruments such as ordinary checks, cashier's checks, certified checks, and money orders.

What is a typical journal entry for the seller in a factoring transaction with recourse when the transaction is accounted as a loan?

DR: CASH DR: DISCOUNT ON FACTOR LIABILITY CR: FACTOR LIABILITY DR: ALLOWANCE 4 DOUB ACCOUNTS CR: DISCOUNT ON FACTOR LIABILITY As payments on the receivables are made to the factor, the factor liability is extinguished and interest expense is recognized. DR: FACTOR LIABILITY CR: A/R CR: CASH (TO PAY FOR UNCOLLECTIBLES) DR: INTEREST EXPENSE CR: DISCOUNT ON FACTOR LIABILITY

What is the typical journal entry for the seller in a factoring transaction without recourse?

DR: CASH DR: RECEIVABLE FROM FACTOR DR: LOSS ON SALE OF RECEIVABLES CR: A/R If any returns are made, then the following occurs: DR: SALES RETURNS AND ALLOWANCES CR: RECEIVABLE FROM FACTOR

Give a general eliminating entry for consolidation when parent owns 100% of subsidiary.

DR: Common Stock (sub) DR: Addition Paid-in Capital (sub) DR: R/E (sub) DR: Identifiable assets (sub TO FV, as needed) DR: Goodwill (if investment cost > FV os sub's Net A.) CR: Identifiable Liabilities (of sub to FV, as needed) CR: Investment in subsidiary (from parent's books)

Give a general eliminating entry for consolidating when parent owns less than 100% of subsidiary.

DR: Common Stock (sub) DR: Addition Paid-in Capital (sub) DR: R/E (sub) DR: Identifiable assets (sub TO FV, as needed) DR: Goodwill (if investment cost > FV os sub's Net A.) CR: Identifiable Liabilities (of sub to FV, as needed) CR: Investment in subsidiary (from parent's books) CR: Noncontrolling interest (% claim to consolidated net assets attributable to the subsidiary)

At the end of the period, what is the general equation that an entity makes for ending inventory?

DR: MERCHANDISE INVENTORY (END) DR: PURCHASE RETURNS AND ALLOWANCES DR: PURCHASE DISCOUNTS DR: COST OF GOODS SOLD CR: MERCHANDISE INVENTORY (BEG) CR: PURCHASES CR: TRANSPORTATION IN

What adjusting entry needs to be made for estimable cash discounts for the coming year at the end reporting date?

DR: SALES DISCOUNTS CR: ALLOWANCE FOR SALES DISCOUNTS Sales discounts is a contra account to sales. Allowance for sales discounts is a contra account to A/R.

What type of account is created when cash is paid before expense is incurred?

Deferred expense - asset Prepaid insurance, supplies, rent, PPE

What type of account is created when cash is received before revenue is earned?

Deferred revenue - liability Rent, subscriptions, gift certificats

Explain what deposits in transit are?

Deposits that have been made by the company in the bank, but the bank has not recognized this deposits due to a policy. The bank will most likely recognize those deposits the next day.

What adjustments to a subsidiary investment on the parent's books are made when cost method of accounting is used?

Does NOT adjust on its books the carrying value of its investment in the subsidiary to reflect: 1. The parent's share of the subsidiary's income or loss. 2. The parent's share of dividends declared 3. The depreciation/amortization of any difference between the fair value of the subsidiary's identifiable net assets and the book value of the subsidiary's identifiable net assets. DOES recognized its share of dividends declared by the subsidiary as dividend income (not as an adjustment to the investment account).

What are the steps to Dollar-Value Retail method?

Dollar-value LIFO retail method is used by companies that use the LIFO cost-flow assumption when they apply the retail inventory method. 1. Take EI FIFO to base-year dollars. 2. Calculate the difference between the beginning and ending inventory at base-year dollars. 3. Convert the difference to current-year dollars. 4. Multiply the current-year dollar difference by the FIFO C/R ratio. This is the CY layer. 5. Add the layers to get EI DV LIFO.

Explain the bank and book to true balance for bank reconciliation.

Ending Balance per Bank + Deposits in Transit + Cash on Hand (Outstanding Checks) +/- Errors made by Bank = True Cash Ending Balance per Book + Interest Earned + Note Collected (Service Charges) (NSF Check) +/- Errors in Firm's Records = True Cash

What is the formula for the retail method?

Ending Inventory at cost = Ending Inventory at Retail * (Cost-to-retail ratio) Cost-to-retail ratio is usually the ratio of Goods Available for Sale

What are the first 4 variations to the retail inventory method?

FIFO- subtract beg inventory at cost and at retail (numerator, denominator) FIFO, LC-M -- like FIFO, but in an attempt to be conservative, don't subtract net markdowns form denominator. Ending Inventory will be lower. Average (the typical Goods Available for Sale C/R ratio)- includes beg inventory, along with current-period purchase in both the numerator and denominator of C/R ratio. Average, LC-M (conventional retail inventory method; the most tested) -- like Average, but excludes net markdowns from the cost ratio calculation.

T/F: In a periodic inventory system, the inventory account is used to record purchases?

False. The purchases account is used. This account is closed out at the end of the period to ending inventory and cost of goods sold.

True or false: if one bank account has an overdraft fee, an entity can offset that fee with cash accounts from other banks?

False: an entity can only offset overdraft fees with the same bank, otherwise, it must record a current liability

What are the 3 parts to the current accounting standard-setting mechanism?

Financial Accounting Standards Board (FASB) - the current standard-setting body in the United States; establishes financial accounting standards for business entities; it is an independent body, subject only to the FAF Financial Accounting Foundation (FAF) - appoints the members of the FASB and its advisory councils, ensures adequate funding for the FASB, and exercises oversight over the FASB. Funding sources include fees levied on publicly traded firms under the Sarbanes-Oxley Act, contributions, and publication sales. The trustees of the FAF are appointed from organizations with an interest in accounting standards. Financial Accounting Standards Advisory Council (FASAC) - provides guidance on major policy issues, project priorities, and the formation of task forces.

What are the accounting procedures for a loss on a purchase commitment (contract)?

If the contract can be modified: The loss is required to be footnoted as a contingent liability, but is not accrued in the accounts because the loss is not probable given that the contract can be revised. If the contract cannot be modified: The loss must be accrued because the loss is probable and estimable. The inventory, when acquired, is recorded at market value and a loss is recognized for the difference between the market value and the contract price. If the contract has not been executed as of the balance sheet date, the following entry is made: DR: LOSS ON PURCHASE COMMITMENT CR: LIABILITY ON PURCHASE COMMITMENT If the market price drops further in the second year, an additional loss is recognized when the contract is executed. Recoveries result in a gain but only to the extent of the previously recognized loss. DR: LIABILITY ON PURCHASE COMMITMENT DR: LOSS ON PURCHASE COMMITMENT DR: INVENTORY CR: CASH

Describe an event where faithful representation is preferred over relevance.

In the opinion of many, the use of historical cost as a valuation base is an example of emphasizing faithful representation over relevance. Historical cost is very reliable because it is based on objectively verifiable past information. However, historical cost is considered to be less current and, therefore, less relevant than market value.

What is merchandise inventory?

Inventory purchased for resale.

What is the formula for margin on cost?

Margin on cost = (Sales - COGS) / COGS Gross Margin divided by COGS Margin on Cost is always greater than Margin on Sales because COGS is smaller than Sales Revenue (denominator).

What is is the formula for gross margin percentage or margin on sales?

Margin on sales = gross margin percentage = (Sales - COGS) / Sales Gross Margin divided by sales

What's one reason the FASB may be influenced to make a particular decision?

Negative economic consequences to the firm; weakens earnings and the ability to raise capital

What is the formula for net purchases?

Net purchases = Gross purchases - less purchase returns + Freight in

Who owns treasury shares?

No one.

Where is the consolidating process carried out?

On a consolidating worksheet, not the books of any entity. The consolidating process and the results are not recorded on the books of any of the affiliated entities.

What are the qualitative characteristics of accounting information?

Primary qualitative characteristics 1. Relevance a. Predictive value b. Confirmatory value c. Materiality 2. Faithful representation a. Completeness b. Neutrality c. Free from error Enhancing qualitative characteristics 1. Comparability 2. Verifiability 3. Timeliness 4. Understandability

What is typically included in inventory?

Property held for resale, property in the process of production, and property consumed in the process of production. Capitalize in inventory all costs needed to bring the item of inventory to salable condition. Freight-in, insurance, taxes, material handling costs, and packaging costs. Interest on the purchase or construction of inventory is never included. This is a financing cost. Promotional costs are not included because they do not help prepare the inventory for sale. Purchase discounts, and returns and allowances reduce the total cost allocated to inventory Goods on consignment are owned by the consignor. The consignee does not include them in inventory.

What do you call a firm that registers with the SEC?

Registrant

What is the name of FASB's conceptual framework?

Statements of Financial Accounting Concepts (SFACs)

When given a checkbook balance or a bank balance, which account do you want to recognize for cash?

The checkbook balance.

What is the difference between the direct write-off method and the allowance method for bad debts?

The direct write off method writes off the accounts when the accounts are deemed unrecoverable. DR: BAD DEBT EXPENSE CR: ACCOUNTS RECEIVABLE When a debt is recovered, the following entry is made: DR: CASH CR: BAD DEBTS RECOVERED The allowance method requires an estimate of bad debts when the sale of inventory occurs. The income statement approach: DR: BAD DEBT EXPENSE CR: ALLOWANCE FOR DOUBTFUL ACCOUNTS When an account is written off: DR: ALLOWANCE FOR DOUBTFUL ACCOUNTS CR: ACCOUNTS RECEIVABLE When an account is recovered: DR: ACCOUNTS RECEIVABLE CR: ALLOWANCE FOR DOUBTFUL ACCOUNTS DR: CASH CR: ACCOUNTS RECEIVABLE

When interest is collected on a note after it has been impaired, how does an entity account for the cash flow? See pg. 264 for illustration.

The entity can many methods. Interest method: At collection of interest: DR: ALLOWANCE 4 DECLINE IN NOTE VALUE CR: INTEREST RECEIVABLE At collection of principal: DR: CASH DR: ALLOWANCE 4 DECLINE IN NOTE VALUE CR: NOTE RECEIVABLE Cost-Recovery Method At collection of interest: No entry as the new carrying value has not been recovered. At collection of principal: DR: CASH DR: ALLOWANCE 4 DECLINE IN NOTE VALUE CR: NOTE RECEIVABLE CR: INTEREST REVENUE

When factoring without recourse, what risk does the factor and transferor bare?

The factor (transferee) bears the cost of uncollectible accounts. The seller (transferor) bears the cost of sales adjustment such as sales discounts and returns and allowances because they are considered preconditions.

Explain the accounting for an impairement to a note receivable.

The impaired loans receivables are written down to either (1) the present value of the future cash flows expected to be collected using the original effective interest rate for the loan, or (2) market value if this is more determinable. DR: BAD DEBT EXPENSE CR: ALLOWANCE FOR DECLINE IN NOTE VALUE Carrying value - PV = Impairement Loss (BD expense)

When is the relative sales value method used?

When firms receive a significant discount for a group of items. This may occur in a liquidation or distress sale. US GAAP requires that the total price be allocated based on the market values or selling prices of the individual inventory items. PG 289 for example.

T/F: An entity must record a short-term asset (under 1 year, such as a 9 month note receivable) at face value instead of present value?

True.

T/F: Checks have to be sent in order for a recognition on the balance sheet?

True. If a check is written before the balance sheet date, but not sent until after the balance sheet date, then the amount is NOT recognized on the balance sheet date.

What are the 5 differences between GAAP and IFRS when it comes to inventory valuation?

US GAAP 1. LC-M or LC-NRV 2. May use more than one cost formula for similar inventories with similar use 3. Reversal of write down (inventory impairment) is prohibited. 4. LIFO permitted. 5. Cost flow assumption does not mirror physical flow. IFRS 1. Only LC-NRV 2. Same cost formulas must be used for inventory with a similar nature and use 3. Reversal of write down (inventory impairment) to original cost is permitted. 4. LIFO prohibited. 5. Cost flow assumption mirrors physical flow.

What are examples of cash equivalents?

US treasury obligations (bills, notes, bonds), commercial paper (very short-term corporate notes), and money market funds. Original maturity must be 90 or less days.

What is the difference between a trade discount and a cash discount?

A trade discount is one that is allowed by the wholesaler to the retailer, calculated on the list price of the product, whereas cash discount is allowed to stimulate instant payment of the goods purchased.

What are the 10 elements of the financial statements?

1. Assets - resources that have probable future benefits to the firm, controlled by management, resulting from past transactions. 2. Liabilities - probable future sacrifices of economic benefits arising from present obligations of an entity to transfer assets to transfer assets or provide services to other entities as a result of past transactions or events. 3. Equity - residual interest in the firm's assets, also known as net assets. Equity is primarily comprised of past investor contributions and retained earnings. 4. Investments by owners - increases in net assets of an entity from transfers to it by existing owners or parties seeking ownership interest. 5. Distributions to owners - decrease in net assets of an entity from the transfer of assets, provision of services, or incurrence of liabilities by the enterprise to owners. 6. Comprehensive income - accounting income (transaction based) plus certain holding gains and losses and other items. It includes all changes in equity other than investments by owners and distributions to owners. 7. Revenues - increases in assets or settlements of liability of an entity by provided goods or services. 8. Expenses - decreases in assets or incurrences of liabilities of an entity by providing goods or services. Expenses provide a benefit to the firm. 9. Gains - increases in equity or net assets from peripheral or incidental transactions. 10. Losses - decreases in equity or net assets from peripheral or incidental transactions. Losses provide no benefit to the firm.

What are the 3 formats for a simple bank reconciliation?

1. Bank to book 2. Book to bank 3. Bank and book to true balance

In order for an asset to be classified as a plant asset, what are the 3 requirements?

1. Be currently used in operations. 2. Have a useful life extending more than one year beyond the balance sheet date; and 3. Have physical substance. Intangible assets are different from plant assets in that they have no physical substance.

What are the 4 ways to research the codification?

1. Browse the structure in the menu provided 2. Search by key words; this mode allows narrowing of a search both by related term and by major area within the Codification structure 3. Enter the specific Codification location (using the numerical system within the Codification); this is designed for users who know their topic and section of interest 4. Search by previous GAAP standard number (ex. FAS 13)

At a minimum, what are the duties that should be separated in relation to cash?

1. Custody of cash. 2. Recording of cash. 3. Reconciliation of bank accounts.

List the 4 accounting assumptions.

1. Entity assumption - we assume there is a separate accounting entity for each business organization. The owners and the corporation are separate. 2. Going-concern assumption - in the absence of information to the contrary, a business is assumed to have an indefinite life, that is, it will continue to be a going concern. Therefore, we do not show items at their liquidation or exit values. This assumption, also called the continuity assumption, supports the historical cost principle for many assets. Income measurement is based on historical cost of assets because assets provide value through use, rathe than disposal. Thus, net income is the difference between revenue and the historical cost of assets used in generating the revenue. 3. Unit of measurement assumption - Assets, liabilities, equities, revenues, expenses, gains, losses, and cash flows are measured in terms of the monetary unit of the country in which the business is operated. Price level changes cause the application of this assumption to weaken the relevance of certain disclosures. 4. Time period assumption - the indefinite life of a business is broken into smaller time frames, typically a year, for evaluation and reporting purposes.

What two methods of impairment of inventory are used by GAAP and when?

1. FIFO or Weighted Average: LC-NRV Applies to all to all inventory methods that are not LIFO or Retail Inventory Method. Net Realizable value is defined as the estimated selling price in the ordinary course of business, less reasonably predictable cost of completion, disposal, and transportation. 2. LIFO or Retail Inventory Method: LC-M The ceiling for market value is NRV. The floor for market value is NRV-normal profit margin. When recording the journal entries for inventory impairment, an entity may use the direct or allowance methods. Direct method: DR: COGS CR: INVENTORY Allowance method: DR: HOLDING LOSS CR: ALLOWANCE TO REDUCE INVENTORY TO LC-M The allowance account is a contra inventory account.

What information is necessary to consolidate financial statements?

1. Financial statements (or adjusted trial balances) of the separate affiliated entities to be consolidated. 2. Data as of the date of business combination: (a) BV of assets acquired and liabilities assumed as of the acquisition date, (b) Fair Value of assets/liabilities acquired/assumed, (c) Fair Value of any non controlling interest in the acquired entity, (d) Fair Value of any equity interest in the acquired entity owned by the parent prior to the acquisition date. 3. Intercompany transaction data and intracompany balance.

Name the exceptions to consolidation.

1. If an investor/parent has majority ownership but may not exercise its control: (a) A foreign subsidiary largely controlled by the foreign government. (b) A domestic subsidiary in bankruptcy and under the control of the courts. 2. Industry-specific guidelines: (a) Registered investment companies (b) Brokers/dealers in securities 3. A variable-interest (investment) or subsidiary (unconsolidated subsidiary) that is not included in consolidated statements would be reported as an investment by the interest-holder/investor. The variable-interest investment would be measured as the entity's claim to the net asset value of the variable-interest entity. The unconsolidated subsidiary investment would be measured using either fair value or the equity method of accounting, depending on the extent of influence that can be exercised over the subsidiary by the parent.

What are two equations for cost of goods available for sale?

Beginning Inventory + Net Purchases = Ending Inventory + Cost of Goods Sold = Cost of Goods Available for Sale

List and define the 4 accounting principles.

1. Measurement - examples include : (a) Historical cost, (b) Net realizable value - used to approximate liquidation value or selling price; it is the net value to be received after the costs of sale are deducted from the current market value; example is lower cost or market for inventory values uses NRV, (c) Current replacement cost - represents how much you would have to pay to replace an asset; current replacement cost would represent current market value from the buyer's perspective; example is replacement cost is also used in inventory valuation, (c) Fair value - the price that would be received to sell an asset or the the price to settle a liability in an orderly transaction from the perspective of a market participant at the measurement date; example is current market value (or fair value) is used to value trading and available-for-sale securities, (d) Amortized cost - historical cost less the accumulated amortization or depreciation of the asset, (e) Net present value - the value determined from discounting the expected future cash flows; example is the discounted future cash flows are used in many capital budgeting decisions. 2. Revenue recognition principle - revenues are recognized when the entity completes its performance obligation to a customer and the revenue is earned and realized. The performance obligation is completed when the goods or services are delivered and cash or promise of cash is received. 3. Expense recognition principle/ matching principle - recognize expense only when expenditures help to produce revenues. Cost of goods sold and sales commissions are expenses that are directly associated, and, therefore, matched with revenue. Other expenses are allocated based on the time period of benefit provided. Depreciation and amortization are examples. Such expenses are not directly matches with revenues. Still other expenses are recognized in the period incurred when there is no determinable relationship between expenditures and revenues. Advertising costs are an example. 4. Full disclosure principle - financial statements should present all information needed by an informed reader to make an economic decision. Example is an aircraft manufacturer enters into a contract to build a place. As of the balance sheet date, production has not begun. Thus, there is no recognition of this contract in the accounts. However, a footnote should explain the financial aspects of the contract.

List the parts of FASB's conceptual framework.

1. Objective of financial reporting 2. Qualitative characteristics of accounting information 3. Accounting assumptions 4. Basic accounting principles 5. Cost constraint 6. Elements of financial reporting

What are the basic steps to the consolidating process?

1. Record trial balances - record account titles and balances of the separate entities on the consolidating worksheet from the adjusted trial balances, separate statements, or other sources. 2. Record adjusting entries - develop and post the worksheet consolidating adjusting entries, if any. Adjusting entries are needed if one company has recorded a transaction with another company, but the receiving company has not recorded the transaction. In such a case, a transaction is in-transit to the receiving company. Make an adjustment to complete the transaction as though it had been received by the receiving company. 3. Record eliminating entries - develop and post to the worksheet consolidating eliminating entries; these entries are likely to include these 4 things: (1) investment eliminating entry (always required to eliminate parent investment in the subsidiary against the subsidiary's shareholders' equity), (2) intracompany receivables/payable eliminations, (3) intracompany revenue/expense elimination, (4) intracompany profit elimination. 4. Complete consolidating worksheet. 5. Prepare formal consolidated financial statements from worksheet.

What can the SEC do to stop fraud?

1. Send a deficiency letter 2. Issue a stop order to stop the trade of the firm's securities if the firm disagrees 3. File criminal charges against the firm's managers and enforce fines

What are the 3 criteria to determine if a sale of a note receivable has occurred?

1. The transferred assets have been isolated from the transferor, even in bankruptcy. 2. The transferee is free to pledge or exchange the assets. 3. The transferor does not maintain effective control over the transferred assets either through an agreement that allows and requires the transferor to repurchase the asset or one that requires the transferor to return specific assets.

What is the difference between the traditional approach (discounted cash flows) vs. the expected cash flows approach in measuring fair value?

1. Traditional approach - uses a single most-likely cash flow in the computation. It uses the interest rate to capture all the uncertainties and risks inherent in a cash flow measure. 2. Expected cash flows approach - the preferred approach, uses a risk-free rate as the discount rate. The cash flow itself inherits the risk.

When does an entity have effective control over another entity?

1. When an entity has a greater than 50% ownership of another entity. 2. When an entity is the principal beneficiary of a variable-interest entity.

What are the 4 factors that will affect the consolidation process?

1. Whether the consolidating process is being carried out at the date of the business combination or at a subsequent date. 2. Whether the parent owns 100% of the voting stock of a subsidiary or less than 100% of the voting stock. 3. Whether on its books the parent carries its investment in a subsidiary using the cost or equity method of accounting. 4. Whether transactions between the affiliated entities originate with the parent or with a subsidiary.

When can the gross margin method of estimating ending inventory be used?

A company may use an estimate of ending inventory for internal purposes during interim periods when a physical count is prohibitively expensive or when inventory is destroyed as the result of a casualty. The gross margin method can be used only for estimation purposes. It cannot be used for financial reporting of inventory. To use the gross margin method a company must have a consistent gross margin percentage (margin as a percentage of sales or margin based on cost). If inventory is heterogeneous, the method should be applied to pools of inventory with relatively homogeneous gross margin percentages.

What is the Emerging Issues Task Force (EITF)?

A group that considers emerging reporting issues and accelerates the process of establishing rulings on such issues. In this sense, the EITF acts as a "filter" for the FASB to focus on more pervasive issues. When a consensus of the 15 members is reached on an issue, no further action by the FASB is required. EITF pronouncements are included in GAAP. If the EITF is unable to reach a consensus, the FASB may become involved, ultimately revising an existing standard or adopting a new one.

What is a compensating balance?

A minimum balance that must be maintained by the firm in relation to a borrowing. It increases the effective interest on the borrowing. If the balance is related to a short-term liability, the compensating balance is shown as a current asset. If the compensating balance is related to a long-term liability, the compensating balance is a non-current asset.

What is the difference between a normal shortage and an abnormal shortage in terms of the Retail Inventory Method?

A normal shortage is a spoilage. It is shown at retail value and subtracted along with sales from Goods Available for Sale at Retail to arrive at Ending Inventory at Retail, after computing the cost-to-retail ratio. An abnormal shortage is due to a loss. It is shown at both cost and retail since the amount of merchandise available for sale has declined. Reduce the cost and retail value of goods available for sale before computing the cost-to-retail ratio. This loss is usually recoverable through insurance.

How does a parent accounting for a subsidiary to be consolidated on their own books?

A parent records a subsidiary on its books as an investment (in subsidiary). Subsequently, a parent may carry an investment in a subsidiary that will be consolidated on its books using: Cost method, equity method, any other method. The method will only affect the consolidating process, not the end result.

What is the difference in the accounting treatment of a sale of a note receivable vs. collateral transfer?

A sale of a receivable is removed from the books of the transferor and a gain or loss on the sale is recorded. If the transfer does not meet the requirements of a sale, then the note is treated as collateral for borrowing funds. The receivable remains on the books of the transferor, and the transferor records a liability related to the borrowing transaction. No gain or loss is record. The transferor will record interest expense related to the borrowing transaction.

What is an escrow account?

An account set aside when making payments (such as mortgage payments) for future lump-sum expenses (such as property taxes and insurance).

What is a monetary asset?

An asset with a fixed nominal (stated) value. The nominal value of a monetary asset does not change with inflation.

Define financial capital maintenance.

An entity maintains financial capital maintenance as long as dividends do not exceed earnings, and earnings is not negative. Assets measured at historical cost. Used by GAAP.

Define physical capital maintenance.

An entity maintains physical capital maintenance as long as the firm has provided for the physical capital used up during the period, which means that earnings can be recognized. Based on FMV of assets. Not used by GAAP.

How does IFRS differ from GAAP when it comes to loan/note impairment?

An impairement loss would be taken as the difference between carrying value and the recoverable amount. If the loan value subsequently increase, IFRS permits recovery of the impairement loss. Recoverable amount: the higher of the fair value less cost to sell or value in use: a. Fair value less cost to sell is the amount obtained from the sale in an arms-length transaction between knowledgeable, willing, and able parties. b. Value in use is the discounted present value of the future cash flows expected from the asset.

What is the difference between an interest-bearing and non-interest-bearing note?

An interest-bearing note has the interest explicitly stated. A non-interest-bearing note has the interest element included in the face value of the note.

What is the difference between assignment of A/R and pledging of A/R?

Assignment of A/R is when accounts receivables are assigned by the borrower as collateral for a loan. The borrower reclassifies the receivables as accounts receivable assigned, a subcategory of total accounts receivable. When the loan is repaid, any remaining accounts receivable assigned are returned to ordinary accounts receivable status. Pledging of A/R is when rights to specific receivables are not noted as collateral, and accounts receivable are not reclassified; rather, receivables in bulk are transferred to a trustee and can be used for payment of the loan in the event of a default by the borrower. Footnote disclosure of the pledge is required.

At what value are receivables valued on the balance sheet?

At net realizable value.

What adjusting entries must be made at the end of the year for A/R?

At the end of the year, material probable and estimable (1) cash discounts (under the gross method) and (2) sales returns and allowances must be recorded in the year of sale for correct reporting of net sales and accounts receivable, (3) and allowance for doubtful accounts.

If there is an inventory error, what equation do you use to analyze the effects and why?

Beg. Inv + Net Purchases = Ending Inventory + COGS If beginning inventory is understated, then COGS is also understated, everything else being the same, because the equation must balance. If ending inventory is understated, COGS must be overstated, again because the equation must balance.

What is the equation for the gross margin method?

Beg. Inventory + Net Purchases = End. Inventory + Sales(Cost/Sales)

What is a typical journal entry for the seller in a factoring transaction with recourse when the transaction is accounted as a sale?

First, the three criteria must be used to determine if the transaction is accounted for as a sale or a loan. The seller (transferor) bears the cost of bad debts as well as the cost of sales adjustments. DR: CASH DR: LOSS ON SALE OF RECEIVABLES CR: A/R CR: RECOURSE LIABILITY When accounts are deemed uncollectible, the transferor remits the necessary cash to the factor: DR: RECOURSE LIABILITY CR: CASH

For notes receivable, what is the difference between a notification and non-notification basis?

For a notification basis, the original creditor must inform the original borrower if the note is transferred so the borrower can pay the 3rd party directly. In a non-notification basis, the original borrower pays the original creditor even if a transfer of the note is made.

Regarding bank overdrafts for the cash account, how does IFRS differ from GAAP?

IFRS allows entities to offset their overdraft fees with accounts from different banks. GAAP does not.

What is the maturity value of a receivable/loan?

The maturity value is the face value plus interest, at the note's original rate, over the entire term of the note. The transferor of a note receivable receives proceeds equal to the maturity value less the discount (bank fee).

When there are estimates of the likelihood of different outcomes, is the preferred approach to report the most likely estimate or the most conservative estimate?

The most likely if the conservative estimate is less likely.

What is the income to non controlling interest?

The non controlling interest claim to consolidated net income is the (1) non controlling interest percentage share of the subsidiary's reported net income, (2) plus (minus) its percentage share of depreciation/amortization expense of fair value in excess of (less than) book value and (3) its percentage share of any other revenues/expenses or gains/losses attributable to the subsidiary recognized on the consolidating worksheet. (1) S's Net Income (2) (Depreciation/amortization of differential) (3) (Goodwill impairment loss) =S's adjusted Net Income *(NCI % ownership of S) = Income to Noncontrolling Interest

Describe an event where relevance is preferred over faithful representation.

The pervasive use of accounting estimates (depreciation, bad debt expense, pension estimates) is an example of emphasizing relevance over faithful representation. Firms are providing estimates, rather than certain amounts. Reasonable approximations, although they cannot be perfectly reliable, are preferred by financial statement users to either (1) perfect information issued too late to make a difference, or (2) no information at all.

How does GAAP require notes to be recorded?

The present value of future cash flows. Notes of less than one-year term need not be recorded at present value. The discount rate in the PV calculation is the market rate of interest on the date of note creation, which may be different from the note's stated rate. Any discounts related to notes will be amortized by applying the effective interest method.

What is factoring of accounts receivable?

The transferor (original creditor) transfers the receivables to a factor (transferee, a financial institution) immediately as a normal part of business. The transferor prefers to pay the factor a fee in return for the factor's administration of the receivables.

Explain what cash on hand is?

This amount reflects petty cash and undeposited cash receipts that the bank is not aware of, but the company is and has.

Explain what outstanding checks are?

This amount represents checks written and mailed by the company that have not cleared the bank by the balance sheet date.

Explain what notes collected refers to in a cash reconciliation?

This amount represents principal and interest added to the company's checking balance by the bank upon collection of a note receivable. Typically automatic.

Explain what NSF checks are in a cash reconciliation?

This represents nonsufficient funds checks received from the customers.

What is the objective of financial reporting?

To provide information about the entity useful to current and future investors and credits in making decisions as capital providers

What is the difference between the gross and the net methods when accounting for sales discounts?

Trade discount and initial recording: Gross method: DR: A/R CR: SALES Net method: DR: A/R CR: Sales Payment is received within the 10-day discount period: Gross method: DR: CASH DR: SALES DISCOUNTS CR: ACCOUNTS RECEIVABLE Net method: DR: CASH CR: ACCOUNTS RECEIVABLE Once payments are received: Gross method: DR: CASH CR: ACCOUNTS RECEIVABLE Net method: DR: CASH CR: SALES DISCOUNTS FORFEITED CR: ACCOUNTS RECEIVABLE