Becker - Module 4

Question 1

Define working capital

Answer 1

= current assets - current liabilities

Question 2

How is the current ratio computed?

Answer 2

= current assets / current liabilities

Question 3

How is the quick ratio computed?

Answer 3

= (cash + net receivables + short term investments) / current liabilities

Question 4

Current assets are defined as…

Answer 4

Those resources that are reasonably expected to be realized in cash, sold, or consumed (prepaid items) during the normal operating cycle of a business or one year, whichever is longer.

Question 5

Current liabilities are defined as…

Answer 5

Obligations whose liquidation is reasonably expected to require the use of current assets or the creation of other current liabilities.

Question 6

When can a short term obligation be included in noncurrent liabilities?

Answer 6

If the enterprise intends to refinance the debt on a long-term basis and the intent is supported by the abiltiy to do so as evidenced by:

• actual refinancing prior to the issuance of the financial statements, or
• existence of a noncancelable financing agreement from a lender having the financial resources to accomplish the refinancing

Question 7

Define cash and cash equivalents

Answer 7

• Cash includes both currency and demand deposits with banks and/or other financial institutions
• Cash equivalents include short-term, highly liquid investments that are both readily convertible to cash and so near their maturity when acquired by the entity (90 days or less from date of purchase) that they represent insignificant risk of changes in value.

Question 8

Name two methods of accounting for uncollectible accounts

Answer 8

Direct Write-Off:
Dr. Bad debt expense
Cr. Accounts receivable
Weaknesses: bad debts are not matched to sales and accounts receivable are overstated. Not GAAP.

Allowance Method:
Dr. Allowance for uncollectible accounts
Cr. Accounts receivable
Strengths: matches bad debts with credit sales. Accounts receivable fairly stated. Required by GAAP

Question 9

Name three methods for estimating uncollectible accounts

Answer 9

1) percentage of credit sales
2) percentage of accounts receivable at year-end
3) aging of accounts receivable at year-end

Question 10

Using the allowance method, give the two journal entries to provide for and then to write off an uncollectible account

Answer 10

Provide for:
Dr. Allowance
Cr. Accounts receivable

Write off:
Dr. Bad debt expense
Cr. Allowance

Question 11

What is the difference between factoring with recourse and without recourse?

Answer 11

With recourse: the factor may return the account to the company if it proves to be uncollectible. potential liability and risk of loss remains with the company

Without recourse: the factor assumes the risk of loss if the account is uncollectible

Question 12

State the three conditions that must exist for control of a financial asset to be considered surrendered

Answer 12

1) the transferred assets have been isolated from the transferor;
2) the transferee has the right to pledge or exchange the assets; and
3) the transferor does not maintain control over transferred assets under a repurchase agreement

Question 13

If control of a financial asset is surrendered, what is the accounting treatment of the transfer?

Answer 13

No continuing involvement:
- recorded as a sale with appropriate reduction in receivables and recognition of any gain or loss

Continuing involvement:

• asset for which there is no retained interest is recorded as a sale using the financial-components approach
• assets for which there is retained interest is carried on the books of transferor and allocated a book value based on relative value of all transferred assets at the date of transfer

Question 14

If control of a financial asset is not surrendered, what is the accounting treatment of the transfer?

Answer 14

• account for transfer as a secured borrowing with pledged collateral
• recognize the appropriate asset/liability amounts and interest revenue/expense amounts

Question 15

At what value should non-interest bearing promissory notes be recorded?

Answer 15

At the present value of all future payments required by the note. The payments should be discounted at the market interest rate.

Question 16

Notes receivable may be discounted “with” or “without” recourse. What is the difference?

Answer 16

Discounting with recourse:
- The holder remains contingently liable

Discounting without recourse:
- The holder assumes no further liability after discounting

Question 17

Describe the computational steps required in “discounting a note”

Answer 17

1) Compute maturity value (remember to include interest to maturity)
2) Compute the “discount” (remember to use maturity value)
3) Get proceeds by subtracting discount from maturity value
4) Compute interest income as difference between proceeds and face of note.

Question 18

When does the title to goods pass for each of the following?

• FOB destination
• FOB shipping point
• COD
• Consigned goods

Answer 18

• FOB destination: when received by buyer
• FOB shipping point: when given to a common carrier
• COD: when received and paid for by buyer
• Consigned goods: when sold to a third party by consignee

Question 19

How is market calculated in the US GAAP lower-of-cost-or-market method?

Answer 19

Market generally means current replacement cost, provided the current replacement cost does not exceed the market ceiling or fall below the market floor.

• Ceiling: Net realizable value (estimated net selling price less completion and disposal costs)
• Floor: Net realizable value minus normal profit margin

Question 20

How is net realizable value calculated in the IFRS lower-of-cost-or-net-realizable-value method?

Answer 20

Net realizable value is the net selling price less completion and disposal costs.

Question 21

Explain the difference between periodic and perpetual inventory methods.

Answer 21

Periodic:

• The quantity of inventory is determine only by physical count.
• Ending inventory is physically counted and priced

Perpetual:

• Inventory is updated for each purchase and for each sale
• Keeps a running total of inventory balances

Question 22

Name several cost flow methods for inventory

Answer 22

• Specific identification
• FIFO
• LIFO (unit and dollar value)
• Averaging
  a. Weighted average (associated with periodic)
  b. Moving average (associated with perpetual)
• Gross profit
• Retail
  a. Conventional retail
  b. Cost retail
  c. FIFO/Cost
  d. LIFO/Cost
  e. Dollar value LIFO/Cost

Question 23

Name several retail inventory methods

Answer 23

• Conventional retail
• Cost retail
• FIFO/Cost
• LIFO/Cost
• Dollar value LIFO/Cost

Question 24

When are losses on firm purchase commitments recognized?

Answer 24

Losses are recognized in the period when the price declines
Dr. Estimated loss on purchase commitment
Cr. Estimated liability on purchase commitment

Question 25

Describe an inventory consignment arrangement. Also, how are the consigned goods carried o the parties' balance sheets?

Answer 25

Consignor gives goods to consignee for sale to third parties. Title to the goods remains with the consignor; therefore the consigned items stay on the balance sheet of the consignor.

Question 26

During periods of rising prices, the use of LIFO versus FIFO has what effect on the valuation of ending inventory and reported net income? Which inventory method is prohibited under IFRS?

Answer 26

Both ending inventory and net income will be lower when LIFO is used during a period of rising prices LIFO = Lowest LIFO is prohibited under IFRS

Question 27

Give some examples of capitalizable costs for: - Acquisition of equipment - Acquisition of building

Answer 27

Acquisition of Equipment: purchase price, freight-in, installation, testing, taxes, less any cash discounts allowed.* Acquisition of Building: purchase price, deferred maintenance, alterations, improvements, architect's fees.* * If equipment or building is constructed by company, capitalized cost could include construction period interest.

Question 28

How is fixed asset carrying value computed under US GAAP and IFRS?

Answer 28

US GAAP: carrying value = historical cost - accumulated depreciation - impairment IFRS: - under IFRS, carrying value can be calculated using the US GAAP method above or can be calculated using the revaluation model. - Revaluation Model Carrying Value = Fair Value on Revaluation Date - Subsequent Accumulated Depreciation - Subsequent Impairment - Revaluation gains are reported in OCI. - Revaluation losses are reported on the income statement.

Question 29

Describe the proper accounting for ordinary versus extraordinary repairs.

Answer 29

Ordinary repairs are expensed as repair and maintenance. They do not increase the life or utility of the asset. Extraordinary repairs either increase the life or utility of the asset. If the extraordinary repair increases the life of the asset, it is recorded by reducing accumulated depreciation. If the extraordinary repair increases the utility of the asset, it is capitalized to the fixed asset account.

Question 30

Give examples of costs to be capitalized as land.

Answer 30

- acquisition price - closing costs, such as real estate broker commissions, legal fees, escrow fees, title guarantee insurance - any mortgages, liens, or encumbrances on the land which the buyer assumes - preparation costs, such as surveying costs, leveling costs, tree removal - cost of razing an existing building, in getting land into condition for intended use - improvements with indefinite life - less: proceeds from sale of assets on land note: excavating costs for a building and cost of improvements with a definite life are not included in land

Question 31

How is investment property defined and reported under IFRS?

Answer 31

Investment property = land and/or buildings held to earn rental income or for capital appreciation is reported using one of two models: 1) cost model: carrying value = historical cost - accumulated depreciation 2) fair value model: reported at fair value and not depreciated. Gains and losses from fair value adjustments are reported on the income statement

Question 32

State two rules concerning capitalizing interest

Answer 32

1) only capitalize interest on money actually spent, not on amount borrowed 2) the amount of capitalized interest is the lower of: a. actual interest incurred, or b. computed capitalized interest (avoidable interest)

Question 33

For capitalizing interest, when does the capitalization period begin?

Answer 33

Begins when three conditions are met: 1) expenditures for the asset have been made 2) activities that are necessary to get the asset ready for its intended use are in progress 3) interest cost is being incurred Ends when the asset is substantially complete and ready for its intended use.

Question 34

Name the most common depreciation methods. Give the basic formula for calculating each method.

Answer 34

Straight-line: (cost - salvage) / useful life Sum-of-the-Years' Digits: Sum of years = n(n+1)/2 (cost - salvage) x (years remaining) / (sum of years) Double-Declining Balance: 2 x Straight-line rate x net book value of asset *no deduction for salvage to determine the depreciable base. depreciate down to salvage value. Units of Production: (cost - salvage) / estimated hours x actual hours for period

Question 35

Explain the different approaches to depreciation under IFRS and US GAAP

Answer 35

Under IFRS, the depreciation method used should match the expected pattern of fixed asset consumption (not required under US GAAP) Under IFRS, component depreciation is required (not required under US GAAP)

Question 36

State the rules for computing depletion on natural resources. [Remember is is REAL property]

Answer 36

Residual value (subtract) Extraction/development cost Anticipated restoration cost Land purchase price ((cost of land + extraction development costs + anticipated restoriation costs - residual value) / estimated recoverable units) x Units extracted = depletion

Question 37

What assets are subject to the impairment test?

Answer 37

- long-lived assets, specific identifiable intangibles, and related goodwill to be held and used - long-lived assets and specific identifiable intangibles slated for disposal - certain assets of a state-regulated entity note: the test must be done at least annually

Question 38

Describe the impairment test for recoverability under US GAAP

Answer 38

If the sum of the undiscounted expected future cash flows is less than the carrying amount, an impairment loss needs to be recognized.

Question 39

Name the two rules for performing impairment calculations under US GAAP

Answer 39

Determining impairment: use the undiscounted future net cash flows. an impairment loss exists if total undiscounted cash flows are less than the carrying value. Amount of impairment: use the fair value of asset impairment loss = fair value - carrying value

Question 40

How is impairment evaluated under IFRS?

Answer 40

Under IFRS, impairment exists if the carrying value of the fixed assets exceeds the higher of: - fair value - costs to sell - value in use (present value of future cash flows)

Question 41

How is the impairment loss reported in the financial statements?

Answer 41

As a component of income from continuing operations before income taxes The carrying amount of the asset is reduced.

Question 42

Is restoration of impairment losses permitted under US GAAP and IFRS?

Answer 42

US GAAP: restoration (reversal of impairment losses) is permitted for assets held for sale. Restoration is prohibited for assets held for use. IFRS: restoration is always permitted.