Term
| Is interest included in inventory? what about taxes? |
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Definition
| Interest no, taxes on purchases, yes. |
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Term
| Are freight in costs included in inventory? What about freight out? What about freight to consignee? From consignor? |
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Definition
| Freight in, yes; freight out (no, SG&A). Transport TO consignee, yes; from consignor, no, goes on consignor's books |
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Term
| Does FOB shipping point vs FOB destination affect which costs are included in inventory? |
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Definition
| YES; Freight in and other shipping costs (handling, packaging, etc) are included ONLY if the purchase is FOB shipping point. If it is FOB destination, the costs belong to the seller as sales costs. |
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Term
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Definition
| COGS, if presented as part of trial balance and SGA exp are listed elsewhere |
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Term
| If freight in is included in inventory costs, at end of year, what's left in inventory? |
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Definition
| just remember that ending inventory can be divided into inventory and freight costs proportionately if a questions asks! |
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Term
| What is a chain discount? |
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Definition
| A type of trade discount. It will be described as 20% and 10%. The treatment is to apply each discount successively. Eg if the list price is 20K then the cost recorded in inventory after the purchase is 20K (1-.2)(1-.1)=14.4K |
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Term
| What kinds of costs are commissions and advertising costs? Is this affected by whether goods are being sold on consignment? |
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Definition
| They are selling costs, whether you sell them or a consignee does! do NOT include in inventoriable product costs. |
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Term
Which leads to a higher COGS/lower NI:
FIFO vs LIFO? Perpetual vs Periodic LIFO? |
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Definition
LIFO --> higher COGS & lower NI than FIFO.
Periodic LIFO --> higher COGS than Perpetual |
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Term
| What extra account is used in a periodic inventory system that is not used in a perpetual inventory system? |
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Definition
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Term
| How deal with purchase returns and allowances in perpetual vs periodic system? |
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Definition
| Perpetual goes directly to inventory acct, periodic go to Purchases acct |
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Term
| What is inventory shrinkage? |
|
Definition
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Term
| What happens to cost of "inventory shrinkage" under periodic vs perpetual system? |
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Definition
| Perpetual can be accounted for separately but a disadvantage of periodic is that you are forced to include them in COGS because COGS is just a "plug" number rather than a direct computation |
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Term
| How calculate weighted average vs moving average? Which inventory system does each apply to? |
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Definition
| Weighted average is for periodic systems and gets a weighted average for all goods present/bought/sold during the period. Moving average is for perpetual and is recalculated at every event |
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Term
| What is a LIFO liquidation? When does it occur? Why does it occur? Effects on FS? |
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Definition
| this is when you reach the bottom, cheapest layer of inventory--might be 20 years old and reflect those costs. Thus it makes the company temporarily and illusory look more profitable. Might occur b/c of poor planning or lack of supply |
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Term
| Main reason cos will choose LIFO over FIFO? |
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Definition
| generally minimizes taxes b/c COGS is at replacement/current cost (but exception if LIFO liquidation occurs) |
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Term
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Definition
| FIFO last in still here so ending inventory fairly valued (BS on target); LIFO first in still here so COGS are at replacement cost and fairly valued (IS on target) |
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Term
| What is a LIFO reserve account? When is it used? What is the other acct in a JE? |
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Definition
| Used by companies that use one system for internal reporting (eg moving average) and LIFO for F/S and taxes. The LIFO reserve account must be adjusted to equal the difference between the two methods (avg vs LIFO) in valuing inventory. The dr/cr will be to COGS. |
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Term
| How determine "market" for lower of cost or market? |
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Definition
| market = replacement value; CEILING = NRV = sales price less cost to complete; FLOOR = NRV - profit margin. If market is >ceiling, market = ceiling; if market is |
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Term
| What is the purpose of LCM? |
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Definition
| Conservatism--writing down goods to their replacement cost if that has dropped |
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Term
| What effect does the LCM rule have on losses due to decline in cost of goods? |
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Definition
| Spreads them out so that part of the loss is written down when you revalue inventory to LCM and then part when the good is sold |
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Term
| How is "cost" determined for LCM? |
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Definition
| Cost = "original cost" under whichever inventory rule co has chosen: FIFO, LIFO, wtd avg, moving avg, specific id etc |
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Term
| If inventory must be written down because of the LCM rule, what are the two methods for doing so? |
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Definition
direct method and allowance method.
Direct: Dr COGS, Cr Inventory.
Allowance: Dr HOlding loss CR Allowance to reduce inventory |
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Term
| What kinds of inventory are valued at replacement cost rather than LCM |
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Definition
|
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Term
| what kinds of inventory are valued at market rather than LCM |
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Definition
| things where cost is hard to determine and market is easy, eg agricultural products, precious metals |
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Term
| LCM can be applied to individual items, groups of items, or inventory as a whole. WHich method results in the lowest valuation of inventory? |
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Definition
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|
Term
Gross Margin % =? another name
Margin on cost =? which is always bigger |
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Definition
Gross margin % = profit/sales rev = margin on sales
margin on cost = profit/COGS--always bigger b/c cogs is always < sales |
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Term
| converting margin on cost to margin on sales or vice versa |
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Definition
| know that (sales-cost)/sales = margin on sales, (sales-cost)/cost = margin on cost. Whichever one you are given,eg given margin on sales/gross profit% at .4, then set the related attribute (sales or cost) to 1.0 to solve |
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Term
| What is the retail inventory method? Is it allowed per GAAP? |
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Definition
| Keep the records at retail, then use known relations to convert to book. Yes, ok for GAAP. |
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Term
| How use the Retail Inventory Method? |
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Definition
| Start to keep records for Beg & Purch at cost as well as retail --> CGAS at both. Use CGAS at cost: CGAS at retail to get cost to retail %. Then sales and End Inv are at retail and End Inv at retail x cost/retail % = End Inv at cost |
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Term
| Retail Inv method: freight in, shortages, purchase returns, shortages, markdowns sales returns--which at retail which at cost which at both? |
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Definition
| freight in at cost, purchase returns at both, markdowns at retail only, abnormal shortages at both, normal at retail only, employee discounts, markdowns at retail only, sales returns at both |
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Term
| Compare/contrast treatment of impaired PPE held for use vs held for sale |
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Definition
Held for use vs held for sale:
1.Det if impaired by expected future CF - CV vs. cf NRV - CV
2. Det amt of loss: CV - FV vs lower of cost vs FV - cost of disposal
3. loss cannot be written back up vs can-note implication is that for latter can recog a GAIN up to amt of prev loss
4. continue to depreciate vs not--essentially PPE held for sale is treated like inventory-take off PPE & put in curr other assets |
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Term
| How is interest expense treated when equip is bought? self-constructed? |
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Definition
| Expensed when purchased but capitalized when self-constructed (chk, pt in one CPAExcel slide) |
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Term
| WHY is interest treated differently when an asset is self constructed as opposed to purchased? |
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Definition
| In this case the assest is not available for use while it is being constructed so you capitalize the interest when it cannot be used and then expense it thru depreciation |
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Term
| Is a "self-constructed asset" necessarily constructed by the firm itself? |
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Definition
|
|
Term
| amt of interest to be capitalized for self constructed asset? |
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Definition
| lesser of actual or "avoidable" (multiply avg accum expenditures x interest rate) |
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Term
| How determine AAE (average accumulated expenditures) on self constructed assets |
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Definition
| either wtd avg or simple beg/end yr avg ok |
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Term
| maximum amt interest that can be capitalized? |
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Definition
| actual. If AAE x int rate exceeds this, max write off is actual! |
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Term
| INTEREST rate to use in self constructed problems |
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Definition
| wtd avg of all int exp over all debt UNLESS the specific interest method is specified. DON'T just use the construction int! |
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Term
| How to use the SPECIFIC interest rate for calc construction interest? |
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Definition
| Calc the AAE. Then for the amt of specific construc expense calc the interest. BE CAREFUL this may not be all the debt. Use the avg rate on nonconstructed interest for the remaining construc debt |
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Term
| What is an accretion expense and what is it related to? |
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Definition
| An accretion expense is the growth in an asset retirement obligation (ARO) over time--include initially in depletion at PV then grow it to final value over time. Dr nat res asset Cr ARO |
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Term
| In nonmonetary exchanges, what % does the gain have to be of the total consideration for the whole gain to be recognized? |
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Definition
| 25% plus. recog new asset at fmv |
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Term
| difference in accounting for convertible bonds vs bonds w/detachable warrants? |
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Definition
| one security vs two securities |
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Term
| two methods to account for convertible bond conversions |
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Definition
| book value vs market value. former uses book value and no gain or loss; latter uses FMV and does have a gain or loss. Former is more common |
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Term
| JEs for convertible bonds |
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Definition
BV: BP
(Loss if mkt value method)
CS at par
APIC
(Gain if mkt value meth and app)
also remove bond discount or premium if there is one |
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Term
| what to look for to determine gain loss on convertible bonds |
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Definition
| compare CS fmv with bv; if CS is bigger then you have a loss |
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Term
| compared to regular bonds do convertible bonds offer a higher or a lower interest rate and why? |
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Definition
| LOWER b/c there is the tradeoff of the security of the bonds PLUS the ability to convert which entices bondholders to accept a lower rate |
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Term
| As interest rates rise, what happens to bond prices? If retire debt early will there be a gain or a loss? |
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Definition
| As interest rates rise, bond prices fall. Therefore I can pay you LESS for the bond than you paid and I have a GAIN. |
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Term
| 3 key interest rates to know and what to use them for in extinguishment of bond debt |
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Definition
| coupon rate (face) tells you interest paid. yield rate at issue tells you BOOK VALUE. yield rate at retirement tells you CASH PAID. If cash paid is < book value, you have a gain, if cash paid is > book value, you have a loss. |
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Term
| What determines whether a lease is direct financing or sales type for the lessor? |
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Definition
| Whether book value of the asset = FMV or not. Yes = direct financing, no = sales type |
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Term
| How does lessee record capital lease--what interest rate to use? |
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Definition
| Use the incremental borrowing rate UNLESS the implicit rate is both LOWER and KNOWN. Record the PV of the pmts and the PV of a BPO, rental, etc |
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Term
| When does a lessee include a guaranteed lease pmt in the lease liability? |
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Definition
| ONLY if the lessee itself is the guarantor; do NOT include it if a third party is doing the guaranteeing |
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Term
| What income does a lessor recognize in the first year of a sales type lease? |
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Definition
| the difference between FMV and cost |
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Term
| *How do you calculate the interest expense for a lease liability? |
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Definition
| REMEMBER to base it on the PV of the MLP at the appropriate interest rate. Do NOT do it just on the pmt--oops! |
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Term
|
Definition
Dr Lease Asset, Cr Lease Liability
Dr Lease Liability & Interest Expense, Cr Cash
*Dr Depreciation Exp, Cr Accum Deprec |
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Term
|
Definition
Dr Lease Recv Cr Asset, Unearned Int
Dr Cash, Unearned Int, Cr Int Rev, Lease Recv |
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Term
| What add'l two req does lessor have for categorizing lease as capital? |
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Definition
| Earned/no signif uncertainties & Realizable |
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Term
| Difference DFL vs STL for lessor? |
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Definition
| Whether there is profit (only for STL)--occurs when cost is different than market value; then add DR cost and CR sales rev to JE |
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Term
| What value to use in calc deprec expense? |
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Definition
| base it on the PV of the MLP, not the FV |
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Term
| Value of net lease receivable for lessor? |
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Definition
| **the lease rec'vable (after subtracting rec'd pmts) LESS the unearned interest revenue!! |
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Term
| Why is the net lease rec'v impt |
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Definition
| it is this value on which int exp is calc |
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Term
| *In STL, what goes in COGS, Sales and Asset? |
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Definition
| SALES is FMV, asset and cogs are at COST** (remember, sales - cost = GP) |
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Term
| treatment of leasehold improvements in operating lease vs capital lease |
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Definition
| operating lease: treat as asset and amortize over useful life or lease term, whichever shorter; capital lease capitalize along w/bldg |
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Term
| sales value to use for STL |
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Definition
|
|
Term
| what incl when there is a bpo |
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Definition
| pv of bpo should be incl in mlp |
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Term
| three rules for recog gains on sale/leasebacks? |
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Definition
| generally gain is deferred. HOWEVER, 1. If PV of the MLP is less than 10% of FMV, recog immed. 2. If gain is > PV of MLP, defer the ord amt and the rest is recog immed. |
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Term
| two rules for recog losses on sales/leasebacks |
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Definition
1. If BV > FMV, real loss, recog immed.
2. If FMV > BV > SP, artificial loss, defer |
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Term
| in sales leasebacks how is the lease treated if it is operating VS if capital? |
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Definition
| Operating = deferred credit; Capital = asset valuation allowance |
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Term
| If have deferred gain how get it off books? |
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Definition
| SL amortization over lease period |
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Term
| what should be the balance in unearned service contract accts after adjustment |
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Definition
| the sum of the unexpired contracts for the applicable years |
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Term
| contingent liability disclosure rules for remote, reasonably possible, likely |
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Definition
| Remote-may disclose, not req; reasonably possible, disclose and range of outcomes; probable or certain, disclose and accrue LIABILITIES. NEVER accrue GAINS even if probable-not until they occur |
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Term
| contingent liabilities: if a liability is expected and there are a range of outcomes that are equally possible, do you accrue the lowest or highest of the range? What if there are a range of outcomes but one is more likely? |
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Definition
| lowest if all outcomes equally probable, most probable if there is one |
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Term
| contingent liabilities: if you have insurance for a loss, do you disclose the expected full loss or the deductible amount |
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Definition
| just the deductible since it is what actually comes out of your books |
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Term
| You produce a product covered by a 3 year warranty. How do you accrue the expected loss? |
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Definition
| Take ALL at year product sold, eg 1% of sales yr 1, 2% yr 2, 4% yr3 |
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Term
| when would you disclose a remote contingent liability |
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Definition
| when guaranteeing the debt of another, eg co guar mortgage of its prez and default remote but still disclose |
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Term
| JEs for warranty expenses? when is expense recorded as expense? |
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Definition
| Warrant Expense/Est warr liability; Est warranty liability/cash--record the EXPENSE at sale!!! |
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Term
| How do you calculate Goodwill? |
|
Definition
| amt paid LESS (Assets minus Liabilities). Do NOT use Owner's Equity amt in calc |
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|
Term
| At what level of a business is goodwill calculated: by entire business or by reporting unit? |
|
Definition
|
|
Term
| how calc goodwill based on excess earnings |
|
Definition
| calc expected earnings for bus based on industry std rate x assets, subtract expected earnings = excess, then do anuity at mkt rate |
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Term
| difference between unit market value and the market value of net identifiable assets is ________ |
|
Definition
|
|
Term
| 3 methods of calculating allowance for doubtful accts? which two are GAAP? |
|
Definition
| direct write-off (NOT GAAP, use for tax); percentage of credit sales; aging of A/R |
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Term
| rel adv of % of credit sales vs aging of A/R as method for est allowance for doubtful accts |
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Definition
| % of credit sales has BETTER MATCHING; aging of A/R has BETTER CREDIT VALUATION |
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Term
| JEs for 1. recording allowance DA, 2. for actual writeoffs, 3. recovery if pd |
|
Definition
1. Bad Debt Expense/Allow DA
2. Allow D/A; A/R
3. TWO JEs: A/R; Allow D/A , and
Cash A/R |
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Term
| What happens at a writeoff of bad debt |
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Definition
| you decide that the co will never pay and take it out of A/R, but there is no net effect b/c you have already rec bad debt expense |
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Term
| what are four ways to get money NOW from your receivables? |
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Definition
| pledge, assign, sale with recourse, sale without recourse |
|
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Term
| what are pledging and assigning? |
|
Definition
| pledging uses asset as collateral, assigning assings the rights to receive money to another |
|
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Term
| what's the difference between a sale with and without recourse? |
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Definition
| sale w/o recourse means that buyer assumes the risk that they won't be able to collect on the receivable, sale w/recourse means that if the receivables aren't paid, the buyer can go bk to the seller and demand to be made right |
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Term
| What actually gets shown on the B/S as far as pension? |
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Definition
| The DIFFERENCE betweeen the PBO and the fair value of plan assets (pension liability OR asset, depending on whether under or overfunded). PBO itself in disclosures not b/s |
|
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Term
|
Definition
| the balance of the pension liability (or asset) account. Add changes for the year to this to get the new pension liability or asset |
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Term
|
Definition
| Accumulated benefit obligation is the present value of all unpaid future retirement benefits as of the balance sheet date based on (1) service rendered to that date, and (2) current salary levels. |
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Term
| How do you calculate Pension Expense for the year? |
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Definition
| ++++--SPIDER = Service Cost for the year, Prior Service Cost for years before Plan began, Interest Cost projected (Beg PBO x disct rate) (these 3 come f/actuary and are projections); Return (actual) on plan assets, Deferred Gain (unrecog gain or loss when actual invest G/L differ from projections); Excess amort of deferred gain (you have a threshold for how big this gain can get and then you amort diffs over time) |
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Term
| How calcuate prior service cost |
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Definition
| beg PSC divided by avg service life or expected future years of service |
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Term
How calculate interest cost for pension?
How calcuate actual return? |
|
Definition
| Interest cost is projection, beg PBO x disct rate. Actual return is either Beg FV of plan assets x actual return OR Beg PA + annual contribt - Benefit Paid - Ending = Earnings (set up T acct and earnings is the plug) |
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Term
|
Definition
| Dr Pension Expense and (Prepaid Pension Cost if Asset), Cr Cash and (Accrued Pension Cost if Liability) |
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Term
| Where are G/L not already recog as pension expense reported |
|
Definition
| Accumulated OCI (net of tax) |
|
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Term
| Is the PBO in the BS? What about the FV of plan assets? |
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Definition
| NEITHER is in the B/S; only the DIFFERENCE between them is in the BS as an asset or a liability |
|
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Term
| what is used to calculate pension expense for the year: the actual return or the expected return? |
|
Definition
| use the EXPECTED; this evens out changes compared to using actual |
|
|
Term
|
Definition
| Beg PBO + service cost + interest cost - benefits pd |
|
|
Term
| role of actual and expected interest in pension expense calc? |
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Definition
| the ACTUAL interest is added in in the I in SPIDER, the EXPECTED is subtracted out in Return** |
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|
Term
| two checks on pension calcs |
|
Definition
| PBO - FV at end of year = pension asset or liability at end of year. Also, Beg Pension Asset or Liability + this year's Pension Expense LESS Funding = Ending Pension Asset or Liability |
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|
Term
|
Definition
| calc pension expense and funding (CPA Excel does as 2 JEs, Roger as one) |
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