Download FAR study guide for CPA test and more Cheat Sheet Financial Accounting in PDF only on Docsity!
FAR 1: Financial Accounting
Unexpired cost (asset) expired cost (expense) Inventory ----------------> COGS Prepaid insurance ----------------> insurance expense NBV fixed assets ----------------> depreciation expense Cost of patents ----------------> amortization expense ● Multi-step IS - reports R&E separate from R&E and g/l (normal-what we’re used to) ● Discontinued operations - reported separately, net of tax ○ Disposed of or held for sale ○ Must represent strategic shift ○ Do not depreciate or amortize asset anymore ○ you cannot reverse impairment beyond the original amount that was impaired ● selling expenses - costs directly related to generating sales or delivering products to customers ● General and administrative expenses - costs related to overall business operations and management, not tied to specific sales ● Foreign currency - adjust balances @ YE, record g/l ○ Direct method - domestic currency in numerator. ex) $1.47 buys € ○ Indirect method - foreign currency in numerator. ex) €0.68 buys $ ○ AR in foreign currency - foreign currency ↑, assets ↑ - GAIN (can buy more dollars) ○ AP in foreign currency - foreign currency ↑, assets ↑ - LOSS (need more US dollars to pay off) ● Other comprehensive income - gains and losses that go direct to equity and are not included in net income ○ Sources of OCI → PUFI ■ P ension adjustments ■ U nrealized g/l on AFS debt securities + hedges ■ F oreign currency translation items ■ I nstrument-specific credit risk ● Comprehensive income - (like a subtotal) changes in owner equity other than transactions with owners (owner investments and distributions) ○ Comprehensive income = net income + other comprehensive income ○ CI closes to BS ○ NI closes to RE ○ OCI closes to AOCI ● Accumulated other comprehensive income - running total of OCI over time (like RE)
EPS & PUBLIC REPORTING TOPICS
● 10-K - annual filing ○ 60 days large accelerated - $700m market share ○ 75 days accelerated - $75m-$700m market share + $100m revenue ○ 90 days for all others - revenue under $100m ● 10-Q - first 3 quarters ○ 40 days large accelerated and accelerated ○ 45 days all others ● Simple capital structure - only common stock, only need to report EPS (no convertible bonds, outstanding options or warrants) ● Complex capital structure - securities that can potentially be converted to CS and dilute EPS
basic EPS = income available ¿ CSH ( AKA net income − preferred dividends )
weight
Calculating preferred dividends ● Cumulative = number of preferred shares x par value per share x rate ● Noncumulative = declared
diluted EPS = income available ¿ CSH + interest on dilutive securities ∧ CY bond am
Beginning shares OS
+Shares sold during period (time weighted)
(shares reacquired)
+stock dividends and splits (retroactive)
(reverse stock splits)
WACSO
○ Treasury stock method - used to calculate dilutive EPS on options and warrants ■ Determine if options are dilutive - AKA “in the money” (average price > exercise/strike price), assume options exercised at the beginning of the period ■ Use proceeds from stock to buy back as many as you can @ average price ■ Difference between # shares issued w/ options and # shares repurchased is added to denominator of diluted EPS
additional shares OS =¿ shares −
¿ shares × exercise price
average market price
○ If converted method - used for convertible securities (bonds, preferred stock) ■ Add interest expense from assumed conversion on bonds → stock, net of tax to numerator (if securities are converted NOT at the beginning of the year, only add back interest for portion of the year interest not paid) ■ Add #CS shares associated with conversion to denominator ■ If convertible bonds issued during the period, assume stock issued @ that date for weighted average calculation ■ Add back preferred dividends to numerator (don’t have to pay preferred dividends if they’ve been converted to common shares) ● Stock dividends and stock splits - if happens after YE but before FS - retroactively adjust. Reverse stock split would retroactively reduce shares OS for all periods presented
STOCKHOLDER’S EQUITY
● Stockholders equity - capital stock, APIC, RE, AOCI, treasury stock ● Capital stock - authorized, issued, or OS ● Treasury stock - issued but not OS ● Common shareholders might have preemptive right to proportional share of additional CS issued
BV per share =
CS equity ( assets − li abilities − preferred equity − dividends ∈ arrea
CSO
Total SH equity
(PSO @ greater of call or par value)
(cumulative preferred dividends in arrears)
Common shareholder equity
● Preferred stock - first in line for payment upon liquidation (after debtors) ○ Cumulative PS - dividends accumulate in arrears ○ Participating PS - shares with CSH in dividends in excess of specific amount ■ Take % on stock x #OS x par value, issue this amount to PSH, then take same % and apply to CSH. Then split up remainder by proportion of total value outstanding (#OS x par)
Cash 1,000,
Dividend income 800,
Investment in XYZ 200,
● Treasury stock - accounted for using cost method or par value method - difference in timing for recognition of g/l ○ Cost method - gain or loss calculated upon reissue (used 95% of time) ■ Recorded, carried and reissued at reacquisition cost ■ Any “gain” is credited to PIC-TS ■ Any “loss” is charged against previous “gains” then RE ■ Reported as deduction from total stockholders equity ○ Par value method - gain or loss calculated immediately upon repurchase ■ Recorded at par value with excess recorded as deduction to PIC-CS and then from RE after PIC-CS is depleted ■ Reported as deduction from capital stock
FAR 2: Financial Reporting & Disclosures
REVENUE RECOGNITION
● Revenue recognition - 5 step approach - ISTAR
- Identify contract w/ customer - obligation present, identifiable rights, commercial substance
- identify separate performance obligation - promise to transfer distinct g/s, separately identifiable
- Determine transaction price
- Allocate transaction price to separate performance obligations - look at stand alone price, then allocate accordingly
- Recognize revenue - can satisfy at point in time or over time ● Contract modification - treat as new contract if: ○ Addition of distinct goods and services ○ Price increase appropriately reflects stand alone selling price of additional g/s ● Contract asset - right to consideration (AKA you’ve done the work, but you can’t bill them yet) ● Contract liability - must be recorded when an entity has an obligation to transfer g/s (AKA unearned revenue, received payment but haven’t completed project) ● Long term construction projects ○ Current asset = cumulative costs incurred + cumulative GP > cumulative billings ○ Current liability = cumulative costs incurred + cumulative GP < cumulative billings
● completed contract method - revenue recognized at point in time. accounts for
long-term construction contracts when contract costs cannot be reasonably
estimated
○ revenue and gains recognized upon completion of the contract
● Percentage-of-completion method - revenue recognized over period of time. used
for long-term construction contracts when costs can be reasonably estimated
○ revenue is recognized as production takes place based on ratio of cost
incurred to date compared to total cost
● When a seller is obligated to repurchase an item at the buyers request, to qualify as
a financing arrangement if the repurchase price must be equal to or exceed the
original sale price
ACCOUNTING CHANGES AND ERROR CORRECTION
● Change in estimate → PROSPECTIVE approach ○ Change in useful life ○ Adjusting YE accrual salaries ○ TO LIFO (change in principle but in separable from change in estimate) ○ Depreciation method (change in principle, but accounted for as estimate) ● Change in principle → RETROSPECTIVE approach ○ Determined cumulative effect of change in principle
- Use new method in ALL years presented
2. Calculate what earnings would have been if new method had always been
used
- Adjust beginning RE net of tax [adjustment x (1-tax rate)] ● Change in entity → RETROSPECTIVE approach ● Error correction → prior period adjustment, net of tax, restate financials
ADJUSTING JOURNAL ENTRIES
● Record @ YE, before FS ● Never involves cash account
● OCBOA - other comprehensive basis of accounting - FS prepared using cash basis, modified cash, and income tax basis Cash Basis Accrual Bases Revenue recognition Cash received Realizable & earned Expense recognition Cash paid incurred/owed/benefit received Cash → Accrual Revenue Cash Basis Revenue From CB income statement +Ending AR Revenue earned during period but not yet collected from customers -Beginning AR Cash collected during current period that was earning in prior periods -ending unearned revenue Cash collected during current period that will be earned in future periods +beginning unearned revenue Cash collected in prior period that was earned in current period Accrual Basis Revenue Cash Paid for Purchases → COGS Cash paid for purchases From CB income statement +Ending AP Expenses incurred but not yet paid -Beginning AP Expenses incurred in the prior periods and paid in current period -ending inventory Purchases made during current period that have not yet been sold +beginning inventory Purchases made in prior periods that were sold in current period COGS Cash Paid for OPEX → Accrual Basis OPEX Cash paid for OPEX From CB income statement +Ending accrued liabilities Expenses incurred during the period but not paid -Beginning accrued liabilities Expenses incurred in the prior periods and paid in current period
-ending prepaid expenses Payment made during current period that will benefit future periods +beginning prepaid expenses Payments made in prior periods that benefit current period Accrual Basis OPEX
RATIO AND VARIANCE ANALYSIS
gross ( profit ) margin =
sales − COGS
sales
profit margin =
net income
sales
return on sales =
EBIT
sales
return on assets =
net income
average total Assets sales
Dupont return on assets = profit margin × asset turnover
asset turnover =
sales
average assets
return on equity =
net income
average total equity
operating CF ratio = CF ¿ ops ¿
current liabilities
current ratio =
current assets
current liabilities
quick ratio =
cash ∧ cash equivalents + ST marketable securities + receivables
current liabilities
turnover ratios generally use average balances, but sometimes the exam has you use ending
balance
AR turnover =
sales
average AR
days sales ∈ AR =
ending AR
sales ÷ 365
inventory turnover =
COGS
average inventory
days ∈ inventory =
ending inventory
COGS ÷ 365
AP turnover =
COGS
average AP
days payables outstanding =
ending AP
COGS ÷ 365
cash conversion cycle = days sales ∈ AR + days ∈ inventory − days payables OS
total debt ratio =
total liabilities
total assets
equity multiplier =
total assets
total equity
○ Gross method ■ Ignore discount ■ If payment received within discount period, record difference, sales discount (contra revenue) account debited to reflect discount ○ Net method ■ Assume discount taken ■ Record net revenue and receivable ■ If payment not received within period, record additional revenue, credit contra account GROSS METHOD NET METHOD Accounts Receivable 100 Sales 100 if payment received as anticipated, then cash collected = AR Cash 100 Accounts Receivable 100 if payment NOT received as anticipated Cash 98 Sales discount taken 2 Accounts receivable 100 Accounts Receivable 98 Sales 98
- if payment received as anticipated, then cash collected = AR* Cash 98 Accounts Receivable 98 if payment NOT received as anticipated Cash 100 Accounts receivable 98 Sales disc. NOT taken 2 ● Trade discounts (quantity) - offered for bulk buying, quoted as percentage, records only using net method bc there is no doubt if they will use discount or not ● Uncollectible accounts - amounts not expected to be collected ○ Current expected credit loss (CECL) method - estimates % of uncollectibles, only method consistent with accrual accounting and GAAP ○ Direct write off method - waits for AR to be uncollectible before writing off, used by IRS ● Current Expected Credit Loss (CECL) method (GAAP) ○ Initial entry to record estimate:
Credit loss expense XX
Allowance for expected credit losses XX
○ Only reduce AR once you are certain a specific customer is uncollectible (e.g. bankruptcy)
Allowance for expected credit losses XX
Accounts receivable XX
○ Methods for computing: ■ Percentage of AR -
- Calculate the ending balance that should be in allowance account (ex. Total BDE is 20% of AR)
- Plug BDE ■ Aging of receivables method - percentage of each period's AR is estimated to be uncollectible (beginning balance does not matter)
- Prepare a schedule categorizing accounts by # days or months OS
- Multiply each category by specific %
- Sum all together ● Direct Write Off Method (Not GAAP - IRS) ○ Federal income tax purposes ○ Doesn’t properly match BDE with revenue ○ AR are always overstated ○ No allowance account ○ Example: Allowance for Credit Losses Allowance for expected credit losses at YE Yr 1: $10,
Credit loss expense realized thru 11/30/1: $35, During December, 2 companies file for bankruptcy and have outstanding receivables of $16, Company decides allowance account for YE should be $15, In February year 2, one of the bankrupt costumes paid $5000 that was previously deemed uncollectible Required: prepare JEs for initial write offs during December Yr 1, calculate and record JEs for needed adjustments at end of year, record JE for collection on account in Feb
Allowance for expected credit losses 16,
Accounts receivable 16,
Credit loss expense (15,850+6,000) 21,
Allowance for expected credit losses 21,
Accounts receivable 5,
Allowance for expected credit losses 5,
Cash 5,
Accounts receivable 5,
● Pledging accounts receivable - Using existing AR as collateral, company retains title, footnote disclosure only ● Factoring of accounts receivable - converts AR to cash by selling it to “factor,” can be done with our without recourse ○ Factoring without recourse - similar to a true sale, factor assumes risk of loss, AR removed from books
Cash XX
Due from factor XX security deposit - retained by factor in case of
returns, etc
Loss on sale of AR XX plug
Accounts receivable XX
○ Factoring with recourse - factor has option to resell any uncollectible receivables back to seller ■ Can be accounted for as sale or borrowing, similar to pledging receivables as collateral ■ In order to be considered a sale, must meet following conditions:
- Transferors' (sellers) obligation for uncollectible accounts, can be reasonably estimated
- Transferor surrenders control of AR to buyer
- Transferor cannot be required to repurchase receivables (May be requested to replace with new receivables) ● Securitization of AR ○ AR transferred to a different entity such as a trust or subsidiary ○ Entity sells securities that are collateralized by AR ○ Investors receive cash as AR paid ● Notes receivable - written promise to pay a debt, promissory note, can be CA or LTA measured @ NPV ○ Valuation and presentation ■ Unearned interest and finance charges are deducted from face value of note
● GR: inventory includes any goods and materials that company has legal title to → follows possession ● application/exceptions ○ Goods in transit - if not specifically outlined in contract, passing of title depends on shipping terms ■ FOB Shipping Point - buyer gets title once seller puts goods in truck ■ FOB Destination - seller retains inventory until goods are received by buyer ○ Nonconforming goods - ship the wrong product, title remains with seller ● Consigned goods - seller (consignor) delivers goods to agent (consignee) ○ Consignor keeps inventory on books ○ Title passes directly from consignor to third party at POS ○ Consignee just receives sales commission for goods sold ● Sale with mandatory buyback - seller keeps goods on inventory even though title passed to buyer - sometimes part of financing arrangement ● Installment sale - seller sells goods on installment, retains legal title as loan security ○ Buyer has possession, seller has legal title ○ If uncollectible amount CAN be reasonably estimated, include in buyer's inventory ○ if it CANNOT be reasonably estimated, include in sellers inventory Valuation of Inventory ● Apply rule of conservatism - gains not recorded until realized ● Inventory recorded at cost and includes freight in ● Departures from cost basis ○ Precious metals and farm products are valued at NRV (selling price - cost to sell) ○ Lower of cost or market (LIFO or retail) ○ Lower of cost and NRV (FIFO or weighted average) ○ Losses → booked immediately ■ Material - disclose separately on IS ■ Immaterial - regular increase COGS ○ Reversal of inventory write-downs prohibited by GAAP ● Lower of cost and NRV - used for FIFO and weighted average ○ NRV = selling price - costs to complete and dispose of inventory ● Lower of cost or market - used for LIFO or retail inventory method ○ Calculate market value - choose the MIDDLE value of the following
- Market ceiling → NRV
- Market floor → NRV - profit margin
- Replacement cost ○ Choose lower of cost or market (middle) JE to record write down:
Inventory loss due to decline in market value XX
Inventory XX
● Periodic inventory system ○ when buying inventory, DR purchases, not inventory ○ When selling inventory, only one JE (DR to cash, CR to sales) - no entry for COGS ○ Physical count of EI and end of period to back into COGS ○ Inventory AFS determined by adding BI and purchases Beginning inventory +purchases (includes freight in) GAFS (ending inventory) → physical count COGS ○ If ending inventory OVERSTATED, then: ■ COGS → UNDERSTATED ■ Profits → OVERSTATED ■ RE → OVERSTATED
■ Equity → OVERSTATED ● Perpetual inventory system ○ Inventory updates for each purchase and sale as they occur Purchase:
Inventory XX
Cash XX
Sale:
COGS XX
Inventory XX
Cash XX
Revenue XX Inventory Cost Flow Assumptions ● Inventory valuation is not required to have rational relationship between physical inventory flows ● Inventory valuation methods ○ Specific identification method - unique goods ○ FIFO - sell oldest first ○ Weighted average - must have periodic system to use ○ Moving average - perpetual system ○ LIFO - sell newest first ○ Dollar value LIFO - need price index ● Weighted average - follows periodic system ONLY ○ At end of period, average cost of each item in inventory is weighted average cost of all items in inventory ○ Particularly suitable for homogeneous products
weighted average cost per unit =
total inventory costs available
total ¿
of units available ¿
Example: Weighted Average Purchases / (Sales) Quantity Price Price 4,000 $4.25 $17, 2,000 $4.50 $9, 3000 $4.75 $14, Total: 9,000 $40, Sales 4, Weighted average cost per unit = $40,250/ = $4. Cost of goods sold = 4,000 units x $4. = $17, Ending inventory = 5,000 units x $4. =$22,
Year 2 layer 15,000 26,000 20,000 (15,000 x 1.33) 12/31/2 $60,000 $80,000 $66, Required: Compute the LIFO layers added and ending inventory for Years 1 and 2 at dollar value LIFO Year 1 price index = 54,000/45,000 = 1. Year 2 price index = 80,000/60,000 = 1. Example: Dollar Value LIFO Price index: 1.2 - AKA, prices have increased by 20% Year 1 ending inventory: $100, Year 2 ending inventory: $132,000 using current costs Required: what should ending inventory be reported at on this year's balance sheet? Step 1: remove price increase (AKA how much would EI be using base year prices) 132,000 / 1.2 = 110, Step 2: determine new inventory layer (how much did inventory increase by, using BY prices) 110,000 - 100,000 = 10, Step 3: increase new layer back to current prices 10,000 x 1.2 = 12, Step 4: calculate total inventory under dollar value LIFO 100,000 + 12,000 = 112, ● In a period of rising prices: ○ FIFO = highest EI, lowest COGS ○ LIFO = lowest EI, highest COGS ○ Moving average = higher EI and lower COGS than weighted average method ● Gross profit method - used for interim FS as part of periodic inventory system. GP% is known and used to calculate cost of sales Example: Gross Profit Method Gross profit percentage: 20% Balances 8/31: Beginning inventory $100, Purchases $100, Sales $200, On 9/1, a flood destroys all inventory Required: estimate cost of destroyed inventory Gross profit = 20% Cost of goods sold = 80% Beginning inventory 100, Purchases 100, GAFS 200, COGS (160,000) - 80% of sales Ending inventory $40,
PROPERTY, PLANT AND EQUIPMENT
● PPE must be shown separately on BS or in footnotes @ historical cost
NBV = cost ( DR )− accumulated depreciation ( CR )
● Incorporates freight in and getting asset into condition necessary for its intended use ● Donated fixed assets - records at FMV (along with incidental costs incurred) and will result in nonoperating gain on IS ○ DR fixed asset at FMV, CR gain PPE - Property ● Land purchased with intent of building construction includes all costs incurred up UNTIL excavation of new building ● Digging foundation begins cost of building ● Cost of land ○ Purchase price ○ Brokers commissions ○ Title, recording, legal fees ○ Draining swamps and clearing brush ○ Site development (grading, filling holes, leveling) ○ Existing obligations assumed by buyer (mortgages, back taxes) ○ Costs of removing old building ○ SUBTRACT proceeds from sale of existing buildings and natural resources such as timber ● Land improvements - depreciable ○ Fences, sidewalks, water systems, paving, landscaping, lighting ○ Interest costs during construction period should be added to cost of land improvements PPE : Plant (Buildings) ● Purchase price, deferred maintenance, alterations and improvements, architect fees, digging a hole for foundation, construction period interest PPE: Equipment ● All expenditures directly related to acquisition or construction ● Invoice, less cash or other discounts, add freight in (and insurance while in transit and while in construction), add installation charges (testing and prep), tax, possible addition of construction period interest ● GR: capitalized on BS and depreciated over EUL ● Sometimes expensed on IS ( AIR ) ○ A dditions: increase FA and are capitalized
Asset XX
Cash XX
○ I mprovements ○ R eplacements - capitalized ■ If old assets CV is known, remove it and recognize g/l ■ If carrying value of old asset is unknown, extend assets life through improvement
Accumulated Depreciation XX
Cash XX
○ AIR is EXTRAORDINARY so CAPITALIZE (treat as long-term investment on BS rather than expense immediately on IS) Fixed Asset Constructed by Company ● Includes the following costs: ○ Direct material, direct labor, repairs and maintenance expenses that add value to FA by increasing life, quality, or usefulness ○ Overhead
$500,000 (construction loan) 11% $55, $100,000 (remainder from general loan) 9% $9, Total capitalizable interest: $64,000 (less than $150k, so 64k gts capitalized, the rest gets expensed)
PP&E: DEPRECIATION AND DISPOSAL
● Consider DATE ● Tangible asset → depreciate ● Intangible asset → amortize ● Natural resource → deplete ● Component depreciation - separate depreciation of each part of item of PPE that is significant to total cost of FA (subtract cost of replacement part when calculating depreciable base for asset, depreciate replacement part separately) ● Composite depreciation - averaging economic lives of PPE units and depreciation entire class of assets over single life ○ If you sell assets in a class:
Cash XXX
Machinery at cost XX
Accumulated depreciation (PLUG)
Example: Composite (group) Depreciation Total Cost Estimated Salv Value EUL Machine A $550,000 $50,000 20 Machine B 200,000 20,000 15 Machine C 40,000 - 5 Required: illustrate the sale of Machine A for $260,000 using composite depreciation Machine Total Cost Est Salv Val Depreciable Cost EUL Annual Depreciation A $550,000 $50,000 $500,000 20 $25, B 200,000 20,000 180,000 15 12, C 40,000 - 40,000 5 8, Total $790,000 $70,000 $720,000 $45, Average composite life = total depreciable cost / total annual depreciation = $720,000 / $45,000 = 16 years
Cash 260,
Accumulated depreciation 290,
Cost of Machine A 550,
Basic Depreciation Methods ● If you change depreciation method, account for prospectively ● Half-year convention - half years depreciation taken in year of acquisition and disposal ●
straight line depreciation =
cost − salvage value
estimated useful life
∑^ of^ years^ digits^ depreciation^ =(^ cost^ −^ salvage^ value^ )^ ×^
remaining life
∑^ of^ years^ digits
∑^ of^ years^ digits^ =
N × ( N + 1 )
N=EUL
Example: Sum of the Year’s Digits Method Asset cost : $11, Salvage value: $1, EUL 4 years Required: calculate depreciation expense for each year Depreciable base = 11,000 - 1,000 = 10, Sum of years digits = [4 x (4+1)] / 2 = 10 Year 1: 10,000 x (4/10) = $4, Year 2: 10,000 x (3/10) = 3, Year 3: 10,000 x (2/10) = 2, Year 4: 10,000 x (1/10) = 1,
units of production depreciation = rate per unit × units produced
rate per unit / hour =
cost − salvage value
estimated units ∨ hours
double declining balance =
N
N
N
DDB depreciation = 2 ×
N
× ( cost − AD )
Example: Double Declining Balance Asset cost : $10, Salvage value: $2, EUL 10 years
- Calculate maximum accumulated depreciation - total depreciation cannot exceed this Max AD = cost - salvage value - 8,
- Calculate constant rate of depreciation 2/10 = 20% Year Double NBV Remaining Depreciation Accumulated
