FAR 2

Card Set Information

Author:
dan1braden
ID:
198333
Filename:
FAR 2
Updated:
2013-02-06 23:31:05
Tags:
Accounting
Folders:

Description:
Purchases, inventory methods, property plant and equipment, asset retirement obligation, interest capitalization, depreciation methods, intangibles
Show Answers:

Home > Flashcards > Print Preview

The flashcards below were created by user dan1braden on FreezingBlue Flashcards. What would you like to do?


  1. what is purchases account and how is it calculated?
    the purchases account is what is purchases during a giving period of each operating period. Net purchases includes all costs getting inventory ready for its intended use and Freight-in cost

    • *Freight in costs-included in purchases
    • *Freight out costs- included in SG&A
  2. what are the basic entries involved in inventory?
    The very basic entries involve these:

    • Seller
    • A/R 100
    •     SALES REV 100
    • COGS 80
    •     INVENTORY 80

    • Buyer
    • INVENTORY 100
    •     A/P 100
  3. what are the 2 shipping methods involved with inventory?
    the 2 shipping methods need to be addressed because this will determine who gets the freight costs. 

    • 1. FOB Shipping pt - a sale is made once its shipped. 
    • 2. FOB Destination - a sale is made once goods arrived. 
  4. there are two ways to account for inventory?
    the first way to account for inventory is a periodic inventory system. This basically mean that you calculate COGS. 

    • 1. Periodic - at the end of a period journalize & calculate COGS
    • At Purchase
    • PURCHASE X
    •     A/P X

    • Yr End
    • END INVENTORY X
    • COGS X
    •     PURCHASES X

    • Perpetual inventory system - a sale is made & COGS calculated immediately
    • At Purchase
    • INVENTORY X 
    •     CASH X

    • At Sale
    • A/R X
    •     SALES REV X
    • COGS X
    •     INVENTORY X
  5. what are the inventory costing methods for calculating ending inventory available? 
    • there are six types available;
    • 1. Specific Identification- Tracks costs to a specific item. This is used for unique inventory like Ferrari's 

    2. FIFO- this simply means inventory that comes in first leaves first. 

    3. LIFO- this simply means inventory that comes in last leaves first. 

    4. Moving Avg- this is a perpetual avg system. Takes an average of cost of inventory everytime a sale is made. 

    5. Weighted Avg- this is a periodic avg system. Takes avg of inventory periodically to value ending inventory which in turn calculates COGS. 

    6. Dollar-Value LIFO- Inventory gets measured in dollars instead of units. so focus on changes in dollars rather than unites. Inventory is valued @ begin vs end. Simply bring the Beg yr $'s vs ending $'s which are deflated using CPI gives diff. 
  6. what is the CPI and how do you calculate it?
    The CPI is the consumer price index and this is used in dollar value LIFO for deflating ending year dollars. There are 3 methods to get the CPI;

    • 1. simplified- use consumer price indexes given @ market
    • 2. double-extension- Current cost/base cost=index this year
    • 3. Linked chain-current cost/prior year cost=index
    • current cost=current quantity x end yr unit cost.
    • prior period cost= current quantity x beg yr unit cost. 
  7. what is LCM and why is it used?
    LCM stands for lower of cost or market. this is used when we value inventory. We value inventory based on the lower of the cost of the inventory or market(middle of 3 numbers).

    • Market is the middle of 3 numbers. 
    • 1. Ceiling=NRV(selling price-cost disposal)
    • 2. Replacement Cost(cost to buy)
    • 3. Floor=NRV-normal profit margin.

    • If a write-down occurs we simply record 
    • LOSS X
    •     INVENTORY X
  8. there are a couple of inventory estimation methods what are they and why are they used? 
    There are 2 inventory estimation methods and they are used to estimate ending inventory incase something happens, like a fire. They are the following;

    1. Gross Profit Method-plug in #'s very simple. here is the formula used. 

    • Sales
    • <COGS>
    • GP

    • Beg Inv
    • +Purchases
    • GA4S
    • <End Inv>
    • COGS

    2. Retail Inventory Conventional Method-this is cost/retail approach

    •                             COST            RETAIL
    • +Beg Inv                 X                    X
    • +Purchases              X                    X
    • +Freight In               X                    
    • +Net Markups           X                    X      
    • GA4S                       X                    X
    • <Net Markdowns>                         <X>  
    • Sales Price GA4S                             X
    • <Sales>                                       <X>
    • <Loss>                                        <X>
    • <Discounts>                                 <X>  
    • Ending Inv.                                      X

    C/R%= GA4S #'S X End Inventory@Retail

    *IFRS same except Markdowns above first line 
  9. what are firm purchase commitments and how do we book?
    firm purchase commitments are non-cancelable agreement to buy inventory in the future. If something happens and you are going to lose money in the future because of your purchase commitment made you need to book loss immediately.

    • Example
    • ESTIMATED LOSS X 
    •     ESTIMATED LIABILITY X
  10. Inventory under IFRS? Explain?
    there are a couple of small differences that are worth pointing out. Need to look back at book for this section as there is a lot better info. 

    • 1. No LIFO cost Assumption
    • 2. LCM is LCNRV so basically lower of cost or NRV
    • 3. Also biological Assets(plants and animals) are measured at FV-Estimated sale costs.
  11. what is property, plant, and equipment? 
    property, plant, and equipment are fixed assets that are acquired for long-term use in normal operations. These are things such as buildings, cars, etc. Just like inventory we capitalize all costs associated with getting the PP&E ready for its intended use. Example entry

    • ASSET X
    •     CASH X 

    *cost getting the PP&E ready for intended use include the following: Purchase price, legal fees, deliquent taxes, title insurance, test runs and sales tax
  12. what is the cost of land in regards to PP&E?
    when a company buys a piece of land and there is a building that needs to be taken down all costs associated are sent to the cost of land and capitalized. The cost of clearing, landscape, destroying building, etc. Scraps sold can reduce the amount of land cost. 
  13. what is a lump-sum purchase and why do I need to know? 
    Lump-sum purchases- acquire land&building in 1 purchase price. each asset needs to have a part of the purchase price so we use the relative FMV approach. We apply purchase price based on relative FMV for each. 
  14. what is ARO and how do we account for them? 
    ARO's are Asset Retirement Obligation- this is when you have something like an oil rig and your are required to return the land to its original state. So having to get rid of the asset has to be reported as an obligation. Like all Obligations that are non-current record at PV. Journal entry example,

    • LAND 30
    • OIL RESERVES 80(PLUG)
    •     CASH 100
    •     ARO LIABILITY 10(PV 20 X 0.5 FACTOR)

    • Every Year
    • ACCREATION EXP X(OVER LIFE ASSET)
    •     ARO LIABILITY X

    • At the End
    • ARO LIABILITY X
    •     CASH X

    • Disclosures required for ARO's are the following:
    • -Description of Obligation
    • -Description of Method Used, etc. 
  15. what happens if land is donated to the corp?
    if land is donated a simple entry is required. Occasionally someone will get land donated and here is the entry:

    • LAND X
    •     CONTRIBUTED REVS X
  16. when do we capitalize interest and why do we capitalize interest? 
    interest is capitalized if it could have been avoided had you not built a building. This means that interest costs during construction period needs to be capitalized. 

    *The capitalized amount is the lower of Actual Interest or weighted avg of Accumulated Expenditures.

    • Capitalize Costs if:
    • -construction of building is for company use
    • -asset manufactured for resale special order

    • Don't Capitalize Costs if:
    • -costs incurred after construction
    • -selling asset is normal course of business. 

    • Amount Capitalized:
    • -Weighted avg Accum. Exp. x Interest rate = capitalized portion. 

    • Example borrow 1 million over 2 years
    • 600k expenditures
    • x50%
    • =300k avg expenditures
    • +0 prior period 
    • =300k
    • x12% interest rate
    • =36k capitalize portion

    • Journal Entry
    • ASSET 36
    • EXP 84(PLUG)
    •     CASH 120(1000 X 12%)
  17. what happens with costs incurred after acquisition?
    costs incurred after the acquistion of an asset fall into several categories:

    Repairs and maintenance- costs incurred to keep asset or restore asset simply entry

    • EXP 10
    •     CASH 10

    Bigger- if costs make additions, new capacity, new functions capitalize like this

    • ASSET 10
    •     CASH 10

    Better- if costs improve the efficiency of the asset

    • ASSET 10
    •     CASH 10

    Longer- extends the life of the asset

    • ACCUM DEP 10
    •     CASH 10
  18. what are the 4 depreciation methods used for fixed assets? 
    the depreciation methods used are the following:

    • 1. Straight-line Dep- 
    • (COST-RESIDUAL)/USEFUL LIFE

    • 2. Double Decline- Balance Dep-
    • (COST)/USEFUL LIFE X 2

    • 3. Sum of Yrs Digits Dep-
    • (COST-RESIDUAL) X (YEARS LEFT/SUM OF YRS)

    SUM OF YRS= N(N+1)/2

    • 4. Units of Production Dep-
    • (COST-RESIDUAL) X (HRS USED/TOTAL HRS)
  19. what do we do if group depreciation takes place and an asset is sold from group? 
    if we are depreciating a group of assets like UPS Trucks. So when we sell 1 truck follow this example entry:

    • CASH X(CASH YOU GET)
    • ACCUM DEP(PLUG)
    •     ASSET X(CV)
  20. what happens with changes in estimates? 
    changes are made prospectively & disclosed
  21. what happens with changes in principals?
    these changes are handled prospectively as well and should be disclosed. 
  22. when do impairments take place in regards to Assets held for use?
    • impairments take place when an asset 
    • 1. CV>EXPECTED FUTURE CASH FLOWS=LOSS
    • 2. CV vs FV= AMOUNT OF LOSS
    • 3. ENTRY
    • LOSS ON IMPAIRMENT X
    •     ACCUMULATED DEP X
  23. when do impairments take place on Long lived assets held for sale? 
    • impairments take place when an asset
    • 1. CV>NRV=LOSS
    • 2. ENTRY
    • LOSS ON IMPAIRMENT X 
    •     ACCUMULATED DEP X
  24. what happens when you dispose of fixed assets journal entry?
    when you dispose of asset and bring off books look to this entry for example:

    • CASH X  
    • ACCUM DEP X
    •     ASSET X
    •     GAIN X

    *CAN HAVE GAIN OR LOSS AND REPORTED IN NONOPERATING SECTION OF THE I/S
  25. what is non-monetary exchanges and how are they accounted for? 
    a non-monetary exchange means no money and basically means trade and asset for an asset. 2 ways to account for these exchanges:

    • 1. exchange has commercial substance(sale)
    • recognize new asset as 1, 2 if not 1, and 3 if not 1 or 2
    • 1. FV GIVEN UP+CASH PAID
    • 2. FV ASSET RECEIVED
    • 3. BV GIVEN UP+CASH PAID
    • *ALL G/L RECOGNIZED IMMEDIATELY

    • 2. exchange that lacks commercial substance(doesn't change timing, risk or cash flows so not really a sale) recognize new asset at lower of 1-3 above.
    • *LOSSES RECOGNIZED IMMEDIATELY, AND GAINS DEFERRED UNLESS BOOT IN EXCESS OF 25% THEN RECOGNIZE ALL GAIN. 
  26. fixed assets under IFRS?
    • IFRS has just a couple diffs 
    • -PP&E recognized at cost + intended for ready use costs. Can be measured with Cost Method(CM) or Revaluation Method(RM)

    -CM- asset carried at cost-accumulated dep-impairments

    -RM-asset carried at FV-accumulated dep-impairments. 

    • Impairments of Assets
    • -if CV>equal recoverable amount=impairment
    • -under IFRS impairments can be written up
    • -if CM used recover G/L in I/S
    • -if RM used recover G/L in OCI

    Bio Assets- measured at FV-costs to sell
  27. what are intangibles?
    • intangibles are something you can't sink your teeth into. benefit but its not physical and comes in 3 basic forms.
    • 1. knowledge
    • 2. legal rights
    • 3. goodwill
  28. whats involved in the knowledge form of intangibles?
    • the knowledge form of intangibles is like R&D costs are expensed. R&D costs in general are expensed because they are before the production of the product and therefore expensed. if there is R&D costs are after production they are capitalized. Stuff that isn't R&D
    • 1. research performed for others at a fee
    • 2. periodic design changes to existing products
    • 3. cost for setting up a commercially viable product.

    *all three are costs of sales.
  29. whats involved in the legal rights & identifiable intangibles?
    these are patents, copyrights, trademarks, franchises and leasehold improvements

    • 1. Patents
    • -capitalize costs of obtaining legal protection
    • -includes costs of successful defense in court.
    • -unsuccessful defense in court is expensed.
    • -max 20yrs life, use shorter of legal life or useful life.

    • 2. Copyrights
    • -life is life of creator +70yrs.
    • -costs amortized over useful life of product

    • 3. Trademarks
    • -exclusive use of process or product.
    • -costs amortized over the life of the trademark or useful life.
    • -Trademarks can be forever, because can be renewed every 10yrs.

    • 4. Franchises
    • -operation of a business unit under contractual agreements within another party

    • 5. Leasehold improvements
    • -lease a room and build a closet as improvement.
    • -amortize the costs and amortize at shorter of legal life or useful life
  30. how does amortization for intangibles work for accounting?
    finite life intangibles-intangibles subject to amortization. they should be amortized over the life which presents the shortest amount of time.

    infinite life intangibles- not subject to amortization. cant amortize with endless life.

    • 3 types of amortization
    • 1. straight-line-costs spread equally
    • 2. units of sale- per unit/estimate of total sales
    • 3. NRV- written off
  31. impairments for intangibles? finite/infinite intangibles?
    when you test for impairment for both finite and infinite lives look to these

    finite life intangibles- CV vs FV OF CASH FLOWS

    infinite life intangibles- CV vs FV
  32. whats involved in the last form of intangibles goodwill?
    goodwill is an unidentifiable asset that arises form buying a corporation and its the amount in excess of the FV of the assets received. Goodwill is like land and cannot be depreciated.

    • Impairment of goodwill is as follows
    • 1. CV>FMW = LOSS IMPAIRMENT
    • 2. PURCHASE PRICE>FMW = Implied Goodwill
    • 3. CV>IMPLIED GOODWILL = LOSS
  33. whats the deal with software costs?
    • Software costs are capitalized if they are after the product is technically feasible even if before production. Amortize over the larger of
    • 1. straightline 1/5
    • or
    • 2. ratio of revs/total revs 100/400
    • so amortize with number 2 because higher percentage of amortization.
  34. intangibles under IFRS?
    • If intangibles are going to be capitalized they need to meet 6 criteria.
    • 1. Technologically feasible of use or sale
    • 2. The entity intends to sell asset
    • 3. The entity has the ability to sell asset
    • 4. The entity understands how asset will generate probable future benefits
    • 5. Other resources available to compare development of asset
    • 6. The entity has the ability to measure expenditures.
    • *if not all 6 are met then they have to expense the costs and do not capitalize.

    • Impairments are simply
    • CV>Recoverable amount.

What would you like to do?

Home > Flashcards > Print Preview