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My CPA-FARmodule12

Notecards I made from Wiley's 2012 CPA Exam Review

Define Cash Includes both Cash (on hand/demand deposits) and cash equivalents (short-term highly liquid investments)
What is meant by the term cash equivalents? readily convertible into cash and close enough to maturity (original maturity 3 months or less from date of purchase) that there is little risk of a change in value due to interest rate changes
Is cash set up for special use disclosed separately? What's the entry needed? 1. Yes 2. Debit: Special Cash Fund Credit: Cash
Are imprest (petty) cash funds included in the total cash figure? Unreimbursed expense vouchers? 1. Yes 2. No
How should cash with restricted use (special funds/not transferrable out of country) that can't be used in the next year be disclosed? Separately, not as a current asset
Define Bank Reconciliation Necessary if made bank deposits, made to determine what the correct cash balance is
What are the bank reconciliations that do not require adjusting JOURNAL entries? 1. Outstanding checks 2. Deposits in transit 3. Bank errors
What are some bank reconciliations that do require adjusting JOURNAL entries? 1. Unrecorded nonsufficient funds checks (NSF) 2. Unrecorded bank charges 3. Errors in the cash account 4. unrecorded bank collections of notes receivables
How is a bank reconciliation performed? Bank Balance +/- A adjustments= Correct cash balance Book Balance +/- B adjustments= Correct cash balance
Is a special account needed for bank reconciliation adjusting entries? No, use cash, expense, a/r, n/r, sales and other simple accounts
What is a proof of cash or a four column cash reconciliation? used to reconcile cash over a time period, has four columns; 1. beginning balance 2. receipts 3. disbursements 4. ending balance
In giving a sales discount with the use of the accounts receivable account, how do the net and gross methods differ? Sales at net: record sale minus discount in a/r and sales, if discount not taken; credit discount not taken account Sales at gross: Record sale same as always, if discount taken; debit sales discount account
Describe the direct write-off method for bed debt expense. bad debts are expenses in the period they are written off. Used for tax purposes. Debit: Bad debt expense Credit: AR
Describe the allowance method for bad debt expense in a sentence and give the entries needed. try and estimate the amount of uncollectible receivables. 1st entry use estimated amounts: Debit: Bad debts expense Credit: Allowance for bad debts 2nd entry use actual uncollectible amount: Debit: Allowance for bad debts Credit: AR
Describe the annual sales percentage method of determining bad debt expense under the allowance method Estimate bad debts based on a percentage of sales (1%) - a balance in the allowance account is ignored when making the adjusting entry -Bad debts expense= Sales X %
Describe the year end aging of AR method of determining bad debt expense under the allowance method Can apply % to total AR or subsets based on an aging schedule - use AR* % to estimate bad debts
What are three major types of transfers, and give a word on each. 1. Securitization- purchase/sell securities, group of receivables 2. Factoring- sell a/r at discount, get cash quicker 3. Transfer with recourse- sell at discount, get cash quicker, retain risk of loss if customer doesnt pay amount owed
What are the other three major types of transfers, and give a word on each. 4.Repurchase agreement- use asset as collateral for loan 5.Loan participation- participating interest holders purchase shares of a financial instrument (eg loan) 6.Banker acceptance- order from bank for specified sum money (post-dated check), may buy/se
What conditions need to be met for a transfer to be considered a sale? 1. transferred asset is isolated and beyond the reach of transferor/creditors (even in bankruptcy) 2. transferee can exchange the asset without constraints 3. transferor loses effective control of financial asset (include 3rd party control)
What characteristics must an asset have to be a participating interest? 1.interest is proportionate ownership interest in entire financial asset 2.all cash flows are divided proportionately by ownership among interest holders 3.rights of each holder have same priority one party can exchange asset unless all holders ag
Define factoring of receivables. With recourse? Without recourse? Sell receivables to a financing institution 1. If factor doesn't get money from customer, then transferor must pay remaining balance 2. outright sell receivable, take a loss on factor's interest expense and fee. Get some of a/r back
How is the factoring of receivables accounted for without recourse when there is a period of return still available on the asset? 1.During initial entry for the sale of the a/r to the factor, debit factor's holdback receivable by stated % of a/r 2.Return: Debit: sales returns Credit: factor's holdback receivable 3.End return period: Debit: cash Credit: factor's holdback receivable
What happens if you are involved in factoring receivables with recourse? Transaction is same as without recourse, but increase loss of sale by recourse obligation fair value (estimated uncollectible accounts), and add a credit to the recourse obligation account
What happens if in factoring receivables with recourse more or less accounts are collected on than the recourse obligation account alloted for? Show additional gain or loss in subsequent period. Proactive- Not corrections of errors or retroactive adjustments.
When is servicing a distinct asset or liability? What are some servicing examples? 1. only when contractually separated from the underlying asset 2. collecting payments, paying tax/insurance, monitoring delinquencies, foreclosing, investing, remitting fees
When should a service be recorded as an asset? liability? neither? 1. benefits (fees, late charges, float) more than adequate compensation for cost of servicing (market value) 2. benefits less than adequate compensation for cost of servicing 3. adequate compensation
Should servicing assets be netted against servicing liabilities? no, report separately
Define the amortization method when dealing with service assets/liabilities. 1. initially record at FV 2. amortize in proportion to receipt of estimated net servicing income/loss 3. Test for impairment based on fair value, if asset impaired show in a valuation allowance account. liability FV>BV then increase liability, show a lo
Define the fair value method when dealing with service assets/liabilities 1. initially measured at FV 2. Measure FV at each reporting date 3. Change in FV is reported in earnings period the change occurs
What disclosure are required for servicing assets/liabilities? basis for determining classes, description of risks, instruments used to mitigate income statement effect of change in FV, amount of specified servicing/late/ancillary fees for each period, and assumptions used to estimate FV
What happens in securitizations? 1. Group together assets (mortgages, credit cards, loans, leases)- make security 2. Sell security (which is now set up to bring in $ thru interest/future cash flow) 3. Remove security from books, gain on sale
What happens when factoring does not qualify as a sale? Treated as a secured borrowing
What is the accounting necessary for a secured borrowing? Debit: Cash, interest expense, factoring fee Credit: Factor borrowing payable Note- the a/r is still on the books with factor borrowing payable, must denote this with parenthesis or footnote disclosure
Describe accounting for collateral. Ordinarily? If transferee has control of the asset? Transferor defaults? 1. transferor still carry as asset, transferee not record 2. Transferee record asset at FV & liability to return, transferor reclassify it as receivable and report separately on BS 3.transferor derecognize asset, transferee recognized if not already
Define pledge The process of having collateral transferred to a secured party
What are some examples of current liabilities? AP, NP, loan obligations(current part of long term debt requiring use of current asset to pay), dividends payable(when declared), payroll expense(employee&employer taxes), property tax, bonus payments, cash advances from customers
How is the effective interest rate calculated? Interest paid/ Cash received
Define determinable liabilities amount of cash and time of payment are known
Define contingent liabilities obligations may exist, but are dependent on uncertain future events
If a contingency is thought to be a loss, when should it be accrued? and how?. note this means before loss happens before contingency resolved 1. If it is PROBABLE that the asset has been impaired/liability incurred at the BS date, AND the amount is estimable (if range given, take best estimate or last resort is lowest number) 2. Debit: expense or loss Credit: liability or contra asset
What is the journal entry for a contingency when recognized? When actually redeemed/used? 1. Debit: Expense (warranty/premium/etc) Credit: Liability (warranty/premium/etc) 2. Debit: Liability (warranty/premium/etc) Credit: Asset (Cash,inventory/premiums)
If the loss from litigation is probable on the balance sheet date and the loss is reasonably estimated, should it be recognized on the balance sheet? Yes
How is a contingent loss from litigation recorded? What if the loss was overstated thanks to a settlement? 1. Debit: Loss from litigation Credit: Liability from litigation 2. Debit: Liability from litigation Credit:Cash Credit:Recovery of loss from litigation
For employee compensated absences to be recognized before they are taken, what 4 conditions must be met? 1. payment is PROBABLE 2. amount is estimable 3. obligation vests or accumulates (must vest to be required by the company to show) 4. employers obligations to pay for future absences is attributable to services already rendered by the employee
What should happen if a contingency is probable to result in a gain? Nothing until the contingency is resolved and the gain occurs. (gain is recognized during period contingency is resolved)
If a loss contingency were remote, it is normally not even disclosed in the financial statements. What are some exceptions to this rule? Guarantee of someone elses debt, standby letters of credit by banks, agreements to repurchase receivables
What is the acid-test (quick) ratio? Cash, Net receivables, market securities/ Current liabilities -measures ability to pay current liabilities from cash and near cash items
What is the current ratio? Current assets/current liabilities -Measures ability to pay current liabilities from cash, near cash, and cash flow items
What is receivable turnover? Net credit sales/average net receivables -Measures how rapidly cash is collected from credit sales
What is number of days' sales in average receivables? 365/Receivable turnover -Measures average length of time receivables are outstanding
What is inventory turnover? COGS/Average inventory -Indicates how rapidly inventory is sold
What is number of days' supply in average inventory? 365/inventory turnover -Measures number of days inventory is held before sale
What is length of operating cycle? Number of days' supply in average inventory + Number of days' sales in average receivables -Measures length of time from purchase of inventory to collection of cash
Under IFRS, when are assets considered current? Liabilities? 1. when the entity expects to realize/consume/sell asset within 12 months or the asset is held primarily for trade 2. When the entity expects to settle the liability within 12 months or is held primarily for trade
Under IFRS, define financial asset. How can it be measured? cash, contractual right to receive cash, contractual right to exchange a financial instrument, contract that will be settled with an entity's own equity instruments, or an equity instrument of another entity (stock) 2. Amortized cost or fair value
Under IFRS, define financial liability. How can it be measured? a contractual obligation to deliver cash/financial asset, exchange financial instruments at a loss, or a contract that may be settled in its own equity instruments 2.amortized at cost using effective interest method or fair value thru profit or loss
How do US GAAP and IFRS differ when it comes to short-term obligations that are expected to be refinanced? US GAAP: may report in non-current liability section if there is intent and ability to refinance IFRS: place under current liability unless there is an agreement in place prior to the balance sheet date
Under IFRS what is classified as a provision? what US GAAP calls a contingent liability, the outcome is probable (>50%) and measurable
Under IFRS what is classified as a contingency? an event which is not recognized because it is not probable that an outflow will be required or the amount can not be reliably measured
Created by: Bsantoro
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