1
Q
How does an error in inventory valuation impact financial statements?
A
Effect on Ending Inventory and Net Income:
- Overstatement leads to both being overstated.
- Understatement results in both being understated.
Misstatements self-correct after two periods.
2
Q
What defines a serial bond?
A
A serial bond matures in segments over time.
3
Q
How does a term bond differ from other bonds?
A
A term bond reaches maturity on a single date.
4
Q
What characterizes a debenture bond?
A
A debenture bond is unsecured by collateral.
5
Q
Explain a sinking fund bond.
A
Funds are reserved in a sinking fund to repay the bond at maturity.
Five-year requirements and maturity information must be disclosed.
6
Q
Fill in the blank:
The proceeds from a bond sale are calculated by adding the present value of principal and _______ _______.
A
interest payments
The sum equals the market value of the bond proceeds.
7
Q
What are the steps to calculate a bond’s present value?
A
Step 1: PV of $1 at the yield rate multiplied by bond face value
PLUS
Step 2: PV of an ordinary annuity of $1 for the term at yield rate multiplied by (stated rate x face value)
8
Q
List the costs associated with issuing bonds and their accounting treatment.
A
- Engraving
- Printing
- Legal fees
- Underwriting
- Registration
They are deducted from the bond’s carrying amount.
Treatment: Retrospective to all prior periods presented.
Effect: Increases the effective interest rate.
9
Q
How are bonds classified as trading securities reported?
A
They are reported at fair market value, with unrealized gains and losses included in earnings.
10
Q
Describe how bonds are amortized using the interest method.
A
Discount and premium amortization amounts increase annually.
11
Q
What is the stated rate of a bond?
A
It’s the interest rate specified on the bond’s face.
12
Q
Define the market rate of a bond.
A
The rate at which bonds are currently being traded.
13
Q
What occurs when a bond’s market rate surpasses its stated rate?
A
The bond sells at a discount to attract buyers, who pay less than the par value.
14
Q
Explain the scenario when a bond’s market rate is below its stated rate.
A
The bond sells at a premium to attract sellers, with buyers paying more than par value.
15
Q
How does accrued interest influence the purchase price of a bond?
A
The seller receives more cash than usual as the buyer pays the accrued interest upfront.
16
Q
When does interest expense begin to accrue on a bond?
A
Interest expense starts accruing upon bond issuance.
17
Q
How is a bond’s interest payment calculated?
A
Payment is calculated as the stated rate multiplied by the face amount.
18
Q
What is the interest expense during a bond interest payment?
A
Interest expense equals the effective yield multiplied by the carrying value, with differences applied as amortization against premium/discount.
19
Q
What constitutes a current asset?
A
Current assets are cash and other assets expected to be sold or converted to cash within the operating cycle, including:
- Demand deposits
- Cash equivalents
- Accounts receivable
- Inventory
- Prepaids
- Short-term investments
20
Q
Define a current liability.
A
A current liability is expected to be settled within 12 months or less.
21
Q
How do you compute the Quick Ratio?
A
(Cash + Accounts Receivable + Marketable Securities) / Current Liabilities
22
Q
What is the formula for the Current Ratio?
A
Current Assets / Current Liabilities
23
Q
How is Working Capital determined?
A
Current Assets - Current Liabilities
24
Q
What formula is used to calculate Accounts Receivable Turnover?
A
Net Credit Sales / Average Accounts Receivable
25
How can you calculate Inventory Turnover?
Cost of Goods Sold / Average Inventory
26
# Fill in the blank:
\_\_\_\_\_\_\_ is used to find Day Sales in Inventory.
365 / Inventory Turnover
27
How do you determine the Days to Collect Accounts Receivable?
Average Accounts Receivable / Average Daily Sales
28
What is the accounting treatment for gain contingencies?
Gain contingencies are not recorded due to the principle of conservatism.
29
Under what conditions are loss contingencies recorded?
If **Probable** - accrue if estimable and disclose.
If **Reasonably Possible** - disclose only.
If **Remote** - neither accrue nor disclose.
30
Define a temporary difference in deferred tax accounting.
It occurs when GAAP and tax laws recognize income or expenses in different periods.
## Footnote
Example: Dividends from equity method investments.
31
What is a deferred tax asset?
An asset that reduces future income tax expenses.
32
What constitutes a deferred tax liability?
Income that will be subject to taxation in a future period, increasing future tax expense.
33
Which tax rate is applied to deferred tax computations?
The **future** enacted tax rate is used, not the current rate.
## Footnote
Deferred taxes are not discounted.
34
When is a valuation allowance applied to a deferred tax asset?
If it is likely that some of the Deferred Tax Asset will not be realized, the asset must be reduced accordingly.
35
What impact do permanent differences have on deferred tax calculations?
Permanent differences have no impact on deferred income taxes and are subtracted from total differences before applying the tax rate.
36
What does deferred income tax expense entail?
It is the net change in Deferred Tax Assets and Liabilities.
## Footnote
GAAP uses the Asset and Liability Approach; IFRS uses only the Liability approach.
37
How are deferred tax items classified on the balance sheet?
Deferred Tax Assets and Liabilities are classified as non-current.
38
Explain the concept of fair value in relation to an asset.
Fair value is the expected price in an orderly transaction between market participants.
## Footnote
Assumes best use and market conditions.
39
What assumptions underlie a fair value measurement?
- Buyer and seller are unrelated.
- Both parties are informed.
- They are able to transact.
- Both are willing to engage in the transaction.
40
What constitutes Level 1 inputs in fair value hierarchy?
Level 1 inputs include observable prices in active markets.
## Footnote
Example: NYSE or NASDAQ quotes.
41
Identify components classified as Level 2 valuation inputs.
- Interest Rates
- Prime Rate
42
What defines Level 3 inputs within the fair value hierarchy?
- Unobservable inputs like assumptions or forecasts
- Lowest priority for valuation
43
List the acceptable methods for determining fair value.
- **Market approach**: relies on market transactions and prices
- **Income approach**: uses discounted present value of expected earnings
- **Cost approach**: involves replacement cost valuation
44
What constitutes current assets on a balance sheet?
- Cash
- Inventory or assets expected to be converted or used within the operating cycle
- Receivables collectible within 12 months
45
Define current liabilities.
Obligations expected to be settled using current assets during the operating cycle.
46
What is an accrued liability?
An expense that has been incurred but remains unpaid.
## Footnote
Example: Rent payable.
47
Describe the present value of future cash flows.
The current worth of a future sum of money, calculated using a specific interest rate.
48
Explain historical cost.
The original cost of an asset, adjusted for depreciation and amortization.
49
How is replacement cost defined?
The expense to reacquire an asset at present, also known as 'Entrance Cost'.
50
What does market cost refer to?
The selling price of an asset, also called 'Exit Cost'.
51
How is Net Realizable Value calculated?
Sale Price of an Asset minus Selling/Disposal Fee.
52
Which costs are included in the acquisition of a building?
All expenditures necessary to prepare the building for use.
53
What costs are capitalized in land acquisition?
- Title and county fees
- Land clearing activities
- Demolition and removal of existing structures (net of salvage)
## Footnote
Note: Capitalized land costs are not subject to depreciation.
54
# Fill in the blank:
Double-declining balance (DDB) depreciation is calculated as \_\_\_\_\_\_\_\_\_.
(1 / Useful Life) x 2 x Book Value, ignoring salvage value.
55
How do you calculate Sum of Years Digits (SYD) depreciation?
(Cost - Salvage Value) x (Remaining Useful Life / SYD) for depreciation expense.
## Footnote
Example:
For a 10-year asset in its third year: 8 / (10+9+8+7+6+5+4+3+2+1) = 8/55 = 14.5%
Remaining useful life: 8
SYD: 55
56
Describe the method for straight-line depreciation calculation.
Depreciation expense is calculated as (Cost - Salvage Value) / Useful life.
57
When is an asset deemed impaired and how is impairment loss determined?
When undiscounted future cash flows fall below its carrying value.
## Footnote
Calculation: Impairment Loss = Carrying Value - Fair Value
Note: Once written down, impaired assets cannot be revalued upwards.
58
What is the one-step process for assessing goodwill impairment?
Compare Carrying Value (CV) to Fair Value (FV):
- If FV > CV: No impairment
- If CV > FV: Impairment (equal to CV - FV)
## Footnote
Impairment loss cannot exceed the goodwill allocated to the unit. Transition to the one-step method is a prospective accounting change.
59
What costs are included in the price of equipment?
- Purchase price and assumed liabilities
- Shipping and taxes
- Insurance
- Installation and testing
- Legal fees
- Construction loan interest
- Capitalized costs for facility or equipment modifications that extend life or enhance efficiency.
60
Identify costs considered inventoriable.
- Purchases
- Net of Discounts
- Freight
- Warehouse expenditures
61
When does ownership of goods transfer under FOB Shipping Point terms?
Ownership transfers to the **buyer** when the goods leave the seller's dock.
62
At what point does ownership transfer for goods sent FOB Destination?
The **seller** retains ownership until the goods arrive at the buyer's location.
63
List examples of costs that are not considered inventoriable.
- Sales Commissions
- Interest on vendor liabilities
- Customer shipping expenses
64
When are discounts acknowledged in the gross method of accounting?
Discounts are recognized only when they are actually **taken**.
65
Under the net method, how are discounts recorded?
Discounts are recorded regardless of use, with unused ones allocated to financing expense.
66
# Fill in the blank:
Gross Margin is calculated as Sales minus \_\_\_\_\_\_.
COGS (BI + P - EI)
67
What characterizes a periodic inventory system?
Inventory is evaluated at intervals, using the weighted-average cost method.
68
Describe the perpetual inventory system.
Inventory records are continuously updated, employing a moving-average cost method.
69
During rising prices, which inventory system results in identical ending inventory for both periodic and perpetual methods?
The **FIFO** method results in the same ending inventory for both systems.
70
How is the inventory turnover ratio determined?
By dividing COGS by Average Inventory.
71
How do you compute Average Days Sales in inventory?
365 divided by Inventory Turnover.
72
In a consignment arrangement, who retains the inventory of consigned goods?
The CONSIGNOR keeps the goods in their inventory, including shipping costs to the consignee.
73
Does the consignee include consignment goods in their inventory?
No, consignment goods remain in the consignor's inventory, not the consignee's.
74
What is the impact of inventory misstatement on ending retained earnings?
Beginning inventory errors do not affect retained earnings, but ending inventory errors do.
75
How does ending inventory misstatement affect Ending Retained Earnings?
If EI is Overstated: COGS is Understated, ERE is Overstated
If EI is Understated: COGS is Overstated, ERE is Understated
76
Which inventory costs are recorded first under the FIFO method?
The oldest inventory costs are recorded first for COGS, purely for accounting.
77
Under the LIFO method, which costs are included in COGS first?
The most recent inventory costs are recorded first for COGS purposes.
78
# Fill in the blank:
Weighted Average Cost Per Unit is calculated as COGAS divided by \_\_\_\_\_\_.
Total Units
79
How does FIFO's COGS compare to LIFO's during price changes?
FIFO's COGS is the **opposite** of LIFO's in periods of price fluctuations.
80
What changes occur under FIFO and LIFO during rising prices?
FIFO results in the Lowest COGS, leading to a High Ending Inventory.
81
How do FIFO and LIFO affect cost of goods sold when prices decline?
FIFO results in the highest cost of goods sold when prices fall.
## Footnote
This impacts ending inventory as well, making it lower.
82
How are the benchmarks set under the Lower of Cost or Market method?
**Market Ceiling:** Net Realizable Value (NRV) = Selling Price - Selling Costs
**Market:** Replacement Cost
**Market Floor:** NRV - Normal Profit
## Footnote
Only LIFO and the Retail Method apply this approach.
83
Which inventory valuation method do FIFO and Weighted Average use?
Lower of Cost or Net Realizable Value
## Footnote
LIFO and Retail Method use Lower of Cost or Market.
84
How are Available-For-Sale Debt securities valued on the balance sheet?
They are listed at **fair value** as either Current or Non-current assets.
## Footnote
Only debt securities are classified as AFS; equity securities are not.
85
Where are unrealized gains and losses for Available-For-Sale Debt securities reported?
They appear in Other Comprehensive Income (**OCI**).
## Footnote
This classification applies solely to debt securities.
86
What happens to unrealized gains and losses when AFS Debt securities are reclassified?
For Held-to-Maturity: Stockholder's Equity
For Trading Debt Securities: Current Period
87
At what value are Held-to-Maturity securities presented on the balance sheet?
They are shown at **amortized cost** as Current or Non-current assets.
- If reclassified as AFS Debt, Unrealized G/L go to Stockholder's Equity.
- If reclassified as Trading Debt, Unrealized G/L recognized in Current Period.
88
Are there unrealized gains or losses for Held-to-Maturity securities?
*Trick question* - Unrealized gains or losses do not apply to **HTM** securities.
89
How are Trading Debt Securities recorded on the balance sheet?
They are recorded at **Fair Value** as a Current Asset.
Unrealized gains/losses are recorded on the Income Statement.
*If reclassified as HTM or AFS, no effect upon transfer.*
## Footnote
Only debt securities have the Trading classification.
90
How are unrealized gains and losses for Trading Debt Securities treated?
They are recorded on the **Income Statement**.
*If reclassified as HTM or AFS, no effect upon transfer.*
91
How is Additional Paid-In Capital (APIC) allocated in a combined stock issuance?
APIC is distributed based on each stock type's percentage of the total fair market value multiplied by the proceeds.
92
When is Additional Paid-In Capital recognized in a stock subscription?
APIC is recorded on the **date of subscription**, not when payment is made or shares issued.
93
To what degree is retained earnings restricted by Treasury Stock?
It is restricted to the extent of the **balance** in the Treasury Stock account.
94
When are dividends in arrears recorded for cumulative preferred stock?
They are not recorded until they are **declared**.
95
Under what condition are dividends in arrears disclosed but not accrued?
If a year passes without a Cumulative Preferred Stock Dividend declared, dividends in arrears appear as a disclosure, not an accrual.
96
What is the impact of a stock dividend or split on total shareholder equity?
Stock dividends and stock splits have **no effect** on Total Shareholder Equity.
97
Does a stock split affect Additional Paid-In Capital (APIC)?
Stock splits only alter par value; APIC remains unchanged.
98
What is the formula for calculating return on common stockholders' equity?
(Net Income - Preferred Stock Dividends) / Average Common Stockholders' Equity
## Footnote
Average CSE: Common Stock + Retained Earnings.
99
How is the book value per share of common stock determined?
Total Shareholder Equity
**-** Total Preferred Stock
_**-** P/S Dividends in Arrears_
**=** Total Book Value
*Book Value per Share = Total Book Value / Shares outstanding*
100
How is the dividend per share payout ratio calculated?
Dividends per share / Earnings per share
101
What is the standard method for amortizing intangible assets with finite lives?
Straight-line method
## Footnote
The straight-line method evenly allocates the cost of an intangible asset over its useful life, reflecting a consistent use pattern.
102
# True or False:
Intangible assets with indefinite lives are amortized annually.
FALSE
## Footnote
Intangible assets with indefinite lives are not amortized but are tested for impairment annually.
103
# Fill in the blank:
The impairment test for intangible assets involves comparing the asset's carrying amount to its \_\_\_\_\_\_.
recoverable amount
## Footnote
If the carrying amount exceeds the recoverable amount, an impairment loss is recognized.
104
How is a contingent liability measured under GAAP?
* Best estimate of the expenditure required to settle the obligation
* If no best estimate, the minimum amount in a range
## Footnote
Contingent liabilities are recognized based on the likelihood of occurrence and are measured at the best estimate of the potential outflow.
105
What should be disclosed in financial statements about long-term debt?
* Terms and conditions
* Maturity dates
* Interest rates
* Restrictions imposed by lenders
## Footnote
Disclosures help users understand the nature and risks associated with long-term debt.
106
# Fill in the blank:
An intangible asset is impaired when its carrying amount exceeds its \_\_\_\_\_\_\_ \_\_\_\_\_\_\_\_.
recoverable amount
## Footnote
Impairment occurs when an asset's carrying value is not recoverable and exceeds its fair value.
107
What is the primary purpose of amortization for intangible assets?
To allocate the cost of the asset over its useful life
## Footnote
Amortization ensures that the expense of an intangible asset is matched with the revenue it helps generate.
108
# True or False:
All contingent liabilities must be recorded on the balance sheet.
FALSE
## Footnote
Only contingent liabilities that are probable and can be reasonably estimated are recorded; others are disclosed in notes.
109
What is typically included in the footnote disclosures of long-term debt?
* Collateral pledged
* Covenants
* Repayment terms
## Footnote
Footnotes provide detailed information to enhance the user's understanding of the debt's implications for the entity.
110
What happens when a contingent liability is deemed 'remote'?
No disclosure or accrual is required
## Footnote
A remote contingent liability has a very low probability of resulting in an actual obligation.
111
What are the two steps in testing for impairment of intangible assets with finite lives?
* Compare the asset's carrying amount with its recoverable amount.
* If carrying amount exceeds recoverable amount, recognize an impairment loss.
## Footnote
The impairment test ensures that an asset's carrying value does not exceed its fair value.
112
Name a factor that could lead to the impairment of an intangible asset.
* Changes in technology
* Decrease in demand
* Legal changes affecting the asset's value
## Footnote
These factors can reduce the expected future cash flows generated by the asset, leading to impairment.
113
# True or False:
Long-term debt requires disclosure of future payment obligations for the next five years.
TRUE
## Footnote
Providing a schedule of future payments helps stakeholders assess liquidity and solvency risk.
114
# Fill in the blank:
The impairment loss on an intangible asset with finite life is reported in the \_\_\_\_\_\_ \_\_\_\_\_\_.
income statement
## Footnote
Impairment losses reduce the carrying amount of the asset and are recognized as a loss in the income statement.
115
What is a common method for estimating the fair value of an impaired intangible asset?
Discounted cash flow analysis
## Footnote
This method estimates the present value of expected future cash flows to determine the asset's fair value.
CPA (2) FAR
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