CPA Exam Review 2018

AT
LEAST
KNOW
THIS
Financial Accounting
and Reporting
 Copyright © 2015
At Least Know This

All rights reserved. No part of this book may be

reproduced in any form, except for the inclusion
of brief quotation in review, without permission
in writing from the author.

ISBN-13: 978-1719007252
ISBN-10: 171900725X
 1A. Basic Concepts ................... 1
1B. Accounting Changes and Errors ................... 4
1C. Financial Statements ................... 5
2A. Inventory ................... 8
2B. Construction Accounting ................... 11
3. Operational Assets ................... 13
4. Monetary Current Assets and Liabilities ................... 15
5A. Time Value, Notes and Bonds ................... 19
5B. Debt Restructure ................... 22
5C. Pensions ................... 24
5D. Leases ................... 27
6. Deferred Taxes ................... 30
7A. Stockholders’ Equity ................... 32
7B. Earnings Per Share ................... 36
8. Investments ................... 38
9. Statement of Cash Flows ................... 41
10. Business Combinations ................... 44
11. Foreign Currency Transactions & Derivatives ................... 46
12A. Interim Reporting ................... 50
12B. Segment Reporting ................... 51
12C. Partnership Accounting ................... 52
12D. Foreign Currency Translation ................... 54
13A. Governmental Accounting ................... 55
13B. Governmental Accounting ................... 58
14. Not-for-Profit Accounting ................... 62
4. Monetary Current Assets and Liabilities

CURRENT ASSETS

Cash equivalent​ Financial instrument with an original maturity of 3 months or less.

Includes Excludes

● Certificate of deposit, no penalty or immaterial penalty. ● Certificate of deposit, material penalty.

● Compensating balance, unrestricted or immaterial restriction. ● Compensating balance, material restriction.
● Commercial paper. ● Restricted cash (e.g. sinking fund, dividend fund, payroll fund).
● Money market fund.
● Treasury bill.

◯​ Compensating balance​ Money that must stay on deposit with bank as condition of loan. ex. If borrower must keep $2,000 compensating balance
as condition of $10,000 loan at 6%, then only $8,000 borrowed and interest payment of $600 has 7.5% effective interest rate. ◯ Disclose all
compensating balances. ◯ ​Restricted cash​ Cash set aside to comply with agreement or for future use. ◯ Cash equivalent includes treasury bill, but
NOT treasury note nor treasury bond.

Bank reconciliation
Balance per bank Balance per books

+ Outstanding checks − Unrecorded customer NSF check

− Outstanding deposits − Unrecorded bank charges
+ Unrecorded note collected by bank directly
+ − Error on bank statement + − Error on books

Corrected cash balance Corrected cash balance

Accounts receivable​ is reported at net realizable value (NRV) using the allowance method.
Assets

X X
Accounts receivable 1000
(Allowance for uncollectible accounts) (200) 800
X X

Uncollectible accounts
Event Allowance method Direct write-off method​ is not acceptable GAAP
because bad debt expense is not recorded in same
period as revenue.

Co. records revenue. dr. AR cr. Revenue dr. AR cr. Revenue

Co. estimates uncollectible accounts. dr. Bad debt expense cr. Allowance

Co. writes off uncollectible account. dr. Allowance cr. AR dr. Bad debt expense cr. AR

Co. collects a previously written-off dr. AR cr. Allowance dr. AR cr. Bad debt expense
account. dr. Cash cr. AR dr. Cash cr. AR

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Allowance for uncollectible accounts
Income statement approach​ First calculate bad debt expense, then Balance sheet approach​ First calculate allowance ending balance, then
solve for allowance ending balance. Bad debt expense = Sales * Bad solve for bad debt expense. Ending allowance for uncollectible accounts
debt % = Agegroup1 * Uncollectible % + Agegroup2 * Uncollectible % + …

Allowance T Account Allowance T Account

Beginning balance Beginning balance

Bad debt expense (Calc) Bad debt expense (Plug)

Write-offs Write-offs

Recoveries Recoveries

Ending balance (Plug) Ending balance (Calc)

Financing with receivables

Sale of receivables​ Defined as all of the following: Secured borrowing​ Fails one of the sales criteria.
● Transfer cannot be avoided in bankruptcy.
● Transferee has the right to sell or borrow against assets.
● No agreement in place to repurchase or return assets.

Factoring​ Company sells
receivables for cash. Receives
most cash up front, then the
balance once receivables
collected. Minus fee to factor. And
minus uncollectible receivables if
sold with recourse.
Securitization​ Company sells
pool of receivables and loans from
the company to special purpose
entity. Entity then issues bonds or
other securities that are secured
by this pool.
Assigning​ Company borrows from Pledging​ Company borrows from
bank with specific receivables as bank with receivables in general as
security. security. Same accounting
treatment as assigning.

Factoring ex. Assigning ex.

Co. has total AR of $145,000. Factors $100,000 to bank with recourse. Co. has total AR of $145,000. On 1/1/1, assigns $120,000 to bank. Bank
Bank charges 2% fee. Bank pays Co. $90,000 up front and agrees to pay charges 12% interest on loan of $100,000, and charges fee equal to 2%
$8,000 (that’s $10,000 balance − 2% fee) once collected. of AR assigned. By 12/31/1, $50,000 of AR collected.

Factoring with recourse, internally
estimated at 5% of AR
dr. Cash 90,000
dr. Loss on sale 2,000 + 5,000
dr. Receivable from factor 8,000
cr. Liability 5,000
cr. AR 100,000
Factoring without recourse 1/1/1 Co. records assignment. dr. Cash 97,600
dr. Assignment expense 2,400
cr. Liability 100,000
dr. Cash 90,000
dr. Loss on sale 2,000 12/31/1 Co. collects AR. dr. Cash 50,000
dr. Receivable from factor 8,000 cr. AR 50,000
​cr. Liability
cr. AR 100,000
12/31/1 Co. pays interest and pay dr. Liability 50,000
down assignment. dr. Interest expense 12,000
cr. Cash 62,000

◯​ Loan participation​ Several banks might join in to fund one large loan. ◯ ​Bankers acceptance​ On behalf of retailer, retailer’s bank issues a
promise to pay to wholesale supplier. At some future date, bank will pay holder (in this case, wholesale supplier) and will recoup directly from
retailer’s bank account. This instrument is potentially useful to retailer, who couldn’t have bought on credit. Retailer may even be able to resell the
goods before instrument comes due.

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