CPA Exam - FAR
Terms with well elaborated definitions
Cash - ✔Money that is FREE and CLEAR and available to be spend in current operations.
Not Cash: - ✔Security deposits & bond sinking funds
Three-Month Rule - ✔Highly liquid securities with ORIGINAL maturity dates of three months or less are
treated as cash.
Bad Debts - Direct Write-Off Method - ✔- No entry for bad debts until customer actually defaults.
- At default, the cutomer's account is written off.
- Theoretically weak, matching issue
- Only allowed if bad debt expense is immaterial
Bad Debts - Allowance Method - ✔Income Statement Approach
Balance Sheet Approach
Income Statement Approach - ✔- Matching Concept
- Estimate of bad debt expense is based on the income statement
- Allowance account balance has no bearing on the amount of adjustment
Balance sheet reporting: - ✔Accounts Receivable
Less: Allowance for bad debts
= Net realizable value of A/R
, Balance Sheet Approach - ✔- Estimate of bad debt expense is based on the balance sheet
- Period sales have no bearing on the amount of adjustment
Written-off account later collected - ✔Reverse write-off entry. Collect as usual.
Assigning Accounts Receivable - ✔- Assignment of A/R normally is done with recourse
- Assignment usually is done without notification to customers
Factoring Accounts Receivable - ✔- With or without recourse.
Pledging A/R - ✔- Use receivables as security for a loan
- Requires footnote disclosure
Noninterest-Bearing Notes - ✔APB 21 requires interest to be inputed
- When a note is made under customary trade terms and is due in less than one year, there is no
requirement to impute interest to that note.
Investments - ✔- Held-to-Maturity
- Trading Securities
- Available-for-Sale Securities
Held-to-Maturity Securities - ✔- Debt securities only
- Mgt has both intent and ability to hold the securities to maturity
- Classified on BS based on maturity date
- Carry on balance sheet at amortized cost
Terms with well elaborated definitions
Cash - ✔Money that is FREE and CLEAR and available to be spend in current operations.
Not Cash: - ✔Security deposits & bond sinking funds
Three-Month Rule - ✔Highly liquid securities with ORIGINAL maturity dates of three months or less are
treated as cash.
Bad Debts - Direct Write-Off Method - ✔- No entry for bad debts until customer actually defaults.
- At default, the cutomer's account is written off.
- Theoretically weak, matching issue
- Only allowed if bad debt expense is immaterial
Bad Debts - Allowance Method - ✔Income Statement Approach
Balance Sheet Approach
Income Statement Approach - ✔- Matching Concept
- Estimate of bad debt expense is based on the income statement
- Allowance account balance has no bearing on the amount of adjustment
Balance sheet reporting: - ✔Accounts Receivable
Less: Allowance for bad debts
= Net realizable value of A/R
, Balance Sheet Approach - ✔- Estimate of bad debt expense is based on the balance sheet
- Period sales have no bearing on the amount of adjustment
Written-off account later collected - ✔Reverse write-off entry. Collect as usual.
Assigning Accounts Receivable - ✔- Assignment of A/R normally is done with recourse
- Assignment usually is done without notification to customers
Factoring Accounts Receivable - ✔- With or without recourse.
Pledging A/R - ✔- Use receivables as security for a loan
- Requires footnote disclosure
Noninterest-Bearing Notes - ✔APB 21 requires interest to be inputed
- When a note is made under customary trade terms and is due in less than one year, there is no
requirement to impute interest to that note.
Investments - ✔- Held-to-Maturity
- Trading Securities
- Available-for-Sale Securities
Held-to-Maturity Securities - ✔- Debt securities only
- Mgt has both intent and ability to hold the securities to maturity
- Classified on BS based on maturity date
- Carry on balance sheet at amortized cost
