Financial Accounting and Reporting –
Comprehensive Q&A on Ratios, Leases,
Consolidation, Foreign Currency, and Nonprofit
Accounting
Question ✔✔Answer
If there is commercial substance to an exchange, the exchange is measured at: ✔✔Fair Value.
The gain is equal to the old asset's fair value and it's book value. If the fair value was 30 and its
book value is 25, the gain is 5.
How does retail inventory method establish lower of cost or market valuation for ending
inventory? ✔✔By excluding net markdowns from the cost to retail ratio.
Can consolidated financial statements be prepared from a business combination that was
accounted for using the acquisition method OR the pooling of interests method? ✔✔Yes to
both. The pooling of interest method CANNOT be used anymore for business combinations,
combinations that happened before that still need to be consolidated.
Does a foreign sub using the local currency as its functional currency has their financials
translated or remeasured? ✔✔Translated.
Does a foreign sub using US dollars as its functional currency has their financials translated or
remeasured? ✔✔Remeasured.
Under translation, common stock is translated at the what exchange rate? ✔✔The historic
exchange rate.
500 shares of 6%, $100 par callable preferred stock are called at $101. The shares were issued
at $103 per share. What is the journal entry to record the retirement? ✔✔DR preferred stock
for 50,000DR PIC-preferred for 1,500CR PIC retirement of preferred for 1,000CR Cash for 50,500
Working capital: ✔✔current assets - current liabilities
Acid test: ✔✔(cash + net receivables)/current liabilities
,Acc Rec turnover: ✔✔Sales/ avg net receivables
Inventory turnover: ✔✔COGS/ avg inventory
Times interest earned: ✔✔EBIT/ interest expense
Return on total assets: ✔✔(net income + after-tax interest expense)/ avg total assets
Return on equity: ✔✔Net income / avg owners equity
Dividend payout ratio ✔✔Common dividends / net income
What are the 2 primary qualitative characteristics? ✔✔Relevance and Faithful representation
2 components of relevance: ✔✔Predictive value and confirmatory value
3 components of Faithful Representation ✔✔Completeness, neutrality, and free from material
error
What are the 4 enhancing characteristics? ✔✔Comparability, verifiability, timeliness, and
understandability
Times interest earned is: ✔✔income before interest and income tax over interest expense
What is a central characteristic of a joint venture? ✔✔Shared control. None of the participating
parties are likely to have unilateral control of the joint venture.
What is the defensive-interval ratio? ✔✔The ratio of quick assets to daily operating
expenditures. The ratio is showing the length of time in days that the firm can operate with its
present liquid resources- so it's a liquidity measure.
Inventory turnover ratio: ✔✔COGS/ avg inventory for the period
Where are G/L on remeasurment and translation booked? ✔✔Remeasurement is on the
income statement, translation go in an equity account. Remeasurement is when the foreign
sub's currency is the US dollar. It's translation if the sub's currency is the local foreign currency.
Receivables turnover ratio: ✔✔Net sales / average net accounts receivable
, What statements are usually included in personal financial statements? ✔✔A statement of
financial condition and a statement of changes in net worth.
If a donation is conditional, how should it be accounted for? ✔✔As a refundable advance.
For donation of specialized services to a nonprofit, at what value should they be recognized?
✔✔Fair value.
For a NP, are contributions spread over a few years restricted or non restricted? ✔✔The
contribution in the current year is non restricted(unless it comes with an actual restriction), and
the contributions for future years are recognized at present value and are RESTRICTED.
When are the payments for an "Annuity Due" made? ✔✔At the beginning of each period.
How is a lease payment calculated when the lease payments are due at the beginning of the
period? ✔✔You divide the FAIR VALUE of the leased equipment by the ANNUITY DUE rate.
What is the journal entry at the inception of a capital lease and the payments are due at the
beginning of each period? ✔✔DR: Leased asset for its fair value amountCR: Lease Liability for
plug amountCR: Cash for the payment amount
How do you calculate the interest expense at the end of the year on a capital lease with
payments at the beginning of the period? What is the journal entry? ✔✔You multiply the
remaining lease liability amount by the interest capitilization rate.DR: Interest expenseCR:
Lease liability
How does the LESSOR in a capital lease determine the amount of Lease Receivable?
✔✔Multiply the payment by the number of payments.
What is the journal entry by the LESSOR for a capital lease with payments at the beginning of
each period? ✔✔DR: Lease receivableDR: Cash for the payment amountDR: COGS for the book
value amountCR: Unearned interest for the lease rec amount MINUS the BVCR: Equipment for
BV amountCR: Sales for the FV amount
Working capital formula ✔✔current assets - current liabilities
Acid test formula ✔✔(cash + net receivables) / current liabilities
Comprehensive Q&A on Ratios, Leases,
Consolidation, Foreign Currency, and Nonprofit
Accounting
Question ✔✔Answer
If there is commercial substance to an exchange, the exchange is measured at: ✔✔Fair Value.
The gain is equal to the old asset's fair value and it's book value. If the fair value was 30 and its
book value is 25, the gain is 5.
How does retail inventory method establish lower of cost or market valuation for ending
inventory? ✔✔By excluding net markdowns from the cost to retail ratio.
Can consolidated financial statements be prepared from a business combination that was
accounted for using the acquisition method OR the pooling of interests method? ✔✔Yes to
both. The pooling of interest method CANNOT be used anymore for business combinations,
combinations that happened before that still need to be consolidated.
Does a foreign sub using the local currency as its functional currency has their financials
translated or remeasured? ✔✔Translated.
Does a foreign sub using US dollars as its functional currency has their financials translated or
remeasured? ✔✔Remeasured.
Under translation, common stock is translated at the what exchange rate? ✔✔The historic
exchange rate.
500 shares of 6%, $100 par callable preferred stock are called at $101. The shares were issued
at $103 per share. What is the journal entry to record the retirement? ✔✔DR preferred stock
for 50,000DR PIC-preferred for 1,500CR PIC retirement of preferred for 1,000CR Cash for 50,500
Working capital: ✔✔current assets - current liabilities
Acid test: ✔✔(cash + net receivables)/current liabilities
,Acc Rec turnover: ✔✔Sales/ avg net receivables
Inventory turnover: ✔✔COGS/ avg inventory
Times interest earned: ✔✔EBIT/ interest expense
Return on total assets: ✔✔(net income + after-tax interest expense)/ avg total assets
Return on equity: ✔✔Net income / avg owners equity
Dividend payout ratio ✔✔Common dividends / net income
What are the 2 primary qualitative characteristics? ✔✔Relevance and Faithful representation
2 components of relevance: ✔✔Predictive value and confirmatory value
3 components of Faithful Representation ✔✔Completeness, neutrality, and free from material
error
What are the 4 enhancing characteristics? ✔✔Comparability, verifiability, timeliness, and
understandability
Times interest earned is: ✔✔income before interest and income tax over interest expense
What is a central characteristic of a joint venture? ✔✔Shared control. None of the participating
parties are likely to have unilateral control of the joint venture.
What is the defensive-interval ratio? ✔✔The ratio of quick assets to daily operating
expenditures. The ratio is showing the length of time in days that the firm can operate with its
present liquid resources- so it's a liquidity measure.
Inventory turnover ratio: ✔✔COGS/ avg inventory for the period
Where are G/L on remeasurment and translation booked? ✔✔Remeasurement is on the
income statement, translation go in an equity account. Remeasurement is when the foreign
sub's currency is the US dollar. It's translation if the sub's currency is the local foreign currency.
Receivables turnover ratio: ✔✔Net sales / average net accounts receivable
, What statements are usually included in personal financial statements? ✔✔A statement of
financial condition and a statement of changes in net worth.
If a donation is conditional, how should it be accounted for? ✔✔As a refundable advance.
For donation of specialized services to a nonprofit, at what value should they be recognized?
✔✔Fair value.
For a NP, are contributions spread over a few years restricted or non restricted? ✔✔The
contribution in the current year is non restricted(unless it comes with an actual restriction), and
the contributions for future years are recognized at present value and are RESTRICTED.
When are the payments for an "Annuity Due" made? ✔✔At the beginning of each period.
How is a lease payment calculated when the lease payments are due at the beginning of the
period? ✔✔You divide the FAIR VALUE of the leased equipment by the ANNUITY DUE rate.
What is the journal entry at the inception of a capital lease and the payments are due at the
beginning of each period? ✔✔DR: Leased asset for its fair value amountCR: Lease Liability for
plug amountCR: Cash for the payment amount
How do you calculate the interest expense at the end of the year on a capital lease with
payments at the beginning of the period? What is the journal entry? ✔✔You multiply the
remaining lease liability amount by the interest capitilization rate.DR: Interest expenseCR:
Lease liability
How does the LESSOR in a capital lease determine the amount of Lease Receivable?
✔✔Multiply the payment by the number of payments.
What is the journal entry by the LESSOR for a capital lease with payments at the beginning of
each period? ✔✔DR: Lease receivableDR: Cash for the payment amountDR: COGS for the book
value amountCR: Unearned interest for the lease rec amount MINUS the BVCR: Equipment for
BV amountCR: Sales for the FV amount
Working capital formula ✔✔current assets - current liabilities
Acid test formula ✔✔(cash + net receivables) / current liabilities
