CPA Exam - FAR
Cash - correct answer ✔✔Money that is FREE and CLEAR and available to be spend in current
operations.
Not Cash: - correct answer ✔✔Security deposits & bond sinking funds
Three-Month Rule - correct answer ✔✔Highly liquid securities with ORIGINAL maturity dates of three
months or less are treated as cash.
Bad Debts - Direct Write-Off Method - correct answer ✔✔- No entry for bad debts until customer
actually defaults.
- At default, the customer’s account is written off.
- Theoretically weak, matching issue
- Only allowed if bad debt expense is immaterial
Bad Debts - Allowance Method - correct answer ✔✔Income Statement Approach
Balance Sheet Approach
Income Statement Approach - correct answer ✔✔- 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: - correct answer ✔✔Accounts Receivable
Less: Allowance for bad debts
= Net realizable value of A/R
Balance Sheet Approach - correct answer ✔✔- 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 - correct answer ✔✔Reverse write-off entry. Collect as usual.
Assigning Accounts Receivable - correct answer ✔✔- Assignment of A/R normally is done with recourse
- Assignment usually is done without notification to customers
Factoring Accounts Receivable - correct answer ✔✔- With or without recourse.
Pledging A/R - correct answer ✔✔- Use receivables as security for a loan
- Requires footnote disclosure
Noninterest-Bearing Notes - correct answer ✔✔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 - correct answer ✔✔- Held-to-Maturity
- Trading Securities
- Available-for-Sale Securities
Held-to-Maturity Securities - correct answer ✔✔- 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
Trading Securities - correct answer ✔✔- Equity or Debt securities held primarily for sale in the near term
- Classified on BS as current
- Carried on BS at FMV
- Unreal holding gains/losses belong on the income statement
Cash - correct answer ✔✔Money that is FREE and CLEAR and available to be spend in current
operations.
Not Cash: - correct answer ✔✔Security deposits & bond sinking funds
Three-Month Rule - correct answer ✔✔Highly liquid securities with ORIGINAL maturity dates of three
months or less are treated as cash.
Bad Debts - Direct Write-Off Method - correct answer ✔✔- No entry for bad debts until customer
actually defaults.
- At default, the customer’s account is written off.
- Theoretically weak, matching issue
- Only allowed if bad debt expense is immaterial
Bad Debts - Allowance Method - correct answer ✔✔Income Statement Approach
Balance Sheet Approach
Income Statement Approach - correct answer ✔✔- 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: - correct answer ✔✔Accounts Receivable
Less: Allowance for bad debts
= Net realizable value of A/R
Balance Sheet Approach - correct answer ✔✔- 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 - correct answer ✔✔Reverse write-off entry. Collect as usual.
Assigning Accounts Receivable - correct answer ✔✔- Assignment of A/R normally is done with recourse
- Assignment usually is done without notification to customers
Factoring Accounts Receivable - correct answer ✔✔- With or without recourse.
Pledging A/R - correct answer ✔✔- Use receivables as security for a loan
- Requires footnote disclosure
Noninterest-Bearing Notes - correct answer ✔✔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 - correct answer ✔✔- Held-to-Maturity
- Trading Securities
- Available-for-Sale Securities
Held-to-Maturity Securities - correct answer ✔✔- 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
Trading Securities - correct answer ✔✔- Equity or Debt securities held primarily for sale in the near term
- Classified on BS as current
- Carried on BS at FMV
- Unreal holding gains/losses belong on the income statement
