ACCTG 414 Final Exam review Jocelyn’s Office hours – All...
Transcript of ACCTG 414 Final Exam review Jocelyn’s Office hours – All...
ACCTG 414 Final Exam review
Jocelynrsquos Office hours ndash All students in 414 are welcomeTuesday Dec 10 Noon ndash 2 pmWednesday Dec 11 Noon ndash 3 pmThursday Dec 12 Noon ndash 3 pmFriday Dec 13 Noon ndash 2 pmOr you can use the discussion board
For the final exam
o Time Dec 14 2013 Saturday 1400 ndash 1700 (Consolidated exam 3 hours)
o Location Pavilion Rows 2468o Arrive at least 30 minutes before the start time of the exam
o Bring a non- programmable calculator
o Please bring Your One Card or a piece of government issued picture ID with you
o Read each question Carefully ndash answer all parts
o Budget your time
Rough Split of pre midterm versus post midterm questionsCh 1-5 appendix Approx 25 Ch 6-11 Approx 75But remember that much of the new material builds on material from earlier chapters
Note
This document is not an exhaustive summary of all materials covered this term but this quick review may be helpful to you in studying It is not a replacement for reading the text and doing the assigned questions
You may wish to add your own notes into this document
Ch 1 and 2 Objectives of Financial Accounting
To communicate financial information to parties outside the business organization
1 Equity Investors 4 Suppliers2 Creditors 5 Customers etc3 Employees
Financial StatementsThe four basic financial statements Statement of Financial position Income Statement statement of comprehensive income Statement of Cash Flows Statement of Retained earningsshareholdersrsquo equity Most companies prepare financial statements at the end of each year (called annual reports) and at the end of each quarter (called quarterly reports)
General justification for ASPE GAAP vs IFRS
Cash Basis vs Accrual Basis Recognition Criteria
Accrual basis Cash basisRevenue When earned When cash is receivedExpense When incurred When cash is paid
Review the conceptual framework
What type of questions would you ask
Appendix - The accounting cycle
The Recording Process Journal entries Unadjusted trial balance Adjusting entries Adjusted Trial Balance Financial statement preparation Closing entries Post closing trial balance Reversing entries are optional ndash not required in this course
The Journal EntriesTransactions recorded using double entry bookkeeping
Debits Dr Credits Cr
Journal Entries and T-accounts
Increases in assets are debited and recorded on the left side of the T-account
Increases in liabilities are credited and recorded on the right side of the T-account
Increases in revenues are credited and recorded on the right side of the T-account
Increases in expenses are debited and recorded on the left side of the T-account
Remember that the balances of the permanent accounts carry over to the next year
Remember that the income statements accounts (revenues and expenses) will be closed through closing entries by the end of each reporting period
T-Accounts You can use balances from T-accounts to prepare financial statements at the end of a fiscal period
Basic Accounts
Adjusting EntriesAdjusting entries record activities that have taken place but which have not yet been recorded Four scenarios1 Cash first expenses later eg Prepaid expense office supplies purchased for later use PPampE purchased2 Expenses first cash later eg Wages accrued but not paid purchases of inventory on credit3 Cash first revenues later eg Unearned revenues 4 Revenues first cash later eg Interest revenues accrued credit sales
Involve at least one temporary account (revenue expense) and at least one permanent account (asset liabilities) They NEVER involve cash
Trial BalancesPurpose To ensure both sides on an entry recorded at the same amount ndash do not guarantee that your entries are correct but do reduce errors
Closing EntriesBridge the Income Statement and Statement of Financial Position ( through) Retained EarningsClose Revenue into RE by
Dr Revenues Cr Retained earnings
Close COGSExpenses into RE byDr Retained earnings
Cr COGSExpensesWhat about dividends Ensure that any dividends declared are closed to retained earnings You can use the income summary if you wish
Sub-ledgers and special journals
What questions might you ask
Ch 3 - The Income Statement and Comprehensive Income
The income statement measures firm performance regardless of when cash is exchanged Key principle
Single step vs Multi stepSingle step
Revenues + gainsLess Expenses and losses=Net income before taxesless Taxes ndash as these mush be shown separately=Net Income
Multi stepRevenues( from operations only)Less COGS=Gross Profitless Operating expenses= operating incomeless Non operating expenses=Net income before taxesless Taxes=Net Income
Function vs Nature
Function- Sort by functional area of the business eg sales admin engineering RampD etc You need to have the costs split by function in order to do thisNature ndash Sort expenses by type eg Utilities office professional fees etcLook at the accounts you are given and use this to determine the better approach Smaller businesses generally sort by nature bigger organizations with more separation by departments may use function
Income statement Equations
Revenue ndash Cost of Goods Sold = gross profitNet Income + - Other comprehensive income = comprehensive income
Components(IFRS and ASPE GAAP)
o Heading ndash for the [year] ended [date] or other period coveredo Revenues -Sales or service revenueo Gains -eg selling an equipment for cash greater than its net book valueo Expenses -Cost of goods sold operating expenses etco Losses eg selling an equipment for cash less than its net book valueo Other revenues and expenses
o Interest revenue dividend income interest expense
Income from Continuing Operationso Discontinued Operations
o Income or Loss from Discontinued Operations net of taxo Gain or Loss on Disposal of Discontinued Operations net of tax
Net income
IFRS onlyo +- Other comprehensive income
Comprehensive income
Differences between IFRS and ASPE
Accounting for discontinued operations and intra-period tax allocation
Earnings management
Typical Questions
Ch 4 - The Statement of Financial Position Statement of Retained Earnings Changes in Shareholdersrsquo Equity and Disclosure
STATEMENT OF FINANCIAL POSITION
Equation Assets = Liabilities + Shareholdersrsquo equity
Components of the Statement - Heading ndash as at [date]- Assets Economic benefits owned by the business as a result of
past transactions - Liabilities Debt and other obligations of the business that result
from past transactions - Shareholdersrsquo equity Residual claim of and financing provided by
the owners of the business- Current vs Non Current- Major categories
o Review major categories for presentation- Order of accounts
o Assets- liquidityo Liabilities ndash time to maturityo Sh Equity - permanence
STATEMENT OF RETAINED EARNINGSThis is reported as a solo statement under ASPE GAAP onlyOpening Retained Earnings + Net Income - Dividends = Closing Retained Earnings
STATEMENT OF CHANGES IN SHAREHOLDERSrsquo EQUITYIFRS OnlyA continuity schedule of opening balances +- changes = closing balance for each component of shareholders equity including retained earnings
Financial statements - Note DisclosurePurpose to provide supplementary information about the financial condition of the company
- Describe accounting policies followed by the company - Provide additional detail about an item on the financial statements- Provide additional information about an item not on the financial
statements- Subsequent events consider the difference in treatment of the two
types of subsequent event
Typical Questions
Ch 5 ndash CASH FLOW STATEMENT ndash indirect method only
Cash and Cash equivalentsbull Cash on hand Bank balancesbull Bank overdraftsbull Short term risk free investments with maturity dates within 3 months
Reports the changes to other accounts that affect a change in cash and cash equivalents on the SFP The change in the cash account is usually not equal to net income
Revenues reported do not always equal cash collected (credit sales)Expenses reported do not always equal cash paid (prepaid expenses)
In relation to the SFP The sum of cash flows from operations cash flows from investing and cash flows from financing must equal to the change in cash and cash equivalents on the SFP
Statement of Cash Flows reports operating cash flow as well as other cash flow information
Provides important information to investors and creditors In particular information about differences in the timing of revenue and
expense recognition under GAAP and the associated cash inflows and outflows
Preparing a cash flow statement Heading - for the [year] ended [date] or other period covered
Cash flow provided by (used in) operating activities (Indirect method)Net IncomeAdjust for Non-Cash Changes in non-cash WC accounts
- Subtract increase in assets- Add decreases in asset- Add increase in liabilities- subtract decreases in Liabilities
Adjust for non cash items included in net incomeAdd Depreciation amp AmortizationAdd Loss on Sale of AssetsSubtract Gain on Sales of Assets
Cash flows provided by (used in) investing activitiesCash paid for long-term assetsCash proceeds from the sale of long-term assets
Cash flows provided by (used in) financing activitiesCash dividends paidCash received on issuing debt ndash ie borrowingCash paid for retirement of debt
Cash received from issuance of common shares Ch 6 - Revenue and Expense RecognitionWhy do we care about revenue recognitionRevenue has a BIG impact on bottom-line profitability managers may be tempted to manage revenue
Criteria for revenue recognition ndash existing standardA firm recognizes revenue when it has
bull Performance achievedbull Measurability of the revenues and associated remaining costsbull Collectability is reasonably assured
Revenue is most often recognized at the time of sale as long as- Reasonable estimate of uncollectible amount - Reasonable estimate of sales returns - Reasonable estimation of all other material expenses representing
uncertain future outflows (eg warranty costs) - Most common in retail wholesale amp manufacturing - Even when right of return exists as long as the company has
booked reasonable allowance for sales return we can still recognize revenues at the point of sale
If there is uncertainty in the three criteria then wait until the uncertainty is resolved
Criteria for revenue recognition ndash proposed standardIFRS
1 Identify the contract(s) with the customer ndash May be explicit or implicit
2 Identify the separate performance obligations ndash may be one or many
3 Determine the transaction price ndash using either weighted probabilities method or most likely amount You must determine an amount for revenue This is very different from the existing approach
4 Allocate the transaction price to the performance obligations
5 Recognize revenue when a performance obligation is satisfied
Review the two cases covered in the lectures
MethodsPercentage of completion method - Recognize revenue and profit as contract progresses Extent of completion at any one point in time is determined by the costs incurred to date divided by the total estimated costs of the contract If it becomes apparent that a loss is expected on a contract recognize the total amount of the expected loss immediately
Completed contract method - Recognize revenue and profit when the contract is complete If it becomes apparent that a loss is expected on a contract recognize the total amount of the expected loss immediately
Percentage of completion methodReview profitable contracts
Calc Year 1 Year 2Costs incurred to date (B) given
Total estimated costs (D) given
Percentage complete (E) BD
Contract Value (F) Given
Revenue recognized to date G F X E
Less revenue already recognized H
Annual revenue ( I) G-H
Construction costs incurred (A) Given
Gross profit I - A
AND Loss contracts
Calc Year 1 Year 2Costs incurred to date (B) given
Total estimated costs (D) given
Percentage complete (E) BD
Contract Value (F) Given
Revenue recognized to date G F X E
Less revenue already recognized H
Annual revenue ( I) G-H
Construction costs incurred (A) Plug this
Total estimated Loss Calc this
(Profit) Loss previously recognized Prior yrs
Gross profitTypical Questions
Ch 7 ndash Financial Instruments Cash Receivables and Payables
CashCash and Cash Equivalents ndash Identifying amounts to be included in cash equivalents ndash See chapter 5 material
Accounts Receivable
Relevant Formulae
1 Ending AR = Beg Bal AR + Credit Sales ndash Cash Received ndash Write-off + 0 Recovery of previous write-off2 Ending Allowance for doubtful accounts (ADA) = Beg Bal AFDA + Bad
Debt Expense ndash Write-off + Recovery of previous write-off
Two approaches to determining Allowance for Bad Debts
1 Percentage of (Credit) Sales (Income statement approach)2 minus Focuses on calculating the Bad Debt Expense recorded for the year
Aging Method (Balance sheet approach)3 minus Focuses on calculating the Ending Balance of Allowance for Bad
Debts 4 minus Bad Debt Expense is a ldquoPlugrdquo
Accounts Receivable Relevant entries 0 Credit sales Dr Accounts receivable
Cr Revenue 2 Record bad debt expense 0 Dr Bad debt expense 0 Cr AFDA 3 When bad debt happens (when we are sure a specific customer
defaults) Dr AFDA 4 Cr Accounts receivable5 Recovery of bad debt 6 Dr Accounts receivable7 Cr AFDA 0 Dr Cash1 Cr Accounts receivable
Notes receivablePayable- Notes written promises- May be at a market rate of interest ndash no discounting needed- May be at a low rate on interest ndash discount the face value of the
note and the interest payments at the market rate- May be at no interest ndash discount the face value at the market rate
of interest
Other items
Sales discounts- Account for sales discounts by recording ldquoallowance for sales
discountsrdquo o A contra account for sales revenue on Income statement
Customer return merchandise- Debit to ldquoSales returns and allowancesrdquo
o A contra account for sales revenue on Income statement
Year-end adjusting entry to account for an estimated amount of sales return and merchandise return
- Credit to Allowance for sales return and allowance - A balance sheet contra account attached to accounts receivables
Transfers of ARIdentify if the transaction is to be accounted for as a sale or a borrowing transaction
Sale transactionsJournal entries to remove the AR any associated AFDA record the receipt of cash the residual obligation if any and a loss on disposal
Borrowing transactionsJournal entries to record the new debt and interest costs fees The AR and associated AFDA remain on the books
Types of Questions
Ch 8 Inventory12 INVEB = INVBB + Purchase ndash COGS
Inventory is recorded on the SFP at the lower of the cost or the net realizable value of the inventory
Key equation Beginning Inv+ Purchases - COGS = Ending Inv
IssuesConsignment inventory - Consignment inventory on the firm premises owned by others should be excluded Consignment inventory of the firm held elsewhere should be included in the inventory of the firm
Goods in transit at period end - Items shipped FOB shipping point are considered to have been sold when shipped Items shipped FOB destination are not considered to have been sold until they have arrived at their destination
Cut-off Errors - A cut-off error occurs with respect to ending inventory if items owned at period end are incorrectly excluded from the physical inventory count or if items already sold are incorrectly included in the period end inventory count
SystemsPerpetual system tracks units sold continuously
More accurate more timely potentially more costlyPeriodic system infer quantities sold by using purchasesproduction beginning and ending inventories
Units sold = Beg Units + Production ndashEnd Units Harder to detect inventory ldquoshrinkagerdquo (eg theft spoilage)
Cost flow assumptions Specific identification Costs of the specific item sold are included in cost of goods sold Costs of specific items on hand are included in inventory (Perpetual inventory systems)
Weighted average cost Inventory is priced on the basis of average cost of goods available for sale during the period Thus the same cost per item is assigned to cost of goods sold and to ending inventory (This method is used for periodic inventory systems)
Moving average cost Cost of goods sold is determined by calculating the average cost of goods available at the time a sale is made (This method is used for perpetual inventory systems)
FIFO assumption about the physical flow of inventory used to determine cost of goods sold and the ending inventory account balance The actual physical flow of inventory need not correspond to these assumptions FIFO shows SFP at relatively current values but income statement cost of goods sold at stale values
Inventory estimation methods
The Gross Profit Method
The gross profit method of inventory estimation relies on the knowledge of opening inventory net purchases net sales at retail prices and the historical gross profit margin
The Retail Inventory Method
The retail inventory method is a method of estimating the dollar amount of ending inventory using the current relationship between cost and selling price This is commonly used by retail stores for the preparation of interim financial statements
IFRS vs ASPEIFRS covers biological assets in a separate sectionIFRS requires the capitalization of interest on inventory that must be manufactured in large quantities ASPE GAAP gives companies the option
Types of Questions
Ch 9- 10 - Accounting for capital assetsPPampE
1 PPEEB = PPEBB + Acquisitions ndash Disposals 2 Straight-line depreciation = (Purchase price ndash salvage value) Useful
life 3 Declining balance methods = (Purchase cost- sum of all prior yearsrsquo
depreciation) X rate4 Units of Production = (Purchase price ndash salvage value) Useful life in
units annual depreciation = rate X of units5 Accumulated DepEB = Accumulated DepBB + Depreciation ndash
AccDepDisposal
Capitalize vs expense Capitalizing costs means to show them as an asset on the SFP (assets have future economic benefits)
We expense (ie not capitalize) when (a) benefits are immediate (b) or future benefits are too uncertain or immaterial (eg RampD)
Accounting for tangible assetsWhat is the acquisition cost
o Include all costs required to bring the asset into usable condition and location
o Purchased assets purchase price plus cost to prepare the asset for use (installation transportation testing)
o Self-constructed assets direct cost of construction (direct material direct labour pro-rata allocation of overhead costs) financing costs (interest on funds specifically borrowed to finance construction can be capitalized)
o Basket purchase ndash the best way to allocate the purchase price of the assets to the individual assets is based on the relative fair market values of the assets acquired
o Deferred payment contracts ndash recorded at the present value of the consideration exchanged between the contracting parties at the date of acquisition
o Non-monetary transactions recorded at the fair value of the assets received or the fair value of the asset given up whichever is more easily determined ASPE GAAP
o Check page 636 and 637 on how IFRS is differento
Measurement after acquisition Cost model vs Revaluation Model
How to account for costs subsequent to acquisition- Additions capitalize the costs to the existing capital asset account and
revise the service life and residual value as needed
- Betterments and replacements capitalize the costs to the existing capital asset account Distinguish the expenditures from normal repair costs o The appropriate accounting treatment depends on whether or not
we know the carrying value of old assets o If Costs are known then remove the old cost and accumulated
depreciation record a loss on disposal and then capitalize the new costs
o If costs are not known then add the new costs into the cost pool and revise the service life and residual value as needed
- Rearrangement and reinstallation capitalize the costs to the existing capital asset account
The appropriate accounting treatment depends on whether or not we know the carrying value of old assets
If Costs are known then remove the old cost and accumulated depreciation record a loss on disposal and then capitalize the new costs
If costs and Accum Amortization not known then expense the full amount
o Repairs ndash always expensed as incurred
Accounting for Intangible Assets
Specific assets - Patents Trademarks Customer lists FranchisesResearch and development Goodwill etc See notes below under Chapter 11 for calculation of Goodwill
o Goodwill is the expected value of future above-normal financial performance
What is the acquisition costPurchased assets - Include all costs required to bring the asset into usable condition and location Goodwill is only recorded if purchased
Six Criteria for capitalization of internally generated intangible assets
Costs to be included ndash Materials and servicesndash Direct labour and other payroll costsndash Interest and borrowing costs ndash if specifically related
Costs excluded ndash Selling administration and general overhead costs
Measurement after acquisition Cost model vs Revaluation Model ndash general understanding of the differences in the two models only
Amortization of Capital assets - What is the expected useful life
o The time period over which the asset will be used
- What is the Residual value o To determine residual value of an asset it requires managerial
judgment o Residual value is the estimated amount a company would receive
today on disposal of an asset net of related disposal costs
- What amortization should we use to allocate expense over the useful life
o What does GAAP allow Straight-line method
bull Annual Depreciation Expense = depreciable basisservice life (in years) = (Acquisition Cost -SV) Useful Years
bull Common for tangible assetsbull Uniform amortization charges over time
Activity methodbull Input methods ndash eg Depreciation cost per machine-
hour = depreciable basisservice life (in machine-hours)
bull Depr Expense = Actual hours used hourly ratebull Common for manufacturing firms bull Output methods- eg units producedbull Depr Expense = Actual units produced rate per unit bull Common for natural resources companybull Unequal amortization charges over time
Decreasing charge (declining balance CCA double declining balance)
bull Higher amortization expense is recognized in the earlier years of an assetrsquos useful life
bull Constant amortization rated applied to reducing book value of assets
Increasing chargebull Lower amortization expense in earlier years and
higher amortization in later years Donrsquot need to calculate this
Land is the never amortized
What accounts does depreciation affect Tangible assets - Accumulated depreciation account Intangible assets ndash The asset account directly Retained earnings account Depreciation expense
Which financial statements are affected SFP and income statement
Does depreciation affect cash NEVER
Amortization for partial periods amortization charges for the periods in which when assets are purchased and disposed Follow the company policy if given
Impairment in Value of Capital Assets IFRS requires impairment test for intangible and tangible assets be
conducted at least once a year Use the rational entity impairment model
Impairment = Carrying value minus (the greater of FV in use and FV less costs to sell)
Impairment loss can be reversed if value recovers in future years
ASPE GAAP requires impairment test for tangible and intangible assets only when circumstances change such that there might be a permanent impairment in the assetsrsquo carrying value Once impairment loss is recorded it cannot be recovered later
Use the cost recovery impairment model - Tangible Assets
Two steps Step 1 compare the assets carrying value to sum of the
Undiscounted cash flowsbull If sum of the undiscounted cash flows gt carrying
value no impairment loss is recorded and impairment test stops
bull If sum of the undiscounted cash flows lt carrying value go to step 2
Step 2 Determine the assetsrsquo fair market value bull If there is an active market for the assets then use
the quoted market price as the fair market value bull If there is no active market for the assets then
calculate the intrinsic value (theoretical value) of the assets by discounting all future cash flows to be resulted from the assets to current period
Impairment loss = carrying value ndash fair market value
Goodwill is not amortized but written down if impaired in value Two steps
bull Step 1 compare fair value of each reporting unit to the total net book value (including goodwill)
o If fair value gt book value no impairment loss is recorded and impairment test stops
o Otherwise go to the second stepbull Step 2
o Determine the fair value of reporting unito Subtract the fair value of all net identifiable
assets of that unit and allocates the remainder to goodwill implied goodwill
o Carrying value of goodwill ndash implied goodwill impairment loss to be recognized
Disposition of Capital assets- Remove the cost from the capital asset account and the accumulated
amortization related to disposed capital assets - Once a long-term assets is determined to be disposed
o Reclassify to assets held for sale
o Determine the net realizable value the lower of carrying value and fair value less cost to sell
o Not amortized any more o When sold record gainloss from disposal
Review Basket purchases and Non-monetary transaction
Ch 11 - Investments
Passive investmentsWhen the investor company does not have significant influence over the investee company
Choices are costamortized cost FVTPL or FV-OCIo ASPE allow only costamortized cost and FVTPL o ASPE GAAP ndash Companies must use FVTPL when active market for
shares existso ASPE GAAP allows companies to choose to use FVTPL if they so
designate at time of initial recognition
Investments other than bonds being held to receive their contractual cash flows will be adjusted to market value at year end
o SFP effects are the same ie FV reported
What is different o Income statement effects o For investments FVTPL gains or losses recognized in Income in
the current periodo For investments FV-OCI gains or losses are recorded in
ldquocomprehensive incomerdquo and accumulated in AOCI until securities are sold
Investments FVTPL (debt and equity) Purchased for short-term profit potential Year-end adjustment to the market value Changes in market value (holding lossgain) reported in the income
statement of the current period
Investment Amortized Cost (debt) Purchased with ability and intention to hold to maturity No adjustment to market value Carried at amortized cost on the SFP
Investments FV-OCI (debt and equity) Securities not classified as either of above Changes in market value (holding lossgain) reported in comprehensive
income On the SFP donrsquot forget to report accumulated comprehensive gainloss
under Shareholdersrsquo equity
Investment revenue is recognized at the point when the investee company declares and pays dividends
When investments are sold
Year-end adjusting to fair market value and investments are not sold
FVTPL Realized gainslosses ndash Net income IS
Unrealized gainslosses ndash Net income IS
FV-OCI Adjust to market at date of sale OCIClose remaining balance in AOCI for the investments sold to RE
Unrealized gainslosses ndash Comprehensive income IS Shareholders equity
Bonds ndash Intent to hold until maturity
NA No year- end adjustment to FV Record at amortized cost
Bonds - Terminology
1 1048697 Principal (Par Value) face value of the bond the amount due at maturity
2 1048697 Coupon Rate the rate used to determine the periodic cash payments (coupon payment) if any
3 1048697 Coupon Payment Cash Payment = face value x Coupon Rate
4 1048697 Market Interest Rate the rate used to determine the current market value of the bond
Bonds - ParDiscountPremium
Bonds Sells Market Rate at issuance
Market Value at issuance
Coupon Payment
At Par = Coupon rate = Par value =Interest expenseAt a Discount gt Coupon rate lt Par value ltInterest expenseAt a Premium lt Coupon rate gt Par value gtInterest expense
Active investmentsUsed when significant influence exists- Under the equity method investment revenue is recognized as soon as the
investee company reports a net income or net loss - When the investee company declares and pays dividends the investor
company does not record as investment revenue but as a decrease of investment to avoid double counting
Starting pointOwnership lt20 20-50 gt50Reporting method
Fair value method
Equity Consolidation
Plus consider other factors such as representation on the board intercompany transactions etc
Equity method - investeersquos announcement of earnings increases investorrsquos Investment
account - Investeersquos announcement of dividends decreases investorrsquos
Investment account - Calculation of equity Income
ASPE vs IFRS - IFRS must use Equity method for investments with significant influence APSE Can use Equity method or Cost( if Shares are not actively traded) If shares actively traded then the choice is Equity or FVTPL
Purchase premiums- Purchase premiums arise for two reasons
o Fair market value differentials the FV of assetsliabilities of the investee are different from BV of those assetsliabilities
Fair market value differentials are amortized and the amortization expenses will be included in net income
bull Inventory fair market value differentials is usually amortized in the first period after acquisition
bull Fixed assets fair market value differentials are usually amortized over the expected remaining service life of the assets
o Goodwill is the expected value of future above-normal financial performance
- Calculation of Goodwill and FV differentials to be amortized
Goodwill CalculationPurchase priceLess percentage share of BV acquiredEquals Purchase PremiumMinus FV differences where FVgtBVAdd FV differences where FVgtBVRemainder equals Goodwill
- Revenue recognized to date G
- Revenue recognized to date G
- Inventory estimation methods
- The Gross Profit Method
-
Ch 1 and 2 Objectives of Financial Accounting
To communicate financial information to parties outside the business organization
1 Equity Investors 4 Suppliers2 Creditors 5 Customers etc3 Employees
Financial StatementsThe four basic financial statements Statement of Financial position Income Statement statement of comprehensive income Statement of Cash Flows Statement of Retained earningsshareholdersrsquo equity Most companies prepare financial statements at the end of each year (called annual reports) and at the end of each quarter (called quarterly reports)
General justification for ASPE GAAP vs IFRS
Cash Basis vs Accrual Basis Recognition Criteria
Accrual basis Cash basisRevenue When earned When cash is receivedExpense When incurred When cash is paid
Review the conceptual framework
What type of questions would you ask
Appendix - The accounting cycle
The Recording Process Journal entries Unadjusted trial balance Adjusting entries Adjusted Trial Balance Financial statement preparation Closing entries Post closing trial balance Reversing entries are optional ndash not required in this course
The Journal EntriesTransactions recorded using double entry bookkeeping
Debits Dr Credits Cr
Journal Entries and T-accounts
Increases in assets are debited and recorded on the left side of the T-account
Increases in liabilities are credited and recorded on the right side of the T-account
Increases in revenues are credited and recorded on the right side of the T-account
Increases in expenses are debited and recorded on the left side of the T-account
Remember that the balances of the permanent accounts carry over to the next year
Remember that the income statements accounts (revenues and expenses) will be closed through closing entries by the end of each reporting period
T-Accounts You can use balances from T-accounts to prepare financial statements at the end of a fiscal period
Basic Accounts
Adjusting EntriesAdjusting entries record activities that have taken place but which have not yet been recorded Four scenarios1 Cash first expenses later eg Prepaid expense office supplies purchased for later use PPampE purchased2 Expenses first cash later eg Wages accrued but not paid purchases of inventory on credit3 Cash first revenues later eg Unearned revenues 4 Revenues first cash later eg Interest revenues accrued credit sales
Involve at least one temporary account (revenue expense) and at least one permanent account (asset liabilities) They NEVER involve cash
Trial BalancesPurpose To ensure both sides on an entry recorded at the same amount ndash do not guarantee that your entries are correct but do reduce errors
Closing EntriesBridge the Income Statement and Statement of Financial Position ( through) Retained EarningsClose Revenue into RE by
Dr Revenues Cr Retained earnings
Close COGSExpenses into RE byDr Retained earnings
Cr COGSExpensesWhat about dividends Ensure that any dividends declared are closed to retained earnings You can use the income summary if you wish
Sub-ledgers and special journals
What questions might you ask
Ch 3 - The Income Statement and Comprehensive Income
The income statement measures firm performance regardless of when cash is exchanged Key principle
Single step vs Multi stepSingle step
Revenues + gainsLess Expenses and losses=Net income before taxesless Taxes ndash as these mush be shown separately=Net Income
Multi stepRevenues( from operations only)Less COGS=Gross Profitless Operating expenses= operating incomeless Non operating expenses=Net income before taxesless Taxes=Net Income
Function vs Nature
Function- Sort by functional area of the business eg sales admin engineering RampD etc You need to have the costs split by function in order to do thisNature ndash Sort expenses by type eg Utilities office professional fees etcLook at the accounts you are given and use this to determine the better approach Smaller businesses generally sort by nature bigger organizations with more separation by departments may use function
Income statement Equations
Revenue ndash Cost of Goods Sold = gross profitNet Income + - Other comprehensive income = comprehensive income
Components(IFRS and ASPE GAAP)
o Heading ndash for the [year] ended [date] or other period coveredo Revenues -Sales or service revenueo Gains -eg selling an equipment for cash greater than its net book valueo Expenses -Cost of goods sold operating expenses etco Losses eg selling an equipment for cash less than its net book valueo Other revenues and expenses
o Interest revenue dividend income interest expense
Income from Continuing Operationso Discontinued Operations
o Income or Loss from Discontinued Operations net of taxo Gain or Loss on Disposal of Discontinued Operations net of tax
Net income
IFRS onlyo +- Other comprehensive income
Comprehensive income
Differences between IFRS and ASPE
Accounting for discontinued operations and intra-period tax allocation
Earnings management
Typical Questions
Ch 4 - The Statement of Financial Position Statement of Retained Earnings Changes in Shareholdersrsquo Equity and Disclosure
STATEMENT OF FINANCIAL POSITION
Equation Assets = Liabilities + Shareholdersrsquo equity
Components of the Statement - Heading ndash as at [date]- Assets Economic benefits owned by the business as a result of
past transactions - Liabilities Debt and other obligations of the business that result
from past transactions - Shareholdersrsquo equity Residual claim of and financing provided by
the owners of the business- Current vs Non Current- Major categories
o Review major categories for presentation- Order of accounts
o Assets- liquidityo Liabilities ndash time to maturityo Sh Equity - permanence
STATEMENT OF RETAINED EARNINGSThis is reported as a solo statement under ASPE GAAP onlyOpening Retained Earnings + Net Income - Dividends = Closing Retained Earnings
STATEMENT OF CHANGES IN SHAREHOLDERSrsquo EQUITYIFRS OnlyA continuity schedule of opening balances +- changes = closing balance for each component of shareholders equity including retained earnings
Financial statements - Note DisclosurePurpose to provide supplementary information about the financial condition of the company
- Describe accounting policies followed by the company - Provide additional detail about an item on the financial statements- Provide additional information about an item not on the financial
statements- Subsequent events consider the difference in treatment of the two
types of subsequent event
Typical Questions
Ch 5 ndash CASH FLOW STATEMENT ndash indirect method only
Cash and Cash equivalentsbull Cash on hand Bank balancesbull Bank overdraftsbull Short term risk free investments with maturity dates within 3 months
Reports the changes to other accounts that affect a change in cash and cash equivalents on the SFP The change in the cash account is usually not equal to net income
Revenues reported do not always equal cash collected (credit sales)Expenses reported do not always equal cash paid (prepaid expenses)
In relation to the SFP The sum of cash flows from operations cash flows from investing and cash flows from financing must equal to the change in cash and cash equivalents on the SFP
Statement of Cash Flows reports operating cash flow as well as other cash flow information
Provides important information to investors and creditors In particular information about differences in the timing of revenue and
expense recognition under GAAP and the associated cash inflows and outflows
Preparing a cash flow statement Heading - for the [year] ended [date] or other period covered
Cash flow provided by (used in) operating activities (Indirect method)Net IncomeAdjust for Non-Cash Changes in non-cash WC accounts
- Subtract increase in assets- Add decreases in asset- Add increase in liabilities- subtract decreases in Liabilities
Adjust for non cash items included in net incomeAdd Depreciation amp AmortizationAdd Loss on Sale of AssetsSubtract Gain on Sales of Assets
Cash flows provided by (used in) investing activitiesCash paid for long-term assetsCash proceeds from the sale of long-term assets
Cash flows provided by (used in) financing activitiesCash dividends paidCash received on issuing debt ndash ie borrowingCash paid for retirement of debt
Cash received from issuance of common shares Ch 6 - Revenue and Expense RecognitionWhy do we care about revenue recognitionRevenue has a BIG impact on bottom-line profitability managers may be tempted to manage revenue
Criteria for revenue recognition ndash existing standardA firm recognizes revenue when it has
bull Performance achievedbull Measurability of the revenues and associated remaining costsbull Collectability is reasonably assured
Revenue is most often recognized at the time of sale as long as- Reasonable estimate of uncollectible amount - Reasonable estimate of sales returns - Reasonable estimation of all other material expenses representing
uncertain future outflows (eg warranty costs) - Most common in retail wholesale amp manufacturing - Even when right of return exists as long as the company has
booked reasonable allowance for sales return we can still recognize revenues at the point of sale
If there is uncertainty in the three criteria then wait until the uncertainty is resolved
Criteria for revenue recognition ndash proposed standardIFRS
1 Identify the contract(s) with the customer ndash May be explicit or implicit
2 Identify the separate performance obligations ndash may be one or many
3 Determine the transaction price ndash using either weighted probabilities method or most likely amount You must determine an amount for revenue This is very different from the existing approach
4 Allocate the transaction price to the performance obligations
5 Recognize revenue when a performance obligation is satisfied
Review the two cases covered in the lectures
MethodsPercentage of completion method - Recognize revenue and profit as contract progresses Extent of completion at any one point in time is determined by the costs incurred to date divided by the total estimated costs of the contract If it becomes apparent that a loss is expected on a contract recognize the total amount of the expected loss immediately
Completed contract method - Recognize revenue and profit when the contract is complete If it becomes apparent that a loss is expected on a contract recognize the total amount of the expected loss immediately
Percentage of completion methodReview profitable contracts
Calc Year 1 Year 2Costs incurred to date (B) given
Total estimated costs (D) given
Percentage complete (E) BD
Contract Value (F) Given
Revenue recognized to date G F X E
Less revenue already recognized H
Annual revenue ( I) G-H
Construction costs incurred (A) Given
Gross profit I - A
AND Loss contracts
Calc Year 1 Year 2Costs incurred to date (B) given
Total estimated costs (D) given
Percentage complete (E) BD
Contract Value (F) Given
Revenue recognized to date G F X E
Less revenue already recognized H
Annual revenue ( I) G-H
Construction costs incurred (A) Plug this
Total estimated Loss Calc this
(Profit) Loss previously recognized Prior yrs
Gross profitTypical Questions
Ch 7 ndash Financial Instruments Cash Receivables and Payables
CashCash and Cash Equivalents ndash Identifying amounts to be included in cash equivalents ndash See chapter 5 material
Accounts Receivable
Relevant Formulae
1 Ending AR = Beg Bal AR + Credit Sales ndash Cash Received ndash Write-off + 0 Recovery of previous write-off2 Ending Allowance for doubtful accounts (ADA) = Beg Bal AFDA + Bad
Debt Expense ndash Write-off + Recovery of previous write-off
Two approaches to determining Allowance for Bad Debts
1 Percentage of (Credit) Sales (Income statement approach)2 minus Focuses on calculating the Bad Debt Expense recorded for the year
Aging Method (Balance sheet approach)3 minus Focuses on calculating the Ending Balance of Allowance for Bad
Debts 4 minus Bad Debt Expense is a ldquoPlugrdquo
Accounts Receivable Relevant entries 0 Credit sales Dr Accounts receivable
Cr Revenue 2 Record bad debt expense 0 Dr Bad debt expense 0 Cr AFDA 3 When bad debt happens (when we are sure a specific customer
defaults) Dr AFDA 4 Cr Accounts receivable5 Recovery of bad debt 6 Dr Accounts receivable7 Cr AFDA 0 Dr Cash1 Cr Accounts receivable
Notes receivablePayable- Notes written promises- May be at a market rate of interest ndash no discounting needed- May be at a low rate on interest ndash discount the face value of the
note and the interest payments at the market rate- May be at no interest ndash discount the face value at the market rate
of interest
Other items
Sales discounts- Account for sales discounts by recording ldquoallowance for sales
discountsrdquo o A contra account for sales revenue on Income statement
Customer return merchandise- Debit to ldquoSales returns and allowancesrdquo
o A contra account for sales revenue on Income statement
Year-end adjusting entry to account for an estimated amount of sales return and merchandise return
- Credit to Allowance for sales return and allowance - A balance sheet contra account attached to accounts receivables
Transfers of ARIdentify if the transaction is to be accounted for as a sale or a borrowing transaction
Sale transactionsJournal entries to remove the AR any associated AFDA record the receipt of cash the residual obligation if any and a loss on disposal
Borrowing transactionsJournal entries to record the new debt and interest costs fees The AR and associated AFDA remain on the books
Types of Questions
Ch 8 Inventory12 INVEB = INVBB + Purchase ndash COGS
Inventory is recorded on the SFP at the lower of the cost or the net realizable value of the inventory
Key equation Beginning Inv+ Purchases - COGS = Ending Inv
IssuesConsignment inventory - Consignment inventory on the firm premises owned by others should be excluded Consignment inventory of the firm held elsewhere should be included in the inventory of the firm
Goods in transit at period end - Items shipped FOB shipping point are considered to have been sold when shipped Items shipped FOB destination are not considered to have been sold until they have arrived at their destination
Cut-off Errors - A cut-off error occurs with respect to ending inventory if items owned at period end are incorrectly excluded from the physical inventory count or if items already sold are incorrectly included in the period end inventory count
SystemsPerpetual system tracks units sold continuously
More accurate more timely potentially more costlyPeriodic system infer quantities sold by using purchasesproduction beginning and ending inventories
Units sold = Beg Units + Production ndashEnd Units Harder to detect inventory ldquoshrinkagerdquo (eg theft spoilage)
Cost flow assumptions Specific identification Costs of the specific item sold are included in cost of goods sold Costs of specific items on hand are included in inventory (Perpetual inventory systems)
Weighted average cost Inventory is priced on the basis of average cost of goods available for sale during the period Thus the same cost per item is assigned to cost of goods sold and to ending inventory (This method is used for periodic inventory systems)
Moving average cost Cost of goods sold is determined by calculating the average cost of goods available at the time a sale is made (This method is used for perpetual inventory systems)
FIFO assumption about the physical flow of inventory used to determine cost of goods sold and the ending inventory account balance The actual physical flow of inventory need not correspond to these assumptions FIFO shows SFP at relatively current values but income statement cost of goods sold at stale values
Inventory estimation methods
The Gross Profit Method
The gross profit method of inventory estimation relies on the knowledge of opening inventory net purchases net sales at retail prices and the historical gross profit margin
The Retail Inventory Method
The retail inventory method is a method of estimating the dollar amount of ending inventory using the current relationship between cost and selling price This is commonly used by retail stores for the preparation of interim financial statements
IFRS vs ASPEIFRS covers biological assets in a separate sectionIFRS requires the capitalization of interest on inventory that must be manufactured in large quantities ASPE GAAP gives companies the option
Types of Questions
Ch 9- 10 - Accounting for capital assetsPPampE
1 PPEEB = PPEBB + Acquisitions ndash Disposals 2 Straight-line depreciation = (Purchase price ndash salvage value) Useful
life 3 Declining balance methods = (Purchase cost- sum of all prior yearsrsquo
depreciation) X rate4 Units of Production = (Purchase price ndash salvage value) Useful life in
units annual depreciation = rate X of units5 Accumulated DepEB = Accumulated DepBB + Depreciation ndash
AccDepDisposal
Capitalize vs expense Capitalizing costs means to show them as an asset on the SFP (assets have future economic benefits)
We expense (ie not capitalize) when (a) benefits are immediate (b) or future benefits are too uncertain or immaterial (eg RampD)
Accounting for tangible assetsWhat is the acquisition cost
o Include all costs required to bring the asset into usable condition and location
o Purchased assets purchase price plus cost to prepare the asset for use (installation transportation testing)
o Self-constructed assets direct cost of construction (direct material direct labour pro-rata allocation of overhead costs) financing costs (interest on funds specifically borrowed to finance construction can be capitalized)
o Basket purchase ndash the best way to allocate the purchase price of the assets to the individual assets is based on the relative fair market values of the assets acquired
o Deferred payment contracts ndash recorded at the present value of the consideration exchanged between the contracting parties at the date of acquisition
o Non-monetary transactions recorded at the fair value of the assets received or the fair value of the asset given up whichever is more easily determined ASPE GAAP
o Check page 636 and 637 on how IFRS is differento
Measurement after acquisition Cost model vs Revaluation Model
How to account for costs subsequent to acquisition- Additions capitalize the costs to the existing capital asset account and
revise the service life and residual value as needed
- Betterments and replacements capitalize the costs to the existing capital asset account Distinguish the expenditures from normal repair costs o The appropriate accounting treatment depends on whether or not
we know the carrying value of old assets o If Costs are known then remove the old cost and accumulated
depreciation record a loss on disposal and then capitalize the new costs
o If costs are not known then add the new costs into the cost pool and revise the service life and residual value as needed
- Rearrangement and reinstallation capitalize the costs to the existing capital asset account
The appropriate accounting treatment depends on whether or not we know the carrying value of old assets
If Costs are known then remove the old cost and accumulated depreciation record a loss on disposal and then capitalize the new costs
If costs and Accum Amortization not known then expense the full amount
o Repairs ndash always expensed as incurred
Accounting for Intangible Assets
Specific assets - Patents Trademarks Customer lists FranchisesResearch and development Goodwill etc See notes below under Chapter 11 for calculation of Goodwill
o Goodwill is the expected value of future above-normal financial performance
What is the acquisition costPurchased assets - Include all costs required to bring the asset into usable condition and location Goodwill is only recorded if purchased
Six Criteria for capitalization of internally generated intangible assets
Costs to be included ndash Materials and servicesndash Direct labour and other payroll costsndash Interest and borrowing costs ndash if specifically related
Costs excluded ndash Selling administration and general overhead costs
Measurement after acquisition Cost model vs Revaluation Model ndash general understanding of the differences in the two models only
Amortization of Capital assets - What is the expected useful life
o The time period over which the asset will be used
- What is the Residual value o To determine residual value of an asset it requires managerial
judgment o Residual value is the estimated amount a company would receive
today on disposal of an asset net of related disposal costs
- What amortization should we use to allocate expense over the useful life
o What does GAAP allow Straight-line method
bull Annual Depreciation Expense = depreciable basisservice life (in years) = (Acquisition Cost -SV) Useful Years
bull Common for tangible assetsbull Uniform amortization charges over time
Activity methodbull Input methods ndash eg Depreciation cost per machine-
hour = depreciable basisservice life (in machine-hours)
bull Depr Expense = Actual hours used hourly ratebull Common for manufacturing firms bull Output methods- eg units producedbull Depr Expense = Actual units produced rate per unit bull Common for natural resources companybull Unequal amortization charges over time
Decreasing charge (declining balance CCA double declining balance)
bull Higher amortization expense is recognized in the earlier years of an assetrsquos useful life
bull Constant amortization rated applied to reducing book value of assets
Increasing chargebull Lower amortization expense in earlier years and
higher amortization in later years Donrsquot need to calculate this
Land is the never amortized
What accounts does depreciation affect Tangible assets - Accumulated depreciation account Intangible assets ndash The asset account directly Retained earnings account Depreciation expense
Which financial statements are affected SFP and income statement
Does depreciation affect cash NEVER
Amortization for partial periods amortization charges for the periods in which when assets are purchased and disposed Follow the company policy if given
Impairment in Value of Capital Assets IFRS requires impairment test for intangible and tangible assets be
conducted at least once a year Use the rational entity impairment model
Impairment = Carrying value minus (the greater of FV in use and FV less costs to sell)
Impairment loss can be reversed if value recovers in future years
ASPE GAAP requires impairment test for tangible and intangible assets only when circumstances change such that there might be a permanent impairment in the assetsrsquo carrying value Once impairment loss is recorded it cannot be recovered later
Use the cost recovery impairment model - Tangible Assets
Two steps Step 1 compare the assets carrying value to sum of the
Undiscounted cash flowsbull If sum of the undiscounted cash flows gt carrying
value no impairment loss is recorded and impairment test stops
bull If sum of the undiscounted cash flows lt carrying value go to step 2
Step 2 Determine the assetsrsquo fair market value bull If there is an active market for the assets then use
the quoted market price as the fair market value bull If there is no active market for the assets then
calculate the intrinsic value (theoretical value) of the assets by discounting all future cash flows to be resulted from the assets to current period
Impairment loss = carrying value ndash fair market value
Goodwill is not amortized but written down if impaired in value Two steps
bull Step 1 compare fair value of each reporting unit to the total net book value (including goodwill)
o If fair value gt book value no impairment loss is recorded and impairment test stops
o Otherwise go to the second stepbull Step 2
o Determine the fair value of reporting unito Subtract the fair value of all net identifiable
assets of that unit and allocates the remainder to goodwill implied goodwill
o Carrying value of goodwill ndash implied goodwill impairment loss to be recognized
Disposition of Capital assets- Remove the cost from the capital asset account and the accumulated
amortization related to disposed capital assets - Once a long-term assets is determined to be disposed
o Reclassify to assets held for sale
o Determine the net realizable value the lower of carrying value and fair value less cost to sell
o Not amortized any more o When sold record gainloss from disposal
Review Basket purchases and Non-monetary transaction
Ch 11 - Investments
Passive investmentsWhen the investor company does not have significant influence over the investee company
Choices are costamortized cost FVTPL or FV-OCIo ASPE allow only costamortized cost and FVTPL o ASPE GAAP ndash Companies must use FVTPL when active market for
shares existso ASPE GAAP allows companies to choose to use FVTPL if they so
designate at time of initial recognition
Investments other than bonds being held to receive their contractual cash flows will be adjusted to market value at year end
o SFP effects are the same ie FV reported
What is different o Income statement effects o For investments FVTPL gains or losses recognized in Income in
the current periodo For investments FV-OCI gains or losses are recorded in
ldquocomprehensive incomerdquo and accumulated in AOCI until securities are sold
Investments FVTPL (debt and equity) Purchased for short-term profit potential Year-end adjustment to the market value Changes in market value (holding lossgain) reported in the income
statement of the current period
Investment Amortized Cost (debt) Purchased with ability and intention to hold to maturity No adjustment to market value Carried at amortized cost on the SFP
Investments FV-OCI (debt and equity) Securities not classified as either of above Changes in market value (holding lossgain) reported in comprehensive
income On the SFP donrsquot forget to report accumulated comprehensive gainloss
under Shareholdersrsquo equity
Investment revenue is recognized at the point when the investee company declares and pays dividends
When investments are sold
Year-end adjusting to fair market value and investments are not sold
FVTPL Realized gainslosses ndash Net income IS
Unrealized gainslosses ndash Net income IS
FV-OCI Adjust to market at date of sale OCIClose remaining balance in AOCI for the investments sold to RE
Unrealized gainslosses ndash Comprehensive income IS Shareholders equity
Bonds ndash Intent to hold until maturity
NA No year- end adjustment to FV Record at amortized cost
Bonds - Terminology
1 1048697 Principal (Par Value) face value of the bond the amount due at maturity
2 1048697 Coupon Rate the rate used to determine the periodic cash payments (coupon payment) if any
3 1048697 Coupon Payment Cash Payment = face value x Coupon Rate
4 1048697 Market Interest Rate the rate used to determine the current market value of the bond
Bonds - ParDiscountPremium
Bonds Sells Market Rate at issuance
Market Value at issuance
Coupon Payment
At Par = Coupon rate = Par value =Interest expenseAt a Discount gt Coupon rate lt Par value ltInterest expenseAt a Premium lt Coupon rate gt Par value gtInterest expense
Active investmentsUsed when significant influence exists- Under the equity method investment revenue is recognized as soon as the
investee company reports a net income or net loss - When the investee company declares and pays dividends the investor
company does not record as investment revenue but as a decrease of investment to avoid double counting
Starting pointOwnership lt20 20-50 gt50Reporting method
Fair value method
Equity Consolidation
Plus consider other factors such as representation on the board intercompany transactions etc
Equity method - investeersquos announcement of earnings increases investorrsquos Investment
account - Investeersquos announcement of dividends decreases investorrsquos
Investment account - Calculation of equity Income
ASPE vs IFRS - IFRS must use Equity method for investments with significant influence APSE Can use Equity method or Cost( if Shares are not actively traded) If shares actively traded then the choice is Equity or FVTPL
Purchase premiums- Purchase premiums arise for two reasons
o Fair market value differentials the FV of assetsliabilities of the investee are different from BV of those assetsliabilities
Fair market value differentials are amortized and the amortization expenses will be included in net income
bull Inventory fair market value differentials is usually amortized in the first period after acquisition
bull Fixed assets fair market value differentials are usually amortized over the expected remaining service life of the assets
o Goodwill is the expected value of future above-normal financial performance
- Calculation of Goodwill and FV differentials to be amortized
Goodwill CalculationPurchase priceLess percentage share of BV acquiredEquals Purchase PremiumMinus FV differences where FVgtBVAdd FV differences where FVgtBVRemainder equals Goodwill
- Revenue recognized to date G
- Revenue recognized to date G
- Inventory estimation methods
- The Gross Profit Method
-
Appendix - The accounting cycle
The Recording Process Journal entries Unadjusted trial balance Adjusting entries Adjusted Trial Balance Financial statement preparation Closing entries Post closing trial balance Reversing entries are optional ndash not required in this course
The Journal EntriesTransactions recorded using double entry bookkeeping
Debits Dr Credits Cr
Journal Entries and T-accounts
Increases in assets are debited and recorded on the left side of the T-account
Increases in liabilities are credited and recorded on the right side of the T-account
Increases in revenues are credited and recorded on the right side of the T-account
Increases in expenses are debited and recorded on the left side of the T-account
Remember that the balances of the permanent accounts carry over to the next year
Remember that the income statements accounts (revenues and expenses) will be closed through closing entries by the end of each reporting period
T-Accounts You can use balances from T-accounts to prepare financial statements at the end of a fiscal period
Basic Accounts
Adjusting EntriesAdjusting entries record activities that have taken place but which have not yet been recorded Four scenarios1 Cash first expenses later eg Prepaid expense office supplies purchased for later use PPampE purchased2 Expenses first cash later eg Wages accrued but not paid purchases of inventory on credit3 Cash first revenues later eg Unearned revenues 4 Revenues first cash later eg Interest revenues accrued credit sales
Involve at least one temporary account (revenue expense) and at least one permanent account (asset liabilities) They NEVER involve cash
Trial BalancesPurpose To ensure both sides on an entry recorded at the same amount ndash do not guarantee that your entries are correct but do reduce errors
Closing EntriesBridge the Income Statement and Statement of Financial Position ( through) Retained EarningsClose Revenue into RE by
Dr Revenues Cr Retained earnings
Close COGSExpenses into RE byDr Retained earnings
Cr COGSExpensesWhat about dividends Ensure that any dividends declared are closed to retained earnings You can use the income summary if you wish
Sub-ledgers and special journals
What questions might you ask
Ch 3 - The Income Statement and Comprehensive Income
The income statement measures firm performance regardless of when cash is exchanged Key principle
Single step vs Multi stepSingle step
Revenues + gainsLess Expenses and losses=Net income before taxesless Taxes ndash as these mush be shown separately=Net Income
Multi stepRevenues( from operations only)Less COGS=Gross Profitless Operating expenses= operating incomeless Non operating expenses=Net income before taxesless Taxes=Net Income
Function vs Nature
Function- Sort by functional area of the business eg sales admin engineering RampD etc You need to have the costs split by function in order to do thisNature ndash Sort expenses by type eg Utilities office professional fees etcLook at the accounts you are given and use this to determine the better approach Smaller businesses generally sort by nature bigger organizations with more separation by departments may use function
Income statement Equations
Revenue ndash Cost of Goods Sold = gross profitNet Income + - Other comprehensive income = comprehensive income
Components(IFRS and ASPE GAAP)
o Heading ndash for the [year] ended [date] or other period coveredo Revenues -Sales or service revenueo Gains -eg selling an equipment for cash greater than its net book valueo Expenses -Cost of goods sold operating expenses etco Losses eg selling an equipment for cash less than its net book valueo Other revenues and expenses
o Interest revenue dividend income interest expense
Income from Continuing Operationso Discontinued Operations
o Income or Loss from Discontinued Operations net of taxo Gain or Loss on Disposal of Discontinued Operations net of tax
Net income
IFRS onlyo +- Other comprehensive income
Comprehensive income
Differences between IFRS and ASPE
Accounting for discontinued operations and intra-period tax allocation
Earnings management
Typical Questions
Ch 4 - The Statement of Financial Position Statement of Retained Earnings Changes in Shareholdersrsquo Equity and Disclosure
STATEMENT OF FINANCIAL POSITION
Equation Assets = Liabilities + Shareholdersrsquo equity
Components of the Statement - Heading ndash as at [date]- Assets Economic benefits owned by the business as a result of
past transactions - Liabilities Debt and other obligations of the business that result
from past transactions - Shareholdersrsquo equity Residual claim of and financing provided by
the owners of the business- Current vs Non Current- Major categories
o Review major categories for presentation- Order of accounts
o Assets- liquidityo Liabilities ndash time to maturityo Sh Equity - permanence
STATEMENT OF RETAINED EARNINGSThis is reported as a solo statement under ASPE GAAP onlyOpening Retained Earnings + Net Income - Dividends = Closing Retained Earnings
STATEMENT OF CHANGES IN SHAREHOLDERSrsquo EQUITYIFRS OnlyA continuity schedule of opening balances +- changes = closing balance for each component of shareholders equity including retained earnings
Financial statements - Note DisclosurePurpose to provide supplementary information about the financial condition of the company
- Describe accounting policies followed by the company - Provide additional detail about an item on the financial statements- Provide additional information about an item not on the financial
statements- Subsequent events consider the difference in treatment of the two
types of subsequent event
Typical Questions
Ch 5 ndash CASH FLOW STATEMENT ndash indirect method only
Cash and Cash equivalentsbull Cash on hand Bank balancesbull Bank overdraftsbull Short term risk free investments with maturity dates within 3 months
Reports the changes to other accounts that affect a change in cash and cash equivalents on the SFP The change in the cash account is usually not equal to net income
Revenues reported do not always equal cash collected (credit sales)Expenses reported do not always equal cash paid (prepaid expenses)
In relation to the SFP The sum of cash flows from operations cash flows from investing and cash flows from financing must equal to the change in cash and cash equivalents on the SFP
Statement of Cash Flows reports operating cash flow as well as other cash flow information
Provides important information to investors and creditors In particular information about differences in the timing of revenue and
expense recognition under GAAP and the associated cash inflows and outflows
Preparing a cash flow statement Heading - for the [year] ended [date] or other period covered
Cash flow provided by (used in) operating activities (Indirect method)Net IncomeAdjust for Non-Cash Changes in non-cash WC accounts
- Subtract increase in assets- Add decreases in asset- Add increase in liabilities- subtract decreases in Liabilities
Adjust for non cash items included in net incomeAdd Depreciation amp AmortizationAdd Loss on Sale of AssetsSubtract Gain on Sales of Assets
Cash flows provided by (used in) investing activitiesCash paid for long-term assetsCash proceeds from the sale of long-term assets
Cash flows provided by (used in) financing activitiesCash dividends paidCash received on issuing debt ndash ie borrowingCash paid for retirement of debt
Cash received from issuance of common shares Ch 6 - Revenue and Expense RecognitionWhy do we care about revenue recognitionRevenue has a BIG impact on bottom-line profitability managers may be tempted to manage revenue
Criteria for revenue recognition ndash existing standardA firm recognizes revenue when it has
bull Performance achievedbull Measurability of the revenues and associated remaining costsbull Collectability is reasonably assured
Revenue is most often recognized at the time of sale as long as- Reasonable estimate of uncollectible amount - Reasonable estimate of sales returns - Reasonable estimation of all other material expenses representing
uncertain future outflows (eg warranty costs) - Most common in retail wholesale amp manufacturing - Even when right of return exists as long as the company has
booked reasonable allowance for sales return we can still recognize revenues at the point of sale
If there is uncertainty in the three criteria then wait until the uncertainty is resolved
Criteria for revenue recognition ndash proposed standardIFRS
1 Identify the contract(s) with the customer ndash May be explicit or implicit
2 Identify the separate performance obligations ndash may be one or many
3 Determine the transaction price ndash using either weighted probabilities method or most likely amount You must determine an amount for revenue This is very different from the existing approach
4 Allocate the transaction price to the performance obligations
5 Recognize revenue when a performance obligation is satisfied
Review the two cases covered in the lectures
MethodsPercentage of completion method - Recognize revenue and profit as contract progresses Extent of completion at any one point in time is determined by the costs incurred to date divided by the total estimated costs of the contract If it becomes apparent that a loss is expected on a contract recognize the total amount of the expected loss immediately
Completed contract method - Recognize revenue and profit when the contract is complete If it becomes apparent that a loss is expected on a contract recognize the total amount of the expected loss immediately
Percentage of completion methodReview profitable contracts
Calc Year 1 Year 2Costs incurred to date (B) given
Total estimated costs (D) given
Percentage complete (E) BD
Contract Value (F) Given
Revenue recognized to date G F X E
Less revenue already recognized H
Annual revenue ( I) G-H
Construction costs incurred (A) Given
Gross profit I - A
AND Loss contracts
Calc Year 1 Year 2Costs incurred to date (B) given
Total estimated costs (D) given
Percentage complete (E) BD
Contract Value (F) Given
Revenue recognized to date G F X E
Less revenue already recognized H
Annual revenue ( I) G-H
Construction costs incurred (A) Plug this
Total estimated Loss Calc this
(Profit) Loss previously recognized Prior yrs
Gross profitTypical Questions
Ch 7 ndash Financial Instruments Cash Receivables and Payables
CashCash and Cash Equivalents ndash Identifying amounts to be included in cash equivalents ndash See chapter 5 material
Accounts Receivable
Relevant Formulae
1 Ending AR = Beg Bal AR + Credit Sales ndash Cash Received ndash Write-off + 0 Recovery of previous write-off2 Ending Allowance for doubtful accounts (ADA) = Beg Bal AFDA + Bad
Debt Expense ndash Write-off + Recovery of previous write-off
Two approaches to determining Allowance for Bad Debts
1 Percentage of (Credit) Sales (Income statement approach)2 minus Focuses on calculating the Bad Debt Expense recorded for the year
Aging Method (Balance sheet approach)3 minus Focuses on calculating the Ending Balance of Allowance for Bad
Debts 4 minus Bad Debt Expense is a ldquoPlugrdquo
Accounts Receivable Relevant entries 0 Credit sales Dr Accounts receivable
Cr Revenue 2 Record bad debt expense 0 Dr Bad debt expense 0 Cr AFDA 3 When bad debt happens (when we are sure a specific customer
defaults) Dr AFDA 4 Cr Accounts receivable5 Recovery of bad debt 6 Dr Accounts receivable7 Cr AFDA 0 Dr Cash1 Cr Accounts receivable
Notes receivablePayable- Notes written promises- May be at a market rate of interest ndash no discounting needed- May be at a low rate on interest ndash discount the face value of the
note and the interest payments at the market rate- May be at no interest ndash discount the face value at the market rate
of interest
Other items
Sales discounts- Account for sales discounts by recording ldquoallowance for sales
discountsrdquo o A contra account for sales revenue on Income statement
Customer return merchandise- Debit to ldquoSales returns and allowancesrdquo
o A contra account for sales revenue on Income statement
Year-end adjusting entry to account for an estimated amount of sales return and merchandise return
- Credit to Allowance for sales return and allowance - A balance sheet contra account attached to accounts receivables
Transfers of ARIdentify if the transaction is to be accounted for as a sale or a borrowing transaction
Sale transactionsJournal entries to remove the AR any associated AFDA record the receipt of cash the residual obligation if any and a loss on disposal
Borrowing transactionsJournal entries to record the new debt and interest costs fees The AR and associated AFDA remain on the books
Types of Questions
Ch 8 Inventory12 INVEB = INVBB + Purchase ndash COGS
Inventory is recorded on the SFP at the lower of the cost or the net realizable value of the inventory
Key equation Beginning Inv+ Purchases - COGS = Ending Inv
IssuesConsignment inventory - Consignment inventory on the firm premises owned by others should be excluded Consignment inventory of the firm held elsewhere should be included in the inventory of the firm
Goods in transit at period end - Items shipped FOB shipping point are considered to have been sold when shipped Items shipped FOB destination are not considered to have been sold until they have arrived at their destination
Cut-off Errors - A cut-off error occurs with respect to ending inventory if items owned at period end are incorrectly excluded from the physical inventory count or if items already sold are incorrectly included in the period end inventory count
SystemsPerpetual system tracks units sold continuously
More accurate more timely potentially more costlyPeriodic system infer quantities sold by using purchasesproduction beginning and ending inventories
Units sold = Beg Units + Production ndashEnd Units Harder to detect inventory ldquoshrinkagerdquo (eg theft spoilage)
Cost flow assumptions Specific identification Costs of the specific item sold are included in cost of goods sold Costs of specific items on hand are included in inventory (Perpetual inventory systems)
Weighted average cost Inventory is priced on the basis of average cost of goods available for sale during the period Thus the same cost per item is assigned to cost of goods sold and to ending inventory (This method is used for periodic inventory systems)
Moving average cost Cost of goods sold is determined by calculating the average cost of goods available at the time a sale is made (This method is used for perpetual inventory systems)
FIFO assumption about the physical flow of inventory used to determine cost of goods sold and the ending inventory account balance The actual physical flow of inventory need not correspond to these assumptions FIFO shows SFP at relatively current values but income statement cost of goods sold at stale values
Inventory estimation methods
The Gross Profit Method
The gross profit method of inventory estimation relies on the knowledge of opening inventory net purchases net sales at retail prices and the historical gross profit margin
The Retail Inventory Method
The retail inventory method is a method of estimating the dollar amount of ending inventory using the current relationship between cost and selling price This is commonly used by retail stores for the preparation of interim financial statements
IFRS vs ASPEIFRS covers biological assets in a separate sectionIFRS requires the capitalization of interest on inventory that must be manufactured in large quantities ASPE GAAP gives companies the option
Types of Questions
Ch 9- 10 - Accounting for capital assetsPPampE
1 PPEEB = PPEBB + Acquisitions ndash Disposals 2 Straight-line depreciation = (Purchase price ndash salvage value) Useful
life 3 Declining balance methods = (Purchase cost- sum of all prior yearsrsquo
depreciation) X rate4 Units of Production = (Purchase price ndash salvage value) Useful life in
units annual depreciation = rate X of units5 Accumulated DepEB = Accumulated DepBB + Depreciation ndash
AccDepDisposal
Capitalize vs expense Capitalizing costs means to show them as an asset on the SFP (assets have future economic benefits)
We expense (ie not capitalize) when (a) benefits are immediate (b) or future benefits are too uncertain or immaterial (eg RampD)
Accounting for tangible assetsWhat is the acquisition cost
o Include all costs required to bring the asset into usable condition and location
o Purchased assets purchase price plus cost to prepare the asset for use (installation transportation testing)
o Self-constructed assets direct cost of construction (direct material direct labour pro-rata allocation of overhead costs) financing costs (interest on funds specifically borrowed to finance construction can be capitalized)
o Basket purchase ndash the best way to allocate the purchase price of the assets to the individual assets is based on the relative fair market values of the assets acquired
o Deferred payment contracts ndash recorded at the present value of the consideration exchanged between the contracting parties at the date of acquisition
o Non-monetary transactions recorded at the fair value of the assets received or the fair value of the asset given up whichever is more easily determined ASPE GAAP
o Check page 636 and 637 on how IFRS is differento
Measurement after acquisition Cost model vs Revaluation Model
How to account for costs subsequent to acquisition- Additions capitalize the costs to the existing capital asset account and
revise the service life and residual value as needed
- Betterments and replacements capitalize the costs to the existing capital asset account Distinguish the expenditures from normal repair costs o The appropriate accounting treatment depends on whether or not
we know the carrying value of old assets o If Costs are known then remove the old cost and accumulated
depreciation record a loss on disposal and then capitalize the new costs
o If costs are not known then add the new costs into the cost pool and revise the service life and residual value as needed
- Rearrangement and reinstallation capitalize the costs to the existing capital asset account
The appropriate accounting treatment depends on whether or not we know the carrying value of old assets
If Costs are known then remove the old cost and accumulated depreciation record a loss on disposal and then capitalize the new costs
If costs and Accum Amortization not known then expense the full amount
o Repairs ndash always expensed as incurred
Accounting for Intangible Assets
Specific assets - Patents Trademarks Customer lists FranchisesResearch and development Goodwill etc See notes below under Chapter 11 for calculation of Goodwill
o Goodwill is the expected value of future above-normal financial performance
What is the acquisition costPurchased assets - Include all costs required to bring the asset into usable condition and location Goodwill is only recorded if purchased
Six Criteria for capitalization of internally generated intangible assets
Costs to be included ndash Materials and servicesndash Direct labour and other payroll costsndash Interest and borrowing costs ndash if specifically related
Costs excluded ndash Selling administration and general overhead costs
Measurement after acquisition Cost model vs Revaluation Model ndash general understanding of the differences in the two models only
Amortization of Capital assets - What is the expected useful life
o The time period over which the asset will be used
- What is the Residual value o To determine residual value of an asset it requires managerial
judgment o Residual value is the estimated amount a company would receive
today on disposal of an asset net of related disposal costs
- What amortization should we use to allocate expense over the useful life
o What does GAAP allow Straight-line method
bull Annual Depreciation Expense = depreciable basisservice life (in years) = (Acquisition Cost -SV) Useful Years
bull Common for tangible assetsbull Uniform amortization charges over time
Activity methodbull Input methods ndash eg Depreciation cost per machine-
hour = depreciable basisservice life (in machine-hours)
bull Depr Expense = Actual hours used hourly ratebull Common for manufacturing firms bull Output methods- eg units producedbull Depr Expense = Actual units produced rate per unit bull Common for natural resources companybull Unequal amortization charges over time
Decreasing charge (declining balance CCA double declining balance)
bull Higher amortization expense is recognized in the earlier years of an assetrsquos useful life
bull Constant amortization rated applied to reducing book value of assets
Increasing chargebull Lower amortization expense in earlier years and
higher amortization in later years Donrsquot need to calculate this
Land is the never amortized
What accounts does depreciation affect Tangible assets - Accumulated depreciation account Intangible assets ndash The asset account directly Retained earnings account Depreciation expense
Which financial statements are affected SFP and income statement
Does depreciation affect cash NEVER
Amortization for partial periods amortization charges for the periods in which when assets are purchased and disposed Follow the company policy if given
Impairment in Value of Capital Assets IFRS requires impairment test for intangible and tangible assets be
conducted at least once a year Use the rational entity impairment model
Impairment = Carrying value minus (the greater of FV in use and FV less costs to sell)
Impairment loss can be reversed if value recovers in future years
ASPE GAAP requires impairment test for tangible and intangible assets only when circumstances change such that there might be a permanent impairment in the assetsrsquo carrying value Once impairment loss is recorded it cannot be recovered later
Use the cost recovery impairment model - Tangible Assets
Two steps Step 1 compare the assets carrying value to sum of the
Undiscounted cash flowsbull If sum of the undiscounted cash flows gt carrying
value no impairment loss is recorded and impairment test stops
bull If sum of the undiscounted cash flows lt carrying value go to step 2
Step 2 Determine the assetsrsquo fair market value bull If there is an active market for the assets then use
the quoted market price as the fair market value bull If there is no active market for the assets then
calculate the intrinsic value (theoretical value) of the assets by discounting all future cash flows to be resulted from the assets to current period
Impairment loss = carrying value ndash fair market value
Goodwill is not amortized but written down if impaired in value Two steps
bull Step 1 compare fair value of each reporting unit to the total net book value (including goodwill)
o If fair value gt book value no impairment loss is recorded and impairment test stops
o Otherwise go to the second stepbull Step 2
o Determine the fair value of reporting unito Subtract the fair value of all net identifiable
assets of that unit and allocates the remainder to goodwill implied goodwill
o Carrying value of goodwill ndash implied goodwill impairment loss to be recognized
Disposition of Capital assets- Remove the cost from the capital asset account and the accumulated
amortization related to disposed capital assets - Once a long-term assets is determined to be disposed
o Reclassify to assets held for sale
o Determine the net realizable value the lower of carrying value and fair value less cost to sell
o Not amortized any more o When sold record gainloss from disposal
Review Basket purchases and Non-monetary transaction
Ch 11 - Investments
Passive investmentsWhen the investor company does not have significant influence over the investee company
Choices are costamortized cost FVTPL or FV-OCIo ASPE allow only costamortized cost and FVTPL o ASPE GAAP ndash Companies must use FVTPL when active market for
shares existso ASPE GAAP allows companies to choose to use FVTPL if they so
designate at time of initial recognition
Investments other than bonds being held to receive their contractual cash flows will be adjusted to market value at year end
o SFP effects are the same ie FV reported
What is different o Income statement effects o For investments FVTPL gains or losses recognized in Income in
the current periodo For investments FV-OCI gains or losses are recorded in
ldquocomprehensive incomerdquo and accumulated in AOCI until securities are sold
Investments FVTPL (debt and equity) Purchased for short-term profit potential Year-end adjustment to the market value Changes in market value (holding lossgain) reported in the income
statement of the current period
Investment Amortized Cost (debt) Purchased with ability and intention to hold to maturity No adjustment to market value Carried at amortized cost on the SFP
Investments FV-OCI (debt and equity) Securities not classified as either of above Changes in market value (holding lossgain) reported in comprehensive
income On the SFP donrsquot forget to report accumulated comprehensive gainloss
under Shareholdersrsquo equity
Investment revenue is recognized at the point when the investee company declares and pays dividends
When investments are sold
Year-end adjusting to fair market value and investments are not sold
FVTPL Realized gainslosses ndash Net income IS
Unrealized gainslosses ndash Net income IS
FV-OCI Adjust to market at date of sale OCIClose remaining balance in AOCI for the investments sold to RE
Unrealized gainslosses ndash Comprehensive income IS Shareholders equity
Bonds ndash Intent to hold until maturity
NA No year- end adjustment to FV Record at amortized cost
Bonds - Terminology
1 1048697 Principal (Par Value) face value of the bond the amount due at maturity
2 1048697 Coupon Rate the rate used to determine the periodic cash payments (coupon payment) if any
3 1048697 Coupon Payment Cash Payment = face value x Coupon Rate
4 1048697 Market Interest Rate the rate used to determine the current market value of the bond
Bonds - ParDiscountPremium
Bonds Sells Market Rate at issuance
Market Value at issuance
Coupon Payment
At Par = Coupon rate = Par value =Interest expenseAt a Discount gt Coupon rate lt Par value ltInterest expenseAt a Premium lt Coupon rate gt Par value gtInterest expense
Active investmentsUsed when significant influence exists- Under the equity method investment revenue is recognized as soon as the
investee company reports a net income or net loss - When the investee company declares and pays dividends the investor
company does not record as investment revenue but as a decrease of investment to avoid double counting
Starting pointOwnership lt20 20-50 gt50Reporting method
Fair value method
Equity Consolidation
Plus consider other factors such as representation on the board intercompany transactions etc
Equity method - investeersquos announcement of earnings increases investorrsquos Investment
account - Investeersquos announcement of dividends decreases investorrsquos
Investment account - Calculation of equity Income
ASPE vs IFRS - IFRS must use Equity method for investments with significant influence APSE Can use Equity method or Cost( if Shares are not actively traded) If shares actively traded then the choice is Equity or FVTPL
Purchase premiums- Purchase premiums arise for two reasons
o Fair market value differentials the FV of assetsliabilities of the investee are different from BV of those assetsliabilities
Fair market value differentials are amortized and the amortization expenses will be included in net income
bull Inventory fair market value differentials is usually amortized in the first period after acquisition
bull Fixed assets fair market value differentials are usually amortized over the expected remaining service life of the assets
o Goodwill is the expected value of future above-normal financial performance
- Calculation of Goodwill and FV differentials to be amortized
Goodwill CalculationPurchase priceLess percentage share of BV acquiredEquals Purchase PremiumMinus FV differences where FVgtBVAdd FV differences where FVgtBVRemainder equals Goodwill
- Revenue recognized to date G
- Revenue recognized to date G
- Inventory estimation methods
- The Gross Profit Method
-
Basic Accounts
Adjusting EntriesAdjusting entries record activities that have taken place but which have not yet been recorded Four scenarios1 Cash first expenses later eg Prepaid expense office supplies purchased for later use PPampE purchased2 Expenses first cash later eg Wages accrued but not paid purchases of inventory on credit3 Cash first revenues later eg Unearned revenues 4 Revenues first cash later eg Interest revenues accrued credit sales
Involve at least one temporary account (revenue expense) and at least one permanent account (asset liabilities) They NEVER involve cash
Trial BalancesPurpose To ensure both sides on an entry recorded at the same amount ndash do not guarantee that your entries are correct but do reduce errors
Closing EntriesBridge the Income Statement and Statement of Financial Position ( through) Retained EarningsClose Revenue into RE by
Dr Revenues Cr Retained earnings
Close COGSExpenses into RE byDr Retained earnings
Cr COGSExpensesWhat about dividends Ensure that any dividends declared are closed to retained earnings You can use the income summary if you wish
Sub-ledgers and special journals
What questions might you ask
Ch 3 - The Income Statement and Comprehensive Income
The income statement measures firm performance regardless of when cash is exchanged Key principle
Single step vs Multi stepSingle step
Revenues + gainsLess Expenses and losses=Net income before taxesless Taxes ndash as these mush be shown separately=Net Income
Multi stepRevenues( from operations only)Less COGS=Gross Profitless Operating expenses= operating incomeless Non operating expenses=Net income before taxesless Taxes=Net Income
Function vs Nature
Function- Sort by functional area of the business eg sales admin engineering RampD etc You need to have the costs split by function in order to do thisNature ndash Sort expenses by type eg Utilities office professional fees etcLook at the accounts you are given and use this to determine the better approach Smaller businesses generally sort by nature bigger organizations with more separation by departments may use function
Income statement Equations
Revenue ndash Cost of Goods Sold = gross profitNet Income + - Other comprehensive income = comprehensive income
Components(IFRS and ASPE GAAP)
o Heading ndash for the [year] ended [date] or other period coveredo Revenues -Sales or service revenueo Gains -eg selling an equipment for cash greater than its net book valueo Expenses -Cost of goods sold operating expenses etco Losses eg selling an equipment for cash less than its net book valueo Other revenues and expenses
o Interest revenue dividend income interest expense
Income from Continuing Operationso Discontinued Operations
o Income or Loss from Discontinued Operations net of taxo Gain or Loss on Disposal of Discontinued Operations net of tax
Net income
IFRS onlyo +- Other comprehensive income
Comprehensive income
Differences between IFRS and ASPE
Accounting for discontinued operations and intra-period tax allocation
Earnings management
Typical Questions
Ch 4 - The Statement of Financial Position Statement of Retained Earnings Changes in Shareholdersrsquo Equity and Disclosure
STATEMENT OF FINANCIAL POSITION
Equation Assets = Liabilities + Shareholdersrsquo equity
Components of the Statement - Heading ndash as at [date]- Assets Economic benefits owned by the business as a result of
past transactions - Liabilities Debt and other obligations of the business that result
from past transactions - Shareholdersrsquo equity Residual claim of and financing provided by
the owners of the business- Current vs Non Current- Major categories
o Review major categories for presentation- Order of accounts
o Assets- liquidityo Liabilities ndash time to maturityo Sh Equity - permanence
STATEMENT OF RETAINED EARNINGSThis is reported as a solo statement under ASPE GAAP onlyOpening Retained Earnings + Net Income - Dividends = Closing Retained Earnings
STATEMENT OF CHANGES IN SHAREHOLDERSrsquo EQUITYIFRS OnlyA continuity schedule of opening balances +- changes = closing balance for each component of shareholders equity including retained earnings
Financial statements - Note DisclosurePurpose to provide supplementary information about the financial condition of the company
- Describe accounting policies followed by the company - Provide additional detail about an item on the financial statements- Provide additional information about an item not on the financial
statements- Subsequent events consider the difference in treatment of the two
types of subsequent event
Typical Questions
Ch 5 ndash CASH FLOW STATEMENT ndash indirect method only
Cash and Cash equivalentsbull Cash on hand Bank balancesbull Bank overdraftsbull Short term risk free investments with maturity dates within 3 months
Reports the changes to other accounts that affect a change in cash and cash equivalents on the SFP The change in the cash account is usually not equal to net income
Revenues reported do not always equal cash collected (credit sales)Expenses reported do not always equal cash paid (prepaid expenses)
In relation to the SFP The sum of cash flows from operations cash flows from investing and cash flows from financing must equal to the change in cash and cash equivalents on the SFP
Statement of Cash Flows reports operating cash flow as well as other cash flow information
Provides important information to investors and creditors In particular information about differences in the timing of revenue and
expense recognition under GAAP and the associated cash inflows and outflows
Preparing a cash flow statement Heading - for the [year] ended [date] or other period covered
Cash flow provided by (used in) operating activities (Indirect method)Net IncomeAdjust for Non-Cash Changes in non-cash WC accounts
- Subtract increase in assets- Add decreases in asset- Add increase in liabilities- subtract decreases in Liabilities
Adjust for non cash items included in net incomeAdd Depreciation amp AmortizationAdd Loss on Sale of AssetsSubtract Gain on Sales of Assets
Cash flows provided by (used in) investing activitiesCash paid for long-term assetsCash proceeds from the sale of long-term assets
Cash flows provided by (used in) financing activitiesCash dividends paidCash received on issuing debt ndash ie borrowingCash paid for retirement of debt
Cash received from issuance of common shares Ch 6 - Revenue and Expense RecognitionWhy do we care about revenue recognitionRevenue has a BIG impact on bottom-line profitability managers may be tempted to manage revenue
Criteria for revenue recognition ndash existing standardA firm recognizes revenue when it has
bull Performance achievedbull Measurability of the revenues and associated remaining costsbull Collectability is reasonably assured
Revenue is most often recognized at the time of sale as long as- Reasonable estimate of uncollectible amount - Reasonable estimate of sales returns - Reasonable estimation of all other material expenses representing
uncertain future outflows (eg warranty costs) - Most common in retail wholesale amp manufacturing - Even when right of return exists as long as the company has
booked reasonable allowance for sales return we can still recognize revenues at the point of sale
If there is uncertainty in the three criteria then wait until the uncertainty is resolved
Criteria for revenue recognition ndash proposed standardIFRS
1 Identify the contract(s) with the customer ndash May be explicit or implicit
2 Identify the separate performance obligations ndash may be one or many
3 Determine the transaction price ndash using either weighted probabilities method or most likely amount You must determine an amount for revenue This is very different from the existing approach
4 Allocate the transaction price to the performance obligations
5 Recognize revenue when a performance obligation is satisfied
Review the two cases covered in the lectures
MethodsPercentage of completion method - Recognize revenue and profit as contract progresses Extent of completion at any one point in time is determined by the costs incurred to date divided by the total estimated costs of the contract If it becomes apparent that a loss is expected on a contract recognize the total amount of the expected loss immediately
Completed contract method - Recognize revenue and profit when the contract is complete If it becomes apparent that a loss is expected on a contract recognize the total amount of the expected loss immediately
Percentage of completion methodReview profitable contracts
Calc Year 1 Year 2Costs incurred to date (B) given
Total estimated costs (D) given
Percentage complete (E) BD
Contract Value (F) Given
Revenue recognized to date G F X E
Less revenue already recognized H
Annual revenue ( I) G-H
Construction costs incurred (A) Given
Gross profit I - A
AND Loss contracts
Calc Year 1 Year 2Costs incurred to date (B) given
Total estimated costs (D) given
Percentage complete (E) BD
Contract Value (F) Given
Revenue recognized to date G F X E
Less revenue already recognized H
Annual revenue ( I) G-H
Construction costs incurred (A) Plug this
Total estimated Loss Calc this
(Profit) Loss previously recognized Prior yrs
Gross profitTypical Questions
Ch 7 ndash Financial Instruments Cash Receivables and Payables
CashCash and Cash Equivalents ndash Identifying amounts to be included in cash equivalents ndash See chapter 5 material
Accounts Receivable
Relevant Formulae
1 Ending AR = Beg Bal AR + Credit Sales ndash Cash Received ndash Write-off + 0 Recovery of previous write-off2 Ending Allowance for doubtful accounts (ADA) = Beg Bal AFDA + Bad
Debt Expense ndash Write-off + Recovery of previous write-off
Two approaches to determining Allowance for Bad Debts
1 Percentage of (Credit) Sales (Income statement approach)2 minus Focuses on calculating the Bad Debt Expense recorded for the year
Aging Method (Balance sheet approach)3 minus Focuses on calculating the Ending Balance of Allowance for Bad
Debts 4 minus Bad Debt Expense is a ldquoPlugrdquo
Accounts Receivable Relevant entries 0 Credit sales Dr Accounts receivable
Cr Revenue 2 Record bad debt expense 0 Dr Bad debt expense 0 Cr AFDA 3 When bad debt happens (when we are sure a specific customer
defaults) Dr AFDA 4 Cr Accounts receivable5 Recovery of bad debt 6 Dr Accounts receivable7 Cr AFDA 0 Dr Cash1 Cr Accounts receivable
Notes receivablePayable- Notes written promises- May be at a market rate of interest ndash no discounting needed- May be at a low rate on interest ndash discount the face value of the
note and the interest payments at the market rate- May be at no interest ndash discount the face value at the market rate
of interest
Other items
Sales discounts- Account for sales discounts by recording ldquoallowance for sales
discountsrdquo o A contra account for sales revenue on Income statement
Customer return merchandise- Debit to ldquoSales returns and allowancesrdquo
o A contra account for sales revenue on Income statement
Year-end adjusting entry to account for an estimated amount of sales return and merchandise return
- Credit to Allowance for sales return and allowance - A balance sheet contra account attached to accounts receivables
Transfers of ARIdentify if the transaction is to be accounted for as a sale or a borrowing transaction
Sale transactionsJournal entries to remove the AR any associated AFDA record the receipt of cash the residual obligation if any and a loss on disposal
Borrowing transactionsJournal entries to record the new debt and interest costs fees The AR and associated AFDA remain on the books
Types of Questions
Ch 8 Inventory12 INVEB = INVBB + Purchase ndash COGS
Inventory is recorded on the SFP at the lower of the cost or the net realizable value of the inventory
Key equation Beginning Inv+ Purchases - COGS = Ending Inv
IssuesConsignment inventory - Consignment inventory on the firm premises owned by others should be excluded Consignment inventory of the firm held elsewhere should be included in the inventory of the firm
Goods in transit at period end - Items shipped FOB shipping point are considered to have been sold when shipped Items shipped FOB destination are not considered to have been sold until they have arrived at their destination
Cut-off Errors - A cut-off error occurs with respect to ending inventory if items owned at period end are incorrectly excluded from the physical inventory count or if items already sold are incorrectly included in the period end inventory count
SystemsPerpetual system tracks units sold continuously
More accurate more timely potentially more costlyPeriodic system infer quantities sold by using purchasesproduction beginning and ending inventories
Units sold = Beg Units + Production ndashEnd Units Harder to detect inventory ldquoshrinkagerdquo (eg theft spoilage)
Cost flow assumptions Specific identification Costs of the specific item sold are included in cost of goods sold Costs of specific items on hand are included in inventory (Perpetual inventory systems)
Weighted average cost Inventory is priced on the basis of average cost of goods available for sale during the period Thus the same cost per item is assigned to cost of goods sold and to ending inventory (This method is used for periodic inventory systems)
Moving average cost Cost of goods sold is determined by calculating the average cost of goods available at the time a sale is made (This method is used for perpetual inventory systems)
FIFO assumption about the physical flow of inventory used to determine cost of goods sold and the ending inventory account balance The actual physical flow of inventory need not correspond to these assumptions FIFO shows SFP at relatively current values but income statement cost of goods sold at stale values
Inventory estimation methods
The Gross Profit Method
The gross profit method of inventory estimation relies on the knowledge of opening inventory net purchases net sales at retail prices and the historical gross profit margin
The Retail Inventory Method
The retail inventory method is a method of estimating the dollar amount of ending inventory using the current relationship between cost and selling price This is commonly used by retail stores for the preparation of interim financial statements
IFRS vs ASPEIFRS covers biological assets in a separate sectionIFRS requires the capitalization of interest on inventory that must be manufactured in large quantities ASPE GAAP gives companies the option
Types of Questions
Ch 9- 10 - Accounting for capital assetsPPampE
1 PPEEB = PPEBB + Acquisitions ndash Disposals 2 Straight-line depreciation = (Purchase price ndash salvage value) Useful
life 3 Declining balance methods = (Purchase cost- sum of all prior yearsrsquo
depreciation) X rate4 Units of Production = (Purchase price ndash salvage value) Useful life in
units annual depreciation = rate X of units5 Accumulated DepEB = Accumulated DepBB + Depreciation ndash
AccDepDisposal
Capitalize vs expense Capitalizing costs means to show them as an asset on the SFP (assets have future economic benefits)
We expense (ie not capitalize) when (a) benefits are immediate (b) or future benefits are too uncertain or immaterial (eg RampD)
Accounting for tangible assetsWhat is the acquisition cost
o Include all costs required to bring the asset into usable condition and location
o Purchased assets purchase price plus cost to prepare the asset for use (installation transportation testing)
o Self-constructed assets direct cost of construction (direct material direct labour pro-rata allocation of overhead costs) financing costs (interest on funds specifically borrowed to finance construction can be capitalized)
o Basket purchase ndash the best way to allocate the purchase price of the assets to the individual assets is based on the relative fair market values of the assets acquired
o Deferred payment contracts ndash recorded at the present value of the consideration exchanged between the contracting parties at the date of acquisition
o Non-monetary transactions recorded at the fair value of the assets received or the fair value of the asset given up whichever is more easily determined ASPE GAAP
o Check page 636 and 637 on how IFRS is differento
Measurement after acquisition Cost model vs Revaluation Model
How to account for costs subsequent to acquisition- Additions capitalize the costs to the existing capital asset account and
revise the service life and residual value as needed
- Betterments and replacements capitalize the costs to the existing capital asset account Distinguish the expenditures from normal repair costs o The appropriate accounting treatment depends on whether or not
we know the carrying value of old assets o If Costs are known then remove the old cost and accumulated
depreciation record a loss on disposal and then capitalize the new costs
o If costs are not known then add the new costs into the cost pool and revise the service life and residual value as needed
- Rearrangement and reinstallation capitalize the costs to the existing capital asset account
The appropriate accounting treatment depends on whether or not we know the carrying value of old assets
If Costs are known then remove the old cost and accumulated depreciation record a loss on disposal and then capitalize the new costs
If costs and Accum Amortization not known then expense the full amount
o Repairs ndash always expensed as incurred
Accounting for Intangible Assets
Specific assets - Patents Trademarks Customer lists FranchisesResearch and development Goodwill etc See notes below under Chapter 11 for calculation of Goodwill
o Goodwill is the expected value of future above-normal financial performance
What is the acquisition costPurchased assets - Include all costs required to bring the asset into usable condition and location Goodwill is only recorded if purchased
Six Criteria for capitalization of internally generated intangible assets
Costs to be included ndash Materials and servicesndash Direct labour and other payroll costsndash Interest and borrowing costs ndash if specifically related
Costs excluded ndash Selling administration and general overhead costs
Measurement after acquisition Cost model vs Revaluation Model ndash general understanding of the differences in the two models only
Amortization of Capital assets - What is the expected useful life
o The time period over which the asset will be used
- What is the Residual value o To determine residual value of an asset it requires managerial
judgment o Residual value is the estimated amount a company would receive
today on disposal of an asset net of related disposal costs
- What amortization should we use to allocate expense over the useful life
o What does GAAP allow Straight-line method
bull Annual Depreciation Expense = depreciable basisservice life (in years) = (Acquisition Cost -SV) Useful Years
bull Common for tangible assetsbull Uniform amortization charges over time
Activity methodbull Input methods ndash eg Depreciation cost per machine-
hour = depreciable basisservice life (in machine-hours)
bull Depr Expense = Actual hours used hourly ratebull Common for manufacturing firms bull Output methods- eg units producedbull Depr Expense = Actual units produced rate per unit bull Common for natural resources companybull Unequal amortization charges over time
Decreasing charge (declining balance CCA double declining balance)
bull Higher amortization expense is recognized in the earlier years of an assetrsquos useful life
bull Constant amortization rated applied to reducing book value of assets
Increasing chargebull Lower amortization expense in earlier years and
higher amortization in later years Donrsquot need to calculate this
Land is the never amortized
What accounts does depreciation affect Tangible assets - Accumulated depreciation account Intangible assets ndash The asset account directly Retained earnings account Depreciation expense
Which financial statements are affected SFP and income statement
Does depreciation affect cash NEVER
Amortization for partial periods amortization charges for the periods in which when assets are purchased and disposed Follow the company policy if given
Impairment in Value of Capital Assets IFRS requires impairment test for intangible and tangible assets be
conducted at least once a year Use the rational entity impairment model
Impairment = Carrying value minus (the greater of FV in use and FV less costs to sell)
Impairment loss can be reversed if value recovers in future years
ASPE GAAP requires impairment test for tangible and intangible assets only when circumstances change such that there might be a permanent impairment in the assetsrsquo carrying value Once impairment loss is recorded it cannot be recovered later
Use the cost recovery impairment model - Tangible Assets
Two steps Step 1 compare the assets carrying value to sum of the
Undiscounted cash flowsbull If sum of the undiscounted cash flows gt carrying
value no impairment loss is recorded and impairment test stops
bull If sum of the undiscounted cash flows lt carrying value go to step 2
Step 2 Determine the assetsrsquo fair market value bull If there is an active market for the assets then use
the quoted market price as the fair market value bull If there is no active market for the assets then
calculate the intrinsic value (theoretical value) of the assets by discounting all future cash flows to be resulted from the assets to current period
Impairment loss = carrying value ndash fair market value
Goodwill is not amortized but written down if impaired in value Two steps
bull Step 1 compare fair value of each reporting unit to the total net book value (including goodwill)
o If fair value gt book value no impairment loss is recorded and impairment test stops
o Otherwise go to the second stepbull Step 2
o Determine the fair value of reporting unito Subtract the fair value of all net identifiable
assets of that unit and allocates the remainder to goodwill implied goodwill
o Carrying value of goodwill ndash implied goodwill impairment loss to be recognized
Disposition of Capital assets- Remove the cost from the capital asset account and the accumulated
amortization related to disposed capital assets - Once a long-term assets is determined to be disposed
o Reclassify to assets held for sale
o Determine the net realizable value the lower of carrying value and fair value less cost to sell
o Not amortized any more o When sold record gainloss from disposal
Review Basket purchases and Non-monetary transaction
Ch 11 - Investments
Passive investmentsWhen the investor company does not have significant influence over the investee company
Choices are costamortized cost FVTPL or FV-OCIo ASPE allow only costamortized cost and FVTPL o ASPE GAAP ndash Companies must use FVTPL when active market for
shares existso ASPE GAAP allows companies to choose to use FVTPL if they so
designate at time of initial recognition
Investments other than bonds being held to receive their contractual cash flows will be adjusted to market value at year end
o SFP effects are the same ie FV reported
What is different o Income statement effects o For investments FVTPL gains or losses recognized in Income in
the current periodo For investments FV-OCI gains or losses are recorded in
ldquocomprehensive incomerdquo and accumulated in AOCI until securities are sold
Investments FVTPL (debt and equity) Purchased for short-term profit potential Year-end adjustment to the market value Changes in market value (holding lossgain) reported in the income
statement of the current period
Investment Amortized Cost (debt) Purchased with ability and intention to hold to maturity No adjustment to market value Carried at amortized cost on the SFP
Investments FV-OCI (debt and equity) Securities not classified as either of above Changes in market value (holding lossgain) reported in comprehensive
income On the SFP donrsquot forget to report accumulated comprehensive gainloss
under Shareholdersrsquo equity
Investment revenue is recognized at the point when the investee company declares and pays dividends
When investments are sold
Year-end adjusting to fair market value and investments are not sold
FVTPL Realized gainslosses ndash Net income IS
Unrealized gainslosses ndash Net income IS
FV-OCI Adjust to market at date of sale OCIClose remaining balance in AOCI for the investments sold to RE
Unrealized gainslosses ndash Comprehensive income IS Shareholders equity
Bonds ndash Intent to hold until maturity
NA No year- end adjustment to FV Record at amortized cost
Bonds - Terminology
1 1048697 Principal (Par Value) face value of the bond the amount due at maturity
2 1048697 Coupon Rate the rate used to determine the periodic cash payments (coupon payment) if any
3 1048697 Coupon Payment Cash Payment = face value x Coupon Rate
4 1048697 Market Interest Rate the rate used to determine the current market value of the bond
Bonds - ParDiscountPremium
Bonds Sells Market Rate at issuance
Market Value at issuance
Coupon Payment
At Par = Coupon rate = Par value =Interest expenseAt a Discount gt Coupon rate lt Par value ltInterest expenseAt a Premium lt Coupon rate gt Par value gtInterest expense
Active investmentsUsed when significant influence exists- Under the equity method investment revenue is recognized as soon as the
investee company reports a net income or net loss - When the investee company declares and pays dividends the investor
company does not record as investment revenue but as a decrease of investment to avoid double counting
Starting pointOwnership lt20 20-50 gt50Reporting method
Fair value method
Equity Consolidation
Plus consider other factors such as representation on the board intercompany transactions etc
Equity method - investeersquos announcement of earnings increases investorrsquos Investment
account - Investeersquos announcement of dividends decreases investorrsquos
Investment account - Calculation of equity Income
ASPE vs IFRS - IFRS must use Equity method for investments with significant influence APSE Can use Equity method or Cost( if Shares are not actively traded) If shares actively traded then the choice is Equity or FVTPL
Purchase premiums- Purchase premiums arise for two reasons
o Fair market value differentials the FV of assetsliabilities of the investee are different from BV of those assetsliabilities
Fair market value differentials are amortized and the amortization expenses will be included in net income
bull Inventory fair market value differentials is usually amortized in the first period after acquisition
bull Fixed assets fair market value differentials are usually amortized over the expected remaining service life of the assets
o Goodwill is the expected value of future above-normal financial performance
- Calculation of Goodwill and FV differentials to be amortized
Goodwill CalculationPurchase priceLess percentage share of BV acquiredEquals Purchase PremiumMinus FV differences where FVgtBVAdd FV differences where FVgtBVRemainder equals Goodwill
- Revenue recognized to date G
- Revenue recognized to date G
- Inventory estimation methods
- The Gross Profit Method
-
Adjusting EntriesAdjusting entries record activities that have taken place but which have not yet been recorded Four scenarios1 Cash first expenses later eg Prepaid expense office supplies purchased for later use PPampE purchased2 Expenses first cash later eg Wages accrued but not paid purchases of inventory on credit3 Cash first revenues later eg Unearned revenues 4 Revenues first cash later eg Interest revenues accrued credit sales
Involve at least one temporary account (revenue expense) and at least one permanent account (asset liabilities) They NEVER involve cash
Trial BalancesPurpose To ensure both sides on an entry recorded at the same amount ndash do not guarantee that your entries are correct but do reduce errors
Closing EntriesBridge the Income Statement and Statement of Financial Position ( through) Retained EarningsClose Revenue into RE by
Dr Revenues Cr Retained earnings
Close COGSExpenses into RE byDr Retained earnings
Cr COGSExpensesWhat about dividends Ensure that any dividends declared are closed to retained earnings You can use the income summary if you wish
Sub-ledgers and special journals
What questions might you ask
Ch 3 - The Income Statement and Comprehensive Income
The income statement measures firm performance regardless of when cash is exchanged Key principle
Single step vs Multi stepSingle step
Revenues + gainsLess Expenses and losses=Net income before taxesless Taxes ndash as these mush be shown separately=Net Income
Multi stepRevenues( from operations only)Less COGS=Gross Profitless Operating expenses= operating incomeless Non operating expenses=Net income before taxesless Taxes=Net Income
Function vs Nature
Function- Sort by functional area of the business eg sales admin engineering RampD etc You need to have the costs split by function in order to do thisNature ndash Sort expenses by type eg Utilities office professional fees etcLook at the accounts you are given and use this to determine the better approach Smaller businesses generally sort by nature bigger organizations with more separation by departments may use function
Income statement Equations
Revenue ndash Cost of Goods Sold = gross profitNet Income + - Other comprehensive income = comprehensive income
Components(IFRS and ASPE GAAP)
o Heading ndash for the [year] ended [date] or other period coveredo Revenues -Sales or service revenueo Gains -eg selling an equipment for cash greater than its net book valueo Expenses -Cost of goods sold operating expenses etco Losses eg selling an equipment for cash less than its net book valueo Other revenues and expenses
o Interest revenue dividend income interest expense
Income from Continuing Operationso Discontinued Operations
o Income or Loss from Discontinued Operations net of taxo Gain or Loss on Disposal of Discontinued Operations net of tax
Net income
IFRS onlyo +- Other comprehensive income
Comprehensive income
Differences between IFRS and ASPE
Accounting for discontinued operations and intra-period tax allocation
Earnings management
Typical Questions
Ch 4 - The Statement of Financial Position Statement of Retained Earnings Changes in Shareholdersrsquo Equity and Disclosure
STATEMENT OF FINANCIAL POSITION
Equation Assets = Liabilities + Shareholdersrsquo equity
Components of the Statement - Heading ndash as at [date]- Assets Economic benefits owned by the business as a result of
past transactions - Liabilities Debt and other obligations of the business that result
from past transactions - Shareholdersrsquo equity Residual claim of and financing provided by
the owners of the business- Current vs Non Current- Major categories
o Review major categories for presentation- Order of accounts
o Assets- liquidityo Liabilities ndash time to maturityo Sh Equity - permanence
STATEMENT OF RETAINED EARNINGSThis is reported as a solo statement under ASPE GAAP onlyOpening Retained Earnings + Net Income - Dividends = Closing Retained Earnings
STATEMENT OF CHANGES IN SHAREHOLDERSrsquo EQUITYIFRS OnlyA continuity schedule of opening balances +- changes = closing balance for each component of shareholders equity including retained earnings
Financial statements - Note DisclosurePurpose to provide supplementary information about the financial condition of the company
- Describe accounting policies followed by the company - Provide additional detail about an item on the financial statements- Provide additional information about an item not on the financial
statements- Subsequent events consider the difference in treatment of the two
types of subsequent event
Typical Questions
Ch 5 ndash CASH FLOW STATEMENT ndash indirect method only
Cash and Cash equivalentsbull Cash on hand Bank balancesbull Bank overdraftsbull Short term risk free investments with maturity dates within 3 months
Reports the changes to other accounts that affect a change in cash and cash equivalents on the SFP The change in the cash account is usually not equal to net income
Revenues reported do not always equal cash collected (credit sales)Expenses reported do not always equal cash paid (prepaid expenses)
In relation to the SFP The sum of cash flows from operations cash flows from investing and cash flows from financing must equal to the change in cash and cash equivalents on the SFP
Statement of Cash Flows reports operating cash flow as well as other cash flow information
Provides important information to investors and creditors In particular information about differences in the timing of revenue and
expense recognition under GAAP and the associated cash inflows and outflows
Preparing a cash flow statement Heading - for the [year] ended [date] or other period covered
Cash flow provided by (used in) operating activities (Indirect method)Net IncomeAdjust for Non-Cash Changes in non-cash WC accounts
- Subtract increase in assets- Add decreases in asset- Add increase in liabilities- subtract decreases in Liabilities
Adjust for non cash items included in net incomeAdd Depreciation amp AmortizationAdd Loss on Sale of AssetsSubtract Gain on Sales of Assets
Cash flows provided by (used in) investing activitiesCash paid for long-term assetsCash proceeds from the sale of long-term assets
Cash flows provided by (used in) financing activitiesCash dividends paidCash received on issuing debt ndash ie borrowingCash paid for retirement of debt
Cash received from issuance of common shares Ch 6 - Revenue and Expense RecognitionWhy do we care about revenue recognitionRevenue has a BIG impact on bottom-line profitability managers may be tempted to manage revenue
Criteria for revenue recognition ndash existing standardA firm recognizes revenue when it has
bull Performance achievedbull Measurability of the revenues and associated remaining costsbull Collectability is reasonably assured
Revenue is most often recognized at the time of sale as long as- Reasonable estimate of uncollectible amount - Reasonable estimate of sales returns - Reasonable estimation of all other material expenses representing
uncertain future outflows (eg warranty costs) - Most common in retail wholesale amp manufacturing - Even when right of return exists as long as the company has
booked reasonable allowance for sales return we can still recognize revenues at the point of sale
If there is uncertainty in the three criteria then wait until the uncertainty is resolved
Criteria for revenue recognition ndash proposed standardIFRS
1 Identify the contract(s) with the customer ndash May be explicit or implicit
2 Identify the separate performance obligations ndash may be one or many
3 Determine the transaction price ndash using either weighted probabilities method or most likely amount You must determine an amount for revenue This is very different from the existing approach
4 Allocate the transaction price to the performance obligations
5 Recognize revenue when a performance obligation is satisfied
Review the two cases covered in the lectures
MethodsPercentage of completion method - Recognize revenue and profit as contract progresses Extent of completion at any one point in time is determined by the costs incurred to date divided by the total estimated costs of the contract If it becomes apparent that a loss is expected on a contract recognize the total amount of the expected loss immediately
Completed contract method - Recognize revenue and profit when the contract is complete If it becomes apparent that a loss is expected on a contract recognize the total amount of the expected loss immediately
Percentage of completion methodReview profitable contracts
Calc Year 1 Year 2Costs incurred to date (B) given
Total estimated costs (D) given
Percentage complete (E) BD
Contract Value (F) Given
Revenue recognized to date G F X E
Less revenue already recognized H
Annual revenue ( I) G-H
Construction costs incurred (A) Given
Gross profit I - A
AND Loss contracts
Calc Year 1 Year 2Costs incurred to date (B) given
Total estimated costs (D) given
Percentage complete (E) BD
Contract Value (F) Given
Revenue recognized to date G F X E
Less revenue already recognized H
Annual revenue ( I) G-H
Construction costs incurred (A) Plug this
Total estimated Loss Calc this
(Profit) Loss previously recognized Prior yrs
Gross profitTypical Questions
Ch 7 ndash Financial Instruments Cash Receivables and Payables
CashCash and Cash Equivalents ndash Identifying amounts to be included in cash equivalents ndash See chapter 5 material
Accounts Receivable
Relevant Formulae
1 Ending AR = Beg Bal AR + Credit Sales ndash Cash Received ndash Write-off + 0 Recovery of previous write-off2 Ending Allowance for doubtful accounts (ADA) = Beg Bal AFDA + Bad
Debt Expense ndash Write-off + Recovery of previous write-off
Two approaches to determining Allowance for Bad Debts
1 Percentage of (Credit) Sales (Income statement approach)2 minus Focuses on calculating the Bad Debt Expense recorded for the year
Aging Method (Balance sheet approach)3 minus Focuses on calculating the Ending Balance of Allowance for Bad
Debts 4 minus Bad Debt Expense is a ldquoPlugrdquo
Accounts Receivable Relevant entries 0 Credit sales Dr Accounts receivable
Cr Revenue 2 Record bad debt expense 0 Dr Bad debt expense 0 Cr AFDA 3 When bad debt happens (when we are sure a specific customer
defaults) Dr AFDA 4 Cr Accounts receivable5 Recovery of bad debt 6 Dr Accounts receivable7 Cr AFDA 0 Dr Cash1 Cr Accounts receivable
Notes receivablePayable- Notes written promises- May be at a market rate of interest ndash no discounting needed- May be at a low rate on interest ndash discount the face value of the
note and the interest payments at the market rate- May be at no interest ndash discount the face value at the market rate
of interest
Other items
Sales discounts- Account for sales discounts by recording ldquoallowance for sales
discountsrdquo o A contra account for sales revenue on Income statement
Customer return merchandise- Debit to ldquoSales returns and allowancesrdquo
o A contra account for sales revenue on Income statement
Year-end adjusting entry to account for an estimated amount of sales return and merchandise return
- Credit to Allowance for sales return and allowance - A balance sheet contra account attached to accounts receivables
Transfers of ARIdentify if the transaction is to be accounted for as a sale or a borrowing transaction
Sale transactionsJournal entries to remove the AR any associated AFDA record the receipt of cash the residual obligation if any and a loss on disposal
Borrowing transactionsJournal entries to record the new debt and interest costs fees The AR and associated AFDA remain on the books
Types of Questions
Ch 8 Inventory12 INVEB = INVBB + Purchase ndash COGS
Inventory is recorded on the SFP at the lower of the cost or the net realizable value of the inventory
Key equation Beginning Inv+ Purchases - COGS = Ending Inv
IssuesConsignment inventory - Consignment inventory on the firm premises owned by others should be excluded Consignment inventory of the firm held elsewhere should be included in the inventory of the firm
Goods in transit at period end - Items shipped FOB shipping point are considered to have been sold when shipped Items shipped FOB destination are not considered to have been sold until they have arrived at their destination
Cut-off Errors - A cut-off error occurs with respect to ending inventory if items owned at period end are incorrectly excluded from the physical inventory count or if items already sold are incorrectly included in the period end inventory count
SystemsPerpetual system tracks units sold continuously
More accurate more timely potentially more costlyPeriodic system infer quantities sold by using purchasesproduction beginning and ending inventories
Units sold = Beg Units + Production ndashEnd Units Harder to detect inventory ldquoshrinkagerdquo (eg theft spoilage)
Cost flow assumptions Specific identification Costs of the specific item sold are included in cost of goods sold Costs of specific items on hand are included in inventory (Perpetual inventory systems)
Weighted average cost Inventory is priced on the basis of average cost of goods available for sale during the period Thus the same cost per item is assigned to cost of goods sold and to ending inventory (This method is used for periodic inventory systems)
Moving average cost Cost of goods sold is determined by calculating the average cost of goods available at the time a sale is made (This method is used for perpetual inventory systems)
FIFO assumption about the physical flow of inventory used to determine cost of goods sold and the ending inventory account balance The actual physical flow of inventory need not correspond to these assumptions FIFO shows SFP at relatively current values but income statement cost of goods sold at stale values
Inventory estimation methods
The Gross Profit Method
The gross profit method of inventory estimation relies on the knowledge of opening inventory net purchases net sales at retail prices and the historical gross profit margin
The Retail Inventory Method
The retail inventory method is a method of estimating the dollar amount of ending inventory using the current relationship between cost and selling price This is commonly used by retail stores for the preparation of interim financial statements
IFRS vs ASPEIFRS covers biological assets in a separate sectionIFRS requires the capitalization of interest on inventory that must be manufactured in large quantities ASPE GAAP gives companies the option
Types of Questions
Ch 9- 10 - Accounting for capital assetsPPampE
1 PPEEB = PPEBB + Acquisitions ndash Disposals 2 Straight-line depreciation = (Purchase price ndash salvage value) Useful
life 3 Declining balance methods = (Purchase cost- sum of all prior yearsrsquo
depreciation) X rate4 Units of Production = (Purchase price ndash salvage value) Useful life in
units annual depreciation = rate X of units5 Accumulated DepEB = Accumulated DepBB + Depreciation ndash
AccDepDisposal
Capitalize vs expense Capitalizing costs means to show them as an asset on the SFP (assets have future economic benefits)
We expense (ie not capitalize) when (a) benefits are immediate (b) or future benefits are too uncertain or immaterial (eg RampD)
Accounting for tangible assetsWhat is the acquisition cost
o Include all costs required to bring the asset into usable condition and location
o Purchased assets purchase price plus cost to prepare the asset for use (installation transportation testing)
o Self-constructed assets direct cost of construction (direct material direct labour pro-rata allocation of overhead costs) financing costs (interest on funds specifically borrowed to finance construction can be capitalized)
o Basket purchase ndash the best way to allocate the purchase price of the assets to the individual assets is based on the relative fair market values of the assets acquired
o Deferred payment contracts ndash recorded at the present value of the consideration exchanged between the contracting parties at the date of acquisition
o Non-monetary transactions recorded at the fair value of the assets received or the fair value of the asset given up whichever is more easily determined ASPE GAAP
o Check page 636 and 637 on how IFRS is differento
Measurement after acquisition Cost model vs Revaluation Model
How to account for costs subsequent to acquisition- Additions capitalize the costs to the existing capital asset account and
revise the service life and residual value as needed
- Betterments and replacements capitalize the costs to the existing capital asset account Distinguish the expenditures from normal repair costs o The appropriate accounting treatment depends on whether or not
we know the carrying value of old assets o If Costs are known then remove the old cost and accumulated
depreciation record a loss on disposal and then capitalize the new costs
o If costs are not known then add the new costs into the cost pool and revise the service life and residual value as needed
- Rearrangement and reinstallation capitalize the costs to the existing capital asset account
The appropriate accounting treatment depends on whether or not we know the carrying value of old assets
If Costs are known then remove the old cost and accumulated depreciation record a loss on disposal and then capitalize the new costs
If costs and Accum Amortization not known then expense the full amount
o Repairs ndash always expensed as incurred
Accounting for Intangible Assets
Specific assets - Patents Trademarks Customer lists FranchisesResearch and development Goodwill etc See notes below under Chapter 11 for calculation of Goodwill
o Goodwill is the expected value of future above-normal financial performance
What is the acquisition costPurchased assets - Include all costs required to bring the asset into usable condition and location Goodwill is only recorded if purchased
Six Criteria for capitalization of internally generated intangible assets
Costs to be included ndash Materials and servicesndash Direct labour and other payroll costsndash Interest and borrowing costs ndash if specifically related
Costs excluded ndash Selling administration and general overhead costs
Measurement after acquisition Cost model vs Revaluation Model ndash general understanding of the differences in the two models only
Amortization of Capital assets - What is the expected useful life
o The time period over which the asset will be used
- What is the Residual value o To determine residual value of an asset it requires managerial
judgment o Residual value is the estimated amount a company would receive
today on disposal of an asset net of related disposal costs
- What amortization should we use to allocate expense over the useful life
o What does GAAP allow Straight-line method
bull Annual Depreciation Expense = depreciable basisservice life (in years) = (Acquisition Cost -SV) Useful Years
bull Common for tangible assetsbull Uniform amortization charges over time
Activity methodbull Input methods ndash eg Depreciation cost per machine-
hour = depreciable basisservice life (in machine-hours)
bull Depr Expense = Actual hours used hourly ratebull Common for manufacturing firms bull Output methods- eg units producedbull Depr Expense = Actual units produced rate per unit bull Common for natural resources companybull Unequal amortization charges over time
Decreasing charge (declining balance CCA double declining balance)
bull Higher amortization expense is recognized in the earlier years of an assetrsquos useful life
bull Constant amortization rated applied to reducing book value of assets
Increasing chargebull Lower amortization expense in earlier years and
higher amortization in later years Donrsquot need to calculate this
Land is the never amortized
What accounts does depreciation affect Tangible assets - Accumulated depreciation account Intangible assets ndash The asset account directly Retained earnings account Depreciation expense
Which financial statements are affected SFP and income statement
Does depreciation affect cash NEVER
Amortization for partial periods amortization charges for the periods in which when assets are purchased and disposed Follow the company policy if given
Impairment in Value of Capital Assets IFRS requires impairment test for intangible and tangible assets be
conducted at least once a year Use the rational entity impairment model
Impairment = Carrying value minus (the greater of FV in use and FV less costs to sell)
Impairment loss can be reversed if value recovers in future years
ASPE GAAP requires impairment test for tangible and intangible assets only when circumstances change such that there might be a permanent impairment in the assetsrsquo carrying value Once impairment loss is recorded it cannot be recovered later
Use the cost recovery impairment model - Tangible Assets
Two steps Step 1 compare the assets carrying value to sum of the
Undiscounted cash flowsbull If sum of the undiscounted cash flows gt carrying
value no impairment loss is recorded and impairment test stops
bull If sum of the undiscounted cash flows lt carrying value go to step 2
Step 2 Determine the assetsrsquo fair market value bull If there is an active market for the assets then use
the quoted market price as the fair market value bull If there is no active market for the assets then
calculate the intrinsic value (theoretical value) of the assets by discounting all future cash flows to be resulted from the assets to current period
Impairment loss = carrying value ndash fair market value
Goodwill is not amortized but written down if impaired in value Two steps
bull Step 1 compare fair value of each reporting unit to the total net book value (including goodwill)
o If fair value gt book value no impairment loss is recorded and impairment test stops
o Otherwise go to the second stepbull Step 2
o Determine the fair value of reporting unito Subtract the fair value of all net identifiable
assets of that unit and allocates the remainder to goodwill implied goodwill
o Carrying value of goodwill ndash implied goodwill impairment loss to be recognized
Disposition of Capital assets- Remove the cost from the capital asset account and the accumulated
amortization related to disposed capital assets - Once a long-term assets is determined to be disposed
o Reclassify to assets held for sale
o Determine the net realizable value the lower of carrying value and fair value less cost to sell
o Not amortized any more o When sold record gainloss from disposal
Review Basket purchases and Non-monetary transaction
Ch 11 - Investments
Passive investmentsWhen the investor company does not have significant influence over the investee company
Choices are costamortized cost FVTPL or FV-OCIo ASPE allow only costamortized cost and FVTPL o ASPE GAAP ndash Companies must use FVTPL when active market for
shares existso ASPE GAAP allows companies to choose to use FVTPL if they so
designate at time of initial recognition
Investments other than bonds being held to receive their contractual cash flows will be adjusted to market value at year end
o SFP effects are the same ie FV reported
What is different o Income statement effects o For investments FVTPL gains or losses recognized in Income in
the current periodo For investments FV-OCI gains or losses are recorded in
ldquocomprehensive incomerdquo and accumulated in AOCI until securities are sold
Investments FVTPL (debt and equity) Purchased for short-term profit potential Year-end adjustment to the market value Changes in market value (holding lossgain) reported in the income
statement of the current period
Investment Amortized Cost (debt) Purchased with ability and intention to hold to maturity No adjustment to market value Carried at amortized cost on the SFP
Investments FV-OCI (debt and equity) Securities not classified as either of above Changes in market value (holding lossgain) reported in comprehensive
income On the SFP donrsquot forget to report accumulated comprehensive gainloss
under Shareholdersrsquo equity
Investment revenue is recognized at the point when the investee company declares and pays dividends
When investments are sold
Year-end adjusting to fair market value and investments are not sold
FVTPL Realized gainslosses ndash Net income IS
Unrealized gainslosses ndash Net income IS
FV-OCI Adjust to market at date of sale OCIClose remaining balance in AOCI for the investments sold to RE
Unrealized gainslosses ndash Comprehensive income IS Shareholders equity
Bonds ndash Intent to hold until maturity
NA No year- end adjustment to FV Record at amortized cost
Bonds - Terminology
1 1048697 Principal (Par Value) face value of the bond the amount due at maturity
2 1048697 Coupon Rate the rate used to determine the periodic cash payments (coupon payment) if any
3 1048697 Coupon Payment Cash Payment = face value x Coupon Rate
4 1048697 Market Interest Rate the rate used to determine the current market value of the bond
Bonds - ParDiscountPremium
Bonds Sells Market Rate at issuance
Market Value at issuance
Coupon Payment
At Par = Coupon rate = Par value =Interest expenseAt a Discount gt Coupon rate lt Par value ltInterest expenseAt a Premium lt Coupon rate gt Par value gtInterest expense
Active investmentsUsed when significant influence exists- Under the equity method investment revenue is recognized as soon as the
investee company reports a net income or net loss - When the investee company declares and pays dividends the investor
company does not record as investment revenue but as a decrease of investment to avoid double counting
Starting pointOwnership lt20 20-50 gt50Reporting method
Fair value method
Equity Consolidation
Plus consider other factors such as representation on the board intercompany transactions etc
Equity method - investeersquos announcement of earnings increases investorrsquos Investment
account - Investeersquos announcement of dividends decreases investorrsquos
Investment account - Calculation of equity Income
ASPE vs IFRS - IFRS must use Equity method for investments with significant influence APSE Can use Equity method or Cost( if Shares are not actively traded) If shares actively traded then the choice is Equity or FVTPL
Purchase premiums- Purchase premiums arise for two reasons
o Fair market value differentials the FV of assetsliabilities of the investee are different from BV of those assetsliabilities
Fair market value differentials are amortized and the amortization expenses will be included in net income
bull Inventory fair market value differentials is usually amortized in the first period after acquisition
bull Fixed assets fair market value differentials are usually amortized over the expected remaining service life of the assets
o Goodwill is the expected value of future above-normal financial performance
- Calculation of Goodwill and FV differentials to be amortized
Goodwill CalculationPurchase priceLess percentage share of BV acquiredEquals Purchase PremiumMinus FV differences where FVgtBVAdd FV differences where FVgtBVRemainder equals Goodwill
- Revenue recognized to date G
- Revenue recognized to date G
- Inventory estimation methods
- The Gross Profit Method
-
Ch 3 - The Income Statement and Comprehensive Income
The income statement measures firm performance regardless of when cash is exchanged Key principle
Single step vs Multi stepSingle step
Revenues + gainsLess Expenses and losses=Net income before taxesless Taxes ndash as these mush be shown separately=Net Income
Multi stepRevenues( from operations only)Less COGS=Gross Profitless Operating expenses= operating incomeless Non operating expenses=Net income before taxesless Taxes=Net Income
Function vs Nature
Function- Sort by functional area of the business eg sales admin engineering RampD etc You need to have the costs split by function in order to do thisNature ndash Sort expenses by type eg Utilities office professional fees etcLook at the accounts you are given and use this to determine the better approach Smaller businesses generally sort by nature bigger organizations with more separation by departments may use function
Income statement Equations
Revenue ndash Cost of Goods Sold = gross profitNet Income + - Other comprehensive income = comprehensive income
Components(IFRS and ASPE GAAP)
o Heading ndash for the [year] ended [date] or other period coveredo Revenues -Sales or service revenueo Gains -eg selling an equipment for cash greater than its net book valueo Expenses -Cost of goods sold operating expenses etco Losses eg selling an equipment for cash less than its net book valueo Other revenues and expenses
o Interest revenue dividend income interest expense
Income from Continuing Operationso Discontinued Operations
o Income or Loss from Discontinued Operations net of taxo Gain or Loss on Disposal of Discontinued Operations net of tax
Net income
IFRS onlyo +- Other comprehensive income
Comprehensive income
Differences between IFRS and ASPE
Accounting for discontinued operations and intra-period tax allocation
Earnings management
Typical Questions
Ch 4 - The Statement of Financial Position Statement of Retained Earnings Changes in Shareholdersrsquo Equity and Disclosure
STATEMENT OF FINANCIAL POSITION
Equation Assets = Liabilities + Shareholdersrsquo equity
Components of the Statement - Heading ndash as at [date]- Assets Economic benefits owned by the business as a result of
past transactions - Liabilities Debt and other obligations of the business that result
from past transactions - Shareholdersrsquo equity Residual claim of and financing provided by
the owners of the business- Current vs Non Current- Major categories
o Review major categories for presentation- Order of accounts
o Assets- liquidityo Liabilities ndash time to maturityo Sh Equity - permanence
STATEMENT OF RETAINED EARNINGSThis is reported as a solo statement under ASPE GAAP onlyOpening Retained Earnings + Net Income - Dividends = Closing Retained Earnings
STATEMENT OF CHANGES IN SHAREHOLDERSrsquo EQUITYIFRS OnlyA continuity schedule of opening balances +- changes = closing balance for each component of shareholders equity including retained earnings
Financial statements - Note DisclosurePurpose to provide supplementary information about the financial condition of the company
- Describe accounting policies followed by the company - Provide additional detail about an item on the financial statements- Provide additional information about an item not on the financial
statements- Subsequent events consider the difference in treatment of the two
types of subsequent event
Typical Questions
Ch 5 ndash CASH FLOW STATEMENT ndash indirect method only
Cash and Cash equivalentsbull Cash on hand Bank balancesbull Bank overdraftsbull Short term risk free investments with maturity dates within 3 months
Reports the changes to other accounts that affect a change in cash and cash equivalents on the SFP The change in the cash account is usually not equal to net income
Revenues reported do not always equal cash collected (credit sales)Expenses reported do not always equal cash paid (prepaid expenses)
In relation to the SFP The sum of cash flows from operations cash flows from investing and cash flows from financing must equal to the change in cash and cash equivalents on the SFP
Statement of Cash Flows reports operating cash flow as well as other cash flow information
Provides important information to investors and creditors In particular information about differences in the timing of revenue and
expense recognition under GAAP and the associated cash inflows and outflows
Preparing a cash flow statement Heading - for the [year] ended [date] or other period covered
Cash flow provided by (used in) operating activities (Indirect method)Net IncomeAdjust for Non-Cash Changes in non-cash WC accounts
- Subtract increase in assets- Add decreases in asset- Add increase in liabilities- subtract decreases in Liabilities
Adjust for non cash items included in net incomeAdd Depreciation amp AmortizationAdd Loss on Sale of AssetsSubtract Gain on Sales of Assets
Cash flows provided by (used in) investing activitiesCash paid for long-term assetsCash proceeds from the sale of long-term assets
Cash flows provided by (used in) financing activitiesCash dividends paidCash received on issuing debt ndash ie borrowingCash paid for retirement of debt
Cash received from issuance of common shares Ch 6 - Revenue and Expense RecognitionWhy do we care about revenue recognitionRevenue has a BIG impact on bottom-line profitability managers may be tempted to manage revenue
Criteria for revenue recognition ndash existing standardA firm recognizes revenue when it has
bull Performance achievedbull Measurability of the revenues and associated remaining costsbull Collectability is reasonably assured
Revenue is most often recognized at the time of sale as long as- Reasonable estimate of uncollectible amount - Reasonable estimate of sales returns - Reasonable estimation of all other material expenses representing
uncertain future outflows (eg warranty costs) - Most common in retail wholesale amp manufacturing - Even when right of return exists as long as the company has
booked reasonable allowance for sales return we can still recognize revenues at the point of sale
If there is uncertainty in the three criteria then wait until the uncertainty is resolved
Criteria for revenue recognition ndash proposed standardIFRS
1 Identify the contract(s) with the customer ndash May be explicit or implicit
2 Identify the separate performance obligations ndash may be one or many
3 Determine the transaction price ndash using either weighted probabilities method or most likely amount You must determine an amount for revenue This is very different from the existing approach
4 Allocate the transaction price to the performance obligations
5 Recognize revenue when a performance obligation is satisfied
Review the two cases covered in the lectures
MethodsPercentage of completion method - Recognize revenue and profit as contract progresses Extent of completion at any one point in time is determined by the costs incurred to date divided by the total estimated costs of the contract If it becomes apparent that a loss is expected on a contract recognize the total amount of the expected loss immediately
Completed contract method - Recognize revenue and profit when the contract is complete If it becomes apparent that a loss is expected on a contract recognize the total amount of the expected loss immediately
Percentage of completion methodReview profitable contracts
Calc Year 1 Year 2Costs incurred to date (B) given
Total estimated costs (D) given
Percentage complete (E) BD
Contract Value (F) Given
Revenue recognized to date G F X E
Less revenue already recognized H
Annual revenue ( I) G-H
Construction costs incurred (A) Given
Gross profit I - A
AND Loss contracts
Calc Year 1 Year 2Costs incurred to date (B) given
Total estimated costs (D) given
Percentage complete (E) BD
Contract Value (F) Given
Revenue recognized to date G F X E
Less revenue already recognized H
Annual revenue ( I) G-H
Construction costs incurred (A) Plug this
Total estimated Loss Calc this
(Profit) Loss previously recognized Prior yrs
Gross profitTypical Questions
Ch 7 ndash Financial Instruments Cash Receivables and Payables
CashCash and Cash Equivalents ndash Identifying amounts to be included in cash equivalents ndash See chapter 5 material
Accounts Receivable
Relevant Formulae
1 Ending AR = Beg Bal AR + Credit Sales ndash Cash Received ndash Write-off + 0 Recovery of previous write-off2 Ending Allowance for doubtful accounts (ADA) = Beg Bal AFDA + Bad
Debt Expense ndash Write-off + Recovery of previous write-off
Two approaches to determining Allowance for Bad Debts
1 Percentage of (Credit) Sales (Income statement approach)2 minus Focuses on calculating the Bad Debt Expense recorded for the year
Aging Method (Balance sheet approach)3 minus Focuses on calculating the Ending Balance of Allowance for Bad
Debts 4 minus Bad Debt Expense is a ldquoPlugrdquo
Accounts Receivable Relevant entries 0 Credit sales Dr Accounts receivable
Cr Revenue 2 Record bad debt expense 0 Dr Bad debt expense 0 Cr AFDA 3 When bad debt happens (when we are sure a specific customer
defaults) Dr AFDA 4 Cr Accounts receivable5 Recovery of bad debt 6 Dr Accounts receivable7 Cr AFDA 0 Dr Cash1 Cr Accounts receivable
Notes receivablePayable- Notes written promises- May be at a market rate of interest ndash no discounting needed- May be at a low rate on interest ndash discount the face value of the
note and the interest payments at the market rate- May be at no interest ndash discount the face value at the market rate
of interest
Other items
Sales discounts- Account for sales discounts by recording ldquoallowance for sales
discountsrdquo o A contra account for sales revenue on Income statement
Customer return merchandise- Debit to ldquoSales returns and allowancesrdquo
o A contra account for sales revenue on Income statement
Year-end adjusting entry to account for an estimated amount of sales return and merchandise return
- Credit to Allowance for sales return and allowance - A balance sheet contra account attached to accounts receivables
Transfers of ARIdentify if the transaction is to be accounted for as a sale or a borrowing transaction
Sale transactionsJournal entries to remove the AR any associated AFDA record the receipt of cash the residual obligation if any and a loss on disposal
Borrowing transactionsJournal entries to record the new debt and interest costs fees The AR and associated AFDA remain on the books
Types of Questions
Ch 8 Inventory12 INVEB = INVBB + Purchase ndash COGS
Inventory is recorded on the SFP at the lower of the cost or the net realizable value of the inventory
Key equation Beginning Inv+ Purchases - COGS = Ending Inv
IssuesConsignment inventory - Consignment inventory on the firm premises owned by others should be excluded Consignment inventory of the firm held elsewhere should be included in the inventory of the firm
Goods in transit at period end - Items shipped FOB shipping point are considered to have been sold when shipped Items shipped FOB destination are not considered to have been sold until they have arrived at their destination
Cut-off Errors - A cut-off error occurs with respect to ending inventory if items owned at period end are incorrectly excluded from the physical inventory count or if items already sold are incorrectly included in the period end inventory count
SystemsPerpetual system tracks units sold continuously
More accurate more timely potentially more costlyPeriodic system infer quantities sold by using purchasesproduction beginning and ending inventories
Units sold = Beg Units + Production ndashEnd Units Harder to detect inventory ldquoshrinkagerdquo (eg theft spoilage)
Cost flow assumptions Specific identification Costs of the specific item sold are included in cost of goods sold Costs of specific items on hand are included in inventory (Perpetual inventory systems)
Weighted average cost Inventory is priced on the basis of average cost of goods available for sale during the period Thus the same cost per item is assigned to cost of goods sold and to ending inventory (This method is used for periodic inventory systems)
Moving average cost Cost of goods sold is determined by calculating the average cost of goods available at the time a sale is made (This method is used for perpetual inventory systems)
FIFO assumption about the physical flow of inventory used to determine cost of goods sold and the ending inventory account balance The actual physical flow of inventory need not correspond to these assumptions FIFO shows SFP at relatively current values but income statement cost of goods sold at stale values
Inventory estimation methods
The Gross Profit Method
The gross profit method of inventory estimation relies on the knowledge of opening inventory net purchases net sales at retail prices and the historical gross profit margin
The Retail Inventory Method
The retail inventory method is a method of estimating the dollar amount of ending inventory using the current relationship between cost and selling price This is commonly used by retail stores for the preparation of interim financial statements
IFRS vs ASPEIFRS covers biological assets in a separate sectionIFRS requires the capitalization of interest on inventory that must be manufactured in large quantities ASPE GAAP gives companies the option
Types of Questions
Ch 9- 10 - Accounting for capital assetsPPampE
1 PPEEB = PPEBB + Acquisitions ndash Disposals 2 Straight-line depreciation = (Purchase price ndash salvage value) Useful
life 3 Declining balance methods = (Purchase cost- sum of all prior yearsrsquo
depreciation) X rate4 Units of Production = (Purchase price ndash salvage value) Useful life in
units annual depreciation = rate X of units5 Accumulated DepEB = Accumulated DepBB + Depreciation ndash
AccDepDisposal
Capitalize vs expense Capitalizing costs means to show them as an asset on the SFP (assets have future economic benefits)
We expense (ie not capitalize) when (a) benefits are immediate (b) or future benefits are too uncertain or immaterial (eg RampD)
Accounting for tangible assetsWhat is the acquisition cost
o Include all costs required to bring the asset into usable condition and location
o Purchased assets purchase price plus cost to prepare the asset for use (installation transportation testing)
o Self-constructed assets direct cost of construction (direct material direct labour pro-rata allocation of overhead costs) financing costs (interest on funds specifically borrowed to finance construction can be capitalized)
o Basket purchase ndash the best way to allocate the purchase price of the assets to the individual assets is based on the relative fair market values of the assets acquired
o Deferred payment contracts ndash recorded at the present value of the consideration exchanged between the contracting parties at the date of acquisition
o Non-monetary transactions recorded at the fair value of the assets received or the fair value of the asset given up whichever is more easily determined ASPE GAAP
o Check page 636 and 637 on how IFRS is differento
Measurement after acquisition Cost model vs Revaluation Model
How to account for costs subsequent to acquisition- Additions capitalize the costs to the existing capital asset account and
revise the service life and residual value as needed
- Betterments and replacements capitalize the costs to the existing capital asset account Distinguish the expenditures from normal repair costs o The appropriate accounting treatment depends on whether or not
we know the carrying value of old assets o If Costs are known then remove the old cost and accumulated
depreciation record a loss on disposal and then capitalize the new costs
o If costs are not known then add the new costs into the cost pool and revise the service life and residual value as needed
- Rearrangement and reinstallation capitalize the costs to the existing capital asset account
The appropriate accounting treatment depends on whether or not we know the carrying value of old assets
If Costs are known then remove the old cost and accumulated depreciation record a loss on disposal and then capitalize the new costs
If costs and Accum Amortization not known then expense the full amount
o Repairs ndash always expensed as incurred
Accounting for Intangible Assets
Specific assets - Patents Trademarks Customer lists FranchisesResearch and development Goodwill etc See notes below under Chapter 11 for calculation of Goodwill
o Goodwill is the expected value of future above-normal financial performance
What is the acquisition costPurchased assets - Include all costs required to bring the asset into usable condition and location Goodwill is only recorded if purchased
Six Criteria for capitalization of internally generated intangible assets
Costs to be included ndash Materials and servicesndash Direct labour and other payroll costsndash Interest and borrowing costs ndash if specifically related
Costs excluded ndash Selling administration and general overhead costs
Measurement after acquisition Cost model vs Revaluation Model ndash general understanding of the differences in the two models only
Amortization of Capital assets - What is the expected useful life
o The time period over which the asset will be used
- What is the Residual value o To determine residual value of an asset it requires managerial
judgment o Residual value is the estimated amount a company would receive
today on disposal of an asset net of related disposal costs
- What amortization should we use to allocate expense over the useful life
o What does GAAP allow Straight-line method
bull Annual Depreciation Expense = depreciable basisservice life (in years) = (Acquisition Cost -SV) Useful Years
bull Common for tangible assetsbull Uniform amortization charges over time
Activity methodbull Input methods ndash eg Depreciation cost per machine-
hour = depreciable basisservice life (in machine-hours)
bull Depr Expense = Actual hours used hourly ratebull Common for manufacturing firms bull Output methods- eg units producedbull Depr Expense = Actual units produced rate per unit bull Common for natural resources companybull Unequal amortization charges over time
Decreasing charge (declining balance CCA double declining balance)
bull Higher amortization expense is recognized in the earlier years of an assetrsquos useful life
bull Constant amortization rated applied to reducing book value of assets
Increasing chargebull Lower amortization expense in earlier years and
higher amortization in later years Donrsquot need to calculate this
Land is the never amortized
What accounts does depreciation affect Tangible assets - Accumulated depreciation account Intangible assets ndash The asset account directly Retained earnings account Depreciation expense
Which financial statements are affected SFP and income statement
Does depreciation affect cash NEVER
Amortization for partial periods amortization charges for the periods in which when assets are purchased and disposed Follow the company policy if given
Impairment in Value of Capital Assets IFRS requires impairment test for intangible and tangible assets be
conducted at least once a year Use the rational entity impairment model
Impairment = Carrying value minus (the greater of FV in use and FV less costs to sell)
Impairment loss can be reversed if value recovers in future years
ASPE GAAP requires impairment test for tangible and intangible assets only when circumstances change such that there might be a permanent impairment in the assetsrsquo carrying value Once impairment loss is recorded it cannot be recovered later
Use the cost recovery impairment model - Tangible Assets
Two steps Step 1 compare the assets carrying value to sum of the
Undiscounted cash flowsbull If sum of the undiscounted cash flows gt carrying
value no impairment loss is recorded and impairment test stops
bull If sum of the undiscounted cash flows lt carrying value go to step 2
Step 2 Determine the assetsrsquo fair market value bull If there is an active market for the assets then use
the quoted market price as the fair market value bull If there is no active market for the assets then
calculate the intrinsic value (theoretical value) of the assets by discounting all future cash flows to be resulted from the assets to current period
Impairment loss = carrying value ndash fair market value
Goodwill is not amortized but written down if impaired in value Two steps
bull Step 1 compare fair value of each reporting unit to the total net book value (including goodwill)
o If fair value gt book value no impairment loss is recorded and impairment test stops
o Otherwise go to the second stepbull Step 2
o Determine the fair value of reporting unito Subtract the fair value of all net identifiable
assets of that unit and allocates the remainder to goodwill implied goodwill
o Carrying value of goodwill ndash implied goodwill impairment loss to be recognized
Disposition of Capital assets- Remove the cost from the capital asset account and the accumulated
amortization related to disposed capital assets - Once a long-term assets is determined to be disposed
o Reclassify to assets held for sale
o Determine the net realizable value the lower of carrying value and fair value less cost to sell
o Not amortized any more o When sold record gainloss from disposal
Review Basket purchases and Non-monetary transaction
Ch 11 - Investments
Passive investmentsWhen the investor company does not have significant influence over the investee company
Choices are costamortized cost FVTPL or FV-OCIo ASPE allow only costamortized cost and FVTPL o ASPE GAAP ndash Companies must use FVTPL when active market for
shares existso ASPE GAAP allows companies to choose to use FVTPL if they so
designate at time of initial recognition
Investments other than bonds being held to receive their contractual cash flows will be adjusted to market value at year end
o SFP effects are the same ie FV reported
What is different o Income statement effects o For investments FVTPL gains or losses recognized in Income in
the current periodo For investments FV-OCI gains or losses are recorded in
ldquocomprehensive incomerdquo and accumulated in AOCI until securities are sold
Investments FVTPL (debt and equity) Purchased for short-term profit potential Year-end adjustment to the market value Changes in market value (holding lossgain) reported in the income
statement of the current period
Investment Amortized Cost (debt) Purchased with ability and intention to hold to maturity No adjustment to market value Carried at amortized cost on the SFP
Investments FV-OCI (debt and equity) Securities not classified as either of above Changes in market value (holding lossgain) reported in comprehensive
income On the SFP donrsquot forget to report accumulated comprehensive gainloss
under Shareholdersrsquo equity
Investment revenue is recognized at the point when the investee company declares and pays dividends
When investments are sold
Year-end adjusting to fair market value and investments are not sold
FVTPL Realized gainslosses ndash Net income IS
Unrealized gainslosses ndash Net income IS
FV-OCI Adjust to market at date of sale OCIClose remaining balance in AOCI for the investments sold to RE
Unrealized gainslosses ndash Comprehensive income IS Shareholders equity
Bonds ndash Intent to hold until maturity
NA No year- end adjustment to FV Record at amortized cost
Bonds - Terminology
1 1048697 Principal (Par Value) face value of the bond the amount due at maturity
2 1048697 Coupon Rate the rate used to determine the periodic cash payments (coupon payment) if any
3 1048697 Coupon Payment Cash Payment = face value x Coupon Rate
4 1048697 Market Interest Rate the rate used to determine the current market value of the bond
Bonds - ParDiscountPremium
Bonds Sells Market Rate at issuance
Market Value at issuance
Coupon Payment
At Par = Coupon rate = Par value =Interest expenseAt a Discount gt Coupon rate lt Par value ltInterest expenseAt a Premium lt Coupon rate gt Par value gtInterest expense
Active investmentsUsed when significant influence exists- Under the equity method investment revenue is recognized as soon as the
investee company reports a net income or net loss - When the investee company declares and pays dividends the investor
company does not record as investment revenue but as a decrease of investment to avoid double counting
Starting pointOwnership lt20 20-50 gt50Reporting method
Fair value method
Equity Consolidation
Plus consider other factors such as representation on the board intercompany transactions etc
Equity method - investeersquos announcement of earnings increases investorrsquos Investment
account - Investeersquos announcement of dividends decreases investorrsquos
Investment account - Calculation of equity Income
ASPE vs IFRS - IFRS must use Equity method for investments with significant influence APSE Can use Equity method or Cost( if Shares are not actively traded) If shares actively traded then the choice is Equity or FVTPL
Purchase premiums- Purchase premiums arise for two reasons
o Fair market value differentials the FV of assetsliabilities of the investee are different from BV of those assetsliabilities
Fair market value differentials are amortized and the amortization expenses will be included in net income
bull Inventory fair market value differentials is usually amortized in the first period after acquisition
bull Fixed assets fair market value differentials are usually amortized over the expected remaining service life of the assets
o Goodwill is the expected value of future above-normal financial performance
- Calculation of Goodwill and FV differentials to be amortized
Goodwill CalculationPurchase priceLess percentage share of BV acquiredEquals Purchase PremiumMinus FV differences where FVgtBVAdd FV differences where FVgtBVRemainder equals Goodwill
- Revenue recognized to date G
- Revenue recognized to date G
- Inventory estimation methods
- The Gross Profit Method
-
Income from Continuing Operationso Discontinued Operations
o Income or Loss from Discontinued Operations net of taxo Gain or Loss on Disposal of Discontinued Operations net of tax
Net income
IFRS onlyo +- Other comprehensive income
Comprehensive income
Differences between IFRS and ASPE
Accounting for discontinued operations and intra-period tax allocation
Earnings management
Typical Questions
Ch 4 - The Statement of Financial Position Statement of Retained Earnings Changes in Shareholdersrsquo Equity and Disclosure
STATEMENT OF FINANCIAL POSITION
Equation Assets = Liabilities + Shareholdersrsquo equity
Components of the Statement - Heading ndash as at [date]- Assets Economic benefits owned by the business as a result of
past transactions - Liabilities Debt and other obligations of the business that result
from past transactions - Shareholdersrsquo equity Residual claim of and financing provided by
the owners of the business- Current vs Non Current- Major categories
o Review major categories for presentation- Order of accounts
o Assets- liquidityo Liabilities ndash time to maturityo Sh Equity - permanence
STATEMENT OF RETAINED EARNINGSThis is reported as a solo statement under ASPE GAAP onlyOpening Retained Earnings + Net Income - Dividends = Closing Retained Earnings
STATEMENT OF CHANGES IN SHAREHOLDERSrsquo EQUITYIFRS OnlyA continuity schedule of opening balances +- changes = closing balance for each component of shareholders equity including retained earnings
Financial statements - Note DisclosurePurpose to provide supplementary information about the financial condition of the company
- Describe accounting policies followed by the company - Provide additional detail about an item on the financial statements- Provide additional information about an item not on the financial
statements- Subsequent events consider the difference in treatment of the two
types of subsequent event
Typical Questions
Ch 5 ndash CASH FLOW STATEMENT ndash indirect method only
Cash and Cash equivalentsbull Cash on hand Bank balancesbull Bank overdraftsbull Short term risk free investments with maturity dates within 3 months
Reports the changes to other accounts that affect a change in cash and cash equivalents on the SFP The change in the cash account is usually not equal to net income
Revenues reported do not always equal cash collected (credit sales)Expenses reported do not always equal cash paid (prepaid expenses)
In relation to the SFP The sum of cash flows from operations cash flows from investing and cash flows from financing must equal to the change in cash and cash equivalents on the SFP
Statement of Cash Flows reports operating cash flow as well as other cash flow information
Provides important information to investors and creditors In particular information about differences in the timing of revenue and
expense recognition under GAAP and the associated cash inflows and outflows
Preparing a cash flow statement Heading - for the [year] ended [date] or other period covered
Cash flow provided by (used in) operating activities (Indirect method)Net IncomeAdjust for Non-Cash Changes in non-cash WC accounts
- Subtract increase in assets- Add decreases in asset- Add increase in liabilities- subtract decreases in Liabilities
Adjust for non cash items included in net incomeAdd Depreciation amp AmortizationAdd Loss on Sale of AssetsSubtract Gain on Sales of Assets
Cash flows provided by (used in) investing activitiesCash paid for long-term assetsCash proceeds from the sale of long-term assets
Cash flows provided by (used in) financing activitiesCash dividends paidCash received on issuing debt ndash ie borrowingCash paid for retirement of debt
Cash received from issuance of common shares Ch 6 - Revenue and Expense RecognitionWhy do we care about revenue recognitionRevenue has a BIG impact on bottom-line profitability managers may be tempted to manage revenue
Criteria for revenue recognition ndash existing standardA firm recognizes revenue when it has
bull Performance achievedbull Measurability of the revenues and associated remaining costsbull Collectability is reasonably assured
Revenue is most often recognized at the time of sale as long as- Reasonable estimate of uncollectible amount - Reasonable estimate of sales returns - Reasonable estimation of all other material expenses representing
uncertain future outflows (eg warranty costs) - Most common in retail wholesale amp manufacturing - Even when right of return exists as long as the company has
booked reasonable allowance for sales return we can still recognize revenues at the point of sale
If there is uncertainty in the three criteria then wait until the uncertainty is resolved
Criteria for revenue recognition ndash proposed standardIFRS
1 Identify the contract(s) with the customer ndash May be explicit or implicit
2 Identify the separate performance obligations ndash may be one or many
3 Determine the transaction price ndash using either weighted probabilities method or most likely amount You must determine an amount for revenue This is very different from the existing approach
4 Allocate the transaction price to the performance obligations
5 Recognize revenue when a performance obligation is satisfied
Review the two cases covered in the lectures
MethodsPercentage of completion method - Recognize revenue and profit as contract progresses Extent of completion at any one point in time is determined by the costs incurred to date divided by the total estimated costs of the contract If it becomes apparent that a loss is expected on a contract recognize the total amount of the expected loss immediately
Completed contract method - Recognize revenue and profit when the contract is complete If it becomes apparent that a loss is expected on a contract recognize the total amount of the expected loss immediately
Percentage of completion methodReview profitable contracts
Calc Year 1 Year 2Costs incurred to date (B) given
Total estimated costs (D) given
Percentage complete (E) BD
Contract Value (F) Given
Revenue recognized to date G F X E
Less revenue already recognized H
Annual revenue ( I) G-H
Construction costs incurred (A) Given
Gross profit I - A
AND Loss contracts
Calc Year 1 Year 2Costs incurred to date (B) given
Total estimated costs (D) given
Percentage complete (E) BD
Contract Value (F) Given
Revenue recognized to date G F X E
Less revenue already recognized H
Annual revenue ( I) G-H
Construction costs incurred (A) Plug this
Total estimated Loss Calc this
(Profit) Loss previously recognized Prior yrs
Gross profitTypical Questions
Ch 7 ndash Financial Instruments Cash Receivables and Payables
CashCash and Cash Equivalents ndash Identifying amounts to be included in cash equivalents ndash See chapter 5 material
Accounts Receivable
Relevant Formulae
1 Ending AR = Beg Bal AR + Credit Sales ndash Cash Received ndash Write-off + 0 Recovery of previous write-off2 Ending Allowance for doubtful accounts (ADA) = Beg Bal AFDA + Bad
Debt Expense ndash Write-off + Recovery of previous write-off
Two approaches to determining Allowance for Bad Debts
1 Percentage of (Credit) Sales (Income statement approach)2 minus Focuses on calculating the Bad Debt Expense recorded for the year
Aging Method (Balance sheet approach)3 minus Focuses on calculating the Ending Balance of Allowance for Bad
Debts 4 minus Bad Debt Expense is a ldquoPlugrdquo
Accounts Receivable Relevant entries 0 Credit sales Dr Accounts receivable
Cr Revenue 2 Record bad debt expense 0 Dr Bad debt expense 0 Cr AFDA 3 When bad debt happens (when we are sure a specific customer
defaults) Dr AFDA 4 Cr Accounts receivable5 Recovery of bad debt 6 Dr Accounts receivable7 Cr AFDA 0 Dr Cash1 Cr Accounts receivable
Notes receivablePayable- Notes written promises- May be at a market rate of interest ndash no discounting needed- May be at a low rate on interest ndash discount the face value of the
note and the interest payments at the market rate- May be at no interest ndash discount the face value at the market rate
of interest
Other items
Sales discounts- Account for sales discounts by recording ldquoallowance for sales
discountsrdquo o A contra account for sales revenue on Income statement
Customer return merchandise- Debit to ldquoSales returns and allowancesrdquo
o A contra account for sales revenue on Income statement
Year-end adjusting entry to account for an estimated amount of sales return and merchandise return
- Credit to Allowance for sales return and allowance - A balance sheet contra account attached to accounts receivables
Transfers of ARIdentify if the transaction is to be accounted for as a sale or a borrowing transaction
Sale transactionsJournal entries to remove the AR any associated AFDA record the receipt of cash the residual obligation if any and a loss on disposal
Borrowing transactionsJournal entries to record the new debt and interest costs fees The AR and associated AFDA remain on the books
Types of Questions
Ch 8 Inventory12 INVEB = INVBB + Purchase ndash COGS
Inventory is recorded on the SFP at the lower of the cost or the net realizable value of the inventory
Key equation Beginning Inv+ Purchases - COGS = Ending Inv
IssuesConsignment inventory - Consignment inventory on the firm premises owned by others should be excluded Consignment inventory of the firm held elsewhere should be included in the inventory of the firm
Goods in transit at period end - Items shipped FOB shipping point are considered to have been sold when shipped Items shipped FOB destination are not considered to have been sold until they have arrived at their destination
Cut-off Errors - A cut-off error occurs with respect to ending inventory if items owned at period end are incorrectly excluded from the physical inventory count or if items already sold are incorrectly included in the period end inventory count
SystemsPerpetual system tracks units sold continuously
More accurate more timely potentially more costlyPeriodic system infer quantities sold by using purchasesproduction beginning and ending inventories
Units sold = Beg Units + Production ndashEnd Units Harder to detect inventory ldquoshrinkagerdquo (eg theft spoilage)
Cost flow assumptions Specific identification Costs of the specific item sold are included in cost of goods sold Costs of specific items on hand are included in inventory (Perpetual inventory systems)
Weighted average cost Inventory is priced on the basis of average cost of goods available for sale during the period Thus the same cost per item is assigned to cost of goods sold and to ending inventory (This method is used for periodic inventory systems)
Moving average cost Cost of goods sold is determined by calculating the average cost of goods available at the time a sale is made (This method is used for perpetual inventory systems)
FIFO assumption about the physical flow of inventory used to determine cost of goods sold and the ending inventory account balance The actual physical flow of inventory need not correspond to these assumptions FIFO shows SFP at relatively current values but income statement cost of goods sold at stale values
Inventory estimation methods
The Gross Profit Method
The gross profit method of inventory estimation relies on the knowledge of opening inventory net purchases net sales at retail prices and the historical gross profit margin
The Retail Inventory Method
The retail inventory method is a method of estimating the dollar amount of ending inventory using the current relationship between cost and selling price This is commonly used by retail stores for the preparation of interim financial statements
IFRS vs ASPEIFRS covers biological assets in a separate sectionIFRS requires the capitalization of interest on inventory that must be manufactured in large quantities ASPE GAAP gives companies the option
Types of Questions
Ch 9- 10 - Accounting for capital assetsPPampE
1 PPEEB = PPEBB + Acquisitions ndash Disposals 2 Straight-line depreciation = (Purchase price ndash salvage value) Useful
life 3 Declining balance methods = (Purchase cost- sum of all prior yearsrsquo
depreciation) X rate4 Units of Production = (Purchase price ndash salvage value) Useful life in
units annual depreciation = rate X of units5 Accumulated DepEB = Accumulated DepBB + Depreciation ndash
AccDepDisposal
Capitalize vs expense Capitalizing costs means to show them as an asset on the SFP (assets have future economic benefits)
We expense (ie not capitalize) when (a) benefits are immediate (b) or future benefits are too uncertain or immaterial (eg RampD)
Accounting for tangible assetsWhat is the acquisition cost
o Include all costs required to bring the asset into usable condition and location
o Purchased assets purchase price plus cost to prepare the asset for use (installation transportation testing)
o Self-constructed assets direct cost of construction (direct material direct labour pro-rata allocation of overhead costs) financing costs (interest on funds specifically borrowed to finance construction can be capitalized)
o Basket purchase ndash the best way to allocate the purchase price of the assets to the individual assets is based on the relative fair market values of the assets acquired
o Deferred payment contracts ndash recorded at the present value of the consideration exchanged between the contracting parties at the date of acquisition
o Non-monetary transactions recorded at the fair value of the assets received or the fair value of the asset given up whichever is more easily determined ASPE GAAP
o Check page 636 and 637 on how IFRS is differento
Measurement after acquisition Cost model vs Revaluation Model
How to account for costs subsequent to acquisition- Additions capitalize the costs to the existing capital asset account and
revise the service life and residual value as needed
- Betterments and replacements capitalize the costs to the existing capital asset account Distinguish the expenditures from normal repair costs o The appropriate accounting treatment depends on whether or not
we know the carrying value of old assets o If Costs are known then remove the old cost and accumulated
depreciation record a loss on disposal and then capitalize the new costs
o If costs are not known then add the new costs into the cost pool and revise the service life and residual value as needed
- Rearrangement and reinstallation capitalize the costs to the existing capital asset account
The appropriate accounting treatment depends on whether or not we know the carrying value of old assets
If Costs are known then remove the old cost and accumulated depreciation record a loss on disposal and then capitalize the new costs
If costs and Accum Amortization not known then expense the full amount
o Repairs ndash always expensed as incurred
Accounting for Intangible Assets
Specific assets - Patents Trademarks Customer lists FranchisesResearch and development Goodwill etc See notes below under Chapter 11 for calculation of Goodwill
o Goodwill is the expected value of future above-normal financial performance
What is the acquisition costPurchased assets - Include all costs required to bring the asset into usable condition and location Goodwill is only recorded if purchased
Six Criteria for capitalization of internally generated intangible assets
Costs to be included ndash Materials and servicesndash Direct labour and other payroll costsndash Interest and borrowing costs ndash if specifically related
Costs excluded ndash Selling administration and general overhead costs
Measurement after acquisition Cost model vs Revaluation Model ndash general understanding of the differences in the two models only
Amortization of Capital assets - What is the expected useful life
o The time period over which the asset will be used
- What is the Residual value o To determine residual value of an asset it requires managerial
judgment o Residual value is the estimated amount a company would receive
today on disposal of an asset net of related disposal costs
- What amortization should we use to allocate expense over the useful life
o What does GAAP allow Straight-line method
bull Annual Depreciation Expense = depreciable basisservice life (in years) = (Acquisition Cost -SV) Useful Years
bull Common for tangible assetsbull Uniform amortization charges over time
Activity methodbull Input methods ndash eg Depreciation cost per machine-
hour = depreciable basisservice life (in machine-hours)
bull Depr Expense = Actual hours used hourly ratebull Common for manufacturing firms bull Output methods- eg units producedbull Depr Expense = Actual units produced rate per unit bull Common for natural resources companybull Unequal amortization charges over time
Decreasing charge (declining balance CCA double declining balance)
bull Higher amortization expense is recognized in the earlier years of an assetrsquos useful life
bull Constant amortization rated applied to reducing book value of assets
Increasing chargebull Lower amortization expense in earlier years and
higher amortization in later years Donrsquot need to calculate this
Land is the never amortized
What accounts does depreciation affect Tangible assets - Accumulated depreciation account Intangible assets ndash The asset account directly Retained earnings account Depreciation expense
Which financial statements are affected SFP and income statement
Does depreciation affect cash NEVER
Amortization for partial periods amortization charges for the periods in which when assets are purchased and disposed Follow the company policy if given
Impairment in Value of Capital Assets IFRS requires impairment test for intangible and tangible assets be
conducted at least once a year Use the rational entity impairment model
Impairment = Carrying value minus (the greater of FV in use and FV less costs to sell)
Impairment loss can be reversed if value recovers in future years
ASPE GAAP requires impairment test for tangible and intangible assets only when circumstances change such that there might be a permanent impairment in the assetsrsquo carrying value Once impairment loss is recorded it cannot be recovered later
Use the cost recovery impairment model - Tangible Assets
Two steps Step 1 compare the assets carrying value to sum of the
Undiscounted cash flowsbull If sum of the undiscounted cash flows gt carrying
value no impairment loss is recorded and impairment test stops
bull If sum of the undiscounted cash flows lt carrying value go to step 2
Step 2 Determine the assetsrsquo fair market value bull If there is an active market for the assets then use
the quoted market price as the fair market value bull If there is no active market for the assets then
calculate the intrinsic value (theoretical value) of the assets by discounting all future cash flows to be resulted from the assets to current period
Impairment loss = carrying value ndash fair market value
Goodwill is not amortized but written down if impaired in value Two steps
bull Step 1 compare fair value of each reporting unit to the total net book value (including goodwill)
o If fair value gt book value no impairment loss is recorded and impairment test stops
o Otherwise go to the second stepbull Step 2
o Determine the fair value of reporting unito Subtract the fair value of all net identifiable
assets of that unit and allocates the remainder to goodwill implied goodwill
o Carrying value of goodwill ndash implied goodwill impairment loss to be recognized
Disposition of Capital assets- Remove the cost from the capital asset account and the accumulated
amortization related to disposed capital assets - Once a long-term assets is determined to be disposed
o Reclassify to assets held for sale
o Determine the net realizable value the lower of carrying value and fair value less cost to sell
o Not amortized any more o When sold record gainloss from disposal
Review Basket purchases and Non-monetary transaction
Ch 11 - Investments
Passive investmentsWhen the investor company does not have significant influence over the investee company
Choices are costamortized cost FVTPL or FV-OCIo ASPE allow only costamortized cost and FVTPL o ASPE GAAP ndash Companies must use FVTPL when active market for
shares existso ASPE GAAP allows companies to choose to use FVTPL if they so
designate at time of initial recognition
Investments other than bonds being held to receive their contractual cash flows will be adjusted to market value at year end
o SFP effects are the same ie FV reported
What is different o Income statement effects o For investments FVTPL gains or losses recognized in Income in
the current periodo For investments FV-OCI gains or losses are recorded in
ldquocomprehensive incomerdquo and accumulated in AOCI until securities are sold
Investments FVTPL (debt and equity) Purchased for short-term profit potential Year-end adjustment to the market value Changes in market value (holding lossgain) reported in the income
statement of the current period
Investment Amortized Cost (debt) Purchased with ability and intention to hold to maturity No adjustment to market value Carried at amortized cost on the SFP
Investments FV-OCI (debt and equity) Securities not classified as either of above Changes in market value (holding lossgain) reported in comprehensive
income On the SFP donrsquot forget to report accumulated comprehensive gainloss
under Shareholdersrsquo equity
Investment revenue is recognized at the point when the investee company declares and pays dividends
When investments are sold
Year-end adjusting to fair market value and investments are not sold
FVTPL Realized gainslosses ndash Net income IS
Unrealized gainslosses ndash Net income IS
FV-OCI Adjust to market at date of sale OCIClose remaining balance in AOCI for the investments sold to RE
Unrealized gainslosses ndash Comprehensive income IS Shareholders equity
Bonds ndash Intent to hold until maturity
NA No year- end adjustment to FV Record at amortized cost
Bonds - Terminology
1 1048697 Principal (Par Value) face value of the bond the amount due at maturity
2 1048697 Coupon Rate the rate used to determine the periodic cash payments (coupon payment) if any
3 1048697 Coupon Payment Cash Payment = face value x Coupon Rate
4 1048697 Market Interest Rate the rate used to determine the current market value of the bond
Bonds - ParDiscountPremium
Bonds Sells Market Rate at issuance
Market Value at issuance
Coupon Payment
At Par = Coupon rate = Par value =Interest expenseAt a Discount gt Coupon rate lt Par value ltInterest expenseAt a Premium lt Coupon rate gt Par value gtInterest expense
Active investmentsUsed when significant influence exists- Under the equity method investment revenue is recognized as soon as the
investee company reports a net income or net loss - When the investee company declares and pays dividends the investor
company does not record as investment revenue but as a decrease of investment to avoid double counting
Starting pointOwnership lt20 20-50 gt50Reporting method
Fair value method
Equity Consolidation
Plus consider other factors such as representation on the board intercompany transactions etc
Equity method - investeersquos announcement of earnings increases investorrsquos Investment
account - Investeersquos announcement of dividends decreases investorrsquos
Investment account - Calculation of equity Income
ASPE vs IFRS - IFRS must use Equity method for investments with significant influence APSE Can use Equity method or Cost( if Shares are not actively traded) If shares actively traded then the choice is Equity or FVTPL
Purchase premiums- Purchase premiums arise for two reasons
o Fair market value differentials the FV of assetsliabilities of the investee are different from BV of those assetsliabilities
Fair market value differentials are amortized and the amortization expenses will be included in net income
bull Inventory fair market value differentials is usually amortized in the first period after acquisition
bull Fixed assets fair market value differentials are usually amortized over the expected remaining service life of the assets
o Goodwill is the expected value of future above-normal financial performance
- Calculation of Goodwill and FV differentials to be amortized
Goodwill CalculationPurchase priceLess percentage share of BV acquiredEquals Purchase PremiumMinus FV differences where FVgtBVAdd FV differences where FVgtBVRemainder equals Goodwill
- Revenue recognized to date G
- Revenue recognized to date G
- Inventory estimation methods
- The Gross Profit Method
-
Ch 4 - The Statement of Financial Position Statement of Retained Earnings Changes in Shareholdersrsquo Equity and Disclosure
STATEMENT OF FINANCIAL POSITION
Equation Assets = Liabilities + Shareholdersrsquo equity
Components of the Statement - Heading ndash as at [date]- Assets Economic benefits owned by the business as a result of
past transactions - Liabilities Debt and other obligations of the business that result
from past transactions - Shareholdersrsquo equity Residual claim of and financing provided by
the owners of the business- Current vs Non Current- Major categories
o Review major categories for presentation- Order of accounts
o Assets- liquidityo Liabilities ndash time to maturityo Sh Equity - permanence
STATEMENT OF RETAINED EARNINGSThis is reported as a solo statement under ASPE GAAP onlyOpening Retained Earnings + Net Income - Dividends = Closing Retained Earnings
STATEMENT OF CHANGES IN SHAREHOLDERSrsquo EQUITYIFRS OnlyA continuity schedule of opening balances +- changes = closing balance for each component of shareholders equity including retained earnings
Financial statements - Note DisclosurePurpose to provide supplementary information about the financial condition of the company
- Describe accounting policies followed by the company - Provide additional detail about an item on the financial statements- Provide additional information about an item not on the financial
statements- Subsequent events consider the difference in treatment of the two
types of subsequent event
Typical Questions
Ch 5 ndash CASH FLOW STATEMENT ndash indirect method only
Cash and Cash equivalentsbull Cash on hand Bank balancesbull Bank overdraftsbull Short term risk free investments with maturity dates within 3 months
Reports the changes to other accounts that affect a change in cash and cash equivalents on the SFP The change in the cash account is usually not equal to net income
Revenues reported do not always equal cash collected (credit sales)Expenses reported do not always equal cash paid (prepaid expenses)
In relation to the SFP The sum of cash flows from operations cash flows from investing and cash flows from financing must equal to the change in cash and cash equivalents on the SFP
Statement of Cash Flows reports operating cash flow as well as other cash flow information
Provides important information to investors and creditors In particular information about differences in the timing of revenue and
expense recognition under GAAP and the associated cash inflows and outflows
Preparing a cash flow statement Heading - for the [year] ended [date] or other period covered
Cash flow provided by (used in) operating activities (Indirect method)Net IncomeAdjust for Non-Cash Changes in non-cash WC accounts
- Subtract increase in assets- Add decreases in asset- Add increase in liabilities- subtract decreases in Liabilities
Adjust for non cash items included in net incomeAdd Depreciation amp AmortizationAdd Loss on Sale of AssetsSubtract Gain on Sales of Assets
Cash flows provided by (used in) investing activitiesCash paid for long-term assetsCash proceeds from the sale of long-term assets
Cash flows provided by (used in) financing activitiesCash dividends paidCash received on issuing debt ndash ie borrowingCash paid for retirement of debt
Cash received from issuance of common shares Ch 6 - Revenue and Expense RecognitionWhy do we care about revenue recognitionRevenue has a BIG impact on bottom-line profitability managers may be tempted to manage revenue
Criteria for revenue recognition ndash existing standardA firm recognizes revenue when it has
bull Performance achievedbull Measurability of the revenues and associated remaining costsbull Collectability is reasonably assured
Revenue is most often recognized at the time of sale as long as- Reasonable estimate of uncollectible amount - Reasonable estimate of sales returns - Reasonable estimation of all other material expenses representing
uncertain future outflows (eg warranty costs) - Most common in retail wholesale amp manufacturing - Even when right of return exists as long as the company has
booked reasonable allowance for sales return we can still recognize revenues at the point of sale
If there is uncertainty in the three criteria then wait until the uncertainty is resolved
Criteria for revenue recognition ndash proposed standardIFRS
1 Identify the contract(s) with the customer ndash May be explicit or implicit
2 Identify the separate performance obligations ndash may be one or many
3 Determine the transaction price ndash using either weighted probabilities method or most likely amount You must determine an amount for revenue This is very different from the existing approach
4 Allocate the transaction price to the performance obligations
5 Recognize revenue when a performance obligation is satisfied
Review the two cases covered in the lectures
MethodsPercentage of completion method - Recognize revenue and profit as contract progresses Extent of completion at any one point in time is determined by the costs incurred to date divided by the total estimated costs of the contract If it becomes apparent that a loss is expected on a contract recognize the total amount of the expected loss immediately
Completed contract method - Recognize revenue and profit when the contract is complete If it becomes apparent that a loss is expected on a contract recognize the total amount of the expected loss immediately
Percentage of completion methodReview profitable contracts
Calc Year 1 Year 2Costs incurred to date (B) given
Total estimated costs (D) given
Percentage complete (E) BD
Contract Value (F) Given
Revenue recognized to date G F X E
Less revenue already recognized H
Annual revenue ( I) G-H
Construction costs incurred (A) Given
Gross profit I - A
AND Loss contracts
Calc Year 1 Year 2Costs incurred to date (B) given
Total estimated costs (D) given
Percentage complete (E) BD
Contract Value (F) Given
Revenue recognized to date G F X E
Less revenue already recognized H
Annual revenue ( I) G-H
Construction costs incurred (A) Plug this
Total estimated Loss Calc this
(Profit) Loss previously recognized Prior yrs
Gross profitTypical Questions
Ch 7 ndash Financial Instruments Cash Receivables and Payables
CashCash and Cash Equivalents ndash Identifying amounts to be included in cash equivalents ndash See chapter 5 material
Accounts Receivable
Relevant Formulae
1 Ending AR = Beg Bal AR + Credit Sales ndash Cash Received ndash Write-off + 0 Recovery of previous write-off2 Ending Allowance for doubtful accounts (ADA) = Beg Bal AFDA + Bad
Debt Expense ndash Write-off + Recovery of previous write-off
Two approaches to determining Allowance for Bad Debts
1 Percentage of (Credit) Sales (Income statement approach)2 minus Focuses on calculating the Bad Debt Expense recorded for the year
Aging Method (Balance sheet approach)3 minus Focuses on calculating the Ending Balance of Allowance for Bad
Debts 4 minus Bad Debt Expense is a ldquoPlugrdquo
Accounts Receivable Relevant entries 0 Credit sales Dr Accounts receivable
Cr Revenue 2 Record bad debt expense 0 Dr Bad debt expense 0 Cr AFDA 3 When bad debt happens (when we are sure a specific customer
defaults) Dr AFDA 4 Cr Accounts receivable5 Recovery of bad debt 6 Dr Accounts receivable7 Cr AFDA 0 Dr Cash1 Cr Accounts receivable
Notes receivablePayable- Notes written promises- May be at a market rate of interest ndash no discounting needed- May be at a low rate on interest ndash discount the face value of the
note and the interest payments at the market rate- May be at no interest ndash discount the face value at the market rate
of interest
Other items
Sales discounts- Account for sales discounts by recording ldquoallowance for sales
discountsrdquo o A contra account for sales revenue on Income statement
Customer return merchandise- Debit to ldquoSales returns and allowancesrdquo
o A contra account for sales revenue on Income statement
Year-end adjusting entry to account for an estimated amount of sales return and merchandise return
- Credit to Allowance for sales return and allowance - A balance sheet contra account attached to accounts receivables
Transfers of ARIdentify if the transaction is to be accounted for as a sale or a borrowing transaction
Sale transactionsJournal entries to remove the AR any associated AFDA record the receipt of cash the residual obligation if any and a loss on disposal
Borrowing transactionsJournal entries to record the new debt and interest costs fees The AR and associated AFDA remain on the books
Types of Questions
Ch 8 Inventory12 INVEB = INVBB + Purchase ndash COGS
Inventory is recorded on the SFP at the lower of the cost or the net realizable value of the inventory
Key equation Beginning Inv+ Purchases - COGS = Ending Inv
IssuesConsignment inventory - Consignment inventory on the firm premises owned by others should be excluded Consignment inventory of the firm held elsewhere should be included in the inventory of the firm
Goods in transit at period end - Items shipped FOB shipping point are considered to have been sold when shipped Items shipped FOB destination are not considered to have been sold until they have arrived at their destination
Cut-off Errors - A cut-off error occurs with respect to ending inventory if items owned at period end are incorrectly excluded from the physical inventory count or if items already sold are incorrectly included in the period end inventory count
SystemsPerpetual system tracks units sold continuously
More accurate more timely potentially more costlyPeriodic system infer quantities sold by using purchasesproduction beginning and ending inventories
Units sold = Beg Units + Production ndashEnd Units Harder to detect inventory ldquoshrinkagerdquo (eg theft spoilage)
Cost flow assumptions Specific identification Costs of the specific item sold are included in cost of goods sold Costs of specific items on hand are included in inventory (Perpetual inventory systems)
Weighted average cost Inventory is priced on the basis of average cost of goods available for sale during the period Thus the same cost per item is assigned to cost of goods sold and to ending inventory (This method is used for periodic inventory systems)
Moving average cost Cost of goods sold is determined by calculating the average cost of goods available at the time a sale is made (This method is used for perpetual inventory systems)
FIFO assumption about the physical flow of inventory used to determine cost of goods sold and the ending inventory account balance The actual physical flow of inventory need not correspond to these assumptions FIFO shows SFP at relatively current values but income statement cost of goods sold at stale values
Inventory estimation methods
The Gross Profit Method
The gross profit method of inventory estimation relies on the knowledge of opening inventory net purchases net sales at retail prices and the historical gross profit margin
The Retail Inventory Method
The retail inventory method is a method of estimating the dollar amount of ending inventory using the current relationship between cost and selling price This is commonly used by retail stores for the preparation of interim financial statements
IFRS vs ASPEIFRS covers biological assets in a separate sectionIFRS requires the capitalization of interest on inventory that must be manufactured in large quantities ASPE GAAP gives companies the option
Types of Questions
Ch 9- 10 - Accounting for capital assetsPPampE
1 PPEEB = PPEBB + Acquisitions ndash Disposals 2 Straight-line depreciation = (Purchase price ndash salvage value) Useful
life 3 Declining balance methods = (Purchase cost- sum of all prior yearsrsquo
depreciation) X rate4 Units of Production = (Purchase price ndash salvage value) Useful life in
units annual depreciation = rate X of units5 Accumulated DepEB = Accumulated DepBB + Depreciation ndash
AccDepDisposal
Capitalize vs expense Capitalizing costs means to show them as an asset on the SFP (assets have future economic benefits)
We expense (ie not capitalize) when (a) benefits are immediate (b) or future benefits are too uncertain or immaterial (eg RampD)
Accounting for tangible assetsWhat is the acquisition cost
o Include all costs required to bring the asset into usable condition and location
o Purchased assets purchase price plus cost to prepare the asset for use (installation transportation testing)
o Self-constructed assets direct cost of construction (direct material direct labour pro-rata allocation of overhead costs) financing costs (interest on funds specifically borrowed to finance construction can be capitalized)
o Basket purchase ndash the best way to allocate the purchase price of the assets to the individual assets is based on the relative fair market values of the assets acquired
o Deferred payment contracts ndash recorded at the present value of the consideration exchanged between the contracting parties at the date of acquisition
o Non-monetary transactions recorded at the fair value of the assets received or the fair value of the asset given up whichever is more easily determined ASPE GAAP
o Check page 636 and 637 on how IFRS is differento
Measurement after acquisition Cost model vs Revaluation Model
How to account for costs subsequent to acquisition- Additions capitalize the costs to the existing capital asset account and
revise the service life and residual value as needed
- Betterments and replacements capitalize the costs to the existing capital asset account Distinguish the expenditures from normal repair costs o The appropriate accounting treatment depends on whether or not
we know the carrying value of old assets o If Costs are known then remove the old cost and accumulated
depreciation record a loss on disposal and then capitalize the new costs
o If costs are not known then add the new costs into the cost pool and revise the service life and residual value as needed
- Rearrangement and reinstallation capitalize the costs to the existing capital asset account
The appropriate accounting treatment depends on whether or not we know the carrying value of old assets
If Costs are known then remove the old cost and accumulated depreciation record a loss on disposal and then capitalize the new costs
If costs and Accum Amortization not known then expense the full amount
o Repairs ndash always expensed as incurred
Accounting for Intangible Assets
Specific assets - Patents Trademarks Customer lists FranchisesResearch and development Goodwill etc See notes below under Chapter 11 for calculation of Goodwill
o Goodwill is the expected value of future above-normal financial performance
What is the acquisition costPurchased assets - Include all costs required to bring the asset into usable condition and location Goodwill is only recorded if purchased
Six Criteria for capitalization of internally generated intangible assets
Costs to be included ndash Materials and servicesndash Direct labour and other payroll costsndash Interest and borrowing costs ndash if specifically related
Costs excluded ndash Selling administration and general overhead costs
Measurement after acquisition Cost model vs Revaluation Model ndash general understanding of the differences in the two models only
Amortization of Capital assets - What is the expected useful life
o The time period over which the asset will be used
- What is the Residual value o To determine residual value of an asset it requires managerial
judgment o Residual value is the estimated amount a company would receive
today on disposal of an asset net of related disposal costs
- What amortization should we use to allocate expense over the useful life
o What does GAAP allow Straight-line method
bull Annual Depreciation Expense = depreciable basisservice life (in years) = (Acquisition Cost -SV) Useful Years
bull Common for tangible assetsbull Uniform amortization charges over time
Activity methodbull Input methods ndash eg Depreciation cost per machine-
hour = depreciable basisservice life (in machine-hours)
bull Depr Expense = Actual hours used hourly ratebull Common for manufacturing firms bull Output methods- eg units producedbull Depr Expense = Actual units produced rate per unit bull Common for natural resources companybull Unequal amortization charges over time
Decreasing charge (declining balance CCA double declining balance)
bull Higher amortization expense is recognized in the earlier years of an assetrsquos useful life
bull Constant amortization rated applied to reducing book value of assets
Increasing chargebull Lower amortization expense in earlier years and
higher amortization in later years Donrsquot need to calculate this
Land is the never amortized
What accounts does depreciation affect Tangible assets - Accumulated depreciation account Intangible assets ndash The asset account directly Retained earnings account Depreciation expense
Which financial statements are affected SFP and income statement
Does depreciation affect cash NEVER
Amortization for partial periods amortization charges for the periods in which when assets are purchased and disposed Follow the company policy if given
Impairment in Value of Capital Assets IFRS requires impairment test for intangible and tangible assets be
conducted at least once a year Use the rational entity impairment model
Impairment = Carrying value minus (the greater of FV in use and FV less costs to sell)
Impairment loss can be reversed if value recovers in future years
ASPE GAAP requires impairment test for tangible and intangible assets only when circumstances change such that there might be a permanent impairment in the assetsrsquo carrying value Once impairment loss is recorded it cannot be recovered later
Use the cost recovery impairment model - Tangible Assets
Two steps Step 1 compare the assets carrying value to sum of the
Undiscounted cash flowsbull If sum of the undiscounted cash flows gt carrying
value no impairment loss is recorded and impairment test stops
bull If sum of the undiscounted cash flows lt carrying value go to step 2
Step 2 Determine the assetsrsquo fair market value bull If there is an active market for the assets then use
the quoted market price as the fair market value bull If there is no active market for the assets then
calculate the intrinsic value (theoretical value) of the assets by discounting all future cash flows to be resulted from the assets to current period
Impairment loss = carrying value ndash fair market value
Goodwill is not amortized but written down if impaired in value Two steps
bull Step 1 compare fair value of each reporting unit to the total net book value (including goodwill)
o If fair value gt book value no impairment loss is recorded and impairment test stops
o Otherwise go to the second stepbull Step 2
o Determine the fair value of reporting unito Subtract the fair value of all net identifiable
assets of that unit and allocates the remainder to goodwill implied goodwill
o Carrying value of goodwill ndash implied goodwill impairment loss to be recognized
Disposition of Capital assets- Remove the cost from the capital asset account and the accumulated
amortization related to disposed capital assets - Once a long-term assets is determined to be disposed
o Reclassify to assets held for sale
o Determine the net realizable value the lower of carrying value and fair value less cost to sell
o Not amortized any more o When sold record gainloss from disposal
Review Basket purchases and Non-monetary transaction
Ch 11 - Investments
Passive investmentsWhen the investor company does not have significant influence over the investee company
Choices are costamortized cost FVTPL or FV-OCIo ASPE allow only costamortized cost and FVTPL o ASPE GAAP ndash Companies must use FVTPL when active market for
shares existso ASPE GAAP allows companies to choose to use FVTPL if they so
designate at time of initial recognition
Investments other than bonds being held to receive their contractual cash flows will be adjusted to market value at year end
o SFP effects are the same ie FV reported
What is different o Income statement effects o For investments FVTPL gains or losses recognized in Income in
the current periodo For investments FV-OCI gains or losses are recorded in
ldquocomprehensive incomerdquo and accumulated in AOCI until securities are sold
Investments FVTPL (debt and equity) Purchased for short-term profit potential Year-end adjustment to the market value Changes in market value (holding lossgain) reported in the income
statement of the current period
Investment Amortized Cost (debt) Purchased with ability and intention to hold to maturity No adjustment to market value Carried at amortized cost on the SFP
Investments FV-OCI (debt and equity) Securities not classified as either of above Changes in market value (holding lossgain) reported in comprehensive
income On the SFP donrsquot forget to report accumulated comprehensive gainloss
under Shareholdersrsquo equity
Investment revenue is recognized at the point when the investee company declares and pays dividends
When investments are sold
Year-end adjusting to fair market value and investments are not sold
FVTPL Realized gainslosses ndash Net income IS
Unrealized gainslosses ndash Net income IS
FV-OCI Adjust to market at date of sale OCIClose remaining balance in AOCI for the investments sold to RE
Unrealized gainslosses ndash Comprehensive income IS Shareholders equity
Bonds ndash Intent to hold until maturity
NA No year- end adjustment to FV Record at amortized cost
Bonds - Terminology
1 1048697 Principal (Par Value) face value of the bond the amount due at maturity
2 1048697 Coupon Rate the rate used to determine the periodic cash payments (coupon payment) if any
3 1048697 Coupon Payment Cash Payment = face value x Coupon Rate
4 1048697 Market Interest Rate the rate used to determine the current market value of the bond
Bonds - ParDiscountPremium
Bonds Sells Market Rate at issuance
Market Value at issuance
Coupon Payment
At Par = Coupon rate = Par value =Interest expenseAt a Discount gt Coupon rate lt Par value ltInterest expenseAt a Premium lt Coupon rate gt Par value gtInterest expense
Active investmentsUsed when significant influence exists- Under the equity method investment revenue is recognized as soon as the
investee company reports a net income or net loss - When the investee company declares and pays dividends the investor
company does not record as investment revenue but as a decrease of investment to avoid double counting
Starting pointOwnership lt20 20-50 gt50Reporting method
Fair value method
Equity Consolidation
Plus consider other factors such as representation on the board intercompany transactions etc
Equity method - investeersquos announcement of earnings increases investorrsquos Investment
account - Investeersquos announcement of dividends decreases investorrsquos
Investment account - Calculation of equity Income
ASPE vs IFRS - IFRS must use Equity method for investments with significant influence APSE Can use Equity method or Cost( if Shares are not actively traded) If shares actively traded then the choice is Equity or FVTPL
Purchase premiums- Purchase premiums arise for two reasons
o Fair market value differentials the FV of assetsliabilities of the investee are different from BV of those assetsliabilities
Fair market value differentials are amortized and the amortization expenses will be included in net income
bull Inventory fair market value differentials is usually amortized in the first period after acquisition
bull Fixed assets fair market value differentials are usually amortized over the expected remaining service life of the assets
o Goodwill is the expected value of future above-normal financial performance
- Calculation of Goodwill and FV differentials to be amortized
Goodwill CalculationPurchase priceLess percentage share of BV acquiredEquals Purchase PremiumMinus FV differences where FVgtBVAdd FV differences where FVgtBVRemainder equals Goodwill
- Revenue recognized to date G
- Revenue recognized to date G
- Inventory estimation methods
- The Gross Profit Method
-
Ch 5 ndash CASH FLOW STATEMENT ndash indirect method only
Cash and Cash equivalentsbull Cash on hand Bank balancesbull Bank overdraftsbull Short term risk free investments with maturity dates within 3 months
Reports the changes to other accounts that affect a change in cash and cash equivalents on the SFP The change in the cash account is usually not equal to net income
Revenues reported do not always equal cash collected (credit sales)Expenses reported do not always equal cash paid (prepaid expenses)
In relation to the SFP The sum of cash flows from operations cash flows from investing and cash flows from financing must equal to the change in cash and cash equivalents on the SFP
Statement of Cash Flows reports operating cash flow as well as other cash flow information
Provides important information to investors and creditors In particular information about differences in the timing of revenue and
expense recognition under GAAP and the associated cash inflows and outflows
Preparing a cash flow statement Heading - for the [year] ended [date] or other period covered
Cash flow provided by (used in) operating activities (Indirect method)Net IncomeAdjust for Non-Cash Changes in non-cash WC accounts
- Subtract increase in assets- Add decreases in asset- Add increase in liabilities- subtract decreases in Liabilities
Adjust for non cash items included in net incomeAdd Depreciation amp AmortizationAdd Loss on Sale of AssetsSubtract Gain on Sales of Assets
Cash flows provided by (used in) investing activitiesCash paid for long-term assetsCash proceeds from the sale of long-term assets
Cash flows provided by (used in) financing activitiesCash dividends paidCash received on issuing debt ndash ie borrowingCash paid for retirement of debt
Cash received from issuance of common shares Ch 6 - Revenue and Expense RecognitionWhy do we care about revenue recognitionRevenue has a BIG impact on bottom-line profitability managers may be tempted to manage revenue
Criteria for revenue recognition ndash existing standardA firm recognizes revenue when it has
bull Performance achievedbull Measurability of the revenues and associated remaining costsbull Collectability is reasonably assured
Revenue is most often recognized at the time of sale as long as- Reasonable estimate of uncollectible amount - Reasonable estimate of sales returns - Reasonable estimation of all other material expenses representing
uncertain future outflows (eg warranty costs) - Most common in retail wholesale amp manufacturing - Even when right of return exists as long as the company has
booked reasonable allowance for sales return we can still recognize revenues at the point of sale
If there is uncertainty in the three criteria then wait until the uncertainty is resolved
Criteria for revenue recognition ndash proposed standardIFRS
1 Identify the contract(s) with the customer ndash May be explicit or implicit
2 Identify the separate performance obligations ndash may be one or many
3 Determine the transaction price ndash using either weighted probabilities method or most likely amount You must determine an amount for revenue This is very different from the existing approach
4 Allocate the transaction price to the performance obligations
5 Recognize revenue when a performance obligation is satisfied
Review the two cases covered in the lectures
MethodsPercentage of completion method - Recognize revenue and profit as contract progresses Extent of completion at any one point in time is determined by the costs incurred to date divided by the total estimated costs of the contract If it becomes apparent that a loss is expected on a contract recognize the total amount of the expected loss immediately
Completed contract method - Recognize revenue and profit when the contract is complete If it becomes apparent that a loss is expected on a contract recognize the total amount of the expected loss immediately
Percentage of completion methodReview profitable contracts
Calc Year 1 Year 2Costs incurred to date (B) given
Total estimated costs (D) given
Percentage complete (E) BD
Contract Value (F) Given
Revenue recognized to date G F X E
Less revenue already recognized H
Annual revenue ( I) G-H
Construction costs incurred (A) Given
Gross profit I - A
AND Loss contracts
Calc Year 1 Year 2Costs incurred to date (B) given
Total estimated costs (D) given
Percentage complete (E) BD
Contract Value (F) Given
Revenue recognized to date G F X E
Less revenue already recognized H
Annual revenue ( I) G-H
Construction costs incurred (A) Plug this
Total estimated Loss Calc this
(Profit) Loss previously recognized Prior yrs
Gross profitTypical Questions
Ch 7 ndash Financial Instruments Cash Receivables and Payables
CashCash and Cash Equivalents ndash Identifying amounts to be included in cash equivalents ndash See chapter 5 material
Accounts Receivable
Relevant Formulae
1 Ending AR = Beg Bal AR + Credit Sales ndash Cash Received ndash Write-off + 0 Recovery of previous write-off2 Ending Allowance for doubtful accounts (ADA) = Beg Bal AFDA + Bad
Debt Expense ndash Write-off + Recovery of previous write-off
Two approaches to determining Allowance for Bad Debts
1 Percentage of (Credit) Sales (Income statement approach)2 minus Focuses on calculating the Bad Debt Expense recorded for the year
Aging Method (Balance sheet approach)3 minus Focuses on calculating the Ending Balance of Allowance for Bad
Debts 4 minus Bad Debt Expense is a ldquoPlugrdquo
Accounts Receivable Relevant entries 0 Credit sales Dr Accounts receivable
Cr Revenue 2 Record bad debt expense 0 Dr Bad debt expense 0 Cr AFDA 3 When bad debt happens (when we are sure a specific customer
defaults) Dr AFDA 4 Cr Accounts receivable5 Recovery of bad debt 6 Dr Accounts receivable7 Cr AFDA 0 Dr Cash1 Cr Accounts receivable
Notes receivablePayable- Notes written promises- May be at a market rate of interest ndash no discounting needed- May be at a low rate on interest ndash discount the face value of the
note and the interest payments at the market rate- May be at no interest ndash discount the face value at the market rate
of interest
Other items
Sales discounts- Account for sales discounts by recording ldquoallowance for sales
discountsrdquo o A contra account for sales revenue on Income statement
Customer return merchandise- Debit to ldquoSales returns and allowancesrdquo
o A contra account for sales revenue on Income statement
Year-end adjusting entry to account for an estimated amount of sales return and merchandise return
- Credit to Allowance for sales return and allowance - A balance sheet contra account attached to accounts receivables
Transfers of ARIdentify if the transaction is to be accounted for as a sale or a borrowing transaction
Sale transactionsJournal entries to remove the AR any associated AFDA record the receipt of cash the residual obligation if any and a loss on disposal
Borrowing transactionsJournal entries to record the new debt and interest costs fees The AR and associated AFDA remain on the books
Types of Questions
Ch 8 Inventory12 INVEB = INVBB + Purchase ndash COGS
Inventory is recorded on the SFP at the lower of the cost or the net realizable value of the inventory
Key equation Beginning Inv+ Purchases - COGS = Ending Inv
IssuesConsignment inventory - Consignment inventory on the firm premises owned by others should be excluded Consignment inventory of the firm held elsewhere should be included in the inventory of the firm
Goods in transit at period end - Items shipped FOB shipping point are considered to have been sold when shipped Items shipped FOB destination are not considered to have been sold until they have arrived at their destination
Cut-off Errors - A cut-off error occurs with respect to ending inventory if items owned at period end are incorrectly excluded from the physical inventory count or if items already sold are incorrectly included in the period end inventory count
SystemsPerpetual system tracks units sold continuously
More accurate more timely potentially more costlyPeriodic system infer quantities sold by using purchasesproduction beginning and ending inventories
Units sold = Beg Units + Production ndashEnd Units Harder to detect inventory ldquoshrinkagerdquo (eg theft spoilage)
Cost flow assumptions Specific identification Costs of the specific item sold are included in cost of goods sold Costs of specific items on hand are included in inventory (Perpetual inventory systems)
Weighted average cost Inventory is priced on the basis of average cost of goods available for sale during the period Thus the same cost per item is assigned to cost of goods sold and to ending inventory (This method is used for periodic inventory systems)
Moving average cost Cost of goods sold is determined by calculating the average cost of goods available at the time a sale is made (This method is used for perpetual inventory systems)
FIFO assumption about the physical flow of inventory used to determine cost of goods sold and the ending inventory account balance The actual physical flow of inventory need not correspond to these assumptions FIFO shows SFP at relatively current values but income statement cost of goods sold at stale values
Inventory estimation methods
The Gross Profit Method
The gross profit method of inventory estimation relies on the knowledge of opening inventory net purchases net sales at retail prices and the historical gross profit margin
The Retail Inventory Method
The retail inventory method is a method of estimating the dollar amount of ending inventory using the current relationship between cost and selling price This is commonly used by retail stores for the preparation of interim financial statements
IFRS vs ASPEIFRS covers biological assets in a separate sectionIFRS requires the capitalization of interest on inventory that must be manufactured in large quantities ASPE GAAP gives companies the option
Types of Questions
Ch 9- 10 - Accounting for capital assetsPPampE
1 PPEEB = PPEBB + Acquisitions ndash Disposals 2 Straight-line depreciation = (Purchase price ndash salvage value) Useful
life 3 Declining balance methods = (Purchase cost- sum of all prior yearsrsquo
depreciation) X rate4 Units of Production = (Purchase price ndash salvage value) Useful life in
units annual depreciation = rate X of units5 Accumulated DepEB = Accumulated DepBB + Depreciation ndash
AccDepDisposal
Capitalize vs expense Capitalizing costs means to show them as an asset on the SFP (assets have future economic benefits)
We expense (ie not capitalize) when (a) benefits are immediate (b) or future benefits are too uncertain or immaterial (eg RampD)
Accounting for tangible assetsWhat is the acquisition cost
o Include all costs required to bring the asset into usable condition and location
o Purchased assets purchase price plus cost to prepare the asset for use (installation transportation testing)
o Self-constructed assets direct cost of construction (direct material direct labour pro-rata allocation of overhead costs) financing costs (interest on funds specifically borrowed to finance construction can be capitalized)
o Basket purchase ndash the best way to allocate the purchase price of the assets to the individual assets is based on the relative fair market values of the assets acquired
o Deferred payment contracts ndash recorded at the present value of the consideration exchanged between the contracting parties at the date of acquisition
o Non-monetary transactions recorded at the fair value of the assets received or the fair value of the asset given up whichever is more easily determined ASPE GAAP
o Check page 636 and 637 on how IFRS is differento
Measurement after acquisition Cost model vs Revaluation Model
How to account for costs subsequent to acquisition- Additions capitalize the costs to the existing capital asset account and
revise the service life and residual value as needed
- Betterments and replacements capitalize the costs to the existing capital asset account Distinguish the expenditures from normal repair costs o The appropriate accounting treatment depends on whether or not
we know the carrying value of old assets o If Costs are known then remove the old cost and accumulated
depreciation record a loss on disposal and then capitalize the new costs
o If costs are not known then add the new costs into the cost pool and revise the service life and residual value as needed
- Rearrangement and reinstallation capitalize the costs to the existing capital asset account
The appropriate accounting treatment depends on whether or not we know the carrying value of old assets
If Costs are known then remove the old cost and accumulated depreciation record a loss on disposal and then capitalize the new costs
If costs and Accum Amortization not known then expense the full amount
o Repairs ndash always expensed as incurred
Accounting for Intangible Assets
Specific assets - Patents Trademarks Customer lists FranchisesResearch and development Goodwill etc See notes below under Chapter 11 for calculation of Goodwill
o Goodwill is the expected value of future above-normal financial performance
What is the acquisition costPurchased assets - Include all costs required to bring the asset into usable condition and location Goodwill is only recorded if purchased
Six Criteria for capitalization of internally generated intangible assets
Costs to be included ndash Materials and servicesndash Direct labour and other payroll costsndash Interest and borrowing costs ndash if specifically related
Costs excluded ndash Selling administration and general overhead costs
Measurement after acquisition Cost model vs Revaluation Model ndash general understanding of the differences in the two models only
Amortization of Capital assets - What is the expected useful life
o The time period over which the asset will be used
- What is the Residual value o To determine residual value of an asset it requires managerial
judgment o Residual value is the estimated amount a company would receive
today on disposal of an asset net of related disposal costs
- What amortization should we use to allocate expense over the useful life
o What does GAAP allow Straight-line method
bull Annual Depreciation Expense = depreciable basisservice life (in years) = (Acquisition Cost -SV) Useful Years
bull Common for tangible assetsbull Uniform amortization charges over time
Activity methodbull Input methods ndash eg Depreciation cost per machine-
hour = depreciable basisservice life (in machine-hours)
bull Depr Expense = Actual hours used hourly ratebull Common for manufacturing firms bull Output methods- eg units producedbull Depr Expense = Actual units produced rate per unit bull Common for natural resources companybull Unequal amortization charges over time
Decreasing charge (declining balance CCA double declining balance)
bull Higher amortization expense is recognized in the earlier years of an assetrsquos useful life
bull Constant amortization rated applied to reducing book value of assets
Increasing chargebull Lower amortization expense in earlier years and
higher amortization in later years Donrsquot need to calculate this
Land is the never amortized
What accounts does depreciation affect Tangible assets - Accumulated depreciation account Intangible assets ndash The asset account directly Retained earnings account Depreciation expense
Which financial statements are affected SFP and income statement
Does depreciation affect cash NEVER
Amortization for partial periods amortization charges for the periods in which when assets are purchased and disposed Follow the company policy if given
Impairment in Value of Capital Assets IFRS requires impairment test for intangible and tangible assets be
conducted at least once a year Use the rational entity impairment model
Impairment = Carrying value minus (the greater of FV in use and FV less costs to sell)
Impairment loss can be reversed if value recovers in future years
ASPE GAAP requires impairment test for tangible and intangible assets only when circumstances change such that there might be a permanent impairment in the assetsrsquo carrying value Once impairment loss is recorded it cannot be recovered later
Use the cost recovery impairment model - Tangible Assets
Two steps Step 1 compare the assets carrying value to sum of the
Undiscounted cash flowsbull If sum of the undiscounted cash flows gt carrying
value no impairment loss is recorded and impairment test stops
bull If sum of the undiscounted cash flows lt carrying value go to step 2
Step 2 Determine the assetsrsquo fair market value bull If there is an active market for the assets then use
the quoted market price as the fair market value bull If there is no active market for the assets then
calculate the intrinsic value (theoretical value) of the assets by discounting all future cash flows to be resulted from the assets to current period
Impairment loss = carrying value ndash fair market value
Goodwill is not amortized but written down if impaired in value Two steps
bull Step 1 compare fair value of each reporting unit to the total net book value (including goodwill)
o If fair value gt book value no impairment loss is recorded and impairment test stops
o Otherwise go to the second stepbull Step 2
o Determine the fair value of reporting unito Subtract the fair value of all net identifiable
assets of that unit and allocates the remainder to goodwill implied goodwill
o Carrying value of goodwill ndash implied goodwill impairment loss to be recognized
Disposition of Capital assets- Remove the cost from the capital asset account and the accumulated
amortization related to disposed capital assets - Once a long-term assets is determined to be disposed
o Reclassify to assets held for sale
o Determine the net realizable value the lower of carrying value and fair value less cost to sell
o Not amortized any more o When sold record gainloss from disposal
Review Basket purchases and Non-monetary transaction
Ch 11 - Investments
Passive investmentsWhen the investor company does not have significant influence over the investee company
Choices are costamortized cost FVTPL or FV-OCIo ASPE allow only costamortized cost and FVTPL o ASPE GAAP ndash Companies must use FVTPL when active market for
shares existso ASPE GAAP allows companies to choose to use FVTPL if they so
designate at time of initial recognition
Investments other than bonds being held to receive their contractual cash flows will be adjusted to market value at year end
o SFP effects are the same ie FV reported
What is different o Income statement effects o For investments FVTPL gains or losses recognized in Income in
the current periodo For investments FV-OCI gains or losses are recorded in
ldquocomprehensive incomerdquo and accumulated in AOCI until securities are sold
Investments FVTPL (debt and equity) Purchased for short-term profit potential Year-end adjustment to the market value Changes in market value (holding lossgain) reported in the income
statement of the current period
Investment Amortized Cost (debt) Purchased with ability and intention to hold to maturity No adjustment to market value Carried at amortized cost on the SFP
Investments FV-OCI (debt and equity) Securities not classified as either of above Changes in market value (holding lossgain) reported in comprehensive
income On the SFP donrsquot forget to report accumulated comprehensive gainloss
under Shareholdersrsquo equity
Investment revenue is recognized at the point when the investee company declares and pays dividends
When investments are sold
Year-end adjusting to fair market value and investments are not sold
FVTPL Realized gainslosses ndash Net income IS
Unrealized gainslosses ndash Net income IS
FV-OCI Adjust to market at date of sale OCIClose remaining balance in AOCI for the investments sold to RE
Unrealized gainslosses ndash Comprehensive income IS Shareholders equity
Bonds ndash Intent to hold until maturity
NA No year- end adjustment to FV Record at amortized cost
Bonds - Terminology
1 1048697 Principal (Par Value) face value of the bond the amount due at maturity
2 1048697 Coupon Rate the rate used to determine the periodic cash payments (coupon payment) if any
3 1048697 Coupon Payment Cash Payment = face value x Coupon Rate
4 1048697 Market Interest Rate the rate used to determine the current market value of the bond
Bonds - ParDiscountPremium
Bonds Sells Market Rate at issuance
Market Value at issuance
Coupon Payment
At Par = Coupon rate = Par value =Interest expenseAt a Discount gt Coupon rate lt Par value ltInterest expenseAt a Premium lt Coupon rate gt Par value gtInterest expense
Active investmentsUsed when significant influence exists- Under the equity method investment revenue is recognized as soon as the
investee company reports a net income or net loss - When the investee company declares and pays dividends the investor
company does not record as investment revenue but as a decrease of investment to avoid double counting
Starting pointOwnership lt20 20-50 gt50Reporting method
Fair value method
Equity Consolidation
Plus consider other factors such as representation on the board intercompany transactions etc
Equity method - investeersquos announcement of earnings increases investorrsquos Investment
account - Investeersquos announcement of dividends decreases investorrsquos
Investment account - Calculation of equity Income
ASPE vs IFRS - IFRS must use Equity method for investments with significant influence APSE Can use Equity method or Cost( if Shares are not actively traded) If shares actively traded then the choice is Equity or FVTPL
Purchase premiums- Purchase premiums arise for two reasons
o Fair market value differentials the FV of assetsliabilities of the investee are different from BV of those assetsliabilities
Fair market value differentials are amortized and the amortization expenses will be included in net income
bull Inventory fair market value differentials is usually amortized in the first period after acquisition
bull Fixed assets fair market value differentials are usually amortized over the expected remaining service life of the assets
o Goodwill is the expected value of future above-normal financial performance
- Calculation of Goodwill and FV differentials to be amortized
Goodwill CalculationPurchase priceLess percentage share of BV acquiredEquals Purchase PremiumMinus FV differences where FVgtBVAdd FV differences where FVgtBVRemainder equals Goodwill
- Revenue recognized to date G
- Revenue recognized to date G
- Inventory estimation methods
- The Gross Profit Method
-
Cash received from issuance of common shares Ch 6 - Revenue and Expense RecognitionWhy do we care about revenue recognitionRevenue has a BIG impact on bottom-line profitability managers may be tempted to manage revenue
Criteria for revenue recognition ndash existing standardA firm recognizes revenue when it has
bull Performance achievedbull Measurability of the revenues and associated remaining costsbull Collectability is reasonably assured
Revenue is most often recognized at the time of sale as long as- Reasonable estimate of uncollectible amount - Reasonable estimate of sales returns - Reasonable estimation of all other material expenses representing
uncertain future outflows (eg warranty costs) - Most common in retail wholesale amp manufacturing - Even when right of return exists as long as the company has
booked reasonable allowance for sales return we can still recognize revenues at the point of sale
If there is uncertainty in the three criteria then wait until the uncertainty is resolved
Criteria for revenue recognition ndash proposed standardIFRS
1 Identify the contract(s) with the customer ndash May be explicit or implicit
2 Identify the separate performance obligations ndash may be one or many
3 Determine the transaction price ndash using either weighted probabilities method or most likely amount You must determine an amount for revenue This is very different from the existing approach
4 Allocate the transaction price to the performance obligations
5 Recognize revenue when a performance obligation is satisfied
Review the two cases covered in the lectures
MethodsPercentage of completion method - Recognize revenue and profit as contract progresses Extent of completion at any one point in time is determined by the costs incurred to date divided by the total estimated costs of the contract If it becomes apparent that a loss is expected on a contract recognize the total amount of the expected loss immediately
Completed contract method - Recognize revenue and profit when the contract is complete If it becomes apparent that a loss is expected on a contract recognize the total amount of the expected loss immediately
Percentage of completion methodReview profitable contracts
Calc Year 1 Year 2Costs incurred to date (B) given
Total estimated costs (D) given
Percentage complete (E) BD
Contract Value (F) Given
Revenue recognized to date G F X E
Less revenue already recognized H
Annual revenue ( I) G-H
Construction costs incurred (A) Given
Gross profit I - A
AND Loss contracts
Calc Year 1 Year 2Costs incurred to date (B) given
Total estimated costs (D) given
Percentage complete (E) BD
Contract Value (F) Given
Revenue recognized to date G F X E
Less revenue already recognized H
Annual revenue ( I) G-H
Construction costs incurred (A) Plug this
Total estimated Loss Calc this
(Profit) Loss previously recognized Prior yrs
Gross profitTypical Questions
Ch 7 ndash Financial Instruments Cash Receivables and Payables
CashCash and Cash Equivalents ndash Identifying amounts to be included in cash equivalents ndash See chapter 5 material
Accounts Receivable
Relevant Formulae
1 Ending AR = Beg Bal AR + Credit Sales ndash Cash Received ndash Write-off + 0 Recovery of previous write-off2 Ending Allowance for doubtful accounts (ADA) = Beg Bal AFDA + Bad
Debt Expense ndash Write-off + Recovery of previous write-off
Two approaches to determining Allowance for Bad Debts
1 Percentage of (Credit) Sales (Income statement approach)2 minus Focuses on calculating the Bad Debt Expense recorded for the year
Aging Method (Balance sheet approach)3 minus Focuses on calculating the Ending Balance of Allowance for Bad
Debts 4 minus Bad Debt Expense is a ldquoPlugrdquo
Accounts Receivable Relevant entries 0 Credit sales Dr Accounts receivable
Cr Revenue 2 Record bad debt expense 0 Dr Bad debt expense 0 Cr AFDA 3 When bad debt happens (when we are sure a specific customer
defaults) Dr AFDA 4 Cr Accounts receivable5 Recovery of bad debt 6 Dr Accounts receivable7 Cr AFDA 0 Dr Cash1 Cr Accounts receivable
Notes receivablePayable- Notes written promises- May be at a market rate of interest ndash no discounting needed- May be at a low rate on interest ndash discount the face value of the
note and the interest payments at the market rate- May be at no interest ndash discount the face value at the market rate
of interest
Other items
Sales discounts- Account for sales discounts by recording ldquoallowance for sales
discountsrdquo o A contra account for sales revenue on Income statement
Customer return merchandise- Debit to ldquoSales returns and allowancesrdquo
o A contra account for sales revenue on Income statement
Year-end adjusting entry to account for an estimated amount of sales return and merchandise return
- Credit to Allowance for sales return and allowance - A balance sheet contra account attached to accounts receivables
Transfers of ARIdentify if the transaction is to be accounted for as a sale or a borrowing transaction
Sale transactionsJournal entries to remove the AR any associated AFDA record the receipt of cash the residual obligation if any and a loss on disposal
Borrowing transactionsJournal entries to record the new debt and interest costs fees The AR and associated AFDA remain on the books
Types of Questions
Ch 8 Inventory12 INVEB = INVBB + Purchase ndash COGS
Inventory is recorded on the SFP at the lower of the cost or the net realizable value of the inventory
Key equation Beginning Inv+ Purchases - COGS = Ending Inv
IssuesConsignment inventory - Consignment inventory on the firm premises owned by others should be excluded Consignment inventory of the firm held elsewhere should be included in the inventory of the firm
Goods in transit at period end - Items shipped FOB shipping point are considered to have been sold when shipped Items shipped FOB destination are not considered to have been sold until they have arrived at their destination
Cut-off Errors - A cut-off error occurs with respect to ending inventory if items owned at period end are incorrectly excluded from the physical inventory count or if items already sold are incorrectly included in the period end inventory count
SystemsPerpetual system tracks units sold continuously
More accurate more timely potentially more costlyPeriodic system infer quantities sold by using purchasesproduction beginning and ending inventories
Units sold = Beg Units + Production ndashEnd Units Harder to detect inventory ldquoshrinkagerdquo (eg theft spoilage)
Cost flow assumptions Specific identification Costs of the specific item sold are included in cost of goods sold Costs of specific items on hand are included in inventory (Perpetual inventory systems)
Weighted average cost Inventory is priced on the basis of average cost of goods available for sale during the period Thus the same cost per item is assigned to cost of goods sold and to ending inventory (This method is used for periodic inventory systems)
Moving average cost Cost of goods sold is determined by calculating the average cost of goods available at the time a sale is made (This method is used for perpetual inventory systems)
FIFO assumption about the physical flow of inventory used to determine cost of goods sold and the ending inventory account balance The actual physical flow of inventory need not correspond to these assumptions FIFO shows SFP at relatively current values but income statement cost of goods sold at stale values
Inventory estimation methods
The Gross Profit Method
The gross profit method of inventory estimation relies on the knowledge of opening inventory net purchases net sales at retail prices and the historical gross profit margin
The Retail Inventory Method
The retail inventory method is a method of estimating the dollar amount of ending inventory using the current relationship between cost and selling price This is commonly used by retail stores for the preparation of interim financial statements
IFRS vs ASPEIFRS covers biological assets in a separate sectionIFRS requires the capitalization of interest on inventory that must be manufactured in large quantities ASPE GAAP gives companies the option
Types of Questions
Ch 9- 10 - Accounting for capital assetsPPampE
1 PPEEB = PPEBB + Acquisitions ndash Disposals 2 Straight-line depreciation = (Purchase price ndash salvage value) Useful
life 3 Declining balance methods = (Purchase cost- sum of all prior yearsrsquo
depreciation) X rate4 Units of Production = (Purchase price ndash salvage value) Useful life in
units annual depreciation = rate X of units5 Accumulated DepEB = Accumulated DepBB + Depreciation ndash
AccDepDisposal
Capitalize vs expense Capitalizing costs means to show them as an asset on the SFP (assets have future economic benefits)
We expense (ie not capitalize) when (a) benefits are immediate (b) or future benefits are too uncertain or immaterial (eg RampD)
Accounting for tangible assetsWhat is the acquisition cost
o Include all costs required to bring the asset into usable condition and location
o Purchased assets purchase price plus cost to prepare the asset for use (installation transportation testing)
o Self-constructed assets direct cost of construction (direct material direct labour pro-rata allocation of overhead costs) financing costs (interest on funds specifically borrowed to finance construction can be capitalized)
o Basket purchase ndash the best way to allocate the purchase price of the assets to the individual assets is based on the relative fair market values of the assets acquired
o Deferred payment contracts ndash recorded at the present value of the consideration exchanged between the contracting parties at the date of acquisition
o Non-monetary transactions recorded at the fair value of the assets received or the fair value of the asset given up whichever is more easily determined ASPE GAAP
o Check page 636 and 637 on how IFRS is differento
Measurement after acquisition Cost model vs Revaluation Model
How to account for costs subsequent to acquisition- Additions capitalize the costs to the existing capital asset account and
revise the service life and residual value as needed
- Betterments and replacements capitalize the costs to the existing capital asset account Distinguish the expenditures from normal repair costs o The appropriate accounting treatment depends on whether or not
we know the carrying value of old assets o If Costs are known then remove the old cost and accumulated
depreciation record a loss on disposal and then capitalize the new costs
o If costs are not known then add the new costs into the cost pool and revise the service life and residual value as needed
- Rearrangement and reinstallation capitalize the costs to the existing capital asset account
The appropriate accounting treatment depends on whether or not we know the carrying value of old assets
If Costs are known then remove the old cost and accumulated depreciation record a loss on disposal and then capitalize the new costs
If costs and Accum Amortization not known then expense the full amount
o Repairs ndash always expensed as incurred
Accounting for Intangible Assets
Specific assets - Patents Trademarks Customer lists FranchisesResearch and development Goodwill etc See notes below under Chapter 11 for calculation of Goodwill
o Goodwill is the expected value of future above-normal financial performance
What is the acquisition costPurchased assets - Include all costs required to bring the asset into usable condition and location Goodwill is only recorded if purchased
Six Criteria for capitalization of internally generated intangible assets
Costs to be included ndash Materials and servicesndash Direct labour and other payroll costsndash Interest and borrowing costs ndash if specifically related
Costs excluded ndash Selling administration and general overhead costs
Measurement after acquisition Cost model vs Revaluation Model ndash general understanding of the differences in the two models only
Amortization of Capital assets - What is the expected useful life
o The time period over which the asset will be used
- What is the Residual value o To determine residual value of an asset it requires managerial
judgment o Residual value is the estimated amount a company would receive
today on disposal of an asset net of related disposal costs
- What amortization should we use to allocate expense over the useful life
o What does GAAP allow Straight-line method
bull Annual Depreciation Expense = depreciable basisservice life (in years) = (Acquisition Cost -SV) Useful Years
bull Common for tangible assetsbull Uniform amortization charges over time
Activity methodbull Input methods ndash eg Depreciation cost per machine-
hour = depreciable basisservice life (in machine-hours)
bull Depr Expense = Actual hours used hourly ratebull Common for manufacturing firms bull Output methods- eg units producedbull Depr Expense = Actual units produced rate per unit bull Common for natural resources companybull Unequal amortization charges over time
Decreasing charge (declining balance CCA double declining balance)
bull Higher amortization expense is recognized in the earlier years of an assetrsquos useful life
bull Constant amortization rated applied to reducing book value of assets
Increasing chargebull Lower amortization expense in earlier years and
higher amortization in later years Donrsquot need to calculate this
Land is the never amortized
What accounts does depreciation affect Tangible assets - Accumulated depreciation account Intangible assets ndash The asset account directly Retained earnings account Depreciation expense
Which financial statements are affected SFP and income statement
Does depreciation affect cash NEVER
Amortization for partial periods amortization charges for the periods in which when assets are purchased and disposed Follow the company policy if given
Impairment in Value of Capital Assets IFRS requires impairment test for intangible and tangible assets be
conducted at least once a year Use the rational entity impairment model
Impairment = Carrying value minus (the greater of FV in use and FV less costs to sell)
Impairment loss can be reversed if value recovers in future years
ASPE GAAP requires impairment test for tangible and intangible assets only when circumstances change such that there might be a permanent impairment in the assetsrsquo carrying value Once impairment loss is recorded it cannot be recovered later
Use the cost recovery impairment model - Tangible Assets
Two steps Step 1 compare the assets carrying value to sum of the
Undiscounted cash flowsbull If sum of the undiscounted cash flows gt carrying
value no impairment loss is recorded and impairment test stops
bull If sum of the undiscounted cash flows lt carrying value go to step 2
Step 2 Determine the assetsrsquo fair market value bull If there is an active market for the assets then use
the quoted market price as the fair market value bull If there is no active market for the assets then
calculate the intrinsic value (theoretical value) of the assets by discounting all future cash flows to be resulted from the assets to current period
Impairment loss = carrying value ndash fair market value
Goodwill is not amortized but written down if impaired in value Two steps
bull Step 1 compare fair value of each reporting unit to the total net book value (including goodwill)
o If fair value gt book value no impairment loss is recorded and impairment test stops
o Otherwise go to the second stepbull Step 2
o Determine the fair value of reporting unito Subtract the fair value of all net identifiable
assets of that unit and allocates the remainder to goodwill implied goodwill
o Carrying value of goodwill ndash implied goodwill impairment loss to be recognized
Disposition of Capital assets- Remove the cost from the capital asset account and the accumulated
amortization related to disposed capital assets - Once a long-term assets is determined to be disposed
o Reclassify to assets held for sale
o Determine the net realizable value the lower of carrying value and fair value less cost to sell
o Not amortized any more o When sold record gainloss from disposal
Review Basket purchases and Non-monetary transaction
Ch 11 - Investments
Passive investmentsWhen the investor company does not have significant influence over the investee company
Choices are costamortized cost FVTPL or FV-OCIo ASPE allow only costamortized cost and FVTPL o ASPE GAAP ndash Companies must use FVTPL when active market for
shares existso ASPE GAAP allows companies to choose to use FVTPL if they so
designate at time of initial recognition
Investments other than bonds being held to receive their contractual cash flows will be adjusted to market value at year end
o SFP effects are the same ie FV reported
What is different o Income statement effects o For investments FVTPL gains or losses recognized in Income in
the current periodo For investments FV-OCI gains or losses are recorded in
ldquocomprehensive incomerdquo and accumulated in AOCI until securities are sold
Investments FVTPL (debt and equity) Purchased for short-term profit potential Year-end adjustment to the market value Changes in market value (holding lossgain) reported in the income
statement of the current period
Investment Amortized Cost (debt) Purchased with ability and intention to hold to maturity No adjustment to market value Carried at amortized cost on the SFP
Investments FV-OCI (debt and equity) Securities not classified as either of above Changes in market value (holding lossgain) reported in comprehensive
income On the SFP donrsquot forget to report accumulated comprehensive gainloss
under Shareholdersrsquo equity
Investment revenue is recognized at the point when the investee company declares and pays dividends
When investments are sold
Year-end adjusting to fair market value and investments are not sold
FVTPL Realized gainslosses ndash Net income IS
Unrealized gainslosses ndash Net income IS
FV-OCI Adjust to market at date of sale OCIClose remaining balance in AOCI for the investments sold to RE
Unrealized gainslosses ndash Comprehensive income IS Shareholders equity
Bonds ndash Intent to hold until maturity
NA No year- end adjustment to FV Record at amortized cost
Bonds - Terminology
1 1048697 Principal (Par Value) face value of the bond the amount due at maturity
2 1048697 Coupon Rate the rate used to determine the periodic cash payments (coupon payment) if any
3 1048697 Coupon Payment Cash Payment = face value x Coupon Rate
4 1048697 Market Interest Rate the rate used to determine the current market value of the bond
Bonds - ParDiscountPremium
Bonds Sells Market Rate at issuance
Market Value at issuance
Coupon Payment
At Par = Coupon rate = Par value =Interest expenseAt a Discount gt Coupon rate lt Par value ltInterest expenseAt a Premium lt Coupon rate gt Par value gtInterest expense
Active investmentsUsed when significant influence exists- Under the equity method investment revenue is recognized as soon as the
investee company reports a net income or net loss - When the investee company declares and pays dividends the investor
company does not record as investment revenue but as a decrease of investment to avoid double counting
Starting pointOwnership lt20 20-50 gt50Reporting method
Fair value method
Equity Consolidation
Plus consider other factors such as representation on the board intercompany transactions etc
Equity method - investeersquos announcement of earnings increases investorrsquos Investment
account - Investeersquos announcement of dividends decreases investorrsquos
Investment account - Calculation of equity Income
ASPE vs IFRS - IFRS must use Equity method for investments with significant influence APSE Can use Equity method or Cost( if Shares are not actively traded) If shares actively traded then the choice is Equity or FVTPL
Purchase premiums- Purchase premiums arise for two reasons
o Fair market value differentials the FV of assetsliabilities of the investee are different from BV of those assetsliabilities
Fair market value differentials are amortized and the amortization expenses will be included in net income
bull Inventory fair market value differentials is usually amortized in the first period after acquisition
bull Fixed assets fair market value differentials are usually amortized over the expected remaining service life of the assets
o Goodwill is the expected value of future above-normal financial performance
- Calculation of Goodwill and FV differentials to be amortized
Goodwill CalculationPurchase priceLess percentage share of BV acquiredEquals Purchase PremiumMinus FV differences where FVgtBVAdd FV differences where FVgtBVRemainder equals Goodwill
- Revenue recognized to date G
- Revenue recognized to date G
- Inventory estimation methods
- The Gross Profit Method
-
Completed contract method - Recognize revenue and profit when the contract is complete If it becomes apparent that a loss is expected on a contract recognize the total amount of the expected loss immediately
Percentage of completion methodReview profitable contracts
Calc Year 1 Year 2Costs incurred to date (B) given
Total estimated costs (D) given
Percentage complete (E) BD
Contract Value (F) Given
Revenue recognized to date G F X E
Less revenue already recognized H
Annual revenue ( I) G-H
Construction costs incurred (A) Given
Gross profit I - A
AND Loss contracts
Calc Year 1 Year 2Costs incurred to date (B) given
Total estimated costs (D) given
Percentage complete (E) BD
Contract Value (F) Given
Revenue recognized to date G F X E
Less revenue already recognized H
Annual revenue ( I) G-H
Construction costs incurred (A) Plug this
Total estimated Loss Calc this
(Profit) Loss previously recognized Prior yrs
Gross profitTypical Questions
Ch 7 ndash Financial Instruments Cash Receivables and Payables
CashCash and Cash Equivalents ndash Identifying amounts to be included in cash equivalents ndash See chapter 5 material
Accounts Receivable
Relevant Formulae
1 Ending AR = Beg Bal AR + Credit Sales ndash Cash Received ndash Write-off + 0 Recovery of previous write-off2 Ending Allowance for doubtful accounts (ADA) = Beg Bal AFDA + Bad
Debt Expense ndash Write-off + Recovery of previous write-off
Two approaches to determining Allowance for Bad Debts
1 Percentage of (Credit) Sales (Income statement approach)2 minus Focuses on calculating the Bad Debt Expense recorded for the year
Aging Method (Balance sheet approach)3 minus Focuses on calculating the Ending Balance of Allowance for Bad
Debts 4 minus Bad Debt Expense is a ldquoPlugrdquo
Accounts Receivable Relevant entries 0 Credit sales Dr Accounts receivable
Cr Revenue 2 Record bad debt expense 0 Dr Bad debt expense 0 Cr AFDA 3 When bad debt happens (when we are sure a specific customer
defaults) Dr AFDA 4 Cr Accounts receivable5 Recovery of bad debt 6 Dr Accounts receivable7 Cr AFDA 0 Dr Cash1 Cr Accounts receivable
Notes receivablePayable- Notes written promises- May be at a market rate of interest ndash no discounting needed- May be at a low rate on interest ndash discount the face value of the
note and the interest payments at the market rate- May be at no interest ndash discount the face value at the market rate
of interest
Other items
Sales discounts- Account for sales discounts by recording ldquoallowance for sales
discountsrdquo o A contra account for sales revenue on Income statement
Customer return merchandise- Debit to ldquoSales returns and allowancesrdquo
o A contra account for sales revenue on Income statement
Year-end adjusting entry to account for an estimated amount of sales return and merchandise return
- Credit to Allowance for sales return and allowance - A balance sheet contra account attached to accounts receivables
Transfers of ARIdentify if the transaction is to be accounted for as a sale or a borrowing transaction
Sale transactionsJournal entries to remove the AR any associated AFDA record the receipt of cash the residual obligation if any and a loss on disposal
Borrowing transactionsJournal entries to record the new debt and interest costs fees The AR and associated AFDA remain on the books
Types of Questions
Ch 8 Inventory12 INVEB = INVBB + Purchase ndash COGS
Inventory is recorded on the SFP at the lower of the cost or the net realizable value of the inventory
Key equation Beginning Inv+ Purchases - COGS = Ending Inv
IssuesConsignment inventory - Consignment inventory on the firm premises owned by others should be excluded Consignment inventory of the firm held elsewhere should be included in the inventory of the firm
Goods in transit at period end - Items shipped FOB shipping point are considered to have been sold when shipped Items shipped FOB destination are not considered to have been sold until they have arrived at their destination
Cut-off Errors - A cut-off error occurs with respect to ending inventory if items owned at period end are incorrectly excluded from the physical inventory count or if items already sold are incorrectly included in the period end inventory count
SystemsPerpetual system tracks units sold continuously
More accurate more timely potentially more costlyPeriodic system infer quantities sold by using purchasesproduction beginning and ending inventories
Units sold = Beg Units + Production ndashEnd Units Harder to detect inventory ldquoshrinkagerdquo (eg theft spoilage)
Cost flow assumptions Specific identification Costs of the specific item sold are included in cost of goods sold Costs of specific items on hand are included in inventory (Perpetual inventory systems)
Weighted average cost Inventory is priced on the basis of average cost of goods available for sale during the period Thus the same cost per item is assigned to cost of goods sold and to ending inventory (This method is used for periodic inventory systems)
Moving average cost Cost of goods sold is determined by calculating the average cost of goods available at the time a sale is made (This method is used for perpetual inventory systems)
FIFO assumption about the physical flow of inventory used to determine cost of goods sold and the ending inventory account balance The actual physical flow of inventory need not correspond to these assumptions FIFO shows SFP at relatively current values but income statement cost of goods sold at stale values
Inventory estimation methods
The Gross Profit Method
The gross profit method of inventory estimation relies on the knowledge of opening inventory net purchases net sales at retail prices and the historical gross profit margin
The Retail Inventory Method
The retail inventory method is a method of estimating the dollar amount of ending inventory using the current relationship between cost and selling price This is commonly used by retail stores for the preparation of interim financial statements
IFRS vs ASPEIFRS covers biological assets in a separate sectionIFRS requires the capitalization of interest on inventory that must be manufactured in large quantities ASPE GAAP gives companies the option
Types of Questions
Ch 9- 10 - Accounting for capital assetsPPampE
1 PPEEB = PPEBB + Acquisitions ndash Disposals 2 Straight-line depreciation = (Purchase price ndash salvage value) Useful
life 3 Declining balance methods = (Purchase cost- sum of all prior yearsrsquo
depreciation) X rate4 Units of Production = (Purchase price ndash salvage value) Useful life in
units annual depreciation = rate X of units5 Accumulated DepEB = Accumulated DepBB + Depreciation ndash
AccDepDisposal
Capitalize vs expense Capitalizing costs means to show them as an asset on the SFP (assets have future economic benefits)
We expense (ie not capitalize) when (a) benefits are immediate (b) or future benefits are too uncertain or immaterial (eg RampD)
Accounting for tangible assetsWhat is the acquisition cost
o Include all costs required to bring the asset into usable condition and location
o Purchased assets purchase price plus cost to prepare the asset for use (installation transportation testing)
o Self-constructed assets direct cost of construction (direct material direct labour pro-rata allocation of overhead costs) financing costs (interest on funds specifically borrowed to finance construction can be capitalized)
o Basket purchase ndash the best way to allocate the purchase price of the assets to the individual assets is based on the relative fair market values of the assets acquired
o Deferred payment contracts ndash recorded at the present value of the consideration exchanged between the contracting parties at the date of acquisition
o Non-monetary transactions recorded at the fair value of the assets received or the fair value of the asset given up whichever is more easily determined ASPE GAAP
o Check page 636 and 637 on how IFRS is differento
Measurement after acquisition Cost model vs Revaluation Model
How to account for costs subsequent to acquisition- Additions capitalize the costs to the existing capital asset account and
revise the service life and residual value as needed
- Betterments and replacements capitalize the costs to the existing capital asset account Distinguish the expenditures from normal repair costs o The appropriate accounting treatment depends on whether or not
we know the carrying value of old assets o If Costs are known then remove the old cost and accumulated
depreciation record a loss on disposal and then capitalize the new costs
o If costs are not known then add the new costs into the cost pool and revise the service life and residual value as needed
- Rearrangement and reinstallation capitalize the costs to the existing capital asset account
The appropriate accounting treatment depends on whether or not we know the carrying value of old assets
If Costs are known then remove the old cost and accumulated depreciation record a loss on disposal and then capitalize the new costs
If costs and Accum Amortization not known then expense the full amount
o Repairs ndash always expensed as incurred
Accounting for Intangible Assets
Specific assets - Patents Trademarks Customer lists FranchisesResearch and development Goodwill etc See notes below under Chapter 11 for calculation of Goodwill
o Goodwill is the expected value of future above-normal financial performance
What is the acquisition costPurchased assets - Include all costs required to bring the asset into usable condition and location Goodwill is only recorded if purchased
Six Criteria for capitalization of internally generated intangible assets
Costs to be included ndash Materials and servicesndash Direct labour and other payroll costsndash Interest and borrowing costs ndash if specifically related
Costs excluded ndash Selling administration and general overhead costs
Measurement after acquisition Cost model vs Revaluation Model ndash general understanding of the differences in the two models only
Amortization of Capital assets - What is the expected useful life
o The time period over which the asset will be used
- What is the Residual value o To determine residual value of an asset it requires managerial
judgment o Residual value is the estimated amount a company would receive
today on disposal of an asset net of related disposal costs
- What amortization should we use to allocate expense over the useful life
o What does GAAP allow Straight-line method
bull Annual Depreciation Expense = depreciable basisservice life (in years) = (Acquisition Cost -SV) Useful Years
bull Common for tangible assetsbull Uniform amortization charges over time
Activity methodbull Input methods ndash eg Depreciation cost per machine-
hour = depreciable basisservice life (in machine-hours)
bull Depr Expense = Actual hours used hourly ratebull Common for manufacturing firms bull Output methods- eg units producedbull Depr Expense = Actual units produced rate per unit bull Common for natural resources companybull Unequal amortization charges over time
Decreasing charge (declining balance CCA double declining balance)
bull Higher amortization expense is recognized in the earlier years of an assetrsquos useful life
bull Constant amortization rated applied to reducing book value of assets
Increasing chargebull Lower amortization expense in earlier years and
higher amortization in later years Donrsquot need to calculate this
Land is the never amortized
What accounts does depreciation affect Tangible assets - Accumulated depreciation account Intangible assets ndash The asset account directly Retained earnings account Depreciation expense
Which financial statements are affected SFP and income statement
Does depreciation affect cash NEVER
Amortization for partial periods amortization charges for the periods in which when assets are purchased and disposed Follow the company policy if given
Impairment in Value of Capital Assets IFRS requires impairment test for intangible and tangible assets be
conducted at least once a year Use the rational entity impairment model
Impairment = Carrying value minus (the greater of FV in use and FV less costs to sell)
Impairment loss can be reversed if value recovers in future years
ASPE GAAP requires impairment test for tangible and intangible assets only when circumstances change such that there might be a permanent impairment in the assetsrsquo carrying value Once impairment loss is recorded it cannot be recovered later
Use the cost recovery impairment model - Tangible Assets
Two steps Step 1 compare the assets carrying value to sum of the
Undiscounted cash flowsbull If sum of the undiscounted cash flows gt carrying
value no impairment loss is recorded and impairment test stops
bull If sum of the undiscounted cash flows lt carrying value go to step 2
Step 2 Determine the assetsrsquo fair market value bull If there is an active market for the assets then use
the quoted market price as the fair market value bull If there is no active market for the assets then
calculate the intrinsic value (theoretical value) of the assets by discounting all future cash flows to be resulted from the assets to current period
Impairment loss = carrying value ndash fair market value
Goodwill is not amortized but written down if impaired in value Two steps
bull Step 1 compare fair value of each reporting unit to the total net book value (including goodwill)
o If fair value gt book value no impairment loss is recorded and impairment test stops
o Otherwise go to the second stepbull Step 2
o Determine the fair value of reporting unito Subtract the fair value of all net identifiable
assets of that unit and allocates the remainder to goodwill implied goodwill
o Carrying value of goodwill ndash implied goodwill impairment loss to be recognized
Disposition of Capital assets- Remove the cost from the capital asset account and the accumulated
amortization related to disposed capital assets - Once a long-term assets is determined to be disposed
o Reclassify to assets held for sale
o Determine the net realizable value the lower of carrying value and fair value less cost to sell
o Not amortized any more o When sold record gainloss from disposal
Review Basket purchases and Non-monetary transaction
Ch 11 - Investments
Passive investmentsWhen the investor company does not have significant influence over the investee company
Choices are costamortized cost FVTPL or FV-OCIo ASPE allow only costamortized cost and FVTPL o ASPE GAAP ndash Companies must use FVTPL when active market for
shares existso ASPE GAAP allows companies to choose to use FVTPL if they so
designate at time of initial recognition
Investments other than bonds being held to receive their contractual cash flows will be adjusted to market value at year end
o SFP effects are the same ie FV reported
What is different o Income statement effects o For investments FVTPL gains or losses recognized in Income in
the current periodo For investments FV-OCI gains or losses are recorded in
ldquocomprehensive incomerdquo and accumulated in AOCI until securities are sold
Investments FVTPL (debt and equity) Purchased for short-term profit potential Year-end adjustment to the market value Changes in market value (holding lossgain) reported in the income
statement of the current period
Investment Amortized Cost (debt) Purchased with ability and intention to hold to maturity No adjustment to market value Carried at amortized cost on the SFP
Investments FV-OCI (debt and equity) Securities not classified as either of above Changes in market value (holding lossgain) reported in comprehensive
income On the SFP donrsquot forget to report accumulated comprehensive gainloss
under Shareholdersrsquo equity
Investment revenue is recognized at the point when the investee company declares and pays dividends
When investments are sold
Year-end adjusting to fair market value and investments are not sold
FVTPL Realized gainslosses ndash Net income IS
Unrealized gainslosses ndash Net income IS
FV-OCI Adjust to market at date of sale OCIClose remaining balance in AOCI for the investments sold to RE
Unrealized gainslosses ndash Comprehensive income IS Shareholders equity
Bonds ndash Intent to hold until maturity
NA No year- end adjustment to FV Record at amortized cost
Bonds - Terminology
1 1048697 Principal (Par Value) face value of the bond the amount due at maturity
2 1048697 Coupon Rate the rate used to determine the periodic cash payments (coupon payment) if any
3 1048697 Coupon Payment Cash Payment = face value x Coupon Rate
4 1048697 Market Interest Rate the rate used to determine the current market value of the bond
Bonds - ParDiscountPremium
Bonds Sells Market Rate at issuance
Market Value at issuance
Coupon Payment
At Par = Coupon rate = Par value =Interest expenseAt a Discount gt Coupon rate lt Par value ltInterest expenseAt a Premium lt Coupon rate gt Par value gtInterest expense
Active investmentsUsed when significant influence exists- Under the equity method investment revenue is recognized as soon as the
investee company reports a net income or net loss - When the investee company declares and pays dividends the investor
company does not record as investment revenue but as a decrease of investment to avoid double counting
Starting pointOwnership lt20 20-50 gt50Reporting method
Fair value method
Equity Consolidation
Plus consider other factors such as representation on the board intercompany transactions etc
Equity method - investeersquos announcement of earnings increases investorrsquos Investment
account - Investeersquos announcement of dividends decreases investorrsquos
Investment account - Calculation of equity Income
ASPE vs IFRS - IFRS must use Equity method for investments with significant influence APSE Can use Equity method or Cost( if Shares are not actively traded) If shares actively traded then the choice is Equity or FVTPL
Purchase premiums- Purchase premiums arise for two reasons
o Fair market value differentials the FV of assetsliabilities of the investee are different from BV of those assetsliabilities
Fair market value differentials are amortized and the amortization expenses will be included in net income
bull Inventory fair market value differentials is usually amortized in the first period after acquisition
bull Fixed assets fair market value differentials are usually amortized over the expected remaining service life of the assets
o Goodwill is the expected value of future above-normal financial performance
- Calculation of Goodwill and FV differentials to be amortized
Goodwill CalculationPurchase priceLess percentage share of BV acquiredEquals Purchase PremiumMinus FV differences where FVgtBVAdd FV differences where FVgtBVRemainder equals Goodwill
- Revenue recognized to date G
- Revenue recognized to date G
- Inventory estimation methods
- The Gross Profit Method
-
Ch 7 ndash Financial Instruments Cash Receivables and Payables
CashCash and Cash Equivalents ndash Identifying amounts to be included in cash equivalents ndash See chapter 5 material
Accounts Receivable
Relevant Formulae
1 Ending AR = Beg Bal AR + Credit Sales ndash Cash Received ndash Write-off + 0 Recovery of previous write-off2 Ending Allowance for doubtful accounts (ADA) = Beg Bal AFDA + Bad
Debt Expense ndash Write-off + Recovery of previous write-off
Two approaches to determining Allowance for Bad Debts
1 Percentage of (Credit) Sales (Income statement approach)2 minus Focuses on calculating the Bad Debt Expense recorded for the year
Aging Method (Balance sheet approach)3 minus Focuses on calculating the Ending Balance of Allowance for Bad
Debts 4 minus Bad Debt Expense is a ldquoPlugrdquo
Accounts Receivable Relevant entries 0 Credit sales Dr Accounts receivable
Cr Revenue 2 Record bad debt expense 0 Dr Bad debt expense 0 Cr AFDA 3 When bad debt happens (when we are sure a specific customer
defaults) Dr AFDA 4 Cr Accounts receivable5 Recovery of bad debt 6 Dr Accounts receivable7 Cr AFDA 0 Dr Cash1 Cr Accounts receivable
Notes receivablePayable- Notes written promises- May be at a market rate of interest ndash no discounting needed- May be at a low rate on interest ndash discount the face value of the
note and the interest payments at the market rate- May be at no interest ndash discount the face value at the market rate
of interest
Other items
Sales discounts- Account for sales discounts by recording ldquoallowance for sales
discountsrdquo o A contra account for sales revenue on Income statement
Customer return merchandise- Debit to ldquoSales returns and allowancesrdquo
o A contra account for sales revenue on Income statement
Year-end adjusting entry to account for an estimated amount of sales return and merchandise return
- Credit to Allowance for sales return and allowance - A balance sheet contra account attached to accounts receivables
Transfers of ARIdentify if the transaction is to be accounted for as a sale or a borrowing transaction
Sale transactionsJournal entries to remove the AR any associated AFDA record the receipt of cash the residual obligation if any and a loss on disposal
Borrowing transactionsJournal entries to record the new debt and interest costs fees The AR and associated AFDA remain on the books
Types of Questions
Ch 8 Inventory12 INVEB = INVBB + Purchase ndash COGS
Inventory is recorded on the SFP at the lower of the cost or the net realizable value of the inventory
Key equation Beginning Inv+ Purchases - COGS = Ending Inv
IssuesConsignment inventory - Consignment inventory on the firm premises owned by others should be excluded Consignment inventory of the firm held elsewhere should be included in the inventory of the firm
Goods in transit at period end - Items shipped FOB shipping point are considered to have been sold when shipped Items shipped FOB destination are not considered to have been sold until they have arrived at their destination
Cut-off Errors - A cut-off error occurs with respect to ending inventory if items owned at period end are incorrectly excluded from the physical inventory count or if items already sold are incorrectly included in the period end inventory count
SystemsPerpetual system tracks units sold continuously
More accurate more timely potentially more costlyPeriodic system infer quantities sold by using purchasesproduction beginning and ending inventories
Units sold = Beg Units + Production ndashEnd Units Harder to detect inventory ldquoshrinkagerdquo (eg theft spoilage)
Cost flow assumptions Specific identification Costs of the specific item sold are included in cost of goods sold Costs of specific items on hand are included in inventory (Perpetual inventory systems)
Weighted average cost Inventory is priced on the basis of average cost of goods available for sale during the period Thus the same cost per item is assigned to cost of goods sold and to ending inventory (This method is used for periodic inventory systems)
Moving average cost Cost of goods sold is determined by calculating the average cost of goods available at the time a sale is made (This method is used for perpetual inventory systems)
FIFO assumption about the physical flow of inventory used to determine cost of goods sold and the ending inventory account balance The actual physical flow of inventory need not correspond to these assumptions FIFO shows SFP at relatively current values but income statement cost of goods sold at stale values
Inventory estimation methods
The Gross Profit Method
The gross profit method of inventory estimation relies on the knowledge of opening inventory net purchases net sales at retail prices and the historical gross profit margin
The Retail Inventory Method
The retail inventory method is a method of estimating the dollar amount of ending inventory using the current relationship between cost and selling price This is commonly used by retail stores for the preparation of interim financial statements
IFRS vs ASPEIFRS covers biological assets in a separate sectionIFRS requires the capitalization of interest on inventory that must be manufactured in large quantities ASPE GAAP gives companies the option
Types of Questions
Ch 9- 10 - Accounting for capital assetsPPampE
1 PPEEB = PPEBB + Acquisitions ndash Disposals 2 Straight-line depreciation = (Purchase price ndash salvage value) Useful
life 3 Declining balance methods = (Purchase cost- sum of all prior yearsrsquo
depreciation) X rate4 Units of Production = (Purchase price ndash salvage value) Useful life in
units annual depreciation = rate X of units5 Accumulated DepEB = Accumulated DepBB + Depreciation ndash
AccDepDisposal
Capitalize vs expense Capitalizing costs means to show them as an asset on the SFP (assets have future economic benefits)
We expense (ie not capitalize) when (a) benefits are immediate (b) or future benefits are too uncertain or immaterial (eg RampD)
Accounting for tangible assetsWhat is the acquisition cost
o Include all costs required to bring the asset into usable condition and location
o Purchased assets purchase price plus cost to prepare the asset for use (installation transportation testing)
o Self-constructed assets direct cost of construction (direct material direct labour pro-rata allocation of overhead costs) financing costs (interest on funds specifically borrowed to finance construction can be capitalized)
o Basket purchase ndash the best way to allocate the purchase price of the assets to the individual assets is based on the relative fair market values of the assets acquired
o Deferred payment contracts ndash recorded at the present value of the consideration exchanged between the contracting parties at the date of acquisition
o Non-monetary transactions recorded at the fair value of the assets received or the fair value of the asset given up whichever is more easily determined ASPE GAAP
o Check page 636 and 637 on how IFRS is differento
Measurement after acquisition Cost model vs Revaluation Model
How to account for costs subsequent to acquisition- Additions capitalize the costs to the existing capital asset account and
revise the service life and residual value as needed
- Betterments and replacements capitalize the costs to the existing capital asset account Distinguish the expenditures from normal repair costs o The appropriate accounting treatment depends on whether or not
we know the carrying value of old assets o If Costs are known then remove the old cost and accumulated
depreciation record a loss on disposal and then capitalize the new costs
o If costs are not known then add the new costs into the cost pool and revise the service life and residual value as needed
- Rearrangement and reinstallation capitalize the costs to the existing capital asset account
The appropriate accounting treatment depends on whether or not we know the carrying value of old assets
If Costs are known then remove the old cost and accumulated depreciation record a loss on disposal and then capitalize the new costs
If costs and Accum Amortization not known then expense the full amount
o Repairs ndash always expensed as incurred
Accounting for Intangible Assets
Specific assets - Patents Trademarks Customer lists FranchisesResearch and development Goodwill etc See notes below under Chapter 11 for calculation of Goodwill
o Goodwill is the expected value of future above-normal financial performance
What is the acquisition costPurchased assets - Include all costs required to bring the asset into usable condition and location Goodwill is only recorded if purchased
Six Criteria for capitalization of internally generated intangible assets
Costs to be included ndash Materials and servicesndash Direct labour and other payroll costsndash Interest and borrowing costs ndash if specifically related
Costs excluded ndash Selling administration and general overhead costs
Measurement after acquisition Cost model vs Revaluation Model ndash general understanding of the differences in the two models only
Amortization of Capital assets - What is the expected useful life
o The time period over which the asset will be used
- What is the Residual value o To determine residual value of an asset it requires managerial
judgment o Residual value is the estimated amount a company would receive
today on disposal of an asset net of related disposal costs
- What amortization should we use to allocate expense over the useful life
o What does GAAP allow Straight-line method
bull Annual Depreciation Expense = depreciable basisservice life (in years) = (Acquisition Cost -SV) Useful Years
bull Common for tangible assetsbull Uniform amortization charges over time
Activity methodbull Input methods ndash eg Depreciation cost per machine-
hour = depreciable basisservice life (in machine-hours)
bull Depr Expense = Actual hours used hourly ratebull Common for manufacturing firms bull Output methods- eg units producedbull Depr Expense = Actual units produced rate per unit bull Common for natural resources companybull Unequal amortization charges over time
Decreasing charge (declining balance CCA double declining balance)
bull Higher amortization expense is recognized in the earlier years of an assetrsquos useful life
bull Constant amortization rated applied to reducing book value of assets
Increasing chargebull Lower amortization expense in earlier years and
higher amortization in later years Donrsquot need to calculate this
Land is the never amortized
What accounts does depreciation affect Tangible assets - Accumulated depreciation account Intangible assets ndash The asset account directly Retained earnings account Depreciation expense
Which financial statements are affected SFP and income statement
Does depreciation affect cash NEVER
Amortization for partial periods amortization charges for the periods in which when assets are purchased and disposed Follow the company policy if given
Impairment in Value of Capital Assets IFRS requires impairment test for intangible and tangible assets be
conducted at least once a year Use the rational entity impairment model
Impairment = Carrying value minus (the greater of FV in use and FV less costs to sell)
Impairment loss can be reversed if value recovers in future years
ASPE GAAP requires impairment test for tangible and intangible assets only when circumstances change such that there might be a permanent impairment in the assetsrsquo carrying value Once impairment loss is recorded it cannot be recovered later
Use the cost recovery impairment model - Tangible Assets
Two steps Step 1 compare the assets carrying value to sum of the
Undiscounted cash flowsbull If sum of the undiscounted cash flows gt carrying
value no impairment loss is recorded and impairment test stops
bull If sum of the undiscounted cash flows lt carrying value go to step 2
Step 2 Determine the assetsrsquo fair market value bull If there is an active market for the assets then use
the quoted market price as the fair market value bull If there is no active market for the assets then
calculate the intrinsic value (theoretical value) of the assets by discounting all future cash flows to be resulted from the assets to current period
Impairment loss = carrying value ndash fair market value
Goodwill is not amortized but written down if impaired in value Two steps
bull Step 1 compare fair value of each reporting unit to the total net book value (including goodwill)
o If fair value gt book value no impairment loss is recorded and impairment test stops
o Otherwise go to the second stepbull Step 2
o Determine the fair value of reporting unito Subtract the fair value of all net identifiable
assets of that unit and allocates the remainder to goodwill implied goodwill
o Carrying value of goodwill ndash implied goodwill impairment loss to be recognized
Disposition of Capital assets- Remove the cost from the capital asset account and the accumulated
amortization related to disposed capital assets - Once a long-term assets is determined to be disposed
o Reclassify to assets held for sale
o Determine the net realizable value the lower of carrying value and fair value less cost to sell
o Not amortized any more o When sold record gainloss from disposal
Review Basket purchases and Non-monetary transaction
Ch 11 - Investments
Passive investmentsWhen the investor company does not have significant influence over the investee company
Choices are costamortized cost FVTPL or FV-OCIo ASPE allow only costamortized cost and FVTPL o ASPE GAAP ndash Companies must use FVTPL when active market for
shares existso ASPE GAAP allows companies to choose to use FVTPL if they so
designate at time of initial recognition
Investments other than bonds being held to receive their contractual cash flows will be adjusted to market value at year end
o SFP effects are the same ie FV reported
What is different o Income statement effects o For investments FVTPL gains or losses recognized in Income in
the current periodo For investments FV-OCI gains or losses are recorded in
ldquocomprehensive incomerdquo and accumulated in AOCI until securities are sold
Investments FVTPL (debt and equity) Purchased for short-term profit potential Year-end adjustment to the market value Changes in market value (holding lossgain) reported in the income
statement of the current period
Investment Amortized Cost (debt) Purchased with ability and intention to hold to maturity No adjustment to market value Carried at amortized cost on the SFP
Investments FV-OCI (debt and equity) Securities not classified as either of above Changes in market value (holding lossgain) reported in comprehensive
income On the SFP donrsquot forget to report accumulated comprehensive gainloss
under Shareholdersrsquo equity
Investment revenue is recognized at the point when the investee company declares and pays dividends
When investments are sold
Year-end adjusting to fair market value and investments are not sold
FVTPL Realized gainslosses ndash Net income IS
Unrealized gainslosses ndash Net income IS
FV-OCI Adjust to market at date of sale OCIClose remaining balance in AOCI for the investments sold to RE
Unrealized gainslosses ndash Comprehensive income IS Shareholders equity
Bonds ndash Intent to hold until maturity
NA No year- end adjustment to FV Record at amortized cost
Bonds - Terminology
1 1048697 Principal (Par Value) face value of the bond the amount due at maturity
2 1048697 Coupon Rate the rate used to determine the periodic cash payments (coupon payment) if any
3 1048697 Coupon Payment Cash Payment = face value x Coupon Rate
4 1048697 Market Interest Rate the rate used to determine the current market value of the bond
Bonds - ParDiscountPremium
Bonds Sells Market Rate at issuance
Market Value at issuance
Coupon Payment
At Par = Coupon rate = Par value =Interest expenseAt a Discount gt Coupon rate lt Par value ltInterest expenseAt a Premium lt Coupon rate gt Par value gtInterest expense
Active investmentsUsed when significant influence exists- Under the equity method investment revenue is recognized as soon as the
investee company reports a net income or net loss - When the investee company declares and pays dividends the investor
company does not record as investment revenue but as a decrease of investment to avoid double counting
Starting pointOwnership lt20 20-50 gt50Reporting method
Fair value method
Equity Consolidation
Plus consider other factors such as representation on the board intercompany transactions etc
Equity method - investeersquos announcement of earnings increases investorrsquos Investment
account - Investeersquos announcement of dividends decreases investorrsquos
Investment account - Calculation of equity Income
ASPE vs IFRS - IFRS must use Equity method for investments with significant influence APSE Can use Equity method or Cost( if Shares are not actively traded) If shares actively traded then the choice is Equity or FVTPL
Purchase premiums- Purchase premiums arise for two reasons
o Fair market value differentials the FV of assetsliabilities of the investee are different from BV of those assetsliabilities
Fair market value differentials are amortized and the amortization expenses will be included in net income
bull Inventory fair market value differentials is usually amortized in the first period after acquisition
bull Fixed assets fair market value differentials are usually amortized over the expected remaining service life of the assets
o Goodwill is the expected value of future above-normal financial performance
- Calculation of Goodwill and FV differentials to be amortized
Goodwill CalculationPurchase priceLess percentage share of BV acquiredEquals Purchase PremiumMinus FV differences where FVgtBVAdd FV differences where FVgtBVRemainder equals Goodwill
- Revenue recognized to date G
- Revenue recognized to date G
- Inventory estimation methods
- The Gross Profit Method
-
Other items
Sales discounts- Account for sales discounts by recording ldquoallowance for sales
discountsrdquo o A contra account for sales revenue on Income statement
Customer return merchandise- Debit to ldquoSales returns and allowancesrdquo
o A contra account for sales revenue on Income statement
Year-end adjusting entry to account for an estimated amount of sales return and merchandise return
- Credit to Allowance for sales return and allowance - A balance sheet contra account attached to accounts receivables
Transfers of ARIdentify if the transaction is to be accounted for as a sale or a borrowing transaction
Sale transactionsJournal entries to remove the AR any associated AFDA record the receipt of cash the residual obligation if any and a loss on disposal
Borrowing transactionsJournal entries to record the new debt and interest costs fees The AR and associated AFDA remain on the books
Types of Questions
Ch 8 Inventory12 INVEB = INVBB + Purchase ndash COGS
Inventory is recorded on the SFP at the lower of the cost or the net realizable value of the inventory
Key equation Beginning Inv+ Purchases - COGS = Ending Inv
IssuesConsignment inventory - Consignment inventory on the firm premises owned by others should be excluded Consignment inventory of the firm held elsewhere should be included in the inventory of the firm
Goods in transit at period end - Items shipped FOB shipping point are considered to have been sold when shipped Items shipped FOB destination are not considered to have been sold until they have arrived at their destination
Cut-off Errors - A cut-off error occurs with respect to ending inventory if items owned at period end are incorrectly excluded from the physical inventory count or if items already sold are incorrectly included in the period end inventory count
SystemsPerpetual system tracks units sold continuously
More accurate more timely potentially more costlyPeriodic system infer quantities sold by using purchasesproduction beginning and ending inventories
Units sold = Beg Units + Production ndashEnd Units Harder to detect inventory ldquoshrinkagerdquo (eg theft spoilage)
Cost flow assumptions Specific identification Costs of the specific item sold are included in cost of goods sold Costs of specific items on hand are included in inventory (Perpetual inventory systems)
Weighted average cost Inventory is priced on the basis of average cost of goods available for sale during the period Thus the same cost per item is assigned to cost of goods sold and to ending inventory (This method is used for periodic inventory systems)
Moving average cost Cost of goods sold is determined by calculating the average cost of goods available at the time a sale is made (This method is used for perpetual inventory systems)
FIFO assumption about the physical flow of inventory used to determine cost of goods sold and the ending inventory account balance The actual physical flow of inventory need not correspond to these assumptions FIFO shows SFP at relatively current values but income statement cost of goods sold at stale values
Inventory estimation methods
The Gross Profit Method
The gross profit method of inventory estimation relies on the knowledge of opening inventory net purchases net sales at retail prices and the historical gross profit margin
The Retail Inventory Method
The retail inventory method is a method of estimating the dollar amount of ending inventory using the current relationship between cost and selling price This is commonly used by retail stores for the preparation of interim financial statements
IFRS vs ASPEIFRS covers biological assets in a separate sectionIFRS requires the capitalization of interest on inventory that must be manufactured in large quantities ASPE GAAP gives companies the option
Types of Questions
Ch 9- 10 - Accounting for capital assetsPPampE
1 PPEEB = PPEBB + Acquisitions ndash Disposals 2 Straight-line depreciation = (Purchase price ndash salvage value) Useful
life 3 Declining balance methods = (Purchase cost- sum of all prior yearsrsquo
depreciation) X rate4 Units of Production = (Purchase price ndash salvage value) Useful life in
units annual depreciation = rate X of units5 Accumulated DepEB = Accumulated DepBB + Depreciation ndash
AccDepDisposal
Capitalize vs expense Capitalizing costs means to show them as an asset on the SFP (assets have future economic benefits)
We expense (ie not capitalize) when (a) benefits are immediate (b) or future benefits are too uncertain or immaterial (eg RampD)
Accounting for tangible assetsWhat is the acquisition cost
o Include all costs required to bring the asset into usable condition and location
o Purchased assets purchase price plus cost to prepare the asset for use (installation transportation testing)
o Self-constructed assets direct cost of construction (direct material direct labour pro-rata allocation of overhead costs) financing costs (interest on funds specifically borrowed to finance construction can be capitalized)
o Basket purchase ndash the best way to allocate the purchase price of the assets to the individual assets is based on the relative fair market values of the assets acquired
o Deferred payment contracts ndash recorded at the present value of the consideration exchanged between the contracting parties at the date of acquisition
o Non-monetary transactions recorded at the fair value of the assets received or the fair value of the asset given up whichever is more easily determined ASPE GAAP
o Check page 636 and 637 on how IFRS is differento
Measurement after acquisition Cost model vs Revaluation Model
How to account for costs subsequent to acquisition- Additions capitalize the costs to the existing capital asset account and
revise the service life and residual value as needed
- Betterments and replacements capitalize the costs to the existing capital asset account Distinguish the expenditures from normal repair costs o The appropriate accounting treatment depends on whether or not
we know the carrying value of old assets o If Costs are known then remove the old cost and accumulated
depreciation record a loss on disposal and then capitalize the new costs
o If costs are not known then add the new costs into the cost pool and revise the service life and residual value as needed
- Rearrangement and reinstallation capitalize the costs to the existing capital asset account
The appropriate accounting treatment depends on whether or not we know the carrying value of old assets
If Costs are known then remove the old cost and accumulated depreciation record a loss on disposal and then capitalize the new costs
If costs and Accum Amortization not known then expense the full amount
o Repairs ndash always expensed as incurred
Accounting for Intangible Assets
Specific assets - Patents Trademarks Customer lists FranchisesResearch and development Goodwill etc See notes below under Chapter 11 for calculation of Goodwill
o Goodwill is the expected value of future above-normal financial performance
What is the acquisition costPurchased assets - Include all costs required to bring the asset into usable condition and location Goodwill is only recorded if purchased
Six Criteria for capitalization of internally generated intangible assets
Costs to be included ndash Materials and servicesndash Direct labour and other payroll costsndash Interest and borrowing costs ndash if specifically related
Costs excluded ndash Selling administration and general overhead costs
Measurement after acquisition Cost model vs Revaluation Model ndash general understanding of the differences in the two models only
Amortization of Capital assets - What is the expected useful life
o The time period over which the asset will be used
- What is the Residual value o To determine residual value of an asset it requires managerial
judgment o Residual value is the estimated amount a company would receive
today on disposal of an asset net of related disposal costs
- What amortization should we use to allocate expense over the useful life
o What does GAAP allow Straight-line method
bull Annual Depreciation Expense = depreciable basisservice life (in years) = (Acquisition Cost -SV) Useful Years
bull Common for tangible assetsbull Uniform amortization charges over time
Activity methodbull Input methods ndash eg Depreciation cost per machine-
hour = depreciable basisservice life (in machine-hours)
bull Depr Expense = Actual hours used hourly ratebull Common for manufacturing firms bull Output methods- eg units producedbull Depr Expense = Actual units produced rate per unit bull Common for natural resources companybull Unequal amortization charges over time
Decreasing charge (declining balance CCA double declining balance)
bull Higher amortization expense is recognized in the earlier years of an assetrsquos useful life
bull Constant amortization rated applied to reducing book value of assets
Increasing chargebull Lower amortization expense in earlier years and
higher amortization in later years Donrsquot need to calculate this
Land is the never amortized
What accounts does depreciation affect Tangible assets - Accumulated depreciation account Intangible assets ndash The asset account directly Retained earnings account Depreciation expense
Which financial statements are affected SFP and income statement
Does depreciation affect cash NEVER
Amortization for partial periods amortization charges for the periods in which when assets are purchased and disposed Follow the company policy if given
Impairment in Value of Capital Assets IFRS requires impairment test for intangible and tangible assets be
conducted at least once a year Use the rational entity impairment model
Impairment = Carrying value minus (the greater of FV in use and FV less costs to sell)
Impairment loss can be reversed if value recovers in future years
ASPE GAAP requires impairment test for tangible and intangible assets only when circumstances change such that there might be a permanent impairment in the assetsrsquo carrying value Once impairment loss is recorded it cannot be recovered later
Use the cost recovery impairment model - Tangible Assets
Two steps Step 1 compare the assets carrying value to sum of the
Undiscounted cash flowsbull If sum of the undiscounted cash flows gt carrying
value no impairment loss is recorded and impairment test stops
bull If sum of the undiscounted cash flows lt carrying value go to step 2
Step 2 Determine the assetsrsquo fair market value bull If there is an active market for the assets then use
the quoted market price as the fair market value bull If there is no active market for the assets then
calculate the intrinsic value (theoretical value) of the assets by discounting all future cash flows to be resulted from the assets to current period
Impairment loss = carrying value ndash fair market value
Goodwill is not amortized but written down if impaired in value Two steps
bull Step 1 compare fair value of each reporting unit to the total net book value (including goodwill)
o If fair value gt book value no impairment loss is recorded and impairment test stops
o Otherwise go to the second stepbull Step 2
o Determine the fair value of reporting unito Subtract the fair value of all net identifiable
assets of that unit and allocates the remainder to goodwill implied goodwill
o Carrying value of goodwill ndash implied goodwill impairment loss to be recognized
Disposition of Capital assets- Remove the cost from the capital asset account and the accumulated
amortization related to disposed capital assets - Once a long-term assets is determined to be disposed
o Reclassify to assets held for sale
o Determine the net realizable value the lower of carrying value and fair value less cost to sell
o Not amortized any more o When sold record gainloss from disposal
Review Basket purchases and Non-monetary transaction
Ch 11 - Investments
Passive investmentsWhen the investor company does not have significant influence over the investee company
Choices are costamortized cost FVTPL or FV-OCIo ASPE allow only costamortized cost and FVTPL o ASPE GAAP ndash Companies must use FVTPL when active market for
shares existso ASPE GAAP allows companies to choose to use FVTPL if they so
designate at time of initial recognition
Investments other than bonds being held to receive their contractual cash flows will be adjusted to market value at year end
o SFP effects are the same ie FV reported
What is different o Income statement effects o For investments FVTPL gains or losses recognized in Income in
the current periodo For investments FV-OCI gains or losses are recorded in
ldquocomprehensive incomerdquo and accumulated in AOCI until securities are sold
Investments FVTPL (debt and equity) Purchased for short-term profit potential Year-end adjustment to the market value Changes in market value (holding lossgain) reported in the income
statement of the current period
Investment Amortized Cost (debt) Purchased with ability and intention to hold to maturity No adjustment to market value Carried at amortized cost on the SFP
Investments FV-OCI (debt and equity) Securities not classified as either of above Changes in market value (holding lossgain) reported in comprehensive
income On the SFP donrsquot forget to report accumulated comprehensive gainloss
under Shareholdersrsquo equity
Investment revenue is recognized at the point when the investee company declares and pays dividends
When investments are sold
Year-end adjusting to fair market value and investments are not sold
FVTPL Realized gainslosses ndash Net income IS
Unrealized gainslosses ndash Net income IS
FV-OCI Adjust to market at date of sale OCIClose remaining balance in AOCI for the investments sold to RE
Unrealized gainslosses ndash Comprehensive income IS Shareholders equity
Bonds ndash Intent to hold until maturity
NA No year- end adjustment to FV Record at amortized cost
Bonds - Terminology
1 1048697 Principal (Par Value) face value of the bond the amount due at maturity
2 1048697 Coupon Rate the rate used to determine the periodic cash payments (coupon payment) if any
3 1048697 Coupon Payment Cash Payment = face value x Coupon Rate
4 1048697 Market Interest Rate the rate used to determine the current market value of the bond
Bonds - ParDiscountPremium
Bonds Sells Market Rate at issuance
Market Value at issuance
Coupon Payment
At Par = Coupon rate = Par value =Interest expenseAt a Discount gt Coupon rate lt Par value ltInterest expenseAt a Premium lt Coupon rate gt Par value gtInterest expense
Active investmentsUsed when significant influence exists- Under the equity method investment revenue is recognized as soon as the
investee company reports a net income or net loss - When the investee company declares and pays dividends the investor
company does not record as investment revenue but as a decrease of investment to avoid double counting
Starting pointOwnership lt20 20-50 gt50Reporting method
Fair value method
Equity Consolidation
Plus consider other factors such as representation on the board intercompany transactions etc
Equity method - investeersquos announcement of earnings increases investorrsquos Investment
account - Investeersquos announcement of dividends decreases investorrsquos
Investment account - Calculation of equity Income
ASPE vs IFRS - IFRS must use Equity method for investments with significant influence APSE Can use Equity method or Cost( if Shares are not actively traded) If shares actively traded then the choice is Equity or FVTPL
Purchase premiums- Purchase premiums arise for two reasons
o Fair market value differentials the FV of assetsliabilities of the investee are different from BV of those assetsliabilities
Fair market value differentials are amortized and the amortization expenses will be included in net income
bull Inventory fair market value differentials is usually amortized in the first period after acquisition
bull Fixed assets fair market value differentials are usually amortized over the expected remaining service life of the assets
o Goodwill is the expected value of future above-normal financial performance
- Calculation of Goodwill and FV differentials to be amortized
Goodwill CalculationPurchase priceLess percentage share of BV acquiredEquals Purchase PremiumMinus FV differences where FVgtBVAdd FV differences where FVgtBVRemainder equals Goodwill
- Revenue recognized to date G
- Revenue recognized to date G
- Inventory estimation methods
- The Gross Profit Method
-
Sale transactionsJournal entries to remove the AR any associated AFDA record the receipt of cash the residual obligation if any and a loss on disposal
Borrowing transactionsJournal entries to record the new debt and interest costs fees The AR and associated AFDA remain on the books
Types of Questions
Ch 8 Inventory12 INVEB = INVBB + Purchase ndash COGS
Inventory is recorded on the SFP at the lower of the cost or the net realizable value of the inventory
Key equation Beginning Inv+ Purchases - COGS = Ending Inv
IssuesConsignment inventory - Consignment inventory on the firm premises owned by others should be excluded Consignment inventory of the firm held elsewhere should be included in the inventory of the firm
Goods in transit at period end - Items shipped FOB shipping point are considered to have been sold when shipped Items shipped FOB destination are not considered to have been sold until they have arrived at their destination
Cut-off Errors - A cut-off error occurs with respect to ending inventory if items owned at period end are incorrectly excluded from the physical inventory count or if items already sold are incorrectly included in the period end inventory count
SystemsPerpetual system tracks units sold continuously
More accurate more timely potentially more costlyPeriodic system infer quantities sold by using purchasesproduction beginning and ending inventories
Units sold = Beg Units + Production ndashEnd Units Harder to detect inventory ldquoshrinkagerdquo (eg theft spoilage)
Cost flow assumptions Specific identification Costs of the specific item sold are included in cost of goods sold Costs of specific items on hand are included in inventory (Perpetual inventory systems)
Weighted average cost Inventory is priced on the basis of average cost of goods available for sale during the period Thus the same cost per item is assigned to cost of goods sold and to ending inventory (This method is used for periodic inventory systems)
Moving average cost Cost of goods sold is determined by calculating the average cost of goods available at the time a sale is made (This method is used for perpetual inventory systems)
FIFO assumption about the physical flow of inventory used to determine cost of goods sold and the ending inventory account balance The actual physical flow of inventory need not correspond to these assumptions FIFO shows SFP at relatively current values but income statement cost of goods sold at stale values
Inventory estimation methods
The Gross Profit Method
The gross profit method of inventory estimation relies on the knowledge of opening inventory net purchases net sales at retail prices and the historical gross profit margin
The Retail Inventory Method
The retail inventory method is a method of estimating the dollar amount of ending inventory using the current relationship between cost and selling price This is commonly used by retail stores for the preparation of interim financial statements
IFRS vs ASPEIFRS covers biological assets in a separate sectionIFRS requires the capitalization of interest on inventory that must be manufactured in large quantities ASPE GAAP gives companies the option
Types of Questions
Ch 9- 10 - Accounting for capital assetsPPampE
1 PPEEB = PPEBB + Acquisitions ndash Disposals 2 Straight-line depreciation = (Purchase price ndash salvage value) Useful
life 3 Declining balance methods = (Purchase cost- sum of all prior yearsrsquo
depreciation) X rate4 Units of Production = (Purchase price ndash salvage value) Useful life in
units annual depreciation = rate X of units5 Accumulated DepEB = Accumulated DepBB + Depreciation ndash
AccDepDisposal
Capitalize vs expense Capitalizing costs means to show them as an asset on the SFP (assets have future economic benefits)
We expense (ie not capitalize) when (a) benefits are immediate (b) or future benefits are too uncertain or immaterial (eg RampD)
Accounting for tangible assetsWhat is the acquisition cost
o Include all costs required to bring the asset into usable condition and location
o Purchased assets purchase price plus cost to prepare the asset for use (installation transportation testing)
o Self-constructed assets direct cost of construction (direct material direct labour pro-rata allocation of overhead costs) financing costs (interest on funds specifically borrowed to finance construction can be capitalized)
o Basket purchase ndash the best way to allocate the purchase price of the assets to the individual assets is based on the relative fair market values of the assets acquired
o Deferred payment contracts ndash recorded at the present value of the consideration exchanged between the contracting parties at the date of acquisition
o Non-monetary transactions recorded at the fair value of the assets received or the fair value of the asset given up whichever is more easily determined ASPE GAAP
o Check page 636 and 637 on how IFRS is differento
Measurement after acquisition Cost model vs Revaluation Model
How to account for costs subsequent to acquisition- Additions capitalize the costs to the existing capital asset account and
revise the service life and residual value as needed
- Betterments and replacements capitalize the costs to the existing capital asset account Distinguish the expenditures from normal repair costs o The appropriate accounting treatment depends on whether or not
we know the carrying value of old assets o If Costs are known then remove the old cost and accumulated
depreciation record a loss on disposal and then capitalize the new costs
o If costs are not known then add the new costs into the cost pool and revise the service life and residual value as needed
- Rearrangement and reinstallation capitalize the costs to the existing capital asset account
The appropriate accounting treatment depends on whether or not we know the carrying value of old assets
If Costs are known then remove the old cost and accumulated depreciation record a loss on disposal and then capitalize the new costs
If costs and Accum Amortization not known then expense the full amount
o Repairs ndash always expensed as incurred
Accounting for Intangible Assets
Specific assets - Patents Trademarks Customer lists FranchisesResearch and development Goodwill etc See notes below under Chapter 11 for calculation of Goodwill
o Goodwill is the expected value of future above-normal financial performance
What is the acquisition costPurchased assets - Include all costs required to bring the asset into usable condition and location Goodwill is only recorded if purchased
Six Criteria for capitalization of internally generated intangible assets
Costs to be included ndash Materials and servicesndash Direct labour and other payroll costsndash Interest and borrowing costs ndash if specifically related
Costs excluded ndash Selling administration and general overhead costs
Measurement after acquisition Cost model vs Revaluation Model ndash general understanding of the differences in the two models only
Amortization of Capital assets - What is the expected useful life
o The time period over which the asset will be used
- What is the Residual value o To determine residual value of an asset it requires managerial
judgment o Residual value is the estimated amount a company would receive
today on disposal of an asset net of related disposal costs
- What amortization should we use to allocate expense over the useful life
o What does GAAP allow Straight-line method
bull Annual Depreciation Expense = depreciable basisservice life (in years) = (Acquisition Cost -SV) Useful Years
bull Common for tangible assetsbull Uniform amortization charges over time
Activity methodbull Input methods ndash eg Depreciation cost per machine-
hour = depreciable basisservice life (in machine-hours)
bull Depr Expense = Actual hours used hourly ratebull Common for manufacturing firms bull Output methods- eg units producedbull Depr Expense = Actual units produced rate per unit bull Common for natural resources companybull Unequal amortization charges over time
Decreasing charge (declining balance CCA double declining balance)
bull Higher amortization expense is recognized in the earlier years of an assetrsquos useful life
bull Constant amortization rated applied to reducing book value of assets
Increasing chargebull Lower amortization expense in earlier years and
higher amortization in later years Donrsquot need to calculate this
Land is the never amortized
What accounts does depreciation affect Tangible assets - Accumulated depreciation account Intangible assets ndash The asset account directly Retained earnings account Depreciation expense
Which financial statements are affected SFP and income statement
Does depreciation affect cash NEVER
Amortization for partial periods amortization charges for the periods in which when assets are purchased and disposed Follow the company policy if given
Impairment in Value of Capital Assets IFRS requires impairment test for intangible and tangible assets be
conducted at least once a year Use the rational entity impairment model
Impairment = Carrying value minus (the greater of FV in use and FV less costs to sell)
Impairment loss can be reversed if value recovers in future years
ASPE GAAP requires impairment test for tangible and intangible assets only when circumstances change such that there might be a permanent impairment in the assetsrsquo carrying value Once impairment loss is recorded it cannot be recovered later
Use the cost recovery impairment model - Tangible Assets
Two steps Step 1 compare the assets carrying value to sum of the
Undiscounted cash flowsbull If sum of the undiscounted cash flows gt carrying
value no impairment loss is recorded and impairment test stops
bull If sum of the undiscounted cash flows lt carrying value go to step 2
Step 2 Determine the assetsrsquo fair market value bull If there is an active market for the assets then use
the quoted market price as the fair market value bull If there is no active market for the assets then
calculate the intrinsic value (theoretical value) of the assets by discounting all future cash flows to be resulted from the assets to current period
Impairment loss = carrying value ndash fair market value
Goodwill is not amortized but written down if impaired in value Two steps
bull Step 1 compare fair value of each reporting unit to the total net book value (including goodwill)
o If fair value gt book value no impairment loss is recorded and impairment test stops
o Otherwise go to the second stepbull Step 2
o Determine the fair value of reporting unito Subtract the fair value of all net identifiable
assets of that unit and allocates the remainder to goodwill implied goodwill
o Carrying value of goodwill ndash implied goodwill impairment loss to be recognized
Disposition of Capital assets- Remove the cost from the capital asset account and the accumulated
amortization related to disposed capital assets - Once a long-term assets is determined to be disposed
o Reclassify to assets held for sale
o Determine the net realizable value the lower of carrying value and fair value less cost to sell
o Not amortized any more o When sold record gainloss from disposal
Review Basket purchases and Non-monetary transaction
Ch 11 - Investments
Passive investmentsWhen the investor company does not have significant influence over the investee company
Choices are costamortized cost FVTPL or FV-OCIo ASPE allow only costamortized cost and FVTPL o ASPE GAAP ndash Companies must use FVTPL when active market for
shares existso ASPE GAAP allows companies to choose to use FVTPL if they so
designate at time of initial recognition
Investments other than bonds being held to receive their contractual cash flows will be adjusted to market value at year end
o SFP effects are the same ie FV reported
What is different o Income statement effects o For investments FVTPL gains or losses recognized in Income in
the current periodo For investments FV-OCI gains or losses are recorded in
ldquocomprehensive incomerdquo and accumulated in AOCI until securities are sold
Investments FVTPL (debt and equity) Purchased for short-term profit potential Year-end adjustment to the market value Changes in market value (holding lossgain) reported in the income
statement of the current period
Investment Amortized Cost (debt) Purchased with ability and intention to hold to maturity No adjustment to market value Carried at amortized cost on the SFP
Investments FV-OCI (debt and equity) Securities not classified as either of above Changes in market value (holding lossgain) reported in comprehensive
income On the SFP donrsquot forget to report accumulated comprehensive gainloss
under Shareholdersrsquo equity
Investment revenue is recognized at the point when the investee company declares and pays dividends
When investments are sold
Year-end adjusting to fair market value and investments are not sold
FVTPL Realized gainslosses ndash Net income IS
Unrealized gainslosses ndash Net income IS
FV-OCI Adjust to market at date of sale OCIClose remaining balance in AOCI for the investments sold to RE
Unrealized gainslosses ndash Comprehensive income IS Shareholders equity
Bonds ndash Intent to hold until maturity
NA No year- end adjustment to FV Record at amortized cost
Bonds - Terminology
1 1048697 Principal (Par Value) face value of the bond the amount due at maturity
2 1048697 Coupon Rate the rate used to determine the periodic cash payments (coupon payment) if any
3 1048697 Coupon Payment Cash Payment = face value x Coupon Rate
4 1048697 Market Interest Rate the rate used to determine the current market value of the bond
Bonds - ParDiscountPremium
Bonds Sells Market Rate at issuance
Market Value at issuance
Coupon Payment
At Par = Coupon rate = Par value =Interest expenseAt a Discount gt Coupon rate lt Par value ltInterest expenseAt a Premium lt Coupon rate gt Par value gtInterest expense
Active investmentsUsed when significant influence exists- Under the equity method investment revenue is recognized as soon as the
investee company reports a net income or net loss - When the investee company declares and pays dividends the investor
company does not record as investment revenue but as a decrease of investment to avoid double counting
Starting pointOwnership lt20 20-50 gt50Reporting method
Fair value method
Equity Consolidation
Plus consider other factors such as representation on the board intercompany transactions etc
Equity method - investeersquos announcement of earnings increases investorrsquos Investment
account - Investeersquos announcement of dividends decreases investorrsquos
Investment account - Calculation of equity Income
ASPE vs IFRS - IFRS must use Equity method for investments with significant influence APSE Can use Equity method or Cost( if Shares are not actively traded) If shares actively traded then the choice is Equity or FVTPL
Purchase premiums- Purchase premiums arise for two reasons
o Fair market value differentials the FV of assetsliabilities of the investee are different from BV of those assetsliabilities
Fair market value differentials are amortized and the amortization expenses will be included in net income
bull Inventory fair market value differentials is usually amortized in the first period after acquisition
bull Fixed assets fair market value differentials are usually amortized over the expected remaining service life of the assets
o Goodwill is the expected value of future above-normal financial performance
- Calculation of Goodwill and FV differentials to be amortized
Goodwill CalculationPurchase priceLess percentage share of BV acquiredEquals Purchase PremiumMinus FV differences where FVgtBVAdd FV differences where FVgtBVRemainder equals Goodwill
- Revenue recognized to date G
- Revenue recognized to date G
- Inventory estimation methods
- The Gross Profit Method
-
Ch 8 Inventory12 INVEB = INVBB + Purchase ndash COGS
Inventory is recorded on the SFP at the lower of the cost or the net realizable value of the inventory
Key equation Beginning Inv+ Purchases - COGS = Ending Inv
IssuesConsignment inventory - Consignment inventory on the firm premises owned by others should be excluded Consignment inventory of the firm held elsewhere should be included in the inventory of the firm
Goods in transit at period end - Items shipped FOB shipping point are considered to have been sold when shipped Items shipped FOB destination are not considered to have been sold until they have arrived at their destination
Cut-off Errors - A cut-off error occurs with respect to ending inventory if items owned at period end are incorrectly excluded from the physical inventory count or if items already sold are incorrectly included in the period end inventory count
SystemsPerpetual system tracks units sold continuously
More accurate more timely potentially more costlyPeriodic system infer quantities sold by using purchasesproduction beginning and ending inventories
Units sold = Beg Units + Production ndashEnd Units Harder to detect inventory ldquoshrinkagerdquo (eg theft spoilage)
Cost flow assumptions Specific identification Costs of the specific item sold are included in cost of goods sold Costs of specific items on hand are included in inventory (Perpetual inventory systems)
Weighted average cost Inventory is priced on the basis of average cost of goods available for sale during the period Thus the same cost per item is assigned to cost of goods sold and to ending inventory (This method is used for periodic inventory systems)
Moving average cost Cost of goods sold is determined by calculating the average cost of goods available at the time a sale is made (This method is used for perpetual inventory systems)
FIFO assumption about the physical flow of inventory used to determine cost of goods sold and the ending inventory account balance The actual physical flow of inventory need not correspond to these assumptions FIFO shows SFP at relatively current values but income statement cost of goods sold at stale values
Inventory estimation methods
The Gross Profit Method
The gross profit method of inventory estimation relies on the knowledge of opening inventory net purchases net sales at retail prices and the historical gross profit margin
The Retail Inventory Method
The retail inventory method is a method of estimating the dollar amount of ending inventory using the current relationship between cost and selling price This is commonly used by retail stores for the preparation of interim financial statements
IFRS vs ASPEIFRS covers biological assets in a separate sectionIFRS requires the capitalization of interest on inventory that must be manufactured in large quantities ASPE GAAP gives companies the option
Types of Questions
Ch 9- 10 - Accounting for capital assetsPPampE
1 PPEEB = PPEBB + Acquisitions ndash Disposals 2 Straight-line depreciation = (Purchase price ndash salvage value) Useful
life 3 Declining balance methods = (Purchase cost- sum of all prior yearsrsquo
depreciation) X rate4 Units of Production = (Purchase price ndash salvage value) Useful life in
units annual depreciation = rate X of units5 Accumulated DepEB = Accumulated DepBB + Depreciation ndash
AccDepDisposal
Capitalize vs expense Capitalizing costs means to show them as an asset on the SFP (assets have future economic benefits)
We expense (ie not capitalize) when (a) benefits are immediate (b) or future benefits are too uncertain or immaterial (eg RampD)
Accounting for tangible assetsWhat is the acquisition cost
o Include all costs required to bring the asset into usable condition and location
o Purchased assets purchase price plus cost to prepare the asset for use (installation transportation testing)
o Self-constructed assets direct cost of construction (direct material direct labour pro-rata allocation of overhead costs) financing costs (interest on funds specifically borrowed to finance construction can be capitalized)
o Basket purchase ndash the best way to allocate the purchase price of the assets to the individual assets is based on the relative fair market values of the assets acquired
o Deferred payment contracts ndash recorded at the present value of the consideration exchanged between the contracting parties at the date of acquisition
o Non-monetary transactions recorded at the fair value of the assets received or the fair value of the asset given up whichever is more easily determined ASPE GAAP
o Check page 636 and 637 on how IFRS is differento
Measurement after acquisition Cost model vs Revaluation Model
How to account for costs subsequent to acquisition- Additions capitalize the costs to the existing capital asset account and
revise the service life and residual value as needed
- Betterments and replacements capitalize the costs to the existing capital asset account Distinguish the expenditures from normal repair costs o The appropriate accounting treatment depends on whether or not
we know the carrying value of old assets o If Costs are known then remove the old cost and accumulated
depreciation record a loss on disposal and then capitalize the new costs
o If costs are not known then add the new costs into the cost pool and revise the service life and residual value as needed
- Rearrangement and reinstallation capitalize the costs to the existing capital asset account
The appropriate accounting treatment depends on whether or not we know the carrying value of old assets
If Costs are known then remove the old cost and accumulated depreciation record a loss on disposal and then capitalize the new costs
If costs and Accum Amortization not known then expense the full amount
o Repairs ndash always expensed as incurred
Accounting for Intangible Assets
Specific assets - Patents Trademarks Customer lists FranchisesResearch and development Goodwill etc See notes below under Chapter 11 for calculation of Goodwill
o Goodwill is the expected value of future above-normal financial performance
What is the acquisition costPurchased assets - Include all costs required to bring the asset into usable condition and location Goodwill is only recorded if purchased
Six Criteria for capitalization of internally generated intangible assets
Costs to be included ndash Materials and servicesndash Direct labour and other payroll costsndash Interest and borrowing costs ndash if specifically related
Costs excluded ndash Selling administration and general overhead costs
Measurement after acquisition Cost model vs Revaluation Model ndash general understanding of the differences in the two models only
Amortization of Capital assets - What is the expected useful life
o The time period over which the asset will be used
- What is the Residual value o To determine residual value of an asset it requires managerial
judgment o Residual value is the estimated amount a company would receive
today on disposal of an asset net of related disposal costs
- What amortization should we use to allocate expense over the useful life
o What does GAAP allow Straight-line method
bull Annual Depreciation Expense = depreciable basisservice life (in years) = (Acquisition Cost -SV) Useful Years
bull Common for tangible assetsbull Uniform amortization charges over time
Activity methodbull Input methods ndash eg Depreciation cost per machine-
hour = depreciable basisservice life (in machine-hours)
bull Depr Expense = Actual hours used hourly ratebull Common for manufacturing firms bull Output methods- eg units producedbull Depr Expense = Actual units produced rate per unit bull Common for natural resources companybull Unequal amortization charges over time
Decreasing charge (declining balance CCA double declining balance)
bull Higher amortization expense is recognized in the earlier years of an assetrsquos useful life
bull Constant amortization rated applied to reducing book value of assets
Increasing chargebull Lower amortization expense in earlier years and
higher amortization in later years Donrsquot need to calculate this
Land is the never amortized
What accounts does depreciation affect Tangible assets - Accumulated depreciation account Intangible assets ndash The asset account directly Retained earnings account Depreciation expense
Which financial statements are affected SFP and income statement
Does depreciation affect cash NEVER
Amortization for partial periods amortization charges for the periods in which when assets are purchased and disposed Follow the company policy if given
Impairment in Value of Capital Assets IFRS requires impairment test for intangible and tangible assets be
conducted at least once a year Use the rational entity impairment model
Impairment = Carrying value minus (the greater of FV in use and FV less costs to sell)
Impairment loss can be reversed if value recovers in future years
ASPE GAAP requires impairment test for tangible and intangible assets only when circumstances change such that there might be a permanent impairment in the assetsrsquo carrying value Once impairment loss is recorded it cannot be recovered later
Use the cost recovery impairment model - Tangible Assets
Two steps Step 1 compare the assets carrying value to sum of the
Undiscounted cash flowsbull If sum of the undiscounted cash flows gt carrying
value no impairment loss is recorded and impairment test stops
bull If sum of the undiscounted cash flows lt carrying value go to step 2
Step 2 Determine the assetsrsquo fair market value bull If there is an active market for the assets then use
the quoted market price as the fair market value bull If there is no active market for the assets then
calculate the intrinsic value (theoretical value) of the assets by discounting all future cash flows to be resulted from the assets to current period
Impairment loss = carrying value ndash fair market value
Goodwill is not amortized but written down if impaired in value Two steps
bull Step 1 compare fair value of each reporting unit to the total net book value (including goodwill)
o If fair value gt book value no impairment loss is recorded and impairment test stops
o Otherwise go to the second stepbull Step 2
o Determine the fair value of reporting unito Subtract the fair value of all net identifiable
assets of that unit and allocates the remainder to goodwill implied goodwill
o Carrying value of goodwill ndash implied goodwill impairment loss to be recognized
Disposition of Capital assets- Remove the cost from the capital asset account and the accumulated
amortization related to disposed capital assets - Once a long-term assets is determined to be disposed
o Reclassify to assets held for sale
o Determine the net realizable value the lower of carrying value and fair value less cost to sell
o Not amortized any more o When sold record gainloss from disposal
Review Basket purchases and Non-monetary transaction
Ch 11 - Investments
Passive investmentsWhen the investor company does not have significant influence over the investee company
Choices are costamortized cost FVTPL or FV-OCIo ASPE allow only costamortized cost and FVTPL o ASPE GAAP ndash Companies must use FVTPL when active market for
shares existso ASPE GAAP allows companies to choose to use FVTPL if they so
designate at time of initial recognition
Investments other than bonds being held to receive their contractual cash flows will be adjusted to market value at year end
o SFP effects are the same ie FV reported
What is different o Income statement effects o For investments FVTPL gains or losses recognized in Income in
the current periodo For investments FV-OCI gains or losses are recorded in
ldquocomprehensive incomerdquo and accumulated in AOCI until securities are sold
Investments FVTPL (debt and equity) Purchased for short-term profit potential Year-end adjustment to the market value Changes in market value (holding lossgain) reported in the income
statement of the current period
Investment Amortized Cost (debt) Purchased with ability and intention to hold to maturity No adjustment to market value Carried at amortized cost on the SFP
Investments FV-OCI (debt and equity) Securities not classified as either of above Changes in market value (holding lossgain) reported in comprehensive
income On the SFP donrsquot forget to report accumulated comprehensive gainloss
under Shareholdersrsquo equity
Investment revenue is recognized at the point when the investee company declares and pays dividends
When investments are sold
Year-end adjusting to fair market value and investments are not sold
FVTPL Realized gainslosses ndash Net income IS
Unrealized gainslosses ndash Net income IS
FV-OCI Adjust to market at date of sale OCIClose remaining balance in AOCI for the investments sold to RE
Unrealized gainslosses ndash Comprehensive income IS Shareholders equity
Bonds ndash Intent to hold until maturity
NA No year- end adjustment to FV Record at amortized cost
Bonds - Terminology
1 1048697 Principal (Par Value) face value of the bond the amount due at maturity
2 1048697 Coupon Rate the rate used to determine the periodic cash payments (coupon payment) if any
3 1048697 Coupon Payment Cash Payment = face value x Coupon Rate
4 1048697 Market Interest Rate the rate used to determine the current market value of the bond
Bonds - ParDiscountPremium
Bonds Sells Market Rate at issuance
Market Value at issuance
Coupon Payment
At Par = Coupon rate = Par value =Interest expenseAt a Discount gt Coupon rate lt Par value ltInterest expenseAt a Premium lt Coupon rate gt Par value gtInterest expense
Active investmentsUsed when significant influence exists- Under the equity method investment revenue is recognized as soon as the
investee company reports a net income or net loss - When the investee company declares and pays dividends the investor
company does not record as investment revenue but as a decrease of investment to avoid double counting
Starting pointOwnership lt20 20-50 gt50Reporting method
Fair value method
Equity Consolidation
Plus consider other factors such as representation on the board intercompany transactions etc
Equity method - investeersquos announcement of earnings increases investorrsquos Investment
account - Investeersquos announcement of dividends decreases investorrsquos
Investment account - Calculation of equity Income
ASPE vs IFRS - IFRS must use Equity method for investments with significant influence APSE Can use Equity method or Cost( if Shares are not actively traded) If shares actively traded then the choice is Equity or FVTPL
Purchase premiums- Purchase premiums arise for two reasons
o Fair market value differentials the FV of assetsliabilities of the investee are different from BV of those assetsliabilities
Fair market value differentials are amortized and the amortization expenses will be included in net income
bull Inventory fair market value differentials is usually amortized in the first period after acquisition
bull Fixed assets fair market value differentials are usually amortized over the expected remaining service life of the assets
o Goodwill is the expected value of future above-normal financial performance
- Calculation of Goodwill and FV differentials to be amortized
Goodwill CalculationPurchase priceLess percentage share of BV acquiredEquals Purchase PremiumMinus FV differences where FVgtBVAdd FV differences where FVgtBVRemainder equals Goodwill
- Revenue recognized to date G
- Revenue recognized to date G
- Inventory estimation methods
- The Gross Profit Method
-
Inventory estimation methods
The Gross Profit Method
The gross profit method of inventory estimation relies on the knowledge of opening inventory net purchases net sales at retail prices and the historical gross profit margin
The Retail Inventory Method
The retail inventory method is a method of estimating the dollar amount of ending inventory using the current relationship between cost and selling price This is commonly used by retail stores for the preparation of interim financial statements
IFRS vs ASPEIFRS covers biological assets in a separate sectionIFRS requires the capitalization of interest on inventory that must be manufactured in large quantities ASPE GAAP gives companies the option
Types of Questions
Ch 9- 10 - Accounting for capital assetsPPampE
1 PPEEB = PPEBB + Acquisitions ndash Disposals 2 Straight-line depreciation = (Purchase price ndash salvage value) Useful
life 3 Declining balance methods = (Purchase cost- sum of all prior yearsrsquo
depreciation) X rate4 Units of Production = (Purchase price ndash salvage value) Useful life in
units annual depreciation = rate X of units5 Accumulated DepEB = Accumulated DepBB + Depreciation ndash
AccDepDisposal
Capitalize vs expense Capitalizing costs means to show them as an asset on the SFP (assets have future economic benefits)
We expense (ie not capitalize) when (a) benefits are immediate (b) or future benefits are too uncertain or immaterial (eg RampD)
Accounting for tangible assetsWhat is the acquisition cost
o Include all costs required to bring the asset into usable condition and location
o Purchased assets purchase price plus cost to prepare the asset for use (installation transportation testing)
o Self-constructed assets direct cost of construction (direct material direct labour pro-rata allocation of overhead costs) financing costs (interest on funds specifically borrowed to finance construction can be capitalized)
o Basket purchase ndash the best way to allocate the purchase price of the assets to the individual assets is based on the relative fair market values of the assets acquired
o Deferred payment contracts ndash recorded at the present value of the consideration exchanged between the contracting parties at the date of acquisition
o Non-monetary transactions recorded at the fair value of the assets received or the fair value of the asset given up whichever is more easily determined ASPE GAAP
o Check page 636 and 637 on how IFRS is differento
Measurement after acquisition Cost model vs Revaluation Model
How to account for costs subsequent to acquisition- Additions capitalize the costs to the existing capital asset account and
revise the service life and residual value as needed
- Betterments and replacements capitalize the costs to the existing capital asset account Distinguish the expenditures from normal repair costs o The appropriate accounting treatment depends on whether or not
we know the carrying value of old assets o If Costs are known then remove the old cost and accumulated
depreciation record a loss on disposal and then capitalize the new costs
o If costs are not known then add the new costs into the cost pool and revise the service life and residual value as needed
- Rearrangement and reinstallation capitalize the costs to the existing capital asset account
The appropriate accounting treatment depends on whether or not we know the carrying value of old assets
If Costs are known then remove the old cost and accumulated depreciation record a loss on disposal and then capitalize the new costs
If costs and Accum Amortization not known then expense the full amount
o Repairs ndash always expensed as incurred
Accounting for Intangible Assets
Specific assets - Patents Trademarks Customer lists FranchisesResearch and development Goodwill etc See notes below under Chapter 11 for calculation of Goodwill
o Goodwill is the expected value of future above-normal financial performance
What is the acquisition costPurchased assets - Include all costs required to bring the asset into usable condition and location Goodwill is only recorded if purchased
Six Criteria for capitalization of internally generated intangible assets
Costs to be included ndash Materials and servicesndash Direct labour and other payroll costsndash Interest and borrowing costs ndash if specifically related
Costs excluded ndash Selling administration and general overhead costs
Measurement after acquisition Cost model vs Revaluation Model ndash general understanding of the differences in the two models only
Amortization of Capital assets - What is the expected useful life
o The time period over which the asset will be used
- What is the Residual value o To determine residual value of an asset it requires managerial
judgment o Residual value is the estimated amount a company would receive
today on disposal of an asset net of related disposal costs
- What amortization should we use to allocate expense over the useful life
o What does GAAP allow Straight-line method
bull Annual Depreciation Expense = depreciable basisservice life (in years) = (Acquisition Cost -SV) Useful Years
bull Common for tangible assetsbull Uniform amortization charges over time
Activity methodbull Input methods ndash eg Depreciation cost per machine-
hour = depreciable basisservice life (in machine-hours)
bull Depr Expense = Actual hours used hourly ratebull Common for manufacturing firms bull Output methods- eg units producedbull Depr Expense = Actual units produced rate per unit bull Common for natural resources companybull Unequal amortization charges over time
Decreasing charge (declining balance CCA double declining balance)
bull Higher amortization expense is recognized in the earlier years of an assetrsquos useful life
bull Constant amortization rated applied to reducing book value of assets
Increasing chargebull Lower amortization expense in earlier years and
higher amortization in later years Donrsquot need to calculate this
Land is the never amortized
What accounts does depreciation affect Tangible assets - Accumulated depreciation account Intangible assets ndash The asset account directly Retained earnings account Depreciation expense
Which financial statements are affected SFP and income statement
Does depreciation affect cash NEVER
Amortization for partial periods amortization charges for the periods in which when assets are purchased and disposed Follow the company policy if given
Impairment in Value of Capital Assets IFRS requires impairment test for intangible and tangible assets be
conducted at least once a year Use the rational entity impairment model
Impairment = Carrying value minus (the greater of FV in use and FV less costs to sell)
Impairment loss can be reversed if value recovers in future years
ASPE GAAP requires impairment test for tangible and intangible assets only when circumstances change such that there might be a permanent impairment in the assetsrsquo carrying value Once impairment loss is recorded it cannot be recovered later
Use the cost recovery impairment model - Tangible Assets
Two steps Step 1 compare the assets carrying value to sum of the
Undiscounted cash flowsbull If sum of the undiscounted cash flows gt carrying
value no impairment loss is recorded and impairment test stops
bull If sum of the undiscounted cash flows lt carrying value go to step 2
Step 2 Determine the assetsrsquo fair market value bull If there is an active market for the assets then use
the quoted market price as the fair market value bull If there is no active market for the assets then
calculate the intrinsic value (theoretical value) of the assets by discounting all future cash flows to be resulted from the assets to current period
Impairment loss = carrying value ndash fair market value
Goodwill is not amortized but written down if impaired in value Two steps
bull Step 1 compare fair value of each reporting unit to the total net book value (including goodwill)
o If fair value gt book value no impairment loss is recorded and impairment test stops
o Otherwise go to the second stepbull Step 2
o Determine the fair value of reporting unito Subtract the fair value of all net identifiable
assets of that unit and allocates the remainder to goodwill implied goodwill
o Carrying value of goodwill ndash implied goodwill impairment loss to be recognized
Disposition of Capital assets- Remove the cost from the capital asset account and the accumulated
amortization related to disposed capital assets - Once a long-term assets is determined to be disposed
o Reclassify to assets held for sale
o Determine the net realizable value the lower of carrying value and fair value less cost to sell
o Not amortized any more o When sold record gainloss from disposal
Review Basket purchases and Non-monetary transaction
Ch 11 - Investments
Passive investmentsWhen the investor company does not have significant influence over the investee company
Choices are costamortized cost FVTPL or FV-OCIo ASPE allow only costamortized cost and FVTPL o ASPE GAAP ndash Companies must use FVTPL when active market for
shares existso ASPE GAAP allows companies to choose to use FVTPL if they so
designate at time of initial recognition
Investments other than bonds being held to receive their contractual cash flows will be adjusted to market value at year end
o SFP effects are the same ie FV reported
What is different o Income statement effects o For investments FVTPL gains or losses recognized in Income in
the current periodo For investments FV-OCI gains or losses are recorded in
ldquocomprehensive incomerdquo and accumulated in AOCI until securities are sold
Investments FVTPL (debt and equity) Purchased for short-term profit potential Year-end adjustment to the market value Changes in market value (holding lossgain) reported in the income
statement of the current period
Investment Amortized Cost (debt) Purchased with ability and intention to hold to maturity No adjustment to market value Carried at amortized cost on the SFP
Investments FV-OCI (debt and equity) Securities not classified as either of above Changes in market value (holding lossgain) reported in comprehensive
income On the SFP donrsquot forget to report accumulated comprehensive gainloss
under Shareholdersrsquo equity
Investment revenue is recognized at the point when the investee company declares and pays dividends
When investments are sold
Year-end adjusting to fair market value and investments are not sold
FVTPL Realized gainslosses ndash Net income IS
Unrealized gainslosses ndash Net income IS
FV-OCI Adjust to market at date of sale OCIClose remaining balance in AOCI for the investments sold to RE
Unrealized gainslosses ndash Comprehensive income IS Shareholders equity
Bonds ndash Intent to hold until maturity
NA No year- end adjustment to FV Record at amortized cost
Bonds - Terminology
1 1048697 Principal (Par Value) face value of the bond the amount due at maturity
2 1048697 Coupon Rate the rate used to determine the periodic cash payments (coupon payment) if any
3 1048697 Coupon Payment Cash Payment = face value x Coupon Rate
4 1048697 Market Interest Rate the rate used to determine the current market value of the bond
Bonds - ParDiscountPremium
Bonds Sells Market Rate at issuance
Market Value at issuance
Coupon Payment
At Par = Coupon rate = Par value =Interest expenseAt a Discount gt Coupon rate lt Par value ltInterest expenseAt a Premium lt Coupon rate gt Par value gtInterest expense
Active investmentsUsed when significant influence exists- Under the equity method investment revenue is recognized as soon as the
investee company reports a net income or net loss - When the investee company declares and pays dividends the investor
company does not record as investment revenue but as a decrease of investment to avoid double counting
Starting pointOwnership lt20 20-50 gt50Reporting method
Fair value method
Equity Consolidation
Plus consider other factors such as representation on the board intercompany transactions etc
Equity method - investeersquos announcement of earnings increases investorrsquos Investment
account - Investeersquos announcement of dividends decreases investorrsquos
Investment account - Calculation of equity Income
ASPE vs IFRS - IFRS must use Equity method for investments with significant influence APSE Can use Equity method or Cost( if Shares are not actively traded) If shares actively traded then the choice is Equity or FVTPL
Purchase premiums- Purchase premiums arise for two reasons
o Fair market value differentials the FV of assetsliabilities of the investee are different from BV of those assetsliabilities
Fair market value differentials are amortized and the amortization expenses will be included in net income
bull Inventory fair market value differentials is usually amortized in the first period after acquisition
bull Fixed assets fair market value differentials are usually amortized over the expected remaining service life of the assets
o Goodwill is the expected value of future above-normal financial performance
- Calculation of Goodwill and FV differentials to be amortized
Goodwill CalculationPurchase priceLess percentage share of BV acquiredEquals Purchase PremiumMinus FV differences where FVgtBVAdd FV differences where FVgtBVRemainder equals Goodwill
- Revenue recognized to date G
- Revenue recognized to date G
- Inventory estimation methods
- The Gross Profit Method
-
o Purchased assets purchase price plus cost to prepare the asset for use (installation transportation testing)
o Self-constructed assets direct cost of construction (direct material direct labour pro-rata allocation of overhead costs) financing costs (interest on funds specifically borrowed to finance construction can be capitalized)
o Basket purchase ndash the best way to allocate the purchase price of the assets to the individual assets is based on the relative fair market values of the assets acquired
o Deferred payment contracts ndash recorded at the present value of the consideration exchanged between the contracting parties at the date of acquisition
o Non-monetary transactions recorded at the fair value of the assets received or the fair value of the asset given up whichever is more easily determined ASPE GAAP
o Check page 636 and 637 on how IFRS is differento
Measurement after acquisition Cost model vs Revaluation Model
How to account for costs subsequent to acquisition- Additions capitalize the costs to the existing capital asset account and
revise the service life and residual value as needed
- Betterments and replacements capitalize the costs to the existing capital asset account Distinguish the expenditures from normal repair costs o The appropriate accounting treatment depends on whether or not
we know the carrying value of old assets o If Costs are known then remove the old cost and accumulated
depreciation record a loss on disposal and then capitalize the new costs
o If costs are not known then add the new costs into the cost pool and revise the service life and residual value as needed
- Rearrangement and reinstallation capitalize the costs to the existing capital asset account
The appropriate accounting treatment depends on whether or not we know the carrying value of old assets
If Costs are known then remove the old cost and accumulated depreciation record a loss on disposal and then capitalize the new costs
If costs and Accum Amortization not known then expense the full amount
o Repairs ndash always expensed as incurred
Accounting for Intangible Assets
Specific assets - Patents Trademarks Customer lists FranchisesResearch and development Goodwill etc See notes below under Chapter 11 for calculation of Goodwill
o Goodwill is the expected value of future above-normal financial performance
What is the acquisition costPurchased assets - Include all costs required to bring the asset into usable condition and location Goodwill is only recorded if purchased
Six Criteria for capitalization of internally generated intangible assets
Costs to be included ndash Materials and servicesndash Direct labour and other payroll costsndash Interest and borrowing costs ndash if specifically related
Costs excluded ndash Selling administration and general overhead costs
Measurement after acquisition Cost model vs Revaluation Model ndash general understanding of the differences in the two models only
Amortization of Capital assets - What is the expected useful life
o The time period over which the asset will be used
- What is the Residual value o To determine residual value of an asset it requires managerial
judgment o Residual value is the estimated amount a company would receive
today on disposal of an asset net of related disposal costs
- What amortization should we use to allocate expense over the useful life
o What does GAAP allow Straight-line method
bull Annual Depreciation Expense = depreciable basisservice life (in years) = (Acquisition Cost -SV) Useful Years
bull Common for tangible assetsbull Uniform amortization charges over time
Activity methodbull Input methods ndash eg Depreciation cost per machine-
hour = depreciable basisservice life (in machine-hours)
bull Depr Expense = Actual hours used hourly ratebull Common for manufacturing firms bull Output methods- eg units producedbull Depr Expense = Actual units produced rate per unit bull Common for natural resources companybull Unequal amortization charges over time
Decreasing charge (declining balance CCA double declining balance)
bull Higher amortization expense is recognized in the earlier years of an assetrsquos useful life
bull Constant amortization rated applied to reducing book value of assets
Increasing chargebull Lower amortization expense in earlier years and
higher amortization in later years Donrsquot need to calculate this
Land is the never amortized
What accounts does depreciation affect Tangible assets - Accumulated depreciation account Intangible assets ndash The asset account directly Retained earnings account Depreciation expense
Which financial statements are affected SFP and income statement
Does depreciation affect cash NEVER
Amortization for partial periods amortization charges for the periods in which when assets are purchased and disposed Follow the company policy if given
Impairment in Value of Capital Assets IFRS requires impairment test for intangible and tangible assets be
conducted at least once a year Use the rational entity impairment model
Impairment = Carrying value minus (the greater of FV in use and FV less costs to sell)
Impairment loss can be reversed if value recovers in future years
ASPE GAAP requires impairment test for tangible and intangible assets only when circumstances change such that there might be a permanent impairment in the assetsrsquo carrying value Once impairment loss is recorded it cannot be recovered later
Use the cost recovery impairment model - Tangible Assets
Two steps Step 1 compare the assets carrying value to sum of the
Undiscounted cash flowsbull If sum of the undiscounted cash flows gt carrying
value no impairment loss is recorded and impairment test stops
bull If sum of the undiscounted cash flows lt carrying value go to step 2
Step 2 Determine the assetsrsquo fair market value bull If there is an active market for the assets then use
the quoted market price as the fair market value bull If there is no active market for the assets then
calculate the intrinsic value (theoretical value) of the assets by discounting all future cash flows to be resulted from the assets to current period
Impairment loss = carrying value ndash fair market value
Goodwill is not amortized but written down if impaired in value Two steps
bull Step 1 compare fair value of each reporting unit to the total net book value (including goodwill)
o If fair value gt book value no impairment loss is recorded and impairment test stops
o Otherwise go to the second stepbull Step 2
o Determine the fair value of reporting unito Subtract the fair value of all net identifiable
assets of that unit and allocates the remainder to goodwill implied goodwill
o Carrying value of goodwill ndash implied goodwill impairment loss to be recognized
Disposition of Capital assets- Remove the cost from the capital asset account and the accumulated
amortization related to disposed capital assets - Once a long-term assets is determined to be disposed
o Reclassify to assets held for sale
o Determine the net realizable value the lower of carrying value and fair value less cost to sell
o Not amortized any more o When sold record gainloss from disposal
Review Basket purchases and Non-monetary transaction
Ch 11 - Investments
Passive investmentsWhen the investor company does not have significant influence over the investee company
Choices are costamortized cost FVTPL or FV-OCIo ASPE allow only costamortized cost and FVTPL o ASPE GAAP ndash Companies must use FVTPL when active market for
shares existso ASPE GAAP allows companies to choose to use FVTPL if they so
designate at time of initial recognition
Investments other than bonds being held to receive their contractual cash flows will be adjusted to market value at year end
o SFP effects are the same ie FV reported
What is different o Income statement effects o For investments FVTPL gains or losses recognized in Income in
the current periodo For investments FV-OCI gains or losses are recorded in
ldquocomprehensive incomerdquo and accumulated in AOCI until securities are sold
Investments FVTPL (debt and equity) Purchased for short-term profit potential Year-end adjustment to the market value Changes in market value (holding lossgain) reported in the income
statement of the current period
Investment Amortized Cost (debt) Purchased with ability and intention to hold to maturity No adjustment to market value Carried at amortized cost on the SFP
Investments FV-OCI (debt and equity) Securities not classified as either of above Changes in market value (holding lossgain) reported in comprehensive
income On the SFP donrsquot forget to report accumulated comprehensive gainloss
under Shareholdersrsquo equity
Investment revenue is recognized at the point when the investee company declares and pays dividends
When investments are sold
Year-end adjusting to fair market value and investments are not sold
FVTPL Realized gainslosses ndash Net income IS
Unrealized gainslosses ndash Net income IS
FV-OCI Adjust to market at date of sale OCIClose remaining balance in AOCI for the investments sold to RE
Unrealized gainslosses ndash Comprehensive income IS Shareholders equity
Bonds ndash Intent to hold until maturity
NA No year- end adjustment to FV Record at amortized cost
Bonds - Terminology
1 1048697 Principal (Par Value) face value of the bond the amount due at maturity
2 1048697 Coupon Rate the rate used to determine the periodic cash payments (coupon payment) if any
3 1048697 Coupon Payment Cash Payment = face value x Coupon Rate
4 1048697 Market Interest Rate the rate used to determine the current market value of the bond
Bonds - ParDiscountPremium
Bonds Sells Market Rate at issuance
Market Value at issuance
Coupon Payment
At Par = Coupon rate = Par value =Interest expenseAt a Discount gt Coupon rate lt Par value ltInterest expenseAt a Premium lt Coupon rate gt Par value gtInterest expense
Active investmentsUsed when significant influence exists- Under the equity method investment revenue is recognized as soon as the
investee company reports a net income or net loss - When the investee company declares and pays dividends the investor
company does not record as investment revenue but as a decrease of investment to avoid double counting
Starting pointOwnership lt20 20-50 gt50Reporting method
Fair value method
Equity Consolidation
Plus consider other factors such as representation on the board intercompany transactions etc
Equity method - investeersquos announcement of earnings increases investorrsquos Investment
account - Investeersquos announcement of dividends decreases investorrsquos
Investment account - Calculation of equity Income
ASPE vs IFRS - IFRS must use Equity method for investments with significant influence APSE Can use Equity method or Cost( if Shares are not actively traded) If shares actively traded then the choice is Equity or FVTPL
Purchase premiums- Purchase premiums arise for two reasons
o Fair market value differentials the FV of assetsliabilities of the investee are different from BV of those assetsliabilities
Fair market value differentials are amortized and the amortization expenses will be included in net income
bull Inventory fair market value differentials is usually amortized in the first period after acquisition
bull Fixed assets fair market value differentials are usually amortized over the expected remaining service life of the assets
o Goodwill is the expected value of future above-normal financial performance
- Calculation of Goodwill and FV differentials to be amortized
Goodwill CalculationPurchase priceLess percentage share of BV acquiredEquals Purchase PremiumMinus FV differences where FVgtBVAdd FV differences where FVgtBVRemainder equals Goodwill
- Revenue recognized to date G
- Revenue recognized to date G
- Inventory estimation methods
- The Gross Profit Method
-
o Repairs ndash always expensed as incurred
Accounting for Intangible Assets
Specific assets - Patents Trademarks Customer lists FranchisesResearch and development Goodwill etc See notes below under Chapter 11 for calculation of Goodwill
o Goodwill is the expected value of future above-normal financial performance
What is the acquisition costPurchased assets - Include all costs required to bring the asset into usable condition and location Goodwill is only recorded if purchased
Six Criteria for capitalization of internally generated intangible assets
Costs to be included ndash Materials and servicesndash Direct labour and other payroll costsndash Interest and borrowing costs ndash if specifically related
Costs excluded ndash Selling administration and general overhead costs
Measurement after acquisition Cost model vs Revaluation Model ndash general understanding of the differences in the two models only
Amortization of Capital assets - What is the expected useful life
o The time period over which the asset will be used
- What is the Residual value o To determine residual value of an asset it requires managerial
judgment o Residual value is the estimated amount a company would receive
today on disposal of an asset net of related disposal costs
- What amortization should we use to allocate expense over the useful life
o What does GAAP allow Straight-line method
bull Annual Depreciation Expense = depreciable basisservice life (in years) = (Acquisition Cost -SV) Useful Years
bull Common for tangible assetsbull Uniform amortization charges over time
Activity methodbull Input methods ndash eg Depreciation cost per machine-
hour = depreciable basisservice life (in machine-hours)
bull Depr Expense = Actual hours used hourly ratebull Common for manufacturing firms bull Output methods- eg units producedbull Depr Expense = Actual units produced rate per unit bull Common for natural resources companybull Unequal amortization charges over time
Decreasing charge (declining balance CCA double declining balance)
bull Higher amortization expense is recognized in the earlier years of an assetrsquos useful life
bull Constant amortization rated applied to reducing book value of assets
Increasing chargebull Lower amortization expense in earlier years and
higher amortization in later years Donrsquot need to calculate this
Land is the never amortized
What accounts does depreciation affect Tangible assets - Accumulated depreciation account Intangible assets ndash The asset account directly Retained earnings account Depreciation expense
Which financial statements are affected SFP and income statement
Does depreciation affect cash NEVER
Amortization for partial periods amortization charges for the periods in which when assets are purchased and disposed Follow the company policy if given
Impairment in Value of Capital Assets IFRS requires impairment test for intangible and tangible assets be
conducted at least once a year Use the rational entity impairment model
Impairment = Carrying value minus (the greater of FV in use and FV less costs to sell)
Impairment loss can be reversed if value recovers in future years
ASPE GAAP requires impairment test for tangible and intangible assets only when circumstances change such that there might be a permanent impairment in the assetsrsquo carrying value Once impairment loss is recorded it cannot be recovered later
Use the cost recovery impairment model - Tangible Assets
Two steps Step 1 compare the assets carrying value to sum of the
Undiscounted cash flowsbull If sum of the undiscounted cash flows gt carrying
value no impairment loss is recorded and impairment test stops
bull If sum of the undiscounted cash flows lt carrying value go to step 2
Step 2 Determine the assetsrsquo fair market value bull If there is an active market for the assets then use
the quoted market price as the fair market value bull If there is no active market for the assets then
calculate the intrinsic value (theoretical value) of the assets by discounting all future cash flows to be resulted from the assets to current period
Impairment loss = carrying value ndash fair market value
Goodwill is not amortized but written down if impaired in value Two steps
bull Step 1 compare fair value of each reporting unit to the total net book value (including goodwill)
o If fair value gt book value no impairment loss is recorded and impairment test stops
o Otherwise go to the second stepbull Step 2
o Determine the fair value of reporting unito Subtract the fair value of all net identifiable
assets of that unit and allocates the remainder to goodwill implied goodwill
o Carrying value of goodwill ndash implied goodwill impairment loss to be recognized
Disposition of Capital assets- Remove the cost from the capital asset account and the accumulated
amortization related to disposed capital assets - Once a long-term assets is determined to be disposed
o Reclassify to assets held for sale
o Determine the net realizable value the lower of carrying value and fair value less cost to sell
o Not amortized any more o When sold record gainloss from disposal
Review Basket purchases and Non-monetary transaction
Ch 11 - Investments
Passive investmentsWhen the investor company does not have significant influence over the investee company
Choices are costamortized cost FVTPL or FV-OCIo ASPE allow only costamortized cost and FVTPL o ASPE GAAP ndash Companies must use FVTPL when active market for
shares existso ASPE GAAP allows companies to choose to use FVTPL if they so
designate at time of initial recognition
Investments other than bonds being held to receive their contractual cash flows will be adjusted to market value at year end
o SFP effects are the same ie FV reported
What is different o Income statement effects o For investments FVTPL gains or losses recognized in Income in
the current periodo For investments FV-OCI gains or losses are recorded in
ldquocomprehensive incomerdquo and accumulated in AOCI until securities are sold
Investments FVTPL (debt and equity) Purchased for short-term profit potential Year-end adjustment to the market value Changes in market value (holding lossgain) reported in the income
statement of the current period
Investment Amortized Cost (debt) Purchased with ability and intention to hold to maturity No adjustment to market value Carried at amortized cost on the SFP
Investments FV-OCI (debt and equity) Securities not classified as either of above Changes in market value (holding lossgain) reported in comprehensive
income On the SFP donrsquot forget to report accumulated comprehensive gainloss
under Shareholdersrsquo equity
Investment revenue is recognized at the point when the investee company declares and pays dividends
When investments are sold
Year-end adjusting to fair market value and investments are not sold
FVTPL Realized gainslosses ndash Net income IS
Unrealized gainslosses ndash Net income IS
FV-OCI Adjust to market at date of sale OCIClose remaining balance in AOCI for the investments sold to RE
Unrealized gainslosses ndash Comprehensive income IS Shareholders equity
Bonds ndash Intent to hold until maturity
NA No year- end adjustment to FV Record at amortized cost
Bonds - Terminology
1 1048697 Principal (Par Value) face value of the bond the amount due at maturity
2 1048697 Coupon Rate the rate used to determine the periodic cash payments (coupon payment) if any
3 1048697 Coupon Payment Cash Payment = face value x Coupon Rate
4 1048697 Market Interest Rate the rate used to determine the current market value of the bond
Bonds - ParDiscountPremium
Bonds Sells Market Rate at issuance
Market Value at issuance
Coupon Payment
At Par = Coupon rate = Par value =Interest expenseAt a Discount gt Coupon rate lt Par value ltInterest expenseAt a Premium lt Coupon rate gt Par value gtInterest expense
Active investmentsUsed when significant influence exists- Under the equity method investment revenue is recognized as soon as the
investee company reports a net income or net loss - When the investee company declares and pays dividends the investor
company does not record as investment revenue but as a decrease of investment to avoid double counting
Starting pointOwnership lt20 20-50 gt50Reporting method
Fair value method
Equity Consolidation
Plus consider other factors such as representation on the board intercompany transactions etc
Equity method - investeersquos announcement of earnings increases investorrsquos Investment
account - Investeersquos announcement of dividends decreases investorrsquos
Investment account - Calculation of equity Income
ASPE vs IFRS - IFRS must use Equity method for investments with significant influence APSE Can use Equity method or Cost( if Shares are not actively traded) If shares actively traded then the choice is Equity or FVTPL
Purchase premiums- Purchase premiums arise for two reasons
o Fair market value differentials the FV of assetsliabilities of the investee are different from BV of those assetsliabilities
Fair market value differentials are amortized and the amortization expenses will be included in net income
bull Inventory fair market value differentials is usually amortized in the first period after acquisition
bull Fixed assets fair market value differentials are usually amortized over the expected remaining service life of the assets
o Goodwill is the expected value of future above-normal financial performance
- Calculation of Goodwill and FV differentials to be amortized
Goodwill CalculationPurchase priceLess percentage share of BV acquiredEquals Purchase PremiumMinus FV differences where FVgtBVAdd FV differences where FVgtBVRemainder equals Goodwill
- Revenue recognized to date G
- Revenue recognized to date G
- Inventory estimation methods
- The Gross Profit Method
-
Activity methodbull Input methods ndash eg Depreciation cost per machine-
hour = depreciable basisservice life (in machine-hours)
bull Depr Expense = Actual hours used hourly ratebull Common for manufacturing firms bull Output methods- eg units producedbull Depr Expense = Actual units produced rate per unit bull Common for natural resources companybull Unequal amortization charges over time
Decreasing charge (declining balance CCA double declining balance)
bull Higher amortization expense is recognized in the earlier years of an assetrsquos useful life
bull Constant amortization rated applied to reducing book value of assets
Increasing chargebull Lower amortization expense in earlier years and
higher amortization in later years Donrsquot need to calculate this
Land is the never amortized
What accounts does depreciation affect Tangible assets - Accumulated depreciation account Intangible assets ndash The asset account directly Retained earnings account Depreciation expense
Which financial statements are affected SFP and income statement
Does depreciation affect cash NEVER
Amortization for partial periods amortization charges for the periods in which when assets are purchased and disposed Follow the company policy if given
Impairment in Value of Capital Assets IFRS requires impairment test for intangible and tangible assets be
conducted at least once a year Use the rational entity impairment model
Impairment = Carrying value minus (the greater of FV in use and FV less costs to sell)
Impairment loss can be reversed if value recovers in future years
ASPE GAAP requires impairment test for tangible and intangible assets only when circumstances change such that there might be a permanent impairment in the assetsrsquo carrying value Once impairment loss is recorded it cannot be recovered later
Use the cost recovery impairment model - Tangible Assets
Two steps Step 1 compare the assets carrying value to sum of the
Undiscounted cash flowsbull If sum of the undiscounted cash flows gt carrying
value no impairment loss is recorded and impairment test stops
bull If sum of the undiscounted cash flows lt carrying value go to step 2
Step 2 Determine the assetsrsquo fair market value bull If there is an active market for the assets then use
the quoted market price as the fair market value bull If there is no active market for the assets then
calculate the intrinsic value (theoretical value) of the assets by discounting all future cash flows to be resulted from the assets to current period
Impairment loss = carrying value ndash fair market value
Goodwill is not amortized but written down if impaired in value Two steps
bull Step 1 compare fair value of each reporting unit to the total net book value (including goodwill)
o If fair value gt book value no impairment loss is recorded and impairment test stops
o Otherwise go to the second stepbull Step 2
o Determine the fair value of reporting unito Subtract the fair value of all net identifiable
assets of that unit and allocates the remainder to goodwill implied goodwill
o Carrying value of goodwill ndash implied goodwill impairment loss to be recognized
Disposition of Capital assets- Remove the cost from the capital asset account and the accumulated
amortization related to disposed capital assets - Once a long-term assets is determined to be disposed
o Reclassify to assets held for sale
o Determine the net realizable value the lower of carrying value and fair value less cost to sell
o Not amortized any more o When sold record gainloss from disposal
Review Basket purchases and Non-monetary transaction
Ch 11 - Investments
Passive investmentsWhen the investor company does not have significant influence over the investee company
Choices are costamortized cost FVTPL or FV-OCIo ASPE allow only costamortized cost and FVTPL o ASPE GAAP ndash Companies must use FVTPL when active market for
shares existso ASPE GAAP allows companies to choose to use FVTPL if they so
designate at time of initial recognition
Investments other than bonds being held to receive their contractual cash flows will be adjusted to market value at year end
o SFP effects are the same ie FV reported
What is different o Income statement effects o For investments FVTPL gains or losses recognized in Income in
the current periodo For investments FV-OCI gains or losses are recorded in
ldquocomprehensive incomerdquo and accumulated in AOCI until securities are sold
Investments FVTPL (debt and equity) Purchased for short-term profit potential Year-end adjustment to the market value Changes in market value (holding lossgain) reported in the income
statement of the current period
Investment Amortized Cost (debt) Purchased with ability and intention to hold to maturity No adjustment to market value Carried at amortized cost on the SFP
Investments FV-OCI (debt and equity) Securities not classified as either of above Changes in market value (holding lossgain) reported in comprehensive
income On the SFP donrsquot forget to report accumulated comprehensive gainloss
under Shareholdersrsquo equity
Investment revenue is recognized at the point when the investee company declares and pays dividends
When investments are sold
Year-end adjusting to fair market value and investments are not sold
FVTPL Realized gainslosses ndash Net income IS
Unrealized gainslosses ndash Net income IS
FV-OCI Adjust to market at date of sale OCIClose remaining balance in AOCI for the investments sold to RE
Unrealized gainslosses ndash Comprehensive income IS Shareholders equity
Bonds ndash Intent to hold until maturity
NA No year- end adjustment to FV Record at amortized cost
Bonds - Terminology
1 1048697 Principal (Par Value) face value of the bond the amount due at maturity
2 1048697 Coupon Rate the rate used to determine the periodic cash payments (coupon payment) if any
3 1048697 Coupon Payment Cash Payment = face value x Coupon Rate
4 1048697 Market Interest Rate the rate used to determine the current market value of the bond
Bonds - ParDiscountPremium
Bonds Sells Market Rate at issuance
Market Value at issuance
Coupon Payment
At Par = Coupon rate = Par value =Interest expenseAt a Discount gt Coupon rate lt Par value ltInterest expenseAt a Premium lt Coupon rate gt Par value gtInterest expense
Active investmentsUsed when significant influence exists- Under the equity method investment revenue is recognized as soon as the
investee company reports a net income or net loss - When the investee company declares and pays dividends the investor
company does not record as investment revenue but as a decrease of investment to avoid double counting
Starting pointOwnership lt20 20-50 gt50Reporting method
Fair value method
Equity Consolidation
Plus consider other factors such as representation on the board intercompany transactions etc
Equity method - investeersquos announcement of earnings increases investorrsquos Investment
account - Investeersquos announcement of dividends decreases investorrsquos
Investment account - Calculation of equity Income
ASPE vs IFRS - IFRS must use Equity method for investments with significant influence APSE Can use Equity method or Cost( if Shares are not actively traded) If shares actively traded then the choice is Equity or FVTPL
Purchase premiums- Purchase premiums arise for two reasons
o Fair market value differentials the FV of assetsliabilities of the investee are different from BV of those assetsliabilities
Fair market value differentials are amortized and the amortization expenses will be included in net income
bull Inventory fair market value differentials is usually amortized in the first period after acquisition
bull Fixed assets fair market value differentials are usually amortized over the expected remaining service life of the assets
o Goodwill is the expected value of future above-normal financial performance
- Calculation of Goodwill and FV differentials to be amortized
Goodwill CalculationPurchase priceLess percentage share of BV acquiredEquals Purchase PremiumMinus FV differences where FVgtBVAdd FV differences where FVgtBVRemainder equals Goodwill
- Revenue recognized to date G
- Revenue recognized to date G
- Inventory estimation methods
- The Gross Profit Method
-
Impairment = Carrying value minus (the greater of FV in use and FV less costs to sell)
Impairment loss can be reversed if value recovers in future years
ASPE GAAP requires impairment test for tangible and intangible assets only when circumstances change such that there might be a permanent impairment in the assetsrsquo carrying value Once impairment loss is recorded it cannot be recovered later
Use the cost recovery impairment model - Tangible Assets
Two steps Step 1 compare the assets carrying value to sum of the
Undiscounted cash flowsbull If sum of the undiscounted cash flows gt carrying
value no impairment loss is recorded and impairment test stops
bull If sum of the undiscounted cash flows lt carrying value go to step 2
Step 2 Determine the assetsrsquo fair market value bull If there is an active market for the assets then use
the quoted market price as the fair market value bull If there is no active market for the assets then
calculate the intrinsic value (theoretical value) of the assets by discounting all future cash flows to be resulted from the assets to current period
Impairment loss = carrying value ndash fair market value
Goodwill is not amortized but written down if impaired in value Two steps
bull Step 1 compare fair value of each reporting unit to the total net book value (including goodwill)
o If fair value gt book value no impairment loss is recorded and impairment test stops
o Otherwise go to the second stepbull Step 2
o Determine the fair value of reporting unito Subtract the fair value of all net identifiable
assets of that unit and allocates the remainder to goodwill implied goodwill
o Carrying value of goodwill ndash implied goodwill impairment loss to be recognized
Disposition of Capital assets- Remove the cost from the capital asset account and the accumulated
amortization related to disposed capital assets - Once a long-term assets is determined to be disposed
o Reclassify to assets held for sale
o Determine the net realizable value the lower of carrying value and fair value less cost to sell
o Not amortized any more o When sold record gainloss from disposal
Review Basket purchases and Non-monetary transaction
Ch 11 - Investments
Passive investmentsWhen the investor company does not have significant influence over the investee company
Choices are costamortized cost FVTPL or FV-OCIo ASPE allow only costamortized cost and FVTPL o ASPE GAAP ndash Companies must use FVTPL when active market for
shares existso ASPE GAAP allows companies to choose to use FVTPL if they so
designate at time of initial recognition
Investments other than bonds being held to receive their contractual cash flows will be adjusted to market value at year end
o SFP effects are the same ie FV reported
What is different o Income statement effects o For investments FVTPL gains or losses recognized in Income in
the current periodo For investments FV-OCI gains or losses are recorded in
ldquocomprehensive incomerdquo and accumulated in AOCI until securities are sold
Investments FVTPL (debt and equity) Purchased for short-term profit potential Year-end adjustment to the market value Changes in market value (holding lossgain) reported in the income
statement of the current period
Investment Amortized Cost (debt) Purchased with ability and intention to hold to maturity No adjustment to market value Carried at amortized cost on the SFP
Investments FV-OCI (debt and equity) Securities not classified as either of above Changes in market value (holding lossgain) reported in comprehensive
income On the SFP donrsquot forget to report accumulated comprehensive gainloss
under Shareholdersrsquo equity
Investment revenue is recognized at the point when the investee company declares and pays dividends
When investments are sold
Year-end adjusting to fair market value and investments are not sold
FVTPL Realized gainslosses ndash Net income IS
Unrealized gainslosses ndash Net income IS
FV-OCI Adjust to market at date of sale OCIClose remaining balance in AOCI for the investments sold to RE
Unrealized gainslosses ndash Comprehensive income IS Shareholders equity
Bonds ndash Intent to hold until maturity
NA No year- end adjustment to FV Record at amortized cost
Bonds - Terminology
1 1048697 Principal (Par Value) face value of the bond the amount due at maturity
2 1048697 Coupon Rate the rate used to determine the periodic cash payments (coupon payment) if any
3 1048697 Coupon Payment Cash Payment = face value x Coupon Rate
4 1048697 Market Interest Rate the rate used to determine the current market value of the bond
Bonds - ParDiscountPremium
Bonds Sells Market Rate at issuance
Market Value at issuance
Coupon Payment
At Par = Coupon rate = Par value =Interest expenseAt a Discount gt Coupon rate lt Par value ltInterest expenseAt a Premium lt Coupon rate gt Par value gtInterest expense
Active investmentsUsed when significant influence exists- Under the equity method investment revenue is recognized as soon as the
investee company reports a net income or net loss - When the investee company declares and pays dividends the investor
company does not record as investment revenue but as a decrease of investment to avoid double counting
Starting pointOwnership lt20 20-50 gt50Reporting method
Fair value method
Equity Consolidation
Plus consider other factors such as representation on the board intercompany transactions etc
Equity method - investeersquos announcement of earnings increases investorrsquos Investment
account - Investeersquos announcement of dividends decreases investorrsquos
Investment account - Calculation of equity Income
ASPE vs IFRS - IFRS must use Equity method for investments with significant influence APSE Can use Equity method or Cost( if Shares are not actively traded) If shares actively traded then the choice is Equity or FVTPL
Purchase premiums- Purchase premiums arise for two reasons
o Fair market value differentials the FV of assetsliabilities of the investee are different from BV of those assetsliabilities
Fair market value differentials are amortized and the amortization expenses will be included in net income
bull Inventory fair market value differentials is usually amortized in the first period after acquisition
bull Fixed assets fair market value differentials are usually amortized over the expected remaining service life of the assets
o Goodwill is the expected value of future above-normal financial performance
- Calculation of Goodwill and FV differentials to be amortized
Goodwill CalculationPurchase priceLess percentage share of BV acquiredEquals Purchase PremiumMinus FV differences where FVgtBVAdd FV differences where FVgtBVRemainder equals Goodwill
- Revenue recognized to date G
- Revenue recognized to date G
- Inventory estimation methods
- The Gross Profit Method
-
o Determine the net realizable value the lower of carrying value and fair value less cost to sell
o Not amortized any more o When sold record gainloss from disposal
Review Basket purchases and Non-monetary transaction
Ch 11 - Investments
Passive investmentsWhen the investor company does not have significant influence over the investee company
Choices are costamortized cost FVTPL or FV-OCIo ASPE allow only costamortized cost and FVTPL o ASPE GAAP ndash Companies must use FVTPL when active market for
shares existso ASPE GAAP allows companies to choose to use FVTPL if they so
designate at time of initial recognition
Investments other than bonds being held to receive their contractual cash flows will be adjusted to market value at year end
o SFP effects are the same ie FV reported
What is different o Income statement effects o For investments FVTPL gains or losses recognized in Income in
the current periodo For investments FV-OCI gains or losses are recorded in
ldquocomprehensive incomerdquo and accumulated in AOCI until securities are sold
Investments FVTPL (debt and equity) Purchased for short-term profit potential Year-end adjustment to the market value Changes in market value (holding lossgain) reported in the income
statement of the current period
Investment Amortized Cost (debt) Purchased with ability and intention to hold to maturity No adjustment to market value Carried at amortized cost on the SFP
Investments FV-OCI (debt and equity) Securities not classified as either of above Changes in market value (holding lossgain) reported in comprehensive
income On the SFP donrsquot forget to report accumulated comprehensive gainloss
under Shareholdersrsquo equity
Investment revenue is recognized at the point when the investee company declares and pays dividends
When investments are sold
Year-end adjusting to fair market value and investments are not sold
FVTPL Realized gainslosses ndash Net income IS
Unrealized gainslosses ndash Net income IS
FV-OCI Adjust to market at date of sale OCIClose remaining balance in AOCI for the investments sold to RE
Unrealized gainslosses ndash Comprehensive income IS Shareholders equity
Bonds ndash Intent to hold until maturity
NA No year- end adjustment to FV Record at amortized cost
Bonds - Terminology
1 1048697 Principal (Par Value) face value of the bond the amount due at maturity
2 1048697 Coupon Rate the rate used to determine the periodic cash payments (coupon payment) if any
3 1048697 Coupon Payment Cash Payment = face value x Coupon Rate
4 1048697 Market Interest Rate the rate used to determine the current market value of the bond
Bonds - ParDiscountPremium
Bonds Sells Market Rate at issuance
Market Value at issuance
Coupon Payment
At Par = Coupon rate = Par value =Interest expenseAt a Discount gt Coupon rate lt Par value ltInterest expenseAt a Premium lt Coupon rate gt Par value gtInterest expense
Active investmentsUsed when significant influence exists- Under the equity method investment revenue is recognized as soon as the
investee company reports a net income or net loss - When the investee company declares and pays dividends the investor
company does not record as investment revenue but as a decrease of investment to avoid double counting
Starting pointOwnership lt20 20-50 gt50Reporting method
Fair value method
Equity Consolidation
Plus consider other factors such as representation on the board intercompany transactions etc
Equity method - investeersquos announcement of earnings increases investorrsquos Investment
account - Investeersquos announcement of dividends decreases investorrsquos
Investment account - Calculation of equity Income
ASPE vs IFRS - IFRS must use Equity method for investments with significant influence APSE Can use Equity method or Cost( if Shares are not actively traded) If shares actively traded then the choice is Equity or FVTPL
Purchase premiums- Purchase premiums arise for two reasons
o Fair market value differentials the FV of assetsliabilities of the investee are different from BV of those assetsliabilities
Fair market value differentials are amortized and the amortization expenses will be included in net income
bull Inventory fair market value differentials is usually amortized in the first period after acquisition
bull Fixed assets fair market value differentials are usually amortized over the expected remaining service life of the assets
o Goodwill is the expected value of future above-normal financial performance
- Calculation of Goodwill and FV differentials to be amortized
Goodwill CalculationPurchase priceLess percentage share of BV acquiredEquals Purchase PremiumMinus FV differences where FVgtBVAdd FV differences where FVgtBVRemainder equals Goodwill
- Revenue recognized to date G
- Revenue recognized to date G
- Inventory estimation methods
- The Gross Profit Method
-
Ch 11 - Investments
Passive investmentsWhen the investor company does not have significant influence over the investee company
Choices are costamortized cost FVTPL or FV-OCIo ASPE allow only costamortized cost and FVTPL o ASPE GAAP ndash Companies must use FVTPL when active market for
shares existso ASPE GAAP allows companies to choose to use FVTPL if they so
designate at time of initial recognition
Investments other than bonds being held to receive their contractual cash flows will be adjusted to market value at year end
o SFP effects are the same ie FV reported
What is different o Income statement effects o For investments FVTPL gains or losses recognized in Income in
the current periodo For investments FV-OCI gains or losses are recorded in
ldquocomprehensive incomerdquo and accumulated in AOCI until securities are sold
Investments FVTPL (debt and equity) Purchased for short-term profit potential Year-end adjustment to the market value Changes in market value (holding lossgain) reported in the income
statement of the current period
Investment Amortized Cost (debt) Purchased with ability and intention to hold to maturity No adjustment to market value Carried at amortized cost on the SFP
Investments FV-OCI (debt and equity) Securities not classified as either of above Changes in market value (holding lossgain) reported in comprehensive
income On the SFP donrsquot forget to report accumulated comprehensive gainloss
under Shareholdersrsquo equity
Investment revenue is recognized at the point when the investee company declares and pays dividends
When investments are sold
Year-end adjusting to fair market value and investments are not sold
FVTPL Realized gainslosses ndash Net income IS
Unrealized gainslosses ndash Net income IS
FV-OCI Adjust to market at date of sale OCIClose remaining balance in AOCI for the investments sold to RE
Unrealized gainslosses ndash Comprehensive income IS Shareholders equity
Bonds ndash Intent to hold until maturity
NA No year- end adjustment to FV Record at amortized cost
Bonds - Terminology
1 1048697 Principal (Par Value) face value of the bond the amount due at maturity
2 1048697 Coupon Rate the rate used to determine the periodic cash payments (coupon payment) if any
3 1048697 Coupon Payment Cash Payment = face value x Coupon Rate
4 1048697 Market Interest Rate the rate used to determine the current market value of the bond
Bonds - ParDiscountPremium
Bonds Sells Market Rate at issuance
Market Value at issuance
Coupon Payment
At Par = Coupon rate = Par value =Interest expenseAt a Discount gt Coupon rate lt Par value ltInterest expenseAt a Premium lt Coupon rate gt Par value gtInterest expense
Active investmentsUsed when significant influence exists- Under the equity method investment revenue is recognized as soon as the
investee company reports a net income or net loss - When the investee company declares and pays dividends the investor
company does not record as investment revenue but as a decrease of investment to avoid double counting
Starting pointOwnership lt20 20-50 gt50Reporting method
Fair value method
Equity Consolidation
Plus consider other factors such as representation on the board intercompany transactions etc
Equity method - investeersquos announcement of earnings increases investorrsquos Investment
account - Investeersquos announcement of dividends decreases investorrsquos
Investment account - Calculation of equity Income
ASPE vs IFRS - IFRS must use Equity method for investments with significant influence APSE Can use Equity method or Cost( if Shares are not actively traded) If shares actively traded then the choice is Equity or FVTPL
Purchase premiums- Purchase premiums arise for two reasons
o Fair market value differentials the FV of assetsliabilities of the investee are different from BV of those assetsliabilities
Fair market value differentials are amortized and the amortization expenses will be included in net income
bull Inventory fair market value differentials is usually amortized in the first period after acquisition
bull Fixed assets fair market value differentials are usually amortized over the expected remaining service life of the assets
o Goodwill is the expected value of future above-normal financial performance
- Calculation of Goodwill and FV differentials to be amortized
Goodwill CalculationPurchase priceLess percentage share of BV acquiredEquals Purchase PremiumMinus FV differences where FVgtBVAdd FV differences where FVgtBVRemainder equals Goodwill
- Revenue recognized to date G
- Revenue recognized to date G
- Inventory estimation methods
- The Gross Profit Method
-
When investments are sold
Year-end adjusting to fair market value and investments are not sold
FVTPL Realized gainslosses ndash Net income IS
Unrealized gainslosses ndash Net income IS
FV-OCI Adjust to market at date of sale OCIClose remaining balance in AOCI for the investments sold to RE
Unrealized gainslosses ndash Comprehensive income IS Shareholders equity
Bonds ndash Intent to hold until maturity
NA No year- end adjustment to FV Record at amortized cost
Bonds - Terminology
1 1048697 Principal (Par Value) face value of the bond the amount due at maturity
2 1048697 Coupon Rate the rate used to determine the periodic cash payments (coupon payment) if any
3 1048697 Coupon Payment Cash Payment = face value x Coupon Rate
4 1048697 Market Interest Rate the rate used to determine the current market value of the bond
Bonds - ParDiscountPremium
Bonds Sells Market Rate at issuance
Market Value at issuance
Coupon Payment
At Par = Coupon rate = Par value =Interest expenseAt a Discount gt Coupon rate lt Par value ltInterest expenseAt a Premium lt Coupon rate gt Par value gtInterest expense
Active investmentsUsed when significant influence exists- Under the equity method investment revenue is recognized as soon as the
investee company reports a net income or net loss - When the investee company declares and pays dividends the investor
company does not record as investment revenue but as a decrease of investment to avoid double counting
Starting pointOwnership lt20 20-50 gt50Reporting method
Fair value method
Equity Consolidation
Plus consider other factors such as representation on the board intercompany transactions etc
Equity method - investeersquos announcement of earnings increases investorrsquos Investment
account - Investeersquos announcement of dividends decreases investorrsquos
Investment account - Calculation of equity Income
ASPE vs IFRS - IFRS must use Equity method for investments with significant influence APSE Can use Equity method or Cost( if Shares are not actively traded) If shares actively traded then the choice is Equity or FVTPL
Purchase premiums- Purchase premiums arise for two reasons
o Fair market value differentials the FV of assetsliabilities of the investee are different from BV of those assetsliabilities
Fair market value differentials are amortized and the amortization expenses will be included in net income
bull Inventory fair market value differentials is usually amortized in the first period after acquisition
bull Fixed assets fair market value differentials are usually amortized over the expected remaining service life of the assets
o Goodwill is the expected value of future above-normal financial performance
- Calculation of Goodwill and FV differentials to be amortized
Goodwill CalculationPurchase priceLess percentage share of BV acquiredEquals Purchase PremiumMinus FV differences where FVgtBVAdd FV differences where FVgtBVRemainder equals Goodwill
- Revenue recognized to date G
- Revenue recognized to date G
- Inventory estimation methods
- The Gross Profit Method
-
Equity method - investeersquos announcement of earnings increases investorrsquos Investment
account - Investeersquos announcement of dividends decreases investorrsquos
Investment account - Calculation of equity Income
ASPE vs IFRS - IFRS must use Equity method for investments with significant influence APSE Can use Equity method or Cost( if Shares are not actively traded) If shares actively traded then the choice is Equity or FVTPL
Purchase premiums- Purchase premiums arise for two reasons
o Fair market value differentials the FV of assetsliabilities of the investee are different from BV of those assetsliabilities
Fair market value differentials are amortized and the amortization expenses will be included in net income
bull Inventory fair market value differentials is usually amortized in the first period after acquisition
bull Fixed assets fair market value differentials are usually amortized over the expected remaining service life of the assets
o Goodwill is the expected value of future above-normal financial performance
- Calculation of Goodwill and FV differentials to be amortized
Goodwill CalculationPurchase priceLess percentage share of BV acquiredEquals Purchase PremiumMinus FV differences where FVgtBVAdd FV differences where FVgtBVRemainder equals Goodwill
- Revenue recognized to date G
- Revenue recognized to date G
- Inventory estimation methods
- The Gross Profit Method
-