Exam (elaborations)
CPA Exam - FAR (1
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Exam of 8 pages for the course CISA: Domain #2, Part A: IT Governance at CISA: Domain #2, Part A: IT Governance (CPA Exam - FAR (1)
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CPA Exam - FARCash - ANS-Money that is FREE and CLEAR and available to be spend in current operations.
Not Cash: - ANS-Security deposits & bond sinking funds
Three-Month Rule - ANS-Highly liquid securities with ORIGINAL maturity dates of three months
or less are treated as cash.
Bad Debts - Direct Write-Off Method - ANS-- No entry for bad debts until customer actually
defaults.
- At default, the cutomer's account is written off.
- Theoretically weak, matching issue
- Only allowed if bad debt expense is immaterial
Bad Debts - Allowance Method - ANS-Income Statement Approach
Balance Sheet Approach
Income Statement Approach - ANS-- Matching Concept
- Estimate of bad debt expense is based on the income statement
- Allowance account balance has no bearing on the amount of adjustment
Balance sheet reporting: - ANS-Accounts Receivable
Less: Allowance for bad debts
= Net realizable value of A/R
Balance Sheet Approach - ANS-- Estimate of bad debt expense is based on the balance sheet
- Period sales have no bearing on the amount of adjustment
Written-off account later collected - ANS-Reverse write-off entry. Collect as usual.
Assigning Accounts Receivable - ANS-- Assignment of A/R normally is done with recourse
- Assignment usually is done without notification to customers
Factoring Accounts Receivable - ANS-- With or without recourse.
Pledging A/R - ANS-- Use receivables as security for a loan
- Requires footnote disclosure
Noninterest-Bearing Notes - ANS-APB 21 requires interest to be inputed
- When a note is made under customary trade terms and is due in less than one year, there is
no requirement to impute interest to that note.
, Investments - ANS-- Held-to-Maturity
- Trading Securities
- Available-for-Sale Securities
Held-to-Maturity Securities - ANS-- Debt securities only
- Mgt has both intent and ability to hold the securities to maturity
- Classified on BS based on maturity date
- Carry on balance sheet at amortized cost
Trading Securities - ANS-- Equity or Debt securities held primarily for sale in the near term
- Classified on BS as current
- Carried on BS at FMV
- Unreal holding gains/losses belong on the income statement
Available-for-sale Securities - ANS-- Debt or Equity securities not classified as either HTM or
Trading
- Debt is classified on BS by maturity date
- Equity securities are classified by mgt's intent
- Carried on BS at aggregate FMV
- Unreal G/L go directly to SH equity (other comprehensive income)
Derivatives - ANS-Investment that derives its value from something else (asset or liability)
Hedging - ANS-Strategy of investing in a derivative to counteralance the potential loss from
another security or transaction
Non-Hedge Derivatives - ANS-- Record on BS as asset or liability at FMV
- Report unrealized G/L on IS
Fair Value Hedge - ANS-Protects against potential loss from the change in an asset's or
liabilities's FMV
- Record on BS as asset or liability at fair market value
- Report unrealized holding G/L on IS
Cash-Flow Hedge - ANS-Protects against potential loss from an asset's or liability's future cash
flow
- Record on BS as asset or liability
- Unreal G/L depend on whether hedge is effective
- Effective cash flow hedges counterbalance losses elsewhere
- Ineffective cash flow hedges are reported on the IS
Foreign currency hedges accounted for as FV hedges - ANS-- Foreign currency denominated
firm commitment hedge
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