CPA Exam (correct answers)
Cash correct answers Money that is FREE and CLEAR and available to be spend in
current operations.
Not Cash: correct answers Security deposits & bond sinking funds
Three-Month Rule correct answers Highly liquid securities with ORIGINAL maturity
dates of three months or less are treated as cash.
Bad Debts - Direct Write-Off Method correct answers - 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 correct answers Income Statement Approach
Balance Sheet Approach
Income Statement Approach correct answers - Matching Concept
- Estimate of bad debt expense is based on the income statement
- Allowance account balance has no bearing on the amount of adjustment
Balance sheet reporting: correct answers Accounts Receivable
Less: Allowance for bad debts
= Net realizable value of A/R
Balance Sheet Approach correct answers - Estimate of bad debt expense is based on
the balance sheet
- Period sales have no bearing on the amount of adjustment
Written-off account later collected correct answers Reverse write-off entry. Collect as
usual.
Assigning Accounts Receivable correct answers - Assignment of A/R normally is done
with recourse
- Assignment usually is done without notification to customers
Factoring Accounts Receivable correct answers - With or without recourse.
Pledging A/R correct answers - Use receivables as security for a loan
- Requires footnote disclosure
Noninterest-Bearing Notes correct answers APB 21 requires interest to be inputed
- When a note is made under customary trade terms and is due in less than one year,
there is no requirement to impute interest to that note.
, Investments correct answers - Held-to-Maturity
- Trading Securities
- Available-for-Sale Securities
Held-to-Maturity Securities correct answers - Debt securities only
- Mgt has both intent and ability to hold the securities to maturity
- Classified on BS based on maturity date
- Carry on balance sheet at amortized cost
Trading Securities correct answers - 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 correct answers - 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 correct answers Investment that derives its value from something else
(asset or liability)
Hedging correct answers Strategy of investing in a derivative to counteralance the
potential loss from another security or transaction
Non-Hedge Derivatives correct answers - Record on BS as asset or liability at FMV
- Report unrealized G/L on IS
Fair Value Hedge correct answers 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 correct answers 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 correct answers - Foreign
currency denominated firm commitment hedge
Cash correct answers Money that is FREE and CLEAR and available to be spend in
current operations.
Not Cash: correct answers Security deposits & bond sinking funds
Three-Month Rule correct answers Highly liquid securities with ORIGINAL maturity
dates of three months or less are treated as cash.
Bad Debts - Direct Write-Off Method correct answers - 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 correct answers Income Statement Approach
Balance Sheet Approach
Income Statement Approach correct answers - Matching Concept
- Estimate of bad debt expense is based on the income statement
- Allowance account balance has no bearing on the amount of adjustment
Balance sheet reporting: correct answers Accounts Receivable
Less: Allowance for bad debts
= Net realizable value of A/R
Balance Sheet Approach correct answers - Estimate of bad debt expense is based on
the balance sheet
- Period sales have no bearing on the amount of adjustment
Written-off account later collected correct answers Reverse write-off entry. Collect as
usual.
Assigning Accounts Receivable correct answers - Assignment of A/R normally is done
with recourse
- Assignment usually is done without notification to customers
Factoring Accounts Receivable correct answers - With or without recourse.
Pledging A/R correct answers - Use receivables as security for a loan
- Requires footnote disclosure
Noninterest-Bearing Notes correct answers APB 21 requires interest to be inputed
- When a note is made under customary trade terms and is due in less than one year,
there is no requirement to impute interest to that note.
, Investments correct answers - Held-to-Maturity
- Trading Securities
- Available-for-Sale Securities
Held-to-Maturity Securities correct answers - Debt securities only
- Mgt has both intent and ability to hold the securities to maturity
- Classified on BS based on maturity date
- Carry on balance sheet at amortized cost
Trading Securities correct answers - 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 correct answers - 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 correct answers Investment that derives its value from something else
(asset or liability)
Hedging correct answers Strategy of investing in a derivative to counteralance the
potential loss from another security or transaction
Non-Hedge Derivatives correct answers - Record on BS as asset or liability at FMV
- Report unrealized G/L on IS
Fair Value Hedge correct answers 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 correct answers 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 correct answers - Foreign
currency denominated firm commitment hedge
