CPA Exam – FAR. Top Exam Questions and answers. VERIFIED.

CPA Exam – FAR. Top Exam Questions and answers. VERIFIED. Cash - -Money that is FREE and CLEAR and available to be spend in current operations. Not Cash: - -Security deposits & bond sinking funds Three-Month Rule - -Highly liquid securities with ORIGINAL maturity dates of three months or less are treated as cash. Bad Debts - Direct Write-Off Method - -- 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 - -Income Statement Approach Balance Sheet Approach Income Statement Approach - -- 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: - -Accounts Receivable Less: Allowance for bad debts = Net realizable value of A/R Balance Sheet Approach - -- 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 - -Reverse write-off entry. Collect as usual. Assigning Accounts Receivable - -- Assignment of A/R normally is done with recourse - Assignment usually is done without notification to customers Factoring Accounts Receivable - -- With or without recourse. Pledging A/R - -- Use receivables as security for a loan - Requires footnote disclosure Noninterest-Bearing Notes - -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 - -- Held-to-Maturity - Trading Securities - Available-for-Sale Securities Held-to-Maturity Securities - -- 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 - -- 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 - -- 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 - -Investment that derives its value from something else (asset or liability) Hedging - -Strategy of investing in a derivative to counteralance the potential loss from another security or transaction Non-Hedge Derivatives - -- Record on BS as asset or liability at FMV - Report unrealized G/L on IS Fair Value Hedge - -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 - -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 - -- Foreign currency denominated firm commitment hedge - Foreign currency available