Financial Accounting: Assets FA 2 Module 6. Handouts. Current financial assets And current liabilities. Presented by: Laura Dallas, CGA

Financial Accounting: Assets

FA 2

Module 6

Handouts

Current financial assets

And current liabilities

Presented by:

Laura Dallas, CGA

Note: this information is prepared from the best information I have available to me. Also, please note, that I am human, and I have checked over all details for accuracy

as much as possible.

Module 6

What is included with this module’s handouts??

I have included:

1. The usual past exam analysis 2. Template of a Bank reconciliation

3. June 2006 exam questions for module 6

4. A T-Account explanation of Audio Lecture Slide 53

5. OLD exams multiple choice question (from 1998- 1999 no longer available on-line) 6. A comparison of what is covered in FA1, FA2, & FA3 from the course syllabus.

**NOTE: Information taken from the 2006 – 2007 Course syllabus, as at the time of recording & preparing this lecture this is the latest syllabus available. (Sept 2007) 7. Table of contents for all FA1 & FA2 courses, so you can have it as a quick reference

I don’t think all students will want to use all items, but please pick and find the items that help you with your learning process.

FA2 Past Exams 2002 - 2007

Module 6 questions

Exam

_Subject

Jun 06 1 6 6 Multiple-choice questions Dec 05 8 7 6 Current monetary balances

Template of Bank Reconciliation

ANY COMPANY Bank Reconciliation

December 31, 2006

Bank statement balance ... $X,XXX Book balance ... $X,XXX ADD: Outstanding deposit... Bank error ... XXX XXX ADD: EFT - Deposit ... Bookkeeping error... XXX XXX $X,XXX DEDUCT: Bank error... Outstanding cheques: #14: $ XXX #54: XXX... XXX XXX DEDUCT: NSF — ABC Company... Service Charges ... EFT – Auto withdrawal... Bookkeeping error...

XXX XXX XXX XXX Adjusted bank balance... $X,XXX Adjusted book balance... $X,XXX

*Outstanding Deposit, or Deposit-in-transit (Either description is fine.) NOTE: Bank error can NOT be on the book balance side.

NOTE: Bookkeeping error can NOT be on the bank statement side.

Journal entries

(for the BOOK balance entries only!)

DR Cash ... XXX

Fees Earned (for auto deposit amount)...XXX Specific Account (amount of error)... XXX

To record journal entries for Bank Reconciliation (ADD items)

A/R – ABC Company (for NSF cheque)... XXX Bank service charge expense………...XXX Hydro (or other) Expense (for auto withdrawal amount)...XXX Specific Account (amount of error)...XXX

CR Cash ……… ... XXX

June 2006 Exam Questions

d) Dwight Limited began the year with a debit balance of $1,312,000 in accounts receivable and a credit balance of $37,000 in allowance for doubtful accounts. During the year, sales on account totaled $551,000, collections of accounts receivable were $589,000, and the bad debt expense was $33,000.

At the end of the year, Dwight had a debit balance of $1,247,000 in accounts receivable and a credit balance of $43,000 in allowance for doubtful accounts. What was the amount of accounts receivable written off during the year?

1) $ 6,000 2) $27,000 3) $33,000 4) $43,000

f) The bank reconciliation for Shilly Limited includes the following: Balance per bank $ 147,300

Balance per accounting records 142,100 Unrecorded services charges 200 Unrecorded NSF cheque 100 Outstanding cheques 13,700 What would outstanding deposits be? 1) $7,800

2) $8,000 3) $8,200 4) $8,800

Question 5

Answer the following unrelated questions.

Required

2 b. When Luis Corporation prepared its bank reconciliation at the end of the month, there was an

adjustment for an NSF cheque for $127.00. Prepare the journal entry required to record the NSF cheque.

Solutions

d. 2) Topic 6.3 (Level 1)

37,000 + 33,000 – 43,000 = $27,000 f. 3) Source: Topic 6.2 (Level 1)

(142,100 – 200 – 100) – (147,300 – 13,700) = $8,200

Question 5

b. Source: Topic 6.2 (Level 1)

T-account representation of slide 52 & 53

Accounts Receivable

Beginning Balance 1,312,000

Sales on Account 551,000 589,000 Collection of Accounts Receivable Subtotal 1,863,000 589,000 Subtotal

Balance (1,863-589) 1,274,000

XXX Amount written off during the year

Ending balance (given) 1,247,000

Allowance for Doubtful

37,000 Beginning Balance 33,000 Bad Debt Expense 70,000 Subtotal

Amount written off during the year XXX

43,000 Ending balance, given

Accounts Receivable

Beginning Balance 1,312,000

Sales on Account 551,000 589,000 Collection of Accounts Receivable

27,000 Amount written off during the year

Subtotal 1,863,000 616,000 Subtotal

Ending balance (given) 1,247,000

Allowance for Doubtful

37,000 Beginning Balance 33,000 Bad Debt Expense 70,000 Subtotal

Amount written off during the year 27,000

On the following pages, please find numerous past exam questions that I had available, which you may find helpful.

These OLD exams are no longer available on the web site. June 99

n. A company reported the following items for 1998:

Accounts receivable balance, January 1, 1998 $ 80,000 Allowance for doubtful accounts balance, January 1, 1998 (credit) 11,000

Total credit sales during 1998 400,000

Total collections on accounts receivable during 1998 360,000 Uncollectible accounts written off during 1998 20,000

Experience indicates that 4% of the uncollected accounts receivable at the end of each year ultimately will be uncollectible. What should be the adjusting entry amount for doubtful accounts at December 31, 1998?

1) $ 4,000 2) $ 4,800 3) $ 7,000 4) $13,000

o. A company had accounts receivable of $3,000 and an allowance for doubtful accounts of $125, just

prior to writing off as uncollectible an account receivable of $30. What were the net realizable values of the accounts receivable as shown by the accounting records before and after the write-off?

Before After

1) $2,875 $2,875 2) $2,875 $2,975 3) $3,000 $2,970 4) $3,000 $3,095

p. A company is preparing its May bank reconciliation. The ending balance on the May bank

statement is shown as $4,225. At the end of the month, the following information was provided by company records and the monthly bank statement:

Bank service charges shown on the bank statement $15

NSF cheques from customers shown on the bank statement 48

Deposits in transit at the end of the month determined by the company’s bookkeeper 63 A cheque for $43 (the correct amount) written by the company was recorded in the books at 34 What is the correct cash balance shown on the bank reconciliation?

March 99

e. An analysis of the cash account for Swiss Company at December 31, 1998 revealed the following

details:

Balance in bank account $15,095

Term deposit which cannot be withdrawn until May 31, 2000 10,000 Customer cheques dated December 31, 1998, on hand but not yet deposited 6,500

What amount should be reported as cash in the current asset section of Swiss Company’s balance sheet at December 31, 1998? 1) $15,095 2) $21,595 3) $25,095 4) $31,595 Dec 98

c. An analysis of the petty cash fund reveals the following:

• Actual cash of $73

• IOU’s from employees of $24

• Receipts of $28 supporting expenses paid out of the fund

Assuming all amounts are material, what amount should be reported in the cash account in the current asset section of the balance sheet?

1) $73 2) $97 3) $101 4) $125

m. During May, a company received a cheque from a customer in payment of the related account

receivable. The cheque was written for the correct amount of $152, and it was deposited on May 18. The May bank statement listed the deposit at $512. How should this error be corrected on the May bank reconciliation?

1) Add $360 to the bank balance. 2) Add $360 to the book balance. 3) Subtract $360 from the bank balance. 4) Subtract $360 from the book balance.

n. A company estimated the needed balance in its account “allowance for doubtful accounts” by

aging the accounts receivable. At the end of 1998, the balance of the allowance account was $5,000. During 1999, the company wrote off $500 and collected a $300 receivable that had been previously written off as uncollectible. At the end of 1999, the aging schedule indicated that the balance of the allowance account should be $6,400. What is bad debt expense for 1999?

1) $1,600 2) $1,900 3) $6,600 4) $6,900

June 98

i. What is the effect of computing a bad debt expense by estimating the net realizable value of

accounts receivable?

1) It causes an adjustment to the allowance account that produces a balance in the allowance account equal to the total estimated uncollectible amount.

2) It emphasizes the income statement rather than the balance sheet.

March 98

n. WIN Corporation (WIN) has $18,000 on deposit with Bank A and is overdrawn $8,000 with Bank

C. Theoretically, what cash balance should WIN report on their balance sheet? 1) $8,000 2) $10,000 3) $18,000 4) $26,000

o. During April 1997, Good Inc. wrote a cheque to pay for inventory purchases in the correct amount

of $4,800. The cheque, which cleared the bank during April, appeared on the bank statement as $4,080. On the April bank reconciliation (correct cash balance approach), what should the accounting clerk do?

1) Add $720 to the book balance. 2) Add $720 to the bank balance. 3) Subtract $720 from the book balance. 4) Subtract $720 from the bank balance.

p. On July 3, 1997, MET Company (MET) sold goods for $1,000, subject to terms of 2/10, n/30. The

customer returned $200 of defective goods on July 5, and paid the amount due on July 12. Which of the following would be included in MET’s entry on July 12 (assuming the gross method) to record the cash receipt?

1) Credit to accounts receivable for $784. 2) Credit to accounts receivable for $800. 3) Credit to accounts receivable for $980. 4) Credit to accounts receivable for $1,000.

q. PRES Ltd. (PRES) estimates its bad debt expense by using a percentage of credit sales. In 1997,

the bad debt estimate was $3,800. In 1996, the estimate was $3,500. During 1997, PRES wrote off $3,000 of specific accounts and recovered $160 of accounts that had been previously written off as uncollectible. At the end of 1997, the balance in the "allowance for doubtful accounts" account was $2,500. What was the balance in the "allowance for doubtful accounts" account at the beginning of 1997?

1) $1,540 2) $1,700 3) $3,460 4) $3,500

June 97

i. The following information pertains to Apricot Ltd., a fruit wholesaler, at December 31, 1996:

Bank statement balance $ 40,000 Chequebook balance 56,000 Deposits in transit 20,000 Outstanding cheques 4,000

On Apricot's December 31, 1996 balance sheet, at what amount should cash be reported? 1) $36,000 2) $40,000 3) $56,000 4) $60,000 5) None of the above.

k. During the year, Kabuki Company made an entry to write off a $3,000 uncollectible account.

Before this entry was made, the balance in accounts receivable was $40,000 and the balance in the allowance account was $3,400. The net realizable value of accounts receivable after the write-off entry was:

CERTIFIED GENERAL ACCOUNTANTS ASSOCIATION OF CANADA

FINANCIAL ACCOUNTING COURSES Topic

Financial Accounting

1

Financial

Accounting 2 Accounting 3 Financial Accounting 4 Financial Accounting Theory 1 Public Sector _Financial Management 1

Accounting for income taxes

X X X X

Accruals and deferrals X X X X

Amortization X X X X X

Bad debt expense X X

B a lan c e sh e et c o n c e p t s , classifications, and preparation X X X X X Business combinations: C o n so l id at io n Foreign operation Non-wholly owned subsidiaries Wholly-owned subsidiaries Purchase X X X X X X X Capital assets X X X X

Capital market theory X X

Cash X X X Conceptual framework: A lt e rn at iv e to current structure Current structure X X X X X X X Contingencies X X X Corporate equity X X X

Cost of goods sold X

Costing issues X Decision-usefulness approach to financial reporting Information perspective Measurement perspective X X X X Double-entry system X

Earnings per share X X X

Efficient market theory X X

Error corrections X

Ethics X X X X X X

Topic _Accounting Financial 1 Financial Accounting 2 Financial Accounting 3 Financial Accounting 4 Accounting

Theory 1 Public Sector _Financial Management 1

Financial accounting & reporting standards X X X X X X Financial instruments X X X Financial statement analysis X X X Foreign currency translation, transactions X Fund accounting X X X Future taxes X X X X Game theory/agency theory X Goods and Services

Tax (GST) X X Goodwill X X X X Income statement concepts, classifications, preparation X X X X X Information needs of financial statement users X X X X X X Intangibles (excluding goodwill) X X X International accounting standards X X X X Inventories X X X Investments in securities: Debt & equity

Topic

Financial Accounting

1

Financial

Accounting 2 Accounting 3 Financial Accounting 4 Financial Accounting Theory 1 Public Sector _Financial Management 1

Performance management

X Present value & future

value concepts X X X X Price-level adjusted financial statements X Public service X Receivables X X X Regulatory influences X X X X X Reporting: Interim Segment disclosures X X X X Research & development costs X

Revenue and expense recognition X X X Risk management X SEC reporting X Single-person decision theory X Small business: Characteristics Information needs Reporting requirements X X X Standard setting C an ad i an environment International environment Political issues Theoretical issues X X X X X X X X X

Cash flow statement X X X X

Transaction analysis X

Financial Accounting 1 [FA1]

Calendar Description This introductory course in financial accounting reviews the accounting cycle and the preparation of financial statements. Topics include accounting for merchandising activities, accounting for cash, temporary investments and accounts receivable, inventories and cost of goods sold, capital assets, current and long-term liabilities, partnership accounting and accounting for corporations, as well as the cash flow statement.

Level of Competence

1. INTRODUCTION TO ACCOUNTING CONCEPTS

1.1 What is accounting? 1

1.2 Forms of organization 2

1.3 Ethics in accounting 1

1.4 Types of accountants and fields of accounting 2

1.5 Financial statements 1

1.6 Generally accepted accounting principles 2

1.7 The accounting equation 1

2. RECORDING TRANSACTIONS

2.1 Economic events and source documents 1

2.2 Accounts 1

2.3 Analyzing transactions 1

2.4 Journalizing and posting transactions 1

2.5 Preparing a trial balance 1

3. ADJUSTING THE ACCOUNTS, PREPARING THE

STATEMENTS,

AND COMPLETING THE ACCOUNTING CYCLE

3.1 Time period principle and the need for adjustments 1

3.2 Adjusting the accounts 1

3.3 Adjusted trial balance and preparation of financial statements 1

3.4 The work sheet 2

3.5 Closing entries 1

3.6 Post-closing trial balance 1

3.7 The accounting cycle 1

3.8 Classification of balance sheet items 1

3.9 Using the information — Current ratio 2

4. ACCOUNTING FOR MERCHANDISING ACTIVITIES

4.1 Merchandising companies 2

4.2 Merchandise purchases — Perpetual inventory system 1

4.3 An ethics application 1

4.4 Revenue from sales and cost of goods sold —

Perpetual inventory system 1

4.5 Additional merchandising issues 1, 2

5. INVENTORIES — ADDITIONAL CONSIDERATIONS

5.1 Assigning costs to inventory items 1

5.2 Lower of cost or market 1

5.3 Inventory errors 1

5.4 Estimating inventories 2

5.5 Inventory costing methods — Periodic inventory system 2 5.6 Using the information — Merchandise turnover and

days’ sales in inventory 2

5.7 Testing the accuracy of ledgers 2

6. INTERNAL CONTROL AND ACCOUNTING FOR CASH,

INVESTMENTS HELD FOR THE SHORT TERM, AND RECEIVABLES

6.1 Internal control 2

6.2 Cash defined and internal control for cash 1

6.3 The petty cash fund 1

6.4 An ethical issue 1

6.5 Reconciling the bank balance 1

6.6 Using the information — Acid-test ratio 2

6.7 Investments held for the short term 1

6.8 Classification of debt and equity investments 1

6.9 Accounting for trading investments 1

6.10 Credit customers and bad debts 1

6.11 Promissory notes 1

6.12 Converting receivables into cash 2

6.13 Using the information — Accounts receivable turnover and

days’ sales outstanding 2

7. CAPITAL ASSETS: PROPERTY, PLANT AND EQUIPMENT,

NATURAL RESOURCES, AND INTANGIBLES

7.1 Capital assets: Property, plant and equipment 1 7.2 Costs subsequent to acquisition of property, plant and equipment 2

7.3 Amortization 1

7.4 An ethics application 1

7.5 Property, plant and equipment disposals 2

7.6 Natural resources 2

7.7 Intangible assets 2

7.8 Using the information — Total asset turnover

and return on total assets 2

8. CURRENT AND LONG-TERM LIABILITIES

8.1 Liabilities 1

8.2 Known (determinable) liabilities 2

8.3 Short-term notes payable 1, 2

8.4 Estimated and contingent liabilities 2

8.5 Bonds payable and other long-term liabilities 2, 3

8.6 Time value of money 2

9. ACCOUNTING FOR PARTNERSHIPS AND CORPORATIONS

9.1 Characteristics of proprietorships and partnerships 2

9.2 Division of partnership earnings 1

9.3 Corporate organization 2

9.4 Corporate financial statements 1

9.5 Issuance of shares 1

9.6 Classes of shares and special features of preferred shares 2 9.7 Cash dividends and closing entries for a corporation 2

9.8 Book value per share 2

9.9 Reporting income 2

9.10 Additional share transactions 2

9.11 Earnings per share 2

9.12 Retained earnings 2

9.13 Ethics — Insider trading 1

10. CASH FLOW STATEMENT AND THE CONCEPTUAL

FRAMEWORK OF ACCOUNTING

10.1 Cash flows and the cash flow statement 1

10.2 Preparing cash flow statements 1

10.3 Interpreting financial statements using ratio analysis 2

10.4 The conceptual framework of accounting 2

10.5 Essential characteristics of accounting information 2

10.6 Tradeoff of qualitative characteristics 2

10.7 Fundamental concepts of accounting — Assumptions 2 10.8 Fundamental concepts of accounting — Basic principles 2

Financial Accounting 2 [FA2]

Calendar Description This intermediate financial accounting course focuses on the asset side of the balance sheet. The first part of the course covers financial reporting and accounting concepts, income statement and balance sheet presentation, the cash flow statement, and revenue and expense recognition. The valuation of notes receivable, investment in debt securities, and leases are studied. The second half of the course covers current monetary balances, inventory and cost of goods sold, temporary and long-term investments, and capital assets. Computer software is used to demonstrate accounting concepts and procedures and to provide hands-on experience.

Level of Competence

1. FINANCIAL REPORTING AND ACCOUNTING CONCEPTS

1.1 Objectives of financial reporting 1

1.2 Ethics in accounting 2

1.3 Accounting assumptions and qualitative characteristics 1 1.4 Recognition criteria and elements of financial statements 1

1.5 Measurement methods 1

1.6 Professional judgment in financial reporting 2

1.7 Accounting information processing system 1

1.8 Computer illustration 1-1: Review of the accounting cycle 1

2. INCOME STATEMENT AND BALANCE SHEET PRESENTATION

2.1 Nature of income 1, 2

2.2 Presentation of the income statement 1, 2

2.3 Discontinued operations 1

2.4 Extraordinary items and unusual gains and losses 1

2.5 Earnings per share 2

2.6 Comprehensive income 1

2.7 Statement of retained earnings 1

2.8 Restatements 2

2.9 Balance sheet presentation 1

2.10 Disclosure 2

2.11 Goods and Services Tax 2

2.12 Computer illustration 2-1: Trial balance 1

3. CASH FLOW STATEMENT

3.1 Theoretical foundation 1

3.2 Classification of cash flows 1

3.3 Preparation of the cash flow statement 1

3.4 Disclosure and special issues 1

3.5 Interpretation of the cash flow statement 2

4. REVENUE AND EXPENSE RECOGNITION

4.1 Revenue recognition concepts 1

4.2 Revenue recognition at delivery 1

4.3 Revenue recognition before and after delivery 2

4.4 Revenue recognition effort expended 1

4.5 Recognition of gains and losses 1

4.6 Expense recognition 1

4.7 Ethical considerations 2

5. INTEREST CONCEPTS OF FUTURE AND PRESENT VALUE

5.1 Time value of money 1

5.2 Basic interest concepts 1

5.3 Computing present value 1

5.4 Computer illustration 5-1: Value of equipment 1

6. CURRENT FINANCIAL ASSETS AND CURRENT LIABILITIES

6.1 Nature of current financial assets 1

6.2 Cash 1

6.3 Receivables 1

6.4 Accounting for bad debt expense 1

6.5 Notes receivable and payable 1, 2

6.6 Current liabilities 1

6.7 Computer illustration 6-1: Aging of accounts receivable 1

7. INVENTORY MEASUREMENT, INVENTORY VALUATION,

AND COST OF GOODS SOLD

7.1 Nature of inventory 1

7.2 Perpetual and periodic inventory systems 1

7.3 Cost flow assumptions 1, 3

7.4 Computer illustration 7-1: Specific cost identification method 1

7.5 Effect of inventory errors 1

7.6 Valuation at lower of cost or market 1

7.7 Inventory estimation methods 2

7.8 Internal controls for inventory 2

8. INVESTMENTS AND FINANCIAL INSTRUMENTS

8.1 Classification of investments 1

8.2 Accounting for held to maturity investments 1 8.3 Accounting for available for sale investments 1 8.4 Accounting for held for trading investments 1

8.5 The equity method 1

8.6 Reclassification of investments 2

8.7 Classification and disclosure issues 2

9. TANGIBLE AND INTANGIBLE CAPITAL ASSETS

9.1 Definition and valuation of capital assets 1

9.2 Determining the cost of capital assets 1, 2

9.3 Intangible assets 1

9.4 Goodwill 1

9.5 Disposal and exchange of capital assets 1

9.6 Post-acquisition expenditures 1

9.7 Disclosure and cash flow reporting 1

10. CAPITAL ASSETS: AMORTIZATION AND IMPAIRMENT

10.1 Nature of amortization 1

10.2 Amortization methods 1

10.3 Computer illustration 10-1: Amortization methods 1

10.4 Additional amortization issues 2

10.5 Impairment of capital assets and goodwill 1

10.6 Capital cost allowance 2

10.7 Amortization of natural resources 2

10.8 Disclosure requirements 1