F3 ASSETS

Question 1

For cash equivalents, do you test the remaining time to maturity at the balance sheet date or the ORIGINAL maturity at purchase/issuance?

Answer 1

Use ORIGINAL maturity at purchase/issuance (not remaining time at reporting date). ≤ 3 months (≈ 90 days) original maturity qualifies. [RULE]

Question 2

Certificate of deposit: 1-year CD that matures 2 weeks after year-end — cash equivalent?

Answer 2

No. Original maturity was 1 year (> 3 months). Remaining time doesn’t matter. [RULE]

Question 2

Treasury bill purchased on issuance date: 6-month T-bill that has 45 days left at year-end — cash equivalent?

Answer 2

No. Original maturity was 6 months (> 3 months), so it is NOT a cash equivalent even if only 45 days remain. [RULE]

Question 2

On the balance sheet date, is a post-dated check from a customer included in Cash?

Answer 2

No. A post-dated check is NOT cash until the date arrives/it’s negotiable; treat as A/R (or “receivable”) at period end. [RULE]

Question 3

On the balance sheet, when can you net overdrafts against positive cash balances?

Answer 3

Net only within the SAME bank (same legal right of offset). Do NOT net between different banks. If a different bank has a negative balance, report it as a liability (bank overdraft). [RULE]

Question 4

What is a money market account (MMA), and how is it classified on the balance sheet?

Answer 4

An MMA is a bank deposit account (interest-bearing savings-type). Classify as Cash if unrestricted and available on demand; if restricted, classify as restricted cash. The “≤ 3 months original maturity” test applies to investments, not deposit accounts. [VOCAB]

Question 5

or a tiered (bracket) volume discount, do you apply the highest discount rate to all units once the threshold is reached?

Answer 5

No. Apply rates sequentially by tier (each bracket gets its own rate). Only apply “all-units/retroactive” pricing if the contract explicitly says so. [RULE]

Question 6

What is NRV for inventory under U.S. GAAP?

Answer 6

NRV = estimated selling price − completion costs − disposal costs. [RULE]

Question 7

When do you record an inventory write-down under LCNRV?

Answer 7

If NRV < cost → write down to NRV (no reversals under GAAP). [RULE]

Question 8

Journal entry for inventory write-down under LCNRV?

Answer 8

Dr Loss on inventory write-down (or COGS); Cr Inventory (or Allowance). [JE]

Question 9

what are disposal cost (inventory)

Answer 9

Disposal costs are the costs to sell and deliver the inventory (the “get it out the door” costs) that reduce what you’ll actually net.

Question 10

what is the Lower of Cost and Net Realizable Value.

Answer 10

inventory should not sit on the balance sheet at an amount higher than what it can be turned into in cash, net of the remaining costs to sell it.

Cost (what you paid / incurred to get it ready), versus

NRV = the net cash you expect to realize from selling it (selling price minus completion + disposal costs)

Question 11

As a consignor, how should you treat shipping costs (like freight or in-transit insurance) when sending goods to the consignee?

Answer 11

The consignor owns the goods until sold, so shipping costs to the consignee are treated like moving inventory between warehouses.

These shipping costs (freight, insurance) are capitalized as part of inventory cost.

They are not expensed immediately because they add “place utility” and are necessary to get inventory ready for sale.

Question 12

In Dollar-Value LIFO, if base-year inventory decreases, which layer is liquidated first?

Answer 12

The most recent (newest) layer is removed first (LIFO liquidation). [RULE]

Question 13

Under U.S. GAAP, how do you treat abnormal costs (e.g., abnormal spoilage, abnormal idle time) in inventory costing?

Answer 13

Do not capitalize—expense as incurred (inventory includes only normal, necessary costs to bring goods to saleable condition). [RULE]

Question 14

Why is indirect labor included in inventory cost under U.S. GAAP for manufacturers?

Answer 14

Indirect labor is manufacturing overhead (MOH)—a necessary factory cost—so under absorption costing inventory = DM + DL + MOH (cap until sold). [RULE]

Question 15

What is a firm purchase commitment?

Answer 15

A binding, noncancelable contract to buy goods in the future at fixed/ determinable terms; losses are accrued if market < contract at the reporting date. [VOCAB]

Question 16

Under U.S. GAAP, when do you record a loss on a firm purchase commitment?

Answer 16

Record a liability only if the contract is firm (noncancelable) and market price < contract price at the reporting date; loss = (contract − market) for the committed quantity. Dr Loss; Cr Estimated liability. [RULE]

Question 17

Under FIFO, how do costs flow and what does ending inventory represent?Under FIFO, how do costs flow and what does ending inventory represent?

Answer 17

FIFO: earliest costs → COGS first; ending inventory → most recent costs. Under FIFO, EI is the same under periodic and perpetual systems. [RULE]

Question 18

What is a key disadvantage of the periodic inventory system related to shrinkage/shortages?

Answer 18

Periodic inventory disadvantage: COGS becomes a “plug” that absorbs shrinkage. In a periodic system, COGS is computed from beginning inventory + purchases − ending inventory, rather than recorded per sale. That means any inventory losses (damage, theft, shrinkage, errors) reduce ending inventory and automatically flow into COGS, making it hard to separate true cost of sales from inventory shortages for reporting and control purposes.

Question 19

Are sales commissions included in inventory/COGS?

Answer 19

No—sales commissions are selling expenses (period costs), not inventoriable; they do not become COGS. [RULE]

Question 20

What is Net Realizable Value (NRV) in inventory valuation?

Answer 20

NRV = Estimated Selling Price – Costs to Complete and Dispose (sell) the inventory.
“Disposal” costs include all costs necessary to sell or get rid of the inventory (e.g., shipping, commissions), not just throwing it away.

Question 21

When should you apply LCNRV to each inventory item separately versus to the total inventory?

Answer 21

Default: Apply LCNRV per item for the most conservative and accurate valuation.
Exception: Apply LCNRV to total inventory only if the question explicitly instructs you to do so.

Question 22

Under FIFO, which costs are transferred first to Cost of Goods Sold?

Answer 22

The oldest (first) costs are transferred first to COGS.

Question 23

In a period of rising prices, how does FIFO affect net income?

Answer 23

FIFO results in the lowest COGS and highest net income.

Question 24

Does FIFO produce the same ending inventory value under periodic and perpetual systems?

Answer 24

Yes, FIFO ending inventory is the same under both systems.

Question 25

Why would a company choose FIFO in a rising price environment?

Answer 25

To maximize reported profits by showing lower COGS and higher net income.

Question 26

What is the inventory turnover ratio and what does it do?

Answer 26

Inventory Turnover= Cost of Goods Sold (COGS) / Average Inventory This ratio measures how many times inventory is sold and replaced over a period. Average Inventory is usually Beginning Inventory+Ending Inventory / 2 ​ ​

Question 27

In accounting, what does it mean to “raze” a building on land?

Answer 27

To demolish/tear down an existing structure (often to prepare land for new construction). [VOCAB]

Question 28

Why are debt issuance costs not included in the capitalized cost of land?

Answer 28

Debt issuance costs are costs of issuing the debt, not costs to acquire or prepare the land. GAAP requires these costs to be recorded as a direct reduction (contra account) to the carrying amount of the bond or note payable.

Question 29

What are the criteria for classifying an asset as held for sale?

Answer 29

Management committed to a plan to sell Asset available for immediate sale in present condition Active program to locate buyer initiated Sale probable within one year Asset actively marketed at a reasonable price No significant changes to the plan expected

Question 30

How is an asset classified as held for sale reported on the balance sheet?

Answer 30

Classified separately as a current asset Depreciation stops once classified as held for sale

Question 31

At what amount is an asset held for sale recorded?

Answer 31

Lower of carrying value (book value) or fair value less costs to sell (net realizable value)

Question 32

What happens if the fair value less costs to sell is lower than the carrying value?

Answer 32

The asset is written down to fair value less costs to sell An impairment loss is recognized

Question 33

Does depreciation continue after an asset is classified as held for sale?

Answer 33

No, depreciation ceases once the asset is classified as held for sale

Question 34

Why is the asset valued at the lower of carrying value or fair value less costs to sell?

Answer 34

To reflect the expected net amount to be recovered from the sale, ensuring no overstatement of asset value

Question 35

Which intangible assets are subject to the recoverability test for impairment?

Answer 35

Intangible assets with finite (limited) useful lives, such as patents, are subject to the recoverability test.

Question 36

Why are goodwill and indefinite-life trademarks not subject to the recoverability test?

Answer 36

Because they have indefinite useful lives, goodwill and indefinite-life trademarks skip the recoverability test and go directly to a fair value impairment test.

Question 37

How are crypto assets classified under U.S. GAAP?

Answer 37

Crypto assets are classified as indefinite-lived intangible assets because their useful life cannot be determined.

Question 38

How are crypto assets measured and reported each reporting period?

Answer 38

Crypto assets are measured at fair value each reporting period, with changes in fair value recognized in current period net income (P&L).

Question 39

What are the three key criteria for a crypto asset to be classified as an indefinite-lived intangible asset?

Answer 39

Secured through cryptography Created or resides on a distributed ledger (blockchain) The asset is not created or issued by the reporting entity or its related parties. The asset does not provide enforceable rights or claims to an underlying good, service, or other asset.

Question 40

When should attorney (legal) fees be capitalized as part of the cost of an intangible asset?

Answer 40

Attorney fees incurred to acquire or secure an intangible asset are capitalized as part of the asset’s cost. This includes fees to finalize the purchase or registration of the intangible. Example: If you pay cash, transfer land at fair value, and pay attorney fees to obtain an intangible, all these costs are included in the intangible asset’s recorded cost.

Question 41

When are attorney (legal) fees included in the cost of an intangible asset?

Answer 41

Attorney fees paid to acquire or secure an intangible asset are added to the asset’s cost. This includes legal costs to complete the purchase or registration. These fees are capitalized, not expensed, as part of the intangible asset’s recorded value.

Question 42

When calculating amortization expense for an intangible asset with a future selling price, what must you do with the selling price?

Answer 42

You must subtract the future selling price (residual value) from the asset’s cost before calculating amortization. This ensures you only amortize the depreciable amount (cost minus residual value) over the asset’s useful life.

Question 43

What is the half-year convention in depreciation, and how does it affect the depreciation expense over an asset’s useful life?

Answer 43

Assumes asset is placed in service (and disposed) at mid-year. Depreciation is half of a full year in the first year and last year only. All middle years get full-year depreciation. For example, a 5-year asset’s depreciation schedule: Year 1: 0.5 × full year depreciation Years 2–5: full year depreciation Year 6: 0.5 × full year depreciation Simplifies calculations and ensures total depreciation equals the asset’s cost over its life.

Question 44

What is pledging of accounts receivable?

Answer 44

Using accounts receivable as collateral for a loan while keeping them on the books. No change to accounts receivable balance; only note disclosure required.

Question 45

What journal entry is made when pledging accounts receivable?

Answer 45

Debit Cash, Credit Notes Payable (loan). No entry to accounts receivable.

Question 46

What is factoring of accounts receivable?

Answer 46

Selling accounts receivable to a third party (factor), removing them from your books, and recognizing any gain or loss.

Question 47

What is the difference between factoring with recourse and without recourse?

Answer 47

Without recourse = true sale, factor assumes risk of uncollectibles. With recourse = seller may have to buy back uncollectibles; can be treated as sale or loan.

Question 48

What is the order of steps in the impairment test for long-lived assets?

Answer 48

dentify the lowest level of cash flows (e.g., division or asset level). Perform the recoverability test using undiscounted cash flows. If impaired, measure the loss by comparing carrying amount to fair value. Record the impairment loss.

Question 49

Apax Corp has a building with: Carrying value = $800,000 Fair value = $750,000 Costs to sell = $20,000 (broker) + $15,000 (closing) = $35,000 What loss should be recorded on initial classification as held for sale?

Answer 49

Key point: Loss = Carrying value – (Fair value – Costs to sell)

Question 50

Factoring A/R

Answer 50

Sell A/R to a factor (third party). Remove A/R from your books. Factor can collect and sell A/R. Can be with or without recourse (risk of bad debts). Entry: Debit Cash, Debit Loss (if any), Credit A/R.

Question 51

Pledging A/R

Answer 51

Use A/R as collateral for a loan. A/R stays on your books. No change to accounts receivable balance. Lender cannot sell or collect A/R. Entry: Debit Cash, Credit Notes Payable. Disclosure only in notes.

Question 52

What is a Debt Covenant?

Answer 52

A debt covenant is a rule set by lenders to protect their loan by requiring the borrower to do or not do certain things—like keeping financial ratios within limits or maintaining minimum working capital—to reduce the lender’s risk and keep the borrower’s credit strong.

Question 53

Avoidable interest

Answer 53

is the interest cost directly tied to construction expenditures—the interest you could avoid if you didn’t build. Calculate it by multiplying average accumulated expenditures by the interest rate(s).