Estimated study time: 60 minutes
Content:
Balance sheet presentation: Current assets listed in order of liquidity. Current liabilities listed in order of maturity. Working capital = current assets − current liabilities. Classified vs. unclassified balance sheets depend on entity type and industry.
Cash and receivables: Bank reconciliations — outstanding checks reduce the bank balance; deposits in transit increase the bank balance; bank service charges reduce the book balance; NSF checks reduce the book balance. Receivables are recognized at net realizable value (NRV) = gross receivables − allowance for doubtful accounts. The allowance method (GAAP required) estimates uncollectible amounts; the direct write-off method is only acceptable for immaterial amounts or when uncollectibles are negligible.
Inventory: FIFO, LIFO, Weighted Average, Specific Identification. Under rising prices, FIFO produces higher ending inventory, lower COGS, higher net income; LIFO produces lower ending inventory, higher COGS, lower net income. LIFO reserve = FIFO inventory − LIFO inventory. Lower of cost or net realizable value (LCNRV) under ASC 330 for FIFO/WA; lower of cost or market (LCM) for LIFO. NRV = estimated selling price − estimated completion costs − estimated selling costs.
Long-lived assets: Capitalization threshold — costs that extend useful life or add future economic benefits are capitalized; maintenance/repairs expense immediately. Depreciation methods: Straight-line (cost − salvage value) / useful life; Declining balance (book value × rate, usually 2×SL rate for double-declining); Sum-of-years-digits = (remaining life / SYD) × depreciable base. MACRS is only for tax purposes, not GAAP.
Impairment: For assets held and used, test when indicators exist. Step 1: recoverability test (if carrying value > undiscounted future cash flows → impaired). Step 2: impairment loss = carrying value − fair value. Impairment losses are not reversed (GAAP; IFRS allows reversal). For assets held for sale, carried at lower of carrying value or fair value less costs to sell.
Leases (ASC 842): All leases with term >12 months recognized on balance sheet. Lessee: Right-of-use (ROU) asset and lease liability at present value of remaining lease payments. Finance lease: accelerated amortization of ROU asset + interest on liability (front-loaded expense pattern). Operating lease: single straight-line lease cost. Lessor: Sales-type lease recognizes selling profit at commencement; direct financing lease recognizes interest income only; operating lease recognizes rental income.
Pensions (ASC 715): Defined contribution — only current period cost recorded; employer contributes and bears no future obligation. Defined benefit — complex. Net pension liability/asset = projected benefit obligation (PBO) − fair value of plan assets. Components of pension expense: service cost, interest cost, expected return on plan assets (reduces cost), amortization of prior service cost, amortization of net actuarial gain/loss (corridor approach or immediate recognition). Funded status is recorded on the balance sheet; AOCI captures unrecognized components.
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