I would like to record about the key points of the US CPA exam content.
<Create and note the points based on mainly Becker’s workbook>
Accrual Basis
- Under the accrual basis of accounting, revenues and expenses are recognized when they are earned or incurred, regardless of when the cash transactions actually occur.
- This method provides a more accurate picture of a company’s financial condition by matching revenues to the expenses incurred to generate those revenues within the same accounting period. This matching principle ensures that financial statements reflect all revenues earned and expenses incurred during a period, even if cash has not yet been received or paid.
- Example: if a lease agreement begins mid-month and the lease payment is due in the following month or later, it is necessary to record the lease expense attributable to the current month as accrued expenses. (DR) Rent Expense / (CR) Accrued Liability.
- Example: If 1,000 identical service contracts for a two-year duration are sold each month, and 40% of the services are provided in the first year, the annual accounting treatment for Deferred Revenue would be as follows. Current year deferral: 1,000 X 12months = 12,000. Earned in the current year: 12,000 X 40% X 1/2 = 2,400. Total deferred revenue amount is 9,600.
Interest Payment vs. Recording of Interest Expense regarding bond
- Interest Payment: Recorded when actual cash is paid and typically occurs when cash is actually transferred to creditors.
- Interest Expense (Amortization of Discount) For a noninterest-bearing note, the discount is recorded as the difference between the cash received and the face value of the note at issuance. This discount is amortized to gradually increase the carrying value of the note to its face value. The amortization of the discount is recorded as interest expense over the period, reflecting the economic interest, but does not involve an actual cash payment.
The impact of correcting the inclusion of freight-out costs in inventory.
If freight-out costs are incorrectly included in inventory, it impacts the P&L statement. Normally, freight-out should be recognized as an expense in SG&A at the time of occurrence. Therefore, including these costs in inventory overstates the inventory value. Additionally, when the inventory is sold, the cost of goods sold is also overstated. This accounting error needs to be corrected to ensure accuracy in financial reporting.”
FOB (Free on Board) terms
<FOB Shipping Point>
- Definition: Under FOB shipping point, the risk and ownership of goods transfer to the buyer the moment the goods leave the shipping point.
- Risk and Responsibility: Once the goods depart from the shipping point, the buyer assumes all risks and responsibilities. This means if the goods are damaged during transit, the risk is borne by the buyer.
- Revenue Recognition: Under US GAAP, revenue is recognized when the goods leave the shipping point because control of the goods transfers to the buyer at shipment.
<FOB Destination>
- Definition: FOB destination means that the seller retains the risk and ownership of the goods until they are delivered to and received by the buyer at the specified destination.
- Risk and Responsibility: The seller bears all risks until the goods reach the destination and are handed over to the buyer.
- Revenue Recognition: Revenue is recognized when the goods arrive at the buyer’s specified destination and receipt is confirmed.
Returns Allowance vs. Bad Debt Expense
Return Allowance: It is set up in connection with product returns. This is a provision for sales that may potentially be returned in the future and is set up in advance for the amount expected to be returned. This ensures that revenue is accurately reported, and the impact of returns is appropriately reflected in the financial statements. (DR) Sales Return Allowance / (CR) Deferred Revenue or Sales Revenue
Bad Debt Expense: It is used when accounts receivable is deemed uncollectible, reflecting the loss in the accounts receivable account. It is recorded when it is determined that collection is unlikely due to customer insolvency or bankruptcy. (DR) Bad debt expense / (CR) Allowance for doubtful accounts
