Chapter 3 of 6Area II, 30–40% of exam

Area II: Cash, Receivables, Inventory, PP&E and Intangibles

This part of Area II works account by account through cash, receivables, inventory, property, plant and equipment and intangibles. Expect to compute balances, record entries, roll accounts forward and reconcile subledgers to the general ledger.

Cash, receivables and inventory

Cash and cash equivalents exclude restricted amounts and investments with original maturities over three months. Receivables are reported net of an allowance for expected credit losses, and transfers are sales only if control is surrendered. Inventory is costed by FIFO, LIFO or average cost and written down when its value falls below cost.

Cash equivalents

Short-term, highly liquid investments with original maturities to the holder of three months or less.

FASB ASC 305-10-20

Expected credit losses

The allowance reflects lifetime expected credit losses; an aging schedule is one acceptable estimation method.

FASB ASC 326-20-30-1; ASC 326-20-55

Sale of receivables

A transfer is a sale when the assets are isolated from the transferor, the transferee can pledge or exchange them, and the transferor keeps no effective control.

FASB ASC 860-10-40-5

LCNRV versus LCM

FIFO and average-cost inventory uses lower of cost and net realizable value; LIFO and retail-method inventory uses lower of cost or market with a ceiling and floor.

FASB ASC 330-10-35-1B and 35-1C

Right of return

Revenue is recognized only for goods expected to be kept, with a refund liability and a recovery asset for expected returns.

FASB ASC 606-10-55-23

Property, plant and equipment and intangibles

Long-lived assets are capitalized at the costs necessary to get them ready for use and depreciated or amortized over useful life. Held-and-used assets are tested for impairment in two steps, recoverability then fair value, while assets held for sale are carried at the lower of carrying amount or fair value less cost to sell. Intangibles are amortized only when their lives are finite.

Historical cost

Cost includes the amounts necessarily incurred to bring an asset to the condition and location for its intended use.

FASB ASC 360-10-30-1

Recoverability test

An impairment loss arises only when carrying amount exceeds undiscounted cash flows, and is measured as carrying amount minus fair value.

FASB ASC 360-10-35-17

Held for sale

Measured at the lower of carrying amount or fair value less cost to sell, and not depreciated while so classified.

FASB ASC 360-10-35-43

Indefinite-lived intangibles

Not amortized; tested for impairment at least annually.

FASB ASC 350-30-35-4 and 35-18

Cloud computing implementation costs

Capitalized implementation costs of a hosting service contract are expensed over the arrangement's term in the same line as the hosting fees.

FASB ASC 350-40; ASU 2018-15

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