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1. Cash
a. Cash is the most liquid asset and the customary medium of exchange. Thus, it provides the
standard of value (the unit of measurement) of reported transactions.
b. Cash is ordinarily a current asset. To be classified as cash, an asset must be readily
available for use by the business.
1) Restricted cash is not actually set aside in special accounts. It is designated for
special uses and should be separately presented and disclosed.
c. Cash equivalents are short-term, highly liquid investments.
d. Noncash items include (1) nonsufficient funds checks, (2) overdrafts, and (3) noncash
short-term investments.
e. Cash is recorded in a general ledger control account, with corresponding subsidiary ledgers,
and appears as one account on the balance sheet.
f. The most common bank reconciliation adjusts the book balance and the bank balance.
Each result should be the true balance.
2. Fair Value Option (FVO)
a. An entity may elect the FVO for most recognized financial assets and liabilities. An item is
then measured at fair value.
b. The decision whether to elect the FVO is made irrevocably at an election date (unless a
new election date occurs).
3. Investments in Equity Securities
a. An equity security is an ownership interest in an entity or a right to acquire or dispose of
such an interest.
b. Investments in equity securities are measured at fair value at each balance sheet date.
Unrealized holding gains and losses on remeasurement to fair value are reported on the
income statement at each subsequent reporting date.
c. At each reporting date, a qualitative assessment of whether an investment is impaired must
be performed. It is impaired if its fair value is lower than the carrying amount.
4. Equity Method
a. If the FVO is not elected, the equity method is applied when an investor has significant
influence over the investee. An investment of 20% or more of the voting stock of an
investee is presumed to enable the investor to exercise significant influence.
b. Under the equity method, the investor recognizes in income its share of the investee’s net
income or loss for the period.
1) The investor’s share of the net income (loss) of the investee increases (decreases) the
equity method investment.
2) Dividends received from the investee decrease the equity method investment but do
not affect the investor’s income.
c. Any difference between the cost and the underlying equity in the investee’s net assets at
the acquisition date also affects the carrying amount of the investment and equity method
income when this difference is amortized in subsequent periods.
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2 CPA FAR – Study Unit 5
Copyright © 2017 Gleim Publications, Inc. All rights reserved. Duplication prohibited. Reward for information exposing violators. Contact copyright@gleim.com.