ACC 301 Exam 1
doubtful account (allowance for doubtful accounts)
% of accounts receivable not collected based on past experience
sale without recourse
**no liability purchases assumes risk of collection, seller records loss on sale -transfer is outright sale of receivable
sale with recourse
*liability seller guarantees payment to purchaser -financial components approach used to record transfer
in periods of decreasing prices... (income statement effects)
-FIFO reports lowest net income -LIFO highest -average in the middle
in periods of increasing prices... (income statement effects)
-FIFO reports the highest net income -LIFO reports the lowest net income -average cost falls in the middle
inventory
-asset items held for sale in ordinary course of business OR -goods to be used in production of goods to be sold
advantages of dollar-value LIFO
-broader range of goods in pool -permits replacement of goods that are similar -helps protect LIFO layers from erosion
receivables are classified in the balance sheet as...
-current or noncurrent -trade or nontrade
disadvantages of LIFO
-reduced earnings -inventory understated -physical flow -involuntary liquidation/poor buying habits
FIFO steps
-start with the first one (least recent) and multiply by unit cost -go to the next one and only use the amount of units (ex. if the total is 5 and you use 4 in the first one, only use 1 for the second) and multiply by unit cost -add those two up and the total is COGS EI: EI= beginning inventory + net purchases - COGS
LIFO steps
-start with the last (most recent) and multiply by unit cost -go to the next most recent purchase and only use the amount of units (ex. if the total is 5 and you use 4 in the first one, only use 1 for the second) and multiply by unit cost -add those two up and the total is COGS -EI= total cost-COGS
advantages of LIFO
-tax advantages -better matching of costs and revenues
perpetual journal entry
DR Inventory CR Accounts Payable
periodic journal entry
DR purchases CR accounts payable
tax effects: inventory on the balance sheet and net income on the income statement are higher when...
FIFO is used in a period of inflation
for internal reporting purposes, many companies use...
FIFO or average cost
cost flow assumptions
FIFO, LIFO, weighted average cost
for external financial reporting purposes, companies use...
LIFO
two limitations of LCM
NRV (ceiling) NRV less a normal profit margin (floor)
bank overdraft
a company writes a check for more than the amount in its cash account
trade discounts are not recognized in...
accounting records
bank overdrafts offset against other cash accounts only when...
accounts are with the same bank
net realizable value formula
accounts receivable - allowance for doubtful accounts
examples of receivables
accounts receivable, notes receivable
allowance to reduce inventory to NRV
allowance account credited for market adjustments
transaction price
amount of consideration a company expects to receive from a customer in exchange for transferring goods or services
current assets
assets that are expected to be converted to cash (sold, used) within a year
FIFO
assumes goods are used in the order in which they are purchased
periodic
at the end of the month/year, determine the ending inventory (recorded in the purchases account)
general rule of average days to collect receivables
average collection period should not greatly exceed the credit term period
direct write off method journal entry
bad debt expense DR A/R CR
allowance method journal entry
bad debt expense DR allowance for doubtful accounts CR
the reconciling item in a bank reconciliation that will result in an adjusting entry by the depositor is...
bank service charges
cost of goods sold formula
beginning inventory + purchases - ending inventory
most liquid asset
cash
restricted cash
cash that is not available for general use but instead is restricted for a particular purpose -segregated from "regular" cash
bank reconciliation
check your balance with the bank (compare your books to the bank)
receivables
claims held against customers and others for money, goods, or services
most popular price-level index
consumer price index for urban consumers (CPI-U)
allowance for sales returns and allowances
contra asset account to accounts receivable
sales returns and allowances
contra revenue account to sales revenue
COGS method journal entry
cost of goods sold DR inventory CR
specific-goods LIFO
costing goods on a unit basis is expensive and time consuming *dollar-value is used by most companies
product costs
costs directly connected with bringing the goods to the buyer's place of business and converting such goods to a salable condition
bank overdraft is reported as...
current liability
NSF check
customer writes company check without sufficient funds and the company deposits it
bad debt expense formula
desired balance of allowance for doubtful accounts - existing credit balance of allowance account OR + existing debit balance
LIFO reserve
difference between inventory method used to internal reporting purposes and LIFO
2 methods to account for uncollectible accounts
direct write-off method and allowance method
in a period of increasing prices, LIFO...
enables the company to avoid reporting paper or phantom profit
net realizable value definition
estimated selling price in the ordinary course of business, less reasonably predictable cost of completion, disposal, and transportation
allowance method
estimating uncollectible accounts at the end of each period and ensures that companies state receivables on their balance sheet at net realizable value -GAAP requires when material in amount -percentage-of-receivebles and percentage-of-sales *estimate the fraction of A/R that will not be collected
lower of cost of net realizable value
final inventory value is the lower of 1. cost (LIFO/FIFO) or net realizable value
objective of bank reconciliation
find the correct cash balance
period costs
generally selling, general, and administrative expenses
consigned goods
goods out on consignment remain the property of the consignor
treatment of purchase discounts
gross versus net method
why is the use of sales returns and allowances and allowance for sales returns and allowances helpful?
identify potential problems associated with inferior merchandise, inefficiencies in filling orders, or delivery or shipment mistakes
why does LIFO lower net income while prices are going up?
if you pay now rather than later it will be cheaper because money has more value now than in the future (time value of $)
switching from FIFO to LIFO usually results in...
immediate tax benefit
perpetual
immediately record what is bought/sold (inventory)
balance sheet effects
in a period of inflation, costs allocated to ending inventory using FIFO will approximate current costs -FIFO will be significantly understated
dollar-value LIFO
increases and decreases in a pool are measured in terms of total dollar value, not physical quantity of goods
revenue recognition principle
indicates that a company should recognize revenue when it satisfies its performance obligation by transferring the good or service to the customer
theoretically, any revenue after the period of sale is... (according to time value of money)
interest revenue
why have many companies switched too LIFO?
it yields the lowest net income and therefore, the lowest income tax liability in a period of increasing prices
loss method journal entry
loss due to decline in inventory to NVR DR inventory CR
cash is the basis for...
measuring and accounting for all items
cash is the standard...
medium of exchange
LIFO liquidation
older, low cost inventory is sold resulting in a lower cost of good sold, higher net income, and higher taxes *selling goods that you bought earlier where were sold at a cheaper price than current (prices are rising)
FOB shipping point
ownership of the goods passes to the buyer when the public carries accepts the goods from the seller
FOB destination
ownership of the goods remains with the seller until the goods reach the buyer
2 inventory methods
perpetual periodic
examples of restricted cash
plant expansion, retirement of long-term debt, compensating balances
ceiling rationale
prevents overstatement of the value of obsolete, damaged, or shopworn inventories
variable consideration
price of a good/service is dependent on future events (examples of these future events: discounts, returns and allowances, rebates, and performance bonuses)
weighted average cost
prices items in inventory on basis of average cost of all similar goods available during the period
direct write-off method
receivables are not stated at cash realizable value -theoretically deficient -no matching -not GAAP when material in amount *not accepted method *no estimate; just wait and record the expense when it happens
fare value option
receivables are recorded at fair value and unrealized holding gains/losses are reported as part of net income
nontrade receivables
receivables that originate from sources other than customers (ex. advances to officers and employees, deposits paid to cover potential damages or losses)
trade discounts
reductions from the list price
percentage-of-receivables approach
reports estimates of receivables at realizable value
2 sales of receivables
sale without recourse sale with recourse
net realizable value (NRV) or ceiling formula
sales price - estimated cost of completion and disposal
cash equivalents
short-term, highly liquid investments that are both... -readily convertible to cash -so near their maturity that they present insignificant risk of changes in value
LIFO
the cost of the total quantity sold or issued during the month comes from the most recent purchases
3 enhancing characteristics of information
timeliness, verifiability, understandibility
examples of cash equivalents
treasury bills, commercial paper, money market funds
the specific-goods approach to costing LIFO inventories is often considered...
unrealistic
accounts receivable turnover
used to evaluate liquidity of A/R; measures times on average a company collects receivables during the period
how do companies estimate uncollectible accounts and net realizable value (allowance method)?
using info about the past and current events as well as forecasts of future collectibility
lower-of-cost-or-market (LCM)
works well to measure the decline in value of a company's inventory for most companies
notes receivable
written promise to pay a certain sum of money at a specific future date -interest bearing or zero-interest bearing
conservatism
you should not overstate inventory/income -this causes the company to be in trouble and people to lose faith in their reporting
2 methods or bank reconciliation
1. balance per bank 2. balance per company's book
goods available for sale formula
1. beginning inventory + cost of goods purchased 2. ending inventory + cost of goods sold
3 versions of the market LCM
1. ceiling 2. floor 3. replacement cost (value in between ceiling and floor)
two methods of recording a loss
1. loss method 2. cost of goods sold method
weighted average cost steps
1. total cost/total units 2. COGS: # of sales units x #1 answer 3. EI: total cost - COGS
3 conditions that must be met for a sale to occur (FASB)
1. transferred assets isolated from transferor 2. transferee has the right to pledge or sell assets 3. transferor doesn't maintain control through repurchase agreement
