Accounting 215 exam 2 review

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average days in inventory

-365/(COGS/AVG IN) -shelf life of inventory (how many days did it take to sell inventory) -lower is better, they're selling quicker

average days to collect receivables

-365/receivable turnover -how many days it takes to collect receivables -lower is better

inventory turnover

-COGS/Average Inventory -how many times did we sell our inventory in a year -higher is better, it means they sell quicker

COGA

-beginning balance + purchases -ending balance + COGS

When you purchase a tangible non-current asset

-capitalize all costs needed to get the asset ready for intended use (purchase price, installation costs, transportation/shipping costs/legal fees and taxes, improvements that increases capabilities, future benefits, useful life0 -expense all repairs/maintenance costs (keeps the asset in working condition and does not improve it)

Affect on t-account for AFDA

-debit decreases it (write offs) -credit increases it (record bad debt expense or recovery)

Affect on t-account for AR

-debit increases it (sales made on account/credit) -credit decreases it (customers pay us back or write off)

Affect of revenue and gain on t-account

-decreases with debit -increases with credit

current ratio

-end current a - end current l -tells you the firm's ability to pay off debts -higher the ratio, higher liquidity

working capital

-end current a - end current l -tells you what amount of current assets are left over after you subtract away your current liabilities -positive number is better, means that not all of your assets were acquired with debt

debt to assets

-end total l / end total a -if the number is high, it means you are funded with a lot of debt.

Gross profit margin

-gross profit/ net sales - for every $1 of ales i generate, how much am i keeping as gross profit -higher is better -higher means you are keeping COGS low, relative to your sale price

If inventory prices are decreasing over time (deflationary), under FIFO

-higher COGS -lower EI -lower NI/GP -lower taxes/ cash flow

If inventory prices are increasing over time (inflationary), under LIFO

-higher COGS -lower EI -lower Net income/ GP -lower taxes/cash flow

Affect of expense/loss on t account

-increases with debit -decreases with credit

affect of inventory on t accounts

-increases with debit -decreases with credit

Affect on T-account for BDE

-increases with debits -decreases with credits

Goodwill

-intangible asset that represents non-identifiable stuff -can only record goodwill when a business has been acquired/bought

If inventory prices are increasing over time, under FIFO

-lower COGS -higher EI -higher NI/GP -higher taxes/ cash flow

If inventory prices are decreasing over time (deflationary), under LIFO

-lower COGS -higher EI -higher NI/GP -higher taxes/cash flow

ROE

-net income/ average total equity -tells us for every dollar of equity, you gain x amount of ni -higher = better, makes firm appear more profitable

Return on assets

-net income/average total assets -higher is better, using assets more effectively

Receivables turnover

-net sales/ average net ar - how many times did we collect ar throughout the year -higher is better, shows firm is efficient in collecting on credit sales

asset turnover

-net sales/average total assets -how effectively a company is using assets to generate revenue

Why do we record bad debt expense

-reflect accounts receivable more accurately -match expenses in same period as revenues

4 types of cost flow assumptions

-specific identification -FIFO -LIFO -weighted average cost

Method 2: Aging of Accounts Receivable method

1. Calculate expected ending balance of allowance for doubtful accounts 2. use the ending balance to solve for BDE (plug)- use a T-account for this

How to solve weighted average cost

1. Calculate total COGA (BB + purchases) 2. Calculate how total units of COGA 3. divide to get average cost per unit total COGA/ total units of COGA = avg cost per unit 4. Calculate COGS avg cost per unit * total units sold

How to solve LIFO or FIFO

1. calculate total units sold 2. start with either first (FIFO) or last layer (LIFO) 3. allocate units sold to each layer and repeat until all units sold are accounted for 4. add up all layer costs to calculate COGS

Impairment 2 step test

1. check for impairment (NBV > estimated future cash flow ) - yes --> must impair -no --> no impairment JE needed 2. write of asset (NBV -FV = amount you impair asset ) - Dr. loss on impairment (-ni, -se) Cr. asset (-a)

How to solve present value

1. find n and i -n = compounding periods -i = interest/ discount rate 2. convert interest rate to match periods (if needed) 3. decide if single sum or annuity 4. decide if solving for pv or fv 5. find corresponding pv factor on table 6. use formula to solve

Method 1: Percent of Credit Sales

1. multiply total credit sales * % estimated to be uncollectible 2. Answer = BDE

Journal entry for disposal of assets

1. one to update depreciation 2. one to record the sale/ retirement

Changes in estimates

(current NBV - new residual value) / remaining useful life = depreciation expense per year - use your current NBV as of today -new useful life = remaining time as of today

double declining balance method

(total cost - accumulated depreciation ) x 2/useful life = depreciation expense per year or NBV x 2/useful life -NBV cannot go lower than residual value.

Straight line depreciation method

(total cost- residual value)/ useful life = depreciation expense per year

losses ____

decrease net income, retained earnings, and equity

across firm analysis

different firms, same time period

probable and not reasonably estimable

disclose in footnotes

reasonably probable and not reasonably estimable

disclose in footnotes

reasonably probable and reasonably estimable

disclose in footnotes

How to match compounding periods and rates

divide annual rate and multiply years by # of compounding periods

Market value > book value

do nothing

remote, not reasonably estimable

do nothing

remote, reasonably estimable

do nothing

Specific write-off method

does not make any estimates. Record BDE when a customer account becomes uncollectible (rarely used)

Net realizable value

ending accounts receivable - ending allowance for doubtful accounts

How to interpret profitability ratios

for every dollar of equity, we generate x amount in net income -higher return on equity = more effective at using equity to generate income

Product differentiator

high profit margin, low asset turnover

useful life/service life

how long we expect to use the asset in our business

residual/salvage value

how much money we expect the asset to be worth at the end of its useful life

LIFO liquidation

if sales > purchases in a given period, then companies are forced to liquidate older inventory

Gains and losses are

incidental transactions that result from a company's non-primary, non frequent business activities

Where is bad debt expense written?

income statement

Gains ____

increase net income, retained earnings, and equity

Lower cost or market

inventory balances cannot exceed what the inventory is actually worth

Cost of goods sold

inventory we already sold

Ending inventory

leftover inventory we did not sell.

cost leader

low profit margin, high asset turnover

Market value < book value

make a journal entry

How to solve the desired ending balance

multiply each account receivable category by the percentage uncollectible, then sum

Net profit margin

ni/rev

Loss contingency

occurs when a firm is dealing with an unpleasant circumstance in which they could potentially suffer a loss in the future -only make a journal entry if loss is probable and estimable. also disclose in footnotes

single sum

one lump sum payment at a point in time

historical cost

original amount we recorded the asset on our books

present value formula

pv = future value * pv factor

capitalize

record cost as an asset (balance sheet)

expense

record cost as an expense (income statement)

Probable, reasonable estimable

record expense and liability and disclose in footnotes

Allowance for doubtful accounts

represents the amount of a/r we estimate to not receive

profitability ratio

return on equity (expressed as %) = net income / average total equity (beg. equity + end. equity/2)

asset turnover =

rev/avg total assets

Gross profit

revenue - COGS

Across time analysis

same firm, different time periods

What are financial ratios?

tools for an analyst to learn about a firm

goodwill occurs when

we buy a company that's "net assets" are worth less than we for it.

specific identification

we know the exact amount inventory is worth so we record that exact cost.

LIFO reserve

FIFO ending inventory- LIFO ending inventory

What does BDE do to allowance account?

Increases it. (rainy day fund)

Cost of goods available

all inventory that was available for sale, AKA how much did we have in stock

Non-current asset

asset held longer than 12 months

turnover/ activity ratios

asset turnover (decimal) = revenues/ average total assets (beg. assets + end. assets/ 2)

Journal entry 2 for disposal of assets

1. record any receipt of cash 2. remove asset from books 3. remove accumulated depreciation from books 4. calculate gain or loss on disposal (gain/loss = proceeds from sale - NBV) Dr. Cash (+a) Dr. Accumulated depreciation (-xa,-a) Dr./ Cr. gain or loss Cr. equipment

disposal steps

1. record depreciation expense and update accumulated depreciation 2. remove asset value and accumulated depreciation from the balance sheet.

Bad debt expense

An estimate of how much accounts receivable we will not be able to collect. (operating expense)

how to find goodwill

1. total assets - total liabilities = fair value of net assets 2. acquisition price - FV of net assets = goodwill

annuity

2+ payments -must be the same amount -must occur at even intervals -must have the same interest rate

Allowance method for estimating BDE

At the end of the period, when making adjusting entries, we will also estimate the amount of bad debt expense for that period

Ending accounts receivable

Beg. A/R + Credit sales + recoveries - cash collections - write offs

Desired ending balance

Beginning balance + BDE - write offs

ending inventory

COGA - COGS

To record sales on credit/account at time of sale

Dr. Accounts Receivable (+A) Cr. Revenue (+Rev/+SE)

To reverse write off entry

Dr. Accounts receivable (+A) Cr. allowance for doubtful accounts (+XA/-A)

To record bad debt expense for the period

Dr. Bad debt expense (+EXP/-SE) Cr. allowance for doubtful accounts (+XA/-A)

When we make a sale

Dr. COGS (+EXP) Cr. inventory (+A)

To record cash payment from customer

Dr. Cash (+A) Cr. Accounts Receivable (-A)

Sale journal entry: sold at a gain

Dr. Cash (-a) Dr. accumulated depreciation (-xa) Cr. gain on sale of asset (+ni) Cr. equipment (-a)

Retirement journal entry: fully depreciated

Dr. accumulated depreciation (-xa) Cr. equipment (-a)

retirement journal entry: before asset is fully depreciated

Dr. accumulated depreciation (-xa) Dr. loss on asset retirement PLUG (-NI) Cr. equipment (-a)

To record a write off

Dr. allowance for doubtful accounts (-XA/+A) Cr. Accounts receivable (-A)

Capitalize journal entry

Dr. asset name (+A) Cr. Cash/ accounts payable

Sale journal entry: sold at a loss

Dr. cash (-a) Dr. accumulated depreciation (-xa) Dr. loss of sale of asset (-ni) Cr. equipment (-a)

Journal entry 1 for disposal of assets

Dr. depreciation expense (+exp) Cr. accumulated depreciation (+xa/ -a)

when loss is recognized

Dr. expense cr. payable

When we make a purchase

Dr. inventory (+A) Cr. Cash/ accounts payable

when liability is paid

Dr. payable Cr. cash

Expense journal entry

Dr. repairs/ maintenance expense (+EXP) Cr. Cash/ accounts payable

How to interpret turnover/ activity ratios

For every dollar of average total assets, we generate x amount in revenues. - higher asset turnover ratio = more effective at generating revenue from its assets

Ending inventory

beginning inventory + purchases - COGS

How does a write-off affect accounts receivable and allowance for doubtful accounts?

both decrease

loss

cash received < NBV or asset is retired before fully depreciated

gain

cash received > NBV

disposal of assets

companies will dispose of an asset by selling it to another party for cash, or retiring the asset from use

benchmark comparison

comparing firms to industry norms

net book value

cost of the asset - all accumulated depreciation


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