ACCT 200 EXAM 2
Depreciation Methods (GAAP)
1. Straight-line method. (KNOW THIS!!) 2.Declining-balance method. 3.MACRS
DISPOSING OF A NOTE RECEIVABLE
1. When held to maturity date and discharged (That is, the note is honored) 2.Maker defaults (Note is dishonored) 3.Holder sells the note to a third party
Recording Merchandise Inventory Purchase Transactions(Perpetual System)
Beginning Inventory Plus:Cost of Goods Purchased Freight-In Less:Cost of Goods Returned to Supplier Cost of Goods Available for Sale Less:Ending Inventory (FIFO, LIFO, Average Cost) Cost of Goods Sold
#/10
Buyer receives #% discount if they pay within 10 days
Beginning inventory understated
COGS: Understated Net Income: Overstated
Ending inventory overstated
COGS: Understated Net Income: Overstated
Ending inventory understated
COGS: overstated Net Income: understated
Beginning inventory overstated
COGS: overstated Net Income:understated
In a perpetual inventory system, the cost of merchandise returned by the purchaser to the seller would be recorded by the purchasing company with a
CREDIT to the "Merchandise Inventory" account
If a $1,000 sales invoice shows credit terms of 2/10, n/30, the selling company's journal entry (if the customer takes the discount) is:
Cash DEBIT: $980 Sales Discount DEBIT: $20 Accounts receivable CREDIT: $1000
In a period of inflation (rising prices), the cost flow method that results in the highest ending inventory figure is what? Which has the lowest ending inventory figure?
FIFO would have highest ending inventory. LIFO would have lowest ending inventory
When a company purchases inventory for resale and incurs the cost of shipping from the seller, that delivery cost is called
Freight-In
shipping costs related to items that a company sells to a customer, are called
Freight-Out
Hasbeen Company completed its inventory count. It arrived at a total ending inventory value of $200,000. You have been given the information listed below. Discuss how this information affects Hasbeen's 'reported' cost of inventory. 1.Hasbeen included in their inventory count - goods that are being held on consignment from Falls Co., the cost associated with those goods is $15,000. (Subtract $15,000 from the initial $200,000 count)
Hasbeen is the Consignee, and does NOT OWN the Good Goods held on consignment should NOT be included in Hasbeen's ending inventory balance. Therefore, $15,000 should be deducted from the initial ending inventory balance.
Multiple-step income statement format
Highlights the components of net income.
To adjust the performance obligation by recognizing the portion ($$$) of the liability that has been satisfied
Unearned Service Revenue DEBIT:$$$ Service Revenue CREDIT:$$$
Utilities expenses incurred but not recorded prior to January 31 totaled $450.
Utilities Expense DEBIT: $450 Utilities Payable CREDIT: $450
Accruals are
actions taken by an a company to create the bookkeeping reference to a cost or revenue that has not yet been acknowledged by the accounting system
Contra Accounts are essentially "valuation" Accounts. Each "contra account" is associated with a specific asset, liability or equity account. The two accounts are ALWAYS
combined to identify the "BOOK VALUE" of that normal account
Stockholders' Equity
common stock and retained earnings
Computing Interest on a Note
face value of note x annual interest rate x time in terms of one year = interest
Classifying, and Determining Inventory Quantities and Relating to Inventory Costs. Cost of Goods Sold is
gone
Operating Income
gross profit - operating expenses
net receivables
gross trade receivables - allowance for doubtful accounts
THE ONLY TIME YOU DEBIT THE BAD DEBT EXPENSE ACCOUNT IS
on the last day of an accounting period when (intentionally) creating a specified CREDIT balance in the contra asset Allowance for Doubtful Accounts
Freight-Out is recorded by the seller as an
operating/selling expense.
Manufacturing Company three classifications
raw materials, work in process, finished goods
Recognizing Accounts Receivable: Service Organization
records account receivable when it performs service on account
According to the FASB, "useful" information should possess two fundamental qualities
relevance and faithful representation
Historical Cost Principle
requires that companies record plant assets at cost: "Cost" includes all expenditures (ordinary and necessary) acquire an asset and make it ready for its intended use.
The revenue recognition principle requires
revenue to be recorded only after the business has satisfied its performance obligation
Net income will result during a time period when:
revenues exceed expenses
Stockholders' Equity accounts
salaries and wages expense, service revenue, dividends, retained earnings, common stock
Inventory management is a critical task High Inventory Levels
storage costs, interest cost (on funds tied up in inventory), and costs associated with the obsolescence of technical goods or shifts in fashion.
Freight Costs
terms of sale
at the moment a specific account is determined uncollectible, the journal entry to recognize that specific determination will effectively reduce
the Account Receivable balance AND reduce the Allowance for Doubtful Accounts balance.
Current Liabilities
"Accounts Payable", "Salaries and Wages Payable", "Notes Payable", "Interest Payable", "Income Taxes Payable" and others.
FIFO - LISH
"First in First Out" - "Last In Still Here"
Straight-line method
(Cost - Salvage Value = Depreciable Cost) (Depreciable Cost / Useful Life (in years) = Depreciation Expense)
Multistep Income Statement - Other Expenses and Losses
(Interest expense) on notes and loans payable. (Casualty losses) from such causes as vandalism and accidents. (Loss) from the sale or abandonment of property, plant, and equipment. (Loss) from strikes by employees and suppliers.
Multistep Income Statement - Other Revenues and Gains
(Interest revenue) from notes receivable and marketable securities. (Dividend revenue) from investments in capital stock. (Rent revenue) from subleasing a portion of the store. (Gain) from the sale of property, plant, and equipment.
Inventory management is a critical task Low Inventory Levels
(potential "stock outs") - may lead to lost sales.
Limited-Life Intangibles:
-amortize to expense -credit asset account directly
AVERAGE COST Physically Impossible and logically not
-Allocates cost of goods available for sale on the basis of weighted-average unit cost incurred. -Applies weighted-average unit cost to the units on hand to determine cost of the ending inventory.
Accounts Receivable - Turnover Ratio
-Assess the liquidity of the receivables. -Measure the number of times, on average, a company collects receivables during the period
Patents
-Capitalize costs of purchasing a patent. (amortize over 20-year life or its remaining useful (or legal) life, whichever is shorter.) -Expense any R&D costs that were incurred while developing the 'thing' to which the patent applies. -Legal fees incurred successfully defending a patent (perfecting the patent) are capitalized to Patent account and amortized as above
When the value of existing inventory is lower than its actual cost
-Companies can "write down" the inventory to its market value in the period in which the price decline occurs. -Market value = Replacement Cost -Doctrine of Conservatism
Franchises
-Contractual arrangement between a franchisor and a franchisee. (Toyota, Shell, Subway, Starbucks, Marriott, Taxicabs are franchises.) -Franchise (or license) with a limited life should be amortized to expense over the life of the franchise. -Franchise with an indefinite life should be carried at cost and not amortized.
Accounting for the Flow of Inventory Costs Periodic Inventory Systems
-Do not keep detailed records of the goods on hand. -Cost of Goods Sold is determined by count at the end of the accounting period. -Calculation of Cost of Goods Sold
Copyrights
-Give the owner the exclusive right to reproduce and sell an artistic or published work. -Granted for the life of the creator plus 70 years. -Capitalize costs of acquiring and defending (but not R&D) it. -Amortize as expense over useful (or legal) whichever is less
Accounting for the Flow of Inventory Costs Perpetual Inventory Systems
-Maintain detailed records of the cost of each inventory purchase and sale. -Records continuously show items of inventory that should been hand -Company determines cost of goods sold each time a sale occurs.
Accounting for the Flow of Inventory (Units) Periodic Inventory System
-Most likely results in more accurate physical flowsfor the entire period -On the last day of the period a physical observation/count of the inventory actually still in stock results in a more accurate Balance Sheetand therefore a more accurate COGS on the Income Statement. -When using the other method (perpetual) a company might be able to more accurately estimate the COGS during the period - but they still MUST count what's left at the end of the period and adjust accordingly.
Plant assets are resources that have
-Physical substance -Used in operations -Not intended for sale -Provide service
Specific Identification
-Practice is relatively rare. -Most companies make assumptions (cost flow assumptions) without referring to or accounting for specific units sold or on hand.
Costs typically 'capitalized' and recorded as LAND include
-Purchase price -Closing costs such as title and attorney's fees -Real estate brokers' commissions -Cost incurred to demolish an unwanted structure
Disposals of Plant Assets Retire/Scrap
-Remove the Accumulated Depreciation with a DEBIT, for the full amount of depreciation taken over the life of the asset. -Remove the Asset account with a CREDIT for the original cost of the asset. -Plug the Journal Entry with a "Loss on Disposal" if Book Value (salvage value) remains at then end of the asset's useful life
cost flow assumptions: unit costs are applied to quantities to determine the total cost of the inventory and the cost of goods sold using the following costing methods
-Specific identification -First-in, first-out (FIFO) -Last-in, first-out (LIFO) -Average-cost
Accounting for the Flow of Inventory (Units) Perpetual Inventory System
-Traditionally used for merchandise with high "per unit" values. Although possible, it is unlikely to be used for merchandise having small "per unit" values -Shows the quantity and cost of the inventory that 'should be' on hand at any time. -Provides better physical control over inventories than a periodic system.
Average collection period - Days Sales Outstanding
-Used to assess effectiveness of credit and collection policies. -Collection period should not exceed credit term period
The physical count is taken,
-When the business is closed or business is slow. -At, or very near to, the end of the accounting period.
Trademarks
-Word, phrase, jingle, or symbol that identifies a particular enterprise or product. (Wheaties, Monopoly, Sunkist, Kleenex, Coca-Cola, Big Mac, and Jeep.) -Legal protection for indefinite number of 20 year renewal periods. -Capitalize acquisition costs. -No periodic amortization
Indefinite-Life Intangibles:
-no foreseeable limit on time the asset is expected to provide cash flows -no amortization -Assess for impairment on a periodic basis
Common types of intangibles
-patents -copyrights -franchises or licenses -trademarks -trade names -goodwill
1/10 EOM
1% discount if paid within first 10 days of next month
Physical Observation (Count) of Inventory Still Here Periodic System
1. Determine the units of physical inventory on hand (Ending Inventory) at end of period (What's Still Here) 2.Subtract Ending Inventory from the Goods Available for Sale to find the number of goods Sold for the period. (What's Gone)
Multiple-step income statement Important Subtotals:
1)Net Sales 2)Cost of Goods Sold 3)Gross Profit 4)Operating Expenses 5)Income from Operations 6)Other Revenues and Gains 7)Other Expenses and Losses 8)Income before Income Taxes 9)Net Income
Journal Entries to Record a Sale
1. Accounts Receivable or Cash DEBIT: $$$ Sales revenue CREDIT: $$$ {SELLING PRICE} 2. Cost of Goods Sold DEBIT: $$$ Merchandise Inventory CREDIT: $$$ {COST OF GOODS SOLD}
Accounting for the disposal of an asset is similar regardless of disposal approach
1. (Gross-Up) Record depreciation up to the date of disposal 2.Eliminate (remove from the bookkeeping system) all references to the asset that was disposed of: by (1) debiting Accumulated Depreciation for the grossed-up value (2) crediting the asset account
Methods for Estimating the Allowance
1. A single percentage of the total ending Accounts Receivable balance Or, 2. Using an "Aging of Accounts Receivable" schedule
Two reasons for using the single-step income statement format:
1. Company does not realize any type of profit or income until total revenues exceed total expenses. 2.Form is simple and easy to read.
Physical Observation (Count) of Inventory Still Here Perpetual System
1. Count what's gone every time a sale is made along the way, (What's Gone) 2. Subtract from Goods Available to find amount that should be here (What's Still Here)
Two accounting issues:
1. recognizing accounts receivable 2. valuing accounts receivable
2/10, n/30
2% discount if paid within 10 days, otherwise net amount due within 30 days
Example: Credit terms may read
2/10, n/30
Seldom coincideswith actual physical flow of merchandise. (LIFO - FISH)
ACTUALLY LIFO NEVER COINCIDES WITH THE PHYSICAL FLOW OF MERCHANDISE
Classified Balance Sheet
ASSETS: current assets, long-term investments, PPE, intangible assets. LIABILITIES AND STOCKHOLDERS EQUITY: current liabilities, long -term liabilities, stockholders equity
If a $5,000 purchase shows credit terms of 2/10, n/30, the purchasing company's journal entry (when the company pays and takes the discount) is:
Accounts Payable DEBIT: $5000 Cash CREDIT: $4900 Inventory CREDIT: $100
Performed services for patients who had dental plan insurance. At January 31, $760 of such services was completed but not yet billed to the insurance companies
Accounts Receivable DEBIT: $760 Service Fees/Revenue CREDIT: $760
Day Sales Outstanding
Accounts Receivable/(Sales/365)
The allocation to expense of the cost of an intangible asset over the asset's useful life.
Amortization
Accounts Receivable
Amounts customers owe on account that result from the sale of goods and services
Which is an advantage of corporations relative to partnerships and sole proprietorships?
An advantage of corporations is that investors are not personally liable for debts of the business
Which statement presents information as of a specific point in time?
Balance sheet
Depreciation
Applies to buildings, and equipment, and land improvements (Does NOT apply to land.)
Expanded Accounting Equation
Assets = Liabilities + Stockholders Equity> { Common Stock + [Retained Earnings>]} [Revenues - Expenses - Dividends]
Accounts that normally have debit balances are:
Assets, dividends, and expenses
The effect of certain inventory errors on the Balance Sheet can be determined by using the basic accounting equation: (OVERSTATED)
Assets: Overstated Liabilities: No effect Stockholders' Equity: Overstated
The effect of certain inventory errors on the Balance Sheet can be determined by using the basic accounting equation: (UNDERSTATED)
Assets: Understated Liabilities: No effect Stockholders' Equity: Understated
In a periodic inventory system, the cost of goods sold is determined:
At the end of the accounting period.
HF had total credit sales of $1,200,000 in 2016, of which $200,000 remained in Accounts Receivable on December 31. The credit manager estimated that $12,000 of that Accounts Receivable balance will prove uncollectible during early 2017. Assuming that before adjustment on December 31, 2016, a zero balance existed in the Allowance for Doubtful Accounts, provide an adjusting journal entry that would record the Bad Debt Expense for 2016 and simultaneously establish the $12,000 CREDIT balance in the Allowance for Doubtful Accounts
Bad Debt Expense DEBIT: $12000 Allowance for Doubtful Accounts CREDIT: $12000
This deferredrevenue (liability) value, that was established at the time cash was received, remains on the books of a company unless (and until) the accounting system intentionally targets that account periodically for review and adjustment. This should occur AT LEAST at the end of every reporting period
Cash DEBIT:$$$ Unearned Service Revenue Credit:$$$
A Performance Obligation (liability) is recorded when
Cash is Received before the obligation event occurs
Valuing Accounts Receivable
Categorically the Balance Sheet valuation attempts to reflect the "net realizable value").
order of liquidity for current assets
Companies list current asset accounts in the order they expect to convert them into cash
Which one of these statements about the accrual basis of accounting is FALSE?
Companies record revenue only when they receive cash, and record expense only when they pay out cash
Sales Returns and Allowances and Sales Discounts are:
Contra revenue accounts
Multistep Income Statement - Net Sales
Cost of Goods Sold
Which is not one of the three forms of business organization?
Creditorship is not a form of business organization
Ordinary Repairs- expenditures for costs incurred to maintainthe operating efficiency and productive life of the unit.
DEBIT - Repair (or Maintenance) Expense.
Additions and Improvements- expenditures for costs incurred toincreasethe operating efficiency, productive capacity, or useful life of a plant asset.
DEBIT - the plant asset account that is affected
The costs related to the earliest purchased goods (including Beginning Inventory) are the first to be recognized in determining cost of goods sold
FIFO - LISH
Dental supplies were purchased on January 1, and $1,750 was recorded as Dental Supplies. On January 31, the office manager determined that only $550 of supplies were still on hand
Dental Supplies Expense DEBIT: $1200 Dental Supplies CREDIT: $1200
Regardless of which physical units are still here or sold (FIFO - LISH)
Ending Inventory DOLLAR valuation -identified with most recent (newest) purchase costs Cost of Goods Sold DOLLAR valuation -identified with oldest purchase costs (includes Beginning Inventory)
Patent-
Exclusive right to manufacture, sell, or otherwise control an invention for a period of 20 years from the date of the grant.
Research and Development Costs - (R&D)
Expenditures that may lead to patents, copyrights, new processes, or new products.
To adjust the asset that prepaid expense (asset) to recognize the consumption (or expiration) of $$$ value.
Expense DEBIT:$$$ Prepaid Expense CREDIT: $$$
Multistep Income Statement - Income Before Income Taxes
Income Tax Expense
long-term liabilities
Include "Bonds Payable", "Mortgages Payable", "Other Long-Term Notes Payable", certain "Lease Obligations", and "Pension Liabilities"
Buildings
Includes all costs ordinary, necessary and directly related to the purchase or construction of a physical structure.
Equipment
Includes all costs ordinary, necessary and directly related to the purchase, installation, construction, testing of a equipment used in operations
Goodwill
Includes exceptional management, desirable location, good customer relations, skilled employees, high-quality products, etc. HOWEVER, Goodwill is recorded ONLY when an entire business is purchased (merger) and the price paid for that entire company EXCEEDS the NET FAIR VALUE of that entire acquisition
A 1-year (12 month) malpractice insurance policy was purchased on January 1 for $24,000
Insurance Expense DEBIT: $2000 Prepaid Insurance CREDIT: $2000
cost flow assumptions
Inventory is accounted for using a "cost-flow" assumption. Inventory cost includes all expenditures necessary to acquire goods and place them in a condition ready for sale
MACRS
Modified Accelerated Cost Recovery System (is NOT acceptable under GAAP for reporting to stockholders.)
inbound goods
Inventory, Accounts Payable
outbound goods
Inventory, Cost of Goods Sold, Sales, Accounts Receivable
On July 1 Nance Insurance Co. received a $12,400 checkfrom Seng Co. that pays for two-years (24 months) insurance coverage contract. Both companies have fiscal years ending December 31 Journalize and post the July 1 creation journal entry for Nance Insurance Co. (Explicit) and Journalize and post the December 31 AJE for Nance Insurance Co. (Adjustment)
July 1st Cash DEBIT: $12400 Unearned Service Revenue CREDIT: $12400 December 31st Unearned Service Revenue DEBIT: $3100 Service Revenue CREDIT: $3100
When counting months, only count FULL months.
June 1 - Dec. 31: 7 months June 30 - Oct. 1: 3 months June 30 - Dec. 31: 6 months June 1 - Oct. 1: 4months
XYZ Corp. sold merchandise to ABC Corp. on June 15th, terms of FOB shipping point. UPS picked up the merchandise at XYZ Corp's office on June 16th and delivered to ABC Corp. on June 18th. ABC Corp. paid XYZ in full on June 25th. Who owns merchandise at each date?
June 15: XYZ (seller) June 16: ABC (buyer) June 18: ABC (buyer) June 25: ABC (buyer)
XYZ Corp. sold merchandise to ABC Corp. on June 15th, terms of FOB destination. UPS picked up the merchandise at XYZ Corp's office on June 16th and delivered to ABC Corp. on June 18th. ABC Corp. paid XYZ in full on June 25th. Who owns merchandise at each date?
June 15: XYZ (seller) June 16: XYZ (seller) June 18: ABC (buyer) June 25: ABC (buyer)
In a period of inflation (rising prices), the cost flow method that results in the highest COGS figure is LIFO, FIFO, or Average Cost? Which has the lowest COGS?
LIFO would have the highest COGS (& lowest net income). FIFO would have the lowest COGS (& highest net income).
LIFO - FISH
Last-In, First-Out (LIFO) - (FISH) First In Still Here
Assume Sauk Stereo (buyer) pays (on May 14) the balance due of $3,500 (original "gross" invoice price of $3,800 LESS THE $300 OF MERCHANDISE THAT WAS PREVIOUSLY RETURNED ON MAY 8)) thereby being eligible to take the timely payment discount. Prepare the journal entry Sauk Stereo makes on May 14 to record the payment of the net, and remaining, amount that is due
May 14th Accounts payable DEBIT: $3,500 Merchandise Inventory CREDIT: $70 (Discount = $3,500 x 2% = $70^2) Cash CREDIT: $3,430 (Amount Paid = $3,500 x 98% = $3,430^1)
Assume the freight terms on the invoice in this illustration required PW Audio Supply (the seller) to pay the freight charges, the entry by that company
May 4th Freight-out (a selling expense) DEBIT: $150 Cash CREDIT: $150
Assume upon delivery of the goods on May 6, Sauk Stereo (the buyer) paysPublic Freight Company $150 for freight charges, the entry on Sauk Stereo's (the buyer's) books is
May 6th Merchandise Inventory DEBIT: $150 Cash CREDIT: $150
Assume Sauk Stereo (buyer) returned goods costing $300 to PW Audio Supply (seller) on May 8 (within the 10 day limit)
May 8 Accounts payable DEBIT: $300 Merchandise Inventory CREDIT: $300
Prepare the entry PW Audio Supply would make to record the 'account credit' for Sauk to acknowledge the returned goods that had an original $300 selling price. Assume those specific returned goods had a $140 inventory original cost on PW Audio Supply books and assume they were returned to stock for resale.
May 8th Sales returns and allowances DEBIT: $300 Accounts receivable CREDIT: $300 May 8th Inventory DEBIT: $140 Cost of goods sold CREDIT: $140
Purchase Allowances
May choose to keep the merchandise if the seller will grant a reduction of the purchase price
Gross profit ratio
Measure of the amount by which the sale price of inventory exceeds its cost per dollar of sales. It equals gross profit divided by net sales.
Merchandising Company one classification
Merchandise Inventory
Exceptions include goods stored in piles, such as coal or hay (LIFO - FISH)
NOT TRUE!!!!!!! The old hay on the bottom would obviously rot
If expenses increase then
Net Income decreases, Ending R/E decreases, Stockholders' Equity decreases
if revenues increase, then:
Net Income increases, Ending R/E increases, Stockholders' Equity increases
If dividends increase then
Net Income not affected, Ending R/E decreases, Stockholders' Equity decreases
Gross Profit
Net Sales - COGS
n/# EOM
Net amount due within the first # days of the next month
n/10 EOM
Net amount due within the first 10 days of the next month
Other Receivables
Nontrade receivables such as interest, loans to officers, advances to employees, and income taxes refundable.
To the maker, a promissory note is referred to as a
Note payable
To the payee, a promissory note is referred to as a
Note receivable
Sierra Corporation provided guide services to clients during the month of October. As of the cut-off date for preparing financial statements (October 31, $200 of such services had not yet been billed. Provide the accrual journal entry to record the $200 that Sierra earned in October, even though they will not 'bill' the clients until November.
October 31st Accounts Receivable DEBIT: $200 Service Revenue (Earned) CREDIT: $200
Sierra Corporation's office equipment is depreciated at the rate of $480 a year ($40 per month). Record the allocated depreciation for the month of October:
October 31st Depreciation Expense DEBIT: $40 Accumulated Depreciation (Office Equipment) CREDIT: $40
Sierra bought a 12 month insurance policy for $600. At the end of October, one month of that 12 month policy has expired. Therefore an adjusting entry is needed to correctly state the ending balance in Prepaid Insurance and transfer the expired portion ($50) of the $600 balance to Insurance Expense
October 31st Insurance Expense DEBIT: $50 Prepaid Insurance CREDIT: $50
Sierra Corporation signed a three-month note payable in the amount of $5,000 on October 1. The note requires Sierra to pay interest at an 'annual' rate of 12%. Interest expense for the previous month (1/12thof a year) is owed for having the use of the bank's funds during that period of time. Because Sierra will not make the interest payment until November 1, the company must recognize that borrowing cost, and the related liability, by recording an adjusting journal entry on October 31
October 31st Interest Expense DEBIT: $50 Interest Payable CREDIT: $50
Sierra Corporation last paid salaries on October 26; the next payment of salaries will not occur until November 9 (after the financial statements for October have been prepared). Sierra employees earn the right to receive total salaries of $2,000 for every five-day work week ($400 per day). Accordingly the company should record the salary expense related to the employee's October effort (3 days) so that amount can be evaluated against the revenue recorded for the same period. Salaries to be ACCRUED on October 31 are $1,200 ($400 × 3 days)
October 31st Salaries and Wages Expense DEBIT: $1200 Salaries and Wages Payable CREDIT: $1200
on October 5 Sierra Corporation purchased $2,500 of office supplies on accounts. A count of the supplies inventory still in the supply room at the close of business on October 31 reveals that ONLY $1,000 of supplies are still on hand. Prepare the AJE to correct the accounts on October 31st
October 31st Supplies Expense DEBIT: $1500 Supplies CREDIT: $1500
Sierra Corporationreceived a $1,200 checkfrom R. Knox on October 2 representing payment in advance for guide services related to multi-day trips. Those trips will occur at different times over the next three months. Now, assume the customer utilized one-third of their prepaid raft trips during October. Since a specific transaction has not yet triggered a journal entry to record those trips in the bookkeeping system, Sierra Corporation must 'force' an adjusting entry (if a financial statement is required to be prepared on October 31) that will effectively recognize the 'earned' portion of the previously recorded obligation. Based on the assumption above, Sierra Corporation would recognize $400 (one-third) of the previously recorded Unearned Revenue as 'Earned' on the last day in October
October 31st Unearned Service Revenue DEBIT: $400 Service Revenue CREDIT: $400
on October 5 Sierra Corporation purchased $2,500 of office supplies on accounts
October 5th Supplies DEBIT: $2500 Accounts Payable CREDIT: $2500
Freight costs incurred by the seller on outgoing merchandise are considered by the seller of those goods to be:
Operating (selling) expenses.
Multistep Income Statement - Operating Expenses
Operating Expenses (listed), Income from Operations
Hasbeen Company completed its inventory count. It arrived at a total ending inventory value of $200,000. You have been given the information listed below. Discuss how this information affects Hasbeen's 'reported' cost of inventory. 2.Hasbeen did NOT include in that inventory count purchased goods of $10,000, which were in transit on the last day of the period (terms: FOB shipping point). (Add $10,000 to the initial $200,000 count)
Ownership has transferred to Has been - should add to and include in ending inventory Because title to goods purchased FOB shipping point legally belongs to the buyer when those goods have been placed with a common carrier, the $10,000 purchase should be included in the buyer's ending inventory. Hasbeen must add $10,000 to the initial count of ending inventory
Simultaneously DEBIT Cost of Goods Sold and CREDIT Merchandise Inventory when using the ______ method
PERPETUAL
When the PURCHASER EXPLICITLY PAYS the freight, it is called "FREIGHT-IN" and recorded as part of Inventory on the _______ books
PURCHASER'S
GAAP Requires a '______' of Ending Inventory Regardless of Physical Flow System Used
Physical Observation
Cost Flow Assumptions most likely will NOT be consistent with the physical movement of goods. In fact some cost flow assumptions are
Physically impossible
Cost the oldest goods on the booksare considered to be the cost of the goods that are physically still on hand (LIFO - FISH)
Physically true or not (can't be true)! It does not matter
Cost of the most recently purchased goods are considered the costs related to the goods that were sold. (LIFO - FISH)
Physically true or not! It does not matter
This deferred expense (asset) value, that was established at the time cash was paid and would remain on the books of a company unless (and until) the accounting system intentionally targets that account periodically for review and adjustment. This should occur AT LEAST at the end of every reporting period
Prepaid Expense DEBIT: $$$ Cash CREDIT: $$$
If the customer finds some resources and indeed pays the $500 amount that was previously written off as uncollectible (in January 2017), two journal entries would be required. First, simply reverse the entry that removed the account (to effectively restore the account to current status) Next, record the collection (albeit a late one) as though the account had never been deemed "uncollectible"
REVERSE Accounts Receivable DEBIT: $500 Allowance for Doubtful Accounts CREDIT: $500 RECORD Cash DEBIT: $500 Accounts Receivable CREDIT: $500
Recognizing Accounts Receivable: Merchandiser
Records accounts receivable at the point of sale of merchandise on account. (When customer takes delivery, or when title legally passes (FOB Shipping Point))
Sarbanes-Oxley Act (SOX)
Regulations passed by Congress to reduce unethical corporate behavior.
Which statement about users of accounting information is incorrect?
Regulatory authorities are considered external, not internal, users.
VALUING and Reporting A NOTE RECEIVABLE
Report short-term notes receivable at the cash (net) realizable value
Purchase Returns
Return goods for credit if the sale was made on credit, or for a cash refund if the purchase was for cash.
intangible assets
Rights, privileges, and competitive advantages that result from the ownership of long-lived assets that do not possess physical substance.
When the SELLER PAYS the freight, it is called "FREIGHT - OUT" (a Selling Expense) on the ________ books
SELLER'S
Multistep Income Statement - Sales
Sales Returns & Allowances Sales Discounts
Sales Returns and Allowances is a CONTRA REVENUE account to
Sales Revenue
The primary source of merchandising revenues is referred to as
Sales Revenue or Sales
Uncollectible Accounts Receivable
Seller records financial losses that result from having extended credit, as "Bad Debts Expenses"or "Uncollectible Accounts Expense"in a way that will "match" that expense in the same period that the related revenues were created
Accrued Revenues:
Services have been performed, but the customer (or client) has not yet been billed as of the last day of the accounting period
Consigned Goods
Sometimes, 'intermediaries' will hold and market goods owned by others, while trying to sell those goods for a fee or portion of the profit.
Single-step income statement format
Subtract total expenses from total revenues
Legder account
T account
At the end of the accounting period after financial statements are issued, companies transfer the temporary account balances to the permanent stockholders' equity account - Retained Earnings.
TEMPORARY: All revenue accounts, all expense accounts, dividends PERMANENT: All asset accounts, all liability accounts, stockholders equity accounts
common stock
Term used to describe the total amount paid in by stockholders for the shares they purchase.
Which of the following did not result from the Sarbanes‐Oxley Act?
The Sarbanes‐Oxley Act (SOX) was created to reduce unethical corporate behavior and decrease the likelihood of future corporate scandals, not to address tax rates.
Which of the following statements is incorrectconcerning the adjusted trial balance?
The adjusted trial balance lists the account balances segregated by assets and liabilities.
What section of a statement of cash flows indicates the cash spent on new equipment during the past accounting period?
The investing activities section of the statement of cash flows provides information about property, plant, and equipment accounts
Hasbeen Company completed its inventory count. It arrived at a total ending inventory value of $200,000. You have been given the information listed below. Discuss how this information affects Hasbeen's 'reported' cost of inventory. 3.The company also did NOT include in the count inventory that had been sold(with a cost of $12,000), which was in transit (terms: FOB shipping point).
Title has transferred to customer - handled correctly When goods sold are shipped "FOB Shipping Point" title, ownership & risk of loss passes to the buyer when the goods are placed in the hands of the common carrier. The cost of those goods were correctly NOT included in the seller's ending inventory, therefore no adjustment is necessary.
Profit Margin Ratio formula
Total expenses / Net sales
net sales
Total sales - sales discount and sales returns and allowances
Goods 'In Transit' -
When Goods are "In-Transit" Either the Seller, or the Buyer "owns" those goods even though they (the goods) might 'appear' to be in limbo
Lower-of-Cost-or-Market
When the value of existing inventory is lower than its actual cost
Notes Receivable
Written promise (formal instrument) for amount to be received. Also called trade receivables (legally this is a Note PAYABLE)
A trial balance will not balance (ie: debit total will not equal credit total) if:
a $100 cash dividends is debited to the Dividends account for $1,000 and credited to Cash for $100.
If proceeds exceed the 'book value',
a gain on disposal occurs
If proceeds are less than the 'book value' (includes proceeds of ZERO),
a loss on disposal occurs
The cost of goods sold is determined and recorded each time a sale occurs in:
a perpetual inventory system only
Generally accepted accounting principles are:
a set of standards and rules that are recognized as a general guide for financial reporting
LIFO Conformity
a tax rule, requires companies that use LIFO for tax purposes, must also use LIFO for financial reporting purposes. This means that if a company chooses the LIFO method to reduce its tax bills, it will also have to report lower net income (in periods of rising prices) in its financial statements.
A promissory note
a written promise to pay a specified amount of money on demand or at a definite time
Liability Accounts
accounts payable, notes payable, accrued liabilities, unearned revenue, interest payable, salaries and wages payable
AJE
adjusting journal entries
The existence of a Note Payable on the Trial Balance suggests that
an adjustment is necessary to take into account the Interest Expense associated with that Note during the period.
Buildings, equipment, and motor vehicles (long-lived assets) are recorded as
assets
Accrued revenues and expenses
cash transacted after event occurs
Deferred revenues and expenses
cash transacted before event occurs
Asset Accounts
cash, accounts receivable, note receivable, prepaid accounts, supplies accounts, equipment accounts, building accounts, land
Common types of current assets are
cash, investments, receivables, inventories, prepaid expenses
Claims to assets categories
claims of creditors and claims of owners
Book Value
cost - accumulated depreciation
Management discussion and analysis (MD&A)
covers the company's ability to pay near-term obligations, its ability to fund operations and expansion, and its results of operations
A "Sales Invoice" should support each ____ sale.
credit
if credits are greater than debits, the account will have a _______ balance
credit
CLER
credit entries increase Liability accounts, Equity accounts (Common Stock & Retained Earnings), Revenue accounts
Aging the accounts receivable
customer balances are classified by the length of time they have remained unpaid
if debits are greater than credits, the account will have a ________ balance
debit
DEAD
debit entries increase Expense accounts, Asset accounts, Dividend accounts
Gross Profit Ratio may be expressed as a percentage of Net Sales by
dividing the Gross Profit amount by the Net Sales amount.
he Sales Revenue account is NOT directly reduced (debited) because
doing so would obscure the importance of any "Sales Returns and Allowances" as a percentage of sales.
IRS requires the use of
either the straight-line method or a special accelerated-depreciation method called the Modified Accelerated Cost Recovery System(MACRS).
Freight-In is,
essentially, a legitimate and necessary cost of buying the inventory and is therefore merged into that inventory account. That is, it is not reported as a 'separate item' or expense when using the perpetual method and eventually gets picked up as part of the Cost of Goods Sold when the related item is eventually sold.
Specific Identification is the ONLY 'cost flow assumption' approach that matches the actual physical flow
in which specific items identified as still physically on hand at the end of the period are specifically included in the calculation of the total cost identified with that ending inventory
Debits (increase/decrease)
increase assets and decrease liabilities
Accrued expenses most often relate to items that have not been recorded by an explicit transaction. Many times these items are indeterminable until the last day of the accounting period, and often require management to make "educated estimates"
interest expense, tax expense, bills not yet paid, purchases not yet recorded, utilities expense, salaries expense
The multiple-step income statement for a merchandiser shows each of the following features except:
investing activities section.
Taking a Physical Inventory
involves counting, weighing, or measuring each kind of inventory on hand
Property, plant, and equipment (PP&E)
land, buildings, equipment, delivery vehicles, and office furniture, accumulated depreciation
claims of creditors
liabilities
Profit Margin Ratio
measures the extent by which total net sales covers all expenses (including cost of goods sold).
n/#
net amount due within # days
Accounts Receivable Turnover Ratio
net credit sales/average net accounts receivable
FOB shipping point
ownership of the goods passes to the buyer when the public carrier accepts the goods from the seller
FOB destination
ownership of the goods remains with the seller until the goods reach the buyer
Dividends
payments of cash from a corporation to its stockholders
Classifying, and Determining Inventory Quantities and Relating to Inventory Costs. Ending Inventory is
still here
claims of owners
stockholders equity
Sales Revenue (like service revenue) is recorded when
the performance obligation is satisfied.
"Depreciation" does not attempt to report the actual change in the value of the asset. "Depreciation" is
the systematic and rational allocation of an asset's depreciable cost over its expected useful life
Performance obligation is satisfied when
the title, ownership and risk of loss has been legally transferred from the seller to the buyer.
"Posting":
transfers journal entry totals to individual ledger accounts
Net Realizable Value
what the company "expects to collect" from the entire group of accounts that have balances at the end of an accounting period
Goods still 'in transit' at the end of an accounting period should be considered "owned by" andincluded in the ending inventory of the "SELLER"
when the terms of sale are FOB destination.
If the credit policy is too loose,
you may sell to customer who will pay either very late or not at all.
If the credit policy is too tight,
you will lose sales
