ACCT Exam 2
Declining-balance method
(cost- accumulated depreciation) *2/useful life = annual depreciation expense
Bad debt expense
expense associated with estimated uncollectible accounts receivable (recorded with adjusting entry at end of period)
Credit card discount
fee charged by the credit card company for its services subtracted from sales revenue
LIFO conformity rule
if LIFO is used on the income tax return, it must be used to calculate inventory for net income on financial statements
Operating activities
inflows and outflows that relate directly to revenues and expenses reported on the income statement
Financing activities
inflows consist of issuance of stock, issuance of bonds/notes (transactions with owners and creditors) and outflows consist of payments of dividends, repurchase of stock, and repayment of debt
Costs included in inventory purchases
invoice price, freight, inspection costs, preparation costs (anything to get the asset ready for use)
Income tax effects
managers prefer to pay the least amount of taxes allowed use LIFO for increasing inventory costs, use FIFO for decreasing inventory costs
Net income effects
managers want to report higher earnings for their company → FIFO
To record goodwill as an asset
must purchase another business
How do managers choose which inventory method to use
net income effect, income tax effect, LIFO conformity rule
FOB shipping point
ownership of the goods passes to the buyer at the shipping date
FOB destination
ownership of the goods remains with the seller until the goods reach the buyer
Lower of Cost or NRV
recognizes loss when NRV < cost journal entry: debit COGS, credit inventory
Capitalize cost
recorded as part of the total cost of an asset, not expense Improvements and acquisition costs are included
Gross profit
revenue- cost of goods sold
Cost of intangible assets with indefinite lives
should not be amortized (goodwill)
Cost of intangible assets with definite life
straight line basis with an amortization process debit amortization expense, credit ex. patent
Goodwill
the amount by which the purchase price exceeds the fair market value of net assets (assets-liabilities) of an acquired business
Depreciation concept
the process of allocating the cost of building and equipment (NOT land) over their productive lives
When unit costs are falling
LIFO produces higher net income and higher inventory valuation than FIFO
When unit costs are rising
LIFO produces lower net income and lower inventory valuation than FIFO
LIFO
Allocates newest unit costs to COGS and oldest unit costs to ending inventory Start with beginning inventory and add units purchased until you reach the number in ending inventory
FIFO
Allocates the oldest unit costs to COGS and newest unit costs to ending inventory Start with most recent and add units until you reach number in ending inventory
Cost of goods sold
BI + P - EI = CGS GAS-ending inventory
Goods available for sale
Beginning inventory + purchases = goods available for sale
Inventory turnover ratio
COGS / Average Inventory
Record write off of an uncollectible account
Decreases contra asset and increases asset = no effect
Units of production method
Depreciation rate= (cost - residual value)/ estimated total production (activity level) units, Depreciation expense= depreciation rate* actual production/activity
Calculating goodwill
Difference between the purchase price of company and the fair value of its net assets
Average cost method
GAS $ / GAS # uses weighted averages
Investing activities
Includes cash transactions involving the purchase and sale of long-term assets and current investments
Record bad debt expense
Increases expenses and decreases net assets
Recievables turnover ratio
Net Credit Sales / Average Accounts Recievable
Straight line method
cost-residual value * 1/ useful life in years
Sales returns and allowances account
a reduction of sales revenues for return of or allowances for unsatisfactory goods subtracted from sales revenue
Sales (cash) discount
cash discount offered to encourage prompt payment of an account receivable subtracted from sales revenue
Inventory- inflation
cost of goods sold is lower under FIFO than LIFO
Inventory- deflation
cost of goods sold is lower under LIFO than FIFO