Chapter 10

What two conditions must be met for a company to recognize revenue?

A company recognizes revenue when it is not not when cash is received.

If a company uses the periodic inventory system, it determines the FIFO or LIFO cost of ending inventory rather than the cost of goods sold. Why?

Because the periodic inventory system determines the balance of inventory and cost of goods sold only at the end of the period. So it is determined after physically counting the inventory.

If a company's Accounts Receivable account increases during the period, were cash collections from customers greater than or less than net sales?

Cash collections were less than net sales because accounts receivable is money that still needs to be gained by the company.

Sales Discount

a temporary account used to record cash discounts taken by customers.

Sales quantity variance

a variance that indicates the difference in revenue due to a change in sales volume.

What is meant by the phrase "cost flow assumption" as it relates to inventories?

It is a rational and systematic allocation of inventory cost between the Cost of Goods Sold and Inventory accounts based on presumptions made about the order in which the company expenses its inventory cost.

Define a cash equivalent value

It is the cash price for which a non-cash asset could be sold.

In a period of rising prices would a company prefer FIFO or LIFO costing? Why?

LIFO because it would help cover the costs of rising prices because it is on the Last-In, First Out. It also generates a lower net income and a higher cost of goods sold which leads to a smaller income tax expense.

What does the term last in, first out mean? What is the impact of this cost flow assumption on the income statement and balance sheet?

LIFO means that costs are charged to cost of goods sold in reverse chronological order.

Sales price variance

a variance that indicates the difference in revenue due to a change in selling price.

What two contra accounts are related to sales and what is the purpose of each?

Sales Returns and Allowances (returns by customers and price allowances granted to customers) and Sales Discounts (discounts taken by the customers) are contra accounts.

What is the difference between a sales return and a sales allowance?

Sales returns are recorded when customers return defective or unwanted products for full refund. Sales allowances are recorded when customers are induced to keep defective or unwanted products for a price reduction.

Assume a company has two items for sale.. Item 1 was produced on January 15 at a cost of $50,000 and Item 2 was produced on January 31 at a cost of $60,000. If the company sells Item 2 on February and uses the FIFO method, what is the amount of cost of goods sold?

The amount of Cost of Goods Sold is $50,000

Assume a company has two items for sale. Item 1 was produced on January 15 at a cost of $50,000 and Item 2 was produced on January 31 at a cost of $60,000. If the company sells Item 2 on February 5 and uses specific identification method, what is the amount of cost of goods sold?

The amount of cost of goods sold is $60,000

Net realizable value

The net dollar amount of receivables the company expects to eventually collect after making allowances for estimated uncollectible accounts.

What is meant by the term net realizable value as it pertains to accounts receivable?

The net dollar amount the company expects to eventually collect after making allowances for estimated uncollectible accounts. It relates to accounts receivable because you aren't going to be making money once people pay you off.

What does the sales price variance indicate?

The sales price variance indicates the difference in revenue due to a change in selling price.

If the actual selling price is greater than the planned selling price, is the sales price variance favorable or unfavorable?

The sales price variance is favorable

What does the sales quantity variance indicate?

The sales quantity variance indicates the difference in revenue due to a change in sales volume.

If the actual quantity sold is less than the budgeted sales quantity, is the sales quantity variance favorable or unfavorable?

The sales quantity variance is unfavorable

What are the external reporting objectives in accounting for uncollectible accounts?

They would use a "write off" as an objective to show that the company hasn't gotten the money back.

What is the impact on financial statements of writing off a specific customer's account receivable?

When the account Allowance for Uncollectible Accounts is reported on the balance sheet, the company anticipates that some of its accounts receivable will not be collected. In other words, without knowing specifically which account will not be collected, the company debits Bad Debt Expense and credits Allowance for Uncollectible Accounts.

Can a company use LIFO for tax reporting and FIFO for external reporting? Why?

Yes, because the IRS approves of this but it is very unlikely to use this route during times of inflation. It is illegal to use LIFO in IFRS but in the US, it is legal

First-in, First-out (FIFO)

a cost flow assumption where costs are charged to Cost of Goods Sold in chronological order.

Last-in, Last-out (LIFO)

a cost flow assumption where costs are charged to Cost of Goods Sold in reverse chronological order.

Specific identification method

a costing system where the price paid for an item is specifically identified with the item and expenses when the item is sold.

Sales Returns and Allowances

a temporary account that represents the returns by customers and price allowances granted to customers.