University Of Oregon Accounting 211 Midterm

percent of sales method

1. Multiply the sales for the period by the percentage. 2. Take the answer from step one. This is the amount for the adjusting journal entry. Record the adjusting journal entry.

Purchase discounts & terms (FOB)

2/10, n/30 (2: discount percent, 10: # of days discount is available for, n: otherwise net (or all) is due in , 30: days/ credit period).

Do you know how to calculate depreciation expense and accumulated depreciation using the straight- line, units of production, and double-declining balance methods of depreciation? Do you know how to prepare the journal entry to record depreciation? Don't forget partial years.

pretty well

FIFO (first in, first out)

principle under which it is assumed that the funds paid into the policy first will be paid out first. COGS will be comprised of the beginning inventory and oldest purchased items, Ending inventory will be the value of the newest items purchase that are left in inventory once you calculate COGS

Receivables: Valuation

the practice of assigning monetary value to intangible benefits and natural capital. "Valuation" is intended to state Sales and Accounts Receivable at the amounts actually expected to be collected.

Ratio: Asset Turnover Ratio

to calculate the asset turnover ratio, divide net sales or revenue by the average total assets. a financial ratio that measures the efficiency of a company's use of its assets in generating sales revenue or sales income to the company.

straight-line depreciation method

(cost - salvage value) / useful life = per year depreciation.

double declining balance method, formula

1. calculate straight-line percent 2. DDB Rate = Straight Line Rate x 2 3. Depreciation expense = DDB Rate x Beginning of period book value 4. Final Year Adjustment.

units of production method

A depreciation method that allocates a varying amount of depreciation each year based on an asset's usage. Depreciation expense for a given year is calculated by dividing the original cost of the equipment less its salvage value, by the expected number of units the asset should produce given its useful life.

Ratio: A/R Turnover

Accounts receivable turnover ratio is calculated by dividing your net credit sales by your average accounts receivable. Accounts receivable turnover ratio is calculated by dividing your net credit sales by your average accounts receivable.

How are the adjusting and closing entries different for merchandisers?

Adjusting and closing entries are different for merchandisers because they have to account for merchandise inventory. Merchandisers just buy the product and resell it without the labor and materials costs.

Do you know how to record journal entries to write-off A/R and recover the write-off?

After someone says they can't pay you, Debit allowance for doubtful accounts credit Accounts receivable, Direct method : Bad debt expense debited, Accounts receivable Credited, Two methods

AFDA definition

Allowance for Doubtful Accounts (accounting) : allowance for bad debts is credited, bad debt expense is debited (expenses are always debited)

Which Intangibles are Amortized?

Amortization of intangible assets is a process by which the cost of such an asset is incrementally expensed or written off over time. Amortization applies to intangible (non-physical) assets, while depreciation applies to tangible (physical) assets. Intangible assets may include various types of intellectual property—patents, goodwill, trademarks, etc. Most intangibles are required to be amortized over a 15-year period for tax purposes. For accounting purposes, there are six amortization methods—straight line, declining balance, annuity, bullet, balloon, and negative amortization.

double declining balance method

An accelerated depreciation method that computes annual depreciation by multiplying the depreciable asset's decreasing book value by a constant percent that is two times the straight-line depreciation rate.

Do you know what kinds of assets are intangible assets?

An intangible asset is an asset that lacks physical substance. Examples are patents, copyright, franchises, goodwill, trademarks, and trade names, as well as software. They can be very hard to valuate.

Bad debt expense using Percent of receivables method

Bad Debt Expense = (Accounts receivable ending balance x percentage estimated as uncollectible) - Existing credit balance in allowance for doubtful accounts or + existing debit balance in allowance for doubtful accounts

Accounting for bad debt using percent of sales method

Bad Debt Expense = Net sales (total or credit) x Percentage estimated as uncollectible

Using T- Accounts: Beginning balance a debit.

Bad Debt Expense is the DR beginning balance plus the ending balance you calculated.

Do you know what it means if you have a debit or credit balance in AFDA prior to recording the adjusting entry for bad debt expense?

Bad debts expense refers to the portion of credit sales that the company estimates as non-collectible. The journal entry to record bad debts is: Dr Bad Debts Expense Cr Allowance for Bad Debts Another common term used for bad debts is "doubtful accounts". Allowance for bad debts (or allowance for doubtful accounts) is a contra-asset account presented as a deduction from accounts receivable.

Do you understand the effect of a change in estimate (either salvage value, useful life or both) on depreciation expense, accumulated depreciation, and the asset's book value?

Book value is the accounting value of the company's assets less all claims senior to common equity (such as the company's liabilities). ... It serves as the total value of the company's assets that shareholders would theoretically receive if a company was liquidated.

Inventory Turnover Ratio

COGS/ avg inventory for the period

Days sales in inventory ratio

DSI= (Average Inventory /COGS) ×365 days where: DSI=days sales of inventory COGS=cost of goods sold​

How about purchase returns and allowances?

Debit accounts payable Credit purchase returns and allowances

Sales discounts and record entry

Debit cash and sales discount Credit Accounts receivable

weighted average

Determine the weighted average cost of all items in inventory before you sell anything (beginning value + purchases). Apply the per unit 'average cost' to determine both COGS and Ending Inventory values.

Disposal of an asset

Disposal of an asset: calculate gain or loss on a sale based on the proceeds/cash received and the book value of the asset. (Cost less Accumulated Depreciation)

Do you know when to include and exclude inventory (e.g. consignment, in transit)

Establishing an inventory cutoff date is important when there are goods in transit between the business and its customers, or between the company and its suppliers. For example, a business ordered inventory on Dec. 28 and received it on Jan 3. If the inventory cutoff date is Dec. 30, the inventory in transit should be included in the company's financial statements. When a business arranges for another business to sell its products while still retaining ownership, it is selling under consignment. The consignor transfers the inventory to the business (the consignee), but the consignor retains legal title. If the consignee can't sell the products, it returns them to the consignor. Most buyers have the right to return merchandise. It can be difficult to accurately count sales returns and include them in inventory. In these situations, the sellers must estimate how many returns will be made. The sellers have to do this before they can record revenue. The sellers must also assign value to the returns that it estimates will be made.

Receivables: Allowance methods

Identify the method being used in order to properly calculate either the Bad Debt Expense (income statement) OR the ending balance in the Allowance for Doubtful Accounts

Receivables : allowance method

If a company uses an allowance method (which is GAAP, so they should) then when an account is actually written off it is a decrease in AR and a decrease in the Allowance for Doubtful Accounts (meaning no income statement impact)

estimated useful life

Is the expected service life of an asset to the present owner.

Do you know how to calculate purchase discounts and record the journal entries?

Purchase price = 1,500 Purchase discount % = 2% Purchase discount = Purchase price x Discount % Purchase discount = 1,500 x 2% = 30 Amount to pay = Purchase price - Purchase discounts Amount to pay = 1,500 - 30 = 1,470 Under periodic inventory system, the company needs to make the purchase discount journal entry by debiting accounts payable and crediting cash account and purchase discounts. Under perpetual inventory system, the company can make the purchase discount journal entry by debiting accounts payable and crediting cash account and inventory account.

Do you know what shrinkage is and how to record it?

Shrinkage is the loss of inventory that can be attributed to factors such as employee theft, shoplifting, administrative error, vendor fraud, damage, and cashier error. Shrinkage is the difference between recorded inventory on a company's balance sheet and its actual inventory. It is a loss of inventory and profits.

aging method

The aging method is used to estimate the amount of uncollectible accounts receivable. The technique is to sort receivables into time buckets (usually of 30 days each) and assign a progressively higher percentage of expected defaults to each time bucket. 1. Multiply the individual A/R balances at the end of each period by the percentage of uncollectable debt. Sum up. 2. Take step one's answer and make that the ending balance for allowance for doubtful accounts. Use a T- Account. 3.Figure out the adjusting entry needed to get the ending balance in Allowance for doubtful accounts. Use the T-Account from step two. 4.Record the adjusting entry.

Bad debt expense - using aging method

The aging method is used to estimate the amount of uncollectible accounts receivable. The technique is to sort receivables into time buckets (usually of 30 days each) and assign a progressively higher percentage of expected defaults to each time bucket. A company has $100,000 of accounts receivable. $80,000 of this amount is in the 0-30 days time bucket, $15,000 is in the 31-60 days time bucket, and the remaining $5,000 is in the 61-90 days bucket. From historical experience, the company accountant applies an estimated 3% bad debt percentage to the 0-30 days bucket, a 9% bad debt rate to the 31-60 days bucket, and a 25% rate to the 61-90 days bucket. This application of the aging method results in an estimated uncollectible accounts receivable amount of $5,000.

Do you understand what kinds of costs are included in inventory?

The cost of inventory includes the cost of purchased merchandise, less discounts that are taken, plus any duties and transportation costs paid by the purchaser.

Ratio: Gross Profit Percentage

The gross profit ratio is calculated by dividing the gross profit by the net sales. To make it easier to read and compare, the result is usually multiplied by 100 so it can be expressed as a percentage. This allows you to determine what percentage of the company's revenue is profit. A gross profit margin ratio of 65% is considered to be healthy. gross profit is to be calculated by subtracting the cost of goods sold from the net sales figure. (net sales - COGS)/(net sales)

LIFO (last in, first out)

The last you purchased is the first out. Example: I buy three books: Book 1 = $1, Book 2 = $2, Book 3 = $3. I resell them. Book 3 is the first to leave. The ending inventory is the sum of Book 1 and Book 2. COGS will be comprised of the most recently purchased inventory. Ending inventory will be the value of the oldest items left in inventory once you calculate COGS

Do you understand how to apply the LCM rule?

The lower of cost or market rule states that a business must record the cost of inventory at whichever cost is lower - the original cost or its current market price. This situation typically arises when inventory has deteriorated, or has become obsolete, or market prices have declined. Here are the steps to valuing inventory at the lower of cost or market: 1. First, determine the historical purchase cost of inventory. 2. Second, determine the replacement cost of inventory. It is the same as the market value of inventory. 3. Compare replacement cost to net realizable value and net realizable value minus a normal profit margin. If: Replacement cost > net realizable value, use net realizable value for replacement cost. Replacement cost < net realizable value minus a normal profit margin, use net realizable value minus a profit margin for replacement cost. Net realizable value minus a normal profit margin < replacement cost < net realizable value, use replacement cost. 4. Compare the cost of inventory to replacement cost. Lastly, if: Historical cost of inventory < replacement cost, a write-down is not necessary. Cost of inventory > replacement cost, write-down inventory to replacement cost.

Do you know how to calculate the gain or loss on sale or disposal of an asset, and how to prepare the related journal entry to record this?

The original purchase price of the asset, minus all accumulated depreciation and any accumulated impairment charges, is the carrying amount of the asset. Subtract this carrying amount from the sale price of the asset. If the remainder is positive, it is a gain. If the remainder is negative, it is a loss. If gain: Debit Cash, Accumulated Depreciation Credit gain on asset disposal, machine asset If Loss: Debit Cash, Accumulated Depreciation, Loss on Disposal Credit Machine Asset

Gain or loss from sale

The original purchase price of the asset, minus all accumulated depreciation and any accumulated impairment charges, is the carrying amount of the asset. Subtract this carrying amount from the sale price of the asset. If the remainder is positive, it is a gain. If the remainder is negative, it is a loss. Loss is expense/debit and Gain is income/credit (remember that these are add-backs or subtractions when you are doing a statement of cash flows)

Percent of Account Receivable Method

The percentage of receivables method is used to derive the bad debt percentage that a business expects to experience. The technique is used to populate the allowance for doubtful accounts, which is a contra account that offsets the accounts receivable asset. At the most basic level, the percentage of receivables method requires the following steps: 1. Obtain the ending trade accounts receivable balance listed in the balance sheet. 2. Calculate the historical percentage of bad debts to accounts receivable. 3. Multiply the ending trade receivables balance by the historical bad debt percentage to arrive at the amount of bad debt to be expected from the ending receivables balance. 4. Compare this expected amount to the ending balance in the allowance for doubtful accounts, and adjust the allowance as necessary for it to match the latest calculation.

Do you know how financial statement presentation is different for merchandise companies?

The primary difference between a merchandising and a service-based business is the presence of inventory. Merchandising businesses sell goods to customer, whereas service-based businesses do not. The companies' financial statements, including the income statements, must reflect this difference.

Do you understand when the title to inventory transfers (FOB shipping point & destination)?

The term FOB is an abbreviation of free on board. If goods are shipped FOB destination, transportation costs are paid by the seller and title does not pass until the carrier delivers the goods to the buyer. The terms FOB destination and FOB shipping point often indicate a specific location at which title to the goods is transferred, such as FOB Denver. This means that the seller retains title and risk of loss until the goods are delivered to a common carrier in Denver who will act as an agent for the buyer.

What costs are part of the acquisition of assets

These costs include shipping, sales taxes, and customs fees, as well as the costs of site preparation, installation, and testing. When acquiring property, acquisition costs can include surveying, closing fees, and paying off liens.

How to calculate goodwill

To determine goodwill in a simplistic formula, take the purchase price of a company and subtract the net fair market value of identifiable assets and liabilities. Goodwill = P-(A-L), where: P = Purchase price of the target company, A = Fair market value of assets, L = Fair market value of liabilities.

Record Shrinkage

To measure the amount of inventory shrinkage, conduct a physical count of the inventory and calculate its cost, and then subtract this cost from the cost listed in the accounting records. Divide the difference by the amount in the accounting records to arrive at the inventory shrinkage percentage.

Do you know when costs incurred for intangible assets are expensed or capitalized?

Typical examples of corporate capitalized costs are items of property, plant, and equipment. For example, if a company buys a machine, building, or computer, the cost would not be expensed but would be capitalized as a fixed asset on the balance sheet. Companies are allowed to capitalize costs associated with trademarks, patents, and copyrights. Capitalization is allowed only for costs incurred to defend or register a patent, trademark, or similar intellectual property successfully. Also, companies can capitalize on the costs that they incur to purchase trademarks, patents, and copyrights. When a company cannot demonstrate a link between costs and future revenues, such costs must be expensed immediately. In the case of software development, any associated costs incurred prior to achieving technological feasibility are expensed. Research and development cost is another example of current expensing due to the high-risk profile and uncertainty of future benefits from such costs.

Do you understand how to calculate ending inventory and COGS using LIFO, FIFO, and weighted average? What methods do companies prefer when prices are rising, falling; and why?

When prices are rising, LIFO When prices are rising, you prefer LIFO because it gives you the highest cost of goods sold and the lowest taxable income. First-in, first-out, or FIFO, applies the earliest costs first. In rising markets, FIFO yields the lowest cost of goods sold and the highest taxable income. When prices are falling, FIFO, because companies are getting rid of their oldest inventory first.

Record Credit Card sales

When you receive immediate payment, your journal entry for credit card purchases should look like this: Debit Cash, Credit card expense Credit Sales Remember that your debits and credits must equal one another. Your first journal entry looks like this: Debit Accounts Receivable Credit Sales The second journal entry looks like this: Debit Cash, Credit card expense Credit Accounts Receivable

purchase cost

all costs incurred to get the asset in place and ready for its intended use

Using T-Accounts: beginning balance a credit.

bad debt expense is the difference between the credit above and the end balance you calculated.

Do you understand the effect of an inventory error on this year / next years' balances in ending inventory, COGS, net income, and retained earnings?

in contrast to an overstated ending inventory, resulting in an overstatement of net income, an overstated beginning inventory results in an understatement of net income. If the beginning inventory is overstated, then cost of goods available for sale and cost of goods sold also are overstated. Consequently, gross margin and net income are understated. Note, however, that when net income in the second year is closed to retained earnings, the retained earnings account is stated at its proper amount. The overstatement of net income in the first year is offset by the understatement of net income in the second year.

journal entry to record an acquisition and balance sheet presentation

journal entries: Credit or debit whatever to change the balance sheet

When is goodwill recorded?

only when one company acquires another company, and the purchase price is greater than 1) the fair value of the identifiable tangible and intangible assets acquired, minus 2) the liabilities that were assumed.

COGS

the cost of goods sold; what you pay for what you sell

salvage value

the estimated value of a fixed asset at the end of its useful life