ACC 302 FINAL

Cash Payments to Suppliers

= Cost of Goods Sold { + increase in inventory or - decrease in inventory } { + decrease in accounts payable or - increase in accounts payable }

Cash Payments for Operating Activities

= Operating Expenses { + increase in prepaid expense or - decrease in prepaid expense } { + decrease in Accrued Expenses Payable or - increase in Accrued Expenses Payable }

Cash Receipts from Customers

= Sales Revenue { + increase in inventory or - decrease in inventory }

Separate Performance Obligations

A PERFORMANCE OBLIGATION is a promise to provide a distinct product or service to a customer A product or service is distinct when a customer is able to: - benefit from a good or service on its own - together with other readily available resources The objective is to determine whether the nature of a company's promise is to transfer individual goods and services to the customer or to transfer a combined item (or items) for which individual goods or services are inputs

Variable Consideration: Estimating

Firm only allocated variable consideration if it is reasonable assured that it will be entitled to the amount Companies only recognizes variable consideration if: 1. They have experience with similar contracts and are able to estimate the cumulative amount of revenue 2. Based on experience, they do not expect a significant reversal of revenue previously recognized If these criteria are not met, revenue recognition is constrained.

For which type of pension plan is there the greatest financial risk to the employer? (CH 20) A. Defined benefit plan B. Roth IRA C. Defined contribution plan D. 401K E. Employee-guided plan

A. Defined benefit plan

What is a difference in lease accounting for operating versus finance leases for the lessee? (CH 21) A. Expenses are smoother with an operating lease B. Revenues are smoother with a finance lease C. A lease liability is only recorded with a finance lease D. A lease asset is only recorded with an operating lease E. Interest income is recorded only for the operating lease

A. Expenses are smoother with an operating lease

Why is an adjustment made on the statement of cash flows for an increase in prepaid expenses? (CH 23) A. Prepaid expenses have not yet reduced net income but cash has been paid B. Prepaid expenses have reduced net income but cash has not been paid C. Prepaid expenses have not yet reduced net income and cash has not been paid D. Prepaid expenses have reduced net income and cash has been paid E. Prepaid expenses are a non-cash expense

A. Prepaid expenses have not yet reduced net income but cash has been paid

Adjustments made in the Operating Activities sections of the Statement of Cash Flows using the Indirect Method

ADDITIONS: Depreciation expense Amortization of intangibles and deferred charges Amortization of discount on bonds payable Increase in deferred income tax liability Loss on investment in common stock using equity method Loss on sale of plant assets Loss on impairment of assets Decrease in receivables Decrease in inventory Decrease in prepaid expense Increase in accounts payable Increase in accrued liabilities DEDUCTIONS: Amortization of premium on bonds payable Decrease in deferred income tax liability Income on investment in common stock using equity method Gain on sale of plant assets Increase in receivables Increase in inventory Increase in prepaid expense Decrease in accounts payable Decrease in accrued liabilities

Role of Actuaries in Pension Accounting

Actuaries make predictions (called actuarial assumptions) of mortality rates, employee turnover, interest and earnings rates, early retirement frequency, future salaries, and any other factors necessary to operate a pension plan.

Changes in Deferred Income Taxes

Affect net income but no effect on cash. Make adjustment

Principle-Agent Relationships

Agent's performance obligation is to arrange for principle to provide goods or services to a customer. Examples: - Travel Company (agent) facilitates booking of cruise for Cruise Company (principle) - Priceline (agent) facilitates sale of various services such as car rentals at Hertz (principal) Amounts collected on behalf of the principal are not revenue of the agent - Revenue for agent is amount of commission received

Repurchase Agreements

Allows company to transfer an asset to a customer but have an unconditional (forward) obligation or unconditional right (call option) to repurchase the asset at a later date If obligation or right to repurchase is for an amount GREATER THAN OR EQUAL TO selling price, then transaction is a financing transaction This may be done because the firm needs funds (financing) or to avoid taxes on inventory

Transaction Price

Amount of consideration that company expects to receive from a customer In a contract it is often easily determined because customer agrees to pay a fixed amount. Companies must also consider: - Variable consideration - Time Value of Money - Noncash consideration - Consideration paid or payable to the customer

Pension Plan Accounting

An arrangement whereby an employer provides benefits (payments) to retired employees for services they provided in their working years Why is pension accounting difficult? -> because there is multiple factors and unknowns

Financing Activities Section

Cash Inflows: From sale of equity securities From insurance of debt (bonds & notes) Cash Outflows: To stockholders as dividends To redeem long-term debt or reacquire capital stock

Investing Activities Section

Cash Inflows: From sale of property, plant, & equipment From sale of debt or equity securities of other entities From collection of principle on loans to other entities Cash Outflows: To purchase property, plant, & equipment To purchase debt to equity securities from other entities To make loans to other entities

Operating Activities Section

Cash Inflows: From sales of goods or services From returns on loans (interest) & on equity securities (dividends) Cash Outflows: To suppliers for inventory To employees for services To government for taxes To lenders for interest To others for expenses

Stock Options

Cash is not affected by recording the expense. The company must increase net income by the amount of compensation expense from stock options in computing net cash flow from operating activities.

Significant Noncash Transactions

Common non cash transactions that a company should report or disclose: 1. Acquisition of assets by assuming liabilities (including capital lease obligations) or by issuing equity securities 2. Exchanges of nonmilitary assets 3. Refinancing of long-term debt 4. Conversion of debt or preferred stock to common stock 5. Issuance of equity securities to retire debt.

Reporting Pension Plans in Financial Statements: Assets and Liabilities

Companies must recognize on their balance sheet the overfunded (pension asset) or underfunded (pension liability) status of their defined benefit pension plan. If fair value exceeds the projected benefit obligation, companies will report a net pension asset No portion of the pension asset is reported as a current asset

Smoothing Unexpected Gains and Losses on Plan Assets

Companies record asset gains and asset losses in an account, OTHER COMPREHENSIVE INCOME (G/L), combining them with gains and losses accumulated in prior years

Unusual and Infrequent Items

Companies should report either as investing activities or as financing activities cash flows from unusual and infrequent transactions and other events whose effects are included in net income but which are not related to operations.

Special Rules Applying to Direct Method

Companies that use the direct method are required, at a minimum, to report separately: RECEIPTS 1. Cash collected from customers (including lessees, licenses, etc.) 2. Interest and dividends received 3. Other operating cash receipts, if any PAYMENTS 1. Cash paid to employees and suppliers of goods or services (including suppliers of insurance, advertising, etc.) 2. Interest paid 3. Income taxes paid 4. Other operating cash payments, if any

Determine the Net Cash Flow from Operating Activities

Company must determine revenues and expenses on a CASH BASIS ELIMINATE the effects of income statement transactions that do not result in an increase or decrease in cash Convert net income to net cash flow from operating activities

Recognizing Revenue When (or as) Each Performance Obligation is Satisfied

Company satisfies its performance obligation when the customer obtains control of the good or service CHANGE IN CONTROL INDICATORS 1. Company has a right to payment for asset 2. Company has transferred legal title to asset 3. Company has transferred physical possession of asset 4. Customer has significant risks and rewards of ownership 5. Customer has accepted the asset

Prior Service Cost (PSC) Amortization

Company should not recognize the RETROACTIVE BENEFITS as pension expense in the year of amendment Employer should recognize the pension expense over the remaining service lives of the employees who are expected to benefit from the change in the plan AMORTIZATION METHOD: - Employers may use STRAIGHT-LINE AMORTIZATION over the average remaining service life of the employees

Journal Entries for Sales on Consignment

Consignor: Cash Advertising Expense Commission Expense Revenue from Consignment Sales Consignee: Payable to Consignor Receivable to Consignor Commission Revenue Cash

Corridor Amortization (Gains and Losses)

FASB invented the CORRIDOR APPROACH for amortizing the accumulated net gain or loss balance when it gets too large HOW LARGE IS TOO LARGE? 10% of the larger of the beginning balances of the PROJECTED BENEFIT OBLIGATION or the market-related value of the PLAN ASSETS Any accumulated OCI net gain or loss balance above the 10% must be amortized

Actual Return on Plan Assets Example: For Blue Corporation, year-end plan assets were $2,000,000. At the beginning of the year, plan assets were $1,750,000. During the year, contributions to the pensions fund were $150,000, and benefits paid were $175,000

(2,000,000 - 1,750,000) - (150,000 - 175,000) = 250,000 - (-25,000) = 275,000

Pension Plans Can Be:

1. CONTRIBUTORY: employees voluntarily make payments to increase their benefits 2. NONCONTRIBUTORY: employer bears the entire cost 3. QUALIFIED PENSION PLANS: offer tax benefits *pension fund should be a separate legal and accounting entity - if a company goes broke, pension is run by the government

Adjustments to Net Income (Cash Flows)

1. Changes in Deferred Income Taxes 2. Equity Method of Accounting 3. Losses and Gains 4. Stock Options 5. Unusual and Infrequent Items

Statement of Cash Flows Provides Information to Help Assess:

1. Entity's ability to generate future cash flows 2. Entity's ability to pay dividends and meet obligations 3. Reasons for difference between net income and net cash flow from operating activities 4. Cash and non cash investing and financing transactions.

5 Steps of Recognizing Revenue

1. Identify Contract 2. Identify Performance Obligations 3. Determine Transaction Price 4. Allocate Transaction Price to Individual Performance Obligations 5. Recognize Revenue when Performance Obligations are Satisfied

Reporting Pension Plans in Financial Statements: Within the Notes to the Financial Statements

1. Major components of pension expense 2. Reconciliation showing how the projected benefit obligation and the fair value of the plan assets changes 3. A disclosure of the rates used in measuring the benefit amounts 4. A table indicating the allocation of pension plan assets by category

Consideration Paid or Payable to Customers

1. May include discounts, volume rebates, coupons, free products, or services 2. In general, these elements reduce the consideration received and the revenue to be recognized.

Two Types of Warranties to Customers:

1. Product meets agreed-upon specifications in contract at time product is sold - Warranty is included in sales price (ASSURANCE-TYPE WARRANTY) 2. Not included in sales price of product (SERVICE-TYPE WARRANTY) - Recorded as a separate performance obligation

Blue Co. had the following activities affecting cash in 2020. Calculate the amount of net cash flow from INVESTING activities and indicate whether it is cash provided or cash used. 1. Purchased equipment $10,000 2. Issued bonds $25,000 3. Sold Investments $5,000 4. Paid dividend $70,000 5. Sold land $30,000

1. Purchased equipment $10,000 -> OUTFLOW 3. Sold investments $5,000 -> INFLOW 5. Sold land $30,000 -> INFLOW -10,000 + 5,000 + 30,000 = 25,000 or 25,000 cash provided

In 2020, Blue Corporation had net cash provided by operating activities of $243,000, net cash used by investing activities of $488,000, and net cash provided by financing activities of $313,500. At January 1, 2020, the cash balance was $174,000. Compute December 31, 2020, cash.

243,000 - 488,000 + 313,500 = 68,500 174,000 + 68,500 = 242,500

Noncash Consideration

Goods, services, or other noncash consideration 1. Companies sometimes receive contributions (e.g., donations and gifts) 2. Customers sometimes contribute goods or services, such as equipment or labor, as consideration for goods provided or services performed. 3. Companies generally recognize revenue on the basis of the fair value of what is received

Different Measures of the Pension Obligation

Present value of expected cash flows computed by actuaries 1. Vested benefit obligation (benefits for vested employees only at current salaries 2. Accumulated benefit obligation (benefits for non vested employees at current salaries) 3. Projected benefit obligation (benefits for vested and non vested employees at future salaries)

Journal Entries for Sale, Return, and Adjusting Entry

Sale: Accounts Receivable Sales Revenue Cost of Goods Sold Inventory Return: Sales Returns and Allowances Accounts Receivable Returned Inventory Cost of Goods Sold Adjusting Entry: Sales Returns and Allowances Allowances for Sales Returns and Allowances Estimated Returned Inventory Cost of Goods Sold

Difference Between Cost and Fair Value and when each is used in journal entries

Selling price is fair value - used for revenue recognition Cost is book value - used to record COGS and decrease in inventory

How to determine the transaction price example: Blue Company enters into a contract with a customer to build a factory for a $100,000, with a performance bonus of $20,000 that will be paid based on the timing of completion. The amount of the performance bonus decreases to $10,000 if construction is completed after 1 week. The contract is like contracts that Blue has performed previously, and management believes that such experience is predictive. Management estimated that there is a 50% probability that the contract will be completed by the agreed-upon completion date and a 50% probability that it will be completed after 1 week. WHAT IS THE AMOUNT OF THE TRANSACTION PRICE USING THE PROBABILITY-WEIGHTED METHOD?

$100,000 + (20,000 x 0.5) + (10,000 x 0.5) = 100,000 + 10,000 + 5,000 =115,000 *** 20,000 - 10,000 = 10,000 50% = 0.5

Blue Corp. enters into a contract with a customer to build an office building for $900,000. The customer hopes to rent office space in the summer and provides a performance bonus of $200,000 to be paid if the building is ready for rental beginning August 1, 2021. The bonus is reduced by $50,000 each week that completion is estimates the following completion outcomes: Completed By Probability August 1, 2021 70 August 8, 2021 20 August 15, 2021 6 Week of August 15, 2021 4 (A) Determine the transaction price for the contract, assuming Blue is only able to estimate whether the building can be completed by August 1, 2021, or not. (Blue estimated that there is a 70% chance that the building will be completed by August 1, 2021) (B) Determine the transaction price for the contract, assuming Blue has limited information with which to develop a reliable estimate of completion by the August 1, 2021, deadline. *(C) Determine the transaction price for the contract using the probability weighted method.

(A) 900,000 + 200,000 =1,100,000 ____________________________________________________ (B) 900,000 ____________________________________________________ (C) 70% -> (900,000 + 200,000) x 70% = 770,000 20% -> (900,000 + 150,000) x 20% = 210,000 6% -> (900,000 + 100,000) x 6% = 60,000 4% -> (900,000 + 50,000) x 4% = 38,000 * decreasing 200,000 by 50,000 each time 770,000 + 210,000 + 60,000 + 38,000 = 1,078,000

MULTIPLE PERFORMANCE OBLIGATIONS EXAMPLE Handler Company is an established manufacturer of equipment used in the construction industry. Handler's products range from small to large individual pieces of automated machinery to complex systems containing numerous components. Unit selling prices range from $600,000 to $4,000,000 and are quoted inclusive of installation and training. The installation process does not involve changes to the features of the equipment and does not require proprietary information about the equipment in order for the installed equipment to perform to specifications. Handler has the following arrangement with Chai Company... Chai Purchases equipment from Handler for a price of $2,000,000 and chooses Handler to do the installation. Handler charges the same price for the equipment irrespective of whether it does the installation or not. (Some companies do the installation themselves because they either prefer their own employees to do the work or because of relationships with other customers.) The installation service included in the arrangement is estimated to have a standalone selling price of $20,000. - Handler also provides training. The standalone selling price of the training sessions is estimates at $50,000. Other companies can also perform these training services. - Chai is obligated to pay Handler the $2,000,000 upon the delivery and installation of the equipment. - Handler delivers the equipment on September 1, 2020, and completes the installation of the equipment and transfers legal title on November 1, 2020 (transfer of control is complete). Training related to the equipment starts Ince the installation is completed and lasts for 1 year. The equipment has a useful life of 10 years. Handler recognizes the training revenues on a straight-line basis starting on November 1, 2020, or $4,026 ($48,309 / 12) per month for 1 year (unless a more appropriate method such as the percentage-of-completion method - discussed in the next section - is warranted). (A) What are the performance obligations for purposes of accounting for the sale of the equipment? (B) If there is more than one performance obligation, how should the payment of $2,000,000 be allocated to various components?

(A) Handler's primary objective is to sell equipment. The other services (installation and training) can be performed by other parties if necessary. As a result, the equipment, installation, and training are three separate products or services. Each of these items has a standalone selling price and is not interdependent. (B) The total revenue of $2,000,000 should be allocated to the three components based on their relative standalone selling prices. In this case, the standalone selling price of the equipment is $2,000,000, the installation fee is $20,000, and the training is $50,000. The total standalone selling price therefore is $2,070,000* * ($2,000,000 + $20,000 + $50,000) The allocations is as follows EQUIPMENT: [($2,000,000 / $2,070,000) x $2,000,000] = $1,932,367 INSTALLATION: [($20,000 / $2,070,000) x $2,000,000] = $19,324 TRAINING: [($50,000 / $2,070,000) x $2,000,000] = $48,309 Handler makes the following entry in November 1, 2020, to record both sales revenue and service revenue on the installation, as well as unearned service revenue November 1, 2020 Cash 2,000,000 Service Revenue (installation) 19,324 Unearned Service Revenue 48,309 Sales Revenue 1,932,367* * 2,000,000 - 19,324 - 48,309 December 31, 2020 Unearned Service Revenue 8,052* Service Revenue (training) 8,052* * $4,026 x 2 Handler makes the following journal entry to recognize the remaining training revenue in 2021, assuming adjusting entries are made at year end December 31, 2021 Unearned Service Revenue 40,257* Service Revenue 40,257* * $48,309 - $8,052

On May 3, 2020, Blue Company consigned 80 freezers, costing $1,080 each, to White Company. The cost of shipping the freezers amounted to $1,640 and was paid by Blue Company. On December 30, 2020, a report was received from the consignee, indicating that 40 freezers had been sold for $1,400 each. Remittance was made by the consignee for the amount due after deducting a commission of 6%, advertising of $360, and total installation costs of $700 on the freezers sold. (A) Compute the inventory value of the units unsold in the hands of the consignee (B) Compute the profit for the consignor for the units sold (C) Compute the amount of cash that will be remitted by the consignee

(A) inventory value ((1,080 x 80) + 1,640) x (40/80) =(86,400 + 1,640) x 0.5 =44,020 _______________________________________ (B) Profit on consignment sales Sales - Cost of sold - Commission - Advertising - Installation (40 x 1,400) - ((40/80) x 88,040) - (0.06 x 56,000) - 360 - 700 = 56,000 - 44,020 - 3,360 - 360 - 700 = 7,560 ________________________________________ (C) Remittance from consignee Sales - Commission - Advertising - Installation (40 x 1,400) - (0.06 x 56,000) - 360 - 700 = 56,000 - 3,360 - 360 - 700 = 51,580

Pension Expense Calculation

+ service costs + interest - return on plan assets + amortization of prior service costs -/+ Gain decrease / Loss (increase)

Pensions Expense Calculation Example: Blue Corporation reported the following (in millions) Service Cost $350 Interest on P.B.O 750 Return on Plan Assets. 600 Amortization of Prior Service Cost. 20 Amortization of Net Loss 150

+350 +750 -600 +20 +150 =670

Defined - Benefit Plan

- Benefit determined by plan - Employees contribution varies (determined by actuaries) - risk borne by employer * "Risk" her is the risk that pension fund investments do not appreciate

Recognition of the Net Funded Status of the Pension Plan

- Companies must recognize on their balance sheet the full overfunded or underfunded status of their defined benefit pension plan -The OVERFUNDED or UNDERFUNDED STATUS is measured as the difference between the fair value of the plan assets and the projected benefit obligation

Defined - Contribution Plan

- Employer contribution determined by plan (fixed) - Risk borne by employees - Benefits based on plan value - Currently more popular * "Risk" her is the risk that pension fund investments do not appreciate

Components of Pension Expense

1. SERVICE COST - + effect on expense (the present value of future pension payments for the employee's work during the period) 2. INTEREST ON THE LIABILITY - + effect on expense (Interest for the period on the projected benefit obligation outstanding during the period. The interest rate used is referred to as the SETTLEMENT RATE. Interest accrues just as it did for bonds and notes payable) 3. ACTUAL RETURN ON PLAN ASSETS - +/- effect on expense (increase in pension funds from interest, dividends, and realized and unrealized changes in the fair value of the plan assets) = (plan assets ending balance - plan assets beginning balance) - (contributions - benefits paid) 4. AMORTIZATION OF PRIOR SERVICE COSTS - + effect on expense (Plan amendments often include provisions to increase benefits for employee service provided in prior years. Company allocated the cost [prior service cost] of providing these retroactive benefits to pension expense in the future, specifically to the remaining service-years of the affected employees.) 5. GAIN OR LOSS - +/- effect on expense (Volatility in pensions expense can result from sudden and large changes in the fair value of plan assets and by changes in projected benefit obligations. Can be due to changes in actuarial assumptions)

Blue Corporation had the following activities in 2020 1. Sale of land $96,000 2. Purchase of inventory $430,500 3. Purchase of treasury stock $35,000 4. Purchase of equipment $209,000 5. Issurance of common stock $176,000 6. Purchase of available-for-sale debt securities $27,000 Compute the amount Blue should report as net cash provided (used) by INVESTING activities in its 2020 statement if cash flows.

1. Sale of land $96,000 -> INFLOW 4. Purchase of equipment $209,000 -> OUTFLOW 6. Purchase of available-for-sale debt securities $27,000 -> OUTFLOW 96,000 - 209,000 - 27,000 = -140,000 or 140,000 cash used

Pension Liability Calculation Example: Blue Corporation has the following balances at December 31, 2020 Projected Benefit Obligation $2,000,000 Plan Assets at Fair Value 1,500,000 Accumulated OCI (PSC) 750,000

2,000,000 - 1,500,000 = 500,000

Blue Co. had the following activities affecting cash in 2020. Calculate the amount of net cash flow from FINANCING activities and indicate whether it is cash provided or cash used 1. Purchased equipment $10,000 2. Issued bonds $25,000 3. Sold Investments $5,000 4. Paid dividend $70,000 5. Sold land $30,000

2. Issued bonds $25,000 -> INFLOW 4. Paid dividend $70,000 -> OUTFLOW 25,000 - 70,000 = -45,000 or 45,000 cash used

Cash Payments to Suppliers Example: Compute cash payments to suppliers given the following information for Blue Co. Inventory decreased by $10,000, accounts payable increased by $20,000, and cost of goods sold was $200,000

200,000 - 10,000 - 20,000 =170,000

Losses and Gains

A loss is added to net income to compute net cash flow from operating activities because the loss is a non cash charge in the income statement. Company reports a gain in the statement of cash flows as part of the cash proceeds from the sale of equipment under investing activities, thus it deducts the gain from net income to avoid double-counting - once as part of net income and again as part of the cash proceeds from the sale.

Repurchase Agreements Example Morgan Inc., an equipment dealer, sells equipment on January 1, 2020, to Lane Company for $100,000. It agree to repurchase this equipment on December 31, 2021, for a price of $121,000. Q: Should Morgan Inc. record this transaction?

Assuming an interest rate in 10% is imputed from the agreement, Morgan makes the following entry to record the financing on January 1, 2020 January 1, 2020 Cash 100,000 Liability to Lane Co. 100,000 Morgan Inc. records interest on December 31, 2020 as follows: December 31, 2020 Interest Expense 10,000* Liability to Lane Co. 10,000* * 100,000 x 10% Morgan Inc. records interest and retirement of its liability to Lane Company on December 31, 2021, as follows: December 31, 2021 Interest Expense 11,000* Liability to Lane Co. 11,000* Liability to Lane Co. 121,000** Cash 121,000** * 110,000 x 10% ** 100,000 + 10,000 + 11,000

On May 10, 2022 Blue Co. signs a contract to provide an item to White Co. on June 15, 2022, Blue delivers the item. White Co. will pay Blue in two installments. The first payment is on July 10, 2022, and the second payment is on July 20, 2022. What is the date that all revenue will have been recognized for this transaction (i.e., the last day that revenue will be recognized for this project)? (CH18) A. May 10 B. June 15 C. July 10 D. July 20 E. December 31

B. June 15

Allocating Transaction Price to Separate Performance Obligations

Based on their relative fair values Best measure of fair value is what the company could sell the good or service for on a standalone basis. If not available, companies should use their best estimate of what the good or service might sell for as a standalone unit

Vested Benefits

Benefits that the employee is entitled to receive even if they stop working immediately typically, companies require a few years of service before benefits are vested

Which of the following is NOT a part of the five-step process for revenue recognition? (CH 18) A. Allocate the transaction price to separate performance obligations B. Determine the performance obligations C. Determine timing of cash payments received D. Determine the transaction price E. Identify the contract

C. Determine timing of cash payments received

Which of the following current liabilities is typically recorded through an adjusting entry at the end of the period? (CH 13) A. Accounts Payable B. Notes Payable C. Interest Payable D. Dividends Payable E. Unearned Revenue

C. Interest Payable

Blue Co.'s income statement for the year ended December 31, 2020, contained the following condensed information Service Revenue 415,500 Operating expenses (excluding depreciation) 310,000 Depreciation expense 30,000 Loss on sale of equipment 13,000 353,000 Income before income taxes 62,500 Income tax expense 20,000 Net income 42,500 BALANCE SHEET INFORMATION 2020 2019 Accounts Receivable 18,500 26,000 Accounts Payable 20,500 15,500 Income Taxes Payable 2,050 4,250 Prepare the operating section of the Statement of Cash Flows using the direct method

CASH FLOWS FROM OPERATING ACTIVITIES Cash receipts from customers 423,000* Cash payments for op. expenses 305,000** Cash payments for income taxes 22,200*** 327,200 Net Cash provided by op. activities 95,800 * 415,500 + (26,000 - 18,500) = 423,000 ** 310,000 - (20,500 - 15,500) = 305,000 *** 20,000 + (4,250 - 2,050) = 22,200 305,000 + 22,200 = 327,200 423,000 - 327,200 = 95,800

Which of the following best describes a bond sold at a discount? (CH 14) A. A bond issue where the market rate is less than the stated rate B. A bond issue where the market rate is equal to the stated rate C. A bond issue where the coupon rate is less than the stated rate D. A bond issue where the stated rate is less than the market rate E. A bond issue where the stated rate is less than the coupon rate

D. A bond issue where the stated rate is less than the market rate

Why is taxable income typically different than pretax financial income? (CH 19) A. IRS accounting recognizes more expenses then GAAP accounting B. IRS accounting recognizes more revenues then GAAP accounting C. GAAP accounting accrues prepayments received but they are deductible for tax purposes D. IRS accounting is based on more of a cash - bases than GAAP accounting E. GAAP accounting defers prepayments made but they increase taxable income for tax purposes

D. IRS accounting is based on more of a cash - basis than GAAP accounting

What is a difference in accounting for the dilutive effects of warrants versus convertible preferred stock for the calculation of diluted earnings per share? (CH 16) A. Shares are added to the denominator for warrants but not convertible preferred B. Shares are added to the denominator for convertible preferred but not warrants C. Treasury stock is purchased to offset share increase for convertible preferred but not warrants D. Treasury stock is purchased to offset share increase for warrants but not convertible preferred E. Convertible preferred uses the treasury stock method and warrants uses the if-converted method

D. Treasury stock is purchased to offset share increase for warrants but not convertible preferred

Depreciation Expense - Indirect Method

Depreciation expense represents a non-cash expense, and it should be added to net income to arrive at net cash flow from operations.

Which of the following is NOT a main reason for firms doing a stock buyback? (CH 15) A. To increase earnings per share B. To take advantage of an underpriced stock C. To provide a tax-efficient return D. To increase liquidity E. To increase stockholders' equity

E. To increase stockholders' equity

Increase in Inventory - Indirect Method

Increases in inventory represent an operating use of cash, not an expense. Deduct the increase from net income to arrive at net cash flow from operations. In other words, when inventory purchased exceeds inventory sold during a period, cost of goods sold on an accrual basis is lower than on a cash basis.

Increase in Prepaid Expenses - Indirect Method

Increases in prepaid expenses represent deferred expenses for GAAP purposes. Subtract the increase from net income to arrive at net cash flow from operations. In other words, when the prepaid expenses balance has increased during the period, cash has been paid out but has not yet impacted net income yet.

How to determine if items represent one or multiple performance obligations

Independent vs. Interdependent

Cash Payments to Suppliers Example Blue Corporation has January 1 and December 31 balances as follows 1/1/20 12/31/20 Inventory 52,500 62,000 Accounts Payable 36,500 40,500 For 2020, cost of goods sold was $246,500

Inventory: (62,000-52,500) = 9,500 Accounts Payable: (40,500 - 36,500) =4,000 246,500 + 9,500 - 4,000 = 252,000

Credit Sales with Returns and Allowances Example: On January 12, 2020, Venden Company sells 100 cameras for $100 each on account to Amaya Inc. Venden allows Amaya to return any unused cameras within 45 days of purchase. The cost of each product is $60. Venden estimated that 1. Three products will be returned 2. The costs of recovering the products will be immaterial 3. The returned products are expected to be resold at a profit On January 24, Amaya returns two of the cameras. On January 31, Venden prepared financial statements and determines that it is likely that only one more camera will be returned. Venden makes the following entries related to these transactions. On January 31, 2020, Venden prepares financial statements. As indicated earlier, Venden originally estimated that the most likely outcome was that three cameras would be returned. Venden believes the original estimate is correct and makes the following adjusting entries to account for expected returns at January 31, 2020

January 12, 2020: Accounts Receivable 10,000* Sales Revenue 10,000* Cost of Goods Sold 6,000** Inventory 6,000** * 100 x $100 = 10,000 ** 100 x $60 = 6,000 January 24, 2020: Sales Returns & Allowances 200* Accounts Receivables 200* Returned Inventory 120** Cost of Goods Sold 120** * 2 x $100 = 200 ** 2 x $60 = 120 January 31, 2020: Sales Returns & Allowances. 100* Allowances for Sales Returns & Allowances 100* Estimated Returned Inventory 60** Cost of Goods Sold 60** * 1 x $100 = 100 ** 1 x $60 = 60

Blue Company sells goods to White Inc. by accepting a note receivable on January 2, 2020. The goods have a sales price of $600,000 (cost of $520,000). The terms are net 30. If White pays within 5 days, however, it receives a cash discount of $10,000. Past history indicates that the cash discount will be taken. On January 28, 2020, White makes payment to Blue for the full sales price. Prepare the journal entries to record the sale and related cost of goods sold for Blue Company on January 2, 2020, and the payment on January 28, 2020. Assume that Blue Company records the January 2, 2020. *Hint actual payment not made within 5 days.

January 2, 2020 Notes Receivable 590,000* Sales Revenue 590,000* Cost of Goods Sold 520,000 Inventory 520,000 *600,000 - 10,000 = 590,000 ______________________________________________________ January 28, 2020 Cash 600,000 Notes Receivable 590,000 Sales Discount Forfeited 10,000* *600,000 - 590,000 = 10,000

Sale With Time-Value of Money Example: On July 1, 2020, SEK Company sold goods to Grant Company for $900,000 in exchange for a 4-year, zero-interest-bearing note with a face amount of $1,416,163. The goods have an inventory cost on SEK's books of $590,000 Q: How much revenue should SEK Company record on July 1, 2020? Q: How much revenue should it report related to this transaction on December 31, 2020?

July 1, 2020: Notes Receivable 1,416,163 Sales Revenue 900,000 Discount on Notes Receivable 516,163* Cost of Goods Sold 590,000 Inventory 590,000 * 1,416,163 - 900,000 = 516,163 ________________________________________________________________________ December 31, 2020 Discount on Notes Receivable 54,000* Interest Revenue 54,000* * 12% x 1/2 x 900,000

Consignments

Manufacturer (or wholesalers) deliver goods but RETAIN TITLE TO THE GOODS until they are sold. CONSIGNOR (manufacturer or wholesaler) ships merchandise to the consignee (dealer), who is to act as an agent for the consignor in selling the merchandise CONSIGNOR makes a profit on the sale - Carrier merchandise as inventory CONSIGNEE makes a commission on the sale

Consideration Paid or Payable: Volume Discount Example Sansung Company offers its customers a 3% volume discount if they purchase at least $2 million of its product during the calendar year. On March 31, 2020, Sansung made sales of $700,000 to Artic Co. In the previous 2 years, Sansung sold over $3,000,000 to Artic in the period April 1 to December 31 Q: How much revenue should Sansung recognize for the first 3 months of 2020?

March 31, 2020 Accounts Receivable 679,000* Sales Revenue 679,000* * 700,000 x 3% = 21,000 700,000 - 21,000 = 679,000 ___________________________________ Assuming Sansung's customer meets the discount threshold, Sansung makes the following entry Cash 679,000 Accounts Receivable 679,000 ________________________________________ If Sansung's customer FAILS to meet the discount threshold, Sansung makes the following entry upon payment Cash 700,000 Accounts Receivable 679,000 Sales Discounts Forfeited 21,000

Sales on Consignment Example: Nelba Manufacturing Co. ships merchandise costing $36,000 on consignment to Best Value Stores. Nelba pays $3,750 of freight costs, and Best Value pays $2,250 for local advertising costs that are reimbursable from Nelba. By the end of the period, Best Value has sold two-thirds of the consigned merchandise for $40,000 cash. Best Value notifies Nelba of the sales, retains a 10% commission, and remits the cash due Nelba.

Nelba (consignor): Cash 33,750* Advertising Expense 2,250 Commission Expense. 4,000 Revenue from Consignment Sales. 40,000 Best Value (consignee): Payable to Consignor 40,000 Receivable to Consignor 2,250 Commission Revenue 4,000 Cash 33,750* * 40,000 - 4,000 - 2,250

Equity Method of Accounting

Net income or net loss is affected by investment under the equity method. Does not affect cash. Company must deduct the net increase from net income to arrive at net cash flow from operating activities.

Journal Entries for sale with time-value of money component

Notes Receivable Sales Revenue Discount on Notes Receivable Cost of Goods Sold Inventory *** When contract (sales transaction) INVOLVES A SIGNIFICANT FINANCING COMPONENT

Pension Expense Journal Entry

Pension Expense Cash Pensions Asset / Liability

Pension Expense Journal Entry Example: Blue Company reported pension expense of $700,000 and contributed $650,000 to the pension fund. Prepare Blue Company's journal entry to record pension expense and funding, assuming Blue has no OCI amounts.

Pension Expense 700,000 Cash 650,000 Pension Liability 50,000 700,000 - 650,000 = 50,000

Reporting Pension Plans in Financial Statements : Net Income

Pension expense includes multiple components (service cost, interest cost, return on assets, and amortization) The FASB requires presentation of the components of pension expense as follows: - Service cost component is reported as pension expense in income from operations - Other components of pension expense are generally reported as one net amount in the "Other expenses and losses" section below income from operations

Variable Consideration

Price dependent on future events - Might include discounts, rebated, credits, performance bonuses, or royalties Companies estimate amount of revenue to recognize. - Expected value (probability-weighted method) - most likely amount EXPECTED VALUE: Probability-weighted amount in a range of possible consideration amounts - May be appropriate if a company has a large number of contracts with similar characteristics (historical data) - Can be based on a limited number of discrete outcomes and probabilities (estimable) MOST LIKELY AMOUNT: the single most likely amount in a range of possible consideration outcomes - May be appropriate if the contract has only two possible outcomes

Pension Liability Calculation

Projected Benefit Obligation - Plan Assets of Fair Value *Do not include Accumulated OCI

Sales Returns and Allowances

Right of return is granted for product for various reasons (e.g., dissatisfaction with product) Company (i.e., customer) returning the product receives any combination of the following 1. Full or partial refund of any consideration paid 2. Credit that can be applied against amounts owed, or that will be owed, to the seller. 3. Another product in exchange

Special Problems: Other Working Capital Changes

Some changes in working capital, although they affect cash, do not affect net income. - Purchase of short-term available-for-sale securities - Cash outflow from investing - Trading securities cash flows in operating - Insurance of a short-term non trade note payable for cash (financing activity) - Cash dividend payable (not recorded)

Preparation of Statement of Cash Flows

THREE SOURCES of Information: 1. Comparative balance sheets (to see change) 2. Current income statement data 3. Selected transaction data THREE MAJOR STEPS: Step 1: Determine change in cash Step 2: Determine net cash flow from operating activities Step 3: Determine net cash flows from investing and financing activities

Classification of Cash Flows: Cash Equivalents

The basis recommended by the FASB for the statement of cash flows is actually "cash and cash equivalents." CASH EQUIVALENTS are short-term, highly liquid investments that are both: 1. Readily convertible to known amounts of cash 2. So near their maturity that they present insignificant risk of changes in interest rates GENERALLY, only investments with original maturities of THREE MONTHS OR LESS qualify under this definition.

Warranties Example: Maverick Company sold 1,000 Rollomatics on October 1, 2020, at total price of $6,000,000, with a warranty guarantee that the product was free of defects. The cost of the Rollomatics is $4,000,000. The term of this assurance warranty is 2 years, with an estimated cost of $80,000. In addition, Maverick sold extended warranties (service type) related to 400 Rollomatics for 3 years beyonds the 2-year period for $18,000. On November 22, 2020, Maverick incurred labor costs of $3,000 and part costs of $25,000 related to the assurance warranties. Maverick prepares financial statements on December 31, 2020. It estimated that its future assurance warranty costs will total $44,000 at December 31, 2020. Q: What are the journal entries that Maverick should make in 2020 related to the sale and the assurance and extended warranties?

To record the sale of the Rollomatics and the related extended warranties October 1, 2020 Cash 6,018,000 Sales Revenue 6,000,000 Unearned Warranty Revenue 18,000 To reduce inventory and recognize cost of goods sold: October 1, 2020 Cost of Goods Sold 4,000,000 Inventory 4,000,000

Gains and Losses (pension)

Unexpected swings in pension expense can results from: 1. Sudden and large changes in the fair value of plan assets 2. Changes in actuarial assumptions that affect the amount of the projected benefit obligation

What is the potential negative impact on net income of these unexpected swings? (gains and losses)

VOLATILITY the profession decided to reduce the volatility with smoothing techniques

Increase in Accounts Payable - Indirect Method

When Accounts Payable increase during the year, expenses on an accrual basis exceed those on a cash basis

How does a "Seller" record a repurchase agreement

a liability is recorded, no revenue is recorded, and interest expense is accrued

Increase in Accounts Receivable - Indirect Method

when Accounts Receivable balance INCREASES cash receipts are LOWER then revenue earned under the accrual basis