Accounting 215 exam 2 review
average days in inventory
-365/(COGS/AVG IN) -shelf life of inventory (how many days did it take to sell inventory) -lower is better, they're selling quicker
average days to collect receivables
-365/receivable turnover -how many days it takes to collect receivables -lower is better
inventory turnover
-COGS/Average Inventory -how many times did we sell our inventory in a year -higher is better, it means they sell quicker
COGA
-beginning balance + purchases -ending balance + COGS
When you purchase a tangible non-current asset
-capitalize all costs needed to get the asset ready for intended use (purchase price, installation costs, transportation/shipping costs/legal fees and taxes, improvements that increases capabilities, future benefits, useful life0 -expense all repairs/maintenance costs (keeps the asset in working condition and does not improve it)
Affect on t-account for AFDA
-debit decreases it (write offs) -credit increases it (record bad debt expense or recovery)
Affect on t-account for AR
-debit increases it (sales made on account/credit) -credit decreases it (customers pay us back or write off)
Affect of revenue and gain on t-account
-decreases with debit -increases with credit
current ratio
-end current a - end current l -tells you the firm's ability to pay off debts -higher the ratio, higher liquidity
working capital
-end current a - end current l -tells you what amount of current assets are left over after you subtract away your current liabilities -positive number is better, means that not all of your assets were acquired with debt
debt to assets
-end total l / end total a -if the number is high, it means you are funded with a lot of debt.
Gross profit margin
-gross profit/ net sales - for every $1 of ales i generate, how much am i keeping as gross profit -higher is better -higher means you are keeping COGS low, relative to your sale price
If inventory prices are decreasing over time (deflationary), under FIFO
-higher COGS -lower EI -lower NI/GP -lower taxes/ cash flow
If inventory prices are increasing over time (inflationary), under LIFO
-higher COGS -lower EI -lower Net income/ GP -lower taxes/cash flow
Affect of expense/loss on t account
-increases with debit -decreases with credit
affect of inventory on t accounts
-increases with debit -decreases with credit
Affect on T-account for BDE
-increases with debits -decreases with credits
Goodwill
-intangible asset that represents non-identifiable stuff -can only record goodwill when a business has been acquired/bought
If inventory prices are increasing over time, under FIFO
-lower COGS -higher EI -higher NI/GP -higher taxes/ cash flow
If inventory prices are decreasing over time (deflationary), under LIFO
-lower COGS -higher EI -higher NI/GP -higher taxes/cash flow
ROE
-net income/ average total equity -tells us for every dollar of equity, you gain x amount of ni -higher = better, makes firm appear more profitable
Return on assets
-net income/average total assets -higher is better, using assets more effectively
Receivables turnover
-net sales/ average net ar - how many times did we collect ar throughout the year -higher is better, shows firm is efficient in collecting on credit sales
asset turnover
-net sales/average total assets -how effectively a company is using assets to generate revenue
Why do we record bad debt expense
-reflect accounts receivable more accurately -match expenses in same period as revenues
4 types of cost flow assumptions
-specific identification -FIFO -LIFO -weighted average cost
Method 2: Aging of Accounts Receivable method
1. Calculate expected ending balance of allowance for doubtful accounts 2. use the ending balance to solve for BDE (plug)- use a T-account for this
How to solve weighted average cost
1. Calculate total COGA (BB + purchases) 2. Calculate how total units of COGA 3. divide to get average cost per unit total COGA/ total units of COGA = avg cost per unit 4. Calculate COGS avg cost per unit * total units sold
How to solve LIFO or FIFO
1. calculate total units sold 2. start with either first (FIFO) or last layer (LIFO) 3. allocate units sold to each layer and repeat until all units sold are accounted for 4. add up all layer costs to calculate COGS
Impairment 2 step test
1. check for impairment (NBV > estimated future cash flow ) - yes --> must impair -no --> no impairment JE needed 2. write of asset (NBV -FV = amount you impair asset ) - Dr. loss on impairment (-ni, -se) Cr. asset (-a)
How to solve present value
1. find n and i -n = compounding periods -i = interest/ discount rate 2. convert interest rate to match periods (if needed) 3. decide if single sum or annuity 4. decide if solving for pv or fv 5. find corresponding pv factor on table 6. use formula to solve
Method 1: Percent of Credit Sales
1. multiply total credit sales * % estimated to be uncollectible 2. Answer = BDE
Journal entry for disposal of assets
1. one to update depreciation 2. one to record the sale/ retirement
Changes in estimates
(current NBV - new residual value) / remaining useful life = depreciation expense per year - use your current NBV as of today -new useful life = remaining time as of today
double declining balance method
(total cost - accumulated depreciation ) x 2/useful life = depreciation expense per year or NBV x 2/useful life -NBV cannot go lower than residual value.
Straight line depreciation method
(total cost- residual value)/ useful life = depreciation expense per year
losses ____
decrease net income, retained earnings, and equity
across firm analysis
different firms, same time period
probable and not reasonably estimable
disclose in footnotes
reasonably probable and not reasonably estimable
disclose in footnotes
reasonably probable and reasonably estimable
disclose in footnotes
How to match compounding periods and rates
divide annual rate and multiply years by # of compounding periods
Market value > book value
do nothing
remote, not reasonably estimable
do nothing
remote, reasonably estimable
do nothing
Specific write-off method
does not make any estimates. Record BDE when a customer account becomes uncollectible (rarely used)
Net realizable value
ending accounts receivable - ending allowance for doubtful accounts
How to interpret profitability ratios
for every dollar of equity, we generate x amount in net income -higher return on equity = more effective at using equity to generate income
Product differentiator
high profit margin, low asset turnover
useful life/service life
how long we expect to use the asset in our business
residual/salvage value
how much money we expect the asset to be worth at the end of its useful life
LIFO liquidation
if sales > purchases in a given period, then companies are forced to liquidate older inventory
Gains and losses are
incidental transactions that result from a company's non-primary, non frequent business activities
Where is bad debt expense written?
income statement
Gains ____
increase net income, retained earnings, and equity
Lower cost or market
inventory balances cannot exceed what the inventory is actually worth
Cost of goods sold
inventory we already sold
Ending inventory
leftover inventory we did not sell.
cost leader
low profit margin, high asset turnover
Market value < book value
make a journal entry
How to solve the desired ending balance
multiply each account receivable category by the percentage uncollectible, then sum
Net profit margin
ni/rev
Loss contingency
occurs when a firm is dealing with an unpleasant circumstance in which they could potentially suffer a loss in the future -only make a journal entry if loss is probable and estimable. also disclose in footnotes
single sum
one lump sum payment at a point in time
historical cost
original amount we recorded the asset on our books
present value formula
pv = future value * pv factor
capitalize
record cost as an asset (balance sheet)
expense
record cost as an expense (income statement)
Probable, reasonable estimable
record expense and liability and disclose in footnotes
Allowance for doubtful accounts
represents the amount of a/r we estimate to not receive
profitability ratio
return on equity (expressed as %) = net income / average total equity (beg. equity + end. equity/2)
asset turnover =
rev/avg total assets
Gross profit
revenue - COGS
Across time analysis
same firm, different time periods
What are financial ratios?
tools for an analyst to learn about a firm
goodwill occurs when
we buy a company that's "net assets" are worth less than we for it.
specific identification
we know the exact amount inventory is worth so we record that exact cost.
LIFO reserve
FIFO ending inventory- LIFO ending inventory
What does BDE do to allowance account?
Increases it. (rainy day fund)
Cost of goods available
all inventory that was available for sale, AKA how much did we have in stock
Non-current asset
asset held longer than 12 months
turnover/ activity ratios
asset turnover (decimal) = revenues/ average total assets (beg. assets + end. assets/ 2)
Journal entry 2 for disposal of assets
1. record any receipt of cash 2. remove asset from books 3. remove accumulated depreciation from books 4. calculate gain or loss on disposal (gain/loss = proceeds from sale - NBV) Dr. Cash (+a) Dr. Accumulated depreciation (-xa,-a) Dr./ Cr. gain or loss Cr. equipment
disposal steps
1. record depreciation expense and update accumulated depreciation 2. remove asset value and accumulated depreciation from the balance sheet.
Bad debt expense
An estimate of how much accounts receivable we will not be able to collect. (operating expense)
how to find goodwill
1. total assets - total liabilities = fair value of net assets 2. acquisition price - FV of net assets = goodwill
annuity
2+ payments -must be the same amount -must occur at even intervals -must have the same interest rate
Allowance method for estimating BDE
At the end of the period, when making adjusting entries, we will also estimate the amount of bad debt expense for that period
Ending accounts receivable
Beg. A/R + Credit sales + recoveries - cash collections - write offs
Desired ending balance
Beginning balance + BDE - write offs
ending inventory
COGA - COGS
To record sales on credit/account at time of sale
Dr. Accounts Receivable (+A) Cr. Revenue (+Rev/+SE)
To reverse write off entry
Dr. Accounts receivable (+A) Cr. allowance for doubtful accounts (+XA/-A)
To record bad debt expense for the period
Dr. Bad debt expense (+EXP/-SE) Cr. allowance for doubtful accounts (+XA/-A)
When we make a sale
Dr. COGS (+EXP) Cr. inventory (+A)
To record cash payment from customer
Dr. Cash (+A) Cr. Accounts Receivable (-A)
Sale journal entry: sold at a gain
Dr. Cash (-a) Dr. accumulated depreciation (-xa) Cr. gain on sale of asset (+ni) Cr. equipment (-a)
Retirement journal entry: fully depreciated
Dr. accumulated depreciation (-xa) Cr. equipment (-a)
retirement journal entry: before asset is fully depreciated
Dr. accumulated depreciation (-xa) Dr. loss on asset retirement PLUG (-NI) Cr. equipment (-a)
To record a write off
Dr. allowance for doubtful accounts (-XA/+A) Cr. Accounts receivable (-A)
Capitalize journal entry
Dr. asset name (+A) Cr. Cash/ accounts payable
Sale journal entry: sold at a loss
Dr. cash (-a) Dr. accumulated depreciation (-xa) Dr. loss of sale of asset (-ni) Cr. equipment (-a)
Journal entry 1 for disposal of assets
Dr. depreciation expense (+exp) Cr. accumulated depreciation (+xa/ -a)
when loss is recognized
Dr. expense cr. payable
When we make a purchase
Dr. inventory (+A) Cr. Cash/ accounts payable
when liability is paid
Dr. payable Cr. cash
Expense journal entry
Dr. repairs/ maintenance expense (+EXP) Cr. Cash/ accounts payable
How to interpret turnover/ activity ratios
For every dollar of average total assets, we generate x amount in revenues. - higher asset turnover ratio = more effective at generating revenue from its assets
Ending inventory
beginning inventory + purchases - COGS
How does a write-off affect accounts receivable and allowance for doubtful accounts?
both decrease
loss
cash received < NBV or asset is retired before fully depreciated
gain
cash received > NBV
disposal of assets
companies will dispose of an asset by selling it to another party for cash, or retiring the asset from use
benchmark comparison
comparing firms to industry norms
net book value
cost of the asset - all accumulated depreciation
