ch 5/6/7 accounting

net revenue

all revenes - all expenses

At December 31, Gill Co. reported accounts receivable of $238,000 and an allowance for uncollectible accounts of $600 (credit). An analysis of accounts receivable suggests that the allowance for uncollectible accounts should be 3% of accounts receivable. The amount of the adjustment for uncollectible accounts would be:

($238,000 x 3%) − $600 = $6,540.

Inventory for manufacturing company

(1.) raw material (2.) work in progress (3.) finished goods

Inventory Cost Methods

-Specific Identification -First In, First Out (FIFO) -Last In, First Out (LIFO) -Weighted Average Cost

useful life of patents

20 years

perpetual inventory system

A detailed inventory system in which a company maintains the cost of each inventory item, and the records continuously show the inventory that should be on hand.

Tax Depreciation

Accelerated methods reduce taxable income more in the earlier years of an asset's life

periodic inventory system

An inventory system in which a company does not maintain detailed records of goods on hand throughout the period and determines the cost of goods sold only at the end of an accounting period.

Weighted-average cost

Assumes each unit of inventory has a cost equal to the weighted-average unit cost of all inventory items Cost of goods available for sale/ Number of units available for sale

First-In, First-Out (FIFO)

Assumes first units purchased are the first ones sold

Last-In, First-Out (LIFO)

Assumes last units purchased are the first ones sold

patents when developed internally

Capitalize legal and filing fees only (Research and Development costs are expensed as incurred

Patents when purchased:

Capitalize the purchase price plus legal and filing fees

The account "Allowance for Uncollectible Accounts" is classified as a

Contra asset to accounts receivable in the balance sheet

cost of goods sold

Cost of the inventory that was sold during the period reported as an expense in the income statement

Garber Plumbers offers a 20% trade discount when providing $2,000 or more of plumbing services its customers. In March 2018, Garber provided $4,000 of plumbing services to Red Oak Inc. and $1,500 of services to Cyril Inc. Each of these customers was granted credit terms of 2/10, net 30. If both customers paid for the plumbing services within the discount period, what was the net revenues amount for these two transactions? a. $5,500b. $4,312c. $4,486d. $4,606

D

On November 10 of the current year, Flores Mills provides services to customer for $8,000 with credit terms 2/10, n/30. The customer made the correct payment on December 5. How would Flores record the collection of cash on December 5? a. Cash...............7,840 A/R.................7,840 b. Cash............................7,840 Sales Discounts.....160 A/R......................................8,000 c. Cash...........................7,840 Sales Revenue.......160 A/R.................................8,000 d. Cash.............8,000 A/R................8,000

D

MACRS

Depreciation system required by federal income tax law.

Goodwill Impairment

Each "reporting unit" should be tested for goodwill (under GAAP) Each "cash generating unit" should be tested for goodwill impairment (IFRS)

Assuming that prices rise over time, which inventory cost flow assumption will result in the lowest cost of goods sold?

FIFO

Bernie Corp. uses the FIFO inventory method to calculate cost of goods sold for financial reporting purposes. Which of the following methods can Bernie use for tax purposes?

FIFO and weighted-average only

LIFO reserve

For a company using LIFO, the difference between inventory reported using LIFO and inventory using FIFO.

FOB destination

Freight terms indicating that ownership of goods remains with the seller until the goods reach the buyer.

Goodwill

Goodwill is the portion of the purchase price that exceeds the fair value of identifiable net assets Recorded only when one company acquires another company

LIFO conformity rule

IRS rule requiring a company that uses LIFO for tax reporting to also use LIFO for financial reporting

Land Improvements

Improvements to land such as paving, lighting, and landscaping that, unlike land itself, are subject to depreciation

average days in inventory

Indicates the approximate number of days the average inventory is held. 365/inventory turnover ratio

gross profit ratio

Indicator of the company's successful management of inventory. Measures the amount by which the sale price of inventory exceeds its cost per dollar of sales gross profit ratio = gross profit/net sales

Turn Company utilizes the LIFO inventory method to calculate taxable income. Which method is available to Turn for financial reporting purposes?

LIFO only

Specific identification

Matches each unit of inventory with its actual cost

Net assets= assets acquired -liabilities assumed

Net assets= assets acquired -liabilities assumed

Basket Purchases

Purchase of more than one asset at the same time for one purchase price

Inventory Turnover Ratio

Shows the number of times the firm sells its average inventory balance during a reporting period. cost of goods sold/average inventory

Residual value (or salvage value)

The amount the company expects to receive from selling the asset at the end of its service life

Service life (or useful life)

The estimated use the company expects to receive from the asset before disposing of it

Depreciation method

The pattern in which the asset's depreciable cost (original cost minus residual value) is allocated over time

Credit Sales

Transfer of products and services to a customer today while bearing the risk of collecting payment from that customer in the future. Also known as sales on account or services on account.

balance sheet for manufacturing company

Work in process Raw materials Finished goods

Buildings

administrative offices, retail stores, manufacturing facilities, and storage warehouses

LIFO adjustment

an adjustment used to convert a company's own inventory records maintained on a FIFO basis to LIFO basis for preparing financial statements

multiple-step income statement

an income statement that reports multiple levels of income (or profitability)

useful life of copyright

authors life plus 70 years

The lower of cost and net realizable value method was developed to

avoid reporting inventory at an amount that exceeds the benefits it provides

allowance for uncollectible accounts

contra asset account representing the amount of accounts receivable that we do not expect to collect

A company's adjustment for uncollectible accounts at year-end would include a:

debit to bad debt expense credit to allowance for uncollectible accounts

Intangible assets developed internally:

expense in the income statement most of the costs for internally developed intangible assets in the period we incur those cost

research and development (R&D)

expensed

In times of rising prices, cost of goods sold determined using the LIFO inventory assumption typically will be _______ than cost of goods sold determined using the FIFO inventory assumption.

greater

Operating Income

gross profit - operating expenses

inventory

includes items a company intends for sale to customers in the ordinary course of business. generally reported as a current asset in the balance sheet

Norma Inc. uses the perpetual inventory system. When the company records a sale, it should make entries to

increase an asset and increase revenue decrease an asset and increase an expense

Purchasing inventory on account

increases assets increases liabilities

useful life of goodwill

indefinite

Profit margin

indicates the earnings per dollar of sales

intangible assets

long-term assets (e.g., patents, trademarks, copyrights) that have no real physical form but do have value

In times of rising prices, ending inventory determined using the LIFO inventory assumption will ________ than ending inventory determined using the FIFO inventory assumption.

lower

Equipment

machinery used in manufacturing, computers and other office equipment, vehicles, furniture, and fixture

Asset turnover

measures the sales per dollar of assets invested

Gross Profit

net sales - cost of goods sold

Natural resources

oil, natural gas, timber, and salt

Income before income taxes

operating income + non-operating revenues and - non-operating expenses

A _____________ inventory system is one that is continually updated to reflect inventory purchases and sales.

perpetual

Purchased intangibles

record at their original cost plus all other costs necessary to get the asset ready for use

useful life of trademark

renewable for indefinite number of 10 year periods

expenditures after acquisition

repairs and maintenance additions improvements litigation costs

Depreciation Methods

straight line, declining balance, activity based

Accounts Receivable

the amount of cash owed to company by its customers from the sale of goods or services on account

Inventory is reported on the balance sheet at

the lower of original cost and net realizable value

Amortization

the reduction of a loan balance through payments made over a period of time

tangible assets

those assets that can be appraised by value or seen or touched

FOB shipping

title passes when the seller ships the item

Purpose of Financial Accounting

to identify, record, and communicate the economic events of an organization to interested users through the preparation and distribution of financial statements