ACC 231 Exam 3

trade receivables

claims held against customers and others for money, goods, or services

allowances for sales returns and allowances is what type of account?

contra asset (to accounts receivable)

sales discount is what type of account?

contra revenue

what type of account is sales returns and allowances?

contra revenue account (to sales revenue)

prepaid expenses valuation

cost

intangible assets

lack physical substance and are not financial instruments

inventories valuation

lower of cost or net realizable value/market

receivables

major categories of receivables should be shown in the balance sheet or the related notes

compensating balance

minimum deposits required to be maintained in connection with a borrowing arrangement

when recording a cash discount, which method is theoretically superior?

net method

how to measure trade accounts receivable

net realizable value

current liabilities

obligations that a company reasonably expects to liquidate either through the use of current assets or the creation of other current liabilities

long term liabilities

obligations that company does not expect to liquidate within the normal operating cycle - all covenants and restrictions must be disclosed

merchandiser inventory

only one inventory account - retailer is business to customer - wholesaler is business to business

accounts receivable

oral promises of the purchaser to pay for g/s sold

what type of account is sales discounts forfeited?

other rev/gain

prepaid expenses

payment of cash, that is recorded as an asset because service or benefit will be received in the future ("capitalized expenses" - cash payment before expense recorded)

assets

probable future economic benefits obtained or controlled by a particular entity as a result of past transactions or events

liabilities

probable future sacrifices of economic benefits arising from present obligation of a particular entity to transfer assets or provide services to other entities in the future as a result of past transactions or events

notes receivable

written promises to pay a sum of money on a specified future date

should the TVM principle be applied to A/R?

yes, but is usually immaterial so is rarely done in practice

examples of nontrade receivables

- advances to officers - advances to subsidiaries - deposits paid to cover potential damages/losses - dividends and interest receivable

cash

- any monies available on demand - cash equivalents (short term highly liquid investments that mature within three months or less) - restrictions or commitments must be disclosed - most liquid asset - basis for measuring and accounting for all items

inventories

- are a current asset - items held for sale in the ordinary course of business or - goods to be used in the production of goods to be sold

elements of the balance sheet

- assets - liabilities - equity

inventory cost flow

- beg inv > cost of goods available for sale > COGS/end inv - cost of goods purchased > cost of goods available for sale > COGS/end inv

stockholders' equity section

- capital stock - additional paid-in capital - retained earnings - accumulated other comprehensive income - treasury stock - noncontrolling interest (minority interest)

correct order to present current assets

- cash - accounts receivable - inventories - prepaid items

example of current assets

- cash and cash equivalents - short term investments - receivables - inventories - prepaid expenses

examples of cash

- coin - currency - available funds on deposit at the bank - money orders - certified checks - cashier's check - personal checks - bank drafts - savings accounts

usefulness of the balance sheet

- computing rates of return - evaluating the capital structure - assess risk and future cash flows - analyze the company's liquidity, solvency, and financial flexibility

assets order

- current assets - long term investments - PP&E - intangible assets - other assets

liabilities/equity order

- current liabilities - long term debt - stockholders' equity

sale of receivables cycle

- customer places order to company - company requests credit review from factor - factor approves credit - factor advances cash to company - company ships goods to customer - customer makes payment to factor

Which is the correct entry for journalizing issuing of 50,000 shares of common stock with par value of $2 and a selling price of $10?

- dr. cash 500000 - cr. paid in capital 100000; cr. additional paid in capital 400000

allowance method for uncollectible accoutns

- involves estimating uncollectible accounts at the end of each period (i.e. adjusting entry) - ensures that companies state receivables on the balance sheet at their net realizable value - companies estimate uncollectible accounts and net realizable value using information about past and current events as well as forecasts of future collectibility

why may an owner transfer a/r or notes/r to another company for cash?

- limited access to normal/affordable credit (debt covenants) - sell receivables because money is tight - billing and collection are time consuming and costly

allowance method

- losses are estimated (% of sales, % of receivables, aging schedules, GAAP requires when material in amount)

limitation of the balance sheet

- moment in time statement - most assets and liabilities are reported at historical cost - use of judgments and estimates - many items of financial value are omitted

cash discounts

- offered to induce prompt payment - 2/10 n/30, etc. - gross method vs net method

type of systems for maintaining inventory records

- perpetual system - periodic system

what would firms restrict cash for?

- plant expansion - retirement of LTD - compensating balances

what is not considered cash?

- post dated checks - IOUs - anything restricted - crypto

sale without recourse

- purchaser assumes risk of collection - transfer is outright sale of receivable - seller records guaranteed loss on sale

perpetual system

- purchases of merchandise are debited to inventory - freight in is debited to inventory (purchase returns and allowances and purchase discounts are credited to inventory) - COGS (expense) is debited and inventory is credited for each sale - subsidiary records show quantity and cost of each type of inventory on hand at any given time this system provides a continuous record of inventory and COGS

uncollectible accounts receivable

- record credit losses as debits to bad debt expense - normal and necessary risk of doing business on credit - two methods to measure uncollectibles: 1) direct write off or 2) allowance method

trade discounts

- reductions from the list price - not recognized in the accounting records - customers are billed net of discounts

long term investments

- securities - tangible fixed assets (not used in operations) - special funds (sinking fund, pension fund, etc.) - nonconsolidated subsidiaries or affiliated companies

sale with recourse

- seller guarantees payment to purchaser - obligation created for estimated amount of uncollectible receivables, given at fair value

assets in order of liquidity: - inventory - goodwill - building - a/r - short term investments - long term investments

- short term investments - a/r - inventory - long term investments - building - goodwill

direct write off method

- theoretically deficient (no matching, receivable not stated at cash realizable value, not allowed in GAAP when material in amount)

examples of cash equivalents

- treasury bills - commercial paper - money market funds

write off on an uncollectible account

- when companies have exhausted all means of collecting a past due account and collection appears impossible, they should write off the account - timing of write off is industry and firm dependent

duncan company reports the following financial info: - dr. a/r 100000 - cr. allowance for doubtful accounts 2000 - cr. sales revenue 900000 - dr. sales returns and allowances 50000 1) Prepare the journal entry to record Bad Debt Expense assuming Duncan Company estimates bad debts at 5% of accounts receivable 2) Prepare the journal entry to record Bad Debt Expense assuming Duncan Company estimates bad debts 5% of accounts receivable but the Allowance had a $1,500 debit balance.

1) dr. bad debt expense 3000; cr. allowance for doubtful accounts 3000 how: 100000(.05) - 2000 2) dr. bad debt expense 6500; cr. allowance for doubtful accounts 6500 how: 100000(.05) + 1500

Assume that Cruz Co. makes $100,000 sales to Yusado on Jan. 1, 20X0 and, after exhausted collection efforts, on Oct. 31, 20X0 Cruz Co. writes off as uncollectible Yusado's $8,000 balance. The entry is what? - use direct write off method

1/1: dr. accounts receivable 100000; cr. revenue 100000 10/31: dr. bad debt expense 8000; cr. accounts receivable 8000

Assume that on Jan. 1, 20X0 Max Glass sells $5,000 of hurricane glass to Oliver Builders on account. At the time of sale, Max Glass estimates that $400 of these glass sales will either be returned or an allowance will be granted. Max Glass records the sale on account and records an allowance for sales returns and allowances as follows

1/1: dr. accounts receivable 5000; cr. sales revenue 5000 1/1: dr. sales returns and allowances 400; cr. allowance for sales returns and allowances

Consider the following: Cash in Bank - checking account of $18,500, Cash on hand of $500, Post-dated checks received totaling $3,500, and Certificates of deposit totaling $124,000. How much should be reported as cash in the balance sheet?

19000

AG Inc. made a $25,000 sale on account with the following terms: 1/15, n/30. If the company uses the net method to record sales made on credit, how much should be recorded as revenue?

24750

Two months (march) after sale, let's assume that Max Glass now grants an allowance of $400 to Oliver Builders because some of the hurricane glass is of lower quality than originally ordered. The entry to record this transaction is as follows.

3/1: dr. allowance for sales and allowances 400; cr. accounts receivable 400

On June 3, Bolton Company sold to Arquette Company merchandise having a sale price of $2,000 with terms of 2/10, n/60, f.o.b. shipping point. Prepare the journal entries on Bolton Company books to record the sale assuming Bolton records sales using the net method, and Arquette did not remit payment until June 29

6/3: dr. accounts receivable 1960; cr. sales 1960 6/29: dr. cash 2000; cr. accounts receivable 1960, cr. sales discounts forfeited 40

On June 3, Bolton Company sold to Arquette Company merchandise having a sale price of $2,000 with terms of 2/10, n/60, f.o.b. shipping point. On June 12, the company received a check for the balance due from Arquette Company. Prepare the journal entries on Bolton Company books to record the sale assuming Bolton records sales using the net method

6/3: dr. accounts receivable 1960; cr. sales revenue 1960 6/12: dr. cash 1960; cr. accounts receivable 1960

On June 3, Bolton Company sold to Arquette Company merchandise having a sale price of $2,000 with terms of 2/10, n/60, f.o.b. shipping point. On June 12, the company received a check for the balance due from Arquette Company. Prepare the journal entries on Bolton Company books to record the sale assuming Bolton records sales using the gross method

6/3: dr. accounts receivable 2000; cr. sales revenue 2000 6/12: dr. cash 1960, dr. sales discounts 40; cr. accounts receivable 2000

Crest Textiles, Inc. factors $500,000 of accounts receivable with Commercial Factors, Inc., on a without recourse basis. Commercial Factors assesses a finance charge of 3 percent of the amount of accounts receivable and retains an amount equal to 5 percent of the accounts receivable (for probable adjustments). Crest Textiles and Commercial Factors make the following journal entries for the receivables transferred without recourse 2) Assume Crest Textiles sold the receivables on a with recourse basis. Crest Textiles determines that this recourse obligation has a fair value of $6,000. To determine the loss on the sale of the receivables, Crest Textiles computes the net proceeds from the sale as follows 3) Prepare the journal entries for Crest Textiles for the receivables sold with recourse.

Crest: dr. cash 460000, dr. due from factor 25000, dr. loss on sale of receivable; cr. accounts receivable 500000 Commercial Factor: dr. accounts receivable 500000; cr. due to customer 25000, cr. interest revenue 15000, cr. cash 460000 2) net proceeds: 479000 (460k - 25k - 6k) Carrying value (500000) - net proceeds (479000) = loss on sale of receivables (21000) 3) dr. cash 460000, dr. due from factor 25000, dr. loss on sale of receivables 21000; cr. accounts receivable 500000, cr. recourse liability 6000 commercial factor's journal entry stays the same

how to measure inventories

LCNRV / LCM

noncontrolling interest (minority interest)

a portion of the equity of subsidiaries not wholly owned by the reporting company

noncurrent assets

assets a company expects to convert into cash, sell, or consume either greater than on year or in the operating cycle, whichever is longer - presented in order of liquidity

current assets

cash and other assets a company expects to convert into cash, sell, or consume either in one year or in the operating cycle, whichever is longer - presented on balance sheet in order of liquidity (u.s. gaap)

other assets

includes only unusual items sufficiently different from assets in the other categories

trading

debt securities bought and held primarily for sale in the near term to generate income on short term price differences

available for sale

debt securities not classified as held to maturity or trading securities

held to maturity

debt securities that a company has the positive intent and ability to hold to maturity

account when retained earnings is negative?

deficit

The financial vice president of Brown Furniture authorizes a write-off of the $1,000 balance owed by Randall Co. on March 1. The entry to record the write-off is what? 2) Assume that on July 1, Randall Co. pays the $1,000 amount that Brown had written off on March 1. What are the entrie(s)?

dr. allowance for doubtful accounts 1000; cr. accounts receivable 1000 2) dr. accounts receivable 1000; cr. allowance for doubtful accounts 1000 dr. cash 1000; cr. accounts receivable 1000

Assume that Brown Furniture in 20X0, its first year of operations, has credit sales of $1,800,000. Of this amount, $150,000 remains uncollected at December 31. The credit manager estimates that $10,000 of these sales will be uncollectible. The adjusting entry to record the estimated uncollectibles (assuming a zero balance in the allowance account) is what? - allowance method

dr. bad debt expense 10000; cr. allowance for doubtful accounts 10000

receivables valuation

estimated account collectible

how to measure trading securities

fair market value

cash valuation

fair value

short term investments valuation

fair value

factors

finance companies or banks that buy receivables from businesses for a fee

bank overdrafts

firm writes a check for more than the amount in its cash account - reported as current liability

treasury stock

generally, the amount of ordinary shares repurchased

PP&E valuation

historical cost

how to measure PPE

historical cost

how to measure prepaid expenses

historical cost

other assets valuation

historical cost (usually)

intangible assets valuation

historical cost or fair value

long term investments valuation

historical cost or fair value

balance sheet "statement of financial position"

reports assets, liabilities, and equity at a specific date

equity

residual interest in the assets of an entity that remains after deducting its liabilities

cash equivalents

short term, highly liquid investments that are both a) readily convertible to cash and b) so near their maturity that they present insignificant risk of changes in value

PP&E

tangible long lived assets used in the regular operations of the business - physical property such as land, buildings, machinery, furniture, tools, and resources - with the exception of land, a company either depreciates or depletes these assets

solvency

the ability of a company to pay its debts as they mature

financial flexibility

the ability of an enterprise to take effective actions to alter the amounts and timing of cash flows so it can respond to unexpected needs and opportunities

accumulated other comprehensive income

the aggregate amount of the other comprehensive income items

liquidity

the amount of time that is expected to elapse until an asset is realized or otherwise converted into cash or until a liability has to be paid

retained earnings

the corporation's undistributed earnings

additional paid in capital

the excess of amounts paid in over the par or stated value

capital stock

the par or stated value of the shares issued

manufacturer inventory

three inventory accounts (raw materials, work in progress, finished goods)

where are repurchased shares classified on the balance sheet?

treasury stock