Accounting Exam 3

goods sold

FIFO, an inventory costing method, actually describes how to calculate the cost of

Net Fixed Assets

Fixed assets include land, buildings, equipment, and natural resources. Net fixed assets are fixed assets less accumulated depreciation or depletion.

revenue expenditures

Generally, subsequent expenditures for ordinary repairs and maintenance are expensed in the period incurred.

Become cost of goods sold on the income statement

Goods available for sale will _________ when sold

Inventory items being transported from a seller to a buyer

Goods in transit are

Goodwill

Goodwill is not amortized. Each year we must test to see if there has been any impairment in the carrying value of the goodwill. If an impairment is determined to exist, we will reduce the goodwill account to its fair value and recognize a loss.

sales

The receivable turnover ratio is computed by dividing the net credit __________ for the year by the average amount of accounts receivable during the year.

=Days to sell

(365) divided by (inventory turnover ratio)

True

A grocery store may use the last in first out inventory method

Leasehold

A leasehold is the right granted in a contract called a lease to use a specific asset. Leasing is a common type of business contract. For a consideration called rent, the owner (lessor) extends to another party (lessee) certain rights to use specified property. Leases may vary from simple arrangements, such as the month-to-month (operating) lease of an office or the daily rental of an automobile, to long-lived (capital) leases having complex contractual arrangements. Lessees sometimes make significant improvements to a leased property when they enter into a long-term lease agreement. A company that agrees to lease office space on a 15-year lease may install new fixtures or move walls to make the space more useful. These improvements are called leasehold improvements and are recorded as an asset by the lessee despite the fact that the lessor usually owns the leasehold improvements at the end of the lease term. The cost of leasehold improvements should be amortized over the estimated useful life of the related improvements or the remaining life of the lease, whichever is shorter.

One of the most common types of financial statement misstatements

A lower cost or market write down

Trademarks and Copyrights

A trademark or trade name is any symbol, name, phrase, or jingle that is identified with a company, product or service. No other party may use the trademark or trade name without the permission of the holder. Many trademarks are extremely valuable. Trademarks have unlimited (or indefinite) lives and are not amortized.  A copyright grants to the holder the exclusive right to publish and sell musical, literary, or artistic work for the life of the creator plus seventy years. Most copyrights are amortized over a short period of time using the straight-line method.

bad debt expense to decrease sales to decrease

Accepting only cash and cancelling credit card program that allowed customers to purchase on credit may cause __________

Balance sheet

Accumulated depreciation would be found on?

$400

Acme had cost of goods sold of $2000. If beginning inventory was $2100 and ending inventory was $500. Acme's purchases must have been _________

Long lived assets

Actively used in operations and will not be used up within the next year

Increases the seller's revenue

Advantage of extending credit?

Permanent account, so its balance carries forward to the next accounting period

Allowance for doubtful account is

Adjusted balance

Always a credit when dealing with bad debt expense or allowance for doubtful accounts

Inventory

Amount of natural resource depleted

Cost of goods sold

Amount of natural resources used matched with related revenues

Notes Receivable

An adjusting entry to accrue for interest earned is often needed when a company has ___________

= Cost - Accumulated depreciation

An asset's book value or carrying value =

good if the inventory turnover ratio is higher

An increase in a company's inventory balance from a prior year is ________________

Increases

As inventory quality increases, its cost usually __________

Decreases

Assuming sales remain unchanged, if cost of goods sold increases then gross profit _____________

Stays same because cash drops 50,000 and equipment goes up 50,000

Bought new computer for 50,000. Whats effect on total assets?

Declining-Balance Method

Calculating depreciation expense under the declining-balance method is a two step process. The first step is to calculate the double-declining-balance depreciation rate. We do this by dividing two by the useful life in years. We can convert this number to a percentage by multiplying by 100 percent. Next, we determine depreciation expense by multiplying the double-declining-balance rate times the asset's beginning-of-the-period book value. The double-declining-balance method ignores estimated residual value.

GOOD SLIDES

Chapter 9_LO2 Slides 7-10

Recovery

Collection of a previously written off account is called a

the asset was seriously damaged in a fire

Company might record an involuntary disposal of an asset if _______

theft storage obsolescence spoilage

Cost of carrying inventory includes the costs of ____________

That a higher number of days means a longer time for collection The average number of days from sale on account to collection

Days to collect ratio provides what information?

Cost - Salvage value

Depreciable cost =

Income statement

Depreciation expense would be found on which financial statement?

Increased wage costs Bad debt costs Delayed receipt of cash

Disadvantages of extending credit?

straight line depreciation

Does best job of matching the expense with related revenue when an asset is used evenly from one accounting period to another

False

First in Last out is one of the titles of inventory methods followed by gap

Acquisition by Construction

If we construct a tangible asset, such as a building, the cost will include all the necessary construction costs, material and labour, plus a reasonable amount of overhead, and any interest costs on money borrowed to finance the construction.

cost

In a perpetual inventory system, inventory is initially recorded as __________

Acquisition Cost of a Building

In addition to the purchase price of a building, the acquisition cost includes legal fees, realty fees, title fees, and renovation and repair costs necessary to get the building ready for its intended use.

Acquisition Cost of Equipment

In addition to the purchase price, the cost of equipment includes sales taxes, delivery charges, installation costs, and any building modification costs necessary to accommodate the equipment.

The company converts existing account receivable to grant customer more time to pay amount and interest The company lends money to employees or businesses

In which situations does a company issue a note receivable?

optimal level of investment in long-lived assets

Insufficient investment results in inadequate capacity to meet consumer demand. Excess investment results in unused capacity, wasted resources, and excessive expenses.

Acquisition of Intangible Assets

Intangible assets are normally recorded at the purchase price plus any legal or related fees.

Definite vs Indefinite

Intangible assets with definite lives are amortized, using the straight-line method, over the shorter of their economic life or legal life, subject to IFRS (generally accepted accounting principles). Amortization is the same concept as depreciation only we call it a different name because it refers to intangible assets. Intangible assets with indefinite lives are not amortized. They must be tested at least annually for possible impairment of value, and if impaired, the book value is reduced to fair value.

Specific identification Weighted average LIFO FIFO

Inventory costing methods allowed by US GAAP include:

Current asset on the balance sheet

Inventory is reported as a ___________

Declining Balance Depreciation

Is best method to use when an asset is productive in its earliest years but quickly loses its usefulness

units of production depreciation

Is the best method to use when the amount of an asset's use varies significantly from one accounting period to another

debit depreciation expense, credit accumulated depreciation

Journal entry to record depreciation include?

Debit: Amortization Expense Credit: Accumulated Amortization

Journal entry to record the amortization of a businesses patents include

Debit to notes receivable of $1000 Credit to cash of $1000

Journal entry to record the loan of $1000 to an employee includes a ___________

Tangible Assets

Land Other assets that are subject to depreciation: Buildings and Equipment Furniture and Fixtures

Intangible Assets

Limited life: Patents and Copyrights Unlimited life: Goodwill and Trademarks

Depreciation

Matching part of the cost of a long lived asset with the revenues generated by the asset is ______________

Stockholders equity to be overstated and Assets to be overstated

Miss Hap, forgot to record the depreciation for the year. This error will cause ___________

Fixed Asset Turnover

Net Sales Revenue/Average Net Fixed Assets

Research and Development Expense

Not an Intangible asset

Extending payment periods Selling large dollar-value items Lending money to individuals or businesses

Notes receivable are used for __________

Custom home builder

Of the 4 companies below Fast food restaurant Custom home builder Bulk candy merchandiser Dog biscuit manufacturer Which company is more likely to use specific identification to value its inventory and cost of goods sold?

$792

On June 1, $800 of goods are sold with credit terms of 1/10, n/30. How much should the seller expect to receive if the buyer pays on June 8?

$693

On June 1, $800 of goods are sold with credit terms of 1/10, n/30. On June 3 the customer returned $100 of the goods. How much should the seller expect to receive if the buyer pays on June 8?

Balance Sheet

On which financial statement would you expect to find Allowance for Doubtful Accounts?

Expensed as they are incurred

Ordinary repairs and maintenance costs should be ______

Long term asset

Original cost of the natural resources

Example of Goodwill

Part I. Arpec Company paid $2,000,000 to purchase all of Utek Company's assets and assumed liabilities of $400,000. The acquired assets were appraised at a fair value of $1,800,000. How much goodwill should Arpec Company record as a result of its purchase of Utek Company? Part II. The correct answer is choice c. Arpec Company paid $2,000,000 dollars for net assets with a fair value of $1,400,000. Since the purchase price exceeded the fair value of net assets by $600,000, Arpec Company will record $600,000 of goodwill.

Notes receivable on journal entry

Principle amount

Land Acquisition costs

Purchase cost Legal fees Survey fees Title search fees

Building Acquisition costs

Purchase cost/construction cost Legal fees Appraisal fees Architect fees

Acquisition cost

Purchase price and all costs needed to prepare asset for use

Both have risk of not being collected and are current assets

Similarities between 6 month note receivable and an account receivable?

Subject to management manipulation

Since accounting numbers, such as the allowance for doubtful accounts balance, are based on estimates, financial statements are __________

Aging method (balance sheet approach)

Sorting a company's accounts receivable into classifications such as current, 1-30 days past due, and 31-60 days past due is known as the __________ of accounts receivables.

Units of Production Method

Step 1: Depreciation Rate = (Cost-Residual Value)/Life in Units of Production Step 2: Depreciation Expense = Depreciation Rate x Number of Units produced for the year

Depreciation Methods

Straight line, units of production, and declining balance are commonly used ____________

False

T/F After several years of operations, a company's Bad Debts Expense for a given year is likely to be the same as its balance in Allowance for Doubtful Accounts.

False

T/F Allowance for doubtful accounts is used for accounts receivable but not notes receivable.

True

T/F FIFO perpetual and FIFO periodic inventory methods result in the same amount of cost of goods sold?

False Notes receivable are interest bearing and are formal written contracts

T/F Notes receivable have the same characteristics as accounts receivable and are interchangeable

(net sales) / (average net assets)

Turnover ratio formula =

Depletion Costs

Unit Depletion Rate x Number of Units Extracted in Period

debit bad debt expense, credit allowance for doubtful accounts

Using the allowance method, which is the correct adjusting journal entry to record bad debt expense?

Customers may get annoyed and take their business elsewhere Hounding customers to pay if their receivables are past due is time consuming and costly

What are the potential drawbacks of speeding up collections of receivables?

It results in an increase in assets and stockholders equity

What effect does the adjusting entry for interest earned but not yet received have on the accounting equation?

1. Debit to notes receivable and credit to cash 2. Debit interest receivable and credit interest revenue 3. Debit cash and credit interest receivable 4. Debit cash and credit notes receivable, interest revenue, and interest receivable

What events occur when a 2 year note is established paying interest annually

The number of times the average receivables balance is collected during the period That a higher ratio also means faster turnover (better)

What info is provided by the receivables turnover ratio?

Reduction in inventory storage costs Reduction in obsolescence

What might occur with a higher inventory turnover ratio?

Company purchases another company for $10,000 more than its net assets Company purchases a franchise for $100,000 $10,000 was spent to purchase a patent

What results in an increase of intangible assets?

discount

When a sale is made with the credit terms of 2/10, net 30, the "10" refers to the __________ period.

FIFO

When costs are rising, which inventory method produces a higher inventory value?

increased with a Debit

When recording losses on the sale of fixed assets. Loss on disposal account is ____________

The amounts are estimates and no one knows which customers will not pay The company would lose track of which customers still owe money

When recording the adjusting entry for uncollectible accounts using the allowance method, customers' subsidiary accounts are not directly reduced. The reason is ___________

credit

When the Allowance for Doubtful Accounts appears on a company's financial statements, its balance will be a __________ balance.

FIFO

Which inventory costing method uses the oldest cost of goods sold on the income statement and the newest cost for inventory on the balance sheet?

LIFO FIFO

Which inventory costing methods are based on assumptions that accountants make about the flow of inventory costs?

Goods held for sale in the normal course of business

Which is merchandise inventory?

direct write-off method

Which method of reporting losses on accounts receivable is required in the U.S. for income tax purposes?

Allowance

Which method of reporting losses on accounts receivable is to be used for financial reporting?

Sales revenue Bad debt expense Depreciation expense

Which of the following accounts are temporary accounts, closed out at the end of the accounting period and turned to retained earnings?

Purchased finished goods

Which of the following would be considered merchandise inventory?

LIFO

With Declining price. Highest COGS?

LIFO

With Declining price. The lowest inventory value?

LIFO

With Declining price. Which inventory method produces a higher inventory value?

LIFO

With rising price. Highest COGS?

LIFO

With rising price. Lowest Gross Profit?

LIFO

With rising price. The lowest inventory value?

Amortization

allocates cost of intangible assets over the period of useful life

Depreciation

allocates the cost of a long lived asset over the periods of use

Interest revenue on journal entry

amount of interest earned

Goods available for sale

beginning inventory + all purchases

residual value

estimated amount to be recovered, less disposal costs at the end of estimated useful life of an asset.

useful life

expected service life of an asset to the present owner.

On-hand inventory (asset)

the amount of a unit that is physically available

Interest receivable on journal entry

the amount of interest earned but not yet collected

Acquistion Cost of Land

the cost includes the purchase price, legal fees, surveying fees, broker's commissions, and other costs generally incurred in connection with the purchase such as taxes and recording fees. As noted earlier, land is not a depreciable asset.

Cost of Goods Sold (COGS) (expense)

the cost of the merchandise inventory that the business has sold to customers

calculation of depreciation requires three things

(1) the asset's acquisition cost; (2) the estimated useful life of the asset, and (3) the estimated residual (salvage) value we expect to receive at the end of its useful life.

Unit Depletion Rate

(Acquisition and Development Cost - Residual Value)/Estimated Recoverable Units

Changes In Depreciation Estimates(straight line method)

(Book Value at date of change - residual value at date of change)/Remaining Useful Life at date of change

Straight Line Method

(Cost - Residual Value)/Useful Life of Years

=Average Inventory

(beginning inventory + ending inventory) divided by (2)

=Inventory turnover ratio

(cost of goods sold) divided by (average inventory)

depreciation methods

- straight line - units of production - accelerated method: declining balance

capital expenditures

. Subsequent expenditures that are for betterments like overhauls that extend the life of the asset, and additions are capitalized instead of expensed.

Debit of $2000

A company estimates that $20,000 of its $500,000 of accounts receivable will be uncollectible. Its Allowance for Doubtful Accounts presently has a credit balance of $18,000. The adjusting entry will include a __________ to Bad Debts Expense.

Credit of $12000

A company estimates that $20,000 of its $500,000 of accounts receivable will be uncollectible. Its Allowance for Doubtful Accounts presently has a credit balance of $8,000. The adjusting entry will include a __________ to the Allowance for Doubtful Accounts.

Credit of $23000

A company estimates that $20,000 of its $500,000 of accounts receivable will be uncollectible. Its Allowance for Doubtful Accounts presently has a debit balance of $3,000. The adjusting entry will include a __________ to Allowance for Doubtful Accounts.

Bad Debt Expense

A company's Allowance for Doubtful Accounts has a credit balance of $25,000. It learns that one of its accounts receivable amounting to $1,800 is worthless and needs to be written off. Assuming that after the account is written off, the supplier receives full payment from the customer. Which account will not be involved in the accounting entries made at the time when the payment is received?

Bad Debt Expense

A company's Allowance for Doubtful Accounts has a credit balance of $25,000. It learns that one of its accounts receivable amounting to $1,800 is worthless and needs to be written off. Under the direct write off method, which account is debited when a company writes off one of its accounts receivable?

Accounts Receivable

A company's Allowance for Doubtful Accounts has a credit balance of $25,000. It learns that one of its accounts receivable amounting to $1,800 is worthless and needs to be written off. Which account should be credited for $1,800 when writing off the account?

Allowance for doubtful accounts

A company's Allowance for Doubtful Accounts has a credit balance of $25,000. It learns that one of its accounts receivable amounting to $1,800 is worthless and needs to be written off. Which account should be debited for $1,800 when writing off the account?

Effectiveness in granting and collecting credit

A high receivables turnover ratio is a sign of a company's _____________

lower

A higher salvage value will result in a _________ depreciation expense per year and a higher net income

higher

A higher salvage value will result in a lower depreciation expense per year and a __________ net income

Patents and Technology

A patent gives the holder the exclusive right to manufacture and sell an item or process for twenty years. A patent is amortized using the straight-line method over its useful life, but never more than twenty years. Most companies amortize patents over a very short period of time. Research and development costs that might lead to a patent are normally expensed as incurred. Technology is a category of intangible assets that includes a company's website and any computer programs written by its employees. This category of intangible assets is rapidly growing on corporate statements of financial position.

channel stuffing

A scenario where a company's credit sales are increasing and its accounts receivable turnover is decreasing would suggest _______________

Write off of a specific customer's account

Entry that includes a debit to allowance for doubtful accounts and a credit to accounts receivable is ____________

Measuring Asset Impairment

If Carrying amount > Recoverable amount, then the asset is impaired impairment loss = carrying amount - recoverable amount

73

If Vito inc has an inventory turnover ratio of 5 times, then its days to sell must be

LIFO

If a company assumes that its inventory costs flow out in the opposite order from which the goods were purchased, it uses ___________ to value its inventory

FIFO

If a company's inventory costs are rising, ______ inventory costing method typically results in a higher income tax expense.

Asset

If a cost is capitalized it is recorded as an _________

Equipment Acquisition costs

Purchase/construction cost Sales taxes Transportation costs Installation costs

Capitalizing

Recording costs as assets is called

Focus on Cash Flows

Several items relating to the accounting for investments are reported as adjustments to profit in the operating activities section of the statement of cash flows prepared using the indirect method. These adjustments to profit are: Depreciation, depletion, and amortization are added to profit. Gains on the sale of long-lived assets are subtracted from profit. Losses on the sale of long-lived assets are added to profit. Impairment losses are added to profit. Purchases of long-lived asset result in cash outflows. Sales of long-lived assets result in cash inflows. These two types of cash flows are reported in the investing activities section of the statement of cash flows.

Match the cost of bad debts to the accounting period in which the related credit sales are made Report accounts receivable net of the amount the company does not expect to collect

The objectives when accounting for accounts receivable and bad debts are to ____________

True

T/F The inventory method selected by management does not have to correspond tot the physical flow of goods to be in accordance with GAAP

True

T/F The inventory method is an assumed cost flow and does not have to correspond with the actual physical flow of goods

net sales revenue divided by average net accounts receivable

The Receivables turnover ratio is computed as _______________

debit bad debt expense, credit allowance for doubtful accounts

The adjusting entry to record the allowance for doubtful accounts includes a ___________

Debited

The allowance for doubtful accounts (a contra-asset account) is ______________ when specific uncollectible accounts are written off.

an effect on the company's income statements and an effect on the company's balance sheet

The assumption a company makes about its inventory cost flow has ___________________

Allowance for Doubtful Accounts

The direct write off method does not require the ______ account

Not be the same person who receives collections from customers

The employee who records the entry to write off uncollectible accounts should _________________

False

The inventory methods apply to perpetual inventory systems and not periodic inventory systems

debit bad debt expense credit accounts receivable

The journal entry for the direct write off method includes a _______

The less likely it is to be collectable

The more overdue an account becomes

Average; Average

The weighted average cost method uses the _________ cost for cost of goods sold on the income statement and the ________ cost for inventory on the balance sheet.

Inventory Cost of goods sold

The weighted average cost method uses the weighted average cost to calculate the value of ________________

Classifying Long-Lived Assets

There are two major categories of long-lived assets. Tangible assets are long-lived assets that have physical substance. Intangible assets are long-lived assets without physical substance.

Acquistions as a Basket Purchase of Assets

When several long-lived assets, such as land, building, and equipment, are acquired in a single transaction and for a single lump sum, known as a basket purchase, the cost of each asset must be measured and recorded separately. This is true because land is not depreciated but buildings and equipment are, although at different rates. The purchase price must be apportioned among the land, the building, and the equipment, on a rational basis.

Disposal of Property, Plant or Equipment

When we dispose of a plant asset, the first thing we do is update depreciation to the date of disposal. After completing the update we can record the disposal with a journal entry. We start the journal entry by recording a debit to the cash account, if cash was received, or credit the cash account, if cash was paid by the company. In addition, we must determine whether a gain or loss is associated with the disposal. A gain is recorded with a credit, just like revenue, and a loss is recorded with a debit, just like an expense account. We complete the entry by removing the plant asset's cost from our books with a credit, and by removing related accumulated depreciation with a debit.

(1) Avoid lengthy cash collection periods and (2) reduction of bad debts expense

Which are advantages of using national credit cards?

Patents Trademarks Brand names Copyrights

Which are intangible assets?

Delivery equipment Machinery

Which are long lived productive assets?

Total assets remain the same

Which effect does the collection of a note receivable, excluding interest, have on the accounting equation?

Work in process inventory Raw materials inventory Finished goods inventory

Which inventory accounts would one expect to see in the accounting records of a company that makes furniture?

LIFO

Which inventory costing method minimizes income taxes?

FIFO

Which inventory costing method uses the oldest cost for cost of goods sold on the income statement and the newest cost for inventory on the balance sheet?

Selling inventory for cash Selling inventory on an account

Which require a credit to the inventory account in a perpetual inventory system?

LIFO

With Declining price. Highest gross profit?

Net income to decrease Intangible assets to decrease

Write down of goodwill due to impairment will cause ______________

Franchises and Licensing and Operating Rights

You probably can't drive down any major street without finding a number of fast-food franchise operations. The holder of a franchise has the right to deliver a product or service under conditions granted by the franchisor. Any cost to acquire a franchise is amortized over the contract life of the franchise. Licenses and operating rights grant limited permission to use a product or service according to specific terms and conditions. For example, you may be using computer software that is made available to you through a campus licensing agreement.