ACCT EXAM 2
Write offs do/do not = bad debt expense which does/does not equal allowance for doubtful accounts
NONE OF THEM EQUAL EACH OTHER
What effect does recognition of bad debt expense have on NRV, total assets, and net income?
NRV, Assets, NI, and SHE ALL GOES DOWN
Journal entries for write off accounts receivable when you know which acct is bad
[allowance for doubtful accounts, debited. Accounts receivable, credited]. Assets go up and down so NO EFFECT on financial statements.
Avg cost inventory method journal entry using perpetual method
[cash/AR debited, sales rev credited] and [COGS debited, inventory credited]
In the perpetual inventory system, every sale of merchandise has two components (two JEs)
[debit: cash/AR. Credit: sales revenue] and [Debit: COGS. Credit: inventory]
What is the principal of a notes receivable?
amount borrowed (how much they owe)
Inventory shrinkage as a result of theft, damage or obsolescence that is discovered during a physical inventory count at the end of the accounting period is recorded with a decrease to Inventory in THIS inventory system.
only in perpetual system
When your ending inventory is overstated, what's the effect on the Net income?
overstates NI in 2022 because you're understanding COGS. but understates NI is understated in 2023. But ending inventory errors self correct
Service companies
perform services, collect cash, and pay operating expenses
Periodic inventory uses a ______ account to record inventory acquisitions
purchases
Specific identification inventory method
small volume of sales, inventory, high priced/high value products. Relatively rare. Houses, airplanes, jewelry. Don't rly have to know
On May 1, there were 4 inventory items that cost $30 each. On May 5, 2 items were purchased for $35 each. Given one item from the beginning inventory and one from the May 5 inventory were sold, under THIS inventory method, cost of goods sold would equal $65.
specific identification
Four inventory cost flow methods
specific identification, avg cost method, FIFO, LIFO
Avg cost inventory method
take GAS price and divide by GAS units.
How to calculate days to sell inventory
(365/inventory turnover ratio)
Advantages of LIFO
(lets you manipulate the earnings). matches current cost with current revenue. In times of rising prices, lower income means lower taxes and better cash flow.
Gross profit % =
(net sales Revenue - COGS)/net sales rev
Disadvantages of FIFO
COGS is not based upon current costs, so less consistent with the matching principle. In times of rising prices, COGS is lower (net income is higher) so income taxes are higher
Inventory turnover ratio formula
COGS/avg inventory = COGS/(beg inv+end inv/2)
Possession does/does not = ownership
DOES NOT
BS or IS method to estimate bad debt?: company estimates 1% of credit sales will be uncollectible
Income statement method
With rising prices, which inventory method would produce the higher COGS?
LIFO
With rising prices, which inventory method would produce the higher cost of goods available for sale in 2022?
LIFO and FIFO would be equal in that way
Balance sheet method to estimate bad debt (or A/R aging)
This estimate is the % of ending accounts receivable (calculates the ending balance of allowance for doubtful accounts on the balance sheet) . $Estimate = ending allowance for doubtful accounts.
Income statement method to estimate bad debt
Uses I/S account to calculate I/S account. This estimate is the % of credit sales for the year (calculates bad debt expense on the income statement). $ estimate = bad debt expense
Direct write off method
WE DO NOT USE. records bad debt expense when the bad debt customer has been identified. This violates the matching principle and is NOT gaap.
How to find amount of inventory that was purchased during the year?
You know that cost of goods sold = Beginning inventory + Purchases − Ending inventory. So you can rearrange to solve for Purchases
How to do a journal entry when you collect previously written off account receivables
[cash, debited. Allowance for doubtful accounts, credited.] assets go up and down. NO EFFECT ON FINANCIAL STATEMENTS
Allowance for doubtful accounts (ADA)
amount of accounts receivable that you DO NOT expect to receive. A contra asset account.
What is the interest in a notes receivable?
an expense for the borrow (the cost of borrowing). Income for the creditor/lender
Specific identification is ______
an inventory method that tracks which item is actually sold and debits Cost of Goods Sold for the actual cost of the item
Accounts affected by bad debt (in the JE)
bad dept expense (BDE) and accounts receivable
BS or IS method to estimate bad debt?: company estimates 5% of A/R will be uncollectible
balance sheet method
How to calculate GAS (same for both periodic and perpetual)
beginning inventory + net purchases = GAS
When using the gross method, the journal entry to record taking a discount when paying for goods previously purchased on account includes a ______. (Check all that apply.)
debit to Accounts Payable for the original cost, credit to Cash for the amount paid, credit to Inventory for the discount amount
JE for a write off for a specific customer's account
debit to Allowance for Doubtful Accounts and a credit to Accounts Receivable
Allowance method
estimates bad debt expense at the end of a period and is recorded through an Adjusting journal entry. Follows the matching principle and is gaap.
Accounts receivable net is what we
expect to collect
FIFO inventory method
first in first out. Most businesses use. Sell the oldest stuff first
In a perpetual inventory system, Inventory is initially recorded at _____ price.
historical price (cost)
Two ways to estimate bad debts (using the allowance method)
income statement method and balance sheet method
LIFO inventory method
last in, first out. First stuff we sell is the last stuff we bought. Start at bottom and go up.
Inventory turnover ratio (what is it)
measures how often in a year a company sells the equivalent of its entire inventory. Must balance customer service and availability with the cost of maintaining inventory
A ____ income statement shows how much profit is earned from product sales without being clouded by other operating expenses and separates other items that are not core to the operations of the company.
multistep
NRV and its formula
net realizable value. The net amount the company expects to realize from the sale. NRV = estimated selling price - costs of competition, disposal, transportation.
Accounts receivable turnover
net sales/avg net AR. aka net sales/(beg AR + end ar)/2
COGS and ending inventory are always ______ when it comes to higher/lower in inventory errors
opposite
All inventory related transactions are recorded in the inventory account under the ____ method
perpetual
Which inventory system requires that the Inventory account be updated when merchandise is purchased?
perpetual
What is the maturity value of notes receivable?
principal + interest
FOB shipping point
record sales revenue when goods are loading onto the truck (ownership changes at this point)
FOB Destination
record sales revenue when goods are unloaded at customer location. This affects sales revenue and inventory
Merchandising company income statement
sales revenue - (COGS) = gross profit - Operating expenses (selling, general, and admin). = net income
Notes receivable are used for
selling large dollar-value items, extending payment periods, lending money to individuals or businesses
Service company income statement
service revenue, operating expenses (selling general and admin) = net income
How to calculate EI using perpetual inventory
subtract COGS from GAS
The journal entry to record the payment within the discount period for goods previously purchased on account causes _____. (Check all that apply.) in terms of A and L
total liabilities to decrease, total assets to decrease
LIFO perpetual method
use the sales as your new bottom and go up from there.
Notes receivables happen either
when a customer needs more time, or a loan. They're formal (you write it up), interest bearing, and have a specific maturity date
Accounts receivable (in regards to bad debt)
classified as a "current asset" on the balance sheet. Must be reported at the amount the business expects to collect on the receivable or NRV
Advantages of FIFO
corresponds to physical flow of goods in most businesses. Inventory on balance sheet is closest to current cost. Net income is higher in times of rising prices (bc old goods are cheaper but you sell for current pries.
Inventory should be recorded at the lower of ____ or _____
cost (price at which inventory was acquired) or NRV (net realizable value - net amount the company expects to realize from the sale)
Bad debt
cost of doing business on credit with customers who do not pay
Inventory is reported on the ______. Later, when the inventory is sold, it becomes ______.
cost of goods sol on the income statement
A contra-asset account, such as Allowance for Doubtful Accounts or Accumulated Depreciation, has a normal balance of a ______ and causes total assets to ______.
credit, decrease
FIFO periodic method vs perpetual method
if you use periodic method, you sell from the top to the bottom. If you use perpetual method, you see how many units the first sale is and then take that from the top down. Same with the second sale and so on
What is the time period for a notes receivable?
interest rate is always expressed as an annual rate. To convert to shorter time periods, express as a fraction of time. The denominator will always be 12 months, so divide by 12 and multiply by # of months
Perpetual inventory makes it so inventory purchases are directly debited to ______ account
inventory account
Is it inventory?: goods sold at FOB shipping points that are in transit on Dec 31
no, we've made the sale. It's COGS
when to record inventory sales
record sales revenues when ownership of goods transfer. Either using FOB shipping point or FOB destination
Difference between the count of inventory and calculation of ending inventory is called
shrinkage. It's automatically calculated using perpetual
In a periodic inventory system, Cost of Goods Sold is recorded at the end of the accounting period.
true
Held on consignment means
we do not own this
An understatement of the 2019 ending inventory will affect ______. (Check all that apply.)
2019 Cost of Goods Sold. 2020 Beginning Inventory. 2020 Cost of Goods Sold
Days to collect/days sales outstanding formula
365/accts receiv turnover
In which company would you rather invest? (in terms of high/low gross profit % and sales volume)
A company with high gross profit percentage and high sales volume
How to record bad debt expense at the end of the period
(record this entry when you don't know which specific accounts are bad) [bad debt expense debited, allowance for doubtful accounts credited]
The Allowance for Doubtful Accounts is a contra-asset account. Increases to the account (to record the period's estimated bad debt expense) are recorded with ______.
- credits
Failing to record bad debt expense in the same period as the related revenue violates which principle
Expense recognition (matching) principle
With rising prices, which inventory method would produce the higher net income for 2022?
FIFO
How to calculate COGS using periodic inventory system
GAS - EI = COGS
Basic inventory flow
beginning inventory (we own it but haven't sold it yet) + net purchases (what we buy to sell) = goods available for sale
Merchandising companies
buy inventory, sell inventory, collect cash, pay operating expenses
Merchandising company balance sheet
cash, acct receivable, inventory (what we sell), supplies, prepaid expenses = total assets
Service company balance sheet (assets)
cash, acct receivable, supplies, prepaid expenses = total assets
Bad dept expense (BDE)
classified as "Selling expense" on the income statement and closed at the end of the year.
Inventory purchases include the
cost of merchandise purchases, transportation costs, purchase returns and allowances, and purchase discounts
The adjusting entry to record the estimated amount of bad credit sales is a
debit to bad debt expense and credit to ADA
The gross profit percentage is the ratio to watch if you are worried about increased competition. If the company lowers its prices to retain market share without lowering its cost of goods sold, its gross profit percentage will ______.
decrease
From goods available for sale, inventory will flow to one of these two places in the financial statements
ending inventory (don't sell it) or COGS (if u sell it)
True or false: Specific identification is an inventory method typically used when accounting for expensive and unique inventory items.
true
Disadvantages of LIFO
unrealistic inventory amount on the balance sheet due to dated costs. Not usually the same as the physical flow of goods
Periodic inventory system
updates inventory records for merchandise purchases, sales and returns, ONLY at the end of an accounting period. Require inventory to be physically counted by employees at the end of the accounting period. Calculates COGS by subtracting EI from GAS. Cannot estimate shrinkage
perpetual inventory
updates inventory records perpetually as each inventory item is purchased, sold, or returned. Automatically calculates EI by subtracting COGS from GAS
Out on consignment means
we own this
Net realizable value is what
we will collect
Allowance
when goods sold to customers arrive in damaged condition, customer can return them for full refund or keep them and request for reduction in sale price
Lower of cost or NRV
when the market value of a company's inventory declines below its historical cost, GAAP dictates the use of the lower of the two values.
Ending inventory errors in 2019 will affect
will affect the 2020 goods available for sale but will not affect the 2020 ending inventory
Removing an uncollectible account and its corresponding allowance from the accounting records is called ______
write off
The entry that includes a debit to Allowance for Doubtful Accounts and a credit to Accounts Receivable is a(n) ______.
write off of a specific customer's acct
What effect does writing off an uncollectible account have on total assets and net income?
writing off creates NO effect on financial statements
Is it inventory?: goods purchased (from someone else) FOB shipping point that are in transit at Dec 31
yes, FOB means once it ships we own it
2/30, n/60 means
you get a 2% discount if you pay within 30 days, or the net purchase is due within 60 days