ACCT Exam 2

Declining-balance method

(cost- accumulated depreciation) *2/useful life = annual depreciation expense

Bad debt expense

expense associated with estimated uncollectible accounts receivable (recorded with adjusting entry at end of period)

Credit card discount

fee charged by the credit card company for its services subtracted from sales revenue

LIFO conformity rule

if LIFO is used on the income tax return, it must be used to calculate inventory for net income on financial statements

Operating activities

inflows and outflows that relate directly to revenues and expenses reported on the income statement

Financing activities

inflows consist of issuance of stock, issuance of bonds/notes (transactions with owners and creditors) and outflows consist of payments of dividends, repurchase of stock, and repayment of debt

Costs included in inventory purchases

invoice price, freight, inspection costs, preparation costs (anything to get the asset ready for use)

Income tax effects

managers prefer to pay the least amount of taxes allowed use LIFO for increasing inventory costs, use FIFO for decreasing inventory costs

Net income effects

managers want to report higher earnings for their company → FIFO

To record goodwill as an asset

must purchase another business

How do managers choose which inventory method to use

net income effect, income tax effect, LIFO conformity rule

FOB shipping point

ownership of the goods passes to the buyer at the shipping date

FOB destination

ownership of the goods remains with the seller until the goods reach the buyer

Lower of Cost or NRV

recognizes loss when NRV < cost journal entry: debit COGS, credit inventory

Capitalize cost

recorded as part of the total cost of an asset, not expense Improvements and acquisition costs are included

Gross profit

revenue- cost of goods sold

Cost of intangible assets with indefinite lives

should not be amortized (goodwill)

Cost of intangible assets with definite life

straight line basis with an amortization process debit amortization expense, credit ex. patent

Goodwill

the amount by which the purchase price exceeds the fair market value of net assets (assets-liabilities) of an acquired business

Depreciation concept

the process of allocating the cost of building and equipment (NOT land) over their productive lives

When unit costs are falling

LIFO produces higher net income and higher inventory valuation than FIFO

When unit costs are rising

LIFO produces lower net income and lower inventory valuation than FIFO

LIFO

Allocates newest unit costs to COGS and oldest unit costs to ending inventory Start with beginning inventory and add units purchased until you reach the number in ending inventory

FIFO

Allocates the oldest unit costs to COGS and newest unit costs to ending inventory Start with most recent and add units until you reach number in ending inventory

Cost of goods sold

BI + P - EI = CGS GAS-ending inventory

Goods available for sale

Beginning inventory + purchases = goods available for sale

Inventory turnover ratio

COGS / Average Inventory

Record write off of an uncollectible account

Decreases contra asset and increases asset = no effect

Units of production method

Depreciation rate= (cost - residual value)/ estimated total production (activity level) units, Depreciation expense= depreciation rate* actual production/activity

Calculating goodwill

Difference between the purchase price of company and the fair value of its net assets

Average cost method

GAS $ / GAS # uses weighted averages

Investing activities

Includes cash transactions involving the purchase and sale of long-term assets and current investments

Record bad debt expense

Increases expenses and decreases net assets

Recievables turnover ratio

Net Credit Sales / Average Accounts Recievable

Straight line method

cost-residual value * 1/ useful life in years

Sales returns and allowances account

a reduction of sales revenues for return of or allowances for unsatisfactory goods subtracted from sales revenue

Sales (cash) discount

cash discount offered to encourage prompt payment of an account receivable subtracted from sales revenue

Inventory- inflation

cost of goods sold is lower under FIFO than LIFO

Inventory- deflation

cost of goods sold is lower under LIFO than FIFO