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