The Effects of LIFO, FIFO, AVERAGE COST, and IDENTIFICATION

Days Sales outstanding ratio or average collection period

365/Turn over ratio... Smaller is better. How long it takes to collect average of accounts Receivable. Would you rather collect every 15 or 30 days? It is better to collect every 15 days.

uncollectible accounts

A contra-account to accounts receivable. The amount of receivables a business expects not to collect. Other names include Allowance for Doubtful Accounts and Allowance for bad Debts. The allowance for uncollectible accounts. reduces apples gross receivables to their net realizable value, which is the amount of receivables the company realistically expects to collect.

Units of Production Method

A fixed amount of depreciation is assigned to each unit of output, or unit of service, produced by the asset. Cost-residual value/useful life, in units of production (an example of this is driving a truck so many miles per year and depreciation according to that)

Quick Ratio

A measure for paying current liabilities with its shorter term assets. Cash and Cash equivalents + Short-term investments+ Net Current Receivables / Total current liabilities.

Straight line method

An equal amount of depreciation is assigned to each year of asset use. Cost-Residual Value/Useful life, in years... Debit Depreciation expense and credit accumulated depreciation (this method is what most companies use)

Depreciable Cost

Asset's cost-Estimated residual value (what FedEx would get for selling scrap metal of a machine)

Land

Brokerage commissions, fees, taxes when the purchaser buys, and notes payable are all part of the cost. The cost of land does not include the cost of fencing, paving, security systems, and lighting which are called land improvements...

Cash flow

Capital expenditures and other asset acquisitions and dispositions are investing activities while operating activities are depreciation and amortization...

Immediate Expenses

Costs that do not extend the assets capacity or its useful life, but merely maintain the asset or restore it to working order, are recored as expenses.

Sales Return or Allowance

Customers usually have a right to return unsatisfactory or damaged merchandise to sellers for refund, credit, or exchange.

Disposing of plant asset

Debit accumulated depreciation and credit the plant asset...

Lost of disposal equipment because there is still value left

Debit accumulated depreciation, Debit loss of disposal of equipment, and credit equipment

Trademarks

Distinctive identifications of products or services...

Percent of sales method

Estimates a business's uncollectible account expense as a percent of the company's revenue. This method is considered an income statement approach because it focuses on the amount of expense to be reported on the income statement.

Aging of receivable

Estimating uncollectible a different way. The aging method is a balance sheet approach because it focuses on what should be the most relevant and faithful representation of accounts receivable as of the balance sheet date.

Capital expenditure

Expenditures that increase an assets capacity or extend its useful life... Ex: a major overhaul extends the useful life of a FedEx truck. Capital expenditures are said to be capitalized, which means the cost is added to an asset account and not expensed immediately...

Three Ratio relate directly to inventory

Gross Profit Percentage, Inventory turnover, and days inventory outstanding

Gross Profit Percentage

Gross Profit/Net Sales Revenue

Intangible assets and Natural resources

Intangible assets hold an amortization expense while natural resources hold a depletion expense... (through cost of goods sold)

Days Inventory outstanding

Inventory turnover can be converted to DIO by dividing it by 365. 120 DIO means inventory stays on the shelf for 120 days. It took 120 days on average until the inventory was sold.

Average cost or weighted average

Is based on the average cost of inventory during the period... Cost of goods available/Number of units available

Lower of Cost or Market (LCM)

LCM requires that inventory be reported in the financial statements at whichever is lower--the inventory's historical cost of its market value. To do this, you would write down inventory is the market value is less than its historical cost. Debit COGS and Credit Inventory.

Measuring COGS and EI

LIFO is most realistic for measuring COGS while FIFO records the most up to date because LIFO can value inventory at very old costs because LIFO leaves the oldest costs in ending inventory.

GOGS

Largest expense for those who sell goods.

Natural Resources

Long term assets of a special types, such as iron ore, petroleum, and timber. These resources are often called wasting assets because, in contrast to property and equipment, they are actually physically used up over time. The process by which this occurs is called depletion.

Manufacturer and resales

Manufacturers sell to wholesalers who in return sell to retailers.

Total asset turnover

Measures how many sales dollars are generated for each dollar of assets invested. This is a measure of how efficiently the company manages its assets.

periodic inventory system

Might count and price its inventory periodically, at least once a year, to determine inventory quantities.

ROA

Net income/Average total assets... Companies with a high ROA have both selected the rights assets and managed them more successfully than companies with a low ROA...

Net Profit Margin Ratio

Net income/net sales (measures how much every sales dollar generates in profit... How much of every dollar of sales a company gets to keep as earnings.

LIFO Liquidation

Occurs when a business draws down its inventory to the point where the quantity of its ending inventory falls below the level of the previous period. They use lower cost, older inventory to compute cost of goods sold which makes income tax and net income higher.

Impairment

Occurs when the expected future cash flows from a long term asset fall below the assets net book value. If an asset is impaired, the company is required to adjust the carrying value downward from its book value to its fair value.

Intangible assets

Patents, copyrights, and trademarks are intangible assets, as is goodwill.

Two main type of inventory accounting systems

Periodic Inventory System and perpetual inventory system

Franchises and licenses

Privileges granted by a private business or a government to sell a product or service in accordance with specified conditions...

Net Purchases of Inventory

Purchase price + Freight In - (Purchase returns) - (purchase allowances) - (purchase discounts) = Net Purchases. Other thing to note: "the cost of any asset, such as inventory, is the sum of all the costs incurred to bring the asset to its intended use, less any discounts."

Notes Receivable

Receivable is an asset obviously. Don't be a dumb donkey. A notes receivable is an IOU.

R&D

Research and Development costs are accounted for as an expense because the probability of it being a benefit in the future is low...

Consighnment

Retail businesses are required to exclude from its inventory all items held on consignment inventory. This consists of all items that other companies still own but that the retailer is willing to sell (for a fee),

Accounts receivable turnover ratio

Shows the number of times per year a company completely collects its average accounts receivable. Indicated how effective a company is at collecting cash from customers that bought products on credit. Net Credit Sales/Average Net accounts receivable. You find the average because you want to find the most representative sample. We want to have an estimate of what is normal for this company. Per dollar invested in receivables, we are able to generate this much revenue in sales. She will ask us to interpret the ratios we learn about.

Inventory Costing methods

Specific Identification, FIFO, LIFO, Weighted Average

Depreciation Methods

Straight line, units of production, and double declining method

Specific Identification Method

The businesses cost their inventories at the specific cost of the particular unit.

Freight Out

The cost a business pays to ship goods to its customer is referred to

The cost of any asset is the sum of all the costs incurred to bring the asset to its intended use

The cost of a plant asset includes its purchase price, plus any taxes, commissions, and other accounts paid to make the asset ready for use

Asset to expense

The cost of inventory sold shifts from asset to expense when the seller fulfills its contract with the customer, delivers the goods to the buyer and recognizes revenue

Gross Profit (Margin)

The excess of sales revenue over a business's cost of goods sold.

FIFO

The first cost into inventory are the first costs assigned to the cost of goods sold. Under FIFO, the cost of ending inventory is always based on the latest costs incurred.

Amortization

The process of allocating to expense the cost of an intangible asset

Inventory Turnover

The ratio of cost of goods sold to average inventory, indicated how rapidly inventory is sold. Cost of Good Sold/Average Inventory... How many timers per year can they sell their inventory. The faster the sales, the higher the income.

Lump Sum used Relative-sales-value-method

The total cost is divided among the assets according tot heir relative sales values.

Freight In

The transportation cost, paid by the buyer under terms FOB shipping point, to move goods from seller to the buyer.

Multi-step income statement

This allows for stopping points in the income statement. This adds more value to the reader...

LIFO

Under LIFO, the last costs into inventory go immediately to the cost of goods sold. Under LIFO, the cost of ending inventory is always based on the oldest costs.

Perpetual Inventory system

Uses software and barcodes to keep a running record of inventory on hand, purchases, and sold.

Sales Discount

a reduction given by a seller for prompt payment of a credit sale. Makes them pay the credit sale faster.

Direct Write off Method

company waits until a specific customers receivable proves uncollectible. Uncollectible account expense and then accounts receivable.

Book Value of an Asset

cost - accumulated depreciation (depreciation process follows the expense recognition principle. Apportions the cost of a fixed asset over time by allocating a portion of that cost against the revenue the asset helps earn each period.)

Patents

exclusive rights to make or sell inventions for 20 years...

Disclosure principle

states that a company should report enough information for a financial statement user to be able to make informed decisions about the firm

Copyrights

the exclusive legal rights of authors, composers, playwrights, artists, and publishers to publish and disperse their work as they see fit... Extend 70 years beyond the authors life...

double declining balance method

this is an accelerated depreciation method because it writes off a larger amount of an assets cost in the early years of its useful life.... 1/useful life, in years X 2... Do not subtract residual value from this...