ACCOUNTING FINAL

methods for making financial comparisons

1. comparing across time 2. comparing across companies

sales revenue less: (3)

1. credit card discounts (contra-revenue) 2.sales discount (contra rev) 3. sales returns and allowances (contra rev)

adjusting entries that increase expenses

1. deferred expenses 2. accrued expenses

adjusting entries that increase revenue

1. deferred revenue 2. accrued revenues

upon acquisition of intangible assets, managers must decide whether separate inangibles have:

1. definite life 2. indefinite life

purchase price allocation method (2 steps)

1. estimate FV of company's tangible assets, intangible assets and liabilities 2. compute goodwill

which 2 companies is conservatism constraint important to?

1. high tech companies that manufacture goods for which costs of production and selling price are declining (HP) 2. companies that sell seasonal goods such as clothing (american eagle outfitters), the value of which drops dramatically at the end of each selling season fall or spring

valuation alternatives for mixed attribute measurement model

1. historical cost 2. adjusted historical cost 3. market value/fair value 4. present value 5. net realizable value

3 types of long lived tangible assets

1. land 2. PPE 3. natural resources

2 primary steps in employing the allowance method:

1. making the end of period adjusting entry to record estimated bad debt expense 2. writing off specific accounts determined to be uncollectible during the period

managers choice of accounting methods (2)

1. net income effects (managers prefer to report higher earnings) 2. income tax effects (managers prefer to pay the least amount of taxes allowed by law as late as possible)

types of loans (3)

1. non interest bearing notes 2. installment notes 3. bonds payable/note payable

estimating bad debts methods- 2

1. percentage of credit sales method 2. an aging of accounts receivable

Coupon Rate

(Stated Rate, Contract Rate, Nominal Rate)

straight line formula

(cost-residual value)/useful life

sales discount (2/10,n/30)

- 2% is the discount - 10 = number of days within which payment is due in order to receive the discount - n = net payment - 30 = days within which payment is due

why do companies wait until the end of the accounting period to do adjusting entries?

daily adjustments would be very costly and time consuming

solvency ratio- long term perspective

debt to equity ratio

remote contingencies

don't require any type of disclosure

names for bad debt expense - 3

doubtful accounts expense, uncollectible accounts expense, provision for uncollectible accounts

bade debt expense is

estimated uncollectible

if intangible assets are developed, they are...

expensed when incurred

bond principle

face value, par value, maturity value

cost of intangible asset with indefinite life

fair value method

total asset turnover ratio

higher=better

intangible assets are recorded at

historical cost only if they have been purchased

when is it best to us declining balance depreciation

if an asset is considered to be more efficient or productive when its newer

secured debt

if company defaults on loan, bank has right to take ownership of assets

when is an asset impaired

if net book value>estimated future cash flows

how are assets listed

in order of liquidity

How are liabilities listed on the balance sheet?

in order of maturity (how soon an obligation is to be paid)

EPS

inc = good

GP MARGIN

inc=good

inventory turnover ratio

inc=good

in summary, revenues

increase with credits, accounts have credit balances

in summary, expenses

increase with debits, accounts have debit balances

finished goods

inventory is sold and the amounts become cost of goods sold expense on the income statement

bond purchasers

invest money by buying the bonds

equity

invested by owners

cash flows from investing activities

investments, PPE

debt to equity- helps us understand how company is funding its assets by debt or equity

larger ratio means more debt

the least latest rule of thumb

managers prefer to pay the least amount of taxes allowed by law as late as possible

bond discount

market rate is greater than coupon rate

bond premium

market rate is less than coupon rate

par

market rate=coupon rate

a liability that is: 1. probable but amount can't be estimated 2. reasonably possible regardless of whether amount can be estimated

must be disclosed in footnote

raw materials

must be purchased; when these are used, the cost of these materials is removed from the raw materials category and moved into the work in process inventory

is depreciation exact?

no! it's an estimate!

does the coupon rate change over time

nooooo

what are deffered expenses

previously recorded assets

how to calculate interest for the period

principal x annual interest rate x #of months/12months

how to calculate goodwill

purchase price minus the difference of fair value and liabilities

current ratio

ratio greater than 1 is good

quality of income

ratio higher than 1 indicated high quality income

write offs are

realized uncollectible

a liability that is both probable and reasonably estimable must be

recorded and reported on balance sheet

How are ordinary repairs and maintenance accounted for?

recorded as expenses.

how are improvements accounted for

recorded as increases in asset accounts, not as expenses.

2 requirements of useful accounting information

relevance and faithful representation

expense recognition (matching) principle

requires that a portion of an asset's cost be allocated as an expense in the same period that revenues are generated by its use

financing provided by operations

retained earnings/earned capital

NET SALES=

sales minus contra rev accounts (cc discount, sales returns, sales discount)

how to find common stock

shares x par value

cost of intangible asset with definite life

straight line basis (amortization)

as a contra-asset, the balance in allowance for doubtful accounts is subtracted from

the balance of the asset accounts receivable, thus the entry decreases the net book value of accounts receivable and total assets

holding loss

the difference between the purchase cost and the lower replacement cost

when is the only time to record goodwill

the only way to record and report goodwill as an asset is to purchase another business

synergy

the operations of two companies together may be more profitable than the combined profitability of the companies as separate entities

horizontal growth

these acquisitions involve companies at the same level in the channels of distribution

why do companies offer sales discount?

to encourage customers to pay more quickly

when is the specific identification method appropriate?

when dealing with expensive, unique items like houses or fine jewelry *not appropriate when large quantities of similar items are stocked

when are intangible assets recorded?

when purchased

market rate

yield rate, effective interest rate

aging of accounts receivable method

Estimates uncollectible accounts based on the age of each account receivable.

copyright

Exclusive right to publish, use, and sell a literary, musical, or artistic work.

improvements

Expenditures that increase the productive life, operating efficiency, or capacity of an asset

Ordinary Repairs and Maintenance

Expenditures that maintain the productive capacity of an asset during the current accounting period only

bad debt expense

Expense associated with estimated uncollectible accounts receivable.

accrued liabilities

Expenses that have been incurred but have not been paid at the end of the accounting period.

component percentages

Express each item on a particular financial statement as a percentage of a single base amount.

decreasing cost inventories

FIFO is most often used for both the tax return and financial statements

operating revenues

Increases in assets or settlements of liabilities from the major or central ongoing operations of the business.

relevant information

Information that can influence a decision; it has predictive and/or feedback value.

indefinite life

Intangible assets with indefinite lives are not amortized

capitalized interest

Interest expenditures included in the cost of a self-constructed asset.

which method results in lower taxes?

LIFO

increasing cost inventories

LIFO is used on the tax return because it normally results in lower income taxes

when unit costs are declining...

LIFO produces higher income and higher inventory valuation than FIFO (lower COGS)

when unit costs are rising...

LIFO produces lower income and a lower inventory valuation than FIFO (higher COGS)

cash flows from financing activities

LONG TERM DEBT, BORROWING, REPAYING, DIVIDENDS, BUYING/SELLING STOCK

post closing trial balance

Prepared as an additional step in the accounting cycle to check that debits equal credits and all temporary accounts have been closed.

time value of money

Principle that a given amount of money deposited in an interest-bearing account increases over time.

LIFO conformity rule

The IRS requirement that when LIFO is used on a tax return, it must also be used in reporting income to stockholders.

lessor

The party that owns a leased asset.

lessee

The party that pays for the right to use the leased asset.

market interest rate

The rate of return investors demand for a company's bonds on the date the bonds are issued, and the rate used to compute the bond's interest expense each period.

what is declining balance deprection?

accelerated depreciation

Net Book Value (Carrying or Book Value) of a long lived assets

acquisition cost minus accumulated depreciation from its acquisition date to the balance sheet date

definite life

allocated on a straight-line basis each period over its useful life (amortization)

alternate names for allowance for doubtful accounts

allowance for bad debts, allowance for uncollectible accounts

accrued expense

an expense incurred in operating a business during an accounting period, but not yet paid.

transaction analysis model includes (5):

assets,liabilites,SH equity,revenues,expenses

how are intangible assets recorded when purchased?

at historical cost

comparison of the 2 bad debt methods

1. percentage of credit sales- directly compute the amount to be recorded as BDE on the income stmt for the period in the adjusting journal entry 2. aging of AR- compute the estimated ending balance we would like to have in the ADA on the balance sheet after we make the necessary adjusting entry. The difference between the current balance in the account and the estimated balance is recorded as the adjusting entry for BDE for the period

diff between preferred and common stock (3)

1. preferred stock typically doesn't have voting right 2. preferred stock is less risky 3. preferred stock typically has a fixed dividend rate

market ratio

1. price earnings ratio 2. dividend yield ratio

Whether a contingent liability is reported on the balance sheet, in the footnotes, or not at all depends on two factors:

1. probability of future economic sacrifice 2. the ability of management to estimate the amount of the liability

businesses can earn a high rate of return through which 2 strategies

1. product differentiation 2. cost differentiation

2 benefits of sales discount

1. prompt receipt of cash from customers reduces the necessity to borrow money to meet operating needs 2. because customers tend to pay bills providing discounts first, a sales discount also decreases the chances that the customer will run out of funds before the companies' bill has been paid

3 types of inventory

1. raw materials 2. work in process 3. finished goods

profitability ratios (6)

1. return on equity 2. return on assets 3. gross profit margin ratio 4. net profit margin ratio 5. earnings per share 6. quality of income ratio

disadvantages to issuing bonds

1. risk of bankruptcy 2. negative impact on cash flows

financial accounting assumptions (4)

1. seaparate entity assumption- business separate from its owners 2. going concern- business will continue to operate 3. monetary unit- report uses national monetary unit 4. time period- companies report info in a shorter time period

4 inventory costing methods

1. specific identification 2. FIFO 3. LIFO 4. weighted average

reasons why companies issue bonds

1. stockholders maintain control 2. a portion of interest expense is tax deductible 3. issuing bonds can increase the return to shareholders

3 depreciation methods

1. straight line 2. units of production 3. declining balance

ratio analysis

An analytical tool that measures the proportional relationship between two financial statement amounts.

deferred expense

An asset created when a business makes advance payments of future expenses. (prepaid rent)

trademark

An exclusive legal right to use a special name, image, or slogan.

specific identification method

An inventory costing method that identifies the cost of the specific item that was sold.

perpetual inventory system

An inventory system in which a detailed inventory record is maintained, recording each purchase and sale during the accounting period.

periodic inventory system

An inventory system in which ending inventory and cost of goods sold are determined at the end of the accounting period based on a physical inventory count.

debentures

An unsecured bond; no assets are specifically pledged to guarantee repayment.

if a lease meets any of the following 5 criteria, it is considered a finance lease:

1. the lease transfers ownership of the underlying asset to the lessee by the end of the lease term 2. the lease grants the lessee an option to purchase the underlying asset that the lessee is reasonably certain to exercise 3. the lease term is for the major part of the remaining economic life of the underlying asset 4. the present value of the sum of the lease payments and any residual value guaranteed by the lessee equals or exceeds substantially all of the fair value of the underlying asset 5. the underlying asset is of such a specialized nature that it is expected to have no alternative use to the lessor at the end of the lease term

2 purposes of closing entries

1. to transfer the balance in the temporary accounts (income stmt accounts) to retained earnings 2. to establish a zero balance in each temporary account to start accumulation for next accounting period

asset turnover ratios (2)

1. total asset turnover ratio 2. inventory turnover ratio

reasons for acquiring control (>50%) of a company

1. vertical integration 2. horizontal growth 3. synergy

benefits of stock ownership

1. voice in management 2. dividends 3. residual claim

how to mitigate bad debt -3

1.require approval of customers credit history by a person independent of the sales and collections function 2. age AR periodically and contact customers with overdue payments 3. reward both sales and collections personnel for speedy collections so that they work as a team

double declining balance (USED FOR TAX)

2xNBV/useful life

WHAT KIND OF BALANCE will the closing entries have

A CREDIT BALANCE for retained earnings to represent net income!

franchise

A contractual right to sell certain products or services, use certain trademarks, or perform activities in a geographical region.

deferred revenue

A liability created when a business collects cash from customers in advance of completing a service or delivering a product.

indirect method

A method of presenting the operating activities section of the statement of cash flows that adjusts net income to compute cash flows from operating activities.

direct method

A method of presenting the operating activities section of the statement of cash flows that reports components of cash flows from operating activities as gross receipts and gross payments.

contingent liability

A potential liability that has arisen as the result of a past event; it is not a definitive liability until some future event occurs.

sales returns and allowances

A reduction of sales revenues for return of or allowances for unsatisfactory goods

accrued revenue

A revenue that has been earned but for which the cash has not yet been collected aka accounts receivable

AFS vs trading

AFS sells but not for a while, trading is bought to sell so very current

AR NET=

AR GROSS- ADA

Percentage of Credit Sales Method

Bases bad debt expense on the historical percentage of credit sales that result in bad debts.

callable bond

Bonds that may be called for early retirement at the option of the issuer.

convertible bonds

Bonds that may be converted to other securities of the issuer (usually common stock).

cash flows from operating activities

Cash inflows and outflows directly related to earnings from normal operations; OPERATIONS AND INTEREST

Allowance for Doubtful Accounts

Contra-asset account containing the estimated uncollectible accounts receivable.

dividends in arrears

Dividends on cumulative preferred stock that have not been paid in prior years.

use the coupon to find the interest rate and then

EFF THE COUPON RATE

finance lease

Effective control of the leased asset is transferred to the lessee.

operating lease

Effective control of the leased asset remains with the lessor.

adjusting entries

Entries necessary at the end of the accounting period to measure all revenues and expenses of that period.

credit card discount

Fee charged by the credit card company for its services.

goodwill

For accounting purposes, the excess of the purchase price of a business over the fair value of the acquired business's assets and liabilities.

patent

Granted by the federal government for an invention; gives the owner the exclusive right to use, manufacture, and sell the subject of the patent.

P/E ratio (price/earnings)

HIGH ratio indicates earnings are expected to grow rapidly

ROA

INC=GOOD; larger the better

technology

Includes costs for computer software and website development.

straight-line depreciation

Method that allocates the depreciable cost of an asset in equal periodic amounts over its useful life.

units of production depreciation

Method that allocates the depreciable cost of an asset over its useful life based on the relationship of its periodic output to its total estimated output.

declining balance depreciation

Method that allocates the net book value (cost minus accumulated depreciation) of an asset over its useful life based on a multiple of the straight-line rate, thus assigning more depreciation to early years and less depreciation to later years of an asset's life.

computation of impairment loss

NBV-FV

Does equity have a maturity date?

NO

are unadjusted trial balances presented to external users?

NO!

if inventory is written down at cost, do you need a write down entry?

NO! only if it changes to NRV

does the first journal entry of ADA (dr ada and cr ar) affect total assets?

NO! only recording BDE!!!

are balance sheet accounts reduced to 0 at the end of an accounting period?

NO! these accounts are permanent

for BDE, if estimates are found to be incorrect, are prior financial statements values corrected?

NOOOOOO!!

licenses and operating rights

Obtained through agreements with governmental units or agencies; permit owners to use public property in performing their services.

asset turnover ratios

Ratios that capture how efficiently a company uses its assets.

profitability ratios

Ratios that compare income with one or more primary activities.

liquidity ratios

Ratios that measure a company's ability to meet its currently maturing obligations.

solvency ratios

Ratios that measure a company's ability to meet its long-term obligations.

market ratios

Ratios that relate the current price per share of a company's stock to the return that accrues to stockholders.

accrual basis accounting

Records revenues when earned and expenses when incurred, regardless of the timing of cash receipts or payments.

cumulative dividend preference

Requires any unpaid dividends on preferred stock to accumulate. These cumulative preferred dividends must be paid before any common dividends can be paid.

current dividend preference

Requires that dividends be paid to preferred stockholders before any dividends are paid to common stockholders.

expense recognition principle

Requires that expenses be recorded in the same time period when incurred in earning revenue.

faithful representation

Requires that the information be complete, neutral, and free from error.

Revenue Recognition Principle (2)

Revenues are recognized (1) when the company transfers promised goods or services to customers (2) in the amount it expects to be entitled to receive.

cash equivalents

Short-term investments with original maturities of three months or less that are readily convertible to cash and whose value is unlikely to change.

secured bond

Specific assets are pledged as a guarantee of repayment at maturity.

separate entity assumption

States that business transactions are separate from the transactions of the owners.

preferred stock

Stock that has specified rights over common stock.

what is post closing trial balance concerned with

TEMPORARY ACCOUNTS

comparative financial statements

To allow users to compare performance from period to period, companies report financial statement values for the current period and one or more prior periods.

primary objective of reporting to external users

To provide financial information about the reporting entity that is useful to existing and potential investors, lenders, and other creditors in making decisions about providing resources to the entity.

average cost method

Uses the weighted average unit cost of the goods available for sale for both cost of goods sold and ending inventory.

lower of cost or NRV

Valuation method departing from the cost principle; it serves to recognize a loss when net realizable value drops below cost.

liabilities and stockholders equity normally have

credit balances

does market rate change over time

YES

vertical integration

a company acquires another at a different level in the channels of distribution

liquidity ratios

current ratio

which is the only non-temporary account

balance sheet! balance sheet is permanent

unsecured debt

bank relies primarily on borrower's integrity and general earning power to repay the loan

COGS equation

beginning inventory + purchases - ending inventory

ROE

bigger=better

net profit margin ratio

bigger=better

debt

borrowed from creditors

bond issuers

borrowing money by issuing bonds

what areas affect the stmt of cash flows

cash received from operations, investing, and financing only

for inventory located in countries that don't allow LIFO for tax purposes or don't have a LIFO conformity rule...

companies w increasing costs most often use FIFO or average cost to report higher income on the income statement

non interest bearing note

company accrue interest expense and interest payable until principal and interest are paid 100% at end of loan

Qualitative Characteristics of Accounting Information

comparability, verifiability, timeliness, and understandability

ratios can only be interpreted by

comparing them to other ratios or a benchmark value

what must be presented when a company acquires another and both companies continue their separate legal existence

consolidated financial statements

what kind of account is ADA

contra-asset

financing provided by owners

contributed capital

work in process

cost of raw materials plus direct labor and factory overhead cost are added into work in process inventory