ACCT EXAM 2

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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


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