Accounting test 2
at the end of period as it pertains to flow of cost, what do we figure out?
you figure out how much you sold (cost of goods sold which shows up in income statement) and ending inventory which shows up as inventory on balance sheet
Illustration: Wendy Construction issues a five-year, interest-bearing $25,000 note on January 1, 2016. This note specifies that each January 1, starting January 1, 2017, Wendy should pay $5,000 of the note. When the company prepares financial statements on December 31, 2016, 1.What amount should be reported as a current liability?__________ 2.What amount should be reported as a long-term liability?________
5,000 20,000 You would also at the same time accrue the interest expense if that is applicable as well
Methods of Accounting for Uncollectible Accounts
-Direct Write-Off -Allowance Method
On financial statements, what are the three things that need to be disclosed?
1)major inventory classifications, 2)basis of accounting (cost or LCM), and 3) costing method (FIFO, LIFO, or average-cost
STOCKHOLDER RIGHTS
1. Vote in election of board of directors and on actions that require stockholder approval. 2. Share the corporate earnings through receipt of dividends. 3. Keep the same percentage ownership when new shares of stock are issued (preemptive right). This is tied to the voting rights → so built ni for owners who have a significant stake, so there power WON't be diluted If this agreement is not put up front, your stock could be diluted !! (so like what happened at Facebook back in the day in social network) 4. Share in assets upon liquidation in proportion to their holdings. This is called a residual claim.
Allowance Method Procedures
1.Companies estimate uncollectible accounts receivable. 2.Debit Bad Debt Expense and credit Allowance for Doubtful Accounts (a contra-asset account). 3.Companies debit Allowance for Doubtful Accounts and credit Accounts Receivable at the time the specific account is written off as uncollectible.
Corporations purchase their outstanding stock:
1.To reissue shares to officers and employees under bonus and stock compensation plans. 2.To increase trading of the company's stock in the securities market. 3.To have additional shares available for use in acquiring other companies. 4.To increase earnings per share. 5.To prevent hostile takeovers.
where does bad debt expense show up and how does it affect net income
Bad debt expense shows up as an expense on income statement reduces net income → because remember any type of expense reduces net income
Periodic inventory system calculation
Beg inventory +**COGP =COGAS -ending inventory =COGS ** it's that chart thing — be careful here
In flow of cost diagram, explain.
Beginning inv + cost of good purchased = COGAS (these 2 go into it) Cogs + end inv = COGAS
Historical cost minus Accumulated Depreciation always equals the _________________ of an asset
Book value
whats on income statement
COGS which is subtracted from sales
In financial statements, why/ why not use fifo?
Fifo is the most accurate Assets are higher and you look more liquid (high ending inv) Net income is higher so they look more profitable
In a period of rising costs, LIFO will result in
Higher COGS Lower Ending Inventory Lower Taxes
◆Top five exchanges by value of shares traded:
Stock market exchanges is secondary market Company does not record this 1.New York Stock Exchange 2.Nasdaq stock market 3.London Stock Exchange 4.Tokyo Stock Exchange 5.Euronext
when comparing lifo, fifo, and ending inv while looking at financial statements, what are the two totals that will be different?
ending inventory and COGS are diff -- also net income
is book value the same as fair market value?
false
treasury stock shows up on...
BS --> its subtracted from paid in capital and retained earnings
Depreciable cost =
Cost less salvage value
in straight line depreciation:
Expense is same amount for each year
Treasury stock is a
contra stockholders' equity account, not an asset.
Illustration: Wal-Mart reported in its 2014 annual report a beginning inventory of $43,803 million, an ending inventory of $44,858 million, and cost of goods sold for the year ended January 31, 2014, of $358,069 million. The inventory turnover formula and computation for Wal-Mart are shown below.
$358,069 / (($43,803/$44,858)/2) =8.1 so 365/8.1 = approximately 45.1 days. This is the approximate time that it takes a company to sell the inventory. If days went up to say 60, that's bad because it means that it takes them long to sell → so problems selling inventory or they are stocking too much Idea is to keep days low
CLASSIFICATION OF CASH FLOWS
- Operating Activities - Investing Activities - Financing Activities
Capital Expenditures
-recorded as long-term assets on the balance sheet -and total costs are depreciated/amortized over the useful life. - Any tangible asset that supports the generation of revenues for more than 1 year -Costs incurred subsequent to asset acquisition that either ❏Increase the useful life ❏Increase operating capacity or quality ❏Called "Additions" or "Improvements"
SIGNIFICANT NONCASH ACTIVITIES
1.Direct issuance of common stock to purchase assets. 2.Conversion of bonds into common stock. 3.Issuance of debt to purchase assets. 4.Exchanges of plant assets. Companies report noncash activities in either a ◆separate schedule (bottom of the statement) or ◆separate note to the financial statements.
CURRENT LIABILITIES
A debt that a company expects to pay 1.from existing current assets 2.within one year
Investing Activities
Changes in Investments and Long-Term Assets
Financing Activities
Changes in Long-Term Liabilities and Stockholders' Equity
CLASSIFICATION OF CASH FLOWS Investing activities
Changes in investments and long-term assets Cash inflows: From sale of property, plant, and equipment. From sale of investments in debt or securities. From collection of principal on loans to other entities. Cash outflows: To purchase property, plant, and equipment. To purchase investments in debt or securities. To make loans to other entities.
CLASSIFICATION OF CASH FLOWS Financing activities
Changes in long-term liabilities and stockholders' equity Cash inflows: From sale of common stock. From issuance of debt (bonds and notes). Cash outflows: To stockholders as dividends. To redeem long-term debt or reacquire capital stock (treasury stock).
INDIRECT AND DIRECT METHODS
Companies favor the indirect method for two reasons: 1.Easier and less costly to prepare. 2.Focuses on differences between net income and net cash flow from operating activities.
WRITE-OFF OF AN UNCOLLECTIBLE ACCOUNT: On March 3rd, when Spalding determines that the $50,000 balance owed by Sports Authority is uncollectible, the entry to record the write-off is:
Debit allowance for doubtful accounts 50,000 Credit accounts receivable for 50,000
In financial statements, why/ why not use lifo?
In lifo you have higher COGS because of inflation net income is lower than other options and The lower your taxable income, the lower your taxes which is why lifo is so appealing If you do end up using lifo instead of fifo you have to actually disclose the difference and disclose that they used it
Operating Activities
Income Statement Items
CLASSIFICATION OF CASH FLOWS: Operating activities
Income statement items Cash inflows: From sale of goods or services. From interest received and dividends received. Cash outflows: To suppliers for inventory. To employees for wages. To government for taxes. To lenders for interest. To others for expenses.
Illustration: Assume that Hydro-Slide, Inc. issues 2,000 shares of $1 par value common stock on 2/1. Prepare Hydro-Slide's journal entry if (a) 1,000 shares are issued for $1 per share, and (b) 1,000 shares are issued for $5 per share.
a - Again use if no par value given or if par value and per share are equal debit cash 1,000 credit common stock 1,000 b - debit cash 5,000 credit common stock 1,000 credit Paid in Capital in Excess of Par 4,000
Treasury stock is classified as
a contra-stockholders' equity account
Treasury stock
a corporation's own stock that has been reacquired by the corporation and is being held for future use.
remember all that
aid in Capital in Excess of Par vales and stck holder equity stuff on BS
in straight line, what would be the annual dep expense, accum dep and book value descending
annual dep expense is gonna be 2,400 across the board accum dep would be 2,400, 4,800, 7,200, etc (all the way down to the dep expense of 12,000) book value wiuld start with the given 13,000 qnd decrease by 2400 unti lit reaches the salvage value of 1,000
Interest is paid to bondholders is
annually or semi-annually
Inventory is accounted for at BLANK
at cost
Which of the columns is least likely to be collected
at risk, 91+, 61-90, 31-60,1-20, current
The principal value of the bond is repaid when
at the end of the term
LONG-TERM DEBT
consists of probable future sacrifices of economic benefits arising from present obligations that are not payable within a year or the operating cycle of the company, whichever is longer. With these you may be making short term payments (so monthly, quarterly, whatever it may be) Long term debt has various covenants/ restrictions
When a corporation issues bonds... its...
borrowing money.
Treasury Stock decreases by
by the same amount when the company later sells the shares.
what to do with ◆Treasury Stock for the price paid.
debit
Illustration: On February 1, 2017, Mead acquires 4,000 shares of its stock at $8 per share. Prepare the entry.
debit Treasury Stock 32000 credit cash 32000
Additions or improvements to a building are
depreciated over the useful life
whats on balance sheet
inventory classified as a current asset
The corporate office building is sold for cash. This is considered a(n)
investing --> corporate buikding is PPE
Depreciation
is the accounting process of allocating the cost of plant assets to expense in a systematic and rational manner to those periods expected to benefit from the use of the asset.
Book value
is the difference between the cost of any depreciable asset and its accumulated depreciation. Note: this is not the same as Fair Market Value (FMV) Historical cost of equipment - depreciation = book value
percentage-of-receivables basis
management establishes a percentage relationship between the amount of receivables and expected losses from uncollectible accounts.
Days in inventory
measures the average number of days inventory is held. Days in Year (365) / Inventory Turnover where COG/ average inventory = inventory turnover
Inventory turnover
measures the number of times on average the inventory is sold during the period COGS/ Avg Inv HIGER IS BETTER
Accounts Receivable Turnover Ratio: Illustration: In 2013 Cisco Systems had net sales of $38,029 million for the year. It had a beginning accounts receivable (net) balance of $4,369 million and an ending accounts receivable (net) balance of $5,470 million. Assuming that Cisco's sales were all on credit ("on account"), its accounts receivable turnover is computed as follows.
net credit sales / average net acc receivable = acc receivable turnover 38029/ (4369+5470)/2 = 7.7 then do 365/7.7 which =
what do current liabilities include
notes payable, accounts payable, unearned revenues, and accrued liabilities such as taxes, salaries and wages, and interest.
Illustration: Bill's Pizzas purchased a small delivery truck on April 1, 2017. Cost $13,000 Expected salvage value $1,000 Estimated useful life (in years) 5 Estimated useful life (in miles) 100,000 Required: Compute depreciation using straight-line.
ok so april is the 4th month, but only count it as 3 --> so 12-3 = 9 if we were doing it the normal way: 13,000- 1,000 = 12,000 depreciation cost and 12,000/ 5 = 2,400 is the dep expense ok so since april --> to get dep exprense do 2,400 *9/12 which = 1,800 and the new expense and the new salvage val would be 2,400* 3/12 =600 so that will be the ending accum dep to look out for but yes annual dep expense is gonna be 1,800then 2,400, 2,400,. 2,400 until yhe last one which is 600! accum dep 1800, 1800+2400 = 4200, 4200+1800 = 6600 ... BOOK VAL just make sure to subract the right things 13,000- 1800= 11,200 11,200-2400 = 8800 8800-2400 = 6400
Ordinary repairs of a building are
remember operating expenses are ordinary expenses !! but if they were additions or improvements, then it would be depreciated over useful life
bonds are sold in
small denominations (usually $1,000 or multiples of $1,000)
in many states the board of directors assigns a BLANK to no-par shares.
stated value
Average-Cost Method Calculations
step 1: find COGS COGAS/ total number of units = wt avg will give you a dollar amount then do # units SOLD * dollar amt you just calculated step 2: ending inv we know COGAS and we just calculated ENDING INV so then fogire out COGS
The paid in capital in excess of par value account is classified as a
stockholders' equity account
cost basis of accounting
the original value of an asset for tax purposes, usually the purchase price
Estimated Useful Life
time the asset is expected to be used by the company. Usually expressed in years
Bonds are a type of long-term debt
true
Many states do not require a par value.
true
◆No-par value stock is fairly common.
true
BLANK are applied to BLANK to determine the BLANK of the inventory and the BLANK using the following costing methods:
unit costs, quantities, total cost, COGS ★Specific identification ★First-in, first-out (FIFO) ★Last-in, first-out (LIFO) ★Average-cost
Salvage or Residual Value
value of the asset at the end of its useful life.
The person who buys the bonds is WHO and does WHAT?
(the bondholder) , is investing in bonds.
BLANK varies considerably among the methods, but blank is the same ($12,000) for the five-year period.
- Annual depreciation expense - total depreciation expense
What was some of the shadiness of world com fraud?
- accounted line costs like transport charges as capital expenditures - planned to ammoritze 3.1 bill over a period of time as much as 10 years which SHOULD have been counted as a cost of business for that quarter -they reported net income as 1.38 billion but should have been a loss World com was telecommunications company In 2001 they recorded capital expenditures for 3.1 billion and amortized it instead of expensing it all at once CEO went to jail The line costs were not capital expenditures, they were ordinary expense that should not have been packaged together
Operating Expenses
- appear on the current year income statement -Ordinary expenses incurred to generate revenues and used for less than one year (i.e. salaries, supplies, cost of goods sold) -Repairs and maintenance of assets currently owned -❏Expenses under a specified dollar amount IRS: <$5000 or <$2500
Depreciable Cost or Base
- is the total amount allocated to Depreciation Expense over all years. Depreciable Cost = Cost - Salvage Value
Receivables
Amounts due from individuals and other companies that are expected to be collected in cash.
Accounts Receivable
Amounts owed by customers on account that result from the sale of goods and services.
Capital Expenditures, such as equipment
Are depreciated over the asset's useful life
Spalding sold $2,000,000 of inventory to customers on account in February 2016. $250,000 remains uncollected as of February 29th. The credit manager estimates that $64,200 of these receivables will be uncollectible*. Spalding has a $4,200 credit (positive) balance in their allowance account before this adjustment.
Debit "Bad Debt Expense" for 60,000 Credit "Allowance for Doubtful Accounts" for 60,000 where did we get the 60,000? So we are given that we already have 4200 in cookie jar So we just need to fill it up with 60,000 be 64,200-4,200 which = 60,000 which goes into adjusting journal entry the 64,200 was calculated by using the A/R Aging from slide 8 on session 6 slides
Historical cost minus Salvage Value always equals the _________________ of an asset.
Depreciable Cost
cost flow assumption for FIFO
In these instances that sell batch products like milk, lumber, those types of things, it is not really necessary to track every specific piece of inventory So in this example, the cheap red wine bottle are the same type of wine, nothing really unique
When an asset or service is purchased to support operations the question is:
Is this recorded as an operating expense? OR Is this recorded as a capital expenditure?
Allowance Method
Losses are estimated: ★Better matching. ★Receivable stated AT net realizable value. ★Required by GAAP. what we focus on
What are Accounts Receivables are reported as
Net Realizable Value ★Sales on account raise the possibility of accounts not being collected ★Net realizable value = collectable amount ★Seller records expenses that result from extending credit as a "Bad Debt Expense"
Other Receivables
Nontrade receivables such as interest, loans to officers, advances to employees, and income taxes
In terms of classifying inventory —> merchandising company?
One classification —> inventory
Net Realizable Value
Reality is its unlikely that you will be able to collect 100% of the money people/customers owe to you So we don't report the who acc receivable of what is supposed to be on balance sheet, you record it as something different called(net realizable value)
LCM
The lower of cost or market (LCM) method states that when valuing a company's inventory, it is recorded on the balance sheet at either the historical cost or the market value --> think h&m to remember
METHODS OF DEPRECIATION
The profession requires the method employed be "systematic and rational." Methods used include*: 1.Activity method (units of use or production). 2.Straight-line method. 3.Sum-of-the-years'-digits. 4.Declining-balance method. 5.Group and composite methods. 6.Hybrid or combination methods. typically companies want to use straight line but some use MACRS *Companies are also permitted to use the Modified Accelerated Cost Recovery System (MACRS) for IRS reporting purposes
Direct Write-Off
Theoretically undesirable: ★No matching. ★Receivable NOT stated at net realizable value. ★Not permitted by GAAP The direct write off is for companies that don't have to report to GAAP, or small cash businesses, you can do that way --but not an ideal process because the BS will show 100% of what your trying to collect -- so not realistic
In terms of classifying inventory —> manufacturing company?
Three classifications —> raw materials, work in process, finished goods
Cost
Total historical cost of the asset
Notes Receivable
Written promise for amounts to be received. Normally requires the collection of interest.
Illustration: First National Bank agrees to lend $100,000 on September 1, 2017, if Cole Williams Co. signs a $100,000, 12%, four-month note maturing on January 1. Instructions a)Prepare the entry on September 1st. b)Prepare the adjusting entry on December 31st, assuming monthly adjusting entries have not been made. c)Prepare the entry required on January 1, 2018, the maturity date.
a) Prepare the entry on September 1st. debit Cash 100,000 credit Notes Payable 100,000 b) Prepare the adjusting entry on December 31st debit Interest Expense 4,000 credit Interest Payable 4,000 $100,000 x 12% x 4/12 = $4,000 c) Prepare the entry at maturity. debit Notes Payable 100,000 ALSO debit Interest Payable 4,000 credit Cash 104,000
Illustration: Bill's Pizzas purchased a small delivery truck on ***January 1, 2017. Cost $13,000 Expected salvage value $1,000 Estimated useful life (in years) 5 Estimated useful life (in miles) 100,000 Compute depreciation using straight-line
cost - salvage value = dep cost dep cost / useful life (in years) = dep expense 13,000 -1,000 = dep cost (12,000) dep cost/ useful life (in years) = dep expense 12,000/ 5 = 2,400
Bonds
long term, interest-bearing notes payables
Direct Write-Off Method Example: Spalding sold $50,000 of basketballs on account to Sports Authority in February of 2016. On March 2nd, 2016 Sports Authority filed for bankruptcy. On 3/3 Spalding determines that they will not be able to collect the $50,000 A/R from Sports Authority and records the bad debt expense as what? Also what happens to net income?
you would DEBIT bad debt expense because expense bad debt is increasing you would CREDIT ACC Receivable bc its going down and acc receivable is considered an asset So this is a huge hit to net income So there's not like an ideal matching here → not ideal because it doesn't follow matching principle which says expenses should be recorded in period rev is in
Examples Long-term debt
►Bonds payable ►Long-term notes payable ►Mortgages payable ►Pension liabilities ►Lease liabilities
Corporation can issue common stock....how?
►directly to investors or ►indirectly through an investment banking firm.
Authorized Stock
◆Charter indicates the amount of stock that a corporation is authorized to sell. ◆Number of authorized shares is often reported in the stockholders' equity section. Max amount that can be issued
how is treasury stock usually accounted for by the
◆Generally accounted for by the cost method.
CURRENT PORTION OF LONG-TERM DEBT
◆Portion of long-term debt that comes due in the current year. ◆No adjusting entry required.
legal capital
◆Years ago, par value determined the legal capital per share that a company must retain in the business for the protection of corporate creditors.
Accumulated Depreciation is
◆a contra asset account (credit) representing the total depreciation expensed over time ◆Appears just after the account it offsets (Equipment) on the balance sheet.
Par value stock
◆is capital stock that has been assigned a value per share.
Average-Cost Method
★Allocates cost of goods available for sale on the basis of weighted-average unit cost incurred. ★Applies weighted-average unit cost to the units on hand to determine cost of the ending inventory.
First-In, First-Out (FIFO)
★Costs of the earliest goods purchased are the first to be recognized in determining COGS ★Often parallels ACTUAL physical flow of merchandise. ★Companies determine the cost of the ending inventory by taking the unit cost of the most recent purchase and working backward until all units of inventory have been costed. **This is the one assumption that typically mimics reality given that most companies will at least try to sell oldest items first
Last-In, First-Out (LIFO)
★Costs of the latest goods purchased are the first to be recognized in determining cost of goods sold. ★Seldom coincides with actual physical flow of merchandise. ★Exceptions include goods stored in piles, such as coal or hay.
Periodic inventory system stipulations
★NO ongoing account of changes in inventory. ★Ending inventory determined by physical count. ★Cost of goods sold not determined until the end of the period.
The Capital expenditure: plant assets
★physical substance (a definite size and shape), ★are used in the operations of a business, ★are not intended for sale to customers, ★are expected to provide service to the company for more than 1 year ★costs are expensed over estimated years of use (except for land) Land gets capitalized but not expensed Also referred to as property, plant, and equipment; "PP&E"; fixed assets.
allocating costs of long lived assets: fixed assets, intangibles, natural resources
❏Fixed assets = Depreciation expense ❏Intangibles = Amortization expense ❏Natural resources = Depletion expense