Test #2

purchase discount & advantages (2)

- seller offers a cash discount for prompt payment 1) purchaser saves $$$ 2) seller converts the accounts receivable into cash more quickly (more liquid)

FOB destination

- seller pays the freight - cost incurred by the seller as an operating expense (freight expense) *ownership of the goods remains with the seller until the goods reach the buyer

specific identification

- that company knows the original cost of each individual inventory item ex: jewelry strore

depreciation

- the process of allocating (to expense) the cost of an asset over its useful life in a rational & systematic manner - the process of cost allocation, NOT asset valuation - is NOT an attempt to recognize a loss in fair value

non-operating activities

- various revenues and expenses that are unrelated to the company's primary line of operations - includes other revenues & gains, and other expenses & losses

2/10, n/30 1/10, EOM n/10 EOM

- you get a 2% discount if paid within 10 days, otherwise the net amount (in full) is due within 30 days - you get a 1% discount if paid within the first 10 days of the next month - the net amount is due within the first 10 days of the next month

cost

All expenditures necessary to acquire the asset & make it ready for intended use

inventory

a tangible resource that is held for resale in the normal course of operations

net accounts receivable =

cash realizable value

merchandising companies

companies that buy & sell goods

double declining balance

computes depreciation expense using a constant rate applied to a declining book value - Accelerated depreciation method - Taking depreciation earlier in its useful life results in... - More depreciation in the early years of an asset's life - Less depreciation in the later years of an asset's life than does the straight-line approach

useful life

Estimate of the expected life based on the need for repair, service life, & vulnerability to obsolescence

inventory turnover ratio & calculation

Indicates how many times the inventory "turns over" (is sold) during the year cost of goods sold / average inventory *want it to be high

land

- All necessary costs incurred in making land ready for its intended use increases the land account cost include... - Cash purchasing price - Closing costs such as title & attorney's fees - Real estate broker's commission - Accrued property taxes & other liens on land assumed by purchaser - Demolition & removal costs for old building - part of the cost of the land DOES NOT DEPRECIATE

accounts receivable

- Amounts customers owe on account - Result from the sale of goods & services (often called trade receivables) - Expected to be collected within 30-60 days - Usually the most significant type of claim held by a company

too much inventory on hand...

- Costs the company money in storage costs, & costs associated with the obsolescence of technical goods or shifts in fashion

FIFO vs. LIFO

- During inflation, cost of goods sold will be lower under FIFO than with LIFO - Ending inventory will be higher w/ FIFO because it consists of the last items purchased (the goods that are "leftover")

salvage value

- Estimate of the asset's value at the end of its useful life ex: turning in your old phone and Apple using parts of it

patents

- Exclusive right to manufacture, sell, or otherwise control an invention for 20 years from date of grant - Cost of purchasing a patent is added to the "patent" account & amortized over its 20-year life or its useful life, whichever is shorter

buildings

- Facilities used in operations, such as stores, offices, factories, warehouses, & airplane hangers costs include... - necessary expenditures relating to the purchase or construction of a building - purchase price, closing costs (attorney's fees, title insurance etc.), & real estate broker's commission - contract price + payments made by the owner for architect's fees, building permits, & excavation costs

copyrights

- Gives owner exclusive right to reproduce & sell an artistic or published work - Lasts for the life of creator plus 70 years - Costs consists of cost of acquiring & defending it - Amortized to expense over its useful life, which generally is significantly shorter than its legal life *NOT amortized over its legal life

plant assets

- Have physical substance ( a definite size & shape) - Are used in the operations of a business - Are not intended for resale - Are expected to provide service to the company for a number of years - Except for land, are expected to decline in service potential over their useful lives (wear & tear, obsolete) - Classified on the balance sheet as a non-current asset

equipment

- Includes assets used in operations, such as store check-out counters, office furniture, factory machinery, delivery trucks, computers, etc. - includes all costs incurred in acquiring the equipment & preparing it for use costs include... - Cash purchase price - Sales taxes - Freight charges - Insurance during transit paid by purchaser - Expenditures for assembling, installing, & testing

allowance method

- Involves estimating uncollectible accounts at the end of each period

notes receivable

- Is in affect a loan (credit) made by the seller to the purchaser of the goods or services - Are credit instruments that normally require payment of interest & extend for time periods of 60-90 days or longer - May result from a sale of goods & services (often called trade receivables)

other receivables

- Non-trade receivables including interest receivable, loans to company offers, advances to employees, & income taxes refundable - Generally classified & reported as separate items in the balance sheet

goods in transit

- Purchased goods not yet received - Sold goods not yet delivered *goods in transit should be included in the inventory of the company that has legal title to the goods

intangible assets

- Rights, privileges, & competitive advantages that result from ownership of long-lived assets that do not possess physical substance - may be evidenced by contracts, licenses, &/or other documents ex: patents, trademarks, copyrights, trade names, franchises, leases, goodwill

land improvements

- Structural additions made to land such as driveways, parking lots, fences, landscaping, & underground sprinklers costs include... - expenditures necessary to make it ready for intended use

units of activity

- The life of an asset is expressed in terms of the total units of production or the use expected from the asset - The amount of depreciation is proportional to the activity that took place during that period ex: machine hours, miles driven

direct write-off method

- When a specific account is determined to be uncollectible, the loss is charged to Bad Debt Expense - Bad debts expense is often recorded in a period different from that in which the revenue was recorded *No attempt is made to match bad debts expense to sales revenue in the income statement

impairments

- a permanent decline in the fair value of an asset - As to not overstate the asset on the books, the company writes the asset down to its new fair value during the year in which the decline in value occurs - Assets lose value and you write down the asset to its new fair value - happens in the year in which you identify it has lost its value

fixed asset

- a tangible piece of property, plant, or equipment (PP&E) that you own or manage with expectations that it'll continuously help generate income

companies collect data about inventory items to...

- analyze customer habits - buying patterns - sales trends

limited-life intangibles

- assets that may expire at some point in time - Allocate cost over the asset's useful life using a process similar to depreciation, called amortization - Typically amortized on a straight-line basis - Indefinite-life intangibles should not be amortized

FOB shipping point

- buyer pays the freight costs - added into the buyers purchasing inventory *ownership of the goods passes to the buyer when the public carrier accepts the goods from the seller

sale of plant assets

- first calculate the book value of the asset - Then compare the book value with the proceeds received from the sale - If proceeds exceed the book value, a gain on disposal occurs; *Revenue increases - If proceeds are less than the book value, a loss on disposal occurs; *expenses increase (- sign)

consigned goods

- holding the goods of other parties and try to sell the goods for them for a fee, but without taking ownership of the goods - you maintain ownership of the product until it is sold

capital expenditure

- increases the expected useful life or productivity of the asset - Costs are added to the asset account - Depreciated over the asset's remaining useful life ex: buying a new engine for a car, buying a new roof

days in inventory & calculation

- indicates the average # of days inventory is held *Want it to be low but needs to be balanced 365 / inventory turnover ratio

periodic system

- inventory records of the goods on hand are NOT kept throughout the accounting period - cost of goods sold is determined at THE END of the accounting period as follows... 1) determine the cost of goods on hand at the beginning of the period 2) add it to the cost of goods purchased 3) subtract the cost of goods on hand at the end of the accounting period

perpetual system

- keeps record of the cost of each inventory purchase & sale - the records continuously show the inventory that should be on hand for every item - determines cost of goods sold each time a sale occurs - take a physical inventory count to verify the accuracy of the inventory records

what is depreciation applied to?

- land improvements - buildings - equipment NOT LAND

revenue expenditure

- maintain the expected useful life or productivity of the asset - wear & tear, maintenance or repair type of things - Recorded as an Operating Expense ex: oil change, fixing a damaged roof

book value

value of the asset on the companies book ex: equipment - accumulated depreciation

manufacturing company - 3 classifications

ex: apple, dell, ford 1) raw materials 2) work in process 3) finished goods

merchandising company - 1 classification

ex: target, walmart, CVS 1) merchandise inventory

research & development costs

expenditures that may lead to... - patents, copyrights, new processes, new products - expensed when incurred

calculating income from operations

gross profit - operating expenses

gross profit rate & calculation

measures the margin by which selling price exceeds cost of goods sold GPR = gross profit / net sales

calculating gross profit

net sales - cost of goods sold

credit terms

specify when an invoice must be paid by & the amount of the discount (if one is offered) & the time period in which it is offered

freight costs

1) FOB shipping point 2) FOB destination

types of receivables (3)

1) accounts 2) notes 3) other

factors in computing depreciation (3)

1) cost 2) useful life 3) salvage value

categories of expenses for merchandising companies (2)

1) cost of goods sold 2) operating expenses

methods of accounting for uncollectible accounts

1) direct write-off method 2) allowance method

depreciation methods (2)

1) double declining balance 2) units of activity

cost flow assumption (3)

1) first-in first-out (FIFO) 2) last-in first-out (LIFO) 3) average cost

1) other revenue & gains 2) other expenses & losses

1) interest, dividend, rent revenue, & gain from sale of property 2) interest expense, casualty losses, loss from sale or abandonment of property plant & equipment, & loss from strikes by employees & suppliers

Plant assets (4)

1) land 2) land improvements 3) buildings 4) equipment

components of the multi-step income statement

1) operating expenses 2) non-operating activities

systems to account for inventory (2)

1) perpetual inventory system 2) periodic inventory system

types of expenses incurred relative to fixed assets (2)

1) revenue expenditures 2) capital expenditures

plant asset disposal ways (3)

1) sale 2) retirement 3) exchange

amortization vs. depreciation

1) the practice of spreading an intangible asset's cost over that asset's useful life - for intangibles 2) expensing a fixed asset as it is used to reflect its anticipated deterioration - for fixed assets

1) retailers 2) wholesalers

1) those that purchase & sell directly to consumers 2) those that sell to retailers

profit margin ratio & calculation

Measures the % of each dollar of sales that results in net income - measures the extent by which selling price covers all expenses (including cost of goods sold) PMR = net income / net sales

gross profit

Profit a company makes from selling merchandise *It is not a measure of the overall profit of a company, since it excludes operating expenses

too little inventory on hand...

Results in lost sales

why is the multi-step income statement considered more useful? what 3 items does it present?

it highlights the components of net income - more information to make decisions 1) gross profit 2) income from operations 3) net income

Why would a company choose to use an accelerated method of depreciation?

pay less taxes

historical cost principle w/ plant assets

requires that companies record plant assets at its original cost

operating expenses

selling & administrative expenses ex: rent, utilities, cleaning

ratio & its importance

the relationship between one number & another - useful in comparing across companies & benchmarking

cost of goods sold

the total cost of the merchandise sold during the period