Vocab/Questions

Units of Production method

(Cost - residual Value)/ total units of production

acid-test ratio

(cash + a/r + short term investment) / current liabilities

Straight-line method

A method of calculating depreciation for tax purposes, computed by dividing the adjusted basis of a property by the estimated number of years of remaining useful life.

Contingent liability

A potential obligation that may be incurred depending on the outcome of a future event. A contingent liability is one where the outcome of an existing situation is uncertain, and this uncertainty will be resolved by a future eve.

Trades payable

A trade payable is an amount billed to a company by its suppliers for goods delivered to or services consumed by the company in the ordinary course of business.

balance sheet

Current Assets: Cash and cash equivalents Trade and other receivables Investments Inventories Assets held for sale Non-Current Assets: Property, plant, and equipment Intangible assets Goodwill Current Liabilities: Trade and other payables Accrued expenses Current tax liabilities Current portion of loans payable Other financial liabilities Liabilities held for sale Non-Current Liabilities: Loans payable Deferred tax liabilities Other non-current liabilities Equity: Capital stock Additional paid-in capital Retained earnings

Accounts Receivable

Current asset

Diminishing balance method

Depreciation is calculated by charging a higher rate in the early part of the assets life. This method is considered for any asset that has a high usage in the early part of their life.

Zahra does not understand why bad debt expense is not increased when a specific customer account is determined to be uncollectible and written off. Explain. (2 marks)

When a specific customer account is determined to be uncollectible and written-off, bad debt expense does not increase. The recognition of the expense occurred earlier when an estimate of the expense was accrued at the end of a previous reporting period. Having done so, the write-off entry is an expected outcome of what the earlier estimate predicted. Recording of a write-off to the expense account would cause the expense to be double counted.

Product warranties

a warranty has various meanings but generally means a guarantee or promise which provides assurance by one party to the other party that specific facts or conditions are true or will happen.

Limited partnership

partnership in which only one partner is required to be a general partner

Statement of partners' equity

shows each partners beginning capital balance, additional investments, allocated income or loss, withdrawals, and ending capital balance.

What are some reasons why the existing partners may be willing to give a new partner a bonus for joining a partnership?

Existing partners may be willing to pay a bonus to a new partner because the new partner may bring in a strong potential to increase profit in the future. For example, the new partner may bring goodwill he has generated in the past from a strong relationship with clients he is bringing to the business.

What are land improvements? Should the cost of clearing and grading the land be recorded as a land improvement cost or not? Explain. (2 marks)

Land improvements are structural additions made to the land such as parking lots and fences. Clearing and grading the land are not land improvements but are part of the land cost as they are required to get the land ready for its intended use.

Laurel Hyatt believes that if a company has a long-term liability, the entire amount should be classified as non-current liabilities. Is Laurel correct? Explain. (2 marks)

Laurel is not correct. Some long-term debts have portions that will be due in the coming year. This portion is classified as a current liability since it will be paid within one year of the balance sheet date.

Explain how notes receivable and accounts receivable are the same and how they are different. (10 marks)

Notes and accounts receivable are credit instruments. Both are valued at their net realizable value. Both can be sold to another party. Accounting for the recognition of a note receivable and an account receivable are the same. Accounting for the disposition of a note receivable and an account receivable are the same. An account receivable is an account that is expected to be paid off in one year or less making it a current asset. A note receivable is generally used for any account that will be paid off in a note form (usually monthly) and is expected to take more than one year (or accounting cycle) to be fully paid making it a long-term asset or "fixed" asset.

Trade receivable

Notes and accounts receivable that result from sales transactions.

Profit and loss ratio

This ratio refers to a trading system's ability to generate profits over losses. The profit/loss ratio is the average profit on winning trades divided by the average loss on losing trades over a specified time period.

What are the three characteristics of property, plant and equipment? In what respect are property, plant and equipment similar or different from inventory? (7 marks)

Three characteristics of property, plant, and equipment include: they (1) have a physical substance (a definite size and shape), (2) are used in the operations of the business, and (3) are not intended for sale to customers. They are similar to inventory, in that they have physical substance. They are different in they are used in operations, and not intended for resale, as is the case for inventory.

Allowance for doubtful accounts

When the allowance account is used, the company is anticipating that some accounts will be uncollectible in advance of knowing the specific account.

Aging Schedule

a grouping of accounts receivable into age categories based upon the length of time they have been outstanding on the company record

Payroll deductions

amounts withheld from an employee's payroll check, and these amounts are withheld by their employer. Among these deductions are insurance pension contributions, wage assignments, child support payments, taxes, and union and uniform dues.

working capital

current assets-current liabilities

current ratio

current assets/current liabilities

Partnership

A business in which two or more persons combine their assets and skills

Property, plant and equipment

A company asset that is vital to business operations but cannot be easily liquidated. The value of property, plant and equipment is typically depreciated over the estimated life of the asset, because even the longest-term assets become obsolete or useless after a period of time.

What factors should be considered when choosing a depreciation method? When revising a depreciation method? (2 marks)

A company should choose the depreciation method it believes will best reflect the pattern over which the asset's future economic benefits are expected to be consumed. The depreciation method must be revised if the expected pattern of consumption of the future economic benefits has changed.

Why will a company take a note receivable from a customer in settlement for a late accounts receivable? (2 marks)

A company will take a note receivable from a customer in settlement of a late accounts receivable because it provides a stronger legal claim to assets and normally includes interest. The note is further evidence and acknowledgement on the part of the customer of the amounts owed to the company.

Limited liability partnership

All partners are limited partners and not responsible for the debts and other liabilities of other partners

Cost model

Carrying amount = Cost - accumulated depreciation - accumulated impairment loss

Revaluation model

Carrying amount = Fair value at date of revaluation - subsequent accumulated depreciation - subsequent accumulated impairment losses

What factors contribute to an impairment loss? In what circumstances, if any is a company allowed to write up its property, plant and equipment? (7 marks)

Factors that may contribute to an impairment loss include: obsolescence of a piece of equipment, loss of a market for a product manufactured, bankruptcy of the supplier of replacement parts for equipment, environmental concerns causing extra costs of disposal at the end of the useful life. Under International Financial Reporting Standards (IFRS) a company may write up the carrying amount of the asset if there is a reversal in a previously recorded impairment. The write up is limited to the amount required to increase the asset's carrying amount to what it would have been if the impairment loss had not been recorded. Also under IFRS, a company will write up its property, plant, and equipment if it is using the revaluation model and the fair value increases. Adoption of the revaluation model is optional, and very rare.

In what respects are gift cards similar to unearned revenues and why are they classified as a liability? How is a gift card different than an airline's unearned passenger revenue for flights paid in advance? (6 marks)

Gift cards are similar to unearned revenues in that they represent cash received from customers for future products or services. They are classified as a liability because they are an obligation for the issuing company to provide assets or services in the future. Unearned passenger revenue usually has a determinable time at which the flight will be taken and the unearned revenue becomes earned. Gift cards however do not have a fixed date at which the obligation will be satisfied, and frequently are not used at all. This is similar to an operating line of credit in that the obligation can be satisfied in the current or long-term. In some cases, a portion or the entire amount of the gift card is not used at all. Over time, companies need to determine if a portion of this unearned revenue can be considered earned since the likelihood of redemption becomes more remote.

The accountant for Amiable Appliances feels that warranty expense should not be recorded unless an appliance is returned for repair. "Otherwise, how do you know if the appliance will be returned, and if so, how much it will cost to fix?" he says. Do you agree? Explain. (3 marks)

I don't agree. Although you don't know which specific appliances will be returned for repair, you can estimate the cost of repairs that will be required under warranty based on past experience or industry information. If repair costs are not recorded until units are brought in, liabilities on the balance sheet will be understated and the expenses will not be properly matched with revenue on the income statement. If sales are increasing, this will probably result in an overstatement of income.

What are the advantages and disadvantages of the partnership form of business? (7 marks)

The advantages of a partnership are: (1) combining skills and resources of two or more individuals, (2) ease of formation, (3) relatively free from governmental regulations and restrictions, and (4) ease of decision-making. Disadvantages are: (1) mutual agency, (2) limited life, and (3) unlimited liability.

Net Realizable value

The amount of accounts receivable a business expects to collect.

Bad Debt Expense

The amount of the adjustment to the allowance for uncollectible accounts, representing the cost of estimated future bad debts charged to the current period.

Explain the allowance method of accounting for debts. How does this method result in (a) assets not being overstated, and (b) the matching of expenses with revenues? ( 6 marks)

The essential features of the allowance method of accounting for bad debts are: (1) Uncollectible accounts receivable are estimated and recorded at the end of an accounting period. Estimated uncollectibles are debited to Bad Debts Expense and credited to Allowance for Doubtful Accounts through an adjusting entry at the end of each period. (2) When collection efforts demonstrate that an actual account receivable needs to be written off, the amount of the uncollectible receivable is debited to Allowance for Doubtful Accounts and credited to Accounts Receivable, reducing the balances of both accounts.0 (3) If an account previously written off is later collected, the original write-off is reversed to reinstate the account receivable and then the collection on account is recorded. (a) The allowance method requires that the accounts receivable be reported on the balance sheet at their net realizable value. Failure to adequately provide for any accounts that will require write-off in the future would cause the assets to be overstated. (b) By recording the accrual of the amount of the bad debt expense, the expense is recorded in the same accounting period as the sale occurred. The matching of expenses to revenues is achieved by this accrual.

Residual Value

The estimated value of a fixed asset at the end of its useful life

When an account receivable that was written off is later collected, two journal entries are usually made. Explain why. (2 marks)

The first entry is made to reverse the write-off of the account receivable in order to reinstate the accounts receivable since it has been proven to be collectible. The second entry records the collection of the account receivable. Although the outcome or result of the two journal entries could be accomplished with one combined entry, it is best to have separate journal entries for the reversal and subsequent collection. By both debiting and crediting accounts receivable, the customer's subsidiary ledger account will be updated to show the reversal of the previous write-off and the collection of the cash. This will provide more accurate information about the customer's payment history in case that customer wants to obtain credit again in the future.

What is the net realizable value of accounts receivable? Why is it important that accounts receivable be reported at net realizable value? (3 marks)

The net realizable value of accounts receivable is the collectible amount of an account receivable; the amount of the cash expected from the collection of the account. Reporting accounts receivable at net realizable value ensures that the company is portraying its current assets accurately on its balance sheet which indicates the company's ability to pay its liabilities when due.

Amortization

The paying off of debt with a fixed repayment schedule in regular installments over a period of time. Consumers are most likely to encounter amortization with a mortgage or car loan.

What is included in a statement of partners' equity? How is it similar to, and different from, a statement of owner's equity? ( 2 marks)

The statement of partner's capital is a financial report that shows the changes in total partners' capital accounts during an accounting period. In other words, it's a financial statement that reports the increases and decreases in the partners' accounts over the course of a period. Similar to the statement of owner's equity, the statement of partner's equity is a short financial report that only lists a few different types of transactions that affect the equity accounts. Unlike the owner's equity report, the partner's equity is only used for partnerships. Thus, it uses net income or and the partner contributions and distributions throughout the year to calculate the ending capital balance. Here is the basic partner's equity equation.