ACC Test 2
Weighted-average cost
Assumes each unit of inventory has a cost equal to theweighted-average unit cost of all inventory items.
equals all revenues minus all expenses.
net income
return on assets =
net income / avg total assets
gross profit - selling(operating) expenses
operating income
credit balance before adjustment means
the allowance account is too high
aging method
The older the account, the less likely it is to be collected.
The allowance for uncollectible accounts is a contra account to
AR
What is the formula for the profit margin ratio
Net income /
The profit margin ratio is defined as
Net income dividend of sales
natural resources
depleted over time ex: oil, natural gas, timber, salt
Intangible assets
patents• Trademarks• Copyrights• Franchises• Goodwill
gross profit
revenues - COGS
Tangible assets
Land• Land improvements• Buildings• Equipment• Natural resources
at the time of credit sale company will record
(d)account receivable, (c)revenue then once cash is received: D cash, C acc receivable
imputting interest: total recieved D cash, C notes receivable (amount not including interest), C interest revenue (interest accrued over period balanced with total cash from transaction)
...
depreciation
Allocation of an asset's cost to expense overtime
Depletion
Choice Allocation of the cost of natural resources
buildings
depreciate over time
Retirement
occurs when an asset is no longer useful, but cannot be sold.
Since accounting numbers, such as the Allowance for Uncollectible Accounts balance, are based on estimates, financial statements are:
subject to inaccuracy
The allowance method estimates
uncollectible accounts.
Perpetual Inventory System
(used virtually by all companies) Maintains a continualrecord of inventory onhand and inventorypurchased and sold• Helps managers make gooddecisions• Most often used in practice
The estimated use the company expects to obtain from an asset before disposing of it is referred to as the
Service life
Tudor Corp. has an ending balance in the accounts receivable account of $20,000. Tudor recorded bad debt expense of $1,000. Tudor has an ending balance in the allowance for uncollectible accounts of $2,000. What is the net accounts receivable balance?
18
Windsor Hospital purchases $90,000 in surgical equipment on October 1, Year 1. The useful life is estimated to be 5 years, and the residual value is estimated to be $10,000. What will be the depreciation expense reported for this equipment in Year 1 if the hospital uses the straight-line method?
4000 18000 x 3/12
A company purchases a machine for $10,000. The estimated residual value is $4,000, and the estimated service life is 4 years or 10,000 units. The company uses the straight-line method of depreciation. The depreciable cost of the asset is:
6000
On January 1, Year 1, Toy Factory purchases a patent for a printing process for $40,000. The original legal life of the patent was 10 years, and there are 8 years remaining. However, due to expected technological obsolescence, the company estimates that the useful life of the patent is only 5 more years. What will be the amortization expense for the patent in Year 1?
8000
KPR, Incorporated just purchased a plot of land on which it expects to build a new manufacturing facility. The Land account will not include:
All of these costs will be included in the Land account.
whereas the allocation of the cost of an intangible asset is referred to as
Amortization
When an account previously written off is collected in full, which is required to ensure the accounting for the complete payment history of the customer?
An entry to reinstate the account receivable and an entry to record payment.
materiality
An item is said to be material if it is large enough toinfluence a decision.• When an expenditure is not material, the item istypically recorded as an expense regardless of itsexpected period of benefit.• Companies generally have policies regardingamounts that are not material. They will expense allcosts under a certain dollar amount, say $1,000,regardless of whether future benefits are increased
First-in, first-out (FIFO)
Assumes first units purchased are first ones sold
Last-in, first-out (LIFO)
Assumes last units purchased are first ones sold
The original cost of the asset less the accumulated depreciation is the
Book value
Amend Inc. debited Accounts Receivable and credited Allowance for Uncollectible Accounts to reestablish an account previously written off. Amend Inc. should also debit AND CREDIT
Cash; Accounts Receivable
The allocation of the cost of a tangible fixed asset is referred to as
Depreciation
If equipment is retired, which of the following accounts would be debited?
Depreciation expense.
Prime, Incorporated, purchases $100,000 in construction machinery on January 1, Year 1. The useful life is estimated to be 8 years, and the residual value is estimated to be $20,000. What will be the depreciation rate if the company uses the double-declining-balance method?
Depreciation rate = 2/service life = .25
Periodic InventorySystem
Does not continually recordinventory amounts• Calculates balance ofinventory at end of periodbased on physical count• Adjusts for purchases andsales of inventory
freight charges
FOB shipping point means title passes when the seller ships the inventory - freight paid by the purchaser FOB destination means title passes when the inventory reaches the buyers - destination - freight paid by the shipper
Where is a note receivable reported in the balance sheet?
In either current or noncurrent assets, as appropriate.
Which information regarding the receivables turnover ratio is true?
It shows the number of times during a period that the average accounts receivable balance is collected. It provides an indication of a company's efficiency in collecting receivables. Need help? Review these concept resources.Read About the Concept Feedback Next QuestionReading
Pixie Inc. writes off a specific accounts receivable. If Pixie is using the allowance method, the write off will
NOT AFFECT NET INCOME
Which of the following is an example of an intangible asset?
Patents of a drug manufacturer
basket purchase
Purchase of more than one asset at the same time for one purchase price example pp 7.15 purchase price is allocated based on fair market values
The write-off
Reduces the balance of Accounts Receivable. Reduces the balance of the contra account Allowance for Uncollectible Accounts. The write-off has no effect on total assets (balance sheet) or total expenses (income statement).5-42
Which of the following are expenditures for assets subsequent to acquisition?
Repairs and maintenance Additions Improvements
The estimated use the company expects to obtain from an asset before disposing of it is referred to as the
Residual value
The research and development (R&D) team at a pharmaceutical company is developing a drug for colon cancer. Which of the following is true of the R&D costs incurred in developing this drug during the current year?
They are expensed directly in the income statement.
A trade discount is
a reduction from list price.
A trademark is:
a word, slogan, or symbol that distinctively identifies a company, product, or service.
The term net accounts receivable refers to
accounts receivable less the allowance for uncollectible accounts.
When considering total depreciation recorded over the entire life span of an asset, the method resulting in the highest total depreciation is:
all three
A company that expects that some of its customers will not pay the agreed upon sales price must utilize the
allowance method
A partial adjustment to the amount owed by the customer for goods that were not returned, but did not fully meet the customer's expectations is referred to as a sales
allowance.
The gain or loss on disposal of an asset is calculated as
amount received less the book value of asset sold
With the allowance method, bad debt expense is recorded
at the end of the period when bad debts are estimated.
Compared to other methods of estimating uncollectible accounts, the aging of accounts receivables method tends to
be more accurate.
purchase returns
buyer returns unwanted or defective inventory
companies can choose which method (fifo/lifo) but
cant change without authorization - once fifo or lifo is picked cannot change
long term benefits
capitalize We capitalize (record as an asset)expenditures that benefit future periods
The purchase price and all costs to bring an asset to its desired condition and location for use should be
capitalized
weighted average:
cost of goods available for sale/number of units available for sale (Example pp 6.29)
If the allowance for uncollectible accounts is 25% of year-end accounts receivable, this might indicate
credit policies are too lenient.
Sales to customers in which the customers pay within 30 to 60 days are referred to as (Select all that apply.)
credit sales. sales on account.
ABC Corp. received a 3-month, 8%, $1,500 note receivable on November 1. The adjustment for interest earned by December 31 will include a:
credit to Interest Revenue of $20
The journal entry to record annual depreciation for equipment includes a:
debit to Depreciation Expense
The journal entry to record bad debt expense includes: (Select all that apply.)
debit to bad debt expense credit to allowance for uncollectible accounts
As natural resources are used, their cost is allocated to an expense through a process known as _____________.
depletion
A company purchases a machine for $12,000. The estimated residual value is $4,000. The machine has a useful life of 5 years, and is expected to produce 20,000 units during its lifetime. Use the activity-based depreciation method to calculate the amount of depreciation in Year 1, assuming that the machine was used to produce 6,000 units.
depriciate rate: dep. cost (12-4)/ total units expected = 8000/20000 = .4x(number of units) = 2400
The Accounts Receivable account is reduced when the seller:
determines that a specific customer account will not be collectible
purchase discounts
discount offered by seller for quick payment
land
does not depredciate
trademarks
dont get depreciated
At the beginning of the year, Gerta Company's allowance account has a credit balance of $10,000. This may indicate that the
estimate of uncollectible accounts was too high.
Gwendolyn uses the allowance method to account for uncollectible receivables. Gwendolyn should record
estimated bad debt expense at the end of the year
activity based depreciation
ex: new truck 40000 res value: 5000 service life: 5 years or 100000 miles depreciation rate : depreciable cost/ total units expected to be produced 40000-5000/100000 = .35 per mile
Depreciation is the process of allocating the cost of an asset to a(n) _________ over its service life.
expense
straight line depreciation:
expense= cost-residual value/service life depreciation expense = assets cost-residual value/service life = depreciable cost/ service life ex: 40000-5000/5 years = 7000 per year depreciation expense example pp 7.51
repairs and maintancnec
expensed as incurred
True or false: Accounts receivable not expected to be collected should be counted in the assets of the company until they are later written off.
f
A trade discount is a reduction from the list price, which is used to: (Select all that apply.)
give quantity discounts to customers change prices without publishing a new catalog disguise real prices from competitors
Which of the following intangible assets is not amortized?
good will
intangible assets
if purchased: recorded at cost and depleted over course of life if internally developed: expensed as developed but for legal and recording costs - research and development, advertising
inventory
includes items a company intends for sale to customers in the ordinary course of business. Inventory also includes items that are not yet finished products. Typically reported as a current asset in the balance sheet. manufacturing companies' inventory: raw materials, work in progress, finished inv
iincome -equals operatingincome plus nonoperating revenues and minusnonoperating expenses.
income before income taxes
An attorney adds an air purification system to his office building. The addition:
increases future benefits and should be capitalized.
double declining balance
more depreciation in early years 2/estimated service life 120000 with 10 years 12000 salvage 120,000/10*2=24000 120-24=96000/10*2=19200 book value = 76800 When using the declining-balance method, mistakes are commonly made in the first and last year of the calculation. In the first year, students sometimes calculate depreciation incorrectly as cost minus residual value times the depreciation rate. The correct way in the first year is to simply multiply cost times the depreciation rate. In the final year, some students incorrectly calculate depreciation expense in the same manner as in earlier years, multiplying book value by the depreciation rate.• However, under the declining-balance method, depreciation expense in the final year is the amount necessary to reduce book value down to residual value. pp7.55
goodwill
only recorded if it is purchased from another company
Which level of profitability is consideredprofit from normal operations?
operating income
acquisition costs
purchase price plus expenditures to get the asset ready for use (ex: freight, instalation, testing, training *not including annual taxes the cost will be expenses over time
______ ratio shows the number of times during a year that the average receivable balance is collected.
receivables turnover
The amount a company expects to receive from selling a long-term asset at the end of its service life is known as:
residual value
When a customer returns a product for a refund, in which account is the entry recorded?
sales return
debit balance before adjustment means
the allowance account is too low
A high ratio of allowance for uncollectible accounts to total accounts receivable can indicate: (Select all that apply.)
the company's customers are high-risk the company extends too much credit
COGS
the cost of inventory recorded at the time of a sale
Accounts receivable are typically classified as current assets because
they will be converted to cash within 1 year.
net revenues:
total revenues less returns, allowances, discounts
