Bus 20N Exam Notes: Long-term Assets, Liabilities, and Intangibles

According to the lecture notes, what four core things does accounting track?

Accounting tracks: 1. Assets (what you own), 2. Liabilities (what you owe), 3. Revenue (what you earned), and 4. Expenses (what you spent).

What are the rules for debits and credits regarding increases in assets, liabilities, revenue, and expenses?

An asset increase is a debit; a liability increase is a credit; a revenue increase is a credit; and an expense increase is a debit.

What is the universal formula used to calculate interest on a note?

$$\text{Interest} = \text{Principal} \times \text{Annual Rate} \times \frac{\text{Months}}{12}$$

When a note crosses December 31 before maturity, what adjusting entry is made by the lender and the borrower?

The lender debits Interest Receivable and credits Interest Revenue. The borrower debits Interest Expense and credits Interest Payable.

What is the journal entry to record the write-off of an uncollectible account receivable, and what is its effect on Net Accounts Receivable?

Debit Allowance for Credit Losses and credit Accounts Receivable. Net Accounts Receivable does not change because gross receivables and the allowance both decrease by the exact same amount.

Under the Percentage of Revenues (Income Statement) method, how is Credit Loss Expense calculated?

The percentage is applied directly to revenues to find the expense: $\text{Credit Loss Expense} = \% \times \text{Revenues}$. The ending allowance is then calculated as: $\text{Ending Allowance} = \text{Beginning Allowance} - \text{Write-offs} + \text{Credit Loss Expense}$.

Under the Percentage of Receivables (Balance Sheet) method, how is Credit Loss Expense determined?

The percentage applied to gross accounts receivable determines the ending allowance balance: $\text{Ending Allowance} = \% \times \text{Gross Accounts Receivable}$. Expense is then backed into: $\text{Expense} = \text{Ending Allowance} - (\text{Beginning Allowance} - \text{Write-offs})$.

What is the formula and guideline for the Current Ratio?

$\text{Current Ratio} = \frac{\text{Current Assets}}{\text{Current Liabilities}}$, with a general guideline of around $2$ or more.

What is the formula and guideline for the Quick Ratio (Acid Test), and why is inventory excluded?

$\text{Quick Ratio} = \frac{\text{Cash} + \text{Net Accounts Receivable} + \text{Short-term Investments}}{\text{Current Liabilities}}$, with a guideline of around $1$ or more. Inventory is excluded because selling it takes time.

What is the formula for Days' Sales in Accounts Receivable, and what does a lower value signify?

$\text{Days' Sales in Accounts Receivable} = \frac{\text{Average Net Accounts Receivable}}{\text{Sales Revenue}} \times 365$. Lower is better because it indicates faster collection.

What expenditures are included in the capitalized cost of an asset?

Everything spent to get the asset ready to use for the first time, including purchase price, shipping, insurance on shipping, sales tax, import duties, installation, outside training if no one in-house can do it, and required initial site preparation such as a special platform.

What expenditures must NOT be included in the capitalized cost of an asset?