FinAcc Lecture 4

What are merchandising operations?

Sale of physical goods rather than services

Gross Profit Formula

Revenue - Costs of goods sold

Net Profit Formula

Gross Profit - Operating Expenses

Cost of goods available for sale

Beginning inventory + Cost of goods available for sale

Contra Accounts: What are they used for and tied to?

Used to reduce the balance of another account

Tied to another account in which they reduce the balance

Net Sales Revenue

Sales revenue - sales returns - sales allowances - sales discounts

Ownership of consigned goods

Selles does not take ownership even when goods are in the store, therefore they are not included in the inventory

FOB destination vs shipping point

destination: seller pays shipping costs

shipping point: buyer pays

Net purchase

Purchase - purchase returns - purchase allowances - purchase discounts

How is inventory valued?

At cost: How much the company paid for it

COGS: what is it and how calculated

Cost of goods sold: Beginning inventory + purchases during the year - ending inventory

LCM Rule

Compare the cost of inventory (Ending inventory value) to its current market price and value the inventory at the lower of these two values

Classifications of Manufacture inventory

Raw Materials, Work in Process, Finished Goods

2 inventory systems

Periodic and perpetual

Average cost valuation

Total Cost / End amount of units

What happens with COGS if beginning inventory is understated

Then it will also be understated

If ending inventory is understated what happens to Assets and Equity?

Assets will be understated, Equity overstated

2 main types of receivables and how long?

Accounts receivable, usually 30-60 days

Notes receivable, usually 60-90 days

Uncolectible accounts - Allowance method

Estimate the Uncollectible Accounts Receivable
each period (31 December)

With which account is the diminution of accounts receivable charged

Bad Debt Expense

Allowance for doubtful account

Benefits of Allowance for Doubtful
Accounts method vs Direct write off
method

Better matching of debt expense and sales revenue
in the same period

realistic picture of the what the company
will actually receive for Accounts Payable

How to compute interest on a note receivable

Face Value*Annual interest rate*Time in years

Which category are notes receivable in the balance sheet

Other financial assets

Can Land be depreciated?

NO

What does the cost of land include

Purchase price, closing costs, agent fees, liabilities on the property

What else is included in the Value of a building except of fees

Preparing for use, such as plumbing or remodeling

For the equipment value, except of taxes and shipping costs, what else is part of it

Cost to test the equipment

When equipment is being used (oil for maintenance for example), do you debit an asset?

No, rather an maintenance expense

Small repairs without significant changes in an PPA asset are an expense; What about major ones?

They are also included on the balance sheet as part of an asset

Depreciation expense formula

Cost - residual value / useful life

What is the difference between the depreciation rate in the straight line and declining balance method?

The declining balance method has the double rate of the straight line

Revaluation gains and losses

gain: other comprehensive income

loss: income statement

How are intangible assets amortized?

Limited life: Straight line amortization

Indefinite life: NOT amortized

How is goodwill amortized?

Not at all