Accounting Exam 2

Chapter 5-8

what are some examples of what we would calculate PV for?

LT notes, LT leases, pensions, retirement, LT assets, stock based compensation, business combinations, disclosures, environmental liabilities

how to find total simple interest

simple interest= p x i x n

stated/nominal/fixed rate

written on loan/contract

effective yield

greater than the nominal rate when considering compounding interest/reinvestment

what is an annuity

periodic payments/receipts of consistent amounts (rents), same interval, compound interest

securitization

bundle debts into securities to sell to investors

how to find present value of deferred annuities?

1. get PV of ordinary annuity, ignoring deferral

2. subtract PV of rents not received during deferral period

how to find market value of a bond?

present value of interest annuity added to the principal

what is the expected cash flow approach?

multiply percent probability of each future cash flow by the cash flow, then add up to get answer

future value of a single sum formula

FV= PV (FVF for n periods at i interest)

PV of single sum formula

PV= FV (PVF for n periods at i interest)

FV of ordinary annuity formula

PMT x FVOAF

FV of annuity due formula

PMT x FVOAF x (1+r)

PV of an ordinary annuity formula

= PMT x PVOAF

PV of annuity due formula

=PMT x PVOAF x (1+r)

1. formula for determining bond interest paid?

2. formula for determining interest expense?

1. face amount of bonds x stated interest rate

2. carrying value (present value) x market (eff) interest rate

cash examples

funds on deposit at bank, negotiable instruments (money orders, certified checks, personal checks), petty cash, money market accounts with checks, cashier check, bank draft

cash equivalents

-convertible to cash with 3 months or less maturity… ex: treasury bills, CDs, commercial paper

what is not considered cash?

postdated checks, IOUs, travel advances (all are receivables) and NSF checks

FVOAF and the PVOAF

FVOAF: (1+r)^n - 1 / r

PVOAF: 1- 1/(1+r)^n / r

trade receivables

customers owe company for goods/services within normal course of business

non trade receivables examples

cash advances, deposits for potential losses, dividends/interest receivable, insurance claims

what are examples of a change in control (when you would recognize rev?)

right to payment, customer has legal title, transfer of possession/risk, reward, acceptance

variable consideration and 4 examples

price of good/service depends on future event…

ex:

1. trade discounts (reduction from list price offered by seller to buyer)

2. cash discounts (to induce prompt payment)

3. sales returns/allowances

4. time value of money (receivables recorded at PV for more than 1 year)

what are the two methods for uncollectible accounts

1. direct write off method (non GAAP)

2. current expected credit loss method (GAAP)

steps to current expected credit loss method (writing off)

1. estimate loss and compare to estimate in allowance account

2. dr. credit loss expense, cr. allowance for credit loss in AJE at EOP

3. when company writes off specific account, dr. actual uncollectible to AFCL and cr. AR

how to record the recovery of an uncollectible account

1. reverse entry of the write off

2. journalize collection normally

promissory note

• written promise to pay the sum of money at a future date

• negotiable (the maker- borrower- signs it in favor of the payee- lender- who may legally sell the note to others

how to record a notes receivable/bond

• when stated int rate does not equal EFF, there’s disct or prem

• record this difference and amortize over the life of the note to approx EFF

what is the implicit rate?

true interest rate which aligns to total cash company will receive in the future with actual value of goods/servs today

effective interest method

1. multiply carrying value of note with effective interest rate to get interest rev/exp for the period

2. calc cash interest paid (bonds face value times stated rate)

3. find amortization amount (interest exp/rev less cash interest)

4. add discount to carrying value or subtract premium from carrying value

when EFF is greater than stated rate…?

then PV of the note is less than the face value (discount)…. and vice versa

sale of receivables

1. sale without recourse (factor assumes credit risk of some customers not paying their AR balance)

• to record: debit cash from sale, factor holdback, loss on sale… and credit accounts receivable for face value sold

1. sale with recourse (if receivable is uncollectible, you will be responsible)

• to record: debit cash, loss on sale… and credit accounts receivable, recourse liability

financial component approach

• to record sale with recourse of AR

• seller assigns values to components and each party only recognizes the assets controlled and liabilities after the sale

three conditions for the transfer of receivables

1. transferred assets are isolated from the transferor

2. transferee has right to pledge and sell assets on their own

3. transferor doesn’t maintain control through the purchase agmmt

AR turnover formula

net sales/avg net AR

(days sales to collect AR=365/AR turnover)

COGAS formula

=beginning inventory + goods purchased/manufactured

COGS formula

=COGAS - ending inventory

perpetual inventory system

• no purchases account

• continuously tracks inventory account changes

1. debit inv for purchases of merch/RM

2. debit inv for freight in and credit inv for discounts/returns

3. debit COGS and credit inv at the time of each sale

4. make subsidiary ledgers

periodic inv system

1. debit purchases acct for inv acquisitions

2. add total in purchases acct (less AJES) at EOP to cost of inventory on hand at BOP to find COGAS

3. compute COGS=COGAS - end inv.

what are parking transactions?

comp retains inv. in their records when they agree to repurchase it at a later date… reports liability to repurchase

ex of products costs

freight charges, insurance for transit, unpacking/prepping goods (all included as inventory)

how to account for purchase discounts?

gross (total invoice) or net (invoice less discount) methods

WAC

weighted avg method (period):

1. COGAS / TOTAL GOODS = $

2. end inv = inventory in x $

3. COGS = COGAS - end inventory

LIFO

periodic: if end inv. is known, we assume older inv is still on hand to calc its total cost, COGS, and end. inv.

perpetual: update COGS/inv after every sale (recent purchases are used to price the sale)

get different results for both methods

FIFO

periodic: EOP, so COGAS - end inv. (units x cost) = COGS

perpetual: attach cost figure to each sales of inv.

get same results for both methods

under periodic system, when costs rise…

LIFO: COGS increases, so GP, IT, and NI are lowest

FIFO: COGS decreases, so GP, IT, and NI are highest

(and vice versa)

lifo reserve

• comp makes entry to adjust internal reporting system to LIFO for end inv. and COGS using Allowance to reduce inv. to LIFO

• carried forward each year

• lifo effect is the change in this balance from year to year

how to adjust inventory using lifo effect

• lifo inv. + lifo reserve = fifo inv.

• lifo cogs - change in lifo reserve = fifo cogs

lifo liquidation

sells more inventory than it buys, so must use older inv layers that were recorded at older costs

what methods to prevent lifo liquidation?

1. specific goods approach

2. dollar value lifo method

two problems with specific goods approach

must constantly redefine pools and erosion of layers (lifo liquidation)

dollar value method

determines/measures any increase or decrease in a pool in terms of total dollar value, not quantity

2 advantages over specific goods: broader range of goods in pool, permits replacement of goods with similar items

double extension method

1. multiply end inv. quantity by base price to get end inv. at base year dollars

2. multiply end inv. quantity by purchase price to get end inv. at current year price

3. then calculate price index: end inv. for period at current cost / end inv. for period at base year cost

what is the effect of understating ending inventory?

• RE, WC, NI, CR (understated)

• COGS (overstated)

COGS=

beg inv + purchase - end inv

when does company record loss of utility in income?

during the period when loss occurs, not when sale occurs

LCNRV

report inventory at cost or NRV (whichever is lowest)

two methods to record valuation of inv at NRV

1. COGS method (debit COGS for write down of NRV to report loss, credit inv)

2. loss method (debit loss account for write down of inv to NRV, credit inv)

nrv=

estimated selling price minus estimated costs to complete, dispose, and transport

LCM

values inv at lower of cost or market

• upper limit (ceiling) is NRV

• lower limit (floor) is NRV less normal profit margin

designated market value is the middle of the three values (replacement, NRV, NRV less PM)

when is recording NRV considered GAAP?

1. controlled market w/price quotes

2. no disposal costs

3. immediate delivery available

purchase commitments

• agreements to buy inv in advance

• dont record if cancellable

• record if noncancellable/contract price is greater than market price and buyer expects loss

gross profit method

1. determine COGAS (beg inv + purchases)

2. determine COGS (sales rev - GP)

3. determine end inv (COGAS - COGS)

GP on selling price

=% markup on cost/100% + % markup on cost

% markup on cost

= GP selling price / 100% - GP on selling price

which is greater, GP on sales price or cost?

GP on sales price is always less than percent on cost

retail inv method

no physical count

1. COGAS - sales rev = est inv

2. cost to retail ratio = COGAS at cost / total goods at retail price

3. multiply cost to retail ratio to end inv valued at retail (=end inv)

conventional retail inv method vs cost retail inv method

• conv method uses markups but not markdowns

• cost method includes markdowns

cost to retail ratio

• to approx LCM

• =COGAS / retail price plus markups (excludes markdowns)

freight costs

• part of purchase cost (inv)

purchase returns

reduction of price at both cost/retail

purchase discount/allowance

• reduction of cost of purchases

retail method special items

• transfer ins from other department = purchase from other comp

• normal shortages deducted from end inv

• abnormal shortages (deducted from cost/retail columns

• employee discounts (deduct only from retail)

disclosures for financial reporting of inv

• basis of inv statement (LCNRV or LCM)

• method to determine cost (FIFO)

• RM WIP FG mix

• unusual financing arrangements

inventory turnover ratio

= COGS / avg inventory

bond discount

Occurs when a bond is issued for less than its face value (because the stated coupon rate is lower than the market rate). The amortization amount increases the carrying value of the bond and increases interest expense.

bond premium

occurs when a bond is issued for more than its face value (because the stated coupon rate is higher than the market rate). The amortization amount decreases the carrying value of the bond and decreases interest expense.