Intermediate Accounting Exam 2

Cash

MOST LIQUID/CURRENT ASSET; a standard medium of exchange coins, currency, available funds in bank account, etc.

Cash Equivalents

SHORT-TERM and HIGHLY LIQUID INVESTMENTS (<90 days) that are 1) readily convertible to cash and 2) near maturity (no risks of change in value); ex: treasury bills, certificates of deposit, commercial paper, and money market

Restricted Cash

can be self-imposed (plant expansion, retirement of long-term debt) to indicate that a company is doing something big OR is required due to a contractual agreement with a bank

Compensating Balances

a type of RESTRICTED cash where a MINIMUM balance must be maintained in a bank account (can be short/long-term)

Bank Overdraft

a company writes a check for more than the amount in its cash account; a CURRENT LIABILITY that offsets other cash accounts (NO NEGATIVE CASH)

Receivables

claims held against customers and others for money, goods, or services; money coming to US, classified as current (

Recognition of Accounts Receivables

recognized when revenue is recognized on account.

Revenue Recognition Principle

a company should recognize revenue when it satisfies its performance obligation (transfer of good/service to customer)

Variable Consideration

the price of a good/service is dependent on future events; discounts, returns and allowances, rebates, and performance bonuses

Trade Discounts

REDUCTIONS from the list price, NOT RECOGNIZED in accounting records and bills customers net of discounts.

Cash (Sales) Discounts

offered to induce PROMPT payment, presented in % discount/days for discount, amount owed/days for original. Ex: 2/10, 100,000/30 = 2% off 100,000 if you pay within 10 days, otherwise pay original 100,000 within 30 days.

Methods to Record Cash Discounts

gross method and net method.

Gross Method

Accounts Receivable $Original Amount, Sales Revenue $Original Amount

Net Method

Accounts Receivable $Discounted Amount, Sales Revenue $Discounted Amount

Sales Returns and Allowances

CONTRA-REVENUE account to Sales Revenue and CONTRA-ASSET account to Accounts Receivable; allows us to identify potential problems/defects/mistakes

Refund Liability Account

a liability for estimated future RETURNS/ALLOWANCES.

Estimated Inventory Returns

returned inventory that's still pending.

Bad Debt Expense

recording credit losses, a normal and necessary risk of doing business on credit.

Allowance Method

losses are ESTIMATED via percentage-of-sales or percentage-of-receivables, and required by GAAP

Bad Debt Expense JE

Bad Debt Expense, Allowance for Doubtful Accounts (+XA)

Write Off

when collection appears impossible and the company has to give up and write off the amount; only affects BALANCE SHEET accounts (NOT I/S).

Write off Uncollectible Account

Allowance for Doubtful Accounts, Accounts Receivable

Recovery

when the collection is recovered after we wrote it off previously; only affects BALANCE SHEET accounts

Recovery of Uncollectible Account

Reverse write-off: Accounts Receivable, Allowance for Doubtful Accounts. Collection: Cash, Accounts Receivable

Percentage-of-Receivables

reports estimate of receivables at realizable value, applied using 1 composite rate/an aging schedule with different rate.

Adjusting Entry to Record Estimate

credit balance before adjustment = subtract and debit balance before adjustment = add

Notes Receivable

written PROMISE to receive a certain sum of money at a specific future date, a negotiable instrument (can be sold) and interest bearing (zero-interest bearing = interest in face amount)

Factors

companies/banks that BUY RECEIVABLES for a fee and collect payments directly from customers; arranged WITHOUT or WITH RECOURSE

Sale Without Recourse

purchaser assumes risk of collection, transfer = sale of receivable, and seller records loss on sale (FAVORS SELLERS)

Sale with Recourse

seller guarantees payment to purchaser

(collectability, FAVORS BUYERS)

Sale vs. Borrowing

Sale = transferred asset was isolated from transferor, transferee has right to pledge/sell gained asset, and transferor doesn't maintain control through repurchase agreement.

Reconciliation of Bank Balances

explains differences between the BANK and COMPANY's records of cash; bank vs. ledger to reconcile any deposits in transit, outstanding checks, bank charges/credits, and bank/depositor errors

Revenues from Contracts with Customers

adopts an asset-liability approach: companies account for revenue based on the asset/libability arising from contracts with customers

Revenue Recognition Principle

recognize revenue in the accounting period when the performance obligation is satisfied.

Components of a Valid Contract

contract has commercial substance, both parties have approved, rights of parties are identified, payment terms are identified, and it's probable that consideration will be collected.

Multiple Performance Obligations

exist if both obligations can be performed 1) Separately and 2) Independently (obligation is NOT dependent on another)

Transaction Price

the amount a company expects to RECEIVE from a customer in exchange for transferring goods and services.

Contract

agreement between 2/more parties that creates enforceable rights or obligations; can be written, oral, or implied from customary business practice.

Collectability

credit risk - risk that a customer won't pay in accordance to the contract; revenue is still recognized and an allowance for bad debt is recorded for the amount that's not collectible.

Performance Obligation

a promise to provide a distinct product/service to a customer

What makes a product/service distinct?

When a customer is able to benefit from a good/service on its own or together with other available resources.

Variable Consideration

estimated based on timing i.e. future events (discounts, rebates, bonuses, etc.) or expected value and most likely amount

Time Value of Money

when a contract involves a significant financing component (interest accrued to be paid over time).

Noncash Consideration

contributions (donations and gifts) or of goods/services from customers; measured at fair value if it can be reasonably estimated.

Sales Returns and Allowances

right of return granted for a product

Repurchase Agreements

company transfers an asset to a customer but has the unconditional obligation/right to repurchase it at a later date; if obligation/right >= selling price => financing transaction

Bill-and-Hold Arrangements

entity bills a customer for the product but retains physical possession of the product until a point of time in the future; the buyer is NOT ready to take delivery but has title and accepts billing.

Principle-Agent Relationships

agent's performance obligation to arrange for principal to provide goods/services to a customer; amounts collected on behalf of the principal are NOT revenue for the agent, agent receives revenue based on commission.

Consignments

cosignor (manufacturer) ships merchandise to cosignor (dealer) who acts as an agent for cosignor in selling the merchandise; cosignor makes profit on sale, cosignee makes commission on sale.

Warranty

2 types; assurance-type (product meets agreed-upon specifications in contract at time product is sold, included in sales price) and service-type (provides additional service, not included in sales price)

Nonrefundable Upfront Fees

payments from customers before delivery of product/performance of service, where setup of good/service is provided in the future; typically nonrefundable

Contract Assets

2 types; unconditional rights - CONSIDERATION received because company SATISFIED performance obligation and conditional rights - CONSIDERATION received company satisfied 1 but must satisfy ANOTHER performance obligation before billing.

Contract Liability

company's obligation to transfer goods/services to a customer for which the company has received CONSIDERATION from the customer.

Contract Modifications

change in contract terms while it's ongoing, classified as a new contract or a change to the existing contract; a new contract = 1. promised goods/service are distinct and 2. company can receive consideration to reflect standalone selling price

Disclosure

companies disclose qualitative/quantitative information about contracts with customers, significant judgements, and assets recognized from costs incurred to fill a contract.

Percentage of Completion

recognize revenues and gross profits each period based on progress; common in long-term projects >1 year

Inventories

asset items held for SALE in the ORDINARY course of business OR goods to be used in PRODUCTION of goods to be sold (manufacturing).

Merchandising Company Inventory

ONE inventory account where merchandise is purchased in a form ready for sale.

Manufacturing Company

THREE inventory accounts; materials and supplies, work in process, and finished goods

Inventory Cost Flow

Beginning Inventory + Cost of Goods Acquired = Total Goods Available for Sale - Ending Inventory = Cost of Goods Sold

Perpetual System

tracks purchased items, performed each year, 90% of companies follow this system; merchandise purchases + freight in are debited to Inventory, and returns/allowances/discounts are credited to Inventory.

Periodic Inventory

determine the quantity of inventory on hand, few items, 1-2 person per store; inventory is not known unless counted and is counted once a month.

Inventory Control

company understocks => lose sales and customers to competition, company overstocks => storing costs are high/inventory becomes obsolete, company fails to protect => items are stolen/damaged

Inventory Over and Short

reported on the INCOME STATEMENT, a JE account to indicate inventory shortage: Debit Inventory Over and Short, Credit Inventory

Inventory Recognition

recognize inventory at the time we control the asset, often "passage of title"

FOB Shipping Point

ownership passes to the BUYER when it's LOADED on the truck.

FOB Destination

ownership passes to the BUYER upon delivery

Cosigned Goods

goods that remain the property of the cosignor; do NOT belong to the cosignee's inventory.

Special Sales Agreements

"repurchase agreement/parking transactions"; selling the items knowing they'll be repurchased

Product Costs

costs DIRECTLY connected with bringing the goods to the buyer's place of business and converting such goods to a salable condition; on B/S

Period Costs

INDIRECTLY related to the acquisition of goods and are difficult to assign to specific inventory items; on I/S

Inventory Cost Flow Assumption

company assumes that goods are sold in a certain patterns, dose NOT need to be consistent with physical movement of goods; FIFO, LIFO, or Average Cost

Specific Identification

used when handling a small number of costly, unique items, cost flow MATCHES physical flow of goods; computed directly

Average-Cost

prices items in inventory on basis of average cost of all similar goods available during the period

First-In First-Out (FIFO)

goods are solder in the order which they are purchased; has the LOWEST COGS when prices rise over time and inventory/COGS is the same whether perpetual/periodic is used.

Last-In First-Out (LIFO)

sell the newest items first while older items stay; has the HIGHEST COGS when prices rise over time and inventory/COGS is different between perpetual/periodic.

FIFO vs. LIFO Physical Flow of Goods

FIFO = may mirror actual flow of goods, LIFO = NOT mirror actual flow of goods

FIFO vs. LIFO Income Tax Effects

when prices are rising; FIFO = HIGHER income taxes, LIFO = lower income taxes (biggest advantage)

FIFO vs. LIFO Earnings Impact

when prices are rising; FIFO = HIGHER reported earnings, LIFO = LOWER reported earnings

FIFO vs. LIFO Matching of Revenues and Current Costs

FIFO = poor matching, LIFO = better matching

FIFO vs. LIFO Inventory

FIFO = reflects CURRENT inventory costs, LIFO = reflects OLD inventory costs

Supplemental Non-LIFO Disclosure

if you use LIFO, you must disclose FIFO impacts; Excess of FIFO over LIFO = the amount we would've recognized if we used FIFO

LIFO Reserve

difference between the inventory method used for internal reporting purposes and LIFO

Net Realizable Value (NRV)

ESTIMATED selling price in the ordinary course of business - reasonably predictable costs of completion, disposal, and transportation.

LCNRV Final Inventory Value

choose the value that is lowest.

Lower-of-Cost-or-Market (LCM)

applies NRV (ceiling) and NRV - Normal Profit Margin (floor); the market value must be not more than NRV or less than NRV - Normal Profit Margin

LCM Final Inventory Value

choose the value that's in between.

5-Step Revenue Recognition Process

1. Identify a valid contract with customers, 2. Identify Separate Performance Obligations, 3. Determine the transaction price, 4. Allocate Transaction Price to Separate Performance Obligations, 5. Recognize Revenue As Each Performance Obligation is Satisfied