ACCT 2301 Final

Revenue Recognition

condition 1: goods are delivered / services are completed

condition 2: arrangement for payment

condition 3: price is fixed

condition 4: recognize collectability

Revenue

IS, R, SE

Retained earnings

BS, SE

The money a company keeps from its profit instead of giving it all away to people who own parts of the company ( like paying them a share of the money, called a dividend )

Dividends Payable

Liability

Unearned Revenue

BS, L

Liability

cash received before revenue is earned

Key words:

rent

services

Accrued Revenue

BS, A

Cash received after revenue is earned

Any Receivables

Key words:

account receivable

ex:

A consulting company finishes a project in December but doesn't send an invoice until January. The revenue is recorded in December because it was earned in that month.

Prepaid Expenses

BS, A

Cash paid before expense is incurred

Key words:

Insurance

Subscriptions 

Depreciation

Insurance Expenses

IS, E

Accrued Expense

BS, L

Any payables

Key words:

wages

interests

tax

Ex: A company uses electricity in December but receives the bill in January. The expense is recorded in December because that's when the electricity was used.

Bad Debt

Occurs when an outstanding balance (like account receivables) cannot be collected, and thus a write off occurs where money is put into ADA (allowance for doubtful accounts)

first record a bad debt (E) expense before ADA (XA/contra-asset account)

Account Receivable

BS, A

A list of all the people who owe you money because that bought something from you but haven’t yet paid yet. It’s money you’re waiting to get.

Bad Debt Expense

E, SE

ADA (allowance of doubtful accounts)

XA, A

Method for estimating bad debts

Percentage of credit sales:

past proportions of uncollected accounts receivable

Aging method:

Groups receivable accounts based on age and assigns a percentage based on likelihood of getting collected

COGS (costs of goods sold)

IS, E (expense)

Beginning inventory + Purchase - Ending Inv.

FIFO (first in first out)

Newest unit inventory used to determine ending inventory; oldest input price used for COGS

• higher net income

• higher ending inventory

LIFO (last in first out)

Oldest unit of inventory used to determine ending inventory; newest input price used for COGS

• higher COGS

• lower taxes

Weighted Average

Method that uses the weighted average unit cost of the goods available for sale for both cost of goods sold and ending inventory

Specific Identification

When you sell something special, you know exactly which one it is, and you can keep track of how much it cost you.

LCM (lower of cost or market)

Happens when the item is worth less right now than it was when you bought it, and you have to lower the value immediately to reflect that.

Discount

If the bonds sell for less that its face value , its a discount. This happens when the bonds interest rate is lower than whats currently available in the market.

r > i → P < FV

Premium

If the bonds sell for more that its face value , its a premium. This happens when the bonds interest rate is higher than whats currently available in the market.

r < i → P > FV

Bonds

Debt securities issued by corporations and governmental entities to borrow LARGE amounts of money.

• companies may issue bonds bc bank CANT lend them money

• long term liability

Face/Par/Nominal/Principal Value / bond related term

The money that the company reimburses at maturity, the original value stated on the bond at issuance (fixed)

Maturity / bond related term

When the company is supposed to pay back the face value to the bondholders ( must be greater than 1 year because bonds are long-term liabilities ) ; Contract ( means it cannot change )

Nominal Rate (i) / bond related term

The nominal rate is the rate they tell you, but it’s not the final amount you end up with because there can be other things affecting it (like fees, compounding, etc.).

• To calculate interest payments ( when we deal with bonds we can have interest payments or interest expenses ( do NOT use nominal rate for interest expenses )); Contract

Market Rate ( r ) / bond related term

to calculate the price of bond + the interest expense; market (not contract) (depends on market conditions so is not chosen by firm)

Price / bond related term

the money received by the firm; not contract

Frequency of the Interest Payments / bond related term

decided by the firm; contract

Bond premium

L

left over

Bond payable

L

Bond discount

XL

left over

Interest Expense

E, SE

Advantages of raising long-term capital with bonds over issuing common stock

1. Ownership and control of the company are NOT diluted

2. Interest expense is TAX DEDUCTIBLE

3. Organization can borrow funds at a specified interest rate and then invest the funds at a higher rate

Disadvantages of BONDS over stock

1. Risk of bankruptcy – the debt must be paid back regularly, or creditors will force legal action

2. Negative impact on cash flow (contractual requirement to make interest and principal payments)

Debenture bonds

NOT secured with the pledge of a specific asset

Callable bonds

May be retired and repaid (called) at any time at the option of the issuer

Redeemable bonds

May be turned in at any time for repayment at the option of the bondholder

Convertible bonds

May be exchanged for other securities of the issuer (usually shares of common stock) at the option of the bond holder

Bond issuers make 2 payments

principal & interest

The interest payment is calculated using

STATED RATE

Calculate the present value of the two payments

use the MARKET RATE

Signaling

If the customer is buying its own shares, its signaling that the price is too low and so company is undervalued

GAAP

Generally Accepted Accounting Principles; the rules that determine the contents and measurement rules of the financial statements

When costs are rising, which method will likely have higher cost of goods sold?

LIFO

When costs are rising, which inventory method will likely result in higher net income?

FIFO

When costs are rising, which method will likely have higher ending inventory on the balance sheet?

FIFO