ACC 341 TEST 3

Items included in definition of cash

coin, money orders, change funds, certified checks, personal checks, bank drafts

items included in definition of cash equivalents

short term highly liquid investments that readily convert to cash, treasury bills, certificates of deposit, commercial paper, money market funds

not included in definition of cash or cash equivalents

postdated checks and IOUs

presenting an overdraft in financial statements

reported as current liability (AP)

having another account with the same bank

offset against other cash accounts only when with same bank

preferable presentation of receivables from officers, affiliated companies, tax refunds, etc

assets but separately from other receivables

anticipated sales returns when returned product is expected to be resold for profit

1. refund liability account amount that liability for estimated future returns

2. estimated inventory returns account will generally be added to returned inventory account at end of reporting period

criteria that must be met to record transfer of receivables as sale or receivables

1. transferred assets isolated from transferer

2. transferee has right to pledge or sell assets

3. transferor doesn’t maintain control through repurchase agreement

calculation of the AR turnover calculation

1. measures number of times on average that company collects receivables during period

2. net sales/average AR = AR turnover ratio

Day sales outstanding formula

days sales outstanding = (AR/net credit sales) x number of days

replenishment entry for petty cash

1. debit expenses as appropriate, credit cash for entire replenishment, no entry to petty cash

2. debit/credit over or short amounts to make accounts balance

elements included on balance sheet as inventory

1. materials and supplies

2. WIP

3. finished goods

examples of product costs

raw materials, labor, manufacturing overhead

examples of period costs

selling (advertising, commissions), general and administrative costs, storage for finished goods, interest for routine inventory purchases

difference between IFRS and US GAAP related to inventory

IFRS doesn’t permit LIFO

cost flow assumptions of LIFO in period of rising prices

produces highest COGS, lowest net income, lowest income tax, lowest ending inventory, lowest retained earnings. FIFO is opposite. average cost is in between them.

Income statement approach

LIFO more closely approximates current COGS

balance sheet approach

FIFO more closely approximates current cost of ending inventory

LIFO reserve

difference between inventory method used for internal reporting and LIFO

characteristics of specific goods pooled LIFO approach

1. reduces record keeping and clerical costs

2. more difficult to erode layers

3. using quantities as measurement basis can lead to untimely LIFO liquidations

4. reduction of one quantity in pool may be offset by increase in another

Included in inventory valuation of lower of cost of market (GAAP)

cost and market

Inventory valuation of market

not more than NRV (ceiling), replacement cost is middle, not less than NRV - normal profit margin (floor)

Designated market value under GAAP in LCM method

limited to amount that isn’t more than net realizable value or less than net realizable value less normal profit margin

Requirements to record total inventory at NRV

1. controlled market with quoted price applicable to all quantities

2. no significant costs of disposal

3. product is available for immediate delivery

journal entry to record sale made on credit using gross method

D: AR

C: sales revenue

journal entry to receive payment with prompt payment discount (gross method)

D: cash

D: sales discount

C: AR

journal entry for estimated uncollectibles of AR using % of AR method

D: credit loss expense

C: allowance for credit losses

journal entry to write off uncollectible account

D: allowance for credit losses

C: AR (company)

adjusting journal entry for anticipated sales returns when returned product is expected to be resold for profit

D: sales returns and allowances

C: refund liability (number x price)

D; estimated inventory returns

C: COGS

Days Sales Outstanding (AR turnover)

net sales/average net AR = AR turnover

journal entry for loss on long-term noncancellable purchase commitments exceeding current market value

D: loss on purchase commitments

C: estimated liability on purchase

C: commitments

journal entry for long-term noncancellable purchase of inventory commitments exceeding current market value

D; purchases (inventory)

D: estimated liability on purchase

D; Commitments

C; cash

record loss of purchase commitment

in the period in which the price declined

effects on various items on cost to retail ratio of conventional retail method

freight in rises, net markup declines, no effect on net markdowns, no effect on sales returns, purchase returns could rise or fall, abnormal shortages could rise or fall

common disclosures required for inventory

1. basis on which company states its inventory amounts (LCNRV)

2. costing methods (specific identification, FIFO, LIFO, average cost)

3. composition of inventory

4. significant or unusual financing arrangements

advantages of LIFO

1. matching of recent costs against current revenues

2. tax deferral benefits/improved cash flow

3. future earnings hedge: company’s future reported earnings won’t be affected substantially by future price declines

disadvantages of LIFO

1. reduced earnings

2. inventory understated

3. physical flow

4. involuntary liquidation or poor buying habits