Financial Accounting and Reporting Exam 2 Official Set

FOB shipping point

Ownership transfers to the buyer when the seller ships the merchandise

FOB destination

Ownership transfers to the buyer when the merchandise arrives at the customer's destination

Cash collected from customers

Beginning accounts receivable plus credit sales minus returns, allowances, discounts, write-offs, and ending accounts receivable. Add cash sales separately when calculating total cash received

Accounts receivable

Amounts customers owe the company for purchases made on credit

Accounts receivable ending balance

Beginning accounts receivable plus credit sales minus cash collections and other reductions to receivables

Bad debt expense

Estimated expense from customer accounts that will not be collected

Allowance for doubtful accounts

Contra-asset account used to estimate uncollectible accounts receivable

Aging of receivables method

Estimates the required ending allowance by applying estimated uncollectible percentages to receivables in different age categories

Bad debt expense using aging method

Required ending allowance balance minus the existing credit balance in the allowance account. Add an existing debit balance instead of subtracting it

Percentage of credit sales method

Estimates bad debt expense by multiplying credit sales by the estimated uncollectible percentage

Bad debt expense using percentage of credit sales

Credit sales multiplied by the estimated uncollectible percentage

Writing off an account

Debit Allowance for Doubtful Accounts and credit Accounts Receivable

Effect of writing off an account under allowance method

Reduces Accounts Receivable and the Allowance for Doubtful Accounts by the same amount. It does not change net accounts receivable or record new bad debt expense

Bank reconciliation

A process that explains differences between the bank statement balance and the company's book cash balance

Deposit in transit

A deposit recorded by the company but not yet recorded by the bank. Add it to the bank statement balance

Outstanding checks

Checks recorded by the company but not yet cleared by the bank. Subtract them from the bank statement balance

Bank service charge

A bank fee not yet recorded in the company's books. Subtract it from the book balance

NSF check

A customer's check returned for insufficient funds. Subtract it from the book cash balance

Adjusted bank balance

Bank statement balance plus deposits in transit minus outstanding checks and other bank-side adjustments

Adjusted book balance

Book cash balance plus additions such as interest earned minus bank fees, NSF checks, and other book-side adjustments

FIFO

First-in, first-out. The oldest inventory costs are assigned to cost of goods sold first

LIFO

Last-in, first-out. The newest inventory costs are assigned to cost of goods sold first

FIFO ending inventory

The ending inventory consists of the newest purchases because the oldest costs are assigned to goods sold first

LIFO ending inventory

The ending inventory consists of the oldest purchase costs because the newest costs are assigned to goods sold first

Cost of goods available for sale

Beginning inventory plus net purchases

Ending inventory under FIFO or LIFO

Calculate the units remaining and assign the appropriate purchase costs based on the inventory costing method

Inventory turnover ratio

Cost of goods sold divided by average inventory

Average inventory

Beginning inventory plus ending inventory divided by 2

Number of days in inventory

365 divided by inventory turnover ratio

Overstated ending inventory effect on current year

Cost of goods sold is understated and net income is overstated

Overstated ending inventory effect on following year

Beginning inventory is overstated, causing cost of goods sold to be overstated and net income to be understated, assuming the next ending inventory is correct

Depreciation

Allocating the cost of a long-term tangible asset over its useful life

Depreciable cost

Asset cost minus estimated residual value

Residual value

Estimated value of an asset at the end of its useful life

Straight-line depreciation formula

Asset cost minus residual value divided by useful life

Declining-balance depreciation

An accelerated depreciation method that applies a depreciation rate to the asset's beginning book value each period

Double-declining-balance depreciation formula

2 divided by useful life multiplied by beginning book value. Do not depreciate below residual value

Units-of-production depreciation formula

Asset cost minus residual value divided by estimated total units of production, multiplied by actual units produced during the period

Book value of an asset

Asset cost minus accumulated depreciation

Gain on sale of an asset

Occurs when cash proceeds from the sale are greater than the asset's book value

Loss on sale of an asset

Occurs when cash proceeds from the sale are less than the asset's book value

Gain or loss on sale formula

Cash proceeds minus book value. A positive result is a gain and a negative result is a loss