Accounting exam 3

advantage of extending credit

increase the sellers revenue

disadvantage of extending revenue

increased wage costs, bad debt costs, delayed receipt of cash

allowance method

record estimated bad debts in the period credit sales occur using an end of period adjustment, then remove the write-off specific customer balances when they are known to be uncollectable

estimating bad debt methods

percentage of credit sale, aging of accounts receivable

percentage of credit sales method

estimates bad debts based on historical percentage of credit sales that lead to bad debt losses

aging of accounts receivable

focuses on estimating the ending balance in the allowance for doubtful accounts, balance sheet

revising estimates

bad debt estimates always differ somewhat from the actual bad debt amounts, which are later written off (to ensure they don’t get misstated overtime, companies lower estimates in the current period to correct overestimates of prior periods)

account recoveries

collection of a previously written off account is called a recovery and accounted for by putting the receivable back on the books by recording the opposite of the write off then recording the collection of the account

receivables turnover analysis

how many times on average this process is selling and collecting on account is repeated during the period (higher ratio=faster collection) net sales revenue/average net receivables

days to collect

number of days it takes to collect receivables, 365/receivables turnover

credit terms

when companies sell on account they specify the length of the credit period, by comparing the number of days to collect to the length of the credit period

factoring receivables

sell outstanding account receivables to another company

credit card sales

allow customers to pay for goods using paypal or national credit cards, this speeds up cash collection and reduces losses from customers writing bad checks

notes receivable

reported if it uses a promissory note to document its right to collect money from another party

interest revenue

notes receivable charge interest from the day they are created to their maturity date

calculating interest

interest= principal(amount of note receivable) X interest rate (annual interest rate) X time

direct write off method

does not estimate bad debts, it reports sales when they occur and bad debt expense when it is discovered

tangible assets

physical substance, subject to depreciation, buildings, machinery, furniture

intangible assets

no physical substance, value represented by rights that produce benefits, limited life, patents, copyrights, subject to amoriztion

acquisition of tangible assets

purchase price, all reasonable and necessary expenditures needed to prepare the asset for its intended use, basket purchase, component allocation

basket purchase

the total cost of a combined purchase of land and buildings is allocated in proportion to their relative market values

component allocation

IFRS takes the idea of basket purchase one step further, the cost of individuals assets components is allocated among each significant component and then depreciated separately over that components useful life

ordinary repairs and maintenance

relatively small recurring expenditures that maintain normal operating condition, do not increase productivity, do not extend life beyond original estimate, expense

extraordinary repairs, replacements and additions

relatively large infrequent expenditures, major overhauls or replacements, may extend useful life, may increase productivity, capitalize

depreciation

a cost allocation process that matches cost of long-lived productive assets with periods benefited by use

straight line

Units of Production

declining balance

asset impairment losses

impairment occurs when events or changed circumstances interfere with a companys availability to recover the value of the asset through operations

asset impairment accounted

eliminate the assets accumulated depreciation against the asset account, write down the asset to its fair value

disposal of tangible assets

update depreciation to date of disposal, record the disposal

intangible asset accounting

capitalize at current cash equivalent cost including purchase price, legal fees and filing fees, expense as research and development expenses if it is being self constructed or internally developed, amortize intangibles with limited lives over the shorter of their economic lives using straight line method

trademarks

a special name, image or slogan identified with a product or company, internally developed have no recorded asset cost, purchased are recorded at cost

copyright

exclusive right granted by the federal government to protect artistic or intellectual properties, amortize cost over the period benefitted

patent

exclusive right granted by the federal government to use, sell or manufacture an invention, amortize cost over shorter of useful life

technology assets

software and web development work, usually used up over a relatively short time

licensing rights

granted limited permission to use a product or service according to specific terms and conditions

franchise

provides legally protected rights to sell products or provide services purchased by a franchise from the franchiser

goodwill

purchase price > fair market value of net assets acquired

occurs when one company buys another company, is not amortized, only purchased goodwill is an intangible asset

fixed asset turnover

measures the sales dollars generated by each dollar invested in fixed assets

net revenue/ average net fixed assets

impact of depreciation differences

accelerated depreciation in the early years of an assets useful life results in higher depreciation expense, lower net income and higher book value than what would result using straight line,

selling an asset with low book value=gain

selling asset with high book value= loss

liabilities created

buys goods and services on credit, obtains short-term loans, issues long term debt

current liabilities

short-term obligations that will be paid with current assets within the companys current operating cycle or within one year of the balance sheet date (whichever is longer)

accounts payable

increases when a company receives goods or services on credit, decreases when a company pays on its account

accrued liabilities

liabilities for expenses that have been incurred but not yet paid

accrued payroll

payroll deductions are either required by law or volunteerily requested by employees and create a current liability for the company

notes payable

establish the note, accuring interest incurred but not paid, recording interest paid, recording principal paid

sales tax payable

payments collected from customers at time of sale create a liability that is due to the state government

deferred revenue

cash received in advance of providing goods or services creates a liability of services due to the customer

long term debt

borrowers must report in current liabilities the portion of long-term debt that is due to be paid within one year

installment notes

requires the borrower to pay interest and principal to the lender over the notes life to maturity, in effect the borrower makes an interest and principal each period resulting in no liability for interest or principal after the final periodic repayment

bonds

are financial instruments that outline the future payments a company promises to make in exchange for receiving a sum of money now

bond pricing

the bond price involves present value computations and is the amount that investors are willing to pay on the issue date for the bonds

premium

when cash proceeds is greater than face value

discount

when face value is greater than cash proceeds

effective interest amorization

method of accounting for bonds, it correctly calculates annual interest expense by multiplying the true cost of borrowing times the amount of money actually owed to investors

bonds early retirement

pays cash, eliminates the bond liability, reports either a gain or a loss

contingent liabilities

potential liabilities that arise as a result of past transactions or events but their ultimate resolution depends on a future event

debt to assets ratio

used to assess a companys ability to generate resources to pay future amount owed

total liabilities/total assets

times interest earned ratio

(net income + interest expense + income tax expense) / interest expense