Accounting: Final Exam

Revenue Recognition Principle

Revenue is recorded when the company transfers goods and services to customers in the amount expected.

FOB Shipping Point

Title changes hands at shipment, and the buyer normally pays for shipping

FOB Destination

Title changes hands on delivery, and the seller normally pays for shipping

Credit Card Sales

Payments via credit cards where the revenue is reduced because the company never collects the cash

Credit Card Discount

The fees credit card companies charge for this service

Sales Discounts

Reductions in the selling price offered to customers as an incentive for early payment.

Sales Returns & Allowances

Deductions from sales revenue due to returned merchandise or allowances granted to customers

Percentage of Credit Sales Method

This method calculates Bad Debt Expense as a percentage of total credit sales for the period, using the historical percentage of credit sales resulting in bad debts.

Aging of Account Receivables Method

This method calculates the uncollectible portion of A/R (allowance) based on the age of existing receivables; the older and more overdue they are, the less likely they are to be collected.

Specific Identification

This inventory valuation method tracks the cost of individual items sold and remaining in inventory, primarily used for businesses with unique products.

First-In, First-Out (FIFO)

An inventory valuation method that assumes the oldest inventory items are sold first, impacting the cost of goods sold and ending inventory valuation.

Last-In, First-Out (LIFO)

An inventory valuation method that assumes the latest units purchased are the first units sold & the first units purchased are left in the ending inventory

Weighted Average Method

An inventory valuation method that uses the weighted average unit cost of the units available for sale for both COGS & ending Inventory

Lower of Cost & Net Relizable Value (LCNRV) Rule

Inventory is valued at the lesser amount of its laid-down cost and the amount for which it can likely be sold.

Long-Term Assets

Tangible & intangible resources owned by a business & used in the operations over several years

Tangible Assets

Physical assets that can be touched and measured, such as machinery, buildings, and inventory.

Intangible Assets

Non-physical assets such as patents, trademarks, and goodwill that provide value to a business over time.

Ordinary Repairs & Maintenance

Expenditures that maintain the operating condition of a fixed asset without enhancing its value or extending its useful life. Recurring in nature & usually in small amounts of money

Improvements

Expenditures that increase productive life, operating efficiency, or capacity and are infrequent and involve large amounts of money.

Straight-Line Method

Allocates the depreciable cost of an asset in equal periodic amounts over its useful life.

Declining-Balance Method

Allocates the net book value of an asset over its useful life based on a multiple of the straight-line rate and assigns more depreciation to the early years & less to the later years.

Units-of-Production Method

Allocates the depreciable cost of an asset over its useful life based on its periodic output/usage to its total estimated output/usage

Asset Impairment

An asset is considered impaired when the sum of the future cash flows it is expected to generate is less than its book value.

Impairment Test

Compare net book value to estimated future cash flows and if net book value > future cash flows, the asset is impaired.

Impairment Loss

Recognize a loss for the difference between the asset’s net book value & fair value.

Disposal of Fixed Assets

Compare the amounts received from disposal & the net book value of the asset. The difference will either be a gain or a loss.

Gain

Increases Net Income

Loss

Decreases Net Income

Goodwill

The favorable company has with its customers. It doesn’t get reported unless sold. It has an indefinite life.

Trademark

A special name, image, or slogan identified with a product or company; protected by law.  It has a definite life.

Copyrights

The exclusive right to publish, use, and sell a literary, musical, or artistic work not exceeding 70 years after the author’s death.  It has a definite life.

Patents

An exclusive right granted by the federal government for 20 years, typically granted to the inventor of a new product or process.  It has a definite life.

Franchises

Granted by the government or a business for a specified period and purpose.  It has a definite life.

Licenses & Operating Rights

 Many types, but often involve getting permission from an organization to make use of something.

Reporting R&D Expenses

Usually listed on the company’s income statement for the year they are incurred.

Amortization Expense

The gradual write-off of an intangible asset or the allocation of the cost of an asset over its useful life. This expense reflects the consumption of the asset's value.

Liabilities

The probable future sacrifices of economic benefits (ie, assets, services) arising from past transactions.

Current Liabilities

Obligations that are due to be settled within one year or within the company’s operating cycle.

Accrued Liabilities

Expenses that have been incurred but have not been paid.

Deferred Liabilities

Obligations that are recognized for accounting purposes but are not due for payment until a future date, often related to expenses that have been recorded but not yet settled.

Contingent Liabilities

A potential liability arises as the result of a past event; not a definitive liability until some future event occurs

Probable Contingent Liability

Future event(s) are likely to occur and recognized/reported on the balance sheet

Reasonably Contingent Liability

Chance is greater than remote; less than probable and are disclosed in 10-K.

Remote Contingent Liability

The chance of the future event(s) occurring is slight and are omitted.

PV of $1 or Lump Sum

The present value of a single future payment, calculated using a specified interest rate, reflecting the current worth of that amount.

PV of Ordinary Annuity

The present value of a series of equal payments made at regular intervals over time, discounted back to the present using a specific interest rate.

PV of $1 & PV of ordinary annuity applications combined

These concepts are used to calculate the present value of future cash flows, whether a single sum or a series of payments, aiding in investment and financial decision-making.

Bonds

Debt securities issued by entities to raise capital, repaying investors with interest over time.

Advantages to Bonds

Stockholders control the company and receive dividends. Bondholders don’t vote or get dividends. Interest on bonds is tax-deductible, which lowers the cost of borrowing. Using bonds can boost returns for shareholders.

Disadvantages to Bonds

The company risk of bankruptcy as interest must be paid regardless of performance. Negative impact on cash flows as bonds need sufficient cash to pay when due or the ability to refinance debt

Face Value (Bond Principle, Par Value, or Maturity Value)

The amount a company must pay to bondholders on the maturity date and used to compute the bond’s periodic cash interest payments

Coupon Rate (Stated Rate, Contract Rate, or Nominal Rate)

The Interest Rate specified on a bond and is used to compute the bond’s periodic cash interest payments

Bonds Issued at a Discount

Coupon Rate < Market Rate

Bonds sold for less than their face value, resulting in higher effective interest rates for the investor.

Bonds Issued at a Premium

Coupon Rate > Market Rate

The situation when a bond is sold for more than its face value, indicating that the interest rate investors require is lower than the bond's coupon rate.

Bonds Issued at Par

Coupon Rate = Market Rate

Bonds sold at their face value, resulting in neither a gain nor a loss for the issuer or the investor.

Effective Interest Amortization Method

A method used in accounting to amortize bond premiums or discounts by applying the effective interest rate to the carrying amount of the bond, leading to periodic interest expense that reflects the current market rate.

Common Stock

 Basic voting stock issued by a corporation

Preferred Stock

Stock that has no voting rights, a fixed dividend rate, and are generally considered less risky.

Treasury Stock

Shares that have been repurchased by the issuing corporation.

Dividends

Payments made by a corporation to its shareholders, typically from profits, represent a share of the company's earnings.

Dividend Yield

The return investors receive on investment is attributed solely to dividends

Pro Rata Basis

Maintain the same proportions of shares

Stock Splits

Divides each outstanding share into multiple new shares, lowering the share price while keeping the overall market capitalization unchanged.

Operating Activities

Cash inflows and outflows directly related to earnings from normal operations

Investing Activities

Cash inflows and outflows related to the acquisition or sale of productive facilities & investments in the securities of other companies

Financing Activities

Cash inflows and outflows related to external sources of financing (owners & creditors) for the enterprise