Accounting Exam 3

7,8,9,10

Perpetual Inventory

Continuous, real time inventory updating, calculating COGS after each sale, more accurate and timely

Periodic Inventory

At specific intervals (ex. end of period)

COGS adjustment at end of period (inventory= beg+purchases-end)

Goods Available For Sale GAFS (Formula)

= Beg Inventory + Purchases

Goods Available at Retail, Conventional (Formula)

= GAFS + Addl. Markups - Markup Cancellations

Total Goods Available at Retail (Formula)

= GAFS + Addl. Markups - Markup Cancellation - Markdowns + Markdown Cancellations

Ending Inventory at Retail

= TGA at Retail - Sales

Ending Inventory at Cost (Formula)

End Inv at Retail * Cost-to-Retail Ratio

COGS Formula

= Beg Inv + Purchases - End Inv

LIFO Reserve

The difference between FIFO & LIFO ending inventory

provides a fuller, more transparent picture of a company’s inventory valuation, profitability, and financial position

LIFO Liquidation

A company using LIFO sells more units than it purchased/produced, resulting in them dipping into older/cheaper inventory layers

Results in higher reported income (lower COGS), higher taxes

Time Value of Money

Reflects that $1 today is worth more than a dollar in the future due to its earning potential through interest

Power of compounding interest

WHY money not invested will lose value over time:

1. Incurs a loss of any additional money that could have been earned from investing

2. Will have less buying power due to inflation, which reduces its value

Revenue Recognition

When you transfer control of goods & services to the customer, in an amount that reflects what you expect to be paid

Rev Rec Steps

1. Identify contract

2. Identify performance obligation(s)

3. Determine transaction price

4. Allocate that price to the performance obligation

5. Recognize rev when/as each performance obligation is satisfied

Contract with customers (Rev Rec Steps)

Step 1: both parties approve and are commitment

• each parties rights are clear, payment terms are clear

Separate Performance Obligations (Rev Rec Steps)

Step 2: Promises in the contract, distinct goods & services owed to the customer

Determining if performance obligations are separate:

• Capable of being distinct: customer can benefit from it on its own/ or with readily available resources

• Distinct in the context of the contract: OR is it so tightly pack with another item(s)?

EX: of 2 Separate Performance Obligations

Apple selling both iPhone & Service Plan

2=Customer can use the phone without any one specific service plan

EX: of 1 Performance Obligations

Construction company designing & building house

design and construction are highly integrate into one big project

Transaction Price (Rev Rec Steps)

Step 3: the total amount of consideration you expect to receive from customer considering:

• Fixed consideration (listed price)

• Variable consideration (discounts, bonuses, rebates, returns)

Expected Value (estimating transaction price)

Probability weighted using SSP- stand alone selling price

(item SSP / Total SSP) * Contract Price

Allocating transaction prices (Rev Rec Steps)

Step 4: determining SSP, stand-alone selling prices of each performance obligation, what you’d charge separately for each

Recognize revenue when/as obligation are satisfied (Rev Rec Steps)

Step 5: Ask whether the performance obligation transfer control overtime or at a point in time

Overtime (revenue recognition)

Customer receiving benefits as you perform (ex. cleaning service)

At a point in time (revenue recognition)

Customer receives benefit as your work creates/enhances an asset the customer controls (ex. building on customers land)

When control passes: sales of inventory in store (when customers take the good and can use it)

US GAAP “Probable” threshold

interpreted as 70% or higher likelihood

Start with highest likelihood then go down to get to at least 70%

Long term contract

Spans more than 1 accounting period (construction, engineering, software implementation)

Percentage of Completion Method (POC) definition- long term

% of cost completed - recognize revenue & gross profit each period based on progress toward completion

POC Formula

= Actual cost incurred to date / Total estimated cost

Total Rev Earned to Date (formula, POC)

Percentage complete * Total contract price

Zero Profit Approach (long term, definition)

Zero profit until the very end - conservative approach

“until i’m confident, i’ll only recognize enough revenue to offset my costs, no profit”

1ST Long term Contract Journal Entry (POC)

Cost of Project

Debit: Construction in Progress (actual cost incurred for period)

Credit: Cash, Inventory, Accounts Payable

2ND Long term Contract Journal Entry (POC)

Billing Clients

Debit: Accounts Receivable

Credit: Billings

3RD Long term Contract Journal Entry (POC)

Collection of Payment

Debit: Cash

Credit: Accounts Receivable

4TH Long term Contract Journal Entry (POC)

Progress of Project, Remaining Rev

Debit: Construction Cost (actual cost incurred for period)

Debit: Construction in Progress

Credit: Construction Revenue (% earned)

(Current Liability) Billings in Excess of Cost & Profit

Billings account > Construction In Progress account

Difference between the two accounts

(Current Asset) Cost to Profit in excess of Billings

Construction In Progress account > Billings account

Difference between the two accounts

Construction In Progress Account (Long Term Projects)

Noncurrent Asset account used to accumulate all the costs of constructing a long-term asset, normal debit balance, debit CIP for all construction-related costs (materials, labor, overhead etc.)

2/10 Sales Discount

2% discount if paid within 10 days

Debit: Cash (Item cost-discount)

Credit: Sales Revenue

Write-Off BDebt Journal Entry

Debit: Allowance for Bad Debt / Allowance for expected credit losses

Credit: Accounts Receivable

Fixing JE that did not originally account for discount

Debit: Cash

Debit: Sales Discount Taken

Credit: Accounts Receivable

Calculating Expected Value of Sales Discount

(% of collecting $_____) + (% of collecting $_____)

(75% of $441,000) + (25% of 450,000)

Bad Debt Expense JE

Debit: BDE

Credit: Allowance Bad Debt

Financing w/ Accounts Receivable

Firms do this to get cash faster, to be able to use it to reduce future risk, cash is king

Assigning A/R as Collateral (1st JE)

Debit: Assigned A/R

Credit: A/R

Factoring A/R

Involved selling receivables to a 3P at a discount, can sell to banks too

Factoring A/R Journal Entry

Debit: Cash

Debit: Receivable from factor (% held back as security)

Debit: Loss on sale of receivables (% fee for factoring + recourse)

Credit: Accounts Receivable

Credit: Recourse Obligation (% if A/R isn’t paid, liability)

Dollar-Value LIFO (DVLIFO)

Pools inventory items and uses the dollar as the common unit of measure for the inventory

Using a common point in time (CPI), thinking about the dollars not the units - firms account for dollars not units

Computing DVLIFO

FIFO to LIFO - Selecting a base year, then pricing out increase/decrease of layers based on current & base-year prices

LIFO Reserve/Adj. JE

FIFO - LIFO

Debit: COGS

Credit: LIFO Reserve

Lower-of-Cost-or-Market (LCM) Rule

You must report inventory at whichever is lower: its original cost or its current market (replacement) value

Help prevent against overstating assets (ex. if market value falls below cost)

Net Realizable Value (NRV)

Items selling price less the cost of disposal

(ex. packing, shipping, commission ~ Cost of completion and sale)