Test 3

Coins and currency

included in cash

Checking accounts

included in cash

Savings accounts

included in cash

Savings accounts

included in cash

Checks and money orders

included in cash

bank drafts (aka “Cashier’s Check”)

included in cash

sinking funds

excluded from cash (restricted cash)

certificates of deposit

excluded from cash (restricted cash)

bank overdrafts

excluded from cash (restricted cash)

postdated checks

excluded from cash (restricted cash)

travel advances

excluded from cash (restricted cash)

cryptocurrencies

excluded from cash (restricted cash)

cash equivalents

short-term, highly liquid investments that are readily convertible into known amounts of cash and near their maturity (90 days) when purchased (e.g., commercial paper, T-bills, money market funds)

sinking funds definition

(L-T inv.) cash set aside for a specific purpose (e.g., bond redemption)

certificates of deposit definition

(S-T inv.) early withdrawal incurs penalty

bank overdrafts definition

(current liab.) negative checking balance owed to the bank

postdated checks definition

treated as receivables until the date on the check

travel advances definition

classified as prepaid expense

cryptocurrencies

treated as either investment, CA, or intangible (still evolving)

net method

record net invoice price at time of sale (i.e., assume discount will be taken)

how should we record it if the customer does not take advantage of the discount and pays an amount greater than originally recorded

the change in the transaction price will be recognized as a credit to Sales Revenue

gross method

record total invoice price at time of sale (i.e., assume discount will not be taken)

how should we record it if the customer does take advantage of the discount and pays an amount lower than originally recorded

the change in the transaction price will be recognized as a debit to Sales Revenue

what’s an alternative to record for a gross method

the company may choose to use a “Sales Discounts Taken” account (a contra-sales revenue account that reduces Net Sales)

when goods are sold that are found to be defective, the customer may return goods to the seller

the exchange is called sales return

the customer may retain the goods and be allowed a reduction in the purchase price

this reduction is called a sales allowance

what is a return liability?

an estimate of the amount of money a company expects to refund customers for future returns

why do companies estimate future sales return?

to correctly report net sales revenue and AR in the same period the sale occurred

bad debts

represents a loss contingency that is probable and reasonably estimated, thus estimated are expensed. this accounting treatment correctly values receivables and matches expenses with revenues. estimates can be based on sales or A/R

income statement approach for bd

estimates uncollectible accounts based on credit sales using a percentage of net credit sales. the existing balance in the allowance account is ignored when computing the expense

balance sheet approach bd

estimates uncollectible accounts based on outstanding A/R. methods include the percentage of outstanding A/R and aging of A/R

allowance for doubtful accounts

an account used to estimate the portion of A/R that will not be collected. A/R are reported on the balance sheet at NRV, which equals A/R minus the estimated uncollectible amount

net realizable value

the amount expected to be collected from receivables

writing off uncollectible accounts

occurs when a specific customer account is determined to be uncollectible. JE: DR. allowance for bad debts and CR. A/R. this removes the receivable from the records and does not affect the net realizable value bcs both accounts decrease by the same amount

recovery of an account previously written off

when payment is received after an account was written off, two entries are required. first, reverse the write-off by debiting A/R and crediting Allowance for Bad Debts. second, record the cash collection by debiting Cash and crediting A/R

direct write-off method

records bad debt expense when a specific account is determined to be uncollectible. JE: DR. Bad Debt Expense and CR. A/R. This method is generally not allowed under GAAP bcs expenses are not matched with revenues in the proper period.

note receivable

is an unconditional written agreement that gives the holder the right to collect a certain sum of money on a specific date

what do note receivable usually involve

interest, requiring the separation of the receivable into its principal and interest component

interest bearing

the amount borrowed (principle) is listed as the face value, and the interest charged is stated as a specific rate applied to the face value

non-interest bearing

the maturity value (the amount to be collected, including implicit interest and principal) is listed as the face value

petty cash

involves a cash fund under the control of an employee that enables a company to pay small amounts that might be impractical or impossible to pay by check

pmts from petty cash

pmts are made from petty cash. prenumbered vouchers are completed as evidence of the expenditures. JE are not made at the time of the pmts

recording petty cash expense

when the cash becomes low or at the end of the accounting period, vouchers are used to record the expenses

cash short and over account

a miscellaneous expense or revenue account used for control purposes to record any shortage (debit balance) or overage (credit balance) when reconciling petty cash

bank reconciliation

schedule that a company prepares to analyze the difference between the ending cash balance in its accounting records and the ending cash balance reported by its bank in a bank statement

differences in bank reconciliation

outstanding checks, deposits in transit, charges made directly by the bank, deposits made directly by the bank, and errors

balance per bank

+amounts added to books not yet added by bank -amounts deducted from books not yet deducted by bank= adjusted balance

balance per books

+amounts added by bank not yet added to books -amounts deducted by bank not yet deducted from books= adjusted balance

periodic inventory systems

the quantity of inventory on hand is determined only periodically through a physical count. COGS is a residual amount that is dependent upon the physical count of the ending inventory

perpetual inventory systems

a continuous record of inventory and COGS is maintained in the inventory account. That is, all purchases and sales of goods are recorded as they occur.

net purchases calculation

Purchases + Freight- in - Purchases Returns and Allowances - Purchases Discounts Taken = Net Purchases

general rule for who the inventory belongs to

inventory is buyer’s when received

FOB shipping point

buyer’s at time of delivery to common carrier

Consignment goods

seller’s (i.e., consignor’s), not buyers (i.e., consignee’s)

Product financing arrangements

seller’s, not buyer’s (where a ‘buyer’ is a financing company)

Sales returns

buyer’s, except for estimated return asset

Bill-and-hold sale

buyer’s, only if goods are properly segregated from seller’s inventory

Purchase obligations

seller’s, not buyer’s

FOB shipping point

included in inventory of buyer

FOB destination

included in inventory of seller

gross price method

records the amount of the discount in the accounting system in the Purchases Discounts account (which reduces the inventory account on the B/S) only if the discount is taken

net price method

records the amount of the discount in the accounting system in the Purchases Discounts Lost account (which is classified as an Other Expense on the I/S) only if the discount is not taken

inventory cost flow assumptions

a major mngt decsion in accounting for inventories is selecting a method for assigning inventory costs to the income statement account COGS

specific identification method

a cost-flow assumption where the cost is traced to the specific inventory items

FIFO

earliest cost are assigned to COGS on the income statement, while the latest costs remain in ending inventory on the balance sheet

Average cost method

a cost-flow assumption that assigns inventory cost based on the average cost of units available

LIFO

latest costs are assigned to COGS on the income statement, while the earliest costs remain in ending inventory on the balance sheet

units available

units remaining from the previous period plus purchases or production

units sold

units taken from the units available that are reported on the income statement

units remaining

units from the units available that remain unsold and are reported on the balance sheet

cost of goods available

cost of beginning inventory plus cost of purchases or production

COGS

the cost assigned to units that are sold and reported on the income statement

cost of ending inventory

the cost assigned to units that remain unsold and reported on the balance sheet

cost-flow assumptions and physical flow

it is not necessary that these cost-flow assumptions replicate the actual physical flow of inventory sold

actual physical flow of inventory

often follows FIFO in manufacturing firms

inventory systems for cost flow methods

these methods can be applied using either a periodic inventory system or a perpetual inventory system

FIFO under periodic vs. perpetual systems

ending inventory and COGS under perpetual and periodic FIFO are identical

dollar-value LIFO

follows the LIFO cost flow assumptions but overcomes many of the problems associated with simple LIFO

LIFO conformity rule

required book-tax conformity

LIFO liquidation

profits resulting from this must be disclosed

LIFO reserve

must be disclosed

change to LIFO

treated as a change in accounting estimate, meaning no retrospective adjustment

lower cost or market

inventory is valued by comparing historical cost with market value and reporting the lower amount

cost in inventory valuation

historical cost, meaning what was originally paid for the inventory, computed using methods such as specific identification, LIFO, FIFO, or weighted average

market value in inventory valuation

depends on the inventory method used

net realizable value

estimated selling price in the ordinary course of business minus reasonably predictable costs of completion and disposal

lower of cost or net realizable value

used for FIFO, average cost, and specific identification methods where inventory is valued at the lower of historical cost or net realizable value

market value for LIFO or retail inventory method

current replacement cost subject to ceiling and floor constraints

application of LCM rule- step 1

choose an implementation approach to measure inventory value by applying the valuation rules to each individual inventory item, each major inventory category, or total inventory

application of LCM rule- step 2

determine the appropriate inventory valuation rule. If using LIFO or the retail method, calculate current replacement cost, ceiling, and floor and select the middle value of the three; otherwise select NRV.

application of LCM rule- step 3

compare historical cost to either NRV or the selected mv and assign the lower value to inventory

application of LCM- step 4

report the lower value on the balance sheet. If a loss occurs, report it on the income statement either as a separate line item for loss from an inventory write-down or include it in COGS

LCM constraints

for LIFO and retail methods, an upper (ceiling) and lower (floor) constraint on market value are imposed on current replacement cost

NRV in LCM

estimated selling price in the ordinary course of business minus reasonably predictable costs of completion and dsiposal

purpose of the ceiling constraint

prevents overstatement of obsolete or damaged inventory and understatement of losses

purpose of the floor constraint

prevents understatement of inventory and overstatement of losses

ceiling calculation

estimated selling price minus estimated costs to complete and sell

floor calculation

NRV minus normal profit margin

ways to apply the LCM rule

the rule can be applied to individual inventory items, the total of major inventory categories, or total inventory

most common LCM application

applying the rule to individual inventory items