Accounting Exam 2

accounts affected by the sale of a product (4)

sales rev
cogs
ar
inventory

recording revenue, revenue should be recorded when earnings process is complete - when goods are sold and when there is certainty as to the collectability of the asset to be received

realization principle

adjustments to sales revenue (2)

sales returns and allowances

discounts

when customer is unhappy and returns inventory for refund or credit

sale return

how is sale return recorded

• Record as a debit since its contra revenue and credit accounts receivable 

customer is unhappy with inventory and seller reduces selling price and the good is kept by the buyer

sales allowance

• Offer of a cash discount to a credit customer for the prompt (quick)  payment of balance due 

sales discounts

sale discount format

3/10 n/30

• 3% discount allowed on all payments made in 10 days of purchase. After 10 days remaining is due in full 30 days after purchased 

decrease to revenue (specifically sales revenue) on income statement normal balance is debit

contra revenue

cashed owed to the company, when the company makes a sale

accounts recievable

• Recorded in the same year the sale is made because of the matching concept - expenses recorded in the same year they help to generate revenue, revenue is earned when the sale is made 

• estimate

bad debt expense

what do you do with bad debt expense and allowance for doubtful accounts at the end of the year

• On December 31 debit bad debt expense and credit allowance for doubtful accounts 

• Decrease in assets, contra asset account, normal balance is credit, found on the balance sheet as a decrease to accounts receivable, uncollectable portion of accounts receivable 

allowance for doubtful accounts

nrv formula

• AR-ADA=NRV 

• When a company makes the determination a customer will not pay they ____ the customers account receivable 

write off

how do you record a write off

D ADA and C AR

Do write offs affect BDE or NRV

no

how do write off affect AR and ADA

reduce both parts

• When a customer pays their bill after company writes off AR as being uncollectable is a ___

recovery

how to record a recovery

D cash, C ADA,

methods to estimate BDE (2)

net credit sales method

aging method

• Based on percept of credit sales we estimate we wont collect, based on past history of pattern of company

net credit sales method

net credit sales method formula

• BDE = net credit sales times % expected uncollectible 

• AR at end of year and determine how much is uncollectable, how long AR has been outstanding, the longer the receivable outstanding the less likely we will collect the money

• Aging schedule based on age and assign % value 

aging method

how to calculate aging method

• Sum of AR times % in each category which gives us the final column of amount, that end total is not the BDE it represents required ending credit side balance in allowance for doubtful accounts 

financial statement ratios relating to AR (2)

AR turnover

Average collection period

AR turnover formula

Net sales rev/avg AR

• Measures # of times on average the company collects its AR or turn over it, how quickly they can turn it into cash and replace with new receivables 

• The higher the better because it means its faster 

AR turnover

avg account receivable formula

• Avg AR = (AR at Jan 1/AR at Dec 31)/2

• Number of days on average between making a sale on credit and collecting our cash from the customer 

• Lower is better as it means you are collecting cash faster 

average collection period

average collection period formula

• 365/AR turnover = Avg collection period 

the product we sell to customers

inventory

• Inventory costs get reported on the income statement as an expense when the inventory is sold, the cost is transferred to income statement and reported as ___

cogs

expenses recorded in same year as revenue generation process, COGS must be recorded in the same year as well

matching concept

inventory or goods shipped from the seller to the buyer; at the end of the year if there are goods still being shipped it is who owns the goods and that's who reports it on the balance sheet - depends on shipping terms

goods in transit

shipping terms (2)

Free on board shipping point

free on board destination point

• Ownership passes to buyer as soon as the goods are shipped, once it leaves the sellers warehouse

free on board shipping point

• Ownership remains with the seller until the goods reach the buyer, when the truck arrives at warehouse place of buyer and unloads it  

free on board destination point

inventory formula

• Beginning inventory + net purchases = COG available for sale; COG available for sale - ending inventory = COGS 

net purchases formula

• To get net purchases you take purchases - purchase returns - purchase discounts + freight-in 

• cost of shipping inventory you have purchased to you

  • Added in net purchases calculation

freight in

cost of transporting inventory to your customers buy where you have agreed to pay the shipping cost

• Expense

  • Nothing to do with net purchase calculation

freight out

inventory cost flow methods (3)

FIFO

LIFO

Weight average

oldest inventory items are the first to be sold

ending inventory is newest items purchased

FIFO

FIFO shows the highest _ and _

net income, total assets

most recent inventory sold first

ending inventory consists of oldest inventory items purchased

LIFO

LIFO has the lowest __ and _

net income, taxes

all items have the same cost - regaurdless of when it was purchased

weighted average

weighted average cost per unit formula

• (cost of beginning inventory + cost of purchases) divided by(units in beginning inventory + units purchased) or COG available for sale divided by units available for sale 

how to find ending inventory

 is adding up all the units including ending inventory and subtracting by the total units and then finding either the most recent of that amount of units or ending of that amount of units

sales revenue formula

• Sales revenue is units sold times selling price per unity 

• requires that companies use the same accounting methods period after period so they will be comparable 

consistency principle

financial statement ratios related to inventory (4)

inventory turnover

number of days sales in inventory

gross margin percentage'

operating cycle

inventory turnover forumla

• COGS/avg inventory = inventory turnover

avg inventory formula

• Avg inventory = (Inventory at Jan 1 + inventory at dec 31)/2

• Indication as to how quickly the company is selling its inventory; how quickly sales are happening 

  • higher is better

inventory turnover

• Measures the number of days on average between buying inventory from suppliers and selling it to customers 

  • lower is better

number of days sales in inventory

number of days sales in inventory formula

365/inventory turnover

• Measures the percentage of the sales price of inventory that is gross profit 

  • higher is better

gross margin percentage

gross margin percentage formula

• Gross margin / net sales revenue

• Number of days on average between buying inventory from suppliers and collecting cash from selling inventory to customers

operating cycle

operating cycle formula

• Number of days sale in inventory + average collection period 

• Shows the change in cash in same period as income statement 

  • Not an accrual based financial statements

statement of cash flows

statement of cash flows parts (3)

operating

investing

financing

• Normal business operations 

• Involve income statement 

• Cash from sale or return on loans/dividends would be cash inflows 

  • Cash to suppliers, employees, etc. are cash outflows

operating

methods to calculate net cash from company (2)

operating only

direct

indirect

• Related to long term assets and investments 

• PPE and intangibles

• Lending money to customers are investments 

• Cash from sale of PPE, sale of investments, collection of principle on notes are cash inflows

  • Cash made to purchase PPE and acquire investments are outflows

investing

• Cash either paid to or received from stockholders and creditors

• Involves interest bearing loans and stockholders equity 

• Cash from sale of own stock to stockholders and borrowing money are cash inflows 

  • Cash to stockholders as dividends (paying) and to creditors as the repayment of principle of funds borrowed are cash outflows 

financing

what are non cash expenses (3)

do not affect statement of cash flows

depreciation

gains

losses

for Investments in equity securities when we own less than 20% and 20% or more of the other companies outstanding stock; When it is acquired, it is recorded at cost as an

asset

• Investments in equity securities when we own less than 20% of the other companies outstanding stock; If dividends received record as _ _

dividend revenue

• Investments in equity securities when we own less than 20% of the other companies outstanding stock; Year end make adjusting to show change in value of investment, record unrealized gain or loss -which is a ___

mark-to-market adjustment

• Investments in equity securities when we own less than 20% of the other companies outstanding stock; When sold record cash received on the sale and any gain or loss, compare gain or loss to  selling price to amount being reported on the___

balance sheet

• investments in equity securities when we own more than 20% of the other companies outstanding stock; Dividends recorded as decrease to ___

investment account

• investments in equity securities when we own more than 20% of the other companies outstanding stock; Record share of other companies net income as increase to investment account as ___

• found as Other companies net income x % ownership 

investment revenue

if we own 20% or more in outstanding stock, are there unreailized gains or losses

no