Inventory Costing, Accounts Receivable, and Long-Lived Assets

This set of flashcards covers essential accounting concepts from Chapters 6 through 10, including inventory costing methods (FIFO, Average Cost), management of Accounts Receivable and bad debts, depreciation of long-lived assets, liability accounting, and financial statement analysis techniques.

According to the transcript, what are the three main inventory costing methods used by businesses?

1. Specific identification, 2. Average cost, and 3. First-in, first-out (FIFO).

Under the FIFO method, which inventory costs are assigned to the Cost of Goods Sold when a sale occurs?

FIFO assumes that the oldest inventory items (the first ones in) are sold first, so the costs of the oldest items are moved to Cost of Goods Sold.

How is the 'Average Cost' per unit calculated in the average cost method?

$$\text{Average Cost per Unit} = \frac{\text{Total Cost of Units Available for Sale}}{\text{Total Number of Units Available for Sale}}$$

What is 'shrinkage' in the context of inventory management?

The loss of inventory due to theft by employees or customers, or errors in recording shipments and sales.

When shipping terms are 'FOB Shipping Point', who owns the goods while they are in transit?

The buyer owns the goods as soon as they are shipped by the supplier.

What is the 'Net Realizable Value' (NRV) of Accounts Receivable?

The total amount of Accounts Receivable minus the Allowance for Doubtful Accounts ($\text{NRV} = \text{A/R} - \text{AFDA}$).

Define 'Allowance for Doubtful Accounts' (AFDA).

A contra-asset account that represents the estimated amount of accounts receivable that a business expects it will never collect in cash.

What are the two common methods for estimating the Allowance for Doubtful Accounts?

The overall percentage (or rate) method and the aging of accounts receivable method.

What is the difference between 'tangible' and 'intangible' assets?

Tangible assets are physical (e.g., equipment, buildings), while intangible assets are non-physical and represent legal rights (e.g., patents, trademarks).

How is 'Straight-Line Depreciation' calculated annually?

$$\text{Annual Depreciation} = \frac{\text{Cost} - \text{Residual Value}}{\text{Estimated Useful Life}}$$

What formula is used to calculate 'Book Value' (also called Carrying Value)?

$$\text{Book Value} = \text{Historic Cost} - \text{Accumulated Depreciation}$$

Which long-lived tangible asset is never depreciated?

Land, because it does not get used up and lasts forever.

What is 'Deferred Revenue' and why is it classified as a liability?

It is money received from a customer in advance of providing a good or service; it is a liability because the business has an obligation to perform the work in the future.

How is interest on a loan calculated for a specific period?

$$\text{Interest} = \text{Principal} \times \text{Annual Interest Rate} \times \frac{\text{Months Outstanding}}{12}$$

In Horizontal Analysis, what is the formula for calculating the percentage change between Year 0 and Year 1?

$$\text{Percentage Change} = \frac{\text{Amount in Year 1} - \text{Amount in Year 0}}{\text{Amount in Year 0}} \times 100$$

What is the primary base used for Vertical Analysis on an Income Statement?

Net Sales (every item is expressed as a percentage of Net Sales).

What does the 'Current Ratio' measure?

Liquidity, specifically the ability of a company to pay its current liabilities using its current assets ($\frac{\text{Current Assets}}{\text{Current Liabilities}}$).

What are the three main sections of the Statement of Cash Flows?

Operating Activities, Investing Activities, and Financing Activities.