acc 355 exam 2

Which of the following would not be included in cash and cash equivalents on the balance sheet?

prepaid inventory

Which of the following statements is true regarding Allowance for Uncollectible (doubtful) Accounts?

It is a contra-asset account, which decreases Net Accounts Receivable

When using the net method to record a sales discount, assuming credit terms of 3/15, n/45, if the customer pays within a window, then

cash will be debited for 97% of the invoice price

Which of the following is true regarding Accounts Receivable (AR)?

AR is typically collected within 30-60 days, so it is often a current asset

company uses a perpetual inventory system. During the month they purchased 500 units of inventory for $10 each. They then sold 200 units of inventory for $16 each. The sale was made on account

the revenue transaction related to the sale of the inventory should be recorded as:

Debit accounts receivable for $3,200 and credit sales revenue for $3,200

company uses a perpetual inventory system. During the month they purchased 500 units of inventory for $10 each. They then sold 200 units of inventory for $16 each. The sale was made on account

the expense transaction related to the sle of the inventory should be recorded as:

Debit cost of goods sold for $2,000 and credit inventory for $2,000

The concept of a company who uses LIFO selling more inventory than they purchased during a given period is known as

lifo liquidation

In a period of rising costs, the inventory method with the lowest cost of goods sold is

fifo

What can you assume if a company with a higher inventory turnover ratio than their competitors?

They are managing their inventory more efficiently than their competitors

if a company lost the majority of their inventory in a fire and are unable to perform a physical inventory count, what inventory valuation method could they use

Gross profit inventory method

When calculating the market value for lower of cost or market (LCM), the value of the ceiling is determined by

The net realizable value (NRV)

When is a write down for inventory needed, when using lower of cost or net realizable value (LCNRV)

When the NRV drops below the cost of the inventory

what is included in cash?

currency, coins, checking, savings, cash equivalents, credit & debit card sales

cash equivalents

short term investment that have a maturity date of 3 months or less, from their date of purchase

where are cash equivalents reported?

balance sheet as a current asset

what are three cash equivalents?

certificates of deposit, money market funds, treasury bills

restricted cash

cash that is held for a specific purpose and cannot be used for general use

restricted cash examples

petty cash, payroll, dividend funds, money set aside to pay off debts

companies list restricted cash separately from cash itself on the balance sheet when

the amount is material

trade receivables

When customers owe a company money for goods and services

what are the types of trade receivables

accounts and notes receivables

what are nontrade receivables

Arise from transactions outside the normal course of business and are reported separately from the balance sheet

nontrade receivable examples

-advances to employees or subsidiaries

-dividends receivable

-interest receivable

-insurance claims

accounts receivable

-oral promise

-paid in 30-60 days

notes receivable

-written promise

-short or long term

-comes from sales, financing, and other transactions

do notes receivable include interest?

YES

allowance for doubtful (uncollectable) accounts

amount of accounts receivable not expected to be collected

allowance for doubtful (uncollectable) accounts is what type of account

contra-asset

what does a contra asset account do? (increase or decrease)

decreases the asset account; receivable account

bad debt expense

cost of the estimated future bad debts that is reported as an expense in the current period

what type of account is BDE

expense

is BDE operating or non-operating?

operating

2 methods for calculating allowance

Percentage of Receivables & Aging of Receivables

Percentage of Receivables characteristics

simple and time efficient

Aging of Receivables charactersistics

precise, accurate, time-consuming

percentage of receivables method def

-estimate uncollectible accounts based on the percentage of accounts receivable expected to not be collected

percentage of receivables method is based on

company history, industry guidelines, and economic conditions

Aging of Receivables method def

Estimate uncollectible accounts based on the various ages of individual accounts receivable, using a higher percentage for "old" account than for "new" accounts

in Aging of Receivables method, the older the account, the ____ likely it is to be collected

less

why is the allowance method used?

-required by GAAP

-for correct amount of accounts receivable to be on their balance sheet

what is the journal entry for an AUA adjustment?

BDE (increase)

      AUA (increase)

what is the journal entry for writing off an uncollectable(doubtful) account?

Accounts Receivable (decrease)

AUA (decrease)

what account is never used in a write off?

BDE

when is an AUA written off?

when it is clear that a customer WILL NOT/ CANNOT pay

in what period is an AUA written off?

after the estimate

A decrease in a contra-assets will increase or decrease assets?

increase

what is the financial impact on the financial statements from an AUA write off?

assets increase and decrease the same amount (no net impact)

zero-interest bearing notes

cash received by the borrower is less than the face value, but the borrower will still pay the full face value

interest in a zero interest bearing note is equal to

face value - value given as the loan

amortization of the discount will be worth _____ at the maturity date

full value

zero interest bearing notes are reported as _____ on the note which shows up on the _______ financial statement

discount, balance sheet

with gross method, at the date of sale, what is the journal entry if a $5000 sale was made on account with credit terms 3/10, n/30?

DR AR 5000

CR Sales Revenue 5000

with gross method, at the date of collection with a discount taken, what is the journal entry if a $5000 sale was made on account with credit terms 3/10, n/30?

DR Cash 4850

DR Sales Discounts 150

      CR AR 5000

with net method, at the date of sale, $5,000 sale was made on account with credit terms, 3/10, n/30, what is the journal entry?

DR AR 4850

CR Sales Revenue 4850

with net method, at the date of collection, with the discount, assume a $5,000 sale was made on account with credit terms, 3/10, n/30 what is the journal entry?

DR cash 4850

CR AR 4850

FOB Shipping Point

-buyer pays freight costs

-ownership passes to the buyer when it is loaded on the truck

FOB Destination

-seller pays freight costs

-ownership passes to buyer upon delivery

consignor

-gives the inventory to a consignee to sell for them

-inventory is still legally theirs

consignee

-takes inventory, sells it, remits the profits (minus a fee) back to the consignor

-DOES NOT add the consigned inventory to their inventory

product cost

-counted as inventory on the balance sheet

examples of product cost

freight, insurance, unpacking costs

period costs

expensed on the income statement

examples of period costs

selling expenses, general and admin, interest for financing

are product or period costs included in inventory?

product costs

FIFO

first units purchased (oldest units) are the first units sold

FIFO characteristics

higher ending inventory & lower cogs

LIFO

last units purchased (newest units) are the first units sold

LIFO characteristics

lower ending inventory, higher cogs

what does FIFO do?

-matches physical flow for most companies

-better financial statements when inventory costs are rising

what does LIFO do?

tax savings when inventory costs are rising

specific identification

-matches each unit of inventory with actual cost of that specific unit of inventory

-used for high value and unique inventory

-uncommon

weighted average

all units sold are a random mix of all units purchased

gross method for recording discounts: initial purchase journal entry

DR Inventory (full)

CR AP (full)

gross method for recording discounts: payment with discount journal entry

DR AP (full)

CR Inventory (disc amt to reduce value)

CR Cash (amt paid)

net method for recording discounts: initial purchase journal entry

DR Inventory (disc amt)

CR AP (disc amt)

net method for recording discounts: payment with discount journal entry

DR AP (disc amt)

CR Cash (disc amt)

dollar-value LIFO

inventory valuation method that groups similar items into pools and measures their changes in dollar value rather than the change in physical units

why is dollar-value LIFO used?

-avoid tracking each price for each inventory type

-reduce risk of LIFO liquidation

LIFO liquidation

-a company sells more inventory than it purchases within a certain period

-older (cheaper) layers are sold and included in COGS which artificially raises income in that period

who uses dollar-value LIFO?

-comp’s with large # of products & expect a significant change in their product mix over time

examples of companies dollar-value LIFO?

grocery stores, pharmacies, comp’s with diverse inventory

net realizable value (NRV)

-selling price of an asset, minus any costs required to sell the asset

-conservative method

examples of costs required to sell with net realizable value

completion, transportation, and other selling expenses

provides a/an ______ value of the asset and its ability to generate revenue

realistic

an adjustment is needed when NRV

drops below cost

an NRV adjustment is done

by writing down the inventory at the end of the period

why is LCNRV used?

-to prevent inventory from being overstated on the balance sheet

-record losses, from the decline in value of inventory, in the period in which the decline happens

lower of cost or nrv can be done on what level?

all of the above

which of the following leads to the most conservative answer?

individual

category and total inventory methods lead to

higher sales prices of some items to offset the lower sales prices of other items

individual approach is most used because

-conservative

-required for tax purposes

what companies use lcm?

companies that use retail inventory method or LIFO

is Lower of Cost or Market required by GAAP?

yes

Lower of Cost or Market (LCM) is used to

-abide by GAAP

-prevent the overstatement of inventory

which of the following is a more appropriate measure of the value of inventory

market value

IFRS does not allow

LIFO and LCM

market value

current replacement cost of the inventory

what is the ceiling of the market value?

NRV of the inventory

what is the floor of the market value?

NRV minus a "normal" profit margin

when talking about a normal profit margin, normal means

depends on the company, industry, products, etc, by using analytics