ACCT-5110 Exam 3

Accounts Receivable

Nonwritten promise to pay in the future

Note Receivable

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

nontrade receivables

transaction not directly related to sale of product/service to customer

What are trade receivables valued and reported at?

Net realizable value (NRV)

What is the net method in Cash (sales) Discounts?

record net income price at time of sale (assuming that the discount will be taken). If discount is not taken & have to pay greater amount than originally recorded, recognized as a Cr. to sales rev.

will need a AJE

What is the gross method in Cash (sales) Discounts?

record total invoice price at time of sale (assume that the discount will not be taken). If discount is taken & pays lower amount than originally, change in transaction price will be recognized as Dr. to sales rev. (Could be Sales discount taken, contra-sales rev)

What method for sales discount does GAAP prefer?

Net method, but companies could use either

Sales return

defected goods that the customers return the goods to the seller (periodic and perpetual (COGS as happens))

Sales allowance

customer keeps the defected good & allowed a reduction in purchase price (periodic and perpetual (COGS as happens))

Bad debt

loss contingency that is probable & reasonably estimated and are expensed

What can bad debts be estimated on

Based on sales or A/R

Bad debts based on relationship to sales

I/S approach

% of net credit sales

Bad debts based on relationship to A/R

B/S approach

% of outstanding A/R

Aging of A/R

How would a journal entry for write-off of a uncollectable account?

Debt - allowance for bad debt

Credit - A/R

(has no effect on NRV of A/R reported on B/S)

How do you reverse a write-off?

1) Dr - A/R and Cr - allowance for bad debt

2) Dr - Cash and Cr - A/R

What write off method is generally not allow by GAAP

Direct Write off method

What are the 2 S-T N/R

Interest bearing and non-interest bearing

Interest bearing N/R

amount borrowed (principal) listed at face value, & interest charged is stated as a specific rate applied to face value

Non-interest bearing N/R

(notes without stated interest value) maturity value (amount to be collected, included implicit interest & principal) is listed as face value

What type of account is Discount on N/R?

Contra-N/R

Petty Cash

cash fund under a employee that enables a company to pay small amount that might be impractical or impossible to by check

How do you set up a petty cash fund?

Dr. - petty cash

Cr. - cash

When are journal entries for petty cash made?

Usually around the end of the month

What is Cash over & short

misc. exp/rev account used for control purposes. Is used to record any shortage (debt balance) or overage (credit balance)

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

What will be on the bank reconciliation form?

1) outstanding checks (- from bank)

2) deposit in transit (+ to bank)

3) charges made directly by the bank (- from business)

4) deposits made directly by the bank (+ to business)

5) errors (could be bank or business)

How can inventory be classified?

Finished goods, work-in-process, and raw material inventory

Periodic Inventory

the quantity of inventory on hand is determined only periodically through a physical count.

How do you find COGS

beginning inventory + net purchases - ending inventory

Perpetual Inventory

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

How do you determine net purchases?

Purchases + freight in - purchase returns & allowances - Purchase Discount taken

What is the basic criteria to determine ownership?

Economic control rather than physical possession or legal ownership

FOB Shipping point

Becomes the buyer's property at time of delivery to common carrier (shipper) (included in inventory of buyer)

FOB destination

Transfer ownership only when the goods are received

(included in inventory of seller)

Consignment goods

Seller's (i.e., consignor's), not buyer's (i.e., consignee's) (Somebody is selling your stuff on your behalf)

Product financing arrangment

sellers, not buyer (where a "buyer" is a financing company)

Sales Return

Buyers, until the ship back, except for estimated return asset

Bill-and-hold sales

buyers, only if goods are properly segregated from sellers inventory

Purchase obligation

sellers, not buyers

The cost of manufactured inventory should include?

direct (raw materials) and indirect (manufacturing overhead) costs incurred in the production activity,

What are the purchase discount methods?

Gross Price Method and Net Price Method

Gross Price Method

record purchase price at gross price & record amount of the discount in the accounting system in the Purchase Discount Account only if the discount is taken

Net Price Method

Record purchase price at it net price & record amount of the discount in the accounting system in the purchase discount loss account only if the discount is not taken

What are the common cash flow assumptions

1) specific identification method (know exact cost of each item)

2) FIFO

3) LIFO

4) Average cost method

What is not necessary for cash flow assumptions?

Replicate actual physical flow of inventory sold. Actual physical flow follows FIFO in manufacturing firms

What happens to COGS and EI under FIFO

For both perpetual and periodic they are identical

In rising prices, LIFO causes what?

Highest COGS, meaning lowest balance on EI on B/S

Useful to pay lower amount of taxes

In rising prices, FIFO causes what?

Lowest COGS, meaning highest balance on EI on B/S

Shows the most income

LCM

Lowe of cost or market

Market values depends on invenotry methods, what are the methods?

FIFO, Avg., or Specific Identification: net realizable value (NRV)

LIFO : current replacement cost (subject to ceiling

and floor constraints

What are the 4 steps to applying LCM

1) choose implementation approach to measure value of inventory

2) determine appropriate inventory valuation rule

3) compare historical cost to either NRV/Market value

4) report the lower result on the F/S

Upper constraint

ceiling, market value should not be more than the NRV

Prevents overstatement of inventory & understatement of loses

Lower constraint

floor, market value should not be less than the NRV

Prevents understatement of inventory & overstatement of loses

The LCM rule can be applied to

1) individual inventory items

2) total of major inventory categories, or

3) total inventory

What are the 2 approach's to write downs to market value?

1) Direct (Dr. COGS, and Cr. Inventory)

2) Allowance (Dr. loss on write down of inv. and Cr. allowance to reduce inv. to NRV)

What expectation can inventory be stated above cost?

1) An inability to determine appropriate costs

2) Immediate marketability of the inventory at quoted market price

3) The interchangeability of the units of inventory

What are the 2 common used methods of estimating inventory costs

Gross profit method

Retail inventory method

Gross Profit Rate

gross profit / net sales

Net income

total revenue - total expenses