econ 25 quiz 2 uci

Merchandising Co.

Merchandise Inventory; buy and resell

Manufacturing Co

Raw materials

work in process (not complete)

finished goods (complete)

FIFO

first in, first out

- inflation = highest net income, lowest cost

deflation = lowest net income

LIFO

last in first out

- inflation = lowest net income, highest unit cost

Average

total cost/ total units

Lower of Cost or Market (LCM)

when the value of the inventory declined, lower than its cost, companies can state the inventory at a lower cost or market value

- market value = replacement cost

ex. conservatism

inventory errors

-Failure to count or price inventory correctly.

-Not properly recognizing the transfer of legal title to goods in transit.

-Errors affect both the income statement and balance sheet.

income statement effects

inventory errors affect the computation of cost of good sold and net income

beginning inventory + cost of good purchased - ending inventory = cost of good sold

beginning inventory understate

CGS understate; Net income overstate

Beginning inventory overstate

CGS overstate; net income understate

Ending inventory understate

CGS overstate; net income understand

Ending inventory overstated

CGS understate; net income overstate

how long does it take for inventory errors to recover?

2 years

Types of Receivables

- accounts receivable

- notes receivable

- other receivables ( non trade receivable, interest receivable, loan to officers, income tax refundable)

service organization

records a receivable when it performs service on account

merchandiser

records accounts receivable at the point of sale of merchandise on accoun

Bad debts expense

seller records losses that result from extending credit

- cannot collect receivable

- happen when people got fired or bankrupt

direct write-off method

A method of accounting for bad debts that involves charging receivable balances to Bad Debt Expense at the time receivables from a particular company are determined to be uncollectible.

bad debt expense

- not stated at the net realizable value

- does not fit the matching principle

Allowance Method

estimate uncollectible accounts at the end of each period

- better matching

- stated at their net realizable

net realizable value

the net amount a company expects to receive in cash from receivable, exclude uncollectible

account receivable - allowance for doubtful account = net realizanble

Allowance for Doubtful Accounts

The contra asset account for accounts receivable.

allowance decrease, receivable increase

-

How does the allowance method work?

1. estimate uncollectible receivable and record it as an increase ( debit) to bad debt expense and credit allowance to doubtful account

2. when the actual uncollectible happens, debit the uncollectible to allowance to doubtful account and credit to account receivable at the time when that amount is written off as uncollectible

- debit allowance to doubtful account credit account receivable.

aging of accounts receivable

classifies customers balance by the length of time they have been unpaid

- longer the time, the less likely it will be collected

- percentage for uncollectible increase

current liabilities

pay the debt from existing current asset or creation of other current liabilities

- pay within 1 year or operating cycle

Types of Current Liabilities

note payable - written promise note, pay interest

sales tax payable -

current maturities of long term debt - portion of long term debt that is due in the current year

payroll and payroll tax payable - salaries ( monthly) wages (hourly)

employees pays..?

FICA payable

Any income tax

employer pays...?

FICA tax

Federal Unemployment tax

state unemployment tax

Bond: Long Term Liabilities

has interest, borrow from people

lower interest for borrower, higher interest for bond investor

- has a maturity date: date that final payment is due

face value

principal due at the maurity

principal

initial amount of debt does not include interest

below face value

discount

above face value

premium

market interest rate

rate of interest that the investor demand

coupon rate

the interest rate that a bond issuer will pay to a bondholder

- interest company have to pay

intracompany

compare to ourselves.

did we do better than last year?

intercompany

compare to our biggest enemy company

industry average

how are we doing in relationship to overall industry

horizontal analysis

trend analysis

evaluate series of financial statement over time

- increase or decrease

- apply to balance sheet and income statement

vertical analysis

common size analysis

- express each financial statement items as a percent of a base amount

ex. long term liability liability account 42.4% = 100%

Ratio Analysis

express the relationship among selected items of financial statement data

statement of cash flow

tells cash amount

go up or down reasons

change only when cash is collected or lose

1. we can see this company's entity's ability to generate future cash flow

2. ability to pay dividends and obligations ( investors wanna see)

3. reasons for the difference between net income and ent cash used by operating activity

operating activity

a. current asset ( PICRI)

b. current liability ( current payables, account payables)

- depreciation expense

- loss on disposal of plant asset

investing activity

longterm investment ( land, equipment)

- increase equipment

- sale of land

sale of equipment

Finance activity

- common stock ( issuance of stock (pay dividends ）

- longterm liability ( bond payable)

noncash activity

1. direct issuance of common stock to purchase asset

2. conversion of bonds into common stock