acc chap 4-6 Flashcards
What is included in a bank reconcilliation?
- Deposits in transit (add) –> cash and cheques issued/received and recorded by the company but not the bank
- Outstanding cheques (subtract) –> checks that have been issued by the company to creditors, but not yet processed.
- Errors (add or subtract)
What is included in a book reconciliation
- Bank collections (add)
- Electronic fund transfers (Add/subtract)
- Service charge (subtract)
- Interest revenue earned on account (add)
- Non sufficient fund cheques (subtract)
- Errors (add/ subtract)
Cash equivalents:
- treasury bills
- commercial paper
- money market funds
Recovery of uncollectable accounts previously written off
- Reinstate accounts receivable
Dr accounts receivable
Cr Allowance for uncollectable accounts - Record collection of cash
Dr Cash
Cr Accounts receivable
Writing off uncollectable amounts
Dr Allowance for uncollectable accounts
Cr Account receivable #
Cr Account receivable #
The allowance method journal and financial statements
Journal:
Dr uncollectable account expense
Cr Allowance for uncollectable accounts
Balance sheet (partial):
Accounts receivable
Less: Allowance for uncollectable accounts
Accounts receivable, net
Income statement (partial):
Expenses:
Uncollectable account expense
Reconciling interest journal entry
Dr Interest receivable
Cr Interest revenue
(Interest = Principal × Rate × Time)
Current Ratio
This measures the entity’s ability to pay its
current liabilities with current assets. (ability to pay its short term debt)
Current assets ÷ Current liabilities
= current ratio
Rule of thumb: A strong current ratio is 1.50
Acid test or quick ratio
This is a stringent test of liquidity which
measures the entity’s ability to pay its
current liabilities immediately.
(Cash + Short-term investments + receivable) ÷ Total current liabilities
A higher the number is better
(Quick ratio does not include inventory and prepaid expenses)
Days’ Sales in Receivables
A/R Turnover =
Net sales ÷ Average net accounts receivables*
- it measures the number of times the company sold goods on account and collected their cash. Higher is better.
Days’ sales in average accounts receivable =
365 days ÷ Accounts receivable turnover
- it measures how long it takes the company to collect cash. Lower number is better.
*(Beginning net accounts receivables + Ending net accounts receivables)/2
Debt ratio
It measures the business’s ability to pay all debt
total liabilities ÷ total assets = debt ratio
(lower number is better)
(Net) Working capital
Total current assets – Total current liabilities
It refers to the ability of the company to use its current assets to pay off its current liabilities
Cost of goods sold
inventory sold. It is an expense on the income statement.
Gross profit
excess of sales revenue over the cost of goods sold. (Revenue – cost of goods sold)
Recording inventory on financial statements
On balance sheet, record inventory units x unit cost
On income statement, record number of units sold x unit cost (record as revenue??)
Periodic vs perpetual
Periodic systems do not keep a
continuous record of inventory on hand.
Perpetual systems maintain a running record
to show the inventory on hand at all times.
Both methods count inventory once a year.
Record inventory bought under periodic and perpetual
Perpetual:
Dr Inventory
Cr Cash/accounts payable
Periodic:
Dr Purchases –> temporary account, normal debit bal
Cr Cash/accounts payable
Record freight-in fee under periodic and perpetual
(inventory shipped in):
Perpetual:
Dr Inventory
Cr Acc payable
Periodic:
Dr Freight-in –> temp acc, normal debit bal
Cr Acc payable
Returned goods under periodic and perpetual
Perpetual:
Dr Accounts payable
Cr Inventory
Periodic:
Dr accounts payable
Cr purchase returns –> temp acc, normal credit bal
Record purchase allowance for perpetual and periodic
Perpetual:
Dr Account payable
Cr Inventory
Periodic:
Dr Account payable
Cr Purchase allowance –> temp acc, normal credit balance
To record purchase discount for perpetual and periodic
Perpetual:
Dr Account payable
Cr inventory
Periodic:
Dr Account payable
Cr Purchase discount –> temp acc, normal credit balance
What happens to Purchases, frieght in, purchase returns, purchase allowance, and purchase discount at year end?
Periodic temporary accounts get closed into cost of goods sold at year end
To record payment to a supplier for perpetual and periodic
Perpetual:
Dr Account payable
Cr Cash
Periodic:
Dr Account payable
Cr Cash
Adjusting entry for periodic inventory at year end
Close out beginning inventory & temporary accounts, set up ending inventory
Dr Cost of goods sold
Dr Ending inventory
Dr Purchase allowance
Dr Purchase returns
Dr Purchase discounts
Cr Purchases
Cr Freight-in
Cr Beginning inventory
Periodic Net Purchases of inventory =
= Purchase price of inventory + Freight-in
– Purchase returns & allowances
– Purchases discount
Perpetual net sales =
= sales revenue - sales returns & allowances - sales discounts
cost vs price
Cost: How much product is worth
Price: How much is paid for product
Perpetual Inventory to record the sale of goods - IFRS
Cash or Accounts receivable 200,000
Sales revenue 198,000
Sales refund payable 2 000
–> (liability) (200,000 x 1%), to record the price expected to be returned
Cost of goods sold 118,800
Inventory returns estimated (120,000 x 1%) 1,200
Inventory 120,000
To record the cost of the product expected to be returned
Perpetual, record sales returns and allowances as they occur - ASPE
Record the sales returns & allowances as they occur
Dr Sales returns & allowances
Cr Cash or Accounts receivable
Dr Inventory
Cr Cost of goods sold
Perpetual, journal entry to record the return of goods - IFRS
Sales Refund payable 500
Cash or Accounts receivable 500
To record the price of the product returned
Inventory ($500 x 60%) 300
Inventory Returns Estimated 300
To record the cost of the product returned
What does 2/10, n/30 mean?
If the buyer pays the invoice within 10 days, they will receive a 2% discount; if not, the full amount of the invoice is due within 30 days
Discounts - Record collection of cash if paid within the timeframe of the discount:
ex.
Cash 1,470 (98%)
Sales Discount 30 (2%)
Accounts receivable 1,500
To record collection of accounts receivable, less 2% discount
When to use specific unit cost
Specific Unit Cost is also called the specific identification method
Some businesses deal in unique inventory items. These businesses cost their inventories at the specific cost of the particular unit
Difference between perpetual and periodic weighted average
Periodic calculates one average cost for the entire period by taking the total cost/total units in inventory
to get a rate
How to use weighted average perpetual
After each purchase, make a new unit cost by taking all costs/units available
After a sale, calculate COGS using the rate calculated above times the number of units sold
For the next purchase, take COGS + price of new units/ number of units = new weighted average
To calculate ending inventory = average unit cost x units left
When inventory costs are increasing (inventory methods)…
Weighted average cost of goods sold is highest because it is based on the average of the costs for the period. Gross profit is the lowest.
FIFO cost of goods sold is lowest because it is
based on the oldest costs. Gross profit and net income are the highest
Perpetual versus Periodic inventory system
Differences between the perpetual system and the periodic system are:
Purchases of inventory – the perpetual system uses the Inventory account while the periodic system uses a Purchases account
Sale of inventory – the perpetual system records two journal entries – one to record the sale and one to update the inventory records while the periodic system only records the sale.
First-In, First-OutPeriodic and Perpetual
Oldest goods are assumed to be sold firstEnding inventory consists of most recent purchases
Comparability (including consistency)
for inventory
Investors want to compare a company’s financial statements from one year to the next
Companies are required to disclose the inventory methods used in the notes
Lower-of-Cost-and-Net Realizable Value (LCNRV)
requires that inventory be reported in the financial statements at whichever is lower – inventory’s cost or its net realizable value
Net realizable value is selling price, less: cost of disposal
Ex. Cost = 500
NRV = 480 (reported on balance sheet as inventory)
Gross profit percentage
It measures the ability of a company to sell inventory at a profit
= gross profit/net sales revenue
- Higher the better
Inventory turnover and days’ inventory outstanding =
Inventory turnover = Cogs/average inventory – higher the better
Days’ Sales in Inventory = 365 days/
Inventory Turnover
It indicates how rapidly inventory is sold
The lower the number the better
If Ending Inventory is overstated,
COGS is understated and gross profit is overstated
If ending inventory is understated,
COGS is overstated and gross profit is understated
If beginning inventory is overstated,
COGS is overstated, gross profit is understated
If beginning inventory is understated,
COGS is understated and gross profit is overstated
What assets get depreciated / amortized
Land –> Neither
Material assets such as building, equipment, furniture, machinery and land improvement –> Deprecitated
Non-material assets such as patents –> amortized
Back property tax
Previous owner owed but didn’t pay so now you have to pay is
Determining the price of land
Purchase price of land $300,000
Add related costs:
Real estate commission $10,000
Back property tax 8,000
Removal of buildings 5,000
Survey fees 1,000 =24,000
Total cost of land $324,000
All costs to get land ready for use (the parts that don’t wear out unlike parking lot), land improvements and such are depreciated
Lump-Sum (or Basket) Purchases of Assets
When a company purchases a group of assets, they must identify the cost of each asset using the relative fair value.
Example:
Company paid $1 million for building and land
Fair value of building = $960,000
land = 240,000
Total fair value $1,200,000
Capital Expenditure versusan Immediate Expense
Record an Asset for Capital Expenditures - debit asset
Extraordinary repairs:
– Major engine overhaul
– Modification of body
for new use of truck
– Addition to storage
capacity of truck
Record Repair and Maintenance Expense - Debit expense
Ordinary repairs:
–Repair of transmission
or other mechanism
– Oil change, lubrication, etc.
– Replacement tires, windshield
– Paint job
Depreciation - Terminology
Cost – all costs incurred to get the asset ready for use
Accumulated depreciation – depreciation expensed over the accounting periods
Carrying amount – Cost minus accumulated depreciation
Estimated useful life – the length of service the business expects from the asset
Estimated residual value – it is the expected cash value of an asset at the end of its useful life
Depreciation - Straight line method formula
(cost - residual value) / years of useful life
- each year is depreciated the same amount
Depreciation - Units of production formula
(Cost - residual value)/ estimated level of activity total
multiply the rate by the estimated value per year to get the amount depreciated
Double-Diminishing-Balance Method
Single rate per year: 1 ÷ 4 (estimated useful life) = 25%
Double-diminishing balance: 2 times the single rate = 2 x 25% = 50%
Carrying amount x rate:
Year 1: 55,000 × 0.50 = $27,500
Year 2: (55,000-27,500) x .50 = $13,750
Year 3: (55,000-27,500-13,750) x .50 = $6,875
Year 4: $1,875**
Total accumulated depreciation =$50,000
**Final year = $50,000 – 27,500 – 13,750 – 6,875 = $1,875
Residual value is NEVER depreciated
Comparing Depreciation Methods
Will always give the same amount of depreciation, it’s just distributed differently
If a company buys an asset other than at year-end:
- Compute the depreciation for the year
- Multiply by the fraction of the year you held the asset
Changing the Useful Lifeof a Depreciable Asset
- Calculate the carrying amount as it is now
- Make a new depreciation rate by dividing the carrying amount by new estimated useful life
Derecognition (sold) of Property,Plant and Equipment
- Before accounting for the derecognition, bring the depreciation up to date
- Remove asset and accumulated depreciation account from the books
Example: A company disposes of equipment that cost $8,000. Accumulated depreciation is $6,000 and the carrying amount is $2,000. The journal entry is:
Accumulated depreciation 6,000
Loss on disposal 2,000 – treated as expense, is on inc. state.
Equipment 8,000
Fully Depreciated Assets
An asset can be used after it is fully depreciated.
The asset and its depreciation account remain in the ledger with no additional depreciation entries.
Recording the sale of depreciated (partially) equipment
September 30, 2020
Cash 5 000
Accumulated Depreciation 3 750
Loss on Sale of Equipment 1 250
Equipment 10 000
To record sale of equipment
Intangible assets
Patents – federal government grant giving the holder exclusive rights to produce and sell and invention
Copyrights – films, novels, software, etc - extend 50 years beyond the creator’s life
Tradenames – are assets that represent distinctive identifications of a product or service
Franchises/Licences – granted by private business or government to sell a product or service
Goodwill – is the excess of the cost of purchasing another company over the sum of its fair values of net assets
Intangible assets are recorded at acquisition
cost and are often the most valuable assets.
The residual value is often zero.
Intangible assets can be finite - get amortized, usually using straight line method
They can be infinite - not amortized but get checked for impairment
Return on Assets (ROA)
= Net income / Average total assets (Beginning total assets + Ending total assets)/2
It measures how much the entity earned for each dollar of assets invested by both investors and creditors. Higher is better
