Accounting Exam 2 Flashcards
Matching Principle
Record expenses in the same period, matched with the recording of related revenues
Deferral Adjusting Entries
Prepaid Expenses and Unearned Revenues
they are expenses or revenues that are recognized at a date later than the point when cash was originally exchanged.
Accrual Adjusting Entries
Accrued Revenues and Accrued Expenses
Merchandising vs Manufacturing Inventory Classification
Merchandising: Inventory
Manufacturing: Raw Materials, WIP, Finished Goods
Periodic Inventory System and formula
Inventory is Tracked Monthly
Beg. Inv. + Purchases = Cost of Goods Available for Sale
Then Cost of Goods Available for Sale - Ending Inventory = COGS
First in First Out (FIFO)
Costs of the earliest goods purchased are the first to be recognized in determining cost of goods sold.
Often parallels actual physical flow of merchandise
Last-In, First-Out (LIFO)
Costs of the latest goods purchased are the first to be recognized in determining cost of goods sold.
Seldom coincides with actual physical flow of merchandise.
Exceptions include goods stored in piles, such as coal or hay.
Average Cost Method
Allocates cost of goods available for sale on the basis of weighted-average unit cost incurred.
Applies weighted-average unit cost to the units on hand to determine cost of the ending inventory.
Example of Average Cost Calc
See session 6 slide 18
add multiple each batch of purchases by their independent unit cost. Add all the total dollar cost of those and divide by the number of total units.
This equals your Average Unit Cost
FIFO: FINANCIAL STATEMENT AND TAX EFFECTS
Results in:
- highest ending inventory (positive)
- lowest COGS expense (positive)
- highest Tax expense (negative)
- highest net income (positive)
LIFO: FINANCIAL STATEMENT AND TAX EFFECTS
Results in:
- lowest ending inventory (negative)
- highest COGS expense (negative)
- lowest tax expense (positive)
- lowest net income (negative)
AVERAGE COST: FINANCIAL STATEMENT AND TAX EFFECTS
Middle of the road for all four: inventory, COGS, tax expense and net income
Inventory Turnover Ratio
COGS/Avg. Inventory
Days in Inventory Calc
365/Inventory Turnover, results in the approximate time it takes a company to sell the inventory
Accounts Receivable are recorded at what?
Net Realizable Value, which is the collectable amount
GAAP AR method is called?
Allowance Method
Results in better matching and receivables stated at NRV
Allowance Method Procedures
- Companies Estimate uncollectable AR
- DR Bad Debt Expense, CR Allowance for the estimate
- To write off you DR Allowance and CR AR
AR Turnover Ratio
Net Sales Revenue/Avg AR
Days in AR Calc
365/AR Turnover, represents the average collection period
Cost vs Depreciable Cost
Cost = historical cost of asset
Depreciable cost = Cost minus Salvage value (use this cost to divide the useful life by)
Salvage Value
value of the asset at the end of its useful life
Expense difference between Straight line and Declining Balance
Straightline expense = same expense amount each year
Declining balance = takes much heavier expense at the beginning of the assets life, vs much smaller expense towards the end of the assets life
Accrual Basis Accounting
Record transactions in period in which event occurs
Recognize revenues when services are performed
Recognize expenses when incurred
Allowed by GAAP
Cash basis Accounting
Revenues are recorded when cash is received
Expenses recorded when cash is paid
Not in accordance with GAAP
Adjusting Entries
necessary to keep trial balance up to date
required every time a company prepares financial statements
always affects on P&L account and one Balance sheet account
4 reasons to use allowance method?
- Losses are estimated
- Better Matching
- Receivables stated at net realizable value
- Required by GAAP
Book value
the difference between the cost of any depreciable asset and its accumulated depreciation
note: not the same as FMV
Notes Payable and Interest expense entry
Cash
N/P
Interest Expense
Int. Payable
to get monthly interest multiply APR interest rate x principle and divide by 12 months
Bonds Payable definition
interest bearing notes payable
sold in smaller denominations
corporation is borrowing money when they issue bonds.
Generally a non-current asset
Stockholder rights
VOTE in the election of the BOD and on actions that require stockholder approval
SHARE in the corporate earnings through receipt of dividends
Preemptive right
still keep the same percentage of ownership when new shares of stocks are issued (does not dilude your value)
Residual claim
proportionate shares in assets upon liquidation
Authorized stock
amount of stock a corporation is authorized to sell and reported in stockholders equity section
Ways to issue stock
direct to investors
indirectly through an investment banking firm (more popular)
Par value stock vs No Par value stock
par values is assigned a value per share vs no par value does not but is fairly common
Record stock with par and no par value:
example with $1 par value:
a) 1000 shares at $1 per share
b) 1000 shares at $5 per share
a) cash $1000
common stock $1000
b) cash $5000
common stock $1000
APIC $4000
Treasury Stock
corporations own stock that has been reacquired by the corporation and is being held for future use
Rationale behind treasury stock purchases
- Bonus and Stock Comp Plans for employees
- Increase trading of the stock
- Aditional shares to Acquiring other companies
- Increase EPS
- Prevent hostile takeovers
Treasury Stock recording rules and example:
a) $4000 shares at $8 per share
DR treasury stock for price paid, recorded at cost method, and contra-equity account.
DR Treasury Stock $32000
CR Cash $32000
Difference between shares issued and outstanding
The amount of treasury stock purchased by the company
