Accounting Exam 2 Flashcards
Capitalization cost
(Purchase price of asset) + (All cost incurred in getting asset ready for use)
Lump sum purchase
Company purchases more than one asset for a price. Find percent asset takes up of total market value and multiply it by the lump sum purchase
Depreciation
Allocation of the cost of plant asset over its useful life (using up the asset) because matching concept.
NOTHING to do with value of asset decreasing
Land does not depreciate
How to record depreciation
Debit: Depreciation expense
Credit: Accumulated depreciation
Accumulated depreciation is what account?
Contra asset (causes decrease in assets)
Book Value
(Cost of asset) - (Accumulated depreciation) = Book Value
Decreases each year because accumulated depreciation increases
Straight line depreciation
(Cost - Salvage value) / (Life in years)
Constant depreciation per year
Relationship between salvage value and fully depreciated asset
They are equal
Sum of the years digits depreciation
(Cost - Salvage value) x (LIFE / SYD)
LIFE: decreases every year
SYD: Ex: 5 = 5+4+3+2+1
Accelerated method: More depreciation in early years
Double declining balance depreciation
(Book value at beginning of yr) x (2 / LIFE)
Book value: Changes every year
(2 / LIFE): Constant
Accelerated method: More depreciation in early years
Depreciation type differences:
A) Highest income in 1st year?
B) Income tax advantage?
A) Straight line
B) Accelerated methods
3 Categories of inflows and outflows
Operating activities
Investing activities
Financial activities
Sale of PPE equation
(Book value at date of sale) - (selling price)
Positive is loss (note selling price compared to value)
Operating activities section
Inflows/outflows related to normal course of business operations
Revenues and expenses from income statement
Accounts ignored in operating activities section
Depreciation expense
Gains
Losses
Financing activities section
Involve bank loans (borrowing or repaying funds) (interest in operating activities)
Stockholders’ equity (sale of stock or paying dividends)
Investing activities section
Inflows/outflows related to purchase and sale of long term assets and investments
(Buy/Sell: PPE, intangibles, investments)
Statement of cash flows
Finds net change in cash by taking sum of each section
Operating activities = should be positive
Investing activities = should be negative (investing in self)
Financing activities = + or -
A) How do you record bad debt expense
B) To what methods is bad debt expense estimated from?
A) Debit: Bad debt expense
Credit: Allowance for bad debts
B) Aging method, which conforms to matching concept
‘Allowance for bad debts’ is a what type of account
contra asset account (normal = credit)
Amount recorded for bad debt expense is an _______ because of the matching concept
Estimate
Matching concept: Expenses are recorded in the same period the revenues are earned
Net Realizable Value (NRV)
(Accounts Receivable) - (Allowance for bad debts)
Allowance for bad debt T account
Debit: Write offs
Credit: Beginning Balance + Bad debt expense
——————————————————————————-
Credit: Ending Balance
FIFO
Assigns oldest inventory cost to COGS
Assigns the newest inventory cost to ending inventory
LIFO
Assigns the newest inventory cost to COGS
Assigns the oldest inventory cost to ending inventory
Weighted Average
Assigns the same unit cost to both COGS and ending inventory
Weighted average cost per unit formula
(Cost of beginning inventory + Cost of purchases) / (Units in beginning inventory + Units purchased)
Segregation of duties? What account functions must be separated?
Ensures more than one person involved in transaction from beginning to end
Authorization, Recording, and Custody
Sale discounts account type?
Contra revenue account.
How is 3/10, n/30 read in terms of discounts
3% discount within 10 days of purchase, after that rest of balance is due within 30 days.
Cash received from discount calculation
Discount = (Amount paid in discount period) (% Discount)
Cash Received = Balance - Discount
