Accounting Methods Flashcards
Indirect Method
Reconciles the net income for the period and cash flows from operating activities. Will show net income followed by the adjustments needed to convert the total net income to the cash amount from operating activities. Nearly all corporations prepare the statement of cash flows using the indirect method.
Under the indirect method (also called the reconciliation method), the net cash flow
from operating activities is determined by adjusting the net income of a business for
the effect of the following:
1) Noncash revenue and expenses that were included in net income, such
as depreciation and amortization expenses, impairment losses, undistributed
earnings of equity-method investments, and amortization of discount and
premium on bonds
2) Items included in net income whose cash effects relate to investing or
financing cash flows, such as gains or losses on sales of property and
equipment (related to investing activities) and gain or losses on extinguishment
of debt (related to financing activities)
3) All deferrals of past operating cash flows, such as changes during the period in
inventory and deferred income
4) All accruals of expected future operating cash flows, such as changes during
the period in accounts receivable and accounts payable
Direct Method
The cash flows from operating activities will include the amounts for lines such as cash from customers and cash paid to suppliers. Also must provide a reconciliation of net income to the cash provided by operating activities.
Installment Method
Recognizes a partial profit on sale as each installment is collected.
Cost Recovery Method
Recognizes no profit until collection exceeds the cost of the item sold. Subsequent receipts are treated entirely as revenues.
Percentage-of-completion Method
Calculates:
Estimated total gross profit
Percentage of the project completed at the reporting date “ordinarily based on costs incurred”
Gross profit for the current period “equals estimated total gross profit - gross profit recognized to date”
Completed-contract Method
Defers all contract costs in the inventory account construction in progress until the project is completed. Revenues and gross profit are recognized only upon completion of the contract.
Single-Step Income Statement
One grouping for revenue items and one for expense items. “One subtraction necessary to arrive at net income”
Multiple-Step Income Statement
Matches operating revenues and expenses in a section separate from non-operating items. *most common way to present the income statement is the condensed format for the multiple-step income statement, which includes only the section totals.
Percentage-of-sales method “Income Statement Approach”
an income statement approach
Calculates bad debt expense as a percentage of credit sales reported on the income statement.
percentage-of-receivables method “Balance Sheet Approach”
a balance sheet approach
estimates the balance that should be recorded in the allowance based on the collectibility of ending gross accounts receivable. Bad debt expenses is the amount necessary to adjust the allowance.
Perpetual System
Perpetual Inventory System Overview
Under the perpetual inventory system, an entity continually updates its inventory records to account for additions to and subtractions from inventory for such activities as:
Received inventory items Goods sold from stock Items moved from one location to another Items picked from inventory for use in the production process Items scrapped
Periodic Inventory System
The periodic inventory system only updates the ending inventory balance in the general ledger when you conduct a physical inventory count. Since physical inventory counts are time-consuming, few companies do them more than once a quarter or year. In the meantime, the inventory account in the accounting system continues to show the cost of the inventory that was recorded as of the last physical inventory count.
