Chapter 2

Question 1

What are the two methods to estimate bad debt expense, and which statements are each related to?

Answer 1

% of net credit sales (income statement)

Aging of accounts receivable (balance sheet)

Question 2

What is the formula for % of net credit sales?

Answer 2

Credit sales * % of uncollectible

Question 3

How to calculate bad debt expense using aging of AR?

What is the journal entry for it?

Answer 3

Not yet due * %
Up to 30 days due *%
Over 30 days due *%
Total $$$

Debit bad debt expense $$$
Credit allowance for doubtful accounts $$$

Question 4

1. Adjusting entry for write off

2. Which statement does this not affect?

Answer 4

Debit: Allowance for doubtful accounts
Credit: Accounts receivable

Income statement

Question 5

In a period of decreasing prices, what is better LIFO or FIFO and based on what criteria?

Answer 5

LIFO: profitability (more revenue)
FIFO: better taxes (lower net income)

Question 6

I’m a period of rising prices, which is better LIFO or FIFO and based on what criteria?

Answer 6

LIFO: taxes (less inventory, less net income)
FIFO: Profitability (more revenue)

Question 7

What is PCAOB?

Answer 7

Public Company Accounting Oversight Board - sets auditing standards for CPAs of public companies

Question 8

What are non operating items in the income statement?

Answer 8

Revenues, expenses, gains/losses

Ex: interest income, interest expense, gain/loss on sale of investments

Question 9

Inventory turnover ratio

Answer 9

COGS/average inventory

Question 10

DuPont analysis (ROA)

Answer 10

ROA = net profit margin x Asset turnover ratio

Net income/Avg Total Assets =
Net income/Net sales x Net sales/Avg total assets

Question 11

Impairment loss

Answer 11

Net Booking Value - Fair Value

Question 12

What is the low cost strategy used to improve?

Answer 12

Produce high asset turnover ratio

Efficient management of assets

Question 13

DuPont analysis (ROE)

Answer 13

ROE = ROA x Leverage

Net income/shares of equity
= Net income/avg assets x Avg assets / shares of equity

Question 14

Average collection period

Answer 14

365/AR turnover ratio

Question 15

Cost of sales formula

Answer 15

Cost of sales = Credit sales + cash sales - gross profit - sales discounts - credit discounts - sales returns and allowances

Question 16

Amount debited to account (purchase of equipment + stock issuance)

Answer 16

Acquisition cost + installation cost + shipping cost + Fair value of stock

Question 17

Ending allowance for doubtful accounts (based on AR and doubtful accounts)

Answer 17

Beginning allowance for D.A. - accounts receivable white offs + bad debt expense

Question 18

What does a high inventory turnover ratio indicate?

Answer 18

Less capital is tied to inventory, company’s assets are more liquid

Question 19

Days inventory outstanding formula

Answer 19

365/Inventory Turnover Ratio

Question 20

Net income equation using COGS

Answer 20

net sales - COGS
= net profit AKA gross profit
-SG&A expenses
= net income

Question 21

Net booking value for sales

Answer 21

Original cost - accumulated depreciation

Question 22

Compute gain/loss on disposal

Answer 22

Cash received - NBV

= cash received - (original cost - accumulated depreciation)

Question 23

How to record the sale (disposal)

Answer 23

Cash received      \$\$$
OG cost        $
Less: A.D.     $
Less: NBV.             \$\$$
Gain/loss.              \$\$$

Question 24

Adjusting journal entry for gain/loss from disposal

Answer 24

Debit: Depreciation expense
Credit: accumulated depreciation

Debit: cash 
Debit: Acc depreciation
Credit: equipment 
Credit: gain on sale 
Or debit: loss on sale

Question 25

Journal entry for disposal of something on January 1

Answer 25

No journal entry required