Chapter 2 Flashcards
(25 cards)
What are the two methods to estimate bad debt expense, and which statements are each related to?
% of net credit sales (income statement)
Aging of accounts receivable (balance sheet)
What is the formula for % of net credit sales?
Credit sales * % of uncollectible
How to calculate bad debt expense using aging of AR?
What is the journal entry for it?
Not yet due * %
Up to 30 days due *%
Over 30 days due *%
Total $$$
Debit bad debt expense $$$
Credit allowance for doubtful accounts $$$
- Adjusting entry for write off
2. Which statement does this not affect?
Debit: Allowance for doubtful accounts
Credit: Accounts receivable
Income statement
In a period of decreasing prices, what is better LIFO or FIFO and based on what criteria?
LIFO: profitability (more revenue)
FIFO: better taxes (lower net income)
I’m a period of rising prices, which is better LIFO or FIFO and based on what criteria?
LIFO: taxes (less inventory, less net income)
FIFO: Profitability (more revenue)
What is PCAOB?
Public Company Accounting Oversight Board - sets auditing standards for CPAs of public companies
What are non operating items in the income statement?
Revenues, expenses, gains/losses
Ex: interest income, interest expense, gain/loss on sale of investments
Inventory turnover ratio
COGS/average inventory
DuPont analysis (ROA)
ROA = net profit margin x Asset turnover ratio
Net income/Avg Total Assets =
Net income/Net sales x Net sales/Avg total assets
Impairment loss
Net Booking Value - Fair Value
What is the low cost strategy used to improve?
Produce high asset turnover ratio
Efficient management of assets
DuPont analysis (ROE)
ROE = ROA x Leverage
Net income/shares of equity
= Net income/avg assets x Avg assets / shares of equity
Average collection period
365/AR turnover ratio
Cost of sales formula
Cost of sales = Credit sales + cash sales - gross profit - sales discounts - credit discounts - sales returns and allowances
Amount debited to account (purchase of equipment + stock issuance)
Acquisition cost + installation cost + shipping cost + Fair value of stock
Ending allowance for doubtful accounts (based on AR and doubtful accounts)
Beginning allowance for D.A. - accounts receivable white offs + bad debt expense
What does a high inventory turnover ratio indicate?
Less capital is tied to inventory, company’s assets are more liquid
Days inventory outstanding formula
365/Inventory Turnover Ratio
Net income equation using COGS
net sales - COGS
= net profit AKA gross profit
-SG&A expenses
= net income
Net booking value for sales
Original cost - accumulated depreciation
Compute gain/loss on disposal
Cash received - NBV
= cash received - (original cost - accumulated depreciation)
How to record the sale (disposal)
Cash received \$\$$ OG cost $ Less: A.D. $ Less: NBV. \$\$$ Gain/loss. \$\$$
Adjusting journal entry for gain/loss from disposal
Debit: Depreciation expense
Credit: accumulated depreciation
Debit: cash Debit: Acc depreciation Credit: equipment Credit: gain on sale Or debit: loss on sale
