Chapter 5, 6, 9, 8 Flashcards
1
Q
Perpetual updated Inventory & Cost of Goods Sold with?
A
Each purchase & sale
2
Q
Periodic determines Inventory & Cost of Goods Sold when?
A
At the end of each accounting period
3
Q
What are the 2 categories of expenses?
A
Cost of Goods Sold (COGS) & Operating Expenses
4
Q
Cost of Goods Sold (COGS)
A
Total cost of merchandise sold during the period
Directly related to the revenue recognized from the sale of goods
5
Q
Operating Expenses
A
Incurred in the process of earning sales revenue
Represent a category of expenses
Examples: Advertising expense, and rent expense
6
Q
Unique to Merchandising Company
A
- Cost of Goods Sold
- Gross Profit
7
Q
Freight Costs
A
Agreed upon between seller & buyer
8
Q
What do Freight Cost determine?
A
Who is responsible for:
- Paying the freight costs
- The risk of loss or damage in transit
9
Q
FOB Shipping Point
A
The Buyer pays
10
Q
FOB Destination
A
The Seller pays
11
Q
Freight Costs Incurred by the Buy Shopping Point: Freight In
A
- Included as part of the cost of purchasing inventory
- Inventory included all costs to acquire the inventory
- Becomes Cost of Goods Sold (COGS) when goods are SOLD
12
Q
Journal Entry for Freight Charges
A
Dr. Inventory (Assets Increase)
Cr. Cash (Assets Decrease)
13
Q
Purchase Return
A
Return goods for CREDIT if purchase was made on credit, or Cash refund if purchase was for cash
14
Q
Purchase Allowance
A
Keep merchandise if seller is willing to grand an allowance (reduction) for purchase price
15
Q
Entry to record purchase RETURN
A
Dr. Accounts Payable (Liabilities Decrease)
Cr. Inventory (Assets Decrease)
16
Q
Entry to record PURCHASE
A
Dr. Accounts Payable (Liabilities Decrease)
Cr. Inventory (Assets Decrease)
17
Q
Purchase Discounts
A
Reduce the purchase cost of the inventory to the buyer
18
Q
How should the buyer reflect the reduced cost of inventory on their books? And why?
A
Credit Inventory by the amount of the discount
Inventory is recorded at the final cost to the purchaser
19
Q
Journal Entry to record Purchase Discounts Taken
A
Dr. Accounts Payable (Liabilities Decrease)
Cr. Inventory (Assets Decrease)
Cr. Cash (Assets Decrease)
20
Q
Purchase Discounts Examples - 2/10, n/30
A
2% discount if paid within 10 days, otherwise remaining amount due within 30 days
21
Q
Components of Purchase Discounts Examples
A
- Percentage amount of the cash discount
- Time period in which discount is offered
- Time period in which the purchaser should pay the full invoice price if the discount is not taken
22
Q
Purchase Discounts
A
- Often permitted by credit terms
- Buyer can claim a cash discount for prompt payment
23
Q
Sales Transaction (Perpetual Inventory System) - Journal Entry to record revenue
A
Dr. Accounts Receivable OR Cash
Cr. Sales Revenue
24
Q
Sales Transaction (Perpetual Inventory System) - Journal Entry to record Cost of Goods Sold
A
Dr. Cost of Goods Sold (Expense)
Cr. Inventory
25
Sales Return & Allowances
“Flip side” of purchase returns and allowances
Contra Revenue Accounts
Normal Debit Account
26
Sales Returns
When a seller accepts goods back from purchaser
27
Sales Allowances
When a seller grants a reduction in the purchase price so the buyer will keep the goods
28
Journal Entry to record Selling Price
Dr. Sales Returns & Allowances
Cr. Accounts Receivable OR Cash
29
Journal Entry to record Cost
Dr. Inventory
Cr. Cost of Goods Sold
(This is the only time you will credit an expense in this class)
30
Sales Discount
Calculated based on the invoice price less returns and allowances
CONTRA-REVENUE account (normal balance is a debit)
31
Sales Discounts - If the amount of discounts is material
Company should estimate discounts and record an adjusting entry for estimated discounts
32
Entry to record a Sales Discount
Dr. Cash (Assets Increase)
Dr. Sales Discount (Revenue Decreases)
Cr. Accounts Receivable (Assets Decrease)
You must get rid of the full amount of Accounts Receivable to this transaction)
33
Net Effect of Sales-Related Transaction
Reported on Income Statement
CONTRA-REVENUE accounts subtracted from Sales Revenue
Often reported as a single amount: Net Sales
34
How do you calculate Net Sales (Step 1 of Multistep Income Statement)
Sales - Sales Returns & Allowances - Sales Discount = Net Sales
35
How do you calculate Gross Profit? (Step 2 of Multistep Income Statement)
Net Sales - Cost of Goods Sold (COGS) = Gross Profit
36
How do you calculate Income of Operations? (Step 3 of Multi-step Income Statement)
Gross Profit - Operating Expenses = Income of Operations
37
How do you calculate Income before Income Tax? (Step 4 of Multi-step income statement)
Income from Operations +/- Non-Operating Items (int./div, rev, int, exp, gain/losses) = Income before Income Tax
38
How do you calculate Net Income? (Step 5 of Multi-step Income Statement)
Income before Income Tax- Income Tax Expense = Net Income
39
What is the Multi-step Income Statement?
Sales - Sales Returns & Allowances - Sales Discounts = Net Sales - COGS = Gross Profit - Operating Expenses = Income from Operations +/- Non Operating Items (int./div, rev, int, exp, gain/losses) = Income before Income Tax - Income Tax Expense = Net Income
40
How do you calculate Income Tax Expense?
Income Tax Expense - Income before income taxes x Corporate income tax rate
41
Non-Operating Activities - Other Revenues & Gains
Increase Net Income
- Interest Revenue from Notes Receivable and Marketable Securities
-Dividend revenue from investments in capital stock
- Rent Revenue from subleasing a portion of the store
- Gain from the sale of Property, Plant, & Equipment (PPE)
42
Non-Operating Activities - Other Expenses and Losses
Decrease Net Income
- Interest expense on Notes & Loans Payable
Casualty losses from such cases as vandalism and accidents
- Loss from the sale of abandonment of Proper, Plant & Equipment (PPE)
- Loss from strikes and suppliers
43
Determining Cost of Goods Sold - Step 1
Beginning Inventory + Goods Purchased = Good Available for Sale (Subtotal)
44
Determining Cost of Goods Sold - Step 2
Goods Available for Sale - Ending Inventory = Cost of Goods Sold
45
Cost Flow Assumptions
First in, First-out (FIFO)
Last in, First-out (LIFO)
Average-cost
46
Calculating Ending Inventory & Cost of Goods Sold using First in, First-Out (FIFO)
1. Calculate Goods Available for Sale in Units & Dollars (Beg. Inventory + Purchases= Goods Available for Sale (GAFS)
2. Calculate Ending Inventory in Units (Usually given, but if not, GAFS - Units Sold = Ending Inventory)
3. Identify the Most Recent Purchases - Last in, Still Here (LISH) (Must total to Ending Inventory in Units)
4. Calculate the dollar value of Ending Inventory
5. Calculate the dollar value of Cost of Goods Sold (COGS) as: $GAFS - $End.Inv = COGS
47
Calculating Ending Inventory & COGS using Last in, First-Out (LIFO)
1. Calculate GAFS in UNited & Dollars (Beg. Inventory + Purchases = GAFS)
2. Calculate Ending Inventory in Units (Usually given, if not, GAFS - Units Sold = Ending. Inventory)
3. Identify the Oldest Purchases - FISH (First in, Still Here) (Must total to Ending Inventory in Units)
4. Calculate the dollar value of Ending Inventory
5. Calculate the dollar value of COGS as: $GAFS - $End.Inv = $COGS
48
Calculating Ending Inventory & COGS Using Average-Cost
1. Calculate Goods Available for Sale in units & dollars (Big. Inv. + Purchases = GAFS)
2. Calculate Ending Inventory in Units (usually given, if not GAFS - Units Sold = End. Inv)
3. Calculate the Average Cost per unit as: Avg. Cost per unit = $GAFS/GAFS in Units
4. Calculate the dollar value of Ending Inventory as: Avg.Cost per unit * End.Inv Units
5. Calculate the dollar value of COGS as: $GAFS - $End.Inv = $COGS
49
Inventory Turnover
Inventory turnover - Cost of Goods Sold/Average Inventory
50
Inventory Turnover - Average Inventory
Average inventory = Beginning Inventory + Ending Inventory / 2
51
Days In Inventory
Days in Inventory = 365/Inventory Turnover
52
Types of Receivables - Accounts Receivable
Amounts customers owe on account that result from the sale of goods and services
53
Types of Receivables - Notes Receivable
Written promise (formal instrument) for amounts to be received
54
Types of Receivables - Other Receivables
Interest, loans to officers, advances to employees, and income taxes refundable
55
Recording Accounts Receivable
Dr. Accounts Receivable
Cr. Sales Revenue
(To record sales on account)
56
Valuation of Accounts Receivable
- Reported on balance sheet as a Current Asset
Valued at: Net Realizable Value/NRV (or Cash Realizable Value)
57
Calculation of Net Realizable Value/ Cash Realizable Value
NRV = Total Receivables - Allowances for Doubtful Accounts
58
Uncollectible Accounts Receivable
- Sales on account raises the possibility of credit losses from uncollectible accounts
- Uncollectible accounts are a normal and necessary risk of doing business on account
- Sellers record credit losses that result from extending credit as BAD DEBT EXPENSE
59
Methods of Accounting for Uncollectible Accounts - Allowance Method
- Bad debt expense reported in the period in which the sales occurs
- receivables stated at estimated collective amount (NRV)
60
Applying the Allowance Method for Uncollectible Accounts
1. Estimate uncollectible account receivable
2. Determine & record bad debt expense
3. Write off specific accounts that have been determined to be uncollectible.
61
Journal Entry to record Bad Debt Expense
Dr. Bad Debt Expense
Cr. Allowance for Doubtful Accounts
62
Journal Entry to write off a SPECIFIC uncollectible account
Dr. Allowance for Doubtful Accounts
Cr. Accounts Receivable
63
What type of account is the Allowance for Doubtful Accounts (AFDA)?
CONTRA-ASSET
Listed with Accounts Receivable on the Balance Sheet as a subtractive item
AFDA has a normal credit balance, it reduces assets
64
Bad Debt Expense
- Reported in the Income Statement as Operating Expense
- Matched with (recorded in the same period as) the associated Sales Revenue
65
Allowance for Doubtful Accounts
- Contra Account used because companies do not know at the point of estimation which specific customers WILL NOT pay
- Balance in AFDA shows estimated amount of claims on customers that the company expects will be uncollectible
66
Presentation of Allowance for Doubtful Accounts
Current Assets
Cash
Accounts Receivable
Less: Allowance for Doubtful Accounts
67
Recording Estimated Uncollectibles
Dr. Bad Debt Expense
Cr. Allowance for Doubtful Accounts
68
Effects of Writing off Accounts Under the Allowance Method - Recording the Write-off
- Reduces BOTH Accounts Receivable & Allowance for doubtful accounts
- DOES NOT change bad debt expense
(Expense is recognized when the adjusting entry to estimate bad debts is made)
69
Recording Write-Off
Dr. Allowance for Doubtful Accounts (Assets Increase)
Cr Accounts Receivable (Assets Decrease)
70
Estimating the Allowance - Percentage-of-Receivables Basis
- Management established a percentage relationship between amount of receivables & expected losses from uncollectible accounts
- Single percentage rate for entire receivables balance, or aging schedule
- Arranges accounts by age and applies a different percentage to each group of accounts
71
Calculate $ estimate of Ending AFDA Balance
Ending Accounts Receivable * % Uncollectible
72
Journal Entry to reinstate the receivable
Dr. Accounts Receivable
Cr. Allowance for Doubtful Accounts
73
Journal Entry to record collection
Dr. Cash
Cr. Accounts Receivable
74
NRV Before and After write-off
ALWAYS stays the same
75
NRV as Accounts Receivable are collected
CHANGES
76
Computing Interest on Notes Receivable
Interest = Face Value of Note * Annual Interest Rate * Time in Terms of One Year
77
Journal Entry to record Note
Dr. Notes Receivable
Cr. Accounts Receivable (To record acceptance of note)
78
Honoring (Collection) of Notes Receivable - Entry to record note
Dr. Notes Receivable
Cr. Cash
79
Honoring (Collection) of Notes Receivable - Entry to record collection of note at maturity
Dr. Cash
Cr. Notes Receivable
Cr. Interest Revenue
80
Average Collection Period
Average Collection Period = 365 Days / Accounts Receivable
81
Accounts Receivable Turnover
Accounts Receivable Turnover = Net Credit Sales / Average Net Accounts Receivable
82
Plant Asset Expenditures
Also called: PPE, Plant & Equipment, Fixed Assets
3 Characteristics: - Physical substance
- Used in operations of business
- Not intended for sale to customers
Expected to be of use to the company for a number of years
Experience a decline in service potential over their useful lives, EXCEPT for land
83
Determining the Cost of Plant Assets
Based on HISTORICAL COST PRINCIPLE (requires that companies record plant assets at original cost)
Cost consists of: ALL expenditures necessary to acquire an asset & make it ready for its intended use
Measured by the cash paid or by the cash equivalent price
Once cost is established, it remains the basis of accounting for the plant asset of its USEFUL life
84
Cash Equivalent Price
Equal to the fair value of the asset given up or the fair value of the asset received, whichever is more clearly determinable
85
Attributes/Determining Cost of Land
- Cash purchase price
- Closing crusts such as title & attorney’s fees
- Real estate brokers commissions
- Accrued property taxes & other liens on land assumed by purchaser
- Clearing, draining, filling, and grading
- All demolition and removal costs
- LESS any proceeds from salvaged materials
86
Is Land depreciated?
No
87
Entry to record cost of land
Dr. Land
Cr. Cash
88
Land Improvements
Includes all expenditures necessary to make the improvements ready for their intended use
Limited useful lives
Depreciated over useful life (will eventually need improvements)
89
Buildings
Facilities used in operations
Included all expenditures related to the purchase or construction to make the facility ready for its intended use
Depreciated over useful life
90
Costs included as Buildings
-Purchase price, closing costs (attorney fees, title insurance), real estate brokers commission
- Remodeling and replacing or repairing anything that might be broken/needs replacing
91
Equipment
Assets used in operations
Check-out counters, office furniture, machinery, computers, printers, delivery trucks
92
Cost of Equipment
- Cash purchase price
- Sales taxes
- Freight charges
- Insurance during transit paid by purchaser
- Expenditures for assembling, installing, and testing
93
What is not included in Cost of Equipment?
Recurring costs: Insurance during use period, licenses, etc
94
Entry to record the cost of equipment
Dr. Equipment
Dr. License Expense
Dr. Prepaid Insurance
Cr. Cash
95
Effects of Depreciation - Income Statement
Depreciation Expense
96
Effects of depreciation- Balance Sheet
Accumulated Depreciation (Contra Asset)
Represents the total amount of an assets cost that the company has charged to expense to date
97
Calculating Net Book Value (NBV)
Cost
Less Accumulated Depreciation = Net Book Value
98
Computing Straight-Line Depreciation - Step 1 - Calculate depreciable cost
Cost - Salvage Value = Depreciable Cost
99
Computing Straight-Line Depreciation - Step 2 - Calculate Annual Straight Line Depreciation Expense
Depreciable Cost/Useful Life (in years) = Annual Depreciation Expense
100
Computing Straight-Line Depreciation - Step 3 - Calculate each year Depreciation Expense
Annual Depreciation * Fraction of year = Each year depreciation expense
101
Computing Straight-Line Depreciation - Step 4 - Calculated Annual Depreciation Balance
Σ (yearly Depreciation Expense)
102
Computing Straight-Line Depreciation - Step 5 - Calculate Net Book Value (NBV)
Purchase Cost - Annual Depreciation Balance
103
Journal Entry to record Straight-Line Depreciation
Dr. Depreciation Expense
Cr. Accumulated Depreciation
104
Plant Asset Disposal
Eliminate Assets and Contra Assets by: - Crediting the PPE asset account
- Debiting Accumulated Depreciation
105
Accounting for Disposal of Plant Assets
- Determine book value at the time of disposal
(If disposal does not occur on the time of the first day of the year, record depreciation up to the date of disposal)
- Record any cash received
- Recognize a gain or loss on disposal
106
How do you eliminate Disposal of Plant Assets Book Value?
- Debiting Accumulated Depreciation for total depreciation to the date of disposal
- Crediting the asset account for the cost of the asset
107
Sale of Plant Assets - Net Book Value of Asset
Original Cost of Asset - Assets Accumulated Depreciation Balance = Net Book Value of Asset
108
Sale of Plant Assets - Proceeds
Proceeds from Sale (Cash Received) - Net Book Value of Asset = GAIN if Positive, LOSS if negative
109
Gain on Disposal
If proceeds exceed the book value of the plant asset
Proceeds > NBV then GAIN
Reported in: Other revenues and gain section of Income Statement
110
Loss on Disposal
If proceeds are less than the book value of the plant asset
Proceeds < NBV then LOSS
Reported in: Other expenses and losses section of Income Statement
111
Gain on Sale - Updating Depreciation - Step 1: Calculate Depreciable Costs
Purchase Cost - Salvage Value
112
Gain on Sale - Updating Depreciation - Step 2: Calculate Annual Depreciation Expense
Depreciable Cost/Useful Life
113
Gain on Sale - Updating Depreciation - Step 3: Calculate each year Depreciation expense
Annual Depreciation * Fraction of year
114
Journal Entry to record Depreciation and update Accumlated Depreciation at the date of sale
Dr. Depreciation Expense
Cr. Accumulated Depreciation — anything that was sold at time
115
Entry to record sale
Dr. Cash
Dr. Accumulated Depreciation
Cr. Equipment
Cr. Gain on Sale of Equipment (Loss will be DEBIT)
116
Retirement of Plant Assets
- Occurs when there is no ready market value when the company no longer needs the asset
- No Cash is received (Proceeds = 0)
- No gain possible since no cash is received
- Loss is recognized when a positive book value exists (Asset is not fully depreciated)
117
How do you record retirement?
- Decrease Accumulated Depreciation for full amount of depreciation taken over life of asset
- Decrease asset account for original cost of asset
118
Journal Entry to record Retirement
Dr. Accumulated Depreciation
Cr. Plant Asset
119
Journal Entry to record retirement including loss
Dr. Loss on Disposal of Equipment
Dr. Accumulated Depreciation
Cr. Plant asset/Equipment
120
Intangible Assets
- Rights, privileges, and competitive advantages without physical substance that result from ownership of long-lived assets
- Evidenced by contracts, licenses, and other documents
121
Where do Intangible Assets arise from?
- Government grants, patents, copyrights, licenses, trademarks, and trade names
- Acquisition of another business in which the purchase price includes a payment for goodwill
- Private monopolistic arrangements arising from contractual agreements, such as franchises and leases
122
Accounting for Intangible Assets
- Recorded at cost
Includes ALL expenditures necessary for the company to acquire the right, privilege, or competitive advantage
- EXCLUDES costs of developing the intangible asset
123
Intangible assets - Limited Life
Cost is amortized over the assets useful life
124
Intangible Assets - Indefinite Life
Cost is NOT amortized
125
Amortizing Intangibles
Amortized over the short of the assets useful or legal life
- Useful life consider obsolescence, inadequacy and other factor
126
How are Amortizing Intangibles included in Adjusting Entries?
Debit Amortization expense
- Reported as an operating expense in the Income Statement
Credit the Intangible Asset account
- Or a contra account, accumulated amortization
127
Limited Life Intangibles Journal Entry
Dr. Amortization Expense
Cr. Specific Intangible Asset
128
Indefinite Life Intangibles
- No foreseeable limit on time the asset is expect to provide cash flows
- NO amortization
129
Types of Intangible Assets
- Patents
- Copyrights
- Franchises
- Trademarks
- Goodwill
130
Accounting for Goodwill
- Represents the value of ALL favorable attributes that relate to a company that are not attributable to any other specific asset
-Recorded only when an entire business is purchased
- NEVER amortized because it is considered to have an INDEFINITE life
- Written down if its value has been permanently impaired
131
What does Goodwill include?
Exceptional Management, Desirable location, good customer relations, skills employees, high-quality products
