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Accounting > Chapters 4 and 5 > Flashcards

Chapters 4 and 5 Flashcards

1
Q

What is collectability risk

A

The risk that the customer doesn’t fully pay what it is owed.

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2
Q

Important distinctions in Income statement

A
  1. Operating vs nonoperating income
  2. Recurring vs nonrecurring revenue
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3
Q

What are noncontrolling interests?

A

parties that own minority stakes in subsidiaries of parent company.

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4
Q

What is revenue recognition?

A

The timing and amount of revenue reported by the company.

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5
Q

What are the 5 steps in the revenue recognition process?

A
  1. Identify contract with customer
  2. Identify performance obligations
  3. Agreeing on trasaction price
  4. Allocate transaction price if necessary
  5. Recognize revenue as performance obligation is met.
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6
Q

Explain the contract identification in the revenue recognition process.

A

The contract is the agreement that creates forceable rights and obligatons for both parties.

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7
Q

What are performance obligations as they relate to the revenue recognition process?

A

In this step parties must determine how many distinct products the company will provide the customer with.

These items must be distinct services or goods.

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8
Q

Explain the step agreeing on transaction price in revenue recognition process.

A

The transaction price is determined by answering the following question: What does the entity expect to be entitled to in exchange for delivering the promised goods and services?

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9
Q

Explain the step allocate transaction price in the revenue recognition process.

A

If multiple goods/services are sold as a bundle, each good must be priced independently as to get to the bundle price.

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10
Q

What is a consignment sale

A

A consigner will provide a consignee to sell product in return for a commission. Revenue is recognized by consigner when consignee sells product.

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11
Q

What are unearned/ deferred revenue streams?

A

Liability item when customers pay for a good/service not yet provided by the company.

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12
Q

What is control in terms of revenue recognition?

A

Entity’s ability to direct use of and obtain all benefits from an asset.

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13
Q

Name the two ways of revenue recognition for long term projects

A
  1. Cost-recovery method
  2. Percentage-of-completion method
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14
Q

What is percentage-of-completion method?

A

The more the performance obligation is satisfied, the more revenue is recognized.

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15
Q

What is the cost-recovery method?

A

Revenue is recognized every reporting period to make sure the company breaks-even on that project. Remaining groos-profit is reported at end of project.

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16
Q

What is a contract asset?

A

The amount the company expects to receive for performance but is not entitled too.

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17
Q

What is a contract liability?

A

When a company receives payment before delivery, it’s called a contract liability. The company is now obligated to perform the task at hand in terms of contract.

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18
Q

How are accounts receivable reported?

A

They are reported as net realisable value (net amount the company expects to collect).

Total receivables - allowance for uncollectible accounts - written off debts

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19
Q

How is the allowance of accounts receivables determined?

A

Often this is done through an ageing analysis. The older the account receivable, the more likely the account will not be collected. The risk percentages should be based on historical data.

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20
Q

How is an allowance reported in journal entries and the FSET?

A

Allowance are reported as contra-assets on the FSET.

Cash assets +noncash assets - contra assets.
Allowance for bad debts are also reported as bad debts expense.

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21
Q

What is a cookie jar reserve?

A

Overstimation of bad debt allowance in prior years to crack up earnings in later periods.

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22
Q

How do you calculate accounts receivables turnover?

A

sales revenue / average accounts receivable

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23
Q

What does accounts receivables turnover calculate?

A

Calculate the number of times each year that accounts receivable is converted into cash

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24
Q

How do you calculate average collection period?

A

365 days/ accounts receivables turnover

OR

Average accounts receivable / average daily sales

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25
Q

What does the average collection period measure?

A

This measures how long it takes to collect cash after a sale

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26
Q

How can accounts receivables be used for financing?

A
  1. Putting it up as collateral on short-term loans. This is called collaterization
  2. Sell them (factoring)
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27
Q

Why does management do earnings management?

A

Earnings management is done to hide the actual performance of a company because:
1. Management wants to mislead financial statement users to get an economic advantage
2. Desire to influence legal contracts based on financial information

28
Q

What are examples of misleading reporting?

A
  1. Overly optimistic/ pessimistic reporting
  2. Channel stuffing (convincing customers to buy more than needed)
  3. Strategic timing and disclosure of transactions
  4. Mischaracterization of transactions
29
Q

What is income smoothing?

A

This is a form of strategic timing and disclosure of transactions. It’s a strategy in which management sells assets for more than book value to prop up net income.

30
Q

What is the ice bath strategy?

A

This is a form of strategic timing and disclosure of transactions. Big nonrecurring losses are recorded at times of low income. This way, those costs will not happen going forward.

31
Q

what are arm’s length sales?

A

Revenue by selling to a related party (subsidiary or company in which entity owns noncontrolling interest.

32
Q

What are the effects of earnings management?

A
  1. Quality of earnings is questioned
  2. Distrust in management team
33
Q

How are customer purchases calculated

A

revenue +change in defeered income liability

34
Q

Write off of bad debts

A

When expenses incurred to retrieve a bad debt are higher than the debt that will be collected, the company can choose to write off bad debts.

35
Q

What are operating expenses

A

Costs associated to the acquisition of products and services that customers purchase, and all expenses in support of the company’s operations

36
Q

When do operating expenses ought to be reported?

A

They should be reported in same period as the associated revenue

37
Q

Methods of expense recognition

A
  1. Direct association
  2. Immediate recognition
  3. Systematic allocation
38
Q

Direct association

A

Expenses are directly linked to revenue. Goods remain in inventory until they are sold. Then they are reported as COGS expense.

Manufacturing companies deal with product and period costs

39
Q

What are product costs?

A

Incurred costs to support the company’s manufacturing activities. Also D&A, utilities etc.

Product costs are assigned to inventory until unit is sold

40
Q

What are period costs?

A

All costs not considered product costs are reported as costs spanning the entire period.

41
Q

What is immediate recognition?

A

Not all costs can be assigned to single transactions, like advertising, r&d, GAS) They are recognized in period the costs occur.

R&D is immediately recognized under IFRS requirements

42
Q

What is systematic allocatoin

A

Costs like depreciation are incurred over multiple periods. Expenses are divided among periods according to certain schedules established by management.

43
Q

What does FOB shipping point mean?

A

FOB means Free On Board

FOB shipping point means title will be in hands of the buyer as soon as the product is shipped by the seller

44
Q

What does FOB destination mean?

A

FOB means Free On Board

FOB destination means that the title passes to customer once the product is delivered to the buyer’s location.

45
Q

What are the three types of inventory for manufacturing companies?

A
  1. Raw materials
  2. Works in Progress (WIP)
  3. Finished Goods (FG)
46
Q

What are raw materials as reported in inventory

A

Raw materials are reported as the costs of obtaining materials needed to manufacture goods

47
Q

What are works in progress as reported under inventory?

A

Works in progress are the costs of inventory of partially completed goods in terms of raw materials needed + labour and overhead costs associated with producing the partially completed goods.

48
Q

What are finished goods as reported under inventory?

A

Completed products

49
Q

How is the Ending Raw Materials Inventory calculated?

A

Beginning RM INV + RM purchased - RM used

50
Q

How is the Ending Works in Progress inventory calculated?

A

Beginning WIP + (RM used +factory labour services received + Factory overhead) - Goods produced

51
Q

How is the finished goods (fs) inventory calculated?

A

Beginning FG INV + Goods produced - COGS

52
Q

What is the cost of goods sold computation?

A

Beginning Inventory value + Cos of inventory purchases/production= cost of goods available for sale

Cost of goods available for sale - ending inventory = COGS

53
Q

What are the acceptable inventory costing methods under IFRS regulations?

A
  1. FIFO ( First in, First out)
  2. Average Cost method: Total cost of goods available for sale / units available for sale
54
Q

What is the lower cost or market principle?

A

LOCOM means cost of inventory should be reported as:
1. Cost of inventory if it’s higher than market value
2. Market value if it’s lower than cost of inventory. Remainder should be written off as an expense

55
Q

What are the required inventory disclosures?

A
  1. Used inventory costing method (can be different for each type of inventory)
  2. Carrying amount of inventory
  3. Carried amount of INV at net realisable value
  4. Amount of INV write down
  5. Amount of reversal write-downs and their reasons
  6. Carrying amounts and inventory pledged
  7. Cost of goods sold
56
Q

What is shrinkage?

A

Loss of inventory due to theft, spoilage, breakage etc.

57
Q

How is COGS calculated for the income statement?

A

Cost of products sold + loss due to shrink + losses from LOCOM calculations

58
Q

How is the gross profit margin calculated?

A

(sales - COGS) / sales

59
Q

What are the implications of a declining GPM and how can management most effectively increase it?

A
  1. Declining GPM means that company cannot pass on as much increased costs to consumers
  2. GPM can best be increased through cost management, as this is something that can be controlled and revenue can’t.
60
Q

How is the inventory turnover ratio calculated?

A

COGS / Average Inventory

61
Q

What does inventory turnover ratio calculate?

A

Calculates how quickly inventory passed through production resulting in sales.

62
Q

How is average inventory days outstanding calculated?

A
  1. Average Inventory / Average daily COGS
  2. 365/Inventory turnover
63
Q

What is the importance of inventory analysis?

A
  1. Measures if product is wanted and production processes are going well.
  2. Gives insights in asset utilization
64
Q

Journal entries if LOCOM causes inventory to be reported as market value

A
  1. Decrease of inventory at non-cash assets
  2. Decrease in retained earnings through write-off expense
65
Q

How does inventory analysis give insight in asset utilization

A

Inventory is for most companies a significant investment. It is therefore important that inventory management is optimal.

Accounting (6 decks)

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