exam 2 Flashcards
what is the formula for cost of goods sold?
(beginning inventory + purchases) - ending inventory
cost of goods available for sale - ending inventory
what is the formula for cost of goods available?
beginning inventory + purchases
what is LIFO (last in, first out) ?
assumes that the last goods purchased are the first to be sold. the cost of the ending inventory is obtained by taking the unit cost of the earlier goods available for sale and work forward until all units of inventory have been valued
what is FIFO (first in, first out)?
assumes that the earliest goods purchased are the first to be sold. the cost of the ending inventory is obtained by taking the unit cost of the most recent purchase and work backwards until all units of inventory have been valued
what is the average cost?
allocates the cost on the basis of weighted-average unit cost incurred. the weighted average unit cost is then applied to the units on hand to determine the cost of the ending inventory and COGS
what is the effect of LIFO on COGS, net income, and ending inventory (when prices rise)?
lowest inventory, highest COGS (therefore lowest net income), lowest income taxes
what is the effect of FIFO on COGS, net income, and ending inventory (when prices rise)?
highest inventory, lowest COGS (therefore highest net income), highest income taxes
what is the effect of average cost on COGS, net income, and ending inventory (when prices rise)?
always falls between FIFO and LIFO
what are the benefits of LIFO?
better matches current costs of goods sold with revenue
what are the benefits of FIFO?
ending inventory approximates current cost
what is the lower-of-cost-or-net-realizable-value (LCNRV)?
when the value of inventory < cost, then you “write it down” to its net realizable value. this is conservatism and is the amount the company expects to receive from the sale of inventory
what is the formula to calculate net realizable value?
normal selling price - estimated cost to complete and sell
what is the effect of inventory errors?
will effect all three financial statements (income, balance, cash flow) as assets and expenses are mistated
what is the effect of understated beginning inventory on COGS, net income, R/E, and S/E?
COGS understated
net income overstated
retained earnings overstated
stockholders’ equity overstated
what is the effect of overstated beginning inventory on COGS, net income, R/E, and S/E?
COGS overstated
net income understated
retained earnings understated
stockholders’ equity understated
what is the effect of understated ending inventory on COGS, net income, R/E, and S/E?
COGS overstated
net income understated
retained earnings understated
stockholders’ equity understated
what is the effect of overstated ending inventory on COGS, net income, R/E, S/E?
COGS understated
net income overstated
retained earnings overstated
stockholders’ equity overstated
what is the inventory turnover ratio?
indicates how many times the inventory is (sold) turned over during the year and allows you to calculate the number of days on average inventory is held
what is the formula for the inventory turnover ratio?
COGS/average inventory
what does 2/10, n/30 mean?
2% discount if paid in 10 days, nothing afterward, payment is due in 30 days
what is accounts receivable?
A/R is an asset and is recorded when a business sells inventory or services to a customer on account
what is the formula for net sales?
net sales = sales revenue - sales discounts - sales returns and allowances
what is the direct write-off method?
no allowance account is used and bad debt expense is recorded when a company determines a particular amount to be “uncollectable”
what is the journal entry for the direct write-off method?
DEBIT bad debt expense, CREDIT accounts receivable
how does the allowance method works?
the company estimates the amount of A/R that will uncollectible. the estimate reflects the required ending balance in the AFDA. at the end of the period, the company records an adjusting entry: debit BDE, credit AFDA.
how does percentage of receivables work?
single percentage (i.e. 5% of A/R will be uncollectible)
how does aging of accounts receivable work?
the company creates a schedule of customer balances by the length of time outstanding and assigns each age an uncollectible percentage
what is the allowance for doubtful accounts?
a contra-asset account that represents a portion of a company’s account receivables that it does not expect to collect. the normal balance is a credit balance.
what is the adjusting entry for AFDA?
DEBIT bad debt expense, CREDIT allowance for doubtful accounts
how do you write-off an accounts receivable?
DEBIT allowance for doubtful accounts, CREDIT accounts receivable. decreases the allowance for DA and A/R by the amount that was written off but has no effect on expense when the allowance method is used.
how do you recover an accounts receivable?
DEBIT accounts receivable, CREDIT allowance for doubtful accounts.
DEBIT cash, CREDIT accounts receivable.
what is the formula for the receivable turnover ratio?
net credit sales / average net accounts receivable (use net sales if net credit sales are not available)
what is the receivable turnover ratio?
liquidity is measured by how quickly certain assets can be converted into cash
how do you calculate the average collection period?
365 days / receivables turnover ratio
what is PP&E?
resources that have physical substance, are used in the operations of a business, and are not intended for sale to customers.
what does PP&E include?
land, land improvements, buildings, equipment, and machinery
what does it mean for PP&E to be recorded at cost?
cost is measured by the cash paid in a cash transaction/cash equivalent. including all costs necessary to acquire the asset and prepare it for use, like sales tax, freight, installation costs, etc.
what is straight-line depreciation?
the most widely used method of depreciation. the depreciation is the same for each year of the asset’s useful life
how do you calculate annual depreciation under the straight-line method?
(cost - residual value) / useful life
what is double-declining depreciation?
an accelerated method, which results in more depreciation in the early years of an asset’s life and less depreciation in the later years of an asset’s life. when applying the declining balance, do not let the book value drop below the residual value
how do you calculate annual depreciation under the double-declining method?
net book value at beginning of year * (2 / useful life in years)
net book value = cost - acc depreciation
what is the unit-of-activity method?
depreciation is based upon expected use or expected output rather than time. not as popular as straight-line as it is difficult to estimate total activity
how do you calculate annual depreciation under the unit-of-activity method?
- depreciation cost per unit of activity = (cost - residual value) / total units of activity
- depreciation expense = depreciation cost per unit of activity * unit of activity during the year
why do we sometimes revise annual depreciation?
if wear and tear or obsolescence indicate that annual depreciation estimates are inadequate or excessive so we revise depreciation for current and future years. there is no correction of previously recorded depreciation expense
why do we dispose of PP&E?
whether a plant asset is sold or retired, the company must determine the net book value of the plant asset at the time of disposal and if a gain/loss exists
what is the journal entry if the PP&E asset is sold for a gain?
DEBIT cash, DEBIT accumulated depreciation, CREDIT equipment, CREDIT gain on sale
what is the journal entry if the PP&E asset is sold for a loss?
DEBIT cash, DEBIT
accumulated depreciation, DEBIT loss on sale, CREDIT equipment
what is the journal entry for the disposal of plant assets?
DEBIT accumulated depreciation, DEBIT
loss on disposal of equipment, CREDIT equipment
what are intangible assets?
rights, privileges, and competitive advantages that result from ownership of long-lived assets that do not possess physical substance. like patents, copyrights, trademarks/trade names, franchises and licenses, goodwill
what is amortization?
if the intangible asset have a limited useful life, its cost is allocated over the useful life. it is similar to depreciation, its systematic allocation of the cost over the asset’s life
what is the journal entry for the amortization of an intangible asset at the end of the accounting period?
DEBIT amortization expense, CREDIT intangible asset
what about R&D?
R&D costs are not intangible assets but may lead to intangible assets. R&D is recorded as an expense when incurred.
how do you calculate the revised annual depreciation?
depreciable cost at time of revision / remaining useful life
