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A311 > Exam 2 > Flashcards

Exam 2 Flashcards

1
Q

Cash

A
  • Monies available on demand
  • Currency, funds on deposit at bank, money orders, checks, petty cash funds
  • NOT cash: post-dated checks, CDs, IOUs, prepaid expenses
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2
Q

Cash equivalents

A

Items that are both:
1)Readily convertible to known amounts of cash
2)So near their maturity that they produce an insignificant risk of change in interest rates
Examples: T-bills, ccommercial paper, anything with very short windows

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3
Q

Restricted cash

A

Cash committed or restricted to a specific purpose

Can be short or long term

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4
Q

Receivables

A
  • Claims held against customers and others for money, goods, or services
  • Classified as trade or non-trade
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5
Q

Trade recceivables

A
  • Accounts or notes receiveable

- Written promises to either pay or to deliver

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6
Q

Non-Trade receivables

A

-Arise from variety of transactions, written promises to pay or deliver
-Generally reported separately on balance sheet
Exmaples: Advances to officers, deposits paid, dividends receivable, claims against insurance

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7
Q

Accounts receivable

A
  • Verbal promises related to goods and services sold
  • Majority of all sales are through AR
  • Recognize AR at the exchange price between buyer and seller
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8
Q

Complications of AR

A
  • Time value of money
  • Availability of discounts
  • Uncollectible amounts
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9
Q

Interest for AR?

A
  • In general, ignore interest implicit on receivables due within one year
  • After one year, report at Net Present Value
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10
Q

Discounts on AR

A
  • Trade discounts

- Cash (sale) discounts

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11
Q

Trade discounts

A
  • Reductions from the list price (often quoted in percentages)
  • Bill customers NET of trade discounts and do not recognize trade discounts in accounting records
  • Just record new sale price
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12
Q

Cash (sales) discounts

A
  • Offered to induce prompt payment
  • Example of cash discount terms: 2/10, n/30
  • 2(Discount %), 10 (Days in discount period), 30 (otherwise pay full amount in this many days)
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13
Q

Cash discounts - Gross method

A
  • Assume not taking discount
  • Sales and receivables recorded at the gross amount
  • Discounts taken by customers debited to Sales Discounts account which reduces sales in the income statement
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14
Q

Cash discounts - Net method

A
  • Assuming they will always take the discount
  • Sales and receivables recorded at the net amount
  • Sales discounts not taken by customers are credited to the Sales Discount Forefeited account which is reported in the Other revenue section of the income statement
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15
Q

Value receivables at:

A

Net realizable value

expected exit value

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16
Q

Direct write-off method

A

-WRONG!
DR Bad debt expense, CR Accounts receivable
-This method may be used only if the amount deemed uncollectible is immaterial

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17
Q

Allowance method

A
  • At the end of each period, estimate the expected losses from uncollectible accounts, create allowance (all adjusting journal entries)
  • When account deemed uncollectible, reduce allowance set up in prior period, DO NOT expense in current period
  • Determine estimate using Percentage of Sales or Percentage of Receivables approach
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18
Q

Percentage of Sales Method

A
  • Attempts to match bad debt expense with revenues

- Calculates amount of bad debt expense

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19
Q

Percentage of Receivables Method

A
  • Estimate uncollectible accounts based on % of outstanding receivables
  • Calculates the ending balance in the allowance account
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20
Q

Write-Offs

A

Debt allowance, cr A/R

-If they end of paying, reverse write-off then recognize receipt of cash

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21
Q

Notes receivable

A
  • Generally come from customers who need to extend the payment period of an outstanding A/R
  • High risk or new customers
  • Sales of property, plant, equip
  • Lending transactions (majority of notes)
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22
Q

For short-term notes:

A

-Record at face value less any allowance (Maturities of 3 months or less)

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23
Q

For long-term notes:

A

-Record at the present value of cash expected to be collected (face amount - allowance + or - any unamortized premium/discount)

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24
Q

Amortization schedule

A

Beg Carrying Value: Present value
Carrying value: Prior carry.val + Amortization of discount
Int Revenue: Market rate of int * carrying val
Amortization of disc: int rev - cash received
Cash received: stated rate * principal

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25
Q

Disposing of receivables

A
  • Company can transfer receivables to another company for cash
  • Needs cash immediately, Billing and collection are costly
  • Transfer accomplished by 1) secured borrowing or 2) sale of receivables
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26
Q

Secured borrowing

A

-Lender has firm claim on all collections, but firm still has legal title to A/R, collects from customers, and retains all RISK

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27
Q

Factors

A

Finance companies or banks that buy receivables from businesses for a fee
-May be sold with or without recourse

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28
Q

Sold without recourse

A
  • Purchaser assumes risk of collectability and absorbs credit losses
  • Seller records loss on sale for excess of face amount of receivables over the cash proceeds
  • Seller uses Due from Factor (receivable) account to cover discounts & returns
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29
Q

Due from factor

A

-If purchaser receives full amount, seller will receive this back

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30
Q

Sold with Recourse

A
  • Seller guarantees payment to purchaser for receivables that become uncollectible
  • Due from Factor account still used
  • Recourse Liability account is used to recognize the probable payment to the factor for uncollectable accounts and this increases the reported loss
31
Q

Inventory

A

Assets held for sale in the ordinary course of business or goods that will be used in the production of goods to be sold

32
Q

Perpetual Inventory systems

A
  • Easier than periodic in terms of entries
  • Costs of purchases and sales recorded directly in inventory account and COGS is a running total
  • A physical inventory count at year-end is taken to determine loss of inventory during the year
33
Q

Shrinkage account

A
  • Treat like an expense account

- Accounts for differences at the end of the period

34
Q

Periodic Inventory system

A
  • Cost of purchases recorded in purchases account
  • At time of sale, no changes made to inventory or COGS
  • At end of period, ending inventory determined by physical count
  • COGS and change in inv. during period recorded, purchases acct cleared
  • COGS = beg inv + purchases - end inv
35
Q

Normally, include inventory when:

A

RECEIVED, when goods change hands
Exceptions: f.o.b. shipping point, sales with buyback agreements, sales with high amounts of returns that CANNOT be estimated

36
Q

F.o.b. Shipping Point

A

Title passes to buyer when the seller delivers the goods to common carrier

37
Q

f.o.b. destination

A
  • More common

- When goods get to the delivery point

38
Q

Costs included in inventory

A
  • Product costs: directly connected with bringing goods to the place of business and converting them to sellable
  • Direct materials, direct labor, manufacturing overhead
  • Do NOT include period costs (SG&A)
39
Q

If ending inventory under-stated:

A

In SAME period
-COGS (over), NI (under), Inventory (under), R/E (under)
In the NEXT period
-COGS (under), NI (over), Inventory (correct), R/E (correct)

40
Q

If ending inventory over-stated:

A

In SAME period
-COGS (under), NI (over), Inventory (over), R/E/(over)
In the NEXT period
-COGS (over), NI (under), Inventory (correct), R/E (correct)

41
Q

Specific Identification

A
  • Cost flow matches the physical flow of goods exactly

- Know what each specific unit costs you

42
Q

Average Cost

A
  • Inventory is priced at the average cost of goods available for sale
  • Under a perpetual system update the average cost at the time of each sale for all purchases that occurred after last sale
43
Q

FIFO

A
  • Assumes first goods purchased are the first goods sold

- Periodic and perpetual are the same

44
Q

LIFO

A
  • Assumes last goods purchased are the first goods sold

- Periodic and perpetual COGS and EI will not be equal

45
Q

Advantages of FIFO

A
  • Most common in the US
  • Corresponds to the physical flow of goods in most businesses
  • Inv on balance sheet is closest to current cost
  • NI is higher in times of rising prices
46
Q

Disadvantages of FIFO

A
  • COGS is not based on current costs, so you are not matching current costs with current revenues
  • Taxes are higher in times of rising prices
47
Q

Advantages of LIFO

A
  • Matches current cost with current revenue

- In times of rising prices, tax advantages

48
Q

Disadvantages of LIFO

A
  • IFRS prohibits
  • Rarely represents the physical flow of goods
  • Inventory on the balance sheet not reflective of current cost
  • Depressed income numbers may influence financial statement users (must use same method for taxes)
49
Q

Inventory is valued at:

A

Lower of cost or market

50
Q

If market value drops below cost:

A

Inventory book value is written down if market value drops below cost
-Losses recorded in period when the loss occurs, not in the period when the sale occurs

51
Q

Write-ups?

A

GAAP does not allow inventory to be written up. of market values recover or exceed cost (conservatism principle)
IFRS - not as conservative, does allow inventory to be written up

52
Q

Market value

A

Defined as replacement cost

  • Bounded by ceiling (NRV) and floor (NRV - normal profit margin)
  • If below floor, stop here mrket value becomes floor
53
Q

Why ceiling?

A
  • Prevents over-statement of inventory

- When higher than ceiling, inventory is obsolete and replacement cost is high, not a good indicator of utility

54
Q

Why floor?

A

-Prevent under-statement of inventory

55
Q

Inv Write-down direct method

A
  • WRONG method
  • Writes down directly to inventory, makes it look like a normal sale
  • Only use if immaterial
  • DR COGS, CR Inventory
56
Q

Inv Write-down indirect or allowance method

A
  • Written down to contra inventory account, balance adjusted each period
  • DR loss on inventory, CR allowance to reduce inventory to market
57
Q

Use of an allowance - multiple periods

A

-Adjust allowance account balance at the next year end to agree with discrepancy between cost and lower of cost or market

58
Q

Evaluation of LCM Rule

A
  • Expense recorded in period with losses (violates matching principle)
  • Inventory valued at cost one year and market the next (violating consistency)
  • NI in year of loss is lower
  • LCM uses “normal” profit margin (inherently subjective)
59
Q

Relative Sales Value Method

A
  • Firms that purchase inventory in bulk must allocate the total cost to individual items
  • Simply dividing total cost by number of units is not appropriate if units vary in value
  • **REVIEW EXAMPLE
60
Q

Motivation for investing in other companies

A
  • Earn a higher rate of return
  • Diversification
  • Secure certain operating or financing arrangements with another company
61
Q

Accounting for investments depends on:

A
  • Type of security

- Management’s intent with respect to the investment

62
Q

Debt securities

A
  • No plans to sell:

- Plans to sell: Fair value

63
Q

Equity securities

A
  • Plans to sell:

- Exercise some control: Equity method

64
Q

Held-to-Maturity

A
  • Valuation: Amortized cost
  • Unrealized G/L: Not recognized
  • Interest when earned, gains and losses when sold
65
Q

Available-for-Sale

A

Valuation: Fair value
Unrealized G/L: recognized as other comp. income
Interest when earned, gains and losses when sold

66
Q

Trading

A

Valuation: Fair value
Unrealized G/L: recognized in net income
Interest when earned, gains and losses when sold

67
Q

Unrealized G/L

A
  • Market value changes but haven’t sold it yet

- Buy an asset and it appreciates could receive gain but haven’t sold it

68
Q

When is it recognized as held to maturity?

A

1) Intent and 2) ability to hold investment until it matures
-Record at cost NOT face value (no discount/premium)
-Report at amortized cost (am. increases/decreases the investments account)
Interim price fluctuations are not relevant because of the intent to hold to maturity

69
Q

Available-for-Sale (debt)

A
  • Record at cost and recognize realized gains and losses in income
  • Report at fair value, unrealized go through equity (kind of like dividends, effect equity but off of IS)
  • When selling AFS securities, ignore FV and record the sale based on cost
  • FV adjustment made at end of period will be based on whatever securities are currently in the portfolio
  • NOT effecting net income
70
Q

Trading Securities

A
  • Bought and held primarily for sale in the near term to generate income on short-term price differences
  • Record at cost
  • Report at fair value
  • Recognize realized and unrealized gains and losses on changes in fair value in income (in that period)
71
Q

No significant influence

A
  • Investor firm has < 20% ownership

- Fair value method

72
Q

Significant influence

A
  • Investor firm as 20-50% ownership

- Equity

73
Q

Control

A

> 50% ownership

Consolidation

74
Q

Fair value method

A
  • AFS and Trading equity securities: treat same as debt securities, report dividends received as income
  • AFS, unrealized go to comprehensive income
  • Trading, unrealized effect NI

A311 (3 decks)

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