Exam 2 Flashcards
Periodic Accounting
- Physically counted every period
- Usually for inexpensive inventory or small shops
Perpetual Accounting
Every inflow / outflow tracked in real time
Credit Terms
Discount Percent / Discount Period, Total Credit Period
FOB Shipping Point / Freight In
Part of inventory cost, paid by the buyer
FOB Destination / Freight Out
Part of selling expense, paid by the seller
Net Sales Revenue Equation
Net Sales Revenue = (Sales Revenue) - (Sales Return + Allowances) - (Sales Discounts)
Multi-Step Income Statement
Sales Revenue Less: Sales Return + Allowances / Discounts Net Sales Revenue Cost of Goods Sold Gross Profit Operation Expenses Selling Expenses Administrative Expenses Operating Income Other Revenues + Expenses (i.e. Interest) Net Income
Consistency Principle
(1) Businesses should use same methods period to period
(2) If changed, they should report it in Financial Statement Notes
Disclosure Principle
Company should report enough relevant information for outsiders to be able to make good educated decisions
Materiality Concept
Company should follow strictly proper accounting only for significant items (ex. anything less than $xxx is immaterial)
Accounting Conservatism
Never overstate assets or net income. Always pick the lesser option.
Inventory Costing Methods
(1) Specific Identification
(2) FIFO
(3) LIFO
(4) Weighted Average
Specific Identification Method
Used when specific cost for each unit of inventory can be tracked (ex. automobiles, unique artwork, jewels, real estate)
First-In-First-Out (FIFO) Method
The cost of the oldest item in the inventory is assigned to each unit as it is sold
Last-In-First-Out (LIFO) Method
Cost of newest item in inventory assigned to each unit as it is sold
Weighted - Average Method
(1) Average cost before + after the sale should be the SAME
(2) $ in inventory / units on hand
Effect of FIFO on Financial Statements
(During rising costs)
COGS: lowest
Net Income: highest
Ending Inventory: highest
Lower-Of-Cost-Or-Market (LCM)
Inventory should be reported at the lower of the inventory’s original cost or its market value.
Effect of Overstatement of Inventory
Ending Inventory, Gross Profit, & Net Income = overstated
COGS = understated
Cost Principle
The actual cost of a plant asset is its purchase price plus all the costs necessary to get the asset ready for its intended use
Plant Assets
Long-lived tangible assets used in the operation of the business
Lump-Sum Purchases
“basket purchase” for one price by each asset must be recorded separately: (market value) * (% of total price) * (total purchase price)
Adjusting for Depreciation
DEBIT: Depreciation Expense
CREDIT: Accumulated Expense
Straight-Line Method
(Cost - Residual Value) / (Estimated Useful Life - Years)
Units of Production Method
(Cost - Residual Value) / (Useful Life in Units)
Double-Declining Balance Method
(Cost - Accumulated Depreciation) * (2 / Useful Life)
Natural Resources
Assets that come from the earth + are consumed / natural resources ‘ deplete’
Recording Depletion Expense
(Depletion Expense / Accumulated Depletion)
(1) Compute depletion per unit
(2) Compute depletion for the period
Intangible Assets
Assets that have no physical substance // They ‘amortize’ via straight-line method – has no contra asset
Common Stockholder Rights
- Vote (1 share = 1 vote)
- Dividends
- Liquidation
- Pre-Emptive Ownership Rights
Preferred Stock Rights
- Priority in dividend distributions
- Dividend as a percent of par value
- Normally no voting rights
Issuing Common Stock
- DEBIT cash received
- CREDIT “Stock Type, – Amt Par Value ($ per share x $ of shares)
- CREDIT “Paid-In Capital in Excess of Par” – stock type
Small vs. Large Stock Dividends
- Lesser / Greater than 20-25%
- (Small - market value), (Big - par value)
- Small credits common stock AND paid in capital
Stock Splits
- Lower the par value
- Increase # of issues + outstanding shares
- Total capital does not change
Treasury Stock
When companies reacquire their own stocks to:
- Support company’s stock price
- Sell to employees at a discount
- Fulfill stock option obligations
Operating Activities
Related to revenues or expenses
Investing Activities
Related to inc/dec in long-term assets
Financing Activities
Related to inc/dec in long-term liabilities & equity
To compute cash flows from operations:
Need:
- net income
- non cash expenses
- gains/losses
- changes inc urrent assets + current liabilities
Positive Adjustments in Cash Flow
- Losses on disposal of long-term assets
- Dec in current assets
- Depreciation, Depletion, Amortization
- Inc in current liabilities
Free Cash Flaw Equation
(Net Cash from Operating Activities) - (Cash Payments Planned for Investments in Long-Term Assets) - (Cash Dividends)
