Exam 3 Review Flashcards
Bad Debt Expense
(Net Credit Sales for Period) x (Historical Bad Debt Loss Rate)
Percentage of Credit Sales Equation
(Net Credit Sales) x (% Estimate Uncollectible)
Interest Equation
Principal(P) x Interest Rate(I) x Time(t)
Write Off Journal Entry:
dr. Allowance for Doubtful Accounts
cr. Accounts Receivable
Reverse Write Off Journal Entry:
dr. Accounts Receivable
cr. Allowance for Doubtful Accounts
Receipt of Cash Journal Entry:
dr. Cash
cr. Accounts Receivable
Bad Debt Journal Entry:
dr. Bad Debt Expense
cr. Allowance for Doubtful Accounts
Loan to Employees Journal Entry:
dr. Notes Receivable
cr. Cash
Interest Accrued Journal Entry:
dr. Interest Receivable
cr. Interest Revenue
Receipt of Interest on Note’s Maturity Date Journal Entry:
dr. Cash
cr. Interest Revenue
cr. Interest Receivable
Payment for Full Principal of Note:
dr. Cash
cr. Notes Receivable
Average Net Receivable
(Beginning Net Receivable + End Net Receivable) /2
Receivable Turnover Ratio
(Net Sales) / (Average Net Receivables)
Days to Collect
365 / (Receivable Turnover Ratio)
Company Interested in Minimizing Income Taxes:
Declining Costs - FIFO
Rising Costs - LIFO
Manager’s Goals for Inventory
(1) Maintaining sufficient quantity
(2) Ensuring quality
(3) Minimizing acquisition and carrying costs
Inventory Turnover Ratio
COGS / (Average Inventory)
Average Inventory
(Beginning Inventory + Ending Inventory) / 2
Days to Sell
365 / (Inventory Turnover Ratio)
Oldest price sold first.
FIFO
Most recent purchase price sold first.
LIFO
Gross Profit Equation
Net Sales - COGS
Current asset on balance sheet.
Inventory
Expense on income statement
COGS
Reasons Inventory Falls Below Cost:
(1) Easily replaced by identical goods at lower cost
(2) Becomes outdated or damaged.
Periodic Updating Equation
Beginning Inventory + Purchases - Ending Inventory = COGS
Perpetual Updating Equation
Beginning Inventory + Purchases - CCOGS = Ending Inventory
Effects of Increasing Costs on Financial Statements
FIFO:
Inventory - higher
COGS - lower
Highest Gross Profit
LIFO:
Inventory - lower
COGS - higher
Effects of Decreasing Costs on Financial Statements
FIFO:
Inventory - lower
COGS - higher
LIFO:
Inventory - higher
COGS - lower
** Highest Gross Profit**
Advantages of Extending Credit
(1) Increases the sellers revenue
Disadvantages of Extending Credit
(1) Increased Wage Costs
(2) Bad Debt Costs
(3) Delayed Receipt of Cash
Number of Days to Sell
Average Inventory / (Daily Average COGS)
Average Inventory
(Beginning Inventory + Ending Inventory) / 2
Daily Average COGS
COGS / 365
Bad Debt Expense
Before income operations
Interest Revenue
After income operations
Allowance for Doubtful Accounts if a contra-account that offsets
Accounts Receivable
If inventory costs have been falling during the year, which cost method results in the highest gross profit?
LIFO
Costing method that approximates closely the current cost of each of the following
Ending Inventory - FIFO
COGS - LIFO
