F3 Flashcards
Factoring
selling A/R
Factoring with recourse
factor (buyer) may return the account to the company if it subsequently requires a credit loss adjustment; liability & risk of loss remains with company
Factoring with recourse JE
Two treatments:
1. sale (if seller’s obligation for uncollectible accounts can be estimated, surrenders control of future benefits, seller isn’t req. to repurchase but may replace A/R)
2. borrowing (with receivables as collateral)
Factoring without recourse
factor (buyer) assumes the risk of loss if the account requires a credit loss adjustment (write-off)
Factoring without recourse JE
Dr. cash, due from factor (factor’s margin), loss on sale of receivable, accounts receivable)
Cr. Accounts receivable
Discounting
selling N/R
At what value should non-interest bearing promissory notes be recorded?
At PV of future payments required, discounted at the market interest rate
discounting N/P with recourse
holder remains contingently liable
discounting w/o recourse
holder assumes no further liability after discounting
tx for N/R with recourse
reported on BS with corresponding contra-account (N/R discounted) OR removed from BS with contingent liability disclosed in footnotes
tx for N/R without recourse
removed from BS
Cash recon items for book balance
B- bank collections +
I- interest income+
N- NSF -
S- service charges -
(&errors) +/-
Cash recon for bank balance
D- deposits in transit +
O- outstanding checks -
Cash rec procedure
Adj. book (true balance), adj. bank to match
Restricted cash
set aside for a specific use or purpose (ST or LT); disclosed in footnotes
Check dating
checks date past but not mailed = add back
checks postdated = not included
Pledging A/R & tx
use A/R as collateral; no JE, footnote disclosure
How is notes receivable recorded?
present value = fv - unearned interest
Trade discounts vs. sales discounts
trade = quantity
sales = prompt payment w/in terms
Trade discounts
offered for bulk buying
stated as percentage
applied one at a time
recorded using net method (not gross method)
Shipping terms and when title is transferred
FOB destination: seller retains inventory until goods are received
FOB shipping point: buyer gets title when goods are given to a common carrier
Goods and materials to be included in inventory
Goods in transit: depends on shipping terms
Wrong goods: seller’s inventory (breach of contract)
Consignment: included in conignor’s inventory (title passes directly from consignor to 3rd party)
Public warehouse: included in inventory (warehouse receipt)
Sales with mandatory buyback: included in seller’s inventory
Installment sale: if bad debt est. = include buyer’s inventory; if bad debt can’t be est. = include in seller’s inventory
Valuation of inventory
generally at cost (including freight-in less discounts)
Departures from cost basis for inventory
precious metals and farm products = NRV (selling price - cost to sell)
Lower of cost and NRV
used for FIFO and weighted average
NRV = selling price - cost to sell
Lower of cost or market
inventory methods and procedure
LIFO or retail inventory
market = middle value of market ceiling, floor, and replacement cost
market ceiling = NRV
market floor = NRV - normal profit margin
replacement cost = cost to repurchase/reproduce
Journal entry to write-down inventory and reporting
Dr. inventory loss; Cr. inventory
booked immediately (lg = disclosed; sm = increase COGS)
cannot be reversed; must also disclose change in measurement method
Inventory systems
periodic inventory JE
Purchases: Dr. Purchases, Cr. cash or A/P
Sales: Dr. Cash or A/R, Cr. Sales
Inventory systems
perpetual inventory JE
Purchases: Dr. Inventory, Cr. cash or A/P
Sales: Dr. Cash or A/R, Cr. Sales; Dr. COGS, Cr. Inventory
Inventory cost flow assumptions
FIFO, LIFO, specific identification, weighted average, moving average, dollar value LIFO
FIFO
- sell old, inventory new
- EI/COG = same in perpetual or periodic system
- use lower of cost or NRV for valuation
Weighted average
- periodic only
- avg. cost per unit = total inventory costs available / total # units available
- homogeneous units
Moving average
- perpetual
- compute weighted average after each purchase
LIFO
- sell new, inventory old
- conformity rule: if used for taxes must also be used for books
- better at matching rev & exp
- different EI and COGS for periodic and perpetual
- use lower of cost or market for valuation
Dollar-value LIFO
price index = ending inventory @ current year cost / ending inventory @ base year cost
The gross profit method is used for
interim FS as part of periodic inventory system (valued @ retail)
Firm purchase commitments
used to try to combat rising future prices; if market value drops, loss must be recognized if it is probable and reasonably estimable
Dr, estimated losses on purchase commitment; cr. estimated liability on purchase commitment
During a period of rising prices, effect of LIFO vs. FIFO
ending inventory and net income will be lower with LIFO & rising prices
(LIFO = LOWEST)
