Far 2 Flashcards
Reconciling Bank Balance to Book Balance
Bank Balance \+ Deposits in Transit -Outstanding Checks \+/- Bank Errors \+/- Errors on Ledgers =Book Balance
*There are only two reconciling items for the balance per bank statement, and these are deposits in transit and outstanding checks.
Any other reconciling items like service charges, NSF checks, interest income and error are only reconciling items to the balance per the books or general ledger balance.
**When your reconciling book and bank balance……If a company has more than one bank account and one bank account has a negative balance, that would be listed as a liability/payable on the balance sheet instead of just being netted against the other bank accounts
Cash and Cash Equivilents
Assets that are readily available and unrestricted
Cash, coins or currency, cash in bank, checks, money orders, checkbook balance, petty cash
cash equivalents: U.S. Treasury bills, Commercial paper, money market funds
***MUST have a maturity date with less than 3 months (90 days) from the date of purchase to be considered cash equivelent
CASH that is in a bond sinking fund is RESTRICTED for use and would not be included under “cash” on the balance sheet
- if a check is not mailed out until the next year then you need to include it as cash still in the year it is recorded, so add it back to the checkbook balance
- A post dated check should not be included in cash equivalent bc it is dated after the B/S date
-A legal right of offset requires a company with different bank accounts to offset overdrawn accounts with positive balances in other accounts of the same bank to arrive at cash
Account Receivables
Recorded at Net Realizable Value (NRV) on the B/S which is the amount of cash the company actually expects to collect
***items that reduce A/R:
sales discounts, sales returns, non-collectible amount
-When a company offers discounts, the sales can be recorded under the net or gross method……
Net method: A/R is recored with the discount already factored in
Gross method: When A/R is recorded the gross amount is shown along with a journal entry for the discount
-Uncollectible A/R- there has to be some sort of estimate of A/R that wont actually be collected….
Direct Write off Method & Allowance Method
Direct Write off Method
Rarely used. Doesn’t conform to GAAP.
When the account becomes uncollectible, it is written off to bad debt expense and A/R is reduced by the same amount
Journal Entry:
Bad Debt Expense X
A/R X
- Net income is reduced under the “direct write off method”
- Working Capital is also reduced under the “direct write off method”
Allowance Method
The allowance is a contra account to A/R, so it has a credit balance.
Journal Entry:
To write of uncollectible amount…
Allowance for Doubtful Accounts X
A/R X
(This entry has no effect on Net income, and the allowance account is lowered/decreased when debited)
To bring allowance back where it needs to be…
Bad Debt Expense X
Allowance for Doubtful Accounts X
Under the Allowance Method, there is the Income Statement Approach and the Balance Sheet Approach….
% of Sales
OR
% of A/R
Income Statement Approach:
Estimates bad debt as a % of SALES. It directly calculates the amount of bad debt expense.
B/S Approach:
This approach estimates bad debt allowance as a % OF A/R not sales. It directly calculates the ending balance of the allowance account.
ex.
A/R at year end
x % estimated that will become uncollectible
=Allowance for uncollectible A/R
Secured Borrowing
If the receivables are transferred by the transferee DOES NOT have the right to sell the receivables and the transferor keeps control…
it is SECURED BORROWING. They are just using their receivables as collateral and receiving a loan.
Cash X
Note Payable X
Factoring Receivables
This means a company assigns their receivables to a factor (like a bank) for a fee, and receives cash in return.
-This can be done with recourse or without recourse. Without recourse is considered a sale of the receivables.
Journal entry for factoring receivables WITHOUT recourse is a sales transaction, and transfers the risk of uncollectible to the buyer(A SALE OF THE RECEIVABLES):
Cash X
Loss on sale of receivables X
A/R X
Journal entry for factoring receivables WITH RECOURSE:
Cash X
Loss on the sale of receivables X
A/R X
Recourse LiabilityX
Is the receivable transferred a LOAN or a SALE?
There is 3 criteria for determining if a transfer of accounts receivable is a loan or sale…
IF all 3 are met, its is a SALE.
If any are not met it is a LOAN.
1. Control is given up
2. Transferee has rich too sell the receivables
3. There is no agreement that lets the company keep control of the receivables
The allowance for uncollectible amounts balance calculation…
Beginning Balance at 1/1 (Balance for allowance for uncollectible amounts at beginning of year)
+ Credit sales for the year ended x % it is likely uncollectible
=Total uncollectible
- Bad Debts written off during year
=year end allowance for uncollectible amounts balance
+estimated uncollectible accounts per aging
=Adj. for uncollectible A/R
Aging the Receivables Method
A method of estimating uncollectible amounts that emphasizes ASSET VALUATION rather than income measurement is the ALLOWANCE METHOD BASED ON AGING THE RECIEVEABLES
Discounting a note to a Bank (basically selling it to the bank for cash)
DISCOUNTING is the process of converting notes receivable to cash.
Factoring is when you convert accounts receivable to cash!
Face Value of Note x Interest rate on notes =Interest \+Face Value =Maturity Value of Note (what it's worth) x Discount % by bank =discount Maturity Value-Discount =Proceeds from bank
“Accounts Receivables Net”
Trade A/R
-Allowance for uncollectible
+Claim against shipper for goods lost in transit (before year end)
=Current Net Receivables
- Consignment goods are inventory not A/R
- Security deposits are not A/R and are not generally a current asset
What is the uncollectible Accounts Expense?
The provision. So It is what they estimate the uncollectible accounts expense will be.
Ex. Estimates it will be 2% of credit sales.
Credit sales is 1,000,000 for the year so…
The uncollectible Accounts Expense is 20,000. (2% of 1,000,000)
How to find the ending balance for uncollectible accounts balance
Beginning balance for uncollectible accounts
+ Uncollectible Accounts Expense (Provision)
=Subtotal
- Write offs
=ending balance for uncollectible accounts
Gar received a $60,000, 6 month, 10% interest bearing note from a customer. After holding the note for 2 months, Gar was in need of cash and discounted the note at the Bank at 12%. What amount of cash did Gar receive from the bank?
Face Value of note=
$60,000 x 10% x 6/12 months
=$3,000
so... 60,000+$3,000= $63,000 x 12 %x 4/ 12 months =$2,520 63,000-2,520= $60,480 would be Gar's proceeds from the bank
Discounting note to a bank
The proceeds received from the bank are the
MATURITY VALUE less the DISCOUNT. The discount is always applied to the maturity value.
When the allowance method of recognizing uncollectible accounts is used, the entry to record the write-off of a specific account…
DECREASES both the accounts receivable and the allowance for doubtful accounts.
journal entry to write-off uncollectible accounts:
allowance 4 doubtful accounts X
A/R X
both accounts are DECREASED.
Allowance for uncollectible Accounts
Accounts Recieveble
-Allowance 4 doubtful accounts
=Net Accounts Receiveable
Aging Method for calculating uncollectible accounts
The balance in the allowance account is determined by multiplying receivables by the uncollectible %
*The existing balance in the allowance account is not used. It is used to determine the expense for the next year!
% of Receivables Method
The ending balance in the allowance account is equal to the total estimated uncollectible amount.
Allowance for uncollectible accounts: Beginning balance \+Expense (squeezed) =subtotal -write-offs =ending balance
Allowance method is consistent with accrual basis of accounting
Direct Write off is NOT consistent with accrual accounting
BASE calculation
B: Beginning allowance for uncollectible accounts balance
A + Uncollectible Accounts Expense
S-Accounts Written off
E Ending Balance for allowance for uncollectible accounts
Inventory
The different ways to value inventory are to use either:
1. Lower of cost or Net Realizable Value
2. Lower of cost or Market
…
to calculate the carrying value of inventory
FIFO and Average-cost Method
These use lower of cost of Net Realizable Value (NRV)
LIFO
This uses lower of cost or market
Inventory LOSSES should generally be recognized in the interim statements. (Permanent declines in inventory market value should be reflected in interim F/S in the period occurred.)
Net Realizable Value
NRV
Selling Price - Costs of completion
Lower of cost or market
This is replacement cost subject to a ceiling and floor.
*if replacement cost is between ceiling and floor, these use replacement cost
- Ceiling=NRV
- Floor=NRV-Profit Margin
FIFO
First in first out.
When prices are rising using FIFO, COGS is the lowest and provides the highest net income, also the highest ending inventory
LIFO
Last in first Out.
When prices are rising using LIFO, this gives the highest COGS and lowest Net income, and lowest ending inventory
*LIFO provides tax advantages bc it causes lower net income
Inventory Equation
Use for questions that are like
“purchases were overstated, what was the effect?”
Beginning inventory \+Purchases =Goods available for sale -Ending Inventory =Ending inventory
Gross Margin Method
Sales- COGS
=Margin
Retail Inventory Method
Used to estimate the cost of ending inventory.
- calculate ending inventory at retail prices
- calculate the cost to retail ratio
- apply cost to retail ratio to ending inventory at retail prices to get ending inventory at cost
IFRS Vs. GAAP in INVENTORY
IRFS:
- Inventory is valued at lower of cost or NRV
- LIFO is not allowed
- Reversal of inventory write-downs IS allowed under IRFS
GAAP:
- Reversal of inventory write-offs IS NOT ALLOWED under GAAP.
- LIFO is allowed
PP&E
PP&E are assets that produce revenue for the business. Their cost is allocated over time through depreciation.
PP&E includes:
- Buildings
- Machinery and Equipment
- Land (only asset that is not depreciated)
- Land improvements -are depreciated
- Natural Resources- oil, well, coal mine. Instead of being depreciated they are “depleted”
Carrying Amount of PP&E
Historical Cost (includes capitalized costs)
-Accmulated Depreciation
-Impairment Losses
=Carrying Amount (what they would be listed on the books)
Capitalized Costs for PP&E
These are costs included in the asset account instead of being expensed.
Two basic categories:
1. Costs to get the asset ready for use
2. Costs to extend the assets useful life or improve productivity
Disposal of PP&E Assets
When a PPE item is sold, a gain or loss is recognized based on the amount realized from the sale compared to the carrying amount of the asset sold.
