FAR - F4: Working Capital and Fixed Assets Flashcards
F4: Working Capital & Fixed Assets
**Factoring receivables without recourse is a sales transaction.
**Factoring without recourse transfers the risk of uncollectible accounts to the buyers.
F4:**Factoring receivables may be treated as a sales transaction
**Factoring with recourse leaves the risk of uncollectible accounts with the seller.
F4: **Pledge receivables
Pledging receivable is the process of obtaining a loan using the receivables as collateral.
F4: **Assigning Receivable
Assigning receivables is the process of obtaining a loan by transferring to the lender the debtor’s right to cash collected on receivables.
F4: When the allowance method of recognizing uncollectible accounts is used…
the entry to record the write-off of a specific account decrease both accounts receivable and the allowance for uncollectible accounts.
JE:
Dr - Allowance for uncollectible accounts
Cr - Accounts receivable
**Net income is not affected.
F4: How to calculate “Adjusted Cash Balance…”
**Adjusted Cash Balance = Unadjusted cash balance +/- bank errors + credit memos - service charges
For example:
Adjusted cash balance = $10,012 - (95 - 59) + 35 - 50 = 9,961
F4: Which method of recording uncollectible accounts expense is consistent with accrual accounting?
**Allowance method is consistent with accrual accounting; direct write-off is not consistent with accrual accounting.
F4: Net sales should reflect estimated sales returns but not exchanges
**When sales returns can be estimated, a decrease in revenue with a debit to the allowance for sales returns is made.
For example; 10% returns are expected. $1,000,000 less 10% is $900,000.
**Expected exchanges do not affect net sales or inventory or cost of sales. The earnings process is complete for the exchange. SFAS 48 para. 3,4.
F4: Factoring of Accounts receivalbles
- Without recourse - True Sale (Risk is transfer to buyer)
- with recourse - Sale or Loan (Risk remains with seller)
**Factoring receivables is the process by which a company converts its receivables to cash by assigning them to a factor, either with or without recourse.
F4: How to calculate Net Proceeds at discount (Maturity Value)
- Original Term 12 months
6 months gone by
————————————
Remaining month: 6 - Bank wants 6 months of interest at 10% of maturity value:
10% on MV for 6 months
Face of Note: $500,000
Interest rate on Note 8% x 1Y = $40,000
So Maturity Value of Note: $540,000
Discount by Bank 10% x 1/2 year = 5%
———————————————————
Bank Interest: ($27,000)
Proceeds from Bank: (540,000 - 27,000) = $513,000
Less: Face Value ($500,000)
Roth Interest: $13,000
F4: Substance over form
It is primary quality of decision usefulness. Information must be valid, and economic substance is more important than legal form.
F4: Milton Co. pledged some of its accounts receivable to Good Neighbor Financing corp in return for a loan.
**Milton will retain control of the receivables.
**When a company pledges (assigns) receivables in return for a loan, the assigning company will retain title to the receivables and will use the proceeds collected from the receivables to repay the loan.
F4: What amount of cash receive from the $80,000 factored receivable without recourse. Assume 10% of the A/R as an allowance for sales returns and %5 commissions
**Factoring involves a company converting its receivables into cash by assigning them to a “factor” either with or without recourse. Aloc factored its receivables without recourse, meaning the sale is final and the factor assumes the risk of any losses
Of the $80,000 factored, 10% was retained by the factor ($80,000 x 10% = $8000) and %5 commission is taken off ($80,000 x 5% = 4,000) to get to cash received of $68,000.
F4: Inventories
A. Goods in Transit - Read Carefully - are “We” buyer or seller
- F.O.B Shipping Point
- F.O.B Destination
- *F.O.B Shipping Point - Buyer pays
- Buyer’s Inventory - “Freight in” added to cost of inventory
- *F.O.B Destination - Seller pays
- Seller Inventory - “freight out” selling expense.
F4: B. Shipment of Non-conforming Goods (Wrong goods)
**Seller’s inventory
C. Sales with a Right to return
- *Can we “reasonably” estimate returns
1. if not then “NO SALE YET”, no A/R
2. If can then setup a contra account “Allowance of Sales return” of Sales
F4: D. Consigned Goods
- Consignor - True owners
- Consignee - Sales agent, inventory is not belong to them.
Consignor - Inventory cost includes shipping cost to consignee
Sales
------------------ GP -Commission -Advertising --------------------- NI =============
F4: Valuation of Inventory
**Net Realizable value
- *GAAP requires that inventory be stated at its “COST”
- Cost - Sold at a profit
= Selling price - disposal cost
B. Departure from the Cost Basis - If sold at a loss
- Lower of cost or market
2. Precious Metals and Farm Products - at Net realizable Value = Selling price - disposable cost
**Lower cost or Market(LCM)
**If you sell it at loss, book the loss now.
**Separately applying LCM to each item results in most conservative Ending Inventory or Total Inventory
Under GAAP, Lower cost or Market
Under IFRS, Lower of cost or Net Realizable Value(NRV)
Market Terms:
1. Market value = Middle value of an inventory item’s replacement cost, its market ceiling and its market floor.
- Replacement Cost = Cost to purchase the item of inventory as of the valuation date
- Market ceiling = Net Realizable value ( Net Selling price less cost to complete and dispose)
- Market Floor = market ceiling - normal profit margin (Based on SP only)
**Reversal of Inventory Write-down
GAAP does not allow reversal, but IFRS does original write-off and reduction of COGS.
**Under GAAP, determine the lower of cost or Market
Under GAAP, 3 steps process:
Step 1: Calculate Market Ceiling (NRV)
Selling price - Cost to Complete = NRV
Step 2: Calculate Market floor:
NRV - Profit margin = Market Floor
Step 3: Find the middle value then compare with Cost then pick the lower value.
**JE to record the write-down
Dr - Inventory loss due to decline in market value
Cr - Inventory
**Under IFRS, determine the Lower of cost or Market
**2 steps process:
step 1: Calculate NRV
Selling price - Cost to completion
Setp 2: Pick up the lower of the cost.
Periodic Inventory system Vs Perpetual Inventory system
- *Periodic - Use Purchases
- No COGS until period end
- **Perpetual - No Purchases,
- Every time we buy inventroy we Dr - inventory and sell inventory, Cr - Inventory
- *updated immediately, we do not wait at the end of the period.
A. Periodic Inventory system -*Use Purchases,
-temporary system
-End of the accounting period.
- COGS “Plug”
Disadvantages - shortages “lumped” in with COGS
Memorize: Beginning Inventory \+ purchases (Net of returns & discounts) = Cost of goods Available for Sale -Ending inventory (Physical count)
=COGS “Plug”
**What if Ending Inventory is overstated or incorrect, What is the ripple effects? "COGS & GP also incorrect" "Overstated + and Understated -" If Ending inventory + COGS - SP - -------------- GP + ========
Jouranl Entry for Periodic system:
**No COGS until period end
Dr - Cash $140,000
Cr - Sales $140,000
Jouranl Entry for Perpetual method:
Step 1:
Dr - Cash $140,000
Dr - Sales $140,000
Step 2: And Update:
Dr - Cost of Goods Sold $100,000 (20,000 x $5)
Cr - Inventory - $100,000
**What if if we purchase 50,000 units for $6/units
Under Periodic system, use purchases:
Dr - Purchases (50,000x6) 300,000
Cr - Cash 300,000
Under Perpetual method:
Dr - Inventory $300,000
Cr- Cash $300,000
**Primary Inventory cost flow assumpstion
**Under IFRS, LIFO method is not allowed. Only FIFO method.
Under GAAP, allows LIFO and FIFO are weighted average method.
**If LIFO is used for tax purposes, it must also be used in the GAAP financial statements.
If LIFO and P + (price is rising)
**What effects in the balance sheet and the income statements
**Assuming inflation:
Balance sheet:
EI - (Cheap)
A = L + E
Income statement:
Rev.
+ Step 1 Expensive
—————
Profit -
Taxable Income -
FIFO and LIFO method
- *FIFO - Up to bottom (1st batch to last batch)
- *LIFO - bottom up (start with last batch)
- FIFO Periodic = FIFO Perpetual
2. LIFO Periodic NOT= LIFO Perpetual
**Handle each assumption separately then net results:
**Use Overstated +
and Understated -
Step 1: BI 26- \+Purchase ------------------ COGAFS 26- -EI -------------------- COGS 26-
Step 2: COGAFS -EI 52 + ------------------ COGS 52 -
Step 3: COGS 26- + COGS -52 = COGS = 78-
Net Sales COGS 26- + COGS 52- = GP 78+
**Determine LCM
SP - Cost to complete = NRV - Profit = Floor
*FIFO Periodic vs Perpetual
**LIFO Periodic vs Perpetual
**An Example of LIFO Periodic and Perpetual Method:
*FIFO periodic and FIFO perpetual will always result in the same dollar valuation of ending inventory.
**LIFO Periodic and LIFO Perpetual will not the same dollar valuation of ending inventory
**An Example of LIFO Periodic (Valuate at the end of period):
**LIFO period is whatever is left after selling at the end of the period:
b/l 1/2: 2000 units x $1 = $2000
P 1/8: 200 units x $3 = 600
—————————————————
Ending Inventory: $2,600
An Example of LIFO Perpetual ( you valuate continuous as inventory flow, top to bottom):
Date - Units - Unit/cost - End Inventory - COGS
——– ——— ————- ——————– ———-
b/l 1/1 2000 $1 $2,000
P 1/8 1,200 $3 3,600
Sold 1/23 (1200) 3 (3,600) 3,600
(600) 1 (600) 600
p 1/28 800 5 4,000
—————————————————————————-
EI: $5,400 COGS: 4,200
**How to calculate COGS
**Calculate COGS
Beginning Inventory \+Purchase price -Purchase Discount \+Freight-in *Freight-out (Not included, Selling Expense) -Ending Inventory --------------------------------- Cost of Goods Sold:
*Freight-out is a selling expense, not an item that is capitalizable as inventory.
**Freight-in is capitalized as part of inventory. (i.e., it is part of the cost of getting the inventory ready for its intended use)
**Change inventory valuation method from FIFO to LIFO in a period of rising prices.
**Under LIFO, ending inventory (EI) has a lower valuation then uner FIFO since older, lower costs are assigned to ending inventory.
**Similarly, Under LIFO, COGS has a higher valuation than under FIFO since recent higher costs are assigned to goods sold.
**This higher COGS means that NET taxable income under LIFO decrease.
**Total Inventory valuation in the balance sheet
**Inventory will not be transferred until title transfer is occurred.
**The $90,000 inventory purchase should be included in inventory since it was shipped prior to year end and the title transferred to the company at the shipping point. the unshipped goods of $120,000 belong to the company since at year-end there has been no title transfer to the buyer. So Inventory includes: Physical count of $1,500,000 \+Inventory in transit of $90,000 \+the unshipped sale of $120,000 ---------------------------------- Total invenotry valuation $1,710,000
**Under the moving-average method, a new weighted average cost is computed after each purchase, and issues are priced at the latest weighted-average cost.
For Example:
Balance 1/1 1000 x $1 = $1,000
Purchase 1/7 600 x 3 = 1,800
————————————————
B/L 1/7 1600 x 1.75 (New weighted-avg.) = 2,800
sold 1/20 (900) x 1.75 = (1,575)
—————————————————-
B/l 1/20 700 x 1.75 = 1,225
Purchase 1/25 400 x 5.0 = 2000
——————————————————————————–
b/l 1/31 1100 x 2.93 (new weighted avg.) = 3225
**Calculate new weighted-average for every purchase.
**In this example, the next units sold would be priced at $2.93, the new weighted-average cost.
**What amount should Opal’s inventory account at December 31 be reduced?
**1. 40% markup and the goods held on consignment (not belonging to Opal) must be reduced from Inventory account.
So reduced form Inventory account is:
40% x 40,000 = 16,000
Goods held on cosignment = 27,000
——————————————————–
Total inventory reduce = $43,000
**$36,000 of goods shipped FOB shipping point (Buyer pays for shipment) should be included in inventory (Title has passed to Opal)
**Inventory accounting systems is true?
- Periodic inventory system
- Perpetual inventory system.
**A disadvantage of the periodic inventory system is that the cost of good sold amount used for financial reporting purposes includes both the cost of inventory sold and inventory shortages.
- With a periodic inventory system, the quantity of inventory is determined only by physical count, usually at least annually. Therefore, units of inventory and the associated costs are counted and valued at the end of the accounting period and the cost of inventory sold and inventory shortages connot be easily distinguished.
- With a perpetual inventory system, the inventory record for each item of inventory is updated for each purchase and each sale as they occur. The actual cost of goods sold is determined and recorded with each sale. At year end, inventory per the perpetual records can be compared to actual inventory per a physical count and inventory shortages can be identified.
**Consignment Sales
Net Income: 7,600
**In consignment sales, revenue is recognized when the goods are sold to a third party. Until the sale, the goods remain in the consignor’s inventory.
**Hart sold $32,000 worth of the consigned inventory and all calculations will be based on that amount.
Sales $32,000
Cost of Sales (40% x 50,000) $20,000
———————————————————
Gross profit: $12,000
Selling Expense: Advertising 1,200 commission 10%: 3,200 ---------------------------------- Total selling expense: $4,400
**The Cost of consigned inventory
**The cost of consigned inventory includes the cost of the inventory and any costs needed to get the inventory in place for sale. In this question, that is $20,000. Because the $500 is paid for advertising, and not for something like freight, it is not included in the cost of the inventory. at the end of the year, 30% of the inventory will remain unsold.
What is the effect of COGS and Taxable Income when Prices are rising?
** FIFO and P^ (Price is rising)
**LIFO and P^
**Under FIFO, the first costs inventoried are the first costs transferred to cost of goods sold. In a period of rising prices, FIFO results in the lowest cost of goods ans the highest net income.
**FIFO and P^ (Higher)
EI ^(Higher) Expensive => A^(Higher) = L + E
Rev.
-COGS - (lower) => “Cheap” items will sell first
———————————————————————
Gross Profit ^ (higher) => Tax liability ^ (Higher)
**LIFO and P^ (Higher)
EI - (Lower) => “Cheap” A - (lower) = L = E
Rev.
-COSGS (Higher) => Expensive items will sell first
————————–
Gross Profit - (Lower)
Taxable Income will lower.
**COGS Formula:
BI (Beginning Inventory) \+P (Purchases) ---------------------------- =COGAFS (Cost of Goods Available for sale) -EI ---------------------------------------- =COGS
EI^ => A^ = L +E
**Because inventory is a component of current assets, an overstatement of ending inventory will cause current assets to be overstated.
**Base on COGS formula:
An overstatement of EI will cause an understatement of COGS, which will result in an overstatement of Gross Profit.
Rev.
-COGS - (understatement)
—————–
Gross Profit - (Overstatement)
**Shipping costs
**Shipping costs from overseas (Freight-in) - Cost of Inventory
**Shipping costs to export customers (Freight-out) - Selling Expenses
***What amount of shipping costs should be included in Seafood trading’s year-end inventory valuation?
**The $1.5 million in overseas shipping costs must be allocated between ending inventory and cost of goods sold at year end, as follows:
BI: $0.0 \+P: 12.0 ----------------- COGAFS: $12.0 -EI: 3.0 -------------------- COGS: $9.0
so $9/$12 = 75% was sold
and $3/$12 = 25% remained in ending inventory at year end.
**Therefore, shipping costs from overseas $1.5 x 75% = $1.125 should be included in COGS
**and $1.5 x 25% = $375,000 should be included in EI.
**The $1.0 million in shipping costs to export customers are a selling cost that will be included in SG&A expenses.
**When the current market value of the inventory is less than the fixed purchase price in a purchase commitment,…
the loss must be recognized at the time of the decline in price, a liability must be recognized on the balance sheet and a description of the losses must be described in the footnotes.
**Agent (Consignee) and Seller (Consignor)
**When an agent(consignee) will hold and sell goods on behalf of the consignor, until the inventory is sold, the seller (consignor) will include in his/her inventory because title and risk of loss are retained by the consignor.
**How to calculate “Dollar-value LIFO”
Price Index = EI at Current year /EI at Base year
Therefore, EI at Base year = EI at current year / PI
Step 1: Price index(PI) = EI at Current Year/EI at Base year
Step 2. Date: Inv. at Current$ / index = Inv. at base $
Step 3. Layers x index = LIFO Result
** An Example of Dollar-value of LIFO
Date - Base/yr/Cost - Current/yr/cost - LIFO Inv. Layer
——— ——————- ——————– ———————–
1/1/Y1 90,000 90,000 90,000
Y1 Layer 20,000 30,000 21.818 *(Note 1)
———————————————————————————-
110,000 120,000 111,818
Y2 Layer 40,000 80,000 53,333**(Note 2)
———————————————————————
150,000 200,000 165,151
*Note 1: Price Index: 120,000/110,000 = 1.09
LIFO Layer: 20,000 x 1.09 = 21,818
**Note 2: Price Index: 200,000/150,000 = 1.33
LIFO Layer: 40,000 x 1.33 = 53,333
** Operating Cycle - 5 Steps and Journal Entry
a.k.a Cash conversion cycle or Net Operating cycle
Step 1: Purchase inventory for $100 and receive Inventory from supplier on credit:
————————————-
Dr - Inventory 100
Cr - A/P $100
Dr - Cash $100
Cr - A/P $100
Step 3: Selling inventory to customer on credit:
(2 Journal Entries)
-----------------------------------
a. Dr - A/R $110
Cr - Sales $110
b. Dr - COGS $100
Cr - Inventory $100
Dr - Cash $110
Cr - A/R $110
Step 5: Calculate Gross Profit ------------------------------- Sales $110 $100 ---------------------- Gross Profit: $10 ======================
