Final Exam Flashcards
Periodic Inventory Cost System
-Only knows balance at end of period
-Temporary Accounts
-Use end of month
Perpetual Inventory Cost System
-Company always knows the amount of inventory on hand.
-Inventory account
-Use right before sale
Calculating COGS in a Periodic System
Beginning Inventory
+Net Purchases
=COGAFS
-Ending Inventory
=COGS
Net Purchases =
Purchases + Freight-In - Purchase Discounts - Purchase Returns
FIFO vs LIFO
FIFO Use inventory at the beginning of the month
LIFO Use inventory at the end of the month
In times of increasing prices, LIFO vs FIFO in Cost of Good Sold and Ending Inventory.
FIFO: Higher Ending Inventory, Lower COGS
LIFO: Higher COGS, Lower Ending Inventory
Perpetual vs Periodic journal entries for items broken/stolen/lost:
Perpetual:
Dr. Cost of Goods Sold (-SE) X
Cr. Inventory (-A). X
Periodic:
None- ending inventory incorporates these.
Inventory Turnover Ratio=
COGS / Average Inventory
Net Realizable Value =
Selling Price - Reasonable Cost of Completion
What IS and ISN’T Lower of Cost-or-Net Realizable Value/Market applied to?
Cost or NRV: Applied to FIFO
Cost or Market: Applied to LIFO
Journal Entries for Lower of Cost or NRV OR Lower of cost or Market:
Amount = Total Cost - Calculation
Dr. COGS (-SE) XX
Cr. Inventory (-A) XX
Ceiling =
Net Realizable Value
Floor =
Net Realizable Value - Normal Profit Margin
Market price to be:
Replacement cost as long as it’s between floor and ceiling.
Gross Profit as a percentage of sales =
(Gross Profit as a percentage of cost) / (1 + Gross Profit as a percentage of cost)
Estimated COGS under Gross Profit Method =
Sales x (1 - Gross Profit as a percentage of sales)
Journal entry for recording a loss on a purchase commitment:
Dr. Estimated Loss on Purchase Commitment (-SE) XX
Cr. Estimated Liability on Purchase Commitment (+L) XX
What is fair value and what items are it used for?
What the item is worth
Investments
What is historical cost and what items are it used for?
The cost of the item, which is deprecated over time.
PPE
What classifies as PPE?
- Actively used in operations
- Long-term in nature (>1yr)
- Tangible
Different accounts within PPE:
Land
Land Improvements
Equipment
Buildings
Construction in Process
What PPE Accounts are exceptions to depreciation?
Land: not depreciated
CIP: Accumulate costs in CIP, transfer to building, equipment, etc. and then start depreciating
4 Steps to account for exchange:
- Record the new asset at fair value
- Remove book value of asset given up
- Record any cash received or paid
- Plug entry to gain or loss
Net Book Value =
Cost - Accumulated Depreciation
New Asset’s Fair Value =
Cash paid + Fair value of old equipment
Typical Journal Entry for exchanges:
Dr. Equipment (New) (+A) XX
Dr. Acc. Dep. (Old) (+A). XX
Cr. Equipment (Old) (-A). XX
Cr. Cash (-A) XX
Cr. Gain on Asset (+SE). XX
Amount of interest to capitalize for self-constructed assets =
Time-weighted expenditure * Construction loan interest rate
(If no construction, multiply by blended rate)
(If amount is above construction rate, multiply other rate/blended rate by the rest)
Blended interest rate =
(Annual interest of both rates) / Total of both loans
If capitalized interest > Actual interest
use actual interest
Journal entry for year of self-constructed asset:
Dr. CIP (+A). XX
Dr. Interest Expense (-SE). XX
Cr. Interest Payable (+L). XX
CIP = Capitalized Interest
IP = Actual interest
IE = Plug
Actual interest=
Each loan times its percentage
Interest expense =
Actual interest - Capitalized interest
Expenditure at the beginning of Year 2:
Expenditures of year 1 + Capitalized interest
Cost of self-constructed asset =
Expenditures in each year + Capitalized interest in each year
What depreciation is and isn’t:
Is used to allocate expense
Isn’t used for tracking what the asset is “worth”
Why do we credit accumulated depreciation, rather than equipment, each period?
Maintain the historical cost in the gross account.
Net Book Value versus Fair Value
NOT THE SAME
Straight-Line Depreciation
(Historical Cost - Residual value)/ Life in years = Depreciation per year
Residual Value
The value of a fixed asset at the end of its lease term or useful life
Sum of Years Digits Formula =
[Number of years remaining / (N*(N+1)/2)] * (Historical Cost - Residual Value)
Carrying value is the same as
Net Book Value
Double Declining Balance Rate =
2 * 1/N
If Net book value is greater than both cash inflows and fair value,
Record impairment
What is the difference between capitalization and expensing?
Total expense is the same, timing is what is different
What to capitalize when it comes to patents
Capitalize cost of obtaining a patent
Don’t capitalize cots of developing the patentable technology
Amortization Journal Entry
Dr. Amortization Expense (-SE)
Cr. Intangible Asset (Ex. Patent) (-A)
Characteristics of good will:
-Do not amortize
-Only happens when purchasing another company.
-Don’t include Common Equity in calculation.
Units of Production Depreciation Method
(NBV / Total estimated units produced) * Actual units produced each year
