Financial Statement Accounts-Recognition, Measurement, Valuation, Calculation, Presentation, and Disclosures Flashcards
Receivables Turnover Ratio
Annual Credit Sales / Average Accounts Receivable
Low turnover rate is desirable because it indicates more collect ability than a high rate.
Beg. AR Balance - Beg. Doubtful Accounts
Ending AR Balance - End Doubtful Accounts
Avg the two
Ending Sales / AVG of the Two.
Factoring of Accounts Receivable
Factoring arrangements are a means of discounting accounts receivable. Accounts Receivable are sold outright and transferred at full risk to the collection agency. The debtors will send payments to the collection agency.
Note Receivable Discounted Account with Recourse
A note sold with recourse is a promise that if the collector can not collect the entity will pay. The entity has a contingent liability, therefore the notes receivable discounted account must be increased by the face amount of the note.
Defensive Interval Ratio
Is a measure of time the company can survive using only the quick assets.
Total Quick Assets / Average Daily Cash Expenditures
Cash Discounts
= Allowance for Discounts
Amount
* Percent taking Discount
* Discount Rate
End of the year gross accounts receivable balance
Beginning Accounts Receivable \+ Credit Sales (Collections) (Sales Returns) (Accounts Written Off) = Accounts Receivable at Year End
Direct write off method
there is no need to consider any allowance account balance. Sale for the period only have to be adjusted downwards for any accounts written off, and also downwards for any increases in deferred receipts (in the form of additions to accounts receivables)
Operating Cycle
is the average period of time between the disbursement of cash to acquire materials or services used in the earning process and the receipt of cash upon the completion of the process.
Quick Ratio
Current Assets (Cash, marketable equity securities, Accounts Receivable) / Current Liabilities
Bad debt allowance methods
Income Statement estimation approach (percentage of sales)
Balance Sheet Estimation approach based on the aging of accounts receivable (conceptually preferable)
Impact of write off has on net income and total assets
No Effect on either.
When the allowance method of accounting for bad debts is applied, the accounts that will be eventually written off are in both the accounts receivable and the allowance account balance. When written off and taken out of both , and the bad debt expense had already been taken as an estimated expense when the sale was made. The write off lowers accounts receivable with a credit and the allowance account with a debit of the same amount. The write off entry does not affect expenses and leaves the net realizable amount of accounts receivable the same.
allowance method of recognizing uncollectible accounts is used, the entry to record the write-off of a specific account:
decreases both accounts receivable and the allowance for uncollectible accounts.
Typical journal entries under the allowance method include:
Debit Credit
------ ------ (a) Bad debt expense xx
Allowance for uncollectible accounts xx To recognize periodic uncollectible accounts expense and provide allowance.
(b) Allowance for uncollectible accounts xx
Accounts receivable xx
To write off uncollectible account
Lower Cost or Market inventory method
Market is the lesser of the total net realizable value or the total replacement cost.
Total net realizable cost is the ceiling
Total net realizable cost less profit margin is the floor.
If the replacement cost, and original cost are less than the floor than the original cost remains the inventory value.
Items that make up Cost of Goods Sold
Add Beginning Inventory to net purchases to get goods available for sale
Then subtract ending inventory from that to get cost of goods sold.
Treatment of under and overstated and effect on COGS
If beginning inventory is understated, then so will goods available for sale, and COGS.
If ending inventory is overstated, then too much is taken out in computing COGS, and again COGS will be understated.
If beginning is understated and ending is overstated, then COGS will be understated by both the amounts.
