Financial Statements Flashcards
What does separation of duties accomplish?
Separation of duties makes it more difficult for employees to perpetrate fraud and gain access to the firm’s cash.
List the characteristics of Notes Receivables.
Typically they are Non-customer transactions.
They have a longer time frame.
They have an interest element.
Describe the Direct write-off method for Bad Debts.
The Direct write-off method records bad debt expense only when a specific account receivable is considered uncollectible and is written off.
The Direct write-off method is rarely used.
Describe the Balance Sheet approach for calculating an allowance balance
It is a percentage to ending accounts receivable.
This estimation is typically expressed as a percentage of total accounts receivable.
Allowance for Doubtful Accounts = Total Accounts Receivable * Estimated Percentage of Uncollectible Amounts
In the transfer of receivables, if the three conditions for a sale are not met, what happens?
The receivable remains on the books of the Transferor, and the transferor records a liability related to the borrowing transaction.
Who bears the cost of bad debts when factoring without recourse?
The factor (Transferee) bears the cost of uncollectible accounts, but the seller (Transferor) bears the cost of sales adjustments.
What merchandise is included in the ending inventory?
All owned inventory, regardless of location.
Formula for “Weighted Average Cost per Unit”
Costs of Goods Available for Sale / Number of Units Available for Sale
What Inventory costs are required to be capitalized?
All costs necessary to bring the item of inventory to salable condition.
How is the ownership of goods shipped “free on board (FOB)” destination determined
The seller owns the goods until they reach the destination.
Formula for calculating “Cost of Goods Sold (COGS)”
Beginning Inventory + Purchases - Ending Inventory = Cost of Goods Sold (COGS)
Gross Margin Percentage Formula
(Sales - Cost of Goods Sold) / Sales
List the attributes of “First In First Out (FIFO)”
Under FIFO, the cost of goods sold (COGS) and the value of ending inventory are based on the assumption that the earliest acquired inventory items are the first to be sold or used. Here are the key attributes of FIFO:
Ending Inventory Valuation: The value of ending inventory is based on the cost of the most recent inventory purchases, as the oldest items are assumed to remain in inventory. This means that the balance sheet reflects the current replacement cost of inventory.
Income Statement Impact: FIFO tends to result in higher reported net income during periods of rising prices or inflation. This is because the cost of goods sold is calculated using older, lower-cost inventory, while the value of ending inventory is based on more recent, higher-cost purchases.
Conformity with Physical Flow: FIFO closely matches the physical flow of inventory in many businesses, where older goods are typically sold or used before newer ones. This makes it intuitive and easy to understand.
Compliance: FIFO is widely accepted under various accounting standards, including Generally Accepted Accounting Principles (GAAP) in the United States and International Financial Reporting Standards (IFRS) internationally.
What is the main reason for using “Last In First Out (LIFO)” in periods of rising costs?
Tax minimization.
LIFO assumes that the most recently acquired inventory items are the first to be sold. In periods of rising costs, this means that the cost of goods sold (COGS) is calculated using the higher, more recent purchase prices, resulting in a higher COGS and lower reported taxable income compared to other inventory valuation methods.
List the attributes of “Last In First Out (LIFO)”
LIFO assumes that the most recently acquired inventory items are the first to be sold.
Ending Inventory Valuation: The value of ending inventory is based on the cost of the oldest inventory items remaining in stock, as LIFO assumes that the most recent purchases have been sold first. Therefore, the ending inventory value reflects the cost of older, lower-priced inventory.
Income Statement Impact: LIFO tends to result in lower reported net income during periods of rising prices or inflation. This is because the cost of goods sold is calculated using more recent, higher-cost inventory, while the value of ending inventory is based on older, lower-cost purchases.
Tax Benefits: LIFO can provide tax benefits during inflationary periods because it results in a higher cost of goods sold and lower reported profits, leading to reduced taxable income and lower tax liabilities.
When “Lower of Cost or Market (LCM)” is used, how is the ceiling value of inventory calculated?
By reducing the sales price by the estimated cost to complete and sell the inventory
List the methods used for estimating ending inventory.
Gross Margin Method
Retails Inventory Method
Dollar-value Last In First Out retail method
What are Net Markdowns?
Net decreases in the original selling price.
If an Inventory error is discovered in Year 2, where is the difference recorded?
In the beginning balance of Retained Earnings
If Beginning Inventory is understated, and purchases and ending inventory are correct, what is the impact on “Cost of Goods Sold (COGS)”?
The Impact of COGS is understated
