Maxwell Review Flashcards
1
Q
cash and cash equivalents
A
-cash and items convertible into cash within 90 days
-ex’s: checking account, savings account, money market funds (like another savings account), treasury bills (maturing within 90 days of purchase, certificates of deposit (maturing within 90 days of purchase), petty cash
2
Q
bank reconciliations - key question to ask
A
what do the accounting records know that the bank doesn’t know? or what does the bank know that the accounting records don’t know?
3
Q
bank reconciliations - accounting records know about, bank doesn’t know about
A
-deposits in transit: a deposit we have sent to the bank, but it hasn’t cleared the bank yet; increase book cash balance
-outstanding checks: a check we have mailed that has not cleared the bank yet; decreases book cash balance
4
Q
bank reconciliations - bank knows about, accounting records don’t know about –> deposits in transit
A
-bank/service fees: the bank knows, but the books don’t; decrease book cash balance
-bank credits (cash back reward, interest income): bank knows, book don’t; increase book balance
-NSF check: bank knows, books don’t because we send a check to a vendor and they deposit it, but it doesn’t clear the bank due to insufficient funds; increase book cash balance
-errors (recording $130 but depositing $120): bank knows correct amount, books don’t
5
Q
held checks
A
-checks that we haven’t mailed yet, so we shouldn’t deduct them from the cash balance
-ex: company decreases its bank balance on Dec 30 but didn’t mail the check until Jan 3. the company should not record the outstanding check until Jan 3
6
Q
negative cash balances
A
-treated as a current liability
-if a company has two bank accounts with two different banks, and one account has a positive balance and the other a negative balance, we report the positive balance as a current asset and the negative as a current liability
-if the accounts are within the same bank, net them together
-ex: bank cash balance of $5,000 and there’s a $20,000 outstanding check –> you’d have a ($15,000) book cash balance
7
Q
cash and cash equivalent common footnote
A
we classify all highly liquid instruments with an original maturity of three months or less as cash equivalents
8
Q
JE for recording a credit on sale
A
debit AR, credit revenue
9
Q
JE for receiving cash payment
A
debit cash, credit AR
10
Q
AR discounts
A
-provide discounts to customers to receive the cash payments more quickly
-ex: 2/10 n/30
11
Q
gross AR
A
-assuming the customer will not take the discount, so we record AR for the full amount without the discount
-gross = full amount of something (pre taxes)
-JE when first making the sale: debit AR, credit rev
-JE if customer takes discount: debit cash, credit AR, debit sales discount (contra rev) for the difference
-JE if customer doesn’t take discount: debit cash, credit AR full amount
12
Q
net AR
A
-assuming the customer will take the discount, so we record the JE after subtracting out the discount
-net = after subtracting something out (like taxes)
-JE when first making the sale: debit AR (with discounted amount), credit rev
-JE if customer doesn’t take discount: debit cash full amount, credit AR what discounted amount would’ve been, credit sales discount (rev) the difference
13
Q
bad debt
A
-us GAAP requires companies to estimate their uncollectible AR
-direct write off method is not allowed under US GAAP
-how to estimate amount of bad debt? BS or IS approach
14
Q
JE for bad debt: initial estimate of bad debt
A
debit bad debt expense, credit allowance for doubtful accounts (contra asset account)
15
Q
JE for bad debt: writing off bad debt
A
debit allowance for doubtful accounts, credit AR
16
Q
JE for bad debt: reversing previous uncollectibles (ends up actually collecting)
A
- debit AR, credit allowance for doubtful accounts
- debit cash, credit AR
17
Q
allowance for doubtful accounts calculation
A
beginning allowance for doubtful accounts
+bad debt expense
-uncollectible AR written off
=ending allowance for doubtful accounts
18
Q
balance sheet approach for bad debt
A
-estimate bad debt by taking a % of the AR balance
-gives the balance that allowance for doubtful account should be
19
Q
income statement approach for bad debt
A
-we estimate a % of credit sales that are uncollectible
-determines bad debt expense, not allowance for doubtful accounts balance
20
Q
pledging AR
A
-pledging AR as collateral for a loan
-bank has right to take AR balance if payments aren’t made
21
Q
factoring AR
A
-for when we have AR but need cash now
-we factor the amount with a bank to pay us now for it
-AR proceeds belong to the bank
22
Q
factoring AR without recourse (responsibility)
A
-factoring without recourse means that even if the customer never makes their payment, the bank has no legal right to demand that we, the company, pay the bank for the receivable
-we treat the transaction as a sale (record as gain or loss) of our AR balance (cash debit, loss on sale of rec. debit, AR credit –> if it was a gain, credit the gain)
23
Q
factoring AR with recourse (responsibility)
A
-factoring with recourse means that the bank can demand us to pay them back the money if the customer doesn’t pay
-we can treat as a sale –> same JE as factoring AR without recourse
-we can treat as a loan –> record a JE for a loan (debit cash, credit notes payable)
24
Q
what is due from factoring?
A
-when the bank factors our AR balance, they typically hold onto part of the payment, which is recorded as “due from factor” which we debit as a receivable
-this allows the bank to cover expenses if there are any sales returns or discounts that the customer takes, which would lower the amount paid to the bank
-JE: debit the due from factor account when bank pays $x back to us when they were holding $x for potential sales returns/discounts
25
discounting notes receivable
-like factoring AR
-we have a notes rec. but we need the cash now
-discount both the principal and the interest payments
-steps:
1. calc the amount if we had not discounted the note rec (principal + interest)
2. multiply the amount by the annualized effective rate the bank wants to earn
3. subtract the amount in step 1 from the amount the ban wants to earn in step 2
26
inventory accounts
-1 type of inventory account for product resellers (non-manufacturers)
-3 types of inventory accounts for manufactures:
1. raw materials: materials we have purchased but not yet used to manufacture
2. WIP: we have started units but not finished them (DM, DL, OH)
3. FG: goods we have finished making but not yet sold
27
selling inventory
-once goods are sold, we expense them to COGS
-JE: debit COGS, credit inventory
28
periodic method of inventory
-inventory is periodically updated (once a year)
-formula:
beginning inventory
+purchases
-COGS **plug number
=ending inventory
29
perpetual method of inventory
-inventory is continually updated after every purchase
-there's no plug number because we record COGS after each sale
30
FIFO method of inventory
-first in, first out
-when we sell inventory, we determine the COGS by the oldest items
-can be either periodic or perpetual
31
LIFO method of inventory
-last in, first out
-when we sell inventory, we determine the COGS by the most recently purchased items
-can be either periodic or perpetual
-due to inflation, typically causes COGS to be higher under LIFO
32
moving average inventory
-moving average is for the perpetual inventory method
-after every sell, we calculate the average of inventory to find COGS
33
weighted average inventory
-weighted average is for the periodic method
-we calculate the average inventory and COGS at the end of each period
34
FOB shipping point
-inventory transfers at the point of shipment
-selling inventory: write it off when it ships
-buying inventory: include in inventory as of shipping date
35
FOB destination
inventory transfers only once it arrives
-selling inventory: write it off when you receive it
-buying inventory: include in inventory once you receive it
36
dollar LIFO inventory
-instead of focusing on the units, we will focus on the dollar amounts of the units
-this attempts to remove the inflation impact of price of inventory
-steps:
1. what's the price index?
2. what's the layer?
3. take the layer and multiply it by the price index
4. add the layer in the dollar value LIFO column
37
lower of cost or market
-used for LIFO and retail method
-pick the middle amount between these three options to find "market value" --> replacement cost, net realizable value, net realizable value - normal profit margin
-replacement cost: if we were to buy the same inventory today, how much would it cost?
-normal profit margin: how much profit we make per unit sold
38
lower of cost of net realizable value
-used for LIFO and all others
-net realizable value = sales price - costs associated with selling the item
39
inventory on consignment
-sending your inventory to another company to sell it for you
-consignor: sends inventory to consignee
-consignee: sells inventory for consignor
-inventory says on consignor's books
-what's in consignor's records? sales rev, COGS, commission exp, advertising exp
-what's in consignee's records? commission rev
40
reversal of inventory errors
sending when errors are made using the periodic method, they will reverse out after 2 years
41
writing down (impairing) inventory JE
1. debit inventory, credit cash
2. debit impairment loss, credit inventory
42
% ownership in a company determines the accounting method
-0 to 20: adjusted cost method (no investment income until dividends paid)
-20 to 50%: equity method (investment income as % of investee's net income)
-50%+: consolidation method (consolidated financial statements)
43
0-20% ownership in a company - adjusted cost method
-we do not have significant influence over a company (but shareholders get to vote about the future of the company)
-we update the investment to its fair value at year end
-we record dividend income only when dividends are paid
-steps:
1. record initial investment
2. update the fair value of investment to record unrealized gain/loss
3. record dividends paid by the investment
44
20-50% ownership in a company - equity method
-even if we own less than 20% but have significant influence, we still use the equity method
-we do not update the investment to its fair value at year end
-steps:
1. record initial investment
2. increase investment by our % ownership * investee's net income
3. decrease investment by dividends paid
45
50%+ ownership in a company - consolidation method
-when we own more than half a company, the company's financial statements are no longer presented on their own
-instead, they are consolidated into the parent company's financial statements
46
investing in a company's bonds
-we dont own the company, so there's no ownership % determination like with the investment in a company's stocks
-the way we determine accounting for bonds is the purpose of our investment
-three possibilities: held to maturity, trading, and available for sale
47
held to maturity with investing in a company's bonds
-once we buy the bond, we will not sell it and will hold it until it matures, recording an amortization expense for the discount/premium
-the market value of the bond throughout its life is irrelevant
-no need to update its fair value
-recorded as a non current asset
48
trading with investing in a company's bonds
-we buy the bond just to re-sell it once its value is high enough
-record unrealized gain/loss in the income statement
-market value is relevant
-recorded as a current asset
49
available for sale with investing in a company's bonds
-we are not going to hold it until maturity, but we don't know when we're going to sell it
-record unrealized gain/loss in the OCI statement
-market value is relevant
-recorded as either current or non current asset
50
3 levels of investments
1. identical asset in active market
2. either identical asset in inactive market or similar asset in active market
3. unobservable management input, based on income it produces or costs it reduces
51
fair value election
-when an asset or liability is not measured at its fair value but you want to measure it as its fair value
-can't be revoked
52
0-20% ownership JE
1. record initial investment: debit investment, credit cash
2. update fair value of investment to record unrealized gain/loss: debit investment, credit unrealized gain
3. record dividends when paid: debit cash, credit dividend income
53
20-50% ownership JE
1. record initial investment: debit investment, credit cash
2. increase investment by our % ownership* investee's net income: debit investment, credit equity in earnings
3. decrease investment by dividends paid: debit cash, credit investment
54
market approach
finding fair value from the market (level 1 and 2)
55
income approach
our value will depend on how much income the asset generations (level 3)
56
cost approach
recording a fixed asset at its cost (level 3)
57
capitalized land
-any cost associated with preparing the fixed asset is capitalized
-examples: purchase price, commissions, costs of razing (tearing down an old building), title and recording fees, site development, decrease by sale of proceeds from sale of scraps, legal fees, draining of swamps
58
capitalizing land improvements
-land is capitalized and not depreciated
-land improvements are capitalized and depreciated
-examples: fences, water systems, sidewalks, paving, landscaping, lighting
59
capitalizing buildings
-everything that prepares the building for use
-examples: purchase price, digging holes for the foundation or basement, architecture fees
60
capitalizing equipment
-everything that prepares the equipment for use
-examples: amount paid, less: any discounts, freight costs, installation charges, all taxes paid
61
capitalize vs expense
-improvements are capitalized (make an asset last longer or increase the usefulness of the asset)
-repairs are expensed (any cost that is not an improvement)
-example with improvement: we spend $6,000 replacing a vehicle's engine, which makes it last longer --> capitalize
-example with repairs: we spend $6,000 replacing the broken windshield on a vehicle, which doesn't enhance the asset --> expense
62
depreciation methods
-three main methods: straight line, double declining, units of production
63
what is the salvage value
price we will be able to sell it once we're done using it
64
depreciable base
cost - salvage value
65
net book value
cost - accumulated deprecation
66
straight line depreciation
-evenly depreciate an asset throughout its useful life
-most common depreciation method, due to its simplicity
-formula: (cost - salvage value) / useful life
67
double declining depreciation
-depreciates a fixed asset twice as fast as straight line
-greater amount of depreciation at beginning of fixed asset's life, less depreciation towards end of its life
-no consideration of salvage value
-amount of depreciation changes each year because its based on the net book value
-annual depreciation: (2*straight line rate)*NBV
-straight line rate: 1/useful life
68
unit of production depreciation
-depreciating an asset based on the output it will generate
-steps:
1. identify how many units the fixed asset will generate
2. divide the depreciable base by the number of units it will generate
-depreciation per unit: (cost-salve value)/total units asset will produce
-annual depreciation: units produced*depreciation per unit
69
depletion expense
-depreciation for nature resources that don't replenish (like mining gold)
-similar to units of production depreciation method
-depletion per unit: (cost-salvage value)/total amount extracted
70
held for sale assets
-when a company no longer uses a fixed asset to generate revenue, or when a company discontinues operations
-steps: 1. stop depreciating the fixed asset. 2. reclass the fixed asset to "held for sale." 3. if fair value is below carrying value, impair it
-when reclassifying it, if the fair value is below the carrying value, then we write it down (impair it)
-if the value recovers, we can reverse the impairment (only up to the point of the previous carrying value)
71
selling a fixed asset
-we need to write off the fixed asset and its accumulated depreciation
-steps: 1. record cash proceeds (debit). 2. write off fixed asset (credit). 3. write off accumulated depreciation (debit). 4. plug number is gain (credit) or loss (debit)
-gain (loss) = proceeds - NBV
-we record gains (losses) in the "other income" section of the income statement
72
capitalizing interest for a construction project
-when we are constructing a fixed asset, instead of expensing/buying the interest, we capitalize the interest
-how much interest do we capitalize?
-steps: 1. find the average cost of construction expenditures. 2. multiply the average cost by the interest rate
73
non monetary transactions
-when we exchange a fixed asset for something other than cash (or boot), it lacks commercial substance and we therefore have limitations on the gains
-boot = cash + mortgage relief
74
non monetary transactions: 4 situations when a transaction lacks commercial substance
1. when there is no cash exchanged at all for the property --> don't recognize any gain in the transaction
2. when we receive cash from the other party (<25% of total consideration) --> we recognize a proportional amount of the gain (cash/total consideration)
3. when we pay cash for the property (<25% of total consideration) --> no gain recorded
4. when we pay or receive cash for the property (>25% of total consideration) --> record entire gain
**general rule: when we aren't receiving cash, GAAP doesn't like for us to record gains (if a transaction lacking commercial substance results in a loss, there are NO limitations)
75
intangible assets
-assets that aren't tangible (patents, goodwill, copyrights, franchises)
-amortization = depreciation of an intangible asset
-typically calculate amortization on straight line basis
-R&D and start up costs are expensed immediately
-can't internally generate goodwill (only created when we purchase another company)
-one intangible we capitalize is when we successfully defend a lawsuit for our intangible asset
76
research and development costs
-R&D is the attempt to discover a NEW product or process
-generally, expense all R&D costs immediately
-when purchasing fixed assets for research, generally expense right away
-if the fixed asset can be used for alternative uses, then we will capitalize it and depreciate it over its useful life
-once we discover a new product, then additional costs are not R&D costs (like quality control and marketing research is not R&D)
77
what is included in R&D
-design and testing of prototypes
-research for new knowledge
-testing to discover new processes
78
what is not included in R&D
-marketing
-legal fees to obtain a patent
-quality control
79
software costs
-technological feasibility: the point at which we have finished planning, designing, coding and testing the software --> expense everything before, capitalize everything after
-when we develop computer software to sell: take the greater of straight line amortization or amortization as a % of revenue
-when we develop computer software for our internal use, use straight line amortization
80
impairment of assets
-impairment: reduction in the value of an asset
-record impair expense
-occurs when the carrying value of the asset is no long true
-carrying value = amount an item is recorded for on the balance sheet
-decrease the asset down to its fair value
81
impairment of goodwill (infinite live assets)
-only need to compare carrying value to fair value of goodwill
-is the fair value of the goodwill lower than its carrying value? If yes, then impair the goodwill down to its fair value
82
impairment of fixed assets (finite live assets)
-are the undiscounted cash flows this asset will generate less than the carrying value of the asset (recoverability test - will we recover our investment through future cash flows)? if yes, impair asset; if no, don't impair asset
-if impairing asset, impair it down to its fair value
83
purchasing a fixed asset JE
debit fixed asset, credit cash
84
non monetary transactions: example for when there is no cash exchanged at all for the property
**do NOT recognize any gain in the transaction
we bought a truck for $50,000. we have accumulated depreciation of $30,000. the NBV is $20,000.
we exchange our truck for a new vehicle, with NO cash in the transaction. the new vehicle has a fair value of $25,000. NO gain is allowed
JE: new vehicle (plug) debit, accumulated depreciation debit, old truck credit
85
non monetary transactions: example for when we receive <25% in cash
**recognize a proportional amount of the gain
we bought a truck for $50,000. we have accumulated depreciation of $30,000. the NBV is $20,000.
we received a new vehicle worth $20,000. we also received $2,000 cash.
total consideration = 20,000 (new vehicle) + 2,000 = 22,000
total gain = 22,000 - 20,000 (NBV) = 2,000 total gain
total consideration = 22,000
boot is what % of the consideration? 2,000/22,000 = 9%
% of gain we can recognize = 9%
JE: new vehicle (plug) debit, accumulated depreciation debit, old truck credit, gain credit
86
non monetary transactions: example for when we pay <25% in cash
**no gain recorded
we bought a truck for $50,000. we have accumulated depreciation of $30,000. the NBV is $20,000.
we received a new vehicle worth $25,000. we pay $5,000 cash to the owner.
boot as a % of total consideration = 5,000/30,000 = 16.67%
JE: new vehicle (plug) debit, accumulation depreciation debit, truck credit, cash credit
87
non monetary transactions: example for when we pay or receive >25% in cash
**recognize the entire gain
we bought a truck for $50,000. we have accumulated depreciation of $30,000. the NBV is $20,000.
we received a new vehicle worth $15,000. we also received $7,000 cash.
boot as a % of total consideration = 7,000/(15,000+7000) = 31.8%
NBV = 20,000
total consideration = 15,000 + 7,000 = 22,000
gain = 22,000 - 20,000 = 2,000
JE: new vehicle (plug) debit, accumulated depreciation debit, truck credit, gain credit
88
consolidating financial statements
only make the consolidating entry when we're consolidating the financial statements together (>50% ownership)
89
consolidating JE
debit subsidiary's equity accounts, credit parent's investment in the sub
debit FV increase of sub's assets, credit non controlling interest
debit goodwill (or bargain purchase if it's a credit balance)
90
goodwill
-diff between FV of the company and what we pay for it
-future earnings ability of the company
91
non controlling interest
% of a company that we don't own
92
non controlling interest JE for consolidating investments
debit sub's equity accounts, credit parent's investment in the sub, credit non controlling interest
93
consolidation after initial purchase of company
-use equity method of accounting for the investment on a yearly basis
-our income = % investment*sub's net income
-our income is known as "equity in earnings"
94
initial JE for purchasing a company for consolidation
JE for investing in a company via cash: debit investment, credit cash
JE for investing in a company via issuing stock: debit investment, credit common stock
95
what does equity mean?
it's the amount of money that owners in the company have the right to withdraw
**we can't have equity in ourselves (eliminate the equity in ourselves with a debit)
96
what does an investment mean?
we own something, such as a % in a company
**we can't have an investment in ourselves (eliminate the investment in ourselves with a credit)
97
entry for yearly activity with consolidation
-use equity method
-increase investment by our % ownership*investee's net income
-decrease investment by dividends paid
98
JE for reporting earnings of subsidiary with consolidation
investment debit, cash credit
investment debit, equity in earnings credit
sub's equity account debit, parent investment in sub credit
99
intercompany payables/receivables are eliminated
-need this when you own >50% and when there's sales between parent and sub
-eliminate 100% of the receivable and payable between the companies
-ex: AR and Ap, or bonds payable and bonds receivable
100
5 steps to eliminating entries
1. write of JE from the parent company and subsidiary perspective
2. ignore cash (because it has a net affect of 0)
3. add up total amounts recorded for each account
4. compare to the correct amounts for each account
5. the difference between the recorded and the correct amounts is the eliminating entry
101
most common eliminating entry
inventory
-eliminate COGS exp, revenue, and inventory
fixed assets
-eliminate gain/loss, fixed assets, accumulated depreciation, depreciation expense
102
why do we have eliminating entries?
-GAAP doesnt like for related-party transactions to inflate a company's financial statements
103
accounts payable
we can either record the AP assuming we take the discount (net method) or assuming we don't take the discount (gross method)
104
accuing expenses
US GAAP accounting says we should record an expense when we incur it, not when we pay it
105
accruing expense example
facts:
-our monthly rent costs $1,000. it must be paid by the 5th day of the next month
-we don't have to pay the december, year 1 rent until January 5, year 2
-we will record the expense in december, because we have incurred the expense in december
JE:
-JE dec 31 year 1: debit rent expense $1,000, credit rent payable $1,000
-JE jan 5, year 2: debit rent payable $1,000, credit cash $1,000
**the matching principle has the expense showing up on year 1 financial statements, since the expense applies to year 1
106
accruing salaries and wages
-US GAAP accounting says that we should record an expense when we incur it, not when we pay it
-we record the expense and accrual for salaries and wages in the period the employees are working, not when we pay them
107
accruing salaries and wages example
facts:
-we have 100 employees we pay $200 per day
-for the last week of year 1, we don't have the payment until jan 7 of year 2
-salaries and wages expense = $100,000 (100 employees*$200 per day*5 workdays)
JE:
-JE dec 31, year 1: debit salary and wage expense $100,000, credit salary and wage payable $100,000
-JE jan 7, year 2: debit salary and wage payable $100,000, credit cash $100,000
108
withholding employee taxes
-employer holders onto part of the employee's pay for the employee's payroll taxes
-social security and medicare payroll taxes: employers are required to pay 7.65% of an employee's pay to the federal government; employees are required to pay 7.65% of an employee's pay to the federal government
-when an employer pays an employee, they will withhold 7.65% of their wages to pay the social security and medicare payroll taxes to the federal government
109
withholding employee taxes example
facts:
-we pay $100,000 to our employees (gross pay)
-we will withhold 7.65% of the pay for the employee's social security and medicare payroll taxes ($7,650)
-the actual amount we will pay the employee's is $92,350 (net pay)
JE:
-JE: debit salary and wage expense $100,000, credit payroll taxes payable $7,650 & cash $92,350
110
employee bonuses
-bonuses are expenses, just like salaries and wages are expenses
-sometimes, bonuses are based on a % of net income (even though bonus expense decreases net income)
-we have to solve for "x" to find the bonus amount
111
accruing employee vacation
-employees accumulate PTO as they work for the company
-we need to record an expense for it, because we record expenses when they are incurred
-if an employee earns through PTO in year 1, yet doesn't use it until year 2, we should record it in year 1, which is when they earned it
-if PTO does not roll forward to future periods, then there is no need to accrue for it
112
notes payable
-loan from the bank
-the ST portion of the principal you will pay off over 12 months is the current portion
-the LT portion of the principal you will pay off after 12 months in the non current portion
-each payment goes to both interest expense and to paying down the principal
-JE initial: debit cash, credit NP
-JE after 1st payment: debit NP & interest expense, credit cash
113
accounts payable discount example
facts:
-we are a restaurant and purchase food supplies for $5,000
-we have 60 days to pay the food supplier
-if we pay within 10 days, we receive a 2% discount, meaning we would only need to pay $4,9000 (5000*.98) --> terms 2/10 net 60
JE:
-either record as a discount (net method) or no discount (gross method)
-gross: debit inventory 5000, credit AP 5000
-net: debit inventory 4,900, credit AP 4,900
114
bonus expense example
facts:
-we pay our employees a bonus of 5% of net income
-if net income before the bonus expense is $250,000, how much is the bonus expense?
solve:
net income = 250,000 - bonus
net income = x
bonus = .05x
x = 250,000 - .05x
1.05x = 250,000
x = 238,095
bonus = .05*238,095 = 11,905
115
subsequent events
-events happening between the end of the financial statement date and the issuance of the financial statements
-"did anything occur in the subsequent event period that requires disclosure, accrual, or both?"
-"did the condition of the item exist as of year end?" --> if yes = disclose and accrue; if no = disclose but don't accrue
116
subsequent event example
facts
-a company's year end is 12/31/2021
-company issues the financial statements on 4/1/2022
