Recognition, Measurement, Valuation, Disclosure - Part 1 Flashcards
What does it mean when goods are shipped FOB Shipping Point?
If goods are shipped FOB Shipping Point, the seller should recognize revenue and a receivable at the time the goods are delivered to the carrier. Under FOB Shipping Point terms, ownership of the goods transfers to the buyer when the goods are delivered to the carrier. Thus, the seller will write the inventory off its books and recognize revenue and a receivable as soon as the goods are turned over to the carrier.
What does it mean when goods are shipped FOB Destination?
If the goods are shipped FOB Destination, the transfer of the goods will not take place until the goods reach the buyer, so the seller will not recognize revenue or a receivable until the goods have been delivered to the buyer by the carrier.
How are short-term receivables valued for the financial statements?
For financial statement presentation, short-term receivables are valued and reported at net realizable value, or the net amount expected to be received in cash. The net amount expected to be received in cash may be different from the amount legally receivable. / Determining net realizable value involves estimation of (1) uncollectible receivables, and (2) any returns or allowances to be granted.
How does the percentage of sales method calculate potentially collectible receivables?
Under the percentage of sales method, a company estimates the amount of its credit sales from the period that will not be collected in the future. This uncollectible amount is recognized as the bad debt expense for the period. In this method, the company uses the income statement to value and match the bad debt expense correctly. The ending balance in the allowance account is the beginning balance adjusted by any accounts written off during the period (debits to the allowance account) and by the bad debt expense recorded for the period (a credit to the allowance account). The ending balance in the allowance account becomes a balancing figure.
How does the percentage of receivables method calculate potentially collectible receivables?
Under the percentage of receivables method, a company focuses on making the ending balance in the allowance account be whatever it needs to be to create a net accounts receivable figure that represents the amount of receivables the company estimates are collectible. It values the ending receivables by estimating the percentage of the year-end receivables that will not be collected in the future. In this manner, the company uses the balance sheet to value the accounts receivable. The amount of bad debt expense the company records is whatever amount is needed to change the unadjusted balance in the allowance account to a balance that will create the correct net accounts receivable figure when the allowance account is combined with the accounts receivable account. (A certain amount of “working backwards” is necessary in this calculation. ) Under this method, the bad debt expense figure on the income statement becomes the balancing figure.
What are the three types of journal entries made that involve the allowance account?
To record the bad debt expense for the period. To write off a specific receivable when it becomes uncollectible. To collect a previously written-off receivable.
What are the steps in the percentage of sales method of calculating allowance for doubtful accounts?
Calculate the bad debt expense for the period as a percentage of total credit sales. Make the journal entry to debit bad debt expense for the calculated bad debt expense amount and credit the allowance for doubtful debts for the same amount. Calculate the ending balance in the allowance account. Check the reasonableness of the allowance account balance.
What are the steps in the percentage of receivables method of calculating allowance for doubtful accounts?
Calculate what the ending balance in the allowance account should be using some percentage of ending accounts receivable. Determine what the “plug figure” in the allowance account needs to be in order for the ending balance in the account to be as calculated in Step 1. This “plug figure” is the bad debt expense for the period. Make the journal entry to debit bad debt expense for the amount calculated as bad debt expense in Step 2 and credit the allowance for doubtful debts account for the same amount.
What is factoring?
Factoring is when accounts receivable are sold to a third party. A commercial finance company called a factor essentially makes a loan guaranteed (collateralized) by the receivables to the seller of the receivables. The factor notifies the seller’s customers to remit their payments directly to the factor. The factor receives repayment of the loan as it collects the receivables.
What is factoring without recourse?
Factoring without recourse means that the factor assumes the risk of any inability to collect the receivables. If a sold receivable proves to be uncollectible, the purchaser (the factor) has no recourse against the seller””the loss is the factor’s loss. Some companies factor their receivables primarily for the purpose of transferring the bad debt risk in this manner.
What is factoring with recourse?
Factoring with recourse meaning that if a customer does not pay the receivable, the seller of the receivable is liable to the factor for the uncollectible amount. When a factor purchases receivables with recourse, the factor’s risk of uncollectibility is limited.
What are the three classifications of inventory for a manufacturing company?
Raw materials – the individual parts and pieces that will be assembled to make the finished goods. Work-in-process – units of inventory for which production has started, but has not yet been completed. Finished goods – units that have been completed but not yet sold.
How is inventory valued?
Inventory should be recorded in the books at the amount that includes all of the costs paid for getting the inventory ready and available for sale. All the costs include not only the cost of the inventory itself, but also shipping costs to receive the inventory, insurance, taxes and tariffs, duties, storage, and any other costs without which the company could not sell the inventory to the customer.
How are in transit goods counted in inventory?
In transit goods are goods that have been shipped prior to year end but had not yet been received by the buyer as of year end. To whom the goods belong is determined by the terms of shipping. Goods sent FOB Shipping Point belong to the buyer from the moment the seller gives them to the shipping company. Thus, while the goods are in transit they belong to the buyer because title was transferred at the shipping point. Goods sent FOB Destination belong to the shipper until the buyer receives them. While the goods are in transit, they belong to the seller and title is transferred at the destination point only when they are received by the buyer.
What are consigned goods and how are they accounted for in inventory?
Consigned goods are given by one company (the consignor) to another company (the consignee) for that second company to sell to the end consumer. Goods may be consigned because the consignee is physically closer to the consumer or because consignment enables the consignor to get a wider distribution of goods than the company could achieve on its own. Goods out on consignment belong in the inventory of the company that has put the goods out on consignment (the consignor). The goods should be carried on the consignor’s balance sheet at the cost the consignee paid for the goods plus any shipping costs the consignor paid to get the goods to the consignee company that will sell the goods. The shipping costs to the consignee are costs of making the goods available for sale to the customer and thus are inventoriable costs. Goods held on consignment do not belong to the company that holds them (consignee) and therefore should not be included in the consignee’s inventory.
What are goods out on approval?
Goods out on approval are goods that are currently held by the customer but have not yet been purchased by the customer. The customer physically has the product and has some period of time to decide whether to purchase it or return it. Goods-out-on-approval items should be included in inventory at their original cost until the customer accepts the goods. Only when the customer accepts the goods (or the time period for return passes without the customer returning the goods) will the sale be recognized and the cost of the inventory moved from inventory to cost of goods sold.
What is obsolete inventory?
Inventory that is obsolete can no longer be sold and should not be included in the inventory balance on the balance sheet. Any inventory that becomes obsolete should be written off as a loss in the period in which it is determined to be obsolete.
What are the four main inventory cost flow assumptions?
First in First Out (FIFO), in which we assume that the item sold to the customer is the earliest unit purchased by the seller that has not yet been sold (in other words, the oldest item in inventory). Last in First Out (LIFO), in which we assume that the item sold to the customer is the latest unit purchased by the seller (in other words, the newest item in inventory). Weighted Average, in which we sum the costs paid for all the individual units of a given item in inventory and divide by the number of units purchased to find the average cost for each unit. Specific Identification, in which we actually keep track of each unit of inventory individually. The specific identification method is used for low quantity, high value inventory items, such as merchandise in a jewelry store or serialized electronic merchandise where records are kept by serial number.
