Unit 2: Short Term Assets Flashcards
Define accounts receivable.
Accounts receivable are amounts owed to an entity by its customers resulting from credit sales in the ordinary course of business that are due in customary trade terms.
Which accounts does an entity use to keep track of estimates for accounts receivable that the entity will not collect?
Entities use the contra asset account “allowance for credit losses” on the balance sheet and the credit loss expense on the income statement.
The carrying amount of accounts receivable is reported at what amount in the balance sheet?
The carrying amount of accounts receivable is reported at the net amount expected to be collected.
Gross accounts receivable – Allowance for credit losses = Carrying amount of accounts receivable
How does an entity estimate the periodic credit loss expense using the income statement approach?
Under the income statement approach, the entity estimates the periodic credit loss expense as a percentage of sales on credit.
How does an entity estimate the periodic credit loss expense using the balance sheet approach?
Using the balance sheet approach, the ending balance of the allowance for credit losses is a percentage of the ending balance of accounts receivable.
What is the difference between FOB shipping point and FOB destination?
FOB shipping point – Legal title and risk of loss pass to the buyer when the seller delivers the goods to the carrier. The buyer must include the goods in inventory during shipping.
FOB destination – Legal title and risk of loss pass to the buyer when the seller delivers the goods to a specified destination. The seller must include the goods in inventory during shipping.
What is the difference between a perpetual inventory system and a periodic inventory system?
A perpetual inventory system updates inventory accounts after each purchase or sale.
In the periodic inventory system, inventory and cost of goods sold are updated at specific intervals, such as quarterly or annually, based on the results of a physical count.
What is included in the cost of purchased inventories?
The cost of purchased inventories includes:
The price paid or consideration given to acquire the inventory (net of trade discounts, rebates, and other similar items);
Import duties and other unrecoverable taxes; and
Handling, insurance, freight-in, and other costs directly attributable to (a) acquiring finished goods and materials and (b) bringing them to their present location and condition (salable or usable condition).
Describe the FIFO method.
The FIFO (first-in, first-out) method assumes that the first goods purchased are the first sold. Thus, ending inventory consists of the latest purchases. Cost of goods sold includes the earliest goods purchased.
Describe the LIFO method.
The LIFO (last-in, first-out) method assumes the newest items of inventory are sold first. Thus, the items remaining in inventory are the oldest. Cost of goods sold includes the most recently purchased goods.
Which inventory cost flow method is not permitted under IFRS?
LIFO is not permitted under IFRS.
How is inventory accounted for using LIFO or the retail inventory method subsequent to initial recognition?
Subsequent to initial recognition, inventory accounted for using LIFO or the retail inventory method is measured at the lower of cost or market.
How is inventory accounted for using FIFO or the average cost method subsequent to initial recognition?
Inventory accounted for using any other cost method (e.g., FIFO or average cost) is measured at the lower of cost or net realizable value.
Describe the measurement of inventory at interim dates.
A write-down of inventory below cost (to market for LIFO and retail and to NRV for all other methods) may be deferred in the interim financial statements if no loss is reasonably anticipated for the year. But inventory losses from a nontemporary decline below cost must be recognized at the interim date.
Define market as used in the phrase “lower of cost or market.”
Market is the current cost to replace inventory, but it cannot exceed a ceiling or be less than a floor.
