ACCTNG 2400 1st EditionExam # 3 Study Guide Lectures: 15 - 24Based off of most important material on lecture notes, Practice Exam on MyGateway, and the list of what to know for the exam from Professor Van WertMaterial from lecture notes (condensed from previously posted lecture notes. Look at individual lecture notes for more detail/charts/other material covered):Lecture 15 (March 31)Types of business:Service – companies provide services directly, with little (if any) physical product provided (ex: hair stylist, house cleaning, etc.)- Revenues are earned by doing something (providing a service)- Expenses are incurred by receiving services or using up assetsMerchandising – companies buy a variety of products from manufacturers or distributers, enabling customers to conveniently select and purchase the product they want (ex: grocery stores, amazon.com, etc.)- Revenues are earned by providing a product to a customero Merchandisers buy products, usually hold them for a while, then sell them to customerso Objects held for later sale to customers are called inventory (an asset)- Expenses are incurred by transferring ownership of inventory to a customer (Cost of Goods Sold [COGS]), or receiving services or using up assetsCredit Sales ReductionGeneral approaches – don’t reduce original revenue recorded; use a contra-revenue or expense account, and reduce accounts receivable.Return – customer returns product for a refund Allowance – customer gets a partial refund as compensation for a quality defect (instead of a return)- Returns and allowances use a contra-revenue account called “sales returns and allowances”Cash discount – seller offers the customer a payment discount for early payment- Use a contra-revenue account called “sales discounts”Bad Debts – credit customer is unable to pay the amount it owes- Use an expense account called “bed-debt expense”Lecture 16 (April 2)Accounts Receivable and Bad Debts- Problem: at September 30th, we have recorded Revenue and Accounts Receivable that we will NOT collect- Solution: Before September 30th, estimate the amount that will not be collectes and make an adjusting entry to record an estimated “Bed Debts Expense” in September. This is called The Allowance Method. It matched expenses with revenues.- “Allowance for Doubtful Accounts” is a contra-asset account; it normally has a credit balance that offsets Accounts Receivable. To estimate Bad Debts amount, look at past percentage of credit sales during the period.If a company usually does not collect about 5% of their total sales, then take 5% of the total sales and use that amount as the estimated Bed Debts amount.Lecture 17 (April 7)Inventory CostsAll costs incurred to obtain the inventory items and bring them to a condition and location where they are ready for sale are added to the value of the inventory. Common costs: freight, storage, and inspection.Ex: Valley view Landscaping purchases $10,500 of patio furniture and landscaping decorations for resale to customersdr Inventory (A+) 10,500cr Accounts payable 10,500Inventory PoliciesFIFO – First-in first-outLIFO – Last-in first-outAvg. – weighted averageLecture 18 (April 9)Inventory Methods Financial Statement EffectsWeighted average: Smoothes out price changesFIFO: ending inventory approximates current replacement costLIFO: better matches current costs in cost of goods sold with revenuesNote: if inventory purchase costs are rising, LIFO results in higher COGS expense therefore lowerNet Income Tax (for now)COGS EquationInventory Management MethodsCompanies use one of two inventory management methodsPerpetual- Perpetual = always = continuously- Records revenue for each sales transaction- Cost of goods sold expense (sale of inventory) is recorded for EVERY individual sale transactionPeriodic- Periodic = every once in a while- Records revenue for each sale transaction- Cost of goods sold expense (sale of inventory) is only recorded the END of each period (after inventory is counted)Lecture 19 (April 14)Operating Cycle EfficiencyLiquidity RatiosInventory Turnover Ratio – the inventory turnover ratio indicates how frequently inventory is bought and sold. The “days to sell” indicates the average number of days needed to sell each purchase of inventory.Inventory turnover ratio = Cost of goods sold / average inventoryDays to sell = 365 / inventory turnover ratioReceivable Turnover Ratio – the receivable turnover ratio indicates how frequently credit sales are collected. The “days in receivables” indicates the average number of days needed to collect cash for each credit sale.Receivable turnover ratio = net sales revenue / average net receivablesDays in receivables = 365 / receivable turnover ratioLecture 20 (April 16)Acquisition of tangible assets- Acquisition costs includes the purchase price- Costs to prepare the asset for its intended use:o Legal feeso Filing feeso Survey feeso Broker commissionso Appraisal feesBasket purchase - The total cost of a combined purchase of land and building is allocated in proportion to their relative market valuesMaintenance Costs Incurred During UseOrdinary repairs and maintenanceCharacteristics:o Relatively small, recurring expenditures that maintain normal operating conditionso Do not increase productivityo Do not extend life beyond original estimateAccounting treatment:o Architectural feeso Sales taxeso Transportation costso Installation costso Calibration costso EXPENSE (report as an expense on the income statement)Additions, replacements, and extraordinary repairsCharacteristicso Relatively large, infrequent expenditures such as major overhauls or replacements ofmajor componentso May extend useful lifeo May increase productivity or efficiencyAccounting treatment: o CAPITALIZE (report as an asset and depreciate)Depreciation ExpenseDepreciation is a cost allocation process that matches costs of operational assets with periods benefited by their use.o Depreciation expense (depreciation for the current year) goes on income statemento Accumulated depreciation (total depreciation to date for an asset) goes on balance sheetMeasure and Record3 items needed:1. Acquisition cost of the asset2. Estimated useful life – how long the company expects to use the asset3. Estimated residual value – expected cash value of asset at the end of its life Depreciable cost = asset’s cost – estimated residual valueDepreciation Methods1. Straight line2. Units-of-production3.