Accounting 200 Spring 2014 Exam 2 Study Guide Chapter 6 o o Goods in transit should be included in the inventory Free on board FOB Shipping Point o Ownership passes to buyer when the public carrier accepts the goods from the seller o Goods should be counted in the inventory of the buyer Free on Board FOB Destination o Ownership remains with seller until goods reach the buyer o Goods should be included in the inventory of the seller Consigned Goods o Counted in the inventory of the owner rather than the consignee 4 Types of Inventory Costing o Specific Identification Method Tracks the actual physical flow of the goods Each item is marked with its exact cost o FIFO Costs of the earliest purchased goods are the first to be recognized as cost of goods sold First In First Out o LIFO Last goods purchased are the first to be sold o Average Cost Last In First Out Assumes that the goods available for sale are homogeneous Total Cost of all Goods Total Goods Companies use one of these methods for one of three reasons o Income Statement effects o Balance Sheet effects o Tax effects During Periods of Increasing Prices o FIFO reports the highest net income o LIFO reports the lowest net income o Average cost falls in the middle During Periods of Decreasing Prices o FIFO will report lowest net income o LIFO will report the highest net income o Average cost falls in the middle Lower of Cost or Market LCM o When value of inventory is less than its cost inventory is written down to its market value Market is defined as current replacement cost not selling price o LCM is an example of conservatism Inventory Turnover Ratio o Cost of Goods sold Average Inventory Days in Inventory o 365 Days Inventory Turnover Ratio LIFO Reporting Under GAAP o Firms using LIFO must report the amount that inventory would increase o decrease if FIFO was used instead Allows people to more easily compare Ending Inv Under LIFO LIFO Reserve Ending Inv Under FIFO Chapter 8 Receivables o Refers to amounts due from individuals companies o They are claims to be collected in cash A R N R Other Receivables o Journal Entry Example Record transactions on the books of Company X 1 April 1 Company X sold merchandise on account to Company Y for 23 000 terms 3 10 n 30 2 April 8 Company Y returned merchandise worth 2 900 to Company X 3 April 11 Company Y paid for the merchandise April 1 Accounts Receivable Sales Revenue April 8 Sales Returns and Allowances Accounts Receivable 2 900 23 000 23 000 2 900 19 497 603 Accounts Receivable 20 100 April 11Cash Sales Discounts Receivable is Recorded Credit Losses are a normal thing in business Methods to Account for Uncollectible Accounts o Direct Write Off Method Not accepted by GAAP Example o When services or goods are provided to a customer on account Bad Debt Expense 500 A R John Doe 500 No attempt is made to match bad debt expense to sales revenue in the Income Statement No attempt is made to show A R in the Balance Sheet at the amount actually expected to be received Looks good in short run but bad in long run o Allowance Method Provides better matching on Income Statement Ensure receivables are stated at cash realizable value Cash Realizable Value Net amount expected to be received in cash Excludes amounts that the company estimates it will not collect 3 Essential Features Uncollectible A R are estimated matched against revenues in the same accounting period in which revenues occurred Estimated uncollectibles are recorded as an increase debit to Bad Debt Expense an increase credit to Allowance for Doubtful Accounts contra asset through an adj entry at the end of each period Actual uncollectibles are debited to Allowance for Doubtful Accounts credited to A R at the time of the specific account is written off as uncollectible Example Company X has credited sales of 2 200 000 of which 300 000 remains uncollected The credit manager estimates 4 200 will be uncollectible Bad Debt Expense 4 200 Allowance for Doubtful Accounts 4 200 Example of a Write Off of an uncollectible account o John Smith authorizes a write off of 800 owed by Jane Doe Allowance for Doubtful Accounts Accounts Receivable Doe 800 800 If a company was to collected debt it had previously written off the company must make 2 journal entries o Example Accounts Receivable Doe Allowance for Doubtful Accounts Cash Accounts Receivable Notes Receivable o Compute the Interest on a N R Interest Face Value X Annual Interest Rate X Time in Terms Years o Example of collecting a Note Receivable at Maturity w Interest Cash N R Interest Revenue o Dishonored Note 800 800 800 800 110 100 10 A note that is not paid in full at maturity Each of the major receivables should be identified in the Balance Sheet Bad Debts Expense Interest Revenue are reported on the Income Statement 5 Principles of Sound A R Management Steps 1 Determine to whom credit should be extended 2 Establish a payment period 3 Monitor Collections 4 Evaluate the liquidity of receivables 5 Accelerate cash receipts from receivables Receivables Turnover Ratio o Measures the number of average times receivables are collected during the period o Net Sales Average Net Receivables Chapter 9 Plant Assets o Resources of physical substance o Used for operation of business o Recorded at cost Land Cost o Cash purchase price o Closing costs o Real estate brokers commissions o Accrued property taxes o Other liens on the land assumed by purchaser o Example of Calculating Cost of Land These expenditures were incurred by Company X in purchasing land cash price 63 370 accrued taxes 4 750 attorney s fees 2 480 real estate broker s commission 3 610 and clearing and grading 4 640 The Cost of the Land 78 850 o 63 370 Cash Price o 4 750 Accrued Taxes o 2 480 Attorney s fees o 3 610 Real estate brokers Commission o 4 640 Clearing and Grading Costs on Balance Sheet o Sales Tax o Logo Painting o Transit Insurance o Anything that is paid for while receiving the asset Costs on Income Statement o Annual Insurance o Annual License o Expenses that are paid each year Land Improvements o Structural additions to land Building account o Anything being charged related to buildings Equipment o Purchase price o Tax o Assembly cost o Testing cost Advantages of Leasing o Reduced risk of obsolescence o Little or no down payment o Shared tax advantages o Assets liabilities are not reported on financial statements Depreciation o Process of allocating to expense the cost of a plant asset over its useful life in a rational