TotalsAccounting 200 Spring 2014Exam 2Study GuideChapter 6- Goods in transit should be included in the inventory- Free on board (FOB) Shipping Pointo Ownership passes to buyer when the public carrier accepts the goods from the sellero Goods should be counted in the inventory of the buyero- Free on Board (FOB) Destinationo Ownership remains with seller until goods reach the buyero Goods should be included in the inventory of the sellero- Consigned Goodso Counted in the inventory of the owner rather than the consignee.- 4 Types of Inventory Costingo Specific Identification Method  Tracks the actual physical flow of the goods Each item is marked with its exact costo 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 “Last In First Out”o Average Cost 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 reasonso Income Statement effectso Balance Sheet effectso Tax effects- During Periods of Increasing Priceso FIFO reports the highest net incomeo LIFO reports the lowest net incomeo Average cost falls in the middle- During Periods of Decreasing Priceso FIFO will report lowest net incomeo LIFO will report the highest net incomeo 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 priceo LCM is an example of conservatism- Inventory Turnover Ratioo (Cost of Goods sold)/(Average Inventory)- Days in Inventoryo (365 Days)/(Inventory Turnover Ratio)- LIFO Reporting Under GAAPo 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- Receivableso Refers to amounts due from individuals & companies.o They are claims to be collected in cash A/R N/R Other Receivableso 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 merchandiseApril 1 Accounts Receivable 23,000Sales Revenue 23,000April 8 Sales Returns and Allowances 2,900Accounts Receivable 2,900April 11Cash 19,497 Sales Discounts 603Accounts Receivable 20,100 - Receivable is Recorded:o When services or goods are provided to a customer on account- Credit Losses are a normal thing in business- Methods to Account for Uncollectible Accountso Direct Write-Off Method Not accepted by GAAP Example:Bad Debt Expense 500A/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 runo 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) throughan 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 4,200Allowance for Doubtful Accounts 4,200 - Example of a Write-Off of an uncollectible accounto John Smith authorizes a write-off of $800 owed by Jane DoeAllowance for Doubtful Accounts 800Accounts Receivable-Doe 800- If a company was to collected debt it had previously written off the company must make 2 journal entrieso Example:Accounts Receivable-Doe 800Allowance for Doubtful Accounts 800Cash 800Accounts Receivable 800- 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/InterestCash 110N/R 100Interest Revenue 10o Dishonored Note 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 extended2- Establish a payment period3- Monitor Collections4- Evaluate the liquidity of receivables5- Accelerate cash receipts from receivables- Receivables Turnover Ratioo Measures the number of average times receivables are collected during the period o (Net Sales)/(Average Net Receivables)Chapter 9- Plant Assetso Resources of physical substanceo Used for operation of businesso Recorded at cost- Land (Cost)o Cash purchase priceo Closing costso Real estate brokers commissionso Accrued property taxeso Other liens on the land assumed by purchasero 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 andgrading $4,640.-The Cost of the Land = $78,850o $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 Sheeto Sales Taxo Logo Paintingo Transit Insuranceo Anything that is paid for while receiving the asset- Costs on Income Statemento Annual Insuranceo Annual Licenseo (Expenses that are paid each year)- Land Improvementso Structural additions to land- Building accounto Anything being charged related to buildings- Equipmento Purchase priceo Taxo Assembly costo Testing cost- Advantages of Leasingo Reduced risk of obsolescenceo Little or no down paymento Shared