Trading security ALWAYS a current asset and report their current market value It is sold WITHIN one year or less it is intended to sell the trading security in the very near future Decrease value to 96 000 from 100 000 DEBIT unrealized loss on investment for 4000 and CREDIT short term trading investments for 4000 USE OR SIGN WHEN ENTERING A LOSS GAINS CREDITS LOSSES DEBITS Writing off a bad account is NOT the same as estimating uncollectible goods Allowance for uncollectible goods Accounts Receivable allowance net realized value Interest principal interest rate months 12 Maturity value principal interest due Write Offs 2500 Beg Bal 2000 Uncollectible x End Bal 1790 X 2290 When goods are shipped FOB destination revenue is recognized by the seller when the goods leave it s shipping deck False FOB point means that revenue is recognized when the goods leave the shippers the seller s shipping dock A separate account for each customer is kept in a SUBSIDIARY ACCOUNT The creditor has a note payable FALSE the borrower has a note payable Unrealized gain not sold yet cost vs the market value Unrealized gain is recorded when the fair value of the trading security is more than the cost The allowance for uncollectible accounts normally has a credit balance because it is a contra asset Two basic ways to estimate uncollectible accounts are PERCENT OF SALES METHOD and AGING SCHEDULE METHOD PERCENT OF SALES METHOD take a of sales each period income statement method AGING SCHEDULE calculate when the allowance should be also called of receivables method balance sheet method 4 inventory METHODS FOR CASH FLOWS Specific unit unique items FIFO FIRST in FIRST out Average cost total cost total units LIFO LAST in FIRST out COGS expense EI asset FIFO oldest units newest units LIFO newest units oldest units THE FIFO METHOD ASSIGNS THE MOST RECENT INVENTORY COST TO EXPENSE FALSE Generally associated with saving income taxes LIFO Lower income Used to account for automobiles jewelry and art objects specific unit cost Results in cost of ending inventory that is close to the current cost of replacing the inventory FIFO Maximizes reported income FIFO Enables a company to buy high cost inventory at year end and thereby decrease REPORTED income and income tax LIFO Results in an old measure of the cost of ending inventory LIFO Ending inventory is the old stuff Provides a middle ground measure of ending inventory and cost of goods sold average cost Enables a company to keep reported income from dropping lower by liquidating old layers of inventories LIFO Writes inventory down when replacement cost drops below historical cost applies to all 4 methods High cost of goods sold lower net income lower taxes Inventory is present at the cost of the item on the balance sheet not the selling price SALES REVENUE is based on SALES PRICE of the inventory while COST OF GOODS SOLD is based on the COST of the inven Beg Inventory Purchases Available Ending inventory Number of units TOTAL cost of Beginning inventory purchases ALWAYS TOTAL cost of ending inv COGS If ending balance is too high your COGS was too low NET SALES OR SALES REVENUE COGS GROSS PROFIT COGS overstated GROSS PROFIT understated EFFECTS OF INVENTORY ERRORS Sold COGS Period 1 Period 2 COGS over under GP NI under over COGS under over NI Net Income GP NI over Period 1 EI overstated under Period 1 EI understated EI Ending Inventory GP Gross Profit GROSS PROFIT OPERATING EXPENSES INCOME BEFORE INCOME TAX Expense immediately shows up on the income statement repairs are expenses Capitalize add to the cost of asset on the balance sheet depreciation over time PLANT ASSET long term asset we use in a business included in cost of land purchase price commissions removing unwanted buildings fencing not included Depreciation needs COST USEFUL LIFE ESTIMATED RESIDUAL VALUE ESTIMATED Residual value is known as Scrap Value Salvage Value It estimates how much it will be worth at the end of the year Double Declining Value is also known as ACCELERATED DEPRECIATION METHOD ACCUMULATED DEPRECIATION is a contra asset where normal balance is a credit COST RESIDUAL LIFE USEFUL LIFE Straight line and Units of PRODUCTION DOUBLE DECLINING BALANCE 2 1 N N Useful Life Double declining will produce the lowest net income while straight line and units of productions depends EXAMPLE Parking lot is a plant asset of LAND OBJECTS The cost of land may include the cost of any back property taxes that the purchaser says TRUE The cost of land includes the cost of fencing and paving FALSE Land improvements are not subject to depreciation FALSE Costs of land improvements are included in the land account FALSE Any cost to get machinery up and running and ready for its intended use should be part of the cost of the asset and depreciated TRUE Company A purchased a used piece of equipment All of the following costs should be included in the cost of the equipment EXCEPT for maintenance costs after the equipment is up and running Company B purchased some land and is preparing the land for a new building Company B should include GRADING AND CLEARING THE LAND in the cost of land The cost of demolishing the building would be part of the cost of the LAND If an expenditure is capitalized it is debited to an asset account Company A replaced tires and painted several of its vehicles during the year the costs should be debited to repair expense Treating a capital expenditure as an immediate expense overstates expenses and understates net income The accumulated depreciation account is an income statement account FALSE At the end of its useful life the book value of an asset must be zero FALSE ORIG COST RESIDUAL VALU The THREE depreciation methods allocate different amounts of depreciation to each period but all results in the same total amount of depreciation over the life of the asset TRUE Book Value the cost of asset the total accumulated depreciation TRUE word problem on slide It is illegal to use one method of depreciation for financial purposes and another method for tax purposes FALSE To account for the disposal of a plant asset the cost of the asset and its related accumulated depreciation are removed from the books TRUE Accumulated depletion reduces equity as this account is a contra revenue account FALSE accum depletion is a contra asset and reduces assets Natural resources are reported in the intangible assets section of the income statement FALSE All of the following are classified as natural resources and are