Chapter 5 Short term investments liquid second to cash holds for less than a year recorded after cash on the balance sheet 3 categories securities trading available for sale hold to maturity Trading securities if market price of investment increases it s a gain act like revenue If market price of investment decreases act like expense it s a loss Recorded at market value on balance sheet Unrealized means not sold Realized gain sale price investment Realized loss sale price investment Journals Purchase debit investment credit cash Received dividend debit cash credit dividend revenue Dividends Unrealized on income statement under other revenue and gains FOB Shipping point ownership changes hands and revenue is recognized when goods leave seller buyer owns while in transit buyer pays shipping FOB destination ownership changes hands and revenue is recognized when goods arrive to buyer seller owns in transport seller pays shipping Sales discounts offered to customers when paid early 2 10 n 30 contra asset account Journal for discount debit cash debit discount credit accounts receivable Sales returns and allowances returned merchandise Journal debit sales returns and allowances credit accounts recievable Gross revenue less discounts less sales returns allowances Net revenue Receivables on account selling goods and notes lending money Cash collections Beg Accts Rec Sales End Accts rec Subsidiary ledger separate account for every customer combined make up the general ledger Journals debit accounts receivables credit sales revenue Debit notes receivable credit cash Internal control over cash separate cash handling from accounting Selling on credit increases cash flow but there will be uncollectible accounts Allowance for uncollectible accounts contra asset Net realizable value Accts Rec AUC Journal allowance debit uncollectible account expense credit allowance for uncollectible accounts rec write off debt AUC credit accts entry to record uncollectible accts affected by decrease net income and decrease assets Methods to estimate uncollectible 1 percent of sales income statement approach multiple estimated uncollectible by revenue 2 Aging balance sheet approach aging schedule individual accounts from customers are analyzed on how long they have been unpaid Estimated AUC Unadjusted AUC Adjusting entry Direct write off not GAAP no estimation only right off after they don t pay Notes receivable loaning money Creditor lender debtor borrower interest principle interest rate month 12 maturity value principle interest principle is initial amount borrowed Journals debit note receivable credit cash Debit interest receivable credit interest revenue Debit cash credit interest receivable interest revenue and note receivable If adjusting entries to accrue interest on note receivable is omitted then assets net income and equity are understated Total interest revenues recognized interest rev remaining interest revenue Chapter 6 Inventory the cost of inventory on hand is an asset on the balance sheet of units on hand cost per unit number of units verified by records do not include consignment of other companies do include our consignment COGS the cost of inventory that s been sold and is expense on the income statement of units sold cost per unit Sales revenue sales price COGS cost of inventory sold inventory cost gross profit sales revenue COGS Periodic system updated at the end of the period won t keep running record of items used for low cost items ex bolts at a hardware store Perpetual updated continuously with purchases keeps running record of all inventory on hand counts inventory annually Journals Purchase debit inventory credit accounts payable cash Sold it debit accounts recievable cash credit sales revenue Recorded COGS Debit COGS credit inventory Balance sheet current assets inventory Income statement sales less COGS gross profit less returns and allowances discounts Net sales Cost of inventory purchase price add freight in add taxes or fees less returns allowances discounts net purchases Four methods 1 Specific unit unique items 2 Average cost weight average cost of goods available number of units available BI Purchases COGS number sold average cost EI number left average cost 3 FIFO first in first out COGS are oldest items EI are newest items if not given take total price total items and use that for prices 4 LIFO last in first out COGS are newest items EI are oldest items BI Purchases EI COGS first then above Impact on financial statements When rising FIFO lowest COGS highest EI LIFO highest COGS lowest EI When decreasing FIFO highest COGS lowest EI LIFO lowest COGS highest EI Tax advantage of LIFO results in lowest income lowers income tax increase cash available buying large amounts of inventory near end of year will show less income show more income by delaying purchases Other comparisons LIFO has most realistic measurement of COGS and net income FIFO reports most up to date EI inventory costs Financial statements should use a consistent method disclose relevant and representationally faithful info that an outsider can make informed decisions Lower cost of market inventory is reported on balance sheet at whichever is lower historical cost or replacement cost if replacement cost falls under historical cost must write down the value of its goods at market value if market above no Journal debit COGS credit inventory Income statement sales revenue less COGS gross profit less operating expenses income before tax income tax Net income Effects of inventory errors error effects 2 accounting periods EI Overstated Period 1 COGS under Gross profit net income over Period 2 COGS over gross profit net income under EI Understated Period 1 COGS over gross profit net income under Period 2 COGS under gross profit net income over Does not affect sales BI purchases goods available BI and goods available affect in 2nd period mirror EI of first period Chapter 7 Plant asset long term asset property plant or equipment expense is depreciable Costs of Plant Assets Land purchase prices add commission survey fees back taxes grading and clearing removing buildings not depreciable Constructed buildings architecture fees material labor interest on funds borrowed Purchased building purchase price add broker s commission taxes costs to repair and renovate Equipment purchase price add transportation insurance in transit sales tax installation testing platforms Once working repairs and maintenance are expenses Land