ACG3101 Final Exam Study Guide Date Monday December 12 2011 5 30pm or Friday December 16 2011 Room RBB108 Vocabulary Chapter 5 Vocabulary 1 Completed Contract Method Recognition of revenue for a long term contract when the project is complete 2 Installment Sales Method Recognizes revenue and costs only when cash payments are received 3 Realization Principle Requires that the earnings process is judged to be complete or virtually complete and there is reasonable certainty as to the collectability of the asset to be received usually cash before revenue can be recognized 4 Percentage of Completion Method Allocation of a share of a project s revenues and expenses to each reporting period during the contract period 5 Cost Recovery Method Deferral of all gross profit recognition until the cost of the item sold has been recovered 6 Right of Return Customers right to return merchandise to retailers if they are not satisfied 7 Consignment The consignor physically transfers the goods to the other company the consignee but the consignor retains the legal title 8 Construction in Progress Asset account equivalent to the asset work in progress inventory in a manufacturing company 9 Franchisor Grants to the franchisee the right to sell the franchisor s products and use its name for a specific period of time Billings on Construction Contract Contra account to the asset construction in progress subtracted from construction in progress to determine balance sheet presentation sell the franchisor s products and use its name for a specific period of time Franchisee Individual or corporation given the right to 10 11 Chapter 7 Vocabulary 1 2 Cash Includes currency and coins balances in checking accounts and items acceptable for deposit in these accounts such as checks and money orders received from customers These forms of cash represent amounts readily available to pay off debt or to use in operations without any legal or contractual constriction Bank Reconciliation One of the most important tools used Step 1 Adjust the bank balance to the corrected cash balance Step 2 Adjust the book balance to the corrected cash balance Bank Balance Checks outstanding Deposits outstanding in transit Errors Book Balance Collections by Bank Service Charges NSF Checks Errors in the control of cash a b c d Corrected balances must be equal Cash Equivalents include money market funds treasury bills and commercial paper To be classified as cash equivalent s these investments must have a maturity date no longer than three months from the date of purchase Internal Control refers to a company s plan to from a financial accounting perspective the focus is on controls intended to improve the accuracy and reliability of accounting data a Encourage adherence to company policies and procedures b Promote operational efficiency Minimize errors and theft c Enhancer the reliability and accuracy of accounting d data e The Sarbanes Oxley Act requires a company to document and access its internal controls Auditors express an opinion on management s assessment Trade Discount Percentage reduction from the list price Allowance for Uncollectibles Recording bad debt expense and reducing accounts receivable indirectly by crediting a contra account ADA to accounts receivable for an estimate of the amount that eventually will prove uncollectible a The use of the allowance method is an attempt to satisfy the matching principle in accounting for bad debts and to record accounts receivable at net realizable value Cash discount Sale discounts represent reductions not in the selling price of a good or service but in the amount to be paid by a credit customer if paid within a specific period of time Balance Sheet approach Determination of Bad Debt Expense by estimating the net realizable value of accounts receivable to be reported in the balance sheet Accounts Receivable Aging Schedule Applying different percentages to accounts receivable balances depending on the length of time outstanding 3 4 5 6 7 8 9 10 Income Statement approach Estimating bad debt expense as a percentage of each period s net credit sales usually determined by reviewing the company s recent history of the relationship between credit sales and actual bad debts 11 Net Method For the buyer considers the cost of inventory to include the net after discount amount and any discounts not taken are reported as interest expense For the seller considers sales revenue to be the new amount after discount and any discounts not taken by the customer as interest revenue Compensating Balance A specified balance usually some of the committee amounts a borrower of a loan is asked to maintain in a low interest or noninterest bearing account at the bank Discounting The transfer of a note receivable to a financial institution a i ii iii Discounting a Note Receivable Step 1 Accrue interest earned on the note receivable prior to its being discounted Step 2 Add interest to maturity to calculate maturity value Step 3 Deduct discount to calculate cash proceeds 12 13 12 13 14 15 16 17 18 Factor Factoring Financial institution that buys Gross Method For the buyer views a discount not taken as part of the cost of inventory For the seller views a discount not taken by the customer as part of sales revenue Direct Write Off Method An allowance for uncollectible accounts is not used instead bad debts that do arise are written off as bad debt expense Two most popular arrangements used for the sale of receivables are factoring and securitization receivables for cash handles the billing and collection of the receivables and charges a fee for this service Without Recourse The buyer assumes the risk of uncollectibility when accounts receivable are sold without recourse With Recourse The seller retains the risk of uncollectibility when accounts receivable are sold with recourse Troubled Debt Restructuring The original terms of a debt agreement are changed as a result of financial difficulties experienced by the debtor borrower Securitization The company creates a special purpose entity SPE usually a trust or subsidiary the SPE buys a pool of trade receivables credit card receivables or loans from the company and then sells related securities 19 20 21 22 23 24 a Notes Receivable Formal credit arrangements between a creditor lender and a debtor borrower Notes receivable are classified as either current or noncurrent depending on the expected collection date s Non interest bearing loan Notes that bare interest but the