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Acct. 2331: Final
Accounts Receivable Turnover |
Sales on account รท Average Accounts Receivable
How many times a companies Accounts Receivables have been converted to cash during the year |
Realized Gain
|
Sale price is greater than the investment carrying amount |
What is the (quick) acid test ratio? |
(cash + short term investments + current receivables) / current liabilities |
Realized Loss
|
Sale price is less than the investment carrying amount |
amount of interest |
(principal * interest rate * time)
time is base on 360 days so if loan is for 60 dayst then the time is : 60/360 |
assets |
LIABILITIES+OWNERS EQUITY
also,
LIABILITIES+PAID-IN CAPITAL+RETAINED EARNINGS
Resources owned by an organization |
Current ratio |
(Current assets / current liabilities) Liquidity ratio - shows a firms ability to pay off current liabilities using assets that can be converted into cash. Ratio should be higher than 1 and 2 or higher is better still. |
DEBT RATIO |
(total liabilities / total assets) Tells the proportion of a company's assets that it has financed with debt. |
Net Income |
The total revenue in an accounting period minus all expenses during the same period. |
net income(or net loss) |
REVENUES minus EXPENSES |
Conservatism |
When alternative accounting valuations are equally possible, the accountant should select the one that is least likely to overstate assets and income in the current period. |
average inventory cost flow method |
the method of inventory costing that is based on the assumption that costs should be charged against revenue by using the weighted average unit cost of the items sold. |
Uncollectible-account expense |
Cost to the seller of extending credit. Arises from the failure to collect from credit customers. Also called doubtful-account expense or bad-debt expense. |
debtor |
A person who owes money |
principal |
the amount borrowed by a debtor and lent by a creditor |
Receivables |
Monetary claims against a business or an individual, acquired mainly by selling goods or services and by lending money.
Third most liquid asset |
Maturity Date |
Date when the note receivable is due to be paid back in full |
Creditor |
The party to whom money is owed. |
interest |
the borrower's cost of renting money from a lender. interest is revenue for the lender and expense for the borrower.
(Amount Borrowed)*(Interest rate)*(lenght of time borrowed) |
accounts receivable turnover |
net sales divided by average net accounts receivable. |
Acid-test ratio |
Ratio of the sum of cash plus short-term investments plus net current receivables to total current liabilities. Tells whether the entity can pay all its current liabilities if they come due immediately. Also called the quick ratio. |
trojan horse |
malicious program that hides within legitimate programs and acts like a computer virus |
Outstanding Checks |
The business has written checks recorded the payments in the books. But these checks are not yet presented to the bank. Therefore, bank statements are yet to recognize them |
petty cash |
fund containing a small amount of cash that is used to pay minor amounts |
Nonsufficient funds (NSF) check |
A check for which the makers bank account has insufficient money to pay the check.
Bank reconciliation - Book Side |
internal control |
organizational plan and related measures adopted by an entity to safeguard assets, encourage adherence to company policies, and ensure accurate and reliable accounting records. |
fidelity bond |
insurance that protects a company from losses caused by employee dishonesty |
Electronic fund transfer (EFT) |
The transfer of funds by an electronic terminal, telephone, or computer
Bank Reconciliation - Book Side |
Bank reconciliation |
a report that accounts for the differences between the bank statement and a checkbook balance |
Audit |
Is an examination of financial reports to ensure that they represent what they claim and confirm with GAAP |
Unearned Revenue |
A liability account use to record cash received in advance of the sale or service |
Net Income |
A company's total revenues less its total expenses for all periods of time.
Net income= revenue - expenses |
accrued liability (accrued expense) |
-liability
creates a payable
-pay them later but record revenue first
ex. employees work - payday
ex. wages payable, interest payable, utilities payable |
Net Loss |
Expenses exceed the income or total revenue produced for a given period of time. |
Partnership |
A business owned by two or more joint owners, or partners, who share the responsibilities and the profits of the firm and are individually liable for all the debts of the partnership. |
Proprietorship |
single owner.
tend to be small retail stores or solo providers of professional service
ex: physicians, attorneys, or accountants.
legally liable for all the business debts. |
accumulated depreciation |
the total amount of depreciation expense that has been recorded since the purchase of a plant assets |
Depreciation |
the process of allocating the cost of a plant asset to expense in the accounting periods benefiting from its use |
liquidity |
measure of how quickly an item can be converted to cash |
accrual |
recognition of an expense incurred or revenue earned that has not yet been recorded |
MANAGEMENT ACCOUNTING |
The branch of accounting that focuses on information for internal decision makers of a business. |
Accounting |
The process of collecting, analyzing, and recording financial info AND communicating to decision makers. |
Balance Sheet |
Financial Statement that reports a firm's financial condition at a specific time and is composed of three major accounts:
1. Assets
2. Liabilities
3. Owners' Equity |
Board of Directors |
A group of persons elected by the stockholders to manage a corporation. They decide corporate policies and goals among other things |
corporation |
a business owned by stockholders. a corporation is a legal entity [an "artificial person" in the eyes of the law]. protects investors from losing more money than they originally invested. |
Business Entity Assumption |
A business is accounted for separately from other business entities, including its owner. |
Financial Accounting |
Area of accounting mainly aimed at serving external users. |
GAAP |
Generalized Accepted Accounting Principles- Common set of standards that the accounting profession has developed and generally accepted and practiced universally. |
transaction |
any event that has a financial impact on the business and can be measured reliably |
Journal |
A chronological record of all transactions... the place where transactions first enter the accounting records. Also called book of original entry. |
cost of goods sold |
cost of the inventory the business has sold to customers
(beginning inventory) + (purchases) - (ending inventory) = Cost of goods Sold |
First-in, first-out (FIFO) method. |
Assumes that items sold are those that were acquired first. Ending inventory consists of the most recently acquired items. |
gross profit |
sales revenue minus cost of goods sold |
gross profit percentage |
useful in measuring profitability because it tells out of every sales dollar, how much goes to cover the cost of product and how much is gross profit or gross margin
(gross profit) / (net sales revenue) |
last in, first out (LIFO) |
an accounting method for calculating cost of inventory; it assumes that the last goods to come in are the first to go out. |
purchase allowance |
credit allowed for part of the purchase price of merchadise that is not returned, resulting in a decrease in the customer's accoutns payable |
purchase discount |
a discount that businesses offer to purchasers as an incentive for early payment |
purchase return |
decrease in the cost of purchases because the buyer returned the goods to the seller |
Amortization |
1. The paying off of debt in regular installments over a period of time.
2. The deduction of capital expenses over a specific period of time (usually over the asset's life). More specifically, this method measures the consumption of the value of intangible assets, such as a patent or a copyright. |
capital expenditure |
a cash outlay that is expected to generate a flow of future cash benefits lasting longer than one year |
Intangible Assets |
assets that do not have physical substance yet are often very valuable (goodwill, patents, trademarks, copyrights, trade names) |
Fixed assets or plant assets |
Long term of permanent tangible assets such as equipment, machinery and buildings that are used in the normal business operations and that depreciate over time. |
Accrued expense |
An expense that the business has incurred but not yet paid
Ret. Earnings decreases
Liabilities increases |
Convertible Bonds and Notes (2)
|
(1) bondholders can exchange bonds for issuing company's common stock
(2) Investors benefit from:
a. SAFETY: guaranteed receipt of principal & interest on bonds
b. OPPORTUNITY: potential gains on stock |
pension |
a cash payment to retired employees |
term bonds |
bonds that all mature at the same time for a particular issue |
authorized stock |
maximum number of shares a corporation can issue under its charter. |
chairperson |
elected by a corporation's board of directors, usually the most powerful person in the corporation |
Preferred Stock is Cumulative Preferred Stock |
any unpaid dividends + current year's dividend have to be paid in FULL before COMMON stockholders get any |
Issued stock |
# of shares that have been sold to investors |
Limited liability |
A shareholder in a limited company is not personally liable for any of the debts of the company, other than for the value of his investment in that company. |
liquidation value |
amount a corporation must pay a preferred stockholder in the event the company liquidates and goes out of business |
shareholders |
Individuals or companies that own stocks in a business. |
stock spilt |
occurs when a corporation increases the number of shares of stock issued and outstanding and reduces the par or stated value proportionally |
channel stuffing |
a type of financial statement fraud that is accomplished by shipping more to customers than they ordered with the expectation that they may return some or all of it |
investment capitalization rate |
used to estimate the value of an investment (interest) |
pretax accounting income |
income before tax on the income statement |
taxable income |
basis for computing the amount of tax to pay the government |
Inventory (Formula) |
(# of units on hand) * (cost per unit of inventory) |
cost of goods sold (Formula) |
(# of units of inventory sold) * (cost per unit of inventory) |
average cost per unit (Formula) |
(cost of goods available) / (# of units available) |
Ending Inventory (Formula) |
(# of units on hand) *(average cost per unit) |
gross profit % (Formula) |
(gross profit) / (net sales revenue) |
Inventory turnover (Formula) |
(Cost of goods sold) / (average inventory) |
book value of a plant asset (Formula) |
(cost) -(accumulated depreciation) |
depreciable cost (Formula) |
(asset's cost) - (estimated residual value) |
book value per share of common stock (Formula) |
(total stockholders' equity -preferred equity) / (# of shares of common stock outstanding) |
rate of return on total assets (Formula) |
(net income + interest expense) / (average total assets) |
rate of return on common stockholder's equity (Formula) |
(net income(loss) - preferred dividends) / (average total assets) |
common stock (Formula)
|
(# of shares issued) * (par value per share) |
current market value of company (Formula) |
(# of shares of common stock outstanding) * (current market price per share) |
earnings per share (Formula) |
(net income - preferred dividends) / (average # of shares of common stock outstanding) |
income tax(expense) (Formula) |
(income before income tax) * (income tax rate) |
income tax (payable) (Formula) |
(taxable income) * (income tax rate) |
assets |
cash, acct.receivable, note receiv., inventory, prepaid expenses, land, building, equip. |
liabilities |
acct payable, notes payable, accrued liabilities |
stockholder's equity |
common stock, dividends, revenues, expenses |
Relevance |
It means that financial information is capable of making a difference in a decision. |
Statement of cash flows and Cash Flows |
Financial statement that explains how a company obtained and used cash during the accounting period. |
Going Concern Concept |
Requires managers to maintain the vaule of assets on the accounting books as if the company were going to exist forever.
Requires that if a company is going to liquidate and sell all of its assets, then it must record them at liquidation value |
Notes recievable |
(promissory notes); written pledge customer will pay amount of money by date |
Uncollectible Amounts |
-Business expense
-GAAP requires that allowances for uncollectible accounts be made in periods in which credit sales are done (matching principle) |
Allowance Method |
set up allowance account to record expense in the same period as revenue is recorded, consistent with matching principle
-will appear in income statement just like any other expense |
Percent of sales method |
Computes estimated amount of uncollectable accounts by using (estimated uncollectable accounts) * (Net credit of sales)
allowance method: estimating amount of uncollectable accounts |
Aging-of-Receivables Method |
-A method of estimating uncollectible receivables by determining the balance of the Allowance for Bad Debts account based on the age of individual accounts receivable
-the more time elapsed after the sale the less liely collection of the receivable becomes |
Percent of Sales |
Adjusts allowance for uncollectible accounts by the amount of uncollectible accounts expense |
Aging of Receivables |
adjusts allowance for uncollectible accounts to the amount of uncollectible accounts expense |
Writing off uncollectible accounts |
-need to remove customers from the accounts receivable (credit accounts receivable)
-use previously made provisions to write off customers (debit allowance for uncollectible accounts)
-Will not impact the net accounts receivables balance in the balance sheet
-will not impact the income statement |
Days Sales in Receivable (collection Period) |
estimates how long it takes to collect receivables on average.
(Days sales in receivables)=(average receivables) / (one days sales)
(one days sales = net sales/365) |
Cost of Goods Sold |
How much the products you sold cost you |
Ending inventory |
Value of inventory remaining at the end of accounting period |
FOB shipping point |
Term of sale indicating that goods are owned by the customer the moment they leave the seller's premises. |
FOB Destination |
Title to the goods does not pass from the seller to the purchaser until the goods arrive at the purchaser's receiving dock |
periodic inventory system |
an inventory system in which a company does not maintain detailed records of goods on hand throughout the period and determines the cost of goods sold only at the end of an accounting period |
Perpetual inventory system |
An inventory system that tracks the number of items in inventory on a constant basis. Inventory is still physically counted periodically (at least once a year) for accuracy) |
Perpetual accounting system |
-two records are made for each sale
-recording of the sale
-recording of transferring inventory to cost of goods sold |
Periodic Inventory System |
-NO transactions are posted into INVENTORY ACCOUNT. Purchases are accounted for in a temporary expense account named "PURCHASES"
-only the sale is recorded. No recording is done for the impact on inventory |
Periodic Inventory System (Period End Adjustments) |
-adjustments are done to update the inventory and cost of goods sold accounts
-transfer the beginning inventory to Cost of Goods Sold
-Transfer the Net Purchases to Cost of Goods Sold |
Inventory Costing Methods |
1) Specific identification
2) FIFO
3) LIFO
4) Weighted Average Cost |
specific unit cost |
under this method, ending inventory is identified as coming from a specific purchase and therefore having a specific price
most accurate method for matching
but only feasible when a few items |
Average Cost |
-A unit cost is computed by dividing the total cost of all items available for sale by the number of units available for sale. |
When inventory cost are increasing FIFO generates: |
-lowest cost of goods sold
-highest profits
-highest ending inventory |
When inventory cost are increasing LIFO Generates: |
-Highest cost of goods sold
-lowest profits
-lowest ending inventory |
Tax Savings from LIFO |
-because when inventory cost are rising LIFO results in the lowest net income, applying LIFO is attractive for income tax purposes.
-IN spite of tax advantage FIFO is the most popular inventory method in the US |
LIFO Issus |
Manipulation of Net Income- price goes up, purchase large quantities of inventory at the end of year to lower net income ten lower taxes.
-LIFO is not allowed under international standards |
Gross Profit Percentage |
Measures what percent of sales is converted into gross profits
(gross profits) / (net sales) |
Net sales |
Sales Revenue - Sales returns and allowances - sales discounts |
Inventory Turnover |
measures the number of times, on avg, the inventory is sold during the period.
It indicates the liquidity of the inventory |
Inventory Error |
-undiscovered inventory error usually affects two accounting periods. |
Land |
Not depreciated since the usefulness of land does not diminish over time |
Straight-Line Depreciation |
Allocate an equal amount of the depreciable cost to each year of the asset's service life.
= (Asset Cost - Salvage Value) / Useful Life |
Units-of-Production Depreciation Method |
Allocates the cost of an asset over its useful life based on its periodic output in relation to its total estimated output. |
Double-Declining-Balance Method |
Computes depreciation expense by multiplying the book value of an asset at the beginning of the period by twice the straight-line rate. |
Disposal of Plant Assets (2) |
(1) Bring depreciation up-to-date
(a) measure asset's final book value
(b) record expense up to date of disposal
(2) Remove asset & related accumulated depreciation account from books |
Intangible assets with finite lives
|
Patents
copyrights
trademarks
franchise and license |
Current Liabilities |
-obligations due within one year
-current liabilities with known amounts
-current liabilities with estimated amounts |
Current Liabilities of Known Amounts |
Accounts payable, short-term notes payable, sales tax payable, accrued liabilities, unearned revenues, and current portion of long-term debt. |
Current Liability with estimated amounts |
Estimated warranty payable, contingent liabilities, |
Estimated Warranty Payable |
-warranty expense is estimated in the year product is sold.
-conceptually similar to allowances for uncollectible accounts
-when actual warranty payments happen they are charged against the allowances already made. |
Contingent Liabilities |
-NOT actual liability
-potential liability that depends on future outcome of past events. |
Bonds |
type of note in which a company agrees to pay the holder the face value on the maturity date and to pay interest on the face value periodically at a specified rate |
Bond Terminology |
-stated interest rate is an annual interest rate
-but interest is paid semiannually (unless otherwise stated) |
Bond Premiums and Discounts |
-a bond issued at a price above its face value (par) is said to be issued at a premium
-a bond issued at a price below its face value (par) is said to be issued at a discount
-as the bond nears maturity, market price moves towards par value |
bond prices
|
quoted as a percentage of the face value of the bond |
Present Value of a Bond |
-present value is computed using market interest rate, not the stated interest rate (coupon rate)
stated interest rate (coupon rate) is used to arrive at the cash amount of interest payment
-since bonds pay interest semiannually we work out present values using semiannual periods.
- |
If bond coupon rate is lower than market rate? |
-bond price is lower than par value
-bond is at a discount |
If bond coupon rate is greater than market rate |
-bond price is greater than par value
-bond is at a premium |
If coupon rate is equal to market rate |
-bond price is equal to par value
-bond is at par |