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121 Cards in this Set
- Front
- Back
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The components of cash |
-Consists of coin, currency, and available funds on deposit at the bank, as well as negotiable instruments such as money orders, certified checks, cashier's checks, personal checks, and bank drafts
- the most liquid of assets, is the standard medium of exchange and the basis for measuring all other items.
-current asset |
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what items are included in the cash account |
-cash -petty cash and change funds
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what items are excluded in the cash account |
-short term paper -post dated checks and IOUs -travel advances -postage on hand -bank overdrafts -compensating balances, legally restricted deposits |
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define trade receivables |
-Accounts receivable and notes receivable that result from sales transactions for a company's goods or services.
-usually the most significant type of receivable a company possesses. |
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how are trade receivables reported on the balance sheet. |
under current assets as a receivable |
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what are trade discounts? |
-Reductions in sales prices -are commonly quoted in percentages. |
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why are trade discounts used? |
-to avoid frequent changes in catalogs -to alter prices for different quantities purchased -to hide the true invoice price from competitors. |
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what is factoring of receivables? |
-Sales of receivables to factors, finance companies, or banks that buy receivables from businesses for a fee and then collect the remittances directly from the customers.
-traditionally associated with the textile, apparel, footwear, furniture, and home furnishing industries
-usually involves sale to only one company, fees are high, the quality of the receivables is low, and the seller afterward does not service the receivables |
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why is factoring of receivables done? |
so that the business can receive cash more quickly than it would by waiting 30 to 60 days for a customer payment |
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how to record credit sales |
dr - ar cr - sales rev
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the entries for recording adjustments to bad debt under the allowance method |
dr - cash dr - allow for doubtful cr - ar
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what 3 items are included in the inventory account |
-raw materials -work in process -finished goods |
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inventory held by one party who acts as the agent for the owner of the goods in selling the goods. The consignee accepts and holds the consigned goods without any liability, except to exercise due care and reasonable protection from loss or damage until it sells the goods to a third party. |
consigned inventory. |
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How is consigned inventory reported? |
-When the consignee sells the goods, it remits the revenue to the consignor, less a selling commission and expenses incurred in accomplishing the sale.
-The consignee makes no entry to the inventory account for goods received. Remember, these goods remain the property of the consignor until sold. In fact, the consignee should be extremely careful not to include any of the goods consigned as a part of inventory. |
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how do errors in inventory affect the income statement and balance sheet? |
(1) In the balance sheet, the inventory and accounts payable will be misstated
(2) in the income statement, purchases and ending inventory will be misstated. |
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what is included in inventory costs? |
-Product costs ... freight charges on goods purchased, other direct costs of acquisition, and labor
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-matches the cost of the last goods purchased against revenue
-assumes that a company uses the latest goods purchased before it uses the earlier goods purchased. Thus, the costs of the latest goods purchased are the first to be allocated to cost of goods sold. LIFO provides a good matching of recent costs against current revenues and tax benefits, but generally reports lower earnings, which some managers see as a disadvantage. |
LIFO method. |
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-a company uses goods in the order in which it purchases them. The inventory remaining must therefore represent the most recent purchases
-method that assumes that a company uses goods in the order in which it purchases them. Thus, the costs of the earliest goods purchased are the first to be allocated to cost of goods sold. FIFO often approximates the physical flow of goods, prevents manipulation of income, and prices ending inventory close to current cost, but it fails to match current costs against current revenues on the income statement, possibly distorting gross profit and net income. |
FIFO method. |
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-used in the periodic inventory method, that prices items in the inventory on the basis of the average cost of all similar goods available during the period.
-The method calculates the total cost of inventories of similar goods, divides the total cost by the number of inventory units, and applies the weighted-average cost per unit to the items in ending inventory. |
weighted average method. |
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how changes in price affects inventory cost methods |
-LIFO results in the highest cash balance at year-end (because taxes are lower)
-gross profit and net income are lowest under LIFO, highest under FIFO, and somewhere in the middle under average-cost. |
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another name for net realizable value |
ceiling or net selling price |
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another name for net realizable value less a normal profit margin |
floor |
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calculate net realizable value |
selling price ( or sales value) - est cost of completion and disposal |
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calculate net realizable value less a normal profit margin |
net realizable value - a normal profit margin |
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why inventory may be valued at net realizable value? |
(1) there is a controlled market with a quoted price applicable to all quantities,
(2) no significant costs of disposal are involved, and
(3) the cost figures are too difficult to obtain. |
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valuing inventory at the lower-of-cost-or-market, with market limited to an amount that is not more than net realizable value or less than net realizable value less a normal profit margin? |
“lower of cost or market” (LCM) |
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calculate “lower of cost or market” (LCM) |
1) the middle amt btwn replacement cost, net realizable value, and net realizable value less a normal profit margin
2) compare cost to designed market value amt and the lowest amt is the final inventory value |
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-method of determining inventory amount, often used when it is impossible or impractical to take a physical inventory.
-In this method, companies compute the gross profit percentage on selling price, multiply that percentage times net sales to determine gross profit, subtract gross profit from net sales to find cost of goods sold, and subtract cost of goods sold from total goods available for sale to determine ending inventory. |
the gross profit method |
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A method of valuing inventories that requires that a retailer keep a detailed record of (1) the total cost and retail value of goods purchased, (2) the total cost and retail value of the goods available for sale, and (3) the sales for the period. |
the retail inventory methods |
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gross profit method: calculate ending inventory |
Cost + gross profit = selling price C + .25C = SP (1+25)C = SP 1.25C = $1.00 C = $0.80
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RETAIL INVENTORY method: calculate ending inventory |
ending invty x cost ratio = value of ending invty $12,500 x 53.9% = $6,737.50 |
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what is not considered cash for financial reporting purposes? |
Postdated checks and I. O. U.'s |
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A cash equivalent is a short-term, highly liquid investment that is readily convertible into known amounts of cash and |
is so near its maturity that it presents insignificant risk of changes in interest rates. |
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Bank overdrafts, if material, should be |
reported as a current liability. |
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When a customer purchases merchandise inventory from a business organization, she may be given a discount which is designed to induce prompt payment. Such a discount is called a(n) |
cash discount. |
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Why is the allowance method preferred over the direct write-off method of accounting for bad debts? |
matching of bad debt expense with revenue. |
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concept that relates to using the allowance method in accounting for accounts receivable? |
Bad debt expense |
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What is the normal journal entry when writing-off an account as uncollectible under the allowance method? |
Debit Allowance for Doubtful Accounts , credit Accounts Receivable. |
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Which of the following is included in the normal journal entry to record the collection of accounts receivable previously written off when using the allowance method? |
Debit Accounts Receivable, credit Allowance for Doubtful Accounts. |
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Equestrain Roads sold $80,000 of goods and accepted the customer's $80,000, 10% 1-year note payable in exchange. Assuming 10% approximates the market rate of return, how much interest would be recorded for the year ending December 31 if the sale was made on June 30? |
$4,000.
-$80,000 × .10 × 6/12 = $4,000. |
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a method to generate cash from accounts receivable? |
Assignment - YES
Factoring - NO |
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what inventory carried by a manufacturer is similar to the merchandise inventory of a retailer? |
Finished goods. |
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Why are inventories included in the computation of net income? |
To determine cost of goods sold. |
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Where should goods in transit that were recently purchased f.o.b. destination be included on the balance sheet? |
Not on the balance sheet. |
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Goods that are shipped, but title remains with the shipper. |
consigned inventory
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a product cost as it relates to inventory? |
Raw materials. |
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a period cost? |
Selling costs. |
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what 2 methods may be used to record cash discounts a company receives for paying suppliers promptly? |
Both the net method and the gross method. |
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inventory costing method most closely approximates current cost for each of the following:
Ending Inventory AND Cost of Goods Sold |
- Ending Inventory - FIFO
- Cost of Goods Sold - LIFO |
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In a period of rising prices, the inventory method which tends to give the highest reported net income is |
first-in, first-out. |
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In the context of dollar-value LIFO, what is a LIFO layer? |
The LIFO value of an increase in the inventory for a given year.
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In no case can "market" in the lower-of-cost-or-market rule be more than |
estimated selling price in the ordinary course of business less reasonably predictable costs of completion and disposal.
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is always the middle value of replacement cost, net realizable value, and net realizable value less a normal profit margin. |
The designated market value |
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is most conservative if applied to individual items of inventory. |
Lower-of-cost-or-market |
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The floor to be used in applying the lower-of-cost-or-market method to inventory is determined as the |
net realizable value less normal profit margin.
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3 acceptable approaches in applying the lower-of-cost-or-market method to inventory? |
-Total of the inventory.
-Individual item.
-Categories of inventory items.
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Which method(s) may be used to record a loss due to a price decline in the value of inventory? |
Both the cost-of-goods-sold method and the loss method. |
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selling price less costs to complete and sell. |
Net realizable value |
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An inventory method which is designed to approximate inventory valuation at the lower of cost or market is |
conventional retail method. |
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To produce an inventory valuation which approximates the lower of cost or market using the conventional retail inventory method, the computation of the ratio of cost to retail should |
include markups but not markdowns.
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Given the acquisition cost of product Z is $80, the net realizable value for product Z is $72, the normal profit for product Z is $6, and the market value (replacement cost) for product Z is $75, what is the proper per unit inventory price for product Z? |
$72
$72 MV, $80 Cost, LCM = $72. |
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Cash consists of what 3... |
Personal checks.
Certified checks.
Money orders. |
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what classification is likely to be eliminated by the FASB? |
cash equivalents |
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Cash can be classified as a current or long-term asset.
true or false |
true |
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Short-term paper with maturities of less than 3 months should be classified as |
cash equivalents. |
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Non-trade receivables include what 3... |
Claims against defendants under suit.
Dividends receivable.
Deposits paid to cover potential losses. |
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If a company purchases merchandise on terms of 1/10, n/30, the cash discount available is equivalent to what effective annual rate of interest (assuming a 360-day year)? |
18%
[360 days ÷ (30 days – 10 days)] × 1% = 18% effective annual rate of interest. |
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what method of determining annual bad debt expense violates the expense recognition concept? |
direct write-off method |
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Under the direct write-off method, bad debts are only recognized when an account is determined to be uncollectible.
true or false? |
true |
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Aging accounts receivable is a variation of the percentage-of-sales approach to recognizing bad debt expense.
true or false? |
false |
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On December 31, 2014, Swan Company sold for $150,000 an old machine having an original cost of $170,000 and a book value of $120,000. The terms of the sale were as follows: $30,000 down payment $60,000 payable on December 31 each of the next two years
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$105,546
The present value of the annuity is ($60,000 × 1.75911) or $105,546. |
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The interest rate that equates the cash paid with the amount received in the future on a zero-interest-bearing note is the: |
implicit rate. |
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If a company elects the fair value option, unrealized holding gains and losses on receivables are reported as part of other comprehensive income.
true or false? |
false |
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In a transfer of receivables accounted for as a secured borrowing: |
a finance charge is recorded.
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Usually with a securitization the seller continues to service the receivables.
true or false |
true |
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a method used to generate cash from accounts receivable? |
Assignment and Factoring are both methods used to generate cash from accounts receivable. |
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The accounts receivable turnover ratio measures the |
number of times the average balance of accounts receivable is collected during the period. |
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helps to reduce the size of a company’s float? |
Lockbox accounts. |
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A creditor bases an impairment loan loss on the difference between the present value of the future cash flows (using the historical effective-interest rate) and the fair value of the note.
true or false? |
false |
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Under IFRS, bank overdrafts are |
netted against cash balances. |
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The IFRS approach to derecognizing a receivable focuses on what 3... |
Loss of control.
Rewards.
Risks. |
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Merchandising concerns report the cost assigned to unsold units left on hand as finished goods inventory.
true or false? |
false |
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rackney Manufacturing Company has the following account balances at year end: Office supplies$6,000 Raw materials21,000 Work-in-process44,000 Finished goods52,000 Prepaid insurance8,000
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$117,000. |
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Under a perpetual inventory system which accounts should be debited the each time a sale on account is made? |
Accounts Receivable and Cost of Goods Sold. |
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Goods shipped f.o.b. destination which arrive, to a customer, on January 2, 2014 should be included in the seller’s December 31, 2013 inventory.
true or false? |
true |
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When goods are shipped f.o.b. shipping point, title passes to the buyer when the seller delivers the goods to a common carrier.
true or false? |
true |
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Which of the following items should be included in a company's inventory at the balance sheet date? |
Goods in transit which were purchased f.o.b. shipping point should be included in the company’s inventory. |
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Interest incurred while getting inventories ready for sale is a product cost.
true or false? |
false |
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Both U.S. GAAP and IFRS exclude which of the following from the cost of inventory? |
General administrative costs.
Selling costs.
Most storage costs. |
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A sale with a “buyback” agreement allows the seller to finance their inventory and retain the risks of ownership even though the technical title has been transferred.
true or false? |
true |
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In a period of rising prices, the inventory method that produces the lowest ending inventory is the: |
LIFO periodic method. |
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A business whose inventory consists of similar items would be most likely to use what cost flow assumptions? |
average |
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What cost flow assumption would be most appropriate when a relatively small number of costly, easily distinguishable items are sold? |
Specific identification. |
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The Allowance to Reduce Inventory to LIFO account is reported on the income statement in the Other Expenses and Losses section.
true or false? |
false |
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LIFO liquidations often distort net income and may result in substantial tax payments.
true or false? |
true |
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It is easier to erode LIFO layers using dollar-value LIFO techniques than it is with specific goods pooled LIFO.
true or false? |
true |
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Under dollar-value LIFO each layer in ending inventory at LIFO cost is calculated by: |
multiplying the layer at base-year prices by the price index for the year the layer was added. |
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3 major disadvantages of using LIFO? |
inventory is understated.
doesn’t approximate the physical flow of inventory.
lower profits reported in inflationary times. |
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3 facts about the FIFO method |
- is preferable if revenues have been increasing slower than costs.
- is not appropriate in situations where specific identification is traditional
- is not preferable in situations where it has been traditional. |
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The method of recording inventory at market that substitutes the market value for cost and reports the loss as a part of cost of goods sold is the: |
direct method.
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The primary basis of accounting for inventories is cost. A departure from the cost basis of pricing the inventory is required where there is evidence that when the goods are sold in the ordinary course of business their |
future utility will be less than their cost. |
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In applying Lower-of-Cost-or-Market, the designated market value is |
the middle value of replacement cost, net realizable value and net realizable value less a normal profit margin. |
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Net realizable value is defined as estimated selling price less purchase price.
true or false? |
false |
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The direct method of recording inventory at market under the lower of cost or market rule establishes a separate contra asset account and a loss account to record the write-off.
true or false? |
false |
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In applying the lower of cost or market rule, the floor is defined as: |
net realizable value less a normal profit margin. |
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In the lower of cost or market rule, net realizable value is referred to as the: |
ceiling.
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When the direct method is used adjust cost to “market”, what account is debited? |
Cost of Goods Sold.
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Inventory may be recorded at net realizable value if what 3 things happen? |
the inventory consists of precious metals or agricultural products.
there is a controlled market with a quoted price.
there are no significant costs of disposal. |
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The LIFO retail method assumes that markups and markdowns apply to both beginning inventory and goods purchased during the period.
true or false? |
false |
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The relative sales value method is used throughout the: |
petroleum industry.
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Colicchio Corporation acquired two inventory items at a lump-sum cost of $60,000. The acquisition included 3,000 units of knife X001, and 3,000 units of knife X002. X001 normally sells for $20 per unit, and X002 for $10 per unit. If Colicchio sells 1,000 units of X002, what amount of gross profit should it recognize? |
$3,330. |
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If a material amount of inventory has been ordered through a formal purchase contract at the balance sheet date for future delivery at firm prices, |
this fact must be disclosed. |
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The percentage markup on cost can be computed by dividing gross profit by 100%: |
minus gross profit. |
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The gross profit method of estimating inventory is acceptable for both interim and annual financial reports.
true or false? |
false |
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Which of the following is included in the calculation of the cost-to-retail ratio under the conventional retail inventory method? |
Markups and markup cancellations.
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Which one of the following is deducted in computing the cost-to-retail ratio? |
Abnormal shortages.
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The conventional retail inventory method includes both net markups and net markdowns to calculate the cost-to-retail ratio.
true or false? |
false |
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Lagasse Corporation’s computation of cost of goods sold is: Beginning Inventory $160,000 Add: Cost of goods purchased 605,000 Cost of goods available for sale 765,000 Ending inventory 180,000 Cost of goods sold $585,000
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106.1 days.
365 days / {$585,000 / [($160,000 + $180,000) / 2]} = 106.1 days. |
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Which of the following is not permitted under IFRS? |
the use of the LIFO cost flow assumption. |
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The LIFO retail method assumes that markups and markdowns apply only to the goods purchased during the period.
true or false? |
true |
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IFRS permits the use of the LIFO cost flow assumption and specific identification where appropriate.
true or false? |
false |
