Financial Accounting Final Exam (Chp. 4-5)

Front 1

The effect of recognizing bad debt expense on financial statements & Accounts receivable: the amount that appears on the balance sheet

Back 1

• A firm extends credit to its customer which results in a current asset called accounts receivable. On the balance sheet, accounts receivable is a current asset & should reflect the net amount the firm expects to collect (known as net realizable value).

• If the firm has a significant amount of bad debts (i.e. customers who will not pay), then the firm must estimate the amount of bad debts & deduct it from gross accounts receivable to get the net realizable value of accounts receivable to report on the balance sheet. This is called the allowance method of accounting for bad debts. This means that bad debts expense will be recognized as an estimate so that the firm can match the bad debts expense with the related sales.

• When a specific customer is identified as one who will not pay, the account is written off but no expense is recognized at that time. (The expense was already recognized in the period of the sale.)

Front 2

Bank reconciliations: reconcile bank balance & company’s cash balance

Back 2

• The Balance per bank side from the bank statement:
1. - Outstanding checks
2. + Deposits in transit
3. Errors made by the bank may require additions or reductions

• The Balance per book side (the company) from the bank statement:
1. + collections made by the bank
2. - Service charges (especially like an overdraft fee)
3. - NSF checks (non-sufficient funds aka “bounced checks”)
4. + Interest earned
5. Errors made by the firm may require additions or reductions

Front 3

Operating cycle (define)

Back 3

The firm begins with cash, then it purchases inventory, sells the inventory (accounts payable will result from the purchase of the inventory), and ends with the collection of cash.

Front 4

Inventory: financial statement classification

Back 4

It is a current asset on the balance sheet when it is NOT sold; when inventory is sold, it is record as an expense on the income statement. There are 2 methods to record inventory transactions: (1) The PERPETUAL inventory system is a method of record keeping that involves updating the inventory account at the time of every purchase, sale, and return. (2) The PERIODIC inventory system is a method of record keeping that involves updating the inventory account only at the end of the accounting period.

Front 5

Cost of goods sold: financial statement classification

Back 5

The Cost of Goods Sold is an expense account. When a sale is made, the inventory (listed under assets) is reduced and Cost of Goods sold (listed under RE) increase [becomes more negative]. The Cost of Goods sold also goes to the income statement as an expense.

Front 6

Net sales (calculate):

Back 6

Net sales = Gross sales – (sales of returns and allowances) – (sales discount).

Front 7

LIFO & FIFO inventory methods: the effect that it has on the financial statements when inventory prices are increasing

Back 7

FIFO: the first inventory items purchased are the first sold. The last items purchased are left in ending inventory. LIFO: last item purchased is the first item sold. The first items purchased are still in beginning inventory. The point made below is shown in a few examples on pages 218-221.

• FIFO --> As [inventory] prices increase, the ending inventory is higher with FIFO.
• LIFO --> As [inventory] prices increase, the Cost of Goods Sold is higher with LIFO.
• If prices are decreasing…then it’s vice versa.

Front 8

Account receivable method (what is it?)

Back 8

This method focuses on the balance sheet. A firm starts by estimating how much of the year-end balance of accounts receivable it believes it will not collect. This estimate reduces the amount of accounts receivable on the balance sheet so that a firm reports the amount it estimates it will collect, the net realizable value.

Front 9

Net Realizable Value (what is it?):

Back 9

the amount of its account receivable balance that the firm EXPECTS to collect.

Front 10

Accounts receivable is…:

Back 10

ALWAYS reported at the net realizable value.

Front 11

The effect that purchasing inventory on account has on a transaction on the accounting equation

Back 11

Inventory is initially recorded as a CURRENT asset.
When inventory is sold, it is recorded as an expense.

Front 12

The FOB designation & FOB shipping diagram/drawing

Back 12

[Look at your “Exam 2” notes (your missed problems sheet). A good, visual example to go along with your drawing is on page 205.]

Front 13

The Inventory Purchase equation (calculate)

Back 13

Ask Prof. Lachmiller. I’m guessing it is referring to LIFO, FIFO, & weighted average.

Front 14

LCM (define the acronyms)

Back 14

Lower-of-cost-or-market rule

Front 15

Physical flow & cost flow are…..

Back 15

NOT the same thing.