Allowance for Uncollectible Accounts is:
A contra asset account.
The largest expense on a retailer's income statement is typically:
Cost of goods sold
Are FICA taxes paid in equal amounts by the employee and the employer? What 2 things are FICA? If the FICA base amount for SS is more than the person's annual salary, how do you compute how much they owe? What if it is less than what they make? How long w
Yes. Social Security and Medicare.
When calculating with the base amount, multiply the % rate times whichever is lower: the base rate or their annual income.
To look at what month the SS will be held through, start by taking whichever number you're using
A company's liquidity refers to its:
Ability to pay currently maturing debts
A high working capital generally indicates what as far as liquidity ratios go?
The ability to pay current liabilities on a timely basis
What are the 2 kinds of methods of collecting bad debts?
1) Allowance method
2) Direct Write-off method
If the account is looking doubtful, consider the account:
Uncollectible
Does writing off affect the realizable value of accounts receivable?
No.
What are the 2 methods to estimate bad debts expense?
1) Percent of sales method
2) Accounts receivable methods
1 -Percent of Accounts Receivable
2 - Aging of Accounts Receivable
What is the Receivable Turnover Ratio?
Net Credit Sales / Average Accounts Receivable
The acronym AUA stands for:
Allowance for Uncollectible Accounts
A Promissory Note is a contract between ____ and ____. It is different than a check and is a _____ _____.
Business, Customer.
Notes Receivable
Total Inventory Available for Sale = ____ __ ____.
Beginning Inventory + New Purchases
Cost of Goods Sold = _________ __ _________.
Total Inventory Available for Sale - Ending Inventory
Ending Inventory = ____ __ ____
Total Inventory Available for Sale - Cost of Goods Sold
LIFO and FIFO are assumptions which means that your final cost is NOT ______.
Objective
What are the 4 Inventory Cost Flow Assumptions?
1) LIFO
2) FIFO
3) Weighted-average cost
4) Specific Identification
Does actual flow of inventory match the assumed cost flow?
No.
Does a company have to use a certain flow of inventory to match how they actually move their inventory?
No.
When is an asset's value not depreciated?
When its lifespan is Infinite.
What are 3 ways to calculate depreciation?
1) Straight - line
2) Declining - balance (Accelerated) (Double-Declining)
3) Activity Based (Units of production) (Weighted?)
What method of depreciation is most common in US?
Straight-line
Depreciation increases with a ____ and decreases with a ____.
Credit, Debit
Most corporations use the ____________ of depreciation for tax purposes.
Modified Accelerated Cost Recovery System (MACRS)
MACRS depreciation provides for ____ write-off of an asset's ____ in order to stimulate ___ ____.
Rapid, Cost, New Investment
Is depreciation an estimate?
Yes.
Goodwill = ____ __ ____.
Purchase price - Net Asset Value
(Purchase price - assets - liabilities)
Total Asset Turnover =
Net Sales / Average Total Assets
Impairment loss = ____ __ ____.
Asset's book value - its fair value
Current (short-term) liabilities are expected to be paid:
Within one year OR within the company's operating cycle. Whichever is longer.
Long-Term (Non-Current) Liabilities are NOT expected to be paid:
Within one year or the company's operating cycle, whichever is longer.
Working Capital = ____ __ ____.
Total Current Assets - Total Current Liabilities
Current Ratio = ____ ____ ____.
Total Current Assets / Total Current Liabilities
Quick Ratio (Acid Test) = ____ __ ____.
Quick Assets / Total Current Liabilities
(No inventory in assets. Quick = cash, stocks, AR, etc.)
Initial Purchase price can be found where?
Balance Sheet
Depreciable Cost =
(Purchase Price - Salve Price) / # of periods
A patent is worth 1M. It is being defended for 50K. If won, what will be the value? If lost, what is the value?
Won: 1M + 50K
Lost: Nothing recorded
If current Assets and Current liabilities are the same, will a loan affect the ratio?
No, because it will always be equal to 1.
If Current Assets and Current Liabilities are different, what will receiving a loan do to the ratio?
It will increase the ratio because top and bottom would go up.
Social Security Tax Limit = ____ __ ____.
% X $113,700
SS Tax cannot be more than $____ annually.
$ 7049.40
Does medicare have a tax limit?
No.
Does writing off a bad debt have an effect on the balance sheet at the time of the write off?
No. Because it was already accounted for in Accounts Receivable. Both are liabilities.
If it looks like you won't collect on some accounts, what 2 accounts will be affected? Will they increase or decrease with a credit or debit?
1) Bad debt expense - Debit increase
2) Allowance for Uncollectible Accounts - Credit Increase
These two increase eachother and balance eachother in journal entry.
Company has:
AUA: $500 (credit)
AR: $20,000 (debit)
15% of AR will not be collected over the next year.
What adjustment would the company record for Allowance for Uncollectible Accounts?
Bad debt expense - $2,500 (debit)
Allowance for uncollectible accounts - $2,500 (credit)
Bad debt just mimics AUA everytime. Calculate for AUA, and Bad debt expense will be the same/match it.
Company has:
AUA: $2,000 (credit)
Future uncollectible accounts: $10,000
What adjustment would the company record for Allowance for Uncollectible Accounts?
Bad debt expense - $8,000 (debit)
Allowance for uncollectible accounts - $8,000 (credit)
Bad Debts must equal:
Allowance for uncollectible accounts
If AUA is $14,000 and bad debt expense is $15,000, what adjustment must be made to AUA?
Must be Debited for $1,000
When you write off an Accounts Receivable, what two accounts are affect and how?
Accounts receivable will be debited to lower it back down, and AUA will be credited to increase it to account for what was written off.
What type of company purchases goods that are primarily in finished form for resale to customers?
Merchandising Company
What type of company earns revenues by providing services to customers?
Service Company
What type of company produces the goods they sell to customers?
Manufacturing Company
Cost of items not yet complete by the end of the period are called:
Work-in-process
Inventory that has been substantially completed is called:
Finished goods
Basic components used to build a product are called:
Raw materials
When calculating ending inventory and COGS etc. (Inventory cash flow) using the Weighted Average Cost method, how do you calculate the average cost per unit?
There's usually a beginning inventory and then a couple more purchases. Each purchase has a different QTY and Unit Price. Multiply each QTY times Unit Price. Add up all of these numbers and divide by total number of units to get average. (can't just add u
When inventory costs are RISING:
Will LIFO or FIFO give you higher total assets?
Will LIFO or FIFO give you higher COGS?
Will LIFO or FIFO give you higher Net Income?
1) FIFO (cheap inventory is being sold, so more expensive is still in inventory which gives you a higher asset value)
2) LIFO
3) FIFO
When inventory costs are Declining:
Will LIFO or FIFO give you higher total assets?
Will LIFO or FIFO give you higher COGS?
Will LIFO or FIFO give you higher Net Income?
1) LIFO
2) FIFO
3) LIFO
Sales Revenue increases with a:
Credit
Cost of Goods Sold increases with a:
Debit
If shipping of inventory cost an extra $500, what is done with this charge?
It is added to inventory. So inventory is now worth an additional $500.
If you bought inventory for a certain cost on account and they offered a discount if you paid the AP within 10 days, what would the journal entry look like?
Your AP would be debited for the full original price.
Your Cash would be credited for the sale price (full price - discount)
Your Inventory would be credited for the difference. This is because you didn't end up paying as much for the inventory since you
Net Income = ___ __ ___.
Gross Profit - Operating Expenses
(Think of Gross Profit as total revenue. Total revenue must make up Operating expenses and Net Income.)
Operating Expenses = ___ __ ___.
Gross Profit - Net Income
Gross Profit = ___ __ ___.
Operating Expenses + Net Income
COGS =
Sales Revenue - Gross Profit
Example: (No Question)
Company has: (This is all correct and in balance - just study the relationships between accounts after memorizing equations)
Sales Revenue - $16,000
COGS - $9,000
Gross Profit - $7,000
Operating Expenses - $3,000
Net Income - $4,000
N/A
When inventory uses "lower-of-cost-or-market", do you use the cost you paid or the price it would go for on the market?
Whichever one is lower
Inventory Turnover Ratio =
COGS / Average cost of inventory
(May have to add beginning inventory plus ending inventory and divide by two to find average)
Average days in inventory =
(Average cost of inventory / COGS) * 365
(May have to add beginning inventory plus ending inventory and divide by two to find average)
When calculating, Revenue is the same as:
Net Sales
Gross Profit Ratio =
(Net sales - COGS) / Net Sales
Net sales is the same thing as Revenue (in the HW, even though it doesn't seem quite right, I'm definitely right)
Cost of land =
+Purchase Price
+Sales Tax
+Broker's commission
+Title Insurance
+Misc. Closing Costs
+Cost to demo current structure that was there
Any costs associated with getting the land to be how you want it. Insurance is included because it is an immediate cost an
Cost of equipment (Initial) =
+Purchase Price
+Sales Tax
+Shipment of machine
+Installation of machine
+Testing
Do not include insurance of machine. Do not include "property tax" if it says something like: property tax on the machine for the first year is $$. We are only looking for i
Total Research and Development expense =
+Salaries for R&D
+Depreciation on R&D facilities and equipment
+Utilities incurred for the R&D facilities
+Payment to another company for part of the development work
Do not include "Patent filing and related legal costs
A company performs annual maintenance on a machine. Should this expense be expended in the period incurred or capitalized and depreciated over the useful life of the asset?
Expended in the period incurred.
This does not increase value of asset so it's not something that gets depreciated.
A company remodels its offices. Should this expense be expended in the period incurred or capitalized and depreciated over the useful life of the asset?
Capitalized and depreciated over the useful life of the asset.
Because this is an improvement and an asset.
A company improves the shipping and receiving area which results in an increase in productivity. Should this expense be expended in the period incurred or capitalized and depreciated over the useful life of the asset?
Capitalized and depreciated over the useful life of the asset.
Because this is an improvement and an asset.
A company adds a security system to its manufacturing facility. Should this expense be expended in the period incurred or capitalized and depreciated over the useful life of the asset?
Capitalized and depreciated over the useful life of the asset.
Because this is an improvement and an asset.
A company purchases a new vehicle for $40,000. At the end of the year, the vehicle has a fair value of $33,000. Is the depreciation expense for this vehicle $7,000?
No. This is not the type of depreciation used in accounting. Depreciating an asset in accounting should allocate a depreciation expense for the asset over its service life. For example, if they determine a useful life of 5 years, then annual depreciation
An asset is purchased on September 1, 2012 for $35,000. It will be worth $5,000 in 10 years. At the end of December 2012, how much depreciation has occurred? At the end of December 2013, how much depreciation occurred for just that year?
1) $1,000
2) $3,000
Make sure to take into account when the asset was purchased.
Straight-line depreciation =
(Asset Starting Value - Asset Ending Value) / Duration
Example: Piece of equipment cost $20,000. In 4 years, it will be worth $2,000. What will be the depreciation expense in the first year?
($20,000-$2,000) / 4 = $4,500
Double-declining-balance depreciation =
(Asset Starting Value * 2) / Total Duration of life
Example: Piece of equipment cost $20,000. In 4 years, it will be worth $2,000. What will be the depreciation expense in the first year?
($20,000*2) / 4 = $10,000
Activity based depreciation =
(Asset Starting Value - Asset Ending Value) / Amount of actual time asset is expected to last [usually hours]
This gives you a depreciation cost per hour. Multiply this cost times actual number of hours in use to get answer.
Example: Piece of equipment co
Do Trademarks have infinite lives?
Yes
Do Patents have infinite lives?
No
Do you amortize goodwill or intangible assets with indefinite useful lives?
No
Amortization and depreciation are similar except that amortization is used for ____ assets and depreciation is used for ______ assets.
Amortization - intangible
Depreciation - tangible
In early January, Burger Mania acquired 100% of the common stock of the Crispy Taco restaurant chain. The purchase price allocation included the following items: $4 million, patent; $3 million, trademark considered to have an indefinite useful life; and $
Since the $3 million, trademark is considered to have an indefinite useful life, the policy doesn't apply.
Goodwill and intangible assets with indefinite useful lives are not amortized but tested annually for impairment.
So the only intangible asset you'd
Company sold equipment for $12,000.
Equipment originally purchased for $80,000.
Depreciation through the date of sale was $66,000.
What was the gain or loss on the sale of equipment?
Loss of $2,000.
Sale Revenue - (Original Purchase Price - Depreciation) = -$2,000
On November 1, 2013, you get a 6 month loan for 3 Million. The interest rate is 6%. What are the journal entries that you would record for November 1, December 31, and April 30?
November 1
Cash: $3,000,000 Debit
Notes Payable: $3,000,000 Credit
December 31
Interest Expense: $30,000 Debit (15K/month X 2 months)
Interest Payable: $30,000 Credit (not paying in cash. paying when loan is returned. otherwise cash would just get credite
Company starts year with Total Assets $740,000. Company ends year with Total Assets $940,000. The return on assets for the year is 20%.
Calculate net income for the year.
($740,000+$940,000) / 2 = $840,000
$840,000 X 20% = $168,000
Impairment loss =
Future Cash Flows - Book Value.
If a positive #, record nothing; there is no loss.
(Future Cash Flows can be replaced with Fair Value I believe)
On July 1, Alaskan Adventures issues a $100,000, eight-month, 6% note. Interest is payable at maturity.
What is the amount of interest expense that the company would record in a year-end adjustment on December 31?
Face Value
Annual interest rate
Fraction of the year
$100,000
.06
.5 = $3,000
Medicare to pay =
Annual salary X given Medicare %
There is no cap on Medicare
Social Security to pay =
Given annual amount/FICA base amount/$113,700 X Social Security percent = Maximum amount payable a year
Next, take monthly income and multiply times Social Security Percent.
Take the first number you found divided by this second number to figure out how m
Employers match Social Security or Medicare?
Both
A company has the following assets and liabilities:
Assets:
Cash - $102 M
AR - $94 M
Inventory - $182 M
Other Current Assets - $18 M
Liabilities:
AP - $98 M
Current portion of long-term debt - $35 M
Long Term Debt - $23 M
Calculate Quick and Current ratio
Quick ratio = (Cash + AR) / (AP + Current Portion of long term debt)
Quick = 1.47
Current ratio = (Cash + AR + Inv. + Other) / (AP + Current Portion of long term debt)
Current = 2.98
Long term debt is the item that is not included ever.
A company gets a $12 M loan with an 8% annual interest rate. The loan period is 8 months. How much interest will they owe at the end of the 8 months?
((Loan amount X Annual Interest Rate) / 12 months)
(($12,000,000 X .08) / 12) = $80,000
This gives you rate per month. Next:
Multiply the rate per month times total duration.
$80,000 X 8 = $720,000
Study Chapter 8 brief exercises Question #6.
If someone prepaid a portion of amount that will eventually be owed when a transaction for a product occurs next month, the company making the sale will receive an unearned revenue credit. Then when the sale ta
study
Unearned revenue increases with a
Credit
Sony introduces a new compact music player to compete with Apple's iPod that carries a two-year warranty against manufacturer's defects. Based on industry experience with similar product introductions, warranty costs are expected to be approximately 2% of
$400,000.
$30 M X 2% = $600,000.
Because they only have $200,000 right now and they are expecting to reach $600,000, their liabilities are lowered from the $600,000 to $400,000 because $200,000 of liabilities have already been cashed in and there should b
Consultants notify management of Discount Pharmaceuticals that a stroke medication poses a potential health hazard. Counsel indicates that a product recall is probable and is estimated to cost the company $8 million.
Which of the following statement(s) ar
A loss and a liability must be recorded for $8 million.
Income before tax will be reduced and total liabilities will be increased by $8 million.
Electronic Innovators is the defendant in a $10 million lawsuit filed by one of its customers, Aviation Systems. The litigation is in final appeal, and legal counsel advises that it is probable that Electronic Innovators will lose the lawsuit. The estimat
A loss and a liability must be recorded for $6 million.
A disclosure note should be included for a range of $6 and $10 million to the financial statements with an entry for the minimum amount.
Aviation Systems is involved in a $10 million lawsuit filed against one of its suppliers, Electronic Innovators. The litigation is in final appeal, and legal counsel advises that it is probable that Aviation Systems will win the lawsuit and be awarded som
Gain contingencies are not recorded.
The Environmental Protection Agency (EPA) is in the process of investigating a possible water contamination issue at the manufacturing facility of Northwest Forest Products. The EPA has not yet proposed a penalty assessment. Management feels an assessment
A disclosure note should be included in the financial statements, without an entry.
This is because the loss is reasonably possible, but not probable. Potential loss and liability are not recorded in financial records.