Reported at net receivable value. Two things must be estimated:
-Returns and Allowances
The amount expected to be uncollectable due to customers being unable to pay.
Returns and Allowances
The amount expected from reduction in the amount owed.
Methods to Estimate Uncollectibles
1. Percentage of Sales Method
2. Aging Method (More Common)
Management must periodically assess the reasonableness of the allowance account if it uses either of these methods.
Percentage of Sales Method
Estimates the amount of bad debt expense based on the amount of credit sales during the period.
Estimates the dollar amount of uncollectible accounts by classifying receivables into different age groups.
1. Company makes sale to customer on credit.
2. Company borrows cash from lender using receivables as security.
3. Customer payment sent to the company.
4. Company's loan payment sent to the lender.
Increase in cash, increase in debt, and able to keep rec
How is sale determined?
Must surrender control of the receivable, if not, it is a borrowing.
Oldest inventory items are recorded as sold first for calculating COGS.
Advantages: Ending inventory consists of the most recently acquired costs.
Disadvantages: The current cost of inventory is not being matched with current revenues.
Newest inventory items are recorded as sold first for calculating COGS.
Advantages: Matches the most recently incurred costs against revenues.
Disadvantages: The LIFO inventory amount does not approximate replacement cost.
The LIFO Reserve
Difference between LIFO and FIFO ending inventory. LIFO ending inventory amounts are often much lower than FIFO ending inventory amounts.
Occur when a company using the LIFO method sells old (cheaper) inventory. It occurs when a company using the LIFO method sells more than it purchases. When LIFO inventory is liquidated, the old (cheaper) costs are matched with the current revenues and as
Results when a revenue or expense enters book income in one period, but affects taxable income in a different period. Examples:
-Bad Debt Expense
Higher taxable income in the first year than in the second year. TI > BI
Lower taxable income in the first year than in the second year. TI < BI
Must be established if it is more likely than not that future benefits from DTA will not be realized in its entirety. This causes a reduction to DTA on the balance sheet and effectively increases tax expense (by removing a tax benefit) on the income state
Average Useful Life
Average Gross PPE / SL Deprecation
Advantages of Share Buybacks
-Offer the greatest potential return to shareholders.
-Sends a strong signal that shares are undervalued.
-Gives the company cash later on to grow their operations, etc.
Disadvantages of Share Buybacks
-Stocks can still go down after a buyback program.
-Stock repurchases can weaken a company's ability to weather an economic crisis.
-May just be boosting EPS, but not increasing fundamental value.
-Buybacks that use borrowed money are risky.
Occurs when a company issues addition common shares to its existing customers. Usually done to companies that have seen their share price increase too high and are not comparable to competitors. A 2-for-1 stock split takes 1 share valued at $10 total and
ASC 350 Stages of Development
1. Expense - Preliminary project stage development costs.
2. Capitalize - Costs and time related to the application development stage.
3. Expense - Post-implementation stage activities related to training and maintenance.
Long-Lived Asset Impairment Guidelines
1. Have changes in circumstances indicate that certain long-lived assets may be impaired?
2. If yes, estimate the undiscounted net cash flows expected from the use and disposal of the asset.
3. If these are lower than the carrying amount of the asset, the
Impairment Journal Entry
CR Long-Lived Asset
Impairment Testing for Intangibles
Indefinite-lived intangible assets must be evaluated for impairment at lease annually. GAAP allows a two step evaluation process:
1. Firms first assesses qualitative factors to determine whether it is necessary to perform a quantitative impairment test.
When must intangibles be tested for impairment?
-Deterioration in Business Climate
-Significant Decline in FMV of Asset
IFRS Intangible Long-Lived Assets
Generally, acquired intangible assets are carried at amortized cost. Capitalized intangible assets can only be impaired. With internally developed intangibles, research costs are expensed but development expenditures may be capitalized.
How to capitalize development expenditures under IFRS?
-Ability to use or sell the asset
-How the intangible asset will generate probable future economic benefits