Test 2

Accounting 200 with Anderson at University of Tennessee - Knoxville

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By: Tatum Suddarth
Created: 2010-03-29
Size: 74 flashcards
Views: 472

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Chapter 6

Receivables and Inventory

receivables are amounts the business is owed

Accounts receivable are recorded when goods or services are sold on account...
Selling on account causes the risk that customers will never pay. This is...
Proper asset valuation and honest financial reporting
Estimating EOP unreceivables
Notes Receivable are generated when a business converts an open account...
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Selling on account causes the risk that customers will never pay. This is uncollectibility risk.

One was to minimize this is transferring risk to a credit card company.
Another way to minimize this risk is transferring the collection risk to a factor.

One was to minimize this is transferring risk to a credit card company.

BUT fees can cost 5-10% of total A/Rec.

Another way to minimize this risk is transferring the collection risk to a factor.

A factor is a business that buys receivables from other businesses.

Proper asset valuation and honest financial reporting

requires that businesses estimate each period how much of their receivables they will NOT collect and report it.

Estimating EOP unreceivables

increase Uncollectible Accounts Expense (on the income sheet)
increase Allowance for Doubtful Accounts (on the balance sheet)
this yields Net Realizable Value- what we actually expect to collect from A/Rec.

increase Allowance for Doubtful Accounts (on the balance sheet)

also called Allowance for Uncollectible Accounts (balance sheet)

Notes Receivable are generated when a business converts an open account receivable (no due date, no interest) to a formal note.

a formal note is a contract with a specific due date, interest rate, and penalties for non-payment.
create Interest Receivable and Interest Revenue

a formal note is a contract with a specific due date, interest rate, and penalties for non-payment.

face or principal is the number value on the formal note
term is the time period in which the formal note is due

create Interest Receivable and Interest Revenue

interest = principal (original amount) x rate (interest %) x time

payment periods are 360 days... not 365

taking inventory involves a physical count of all items at the end of a period

all items are either present or gone
for homogeneous inventory (e.g. sheets of paper, bubblegum)
FIFO (first-in, first-out)... most realistic, follows business practice
LIFO (last-in, first-out)... most used, 70% of all businesses use it to cost their inventories
Businesses choose LIFO because it saves income tax.

all items are either present or gone

gone includes sold, theft, damaged, etc.

for homogeneous inventory (e.g. sheets of paper, bubblegum)

average cost = total cost / total units
average cost = cost of goods available (COGAS) / Goods Available (GAS)
average cost x units sold = Cost of Goods Sold
average cost x units unsold = Cost of Ending Inventory

FIFO (first-in, first-out)... most realistic, follows business practice

first units we bought were the first units we sold... selling the oldest inventory first
oldest inventory goes under "gone" or "sold"
newest inventory goes under "here" or "unsold"

interest

principal (original amount) x rate (interest %) x time

first units we bought were the first units we sold... selling the oldest inventory first

(putting the newest bread in the back at Kroger, selling old flowers before they die)

LIFO (last-in, first-out)... most used, 70% of all businesses use it to cost their inventories

last units bought are the first units sold... selling the newest inventory first

oldest inventory goes under "here" or "unsold"
newest inventory goes under "gone" or "sold"

LIFO causes the highest COGS expense, so the lowest operating income. (Method preferred for reporting to tax authorities.)

show to federal government (shows lower income, so lower taxes)

average cost

cost of goods available (COGAS) / Goods Available (GAS)

FIFO causes the lowest COGS expense, so the highest operating income. (Method preferred for reporting to owners and creditors.)

show to lenders and investors (shows higher income)

look at cost, look at market, pick the lower

cost, 1200
market, 2625
market, 2600
market, 448
cost, 3600

Business Expenditures (Costs)

Asset on Balance Sheet
Expense on Income Statement
Current assets will be used within one year
Long Term Assets will be used in longer than one year
Six Questions for Fixed Assets

Asset on Balance Sheet

capitalized cost

item will be used in the future to generate revenue
costs that improve the asset
costs that extends the asset's life

Expense on Income Statement

expended cost

item is used in the current period to generate revenue
costs that maintain the asset
costs of ordinary repairs

Long Term Assets will be used in longer than one year

Fixed (PPE), Investment, Intangible
Fixed (PPE)
Investment
Intangible

total

10473

Fixed (PPE), Investment, Intangible

four questions determining which

Physical substance
Held for resale
Used by business for productive purposes
Used by business to generate operating revenue

Fixed (PPE)

property, plant, equipment, land under a building, buildings
yes, no, yes, yes

Investment

land held for investment
yes/no, yes, no, no

Intangible

patents, trademarks
no, no, yes, yes

Six Questions for Fixed Assets

What is the asset's cost at acquisition
How do we classify other expenditures of the asset
What is the annual depreciation expense on the asset
What is the accumulated depreciation on the asset
What is the book value of the asset
What is the gain or loss after disposing of the asset

Costs to acquire an asset

purchase price, tax, fees, interest, insurance, shipping...

"Necessary": do not capitalize assets as the costs of repairing damage, fines, etc. These costs are expensed on the income statement.

cost is only what is NECESSARY... this bars things like damage, vandalism etc.

Costs to put the asset to use

installation, removing unwanted structures, modification costs, landscaping

cost is only what is NECESSARY... this bars things like damage, vandalism etc.

damage, vandalism, etc. are recorded as an Expense on the Income Statement

Depreciation: the periodic decrease of an asset reflecting its use during the period

periodic depreciation is recorded....
depreciable cost = (cost - residual value)
depreciation expense- annual amount
accumulated depreciation- total depreciation to date

periodic depreciation is recorded....

increase depreciation expense
increase accumulated depreciation (contra-LTA)

Straight-line depreciation

equal amount of fixed asset cost in each year of use

increase accumulated depreciation (contra-LTA)

these are a deferred EOP adjustment

equal amount of fixed asset cost in each year of use

Annual Depreciation Expense = (Depreciable Cost/Useful Life)

Capitalized Asset Cost

all expenditures necessary to acquire an asset and put it to its intended use

"Necessary"

do not capitalize assets as the costs of repairing damage, fines, etc

Depreciation

the periodic decrease of an asset reflecting its use during the period

depreciable cost

(cost - residual value)

Straight-line: deprec. exp. = dc x 1/ul

dc = (cost - residual value)

Annual Depreciation Expense

(Depreciable Cost/Useful Life)

refrigerator

LTfA, Long Term fixed Asset

Double-declining-balance: deprec. exp. = bv x 2/ul

book value = (cost - accum.depr.)

Straight-line

deprec

(cost - residual value)

Double-declining-balance

deprec

book value

(cost - accum.depr.) .

businesses acquire assets in four ways...

trading assets (purchase with cash)
borrowing- debt financing (most costly way)
equity financing by issuing stock (dilutes control by creating more owners)
equity financing via retained earnings (ideal way)

Book Value

375,600

notes payable- amounts borrowed and owed with a stated due date and interest rate

P x R x T = Principal x Rate x Time
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P x R x T = Principal x Rate x Time

principal and face are synonyms

Stock is ownership of a corporation

stockholders are also called investors or owners

they have rights to vote on corporate matters, and receive dividends

Dividends

preferred stockholders receive dividends before common stockholders do

preferred stockholders are also guaranteed a dividend
preferred stockholders get paid for the liquidation of a company after creditors but before common stockholders

"The stock market is the original eBay."

market price changes minute by minute, corporations can't control this

there are millions of investors worldwide

par value means legal value of a share of stock (completely UNRELATED to fair market value)

corporations must state a stock value at incorporation

issued means shares sold

outstanding means shares still in stockholders' hands
treasury means shares repurchased by the corporation in the open market, treasury stock is a contra-equity account

preferred stock

issued x par

corporations repurchase their own stock to...

concentrate voting control
have shares available for employee stock programs like bonuses
attempt (not always successful) to affect the stock price

About this deck

By: Tatum Suddarth
Created: 2010-03-29
Size: 74 flashcards
Views: 472

About StudyBlue

“Simply amazing. The flash cards are smooth, there are many different types of studying tools, and there is a great search engine. I praise you on the awesomeness.”
Dennis