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Accounting Midterm #2
Terms in this set (75)
What is F.O.B. shipping point? Who pays for it usually?
-Title changes hands at the shipping point
-the buyer generally pays for shipping.
-Seller recognizes revenue at shipment.
What is F.O.B. destination? Who pays for it usually?
-Title changes hands at destination
-the seller usually pays for shipping
-Seller recognizes revenue when the goods have safely arrived on buyer premises.
What is the "net realizable value"?
The amount of cash the company expects to collect on accounts receivable
What does "perpetual method" mean?
Maintains a continual record of inventory purchased and sold
What does "periodic method" mean?
adjusts for purchases and sales of inventory at the end of the reporting period based on a physical count of inventory
What does FIFO essentially mean?
Oldest used first
What does LIFO essentially mean?
Newest/most recent purchase used first`
What is the equation for weighted average cost?
Amount paid for inventory/# of units= _____
What is the LIFO conformity rule?
If a company uses LIFO for tax reporting, they must also use LIFO for financial reporting
What are examples of "tangible" assets?
- Land improvements
- Natural resources
What are examples of intangible assets?
What are the costs that need to be "capitalized" for assets?
All the costs that are needed to get the asset ready for its intended use...
-Improvements, alterations, etc.
True or false: If you buy a car for $10,000 and two years later you get a new engine for it that will improve it's service life by 5 years the cost should be capitalized.
True; improvements increase the capability of the asset and should be capitilized
True or false: If a company buys a car and 3 months later gets an oil change that cost would not be capitalized.
True; This would be a maintenance expense --> it doesn't "improve" the car for its service life
If a company purchases an intangible asset from an external party, we would ........
Capitalize the cost of the intangible and ALL the costs needed to get the intangible ready for use
If we develop an intangible asset internally, then we would....
Expense almost all of the costs in the current period
Cost that can be capitalized from developing an intangible asset internally include:
-Legal defense fees
When is Goodwill recorded on a company's financial statements?
If Goodwill was acquired
What is the equation for Goodwill?
Purchase price of company - fair value of net assets= Goodwill
What is the difference between "depreciation", "amortization", and "depletion"
-Depreciation pertains to tangible assets
-Amortization pertains to intangible assets
-Depletion pertains to natural resources
What is the "residual" or "salvage" value?
The amount a company expects to receive from selling an asset at the end of its service life
What is the equation for "depreciation cost"?
Cost - residual value
What is the equation for "net book value"?
Cost - accumulated depreciation
What is the "straight line method" equation?
Depreciation cost/service life in years =
What is the "double declining balance method" equation?
1. 2/service life in years =
2. Depreciation rate x Beginning Book Value =
-NOTE: book value cannot go below residual value
What is the "activity-based method" equation?
1. Depreciation cost/service life in units of activity=
2. Depreciation rate x activity for period = depreciation expense
When the useful life of an asset is changed, what should you do to the remaining net value?
It's allocated over the revised amount of years remaining
Why is changing the useful life of an asset NOT an error?
Because useful life is an estimate, and changing an estimate is not considered an error
How to check if an asset is impaired?
If the net book value is GREATER THAN estimated future cash flows, then the asset is impaired
What should you record if the asset is impaired?
Record an impairment loss for the difference between net book value and fair value
What should be the impairment loss journal entry?
Dr. impairment loss xx
Cr. Equipment xx
What are some examples of voluntary disposal?
What are some examples of involuntary disposal?
What are the steps of selling an involuntary/voluntary asset?
Step 1: Make sure the depreciation expense on the asset is up-to-date
Step 2: The cost of the asset and the accumulated depreciation accounts must be removed from the books
-Any cash or other consideration received must be recorded. Any difference between the net book value and consideration received is a gain or loss.
What kind of method is Amortization?
What type of method do you usually use with "depletion"?
How do you find the "book value"?
Purchase price - accumulated depreciation
What is a "line of credit"?
-Open option to borrow from the bank
-Bank approves for you to take out a loan
What is "commercial paper"?
When one company borrows from another
What are "salary withholdings"? What are some examples?
-All the things that make your paycheck lower (things to be paid to gov't mostly)
- Social security, income taxes, unemployment taxes
True or false: Sales taxes affect the income statement
False; They are collected by businesses on behalf of local/state gov'ts
What is known as a "contingent liability"?
An existing, uncertain situation that might result in a loss
What is known as a "contingent gain"?
An existing, uncertain situation that might result in a gain
Whether/How we report contingent liability depends on what two criteria?
1. The likelihood of having to pay
- reasonably possible
2. The ability to estimate the amount of payment
- reasonably estimable
- not reasonably estimable
Look at table for contingent liabilities on lecture slide #12 (Chapter 9)
What if a company is able to estimate a range for potential losses, but not a specific dollar value?
-If management judges one amount in the range of potential losses to be more likely than other amounts,
we record that amount
-If management judges no one amount within the range to be more likely than other amounts, we record the
disclose information about the range
Are warranty expenses (contingent liability) and estimate or an actual certain amount?
What are warranty expenses an estimate of?
An estimate of warranty services that a company will have to provide on products sold in a certain period
How are warranty expenses usually estimated?
Generally a percentage of sales
What is the journal entry for warranty expense when goods are sold?
Dr. warranty expense xx (estimate)
cr. accrued warranty liability xx (estimate)
What is the journal entry when warranty claims are made and the company either reimburses the customer or replaces the product?
Dr. accrued warranty liability xx (amount of claim)
cr. cash/inventory (amount of claim)
How do we record contingent gains?
We do not record contingent gains until the gain is certain... at which time it is no longer a contingency
True or false: Firms can disclose information about contingent gains in the footnotes
Does the "purchase returns" account add or take away from the "purchases" account?
It will decrease purchases account
How long do patents last in the U.S. usually?
What is the equation for gross profit?
Net sales - COGS = gross profit
What is the equation for operating income?
Gross profit - expenses = Operating income
What does "operating income + gains/losses" equal?
How does bad debt expense affect expenses and net income?
Expense increase; net income decreases
How does a credit to "Allowance for Doubtful Accounts" affect expenses and net income?
Does not have an effect
True or false: The journal entry for writing off an uncollectible account changes the net realizable value of accounts receivable
Dr. Allowance for doubtful accounts xx
Cr. accounts receivable xx
When using the "percentage of credit" in the allowance method what will that number give you?
Bad debt expense
When using the "aging" method what will the number that you calculate give you?
Ending balance for Allowance for doubtful account
True or false: GAAP makes the allowance method required where possible?
What would the journal entry be if a company used the "specific write-off" method and the company cannot pay back money for a certain purchase they made?
Dr. Bad debt expense xx
Cr. accounts receivable xx
Why is the "allowance method" better then the "specific write-off" method?
Because the allowance method matches the expenses with the revenues that there generated with
When Purchases are < COGS will ending inventory or beginning inventory be higher?
Beginning inventory; vice versa
What is the equation for "Lifo reserve"?
Fifo ending inventory value (high inventory value) - Lifo ending inventory value (low inventory value)
-Lifo reserve should be disclosed in footnotes
What are the results of "Lifo liquidation"?
-Lower COGs and higher taxes
-This happens if inventory levels fall too low
What type of account are "purchase returns" and "purchase discounts"?
Temporary contra asset accounts
When natural resources are extracted, they are generally ________ for the extracting company
What is the journal entry if natural resources are extracted and can be sold (in perspective of extracting company?
Dr. inventory xx
Cr. accumulated depletion xx (how much natural resources you're taking out)
Sales taxes that need to be paid to the gov't should be written as.....
Sales tax payable
Make sure to add the sales tax to the amount of cash or account receivable when doing journal entries and then credit the sales tax payable
What financial statement(s) do gains/losses affect?
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