acc chap 4-6

Question 1

What is included in a bank reconcilliation?

Answer 1

• Deposits in transit (add) –> cash and cheques issued/received and recorded by the company but not the bank
• Outstanding cheques (subtract) –> checks that have been issued by the company to creditors, but not yet processed.
• Errors (add or subtract)

Question 2

What is included in a book reconciliation

Answer 2

• Bank collections (add)
• Electronic fund transfers (Add/subtract)
• Service charge (subtract)
• Interest revenue earned on account (add)
• Non sufficient fund cheques (subtract)
• Errors (add/ subtract)

Question 3

Cash equivalents:

Answer 3

• treasury bills
• commercial paper
• money market funds

Question 4

Recovery of uncollectable accounts previously written off

Answer 4

1. Reinstate accounts receivable
   Dr accounts receivable
   Cr Allowance for uncollectable accounts
2. Record collection of cash
   Dr Cash
   Cr Accounts receivable

Question 5

Writing off uncollectable amounts

Answer 5

Dr Allowance for uncollectable accounts
Cr Account receivable #
Cr Account receivable #

Question 6

The allowance method journal and financial statements

Answer 6

Journal:
Dr uncollectable account expense
Cr Allowance for uncollectable accounts

Balance sheet (partial):
Accounts receivable
Less: Allowance for uncollectable accounts
Accounts receivable, net

Income statement (partial):
Expenses:
Uncollectable account expense

Question 7

Reconciling interest journal entry

Answer 7

Dr Interest receivable
Cr Interest revenue

(Interest = Principal × Rate × Time)

Question 8

Current Ratio

Answer 8

This measures the entity’s ability to pay its
current liabilities with current assets. (ability to pay its short term debt)

Current assets ÷ Current liabilities
= current ratio

Rule of thumb: A strong current ratio is 1.50

Question 9

Acid test or quick ratio

Answer 9

This is a stringent test of liquidity which
measures the entity’s ability to pay its
current liabilities immediately.

(Cash + Short-term investments + receivable) ÷ Total current liabilities

A higher the number is better
(Quick ratio does not include inventory and prepaid expenses)

Question 10

Days’ Sales in Receivables

Answer 10

A/R Turnover =
Net sales ÷ Average net accounts receivables*
- it measures the number of times the company sold goods on account and collected their cash. Higher is better.

Days’ sales in average accounts receivable =
365 days ÷ Accounts receivable turnover
- it measures how long it takes the company to collect cash. Lower number is better.

*(Beginning net accounts receivables + Ending net accounts receivables)/2

Question 11

Debt ratio

Answer 11

It measures the business’s ability to pay all debt
total liabilities ÷ total assets = debt ratio

(lower number is better)

Question 12

(Net) Working capital

Answer 12

Total current assets – Total current liabilities

It refers to the ability of the company to use its current assets to pay off its current liabilities

Question 13

Cost of goods sold

Answer 13

inventory sold. It is an expense on the income statement.

Question 14

Gross profit

Answer 14

excess of sales revenue over the cost of goods sold. (Revenue – cost of goods sold)

Question 15

Recording inventory on financial statements

Answer 15

On balance sheet, record inventory units x unit cost

On income statement, record number of units sold x unit cost (record as revenue??)

Question 16

Periodic vs perpetual

Answer 16

Periodic systems do not keep a
continuous record of inventory on hand.

Perpetual systems maintain a running record
to show the inventory on hand at all times.

Both methods count inventory once a year.

Question 17

Record inventory bought under periodic and perpetual

Answer 17

Perpetual:
Dr Inventory
Cr Cash/accounts payable

Periodic:
Dr Purchases –> temporary account, normal debit bal
Cr Cash/accounts payable

Question 18

Record freight-in fee under periodic and perpetual

Answer 18

(inventory shipped in):

Perpetual:
Dr Inventory
Cr Acc payable

Periodic:
Dr Freight-in –> temp acc, normal debit bal
Cr Acc payable

Question 19

Returned goods under periodic and perpetual

Answer 19

Perpetual:
Dr Accounts payable
Cr Inventory

Periodic:
Dr accounts payable
Cr purchase returns –> temp acc, normal credit bal

Question 20

Record purchase allowance for perpetual and periodic

Answer 20

Perpetual:
Dr Account payable
Cr Inventory

Periodic:
Dr Account payable
Cr Purchase allowance –> temp acc, normal credit balance

Question 21

To record purchase discount for perpetual and periodic

Answer 21

Perpetual:
Dr Account payable
Cr inventory

Periodic:
Dr Account payable
Cr Purchase discount –> temp acc, normal credit balance

Question 22

What happens to Purchases, frieght in, purchase returns, purchase allowance, and purchase discount at year end?

Answer 22

Periodic temporary accounts get closed into cost of goods sold at year end

Question 23

To record payment to a supplier for perpetual and periodic

Answer 23

Perpetual:
Dr Account payable
Cr Cash

Periodic:
Dr Account payable
Cr Cash

Question 24

Adjusting entry for periodic inventory at year end

Answer 24

Close out beginning inventory & temporary accounts, set up ending inventory

Dr Cost of goods sold
Dr Ending inventory
Dr Purchase allowance
Dr Purchase returns
Dr Purchase discounts
Cr Purchases
Cr Freight-in
Cr Beginning inventory

Question 25

Periodic Net Purchases of inventory =

Answer 25

= Purchase price of inventory + Freight-in – Purchase returns & allowances – Purchases discount

Question 26

Perpetual net sales =

Answer 26

= sales revenue - sales returns & allowances - sales discounts

Question 26

cost vs price

Answer 26

Cost: How much product is worth Price: How much is paid for product

Question 27

Perpetual Inventory to record the sale of goods - IFRS

Answer 27

Cash or Accounts receivable 200,000 Sales revenue 198,000 Sales refund payable 2 000 --> (liability) (200,000 x 1%), to record the price expected to be returned Cost of goods sold 118,800 Inventory returns estimated (120,000 x 1%) 1,200 Inventory 120,000 To record the cost of the product expected to be returned

Question 28

Perpetual, record sales returns and allowances as they occur - ASPE

Answer 28

Record the sales returns & allowances as they occur Dr Sales returns & allowances Cr Cash or Accounts receivable Dr Inventory Cr Cost of goods sold

Question 28

Perpetual, journal entry to record the return of goods - IFRS

Answer 28

Sales Refund payable 500 Cash or Accounts receivable 500 To record the price of the product returned Inventory ($500 x 60%) 300 Inventory Returns Estimated 300 To record the cost of the product returned

Question 29

What does 2/10, n/30 mean?

Answer 29

If the buyer pays the invoice within 10 days, they will receive a 2% discount; if not, the full amount of the invoice is due within 30 days

Question 30

Discounts - Record collection of cash if paid within the timeframe of the discount:

Answer 30

ex. Cash 1,470 (98%) Sales Discount 30 (2%) Accounts receivable 1,500 To record collection of accounts receivable, less 2% discount

Question 31

When to use specific unit cost

Answer 31

Specific Unit Cost is also called the specific identification method Some businesses deal in unique inventory items. These businesses cost their inventories at the specific cost of the particular unit

Question 32

Difference between perpetual and periodic weighted average

Answer 32

Periodic calculates one average cost for the entire period by taking the total cost/total units in inventory to get a rate

Question 33

How to use weighted average perpetual

Answer 33

After each purchase, make a new unit cost by taking all costs/units available After a sale, calculate COGS using the rate calculated above times the number of units sold For the next purchase, take COGS + price of new units/ number of units = new weighted average To calculate ending inventory = average unit cost x units left

Question 34

When inventory costs are increasing (inventory methods)...

Answer 34

Weighted average cost of goods sold is highest because it is based on the average of the costs for the period. Gross profit is the lowest. FIFO cost of goods sold is lowest because it is based on the oldest costs. Gross profit and net income are the highest

Question 35

Perpetual versus Periodic inventory system

Answer 35

Differences between the perpetual system and the periodic system are:   Purchases of inventory – the perpetual system uses the Inventory account while the periodic system uses a Purchases account   Sale of inventory – the perpetual system records two journal entries – one to record the sale and one to update the inventory records while the periodic system only records the sale.

Question 36

First-In, First-OutPeriodic and Perpetual

Answer 36

Oldest goods are assumed to be sold firstEnding inventory consists of most recent purchases

Question 37

Comparability (including consistency) for inventory

Answer 37

Investors want to compare a company’s financial statements from one year to the next Companies are required to disclose the inventory methods used in the notes

Question 38

Lower-of-Cost-and-Net Realizable Value (LCNRV)

Answer 38

requires that inventory be reported in the financial statements at whichever is lower – inventory’s cost or its net realizable value Net realizable value is selling price, less: cost of disposal Ex. Cost = 500 NRV = 480 (reported on balance sheet as inventory)

Question 39

Gross profit percentage

Answer 39

It measures the ability of a company to sell inventory at a profit = gross profit/net sales revenue - Higher the better

Question 40

Inventory turnover and days’ inventory outstanding =

Answer 40

Inventory turnover = Cogs/average inventory – higher the better Days’ Sales in Inventory = 365 days/ Inventory Turnover It indicates how rapidly inventory is sold The lower the number the better

Question 41

If Ending Inventory is overstated,

Answer 41

COGS is understated and gross profit is overstated

Question 42

If ending inventory is understated,

Answer 42

COGS is overstated and gross profit is understated

Question 43

If beginning inventory is overstated,

Answer 43

COGS is overstated, gross profit is understated

Question 44

If beginning inventory is understated,

Answer 44

COGS is understated and gross profit is overstated

Question 45

What assets get depreciated / amortized

Answer 45

Land --> Neither Material assets such as building, equipment, furniture, machinery and land improvement --> Deprecitated Non-material assets such as patents --> amortized

Question 46

Back property tax

Answer 46

Previous owner owed but didn’t pay so now you have to pay is

Question 47

Determining the price of land

Answer 47

Purchase price of land $300,000 Add related costs: Real estate commission $10,000 Back property tax 8,000 Removal of buildings 5,000 Survey fees 1,000 =24,000 Total cost of land $324,000 All costs to get land ready for use (the parts that don’t wear out unlike parking lot), land improvements and such are depreciated

Question 48

Lump-Sum (or Basket) Purchases of Assets

Answer 48

When a company purchases a group of assets, they must identify the cost of each asset using the relative fair value. Example: Company paid $1 million for building and land Fair value of building = $960,000 land = 240,000 Total fair value $1,200,000

Question 49

Capital Expenditure versusan Immediate Expense

Answer 49

Record an Asset for Capital Expenditures - debit asset Extraordinary repairs: – Major engine overhaul – Modification of body for new use of truck – Addition to storage capacity of truck Record Repair and Maintenance Expense - Debit expense Ordinary repairs: –Repair of transmission or other mechanism – Oil change, lubrication, etc. – Replacement tires, windshield – Paint job

Question 50

Depreciation - Terminology

Answer 50

Cost – all costs incurred to get the asset ready for use Accumulated depreciation – depreciation expensed over the accounting periods Carrying amount – Cost minus accumulated depreciation Estimated useful life – the length of service the business expects from the asset Estimated residual value – it is the expected cash value of an asset at the end of its useful life

Question 51

Depreciation - Straight line method formula

Answer 51

(cost - residual value) / years of useful life - each year is depreciated the same amount

Question 52

Depreciation - Units of production formula

Answer 52

(Cost - residual value)/ estimated level of activity total multiply the rate by the estimated value per year to get the amount depreciated

Question 53

Double-Diminishing-Balance Method

Answer 53

Single rate per year: 1 ÷ 4 (estimated useful life) = 25% Double-diminishing balance: 2 times the single rate = 2 x 25% = 50% Carrying amount x rate: Year 1: 55,000 × 0.50 = $27,500 Year 2: (55,000-27,500) x .50 = $13,750 Year 3: (55,000-27,500-13,750) x .50 = $6,875 Year 4: $1,875** Total accumulated depreciation =$50,000 **Final year = $50,000 – 27,500 – 13,750 – 6,875 = $1,875 Residual value is NEVER depreciated

Question 54

Comparing Depreciation Methods

Answer 54

Will always give the same amount of depreciation, it's just distributed differently

Question 55

If a company buys an asset other than at year-end:

Answer 55

1. Compute the depreciation for the year 2. Multiply by the fraction of the year you held the asset

Question 55

Changing the Useful Lifeof a Depreciable Asset

Answer 55

1. Calculate the carrying amount as it is now 2. Make a new depreciation rate by dividing the carrying amount by new estimated useful life

Question 56

Derecognition (sold) of Property,Plant and Equipment

Answer 56

1. Before accounting for the derecognition, bring the depreciation up to date 2. Remove asset and accumulated depreciation account from the books Example: A company disposes of equipment that cost $8,000. Accumulated depreciation is $6,000 and the carrying amount is $2,000. The journal entry is: Accumulated depreciation 6,000 Loss on disposal 2,000 – treated as expense, is on inc. state. Equipment 8,000

Question 56

Fully Depreciated Assets

Answer 56

An asset can be used after it is fully depreciated. The asset and its depreciation account remain in the ledger with no additional depreciation entries.

Question 57

Recording the sale of depreciated (partially) equipment

Answer 57

September 30, 2020 Cash 5 000 Accumulated Depreciation 3 750 Loss on Sale of Equipment 1 250 Equipment 10 000 To record sale of equipment

Question 58

Intangible assets

Answer 58

Patents – federal government grant giving the holder exclusive rights to produce and sell and invention Copyrights – films, novels, software, etc - extend 50 years beyond the creator’s life Tradenames – are assets that represent distinctive identifications of a product or service Franchises/Licences – granted by private business or government to sell a product or service Goodwill – is the excess of the cost of purchasing another company over the sum of its fair values of net assets Intangible assets are recorded at acquisition cost and are often the most valuable assets. The residual value is often zero. Intangible assets can be finite - get amortized, usually using straight line method They can be infinite - not amortized but get checked for impairment

Question 59

Return on Assets (ROA)

Answer 59

= Net income / Average total assets (Beginning total assets + Ending total assets)/2 It measures how much the entity earned for each dollar of assets invested by both investors and creditors. Higher is better