CH 7 and 8 Flashcards
- How do we treat 3-month certificates of deposit on our balance sheet?
Same as cash.
- When a note receivable is created (on that date) what is the entry to record interest portion?
No entry since no time has elapsed. Interest only earned over time.
- Why is the direct bad debt write off method a violation of GAAP?
It violates the matching principle since the expense is recorded in a later period than the revenue.
- What are the two methods of used for the indirect (allowance) method of bad debt recognition?
Balance sheet approach – adjust Allowance balance to pre-determined balance (e.g. 3% of A/R).
Income statement approach – adjust bad debt expense to a specific amount (e..g. 3% of sales revenue)
- In the indirect approach, what is the entry to write-off SPECIFIC uncollectible accounts?
Allowance for Doubtful Accounts XXX
A/R XXX
- What is factoring? How does it differ from assigning accounts receivable?
Factoring is the sale of A/R to an outside party (factor).
Factored receivables belong to the factor and no longer belong to the original company. When a company assigns it’s A/R, it is simply pledging it as collateral for a loan.
Ownership of A/R does not transfer to the bank (or other party) unless the company defaults on its loan.
- What are the two methods of accounting for inventory?
Perpetual vs. periodic methods.
In perpetual, inventory is being adjusted for every transaction – purchases and sales.
What is the major difference between Perpetual and peridoic?
Inventory account is debited for all purchases and other costs increasing value of inventory. Inventory is credited and CGS debited each time a sale is made.
In periodic method, we do not involve the inventory account. When inventory is purchased, we debit Purchases.
Other cost accounts are used for other costs that are related to the inventory. No entry is made when inventory is sold. At the end of the period, a physical inventory is taken and inventory is adjusted to its correct ending balance by debiting inventory, debiting CGS and crediting Purchases and other accounts used to track inventory costs.
What is a purchase discount?
A discount offered by vendors to their customers for prompt payment within a prescribed discount period. Usually a % of the total (e.g. 2%) expressed as x n, net y, where X is the % discount, n is number of days in the discount period and y is the number of days until the due date of the full invoice amount.
How do we account for purchase discount at time of purchase and at time of payment?
The gross method records the Purchase at its full cost and waits until the invoice is paid by the discount due date to record the discount – at which time we debit A/P for the full invoice amount and credit Purchase discounts (or inventory if using Perpetual method) and credits cash for the amount paid.
The net method records the purchase at the discounted amount (full price minus the discount) immediately. If the invoice is paid after the discount period, the company will Debit A/P at the net amount , debit loss on purchase discounts lost and credit cash for the full amount paid.
What are the three basic assumptions used in accounting for cost flow of inventory – name them and briefly describe each.
FIFO – first in first out, oldest items are sold first, newest items left in inventory.
LIFO – last in first out, newest items sold first, oldest items left in inventory
Weighted (moving) average – Look at total dollar value of goods available for sale during a period and divide by total units available. Apply that average cost to both cost of goods sold and ending inventory.
If we overstate the value of our ending inventory – how does that affect our net income? Explain.
The higher ending inventory, the lower CGS, so an overstated ending inventory understates CGS which then gives us an overstated gross profit, which overstates net income.
