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MGT 8803 > Classification and Measurement > Flashcards

Classification and Measurement Flashcards

1
Q

What is revenue recognition

A

companies recognize revenue when goods or services are transferred to customers for the amount the company expects to be entitled to recieve in exchange

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2
Q

When is revenue recognized?

A

when the performance obligation is satisified

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3
Q

Step 1 revenue recognition

A

Identify the contract with a customer
-contract estabilshes the legal rights and obligation of the seller and the customer
-need to have. contract to have revenue

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4
Q

Step 2 revenue recognition

A

Identify the performance obligation(s) in the contract
-seller can have 1 or more performance obligations

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5
Q

Step 3 revenue recognition

A

determine the transaction price
-the transaction price is what the seller should receive from the customer

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6
Q

Step 4 revenue recognition

A

allocate the transaction price to each performance obligation
-if there are multiple p.o.s the contract price is allocated among them

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7
Q

Step 5 revenue recognition

A

recognize revenue when- or as - each performance obligation is satisfied
-at a point in time or over time depending on how the p.o. is satisfied

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8
Q

Revenue recognition practice from lecture notes

A
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9
Q

cash

A

money or currency a firm has on hand r in checking accounts, and items acceptable for deposit such as check and money orders

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10
Q

cash equivalents

A

items such as money market funds, short-term certificates of deposit and treasury bills.
-typically investments with maturity dates of less than 3 months or less are considered cash equivalents

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11
Q

Restricted Cash

A

cash not available for current use, usually reported as investments or other assets

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12
Q

What are accounts receiveable?

A

-funds owed to a firm from the sale of goods and services

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13
Q

sales on credit

A

when companies sell to other companies they offer credit terms (or credit sales or sales on account)

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14
Q

what is the initial valuation of a/r?

A

the amount of the credit sales

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15
Q

what is the subsequent valuation of a/r

A

at the amount expected to be received (net realizable value)

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16
Q

what 2 things are estimated to determine the net realizable value?

A
  1. the amount that won’t be collected because people don’t pay (called uncollectibles)
  2. the amount that won’t be collected because of sales returns
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17
Q

uncollectible a/r

A

bad debts: customers who don’t pay the amount they owe

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18
Q

Allowance for uncollectible accounts (provision method) (4 things)

A

-estimate future bad debts and match the expense against the related revenues in the same period as the revenues are recognized
-write off accounts receivable when it becomes uncollectable
-the amount of expected uncollectible accounts is usually computed based on an aging analysis or a simple precentage
-matches expesns to the same period as revenues

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19
Q

uncollectable accounts example (lecture notes)

A
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20
Q

What is Inventory?

A

assets consisting of goods owned by the business and held for resale or for future use in the manufacturing of goods for sale

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21
Q

what costs should be included in inventory?

A

should include costs of the goods plus all the costs required to btain physical posession and to put the merchandies in saleable condition

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22
Q

two types of inventory?

A

merchandising inventories and manufacturing inventories

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23
Q

merchandising inventories

A

physical form of the goods is not altered prior to sales

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24
Q

cost of merchandising inventories

A

cost = purchase price + [taxes, duties, freight, storage, insurance during transit, etc] - [discounts and allowances, purchase returns, purchase discounts]

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25
What are manufactuing inventories?
physical form of the goods is altered prior to the sales
26
categories of manufacturing inventories
1 raw materials 2 work in process inventory 3 finished good inventory
27
manufacturing inventories cost
cost = raw materials + direct labor cost + indirect factor costs (electricity, depreciation of equipment and building, supervisory salaries, supplies, etc.)
28
What are the Inventory cost flow assumptions
firms purchase or manufacture products at different times and different costs -which units were sold and which are still in inventory? -how should dollar amounts be assigned? -most important issue in inventory accounting
29
inventory costing methods
specific identification FIFO LIFO Avg cost
30
inventory costing -specific identification
keep track of each item individually
31
inventory costing- FIFO
assumes that the first unis purchased are the first to be sold
32
inventory costing - LIFO
last units purchased are the first sold (only in us - inaccurate)
33
inventory costing - avg cost
units are sold without regard to order of purchase, instead computes cogs and ending inventories based on a simple weighted average
34
COGS Equation
beginning inv + inv purchase = goods available for sale (ending inv + cogs)
35
Inventory costing example from lecture
36
What are Investments?
includes investments in other entities debt securities and equity securities. -accounting for these can be wildly ddifferent
37
6 ways of recording investments
-consolidation -equity method -fair value method -held to maturity -trading debt -available for sale
38
Attributes Property plant and equipment (ppe)
-actively used in operations -long term periods of service utility -physical substance -often make up largest asset amounts -PPE include natural resources
39
How is ppe reported on the balance sheet
reported at historical cost less accumulated depreciation (book value) -if impairment of value, write down to reflect lower fair market value
40
which expenditures should we include in historical cost
all costs nescessary to acquire an asset and make it ready for use
41
what does historical cost include
purchase price and other related costs like sales tax, transportation costs, installation, testing, legal fees to establish title, recording fees and any other costs to get asset ready for use
42
What is the difference between Capitalization and expense in terms of financial reporting?
should long lived asseets be capitalzed (placed on balance sheet) or expensed (immediately reducing net income)
43
Capitalization vs expense example from lecture
44
What is Depreciation?
a system of accounting which aims to distribute the cost or other basic value of tangible capital assets, less salvage, over the estimated life of the unit, in a systematic and rational manner -process of allocation not valuation
45
What estimates are needed for depreciation?
useful life salvage value depreciation rate
46
depreciation estimates - useful life
period of time over which the asset is expected to generate cash inflows
47
depreciation estimates-depreciation rate
depreciation rate - estimate of how the asset will be used up over its useful life
48
depreciation estimates - salvage value
expected disposal amount for the asset at the end of its useful life
49
Depreciation methods
Straight-line method accelerated methods activity based methods
50
depreciation methods - straight line
depreciation expense is recognized evenly over the estimated useful life of the asset
51
depreciation methods - accelerated methods
double declining-balance - depreciates assets twice as quickly
52
depreciation methods - activity based methods
units of production
53
Impariment of value
ppe should be written down if there has been a significant and permanent impairment of value -most long term assets an impairment test id one whenever there is a triggering event
54
triggering event
with impairment of value, a triggereing event is certain events or changes in cricustances that raise the possiblitiy that certain long-lived assets may be imparied
55
What are Intangible assets?
-have no physical substance -not financial instruments -convey certain legal and economic rights -uncertainty associated with future economic benefits (very conservative with these estimates)
56
Types of intangible assets and definitions
Identifiable - patents, copyrights, trademarks, franchises, license unidentifiable- goodwill (only recognized with purchase of other business)
57
How are intangibles acquired? When can you capitalize the costs?
externally - can capitalize purchase cost and other related costs internally - can only capitalize direct costs like legal fees. all other related costs are expensed as incurred
58
What are Current liabilities? (Time Periods)
probable future sacrifices of economic benefits arising from present obligations to other entities resulting from past transactions or events
59
current liabilities are...
-obligations payable within 1 year or one operating cycle, whichever is longer -expected to be satisfied with current assets or by the creation of other current liabilities ex- accounts payable cash dividedns payable, accrued expesnses, unearned revenues, taxes payable, short-term notes payables -current liabilities are considered more risky than noncurrent liabiliities -usually reported at their maturity amounts
60
Long term debt
obligations that extend beyond one year or the operating cycle, whichever is longer
61
examples of long term debt
bonds payable, notes payable, mortgages payable, pensions, leases
62
long term debt...
-signifies creditors interest in a companys assets -requires the future payment of cash in specified amounts, at specified dates -mirror image of an asset -as time passes interest accrues on debt -debt is reported at the present value of its related cash flows (principal and or interest payments, discounted at the effective rate of interest at issuance
63
Most common type of corporate debt?
bonds
64
One advantage of bonds?
they divide a large liability into many smaller liabilities
65
How long on average does it take for bonds to mature?
10-40 year
66
What payment and when are made on bonds?
bonds require the payment of the stated amount at maturity and interest at a stated rate
67
Stated amount (bond) (principal, par value, face amount, maturity value)
the amount used to determine cash interest payments and the amount paid back at maturity
68
Stated rate (coupon rate, nominal rate)
the interest rate used to determine cash interest payments
69
Market rate (effective rate)
the going interest rate of simlarly risky debt
70
Effective interest method
interest accrues on an outstanding debt at a contstant percentage of the debt each period. Interest each period is recorded as the effective market rate of interest multiplied by the outstanding balance of the debt (during the interest period) -interest is recorded as expense to the issuer and revenue to the investor
71
Bond example (s) from lecture
72
Types of shareholders equity
by business structure -sole proprietorship -partnership -corporation
73
Common stock
-share proportionately in profits or losses -owners of the company (voting rights) -residual interest -preemptive rights
74
Common stock common values
par value authorized issued outstanding
75
common stock par value
somewhat arbitrary amount used to determine legal capital, stated in the charter. When stock is issued for more than par value, the excess is reported in the account, paid in capital in excess of par
76
common stock authorized value
maximum number of shares distributed to stockholders (not retired)
77
common stock outstanding value
number of shares currently held by stockholders outside the corporation
78
preferred stock
-some rights of ownership -preference over common stock (but not debt) in dividends and or liquidation
79
Treasury stock
-represents reacquisition of the firms shares from shareholders -a contra equity account
80
Retained Earnings
Accumulation of earnings minus dividends Dividends -cash - only one that affects RE -stock -stock splits
81
Capitalization
the process of recording an expense as an asset on a company's balance sheet instead of an expense on the income statement
82
-consolidation
- equity with control
83
-equity method
- equity with significant influence
84
-fair value method
- equity with significant influence
85
-held to maturity
- debt with intention of holding to maturity
86
-trading method
debt with intention of holding for short period to get a gain
87
-available for sale
- debt without the previous intentions
88
what are capitalized costs?
-costs included in asset account are called
89
What is Capitalization?
an accounting method in which a cost is included in an asset's value and expensed over the asset's useful life, rather than expensed in the period the cost was incurred.
90
What is periodic interest?
the effective interest rate (market rate) times the amounts of the debt outstanding during the interest period
91
(known as the book value or carrying value
Historical Cost less Accumulated Depreciation
92
-periodic interest
is the effective interest rate (market rate) times the amounts of the debt outstanding during the interest period
93
interest expense formula
carrying value * market rate of interest during period
94
carrying value
Historical Cost less Accumulated Depreciation
95

MGT 8803 (11 decks)

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