Midterm #2

Question 1

Net Sales (income statement)

Answer 1

Net returns of products

Question 2

Net Earnings from Discontinued Operations (income statement)

Answer 2

Earnings from operating / products no longer being sold / discontinued

Question 3

Consolidated Statement of Earnings (income statement)

Answer 3

All of the companies earnings and the companies that they own more than 50% of as well

Question 4

Revenue Recognition Rules

Answer 4

Revenue is included on the income statement when it is earned

Question 5

Revenue is Earned when…

Answer 5

1. Service provided OR
2. When ownership of goods transfers to the customer

Question 6

Ownership of Goods Transfers to Customer when…

Answer 6

1. FOB Shipping Point – (Freight on Board) legal ownership transfers upon shipment
2. FOB Destination – legal ownership transfers upon receipt by customer

Question 7

5 Step Process for Revenue Recognition

Answer 7

1. Identify the Contract with the customer
2. Identify the Performance Obligations in the contract
3. Determine the transaction Price
4. Allocate the transaction price to the performance obligations
5. Recognize revenues as each performance obligation is satisfied - earned

Question 8

Separate Performance Obligation

Answer 8

Capable of being distinct (customer can receive the benefit on its own)

Question 9

Revenue Earned Over Time

Answer 9

-Can recognize revenue evenly overtime
-Long-term construction (percentage of completion)

Question 10

Accounts Receivable

Answer 10

-Must be presented on the balance sheet at net realizable value
-Must estimate how much of accounts receivable might become uncollectible

Question 11

Net Realizable Value

Answer 11

Amount company expects to collect from customers

Question 12

Accounts Receivable Aging Report

Answer 12

Can be 0-30 days, 31-60 days etc. shows Percentage of Uncollectible and Total Uncollectible

Question 13

Allowance for Uncollectible Accounts

Answer 13

-A contra-asset
-Decreases accounts receivable down to net realizable value

Question 14

Throughout the Year (accounts receivable)

Answer 14

-Known Uncollectible Accounts (Write-Offs): Dr. Allowance for Uncollectible Accounts, Cr. Accounts Receivable

-Collection of an Account Already Written-Off: Dr. Accounts Receivable, Cr. Allowance for Uncollectible Accounts, Dr. Cash, Cr. Accounts Receivable

Question 15

Ending of Reporting Period (accounts receivable)

Answer 15

-Calculate uncollectible accounts receivable using an aging analysis

-Estimated uncollectible’s must be the ending balance in the allowance account

-Record bad debt expense entry to adjust the allowance to the correct ending balance: Dr. Bad Debt Expense, Cr. Allowance for Uncollectible Accounts

Question 16

Net Operating Profit After Taxes (ratios)

Answer 16

(NOPAT)
= Net Income + Tax Expense + Non-Operating Expenses - Non-Operating Income * (1 - tax rate)

Question 17

Income from Operations

Answer 17

= Net Income + Tax Expense + Non-Operating Expenses

Question 18

Net Operating Profit Margin (ratios)

Answer 18

= NOPAT / Revenue

Question 19

Accounts Receivable Turnover Ratio (ratios)

Answer 19

= Revenue / Average Accounts Receivable

*how many times during the year was accounts receivable collected

Question 20

Average Accounts Receivable

Answer 20

= Current Year Accounts Receivable + Prior Year Accounts Receivable / 2

Question 21

Average Collection Period (ratios)

Answer 21

=Average Accounts Receivable / Revenue / 365
OR
= 365 / Accounts Receivable Turnover

*how many days does it take to collect receivables

Question 22

3 Types of Expenses

Answer 22

1. Direct Association Expense
2. Immediate Recognition Expense
3. Systematic Allocation Expense

Question 23

Direct Association Expense

Answer 23

Directly associated with a specific revenue transaction

Ex: cost of goods sold, commissions/fees, etc.

*recognized at the same time as the revenue

Question 24

Immediate Recognition Expense

Answer 24

Related to a time period, not a specific revenue event

Ex: wages, insurance, interest, utilities, etc.

*recognized in the time period they were incurred

Question 25

Systematic Allocation Expense

Answer 25

Allocating items to expense that impact multiple periods Ex: depreciation

Question 26

Inventory

Answer 26

Reported on the balance sheet at cost Cost: cost to purchase/acquire, transport to company, make/manufacture (labor, overhead), packaging, inspection, etc.

Question 27

Categories of Inventory

Answer 27

1. Raw Materials - parts/materials/ingredients that will be used to make the companies products 2. Work in Process - partially completed goods 3. Finished Goods - completed products ready for sale

Question 28

Inventory Assumptions

Answer 28

1. First in First Out (FIFO) 2. Last in First Out (LIFO) 3. Average Cost

Question 29

First in First Out (FIFO)

Answer 29

Assumed oldest inventory is sold first and newest inventory remains

Question 30

Last in First Out (LIFO)

Answer 30

Assumes newest inventory is sold first and oldest inventory remains

Question 31

Average Cost

Answer 31

= $ Goods Available for Sale / # of Units in Goods Available for Sale

Question 32

Cost of Goods Sold & Ending Inventory

Answer 32

Cost of Goods Sold = Average Cost * Units Sold Ending Inventory = Average Cost * Units in Ending Inventory

Question 33

Lower of Cost or Net Realizable Value

Answer 33

= Sales Price - Costs to complete or sell

Question 34

NRV Per Item

Answer 34

Lesser of Cost Value and NRV value for all items and then added up for the total

Question 35

NRV Per Category

Answer 35

Lesser of Cost Value total and NRV value total for each category and then add the two lessers for the total

Question 36

NVR By Total

Answer 36

Total of all Cost Values and NVR values for all items

Question 37

Gross Profit Margin (ratios)

Answer 37

= Revenue - Cost of Goods Sold / Revenue

Question 38

Reasons for Gross Profit Margin Decline

Answer 38

1. Competition 2. Product line is stale 3. Economic issues 4. Inventory is overstocked

Question 39

Inventory Turnover (ratios)

Answer 39

= Cost of Goods Sold / Average Inventory *how many times the inventory population is sold during the year

Question 40

Average Inventory

Answer 40

= Current Year Inventory + Prior Year Inventory / 2

Question 41

Average Inventory Days Outstanding (ratios)

Answer 41

= Average Inventory / Cost of Goods Sold / 365 OR = 365 / Inventory Turnover *how many days it takes to sell inventory

Question 42

Journal Entry for Sales (cash and account)

Answer 42

Cash: Dr. Cash Cr. Revenue Dr. Cost of Goods Sold Cr. Inventory Account: Dr. Accounts Receivable Cr. Revenue Dr. Cost of Goods Sold Cr. Inventory