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Flashcards in MIDTERM I REVIEW Deck (84):
1

What are cash equivalents?

Cash equivalents include money market funds, treasury bills, and commercial paper. In other words, short-term, highly liquid investments that can be readily converted to cash with little risk of loss.

2

To be classified as cash equivalents, these investments must have a maturity date no longer than __________ from the date of purchase.

3 months

3

What are cash discounts?

Cash discounts, often called sales discounts, represent reductions not in the selling price of a good or service but in the amount to be paid by a credit customer if paid within a specified period of time.

4

What is the gross method?

Gross Method views a discount not taken by the customer as part of sales revenue.

5

What is the journal entry for recording sales under the gross method?

Debit: Accounts Receivable =
[(List Price * Units) - (LP * Units * Trade Discount)]
Credit: Sales Revenue

6

What is the journal entry for collection under the gross method?

Debit: Cash = A/R - Sales Discount
Debit: Sales Discount = A/R * 2% (If 2/10, n/30)
Credit: A/R = A/R

7

What is the journal entry for the final collection under the gross method?

Debit: Cash = A/R
Credit: A/R

8

What is the net method?

Net method considers cash discounts not taken as interest revenue.

9

What is the journal entry for recording sales under the net method?

Debit: Accounts Receivable = A/R - Sales Discount
Credit: Sales Revenue

10

What is the journal entry for collection under the net method?

Debit: Cash = A/R - Sales Discount
Credit: Accounts Receivable

11

What is the journal entry for the final collection under the net method?

Debit: Cash = A/R
Credit: Accounts Receivable = A/R - Sales Discount
Credit: Interest Revenue = A/R * 2% (If 2/10, n/30)

12

What is the journal entry for recording sales returns?

Debit: Sales Returns = Returned in Sales Credit
Credit: Accounts Receivable

Debit: Inventory = Sales Returns * % of Selling Prices
Credit: COGS

13

What is the adjusting entry for estimated returns?

Debit: Sales Returns = ([Estimated % of Sales * Merchandise on Account] - Sales Returns)
Credit: Allowance for Sales Returns

Debit: Inventory-Estimated Returns = Sales Returns * % of Selling Price
Credit: COGS

14

What is the allowance method?

Allowance method is an application of matching accounting for bad debts.

15

What is the direct write-off method?

Direct Write-Off Method is used only rarely for financial reporting, but it is the required method for income tax purposes.

16

What is the journal entry for the Direct Write-Off Method?

Debit: Bad Debt Expense
Credit: Accounts Receivable

17

What is the income statement approach?

We estimate bad debt expense as a percentage of each period's net credit sales.

18

What is the journal entry for the Income Statement Approach?

Debit: Bad Debt Expense = Net Credit Sales * %
Credit: Allowance for Uncollectible Accounts

19

What is the Balance Sheet Approach?

We determine bad debt expense by estimating the net realizable value (NRV) of accounts receivable to be reported in the balance sheet.

20

What is the Accounts Receivable Aging Schedule?

It analyzes each customer account by applying different percentages to A/R balances depending on the length of time outstanding.

21

How do we calculate interest on notes?

Face Amount * Annual Rate * Fraction of the Annual Period (i.e. 6/12)

22

What is the journal entry to record sale of merchandise under interest bearing notes?

Debit: Note Receivable = Sale of Merchandise
Credit: Sales Revenue

23

What is the journal entry for recording interest accrual under interest bearing notes?

Debit: Interest Receivable = Note Receivable * % * [(# of Months)/12]
Credit: Interest Revenue

24

What is the journal entry to record collection under interest bearing notes?

Debit: Cash
Credit: Interest Revenue = N/R * % * [(# of Months)/12]
Credit: Note Receivable = N/R
Credit: Interest Receivable = I/R

25

__________ notes actually do bear interest, but the interest is deducted (or discounted) from the face amount to determine the cash proceeds made available to the borrower at the outset.

Non interest-bearing

26

What is the journal entry to record sale of merchandise under non interest-bearing notes?

Debit: Note Receivable = Merchandise Sold
Credit: Discount on N/R = N/R * % * [(# of Months)/12]
Credit: Sales Revenue = N/R - Discount on N/R

27

What is the journal entry to record interest accrual under non interest-bearing notes?

Debit: Discount on N/R = Discount on N/R
Credit: Interest Revenue

28

What is the journal entry for collection under non interest-bearing notes?

Debit: Cash = N/R
Credit: Note Receivable

29

How do we calculate the Effective Interest Rate?

(Interest/Sales Price) = Rate for 6 Months * 2 (to annualize rate) = Effective Interest Rate

Adjust 2* if the rate is for 3 or 9 months.

30

What is secured borrowing?

Under this approach, the borrower simply acts like it borrowed money from the lender, with receivable remaining in the borrower's balance sheet and serving as collateral for the loan.

31

What is the journal entry to record transfer under secured borrowing?

Debit: Cash = Liability - Finance Charge Expense
Debit: Finance Charge Expense = Finance Fee % * Receivables
Credit: Liability: Borrowed from Bank

32

When a company sells accounts receivable __________ recourse, the seller retains all the risk of bad debts.

with

33

What is the journal entry to record transfer when factoring WITH recourse?

Debit: Cash = Receivables * (90% - 2%) (i.e. only if bank charges 2% fee)
Debit: Loss on Sale of Receivables
Debit: Receivable from factor = Fair Value
Credit: Recourse Liability = Recourse Obligation
Credit: Accounts Receivable = Receivables

34

What is sale of receivables?

Under this approach, the seller removes the receivables from its balance sheet, acting like it sold them to the buyer.

35

If a factoring arrangement is made __________ recourse, the buyer can't ask the seller for more money if the receivables prove to be uncollectible. Therefore, buyer assumes the risk of bad debts.

without

36

What is the journal entry to record transfer when factoring WITHOUT recourse?

Debit: Cash = Receivables * 90%
Debit: Loss on Sale of Receivables
Debit: Receivable from Factor = Fair Value - (Receivables * Factoring Fee %)
Credit: Accounts Receivable = Receivables

37

What is the perpetual inventory system?

A perpetual inventory system continuously records both changes in inventory quantity and inventory cost.

38

What is the periodic inventory system?

A periodic inventory system adjust inventory and records cost of goods sold only at the end of each reporting period.

39

What is the journal entry for purchase under the perpetual inventory system?

Debit: Inventory
Credit: Accounts Payable

40

What is the journal entry for freight under the perpetual inventory system?

Debit: Inventory
Credit: Cash

41

What is the journal entry for returns under the perpetual inventory system?

Debit: Accounts Payable
Credit: Inventory

42

What is the journal entry for sales under the perpetual inventory system?

Debit: Accounts Receivable
Credit: Sales Revenue

43

What is the journal entry for the end of the period under the perpetual inventory system?

Debit: COGS
Credit: Inventory

44

What is the journal entry for purchase under the periodic inventory system?

Debit: Purchases
Credit: Accounts Payable

45

What is the journal entry for freight under the periodic inventory system?

Debit: Freight-in
Credit: Cash

46

What is the journal entry for returns under the periodic inventory system?

Debit: Accounts Payable
Credit: Purchase Returns

47

What is the journal entry for sales under the periodic inventory system?

Debit: Accounts Receivable
Credit: Sales Revenue

48

What is the journal entry for the end of the period under the periodic inventory system?

No Entry

49

What is a purchase return?

Purchase return represents a reduction of net purchases.

50

What is a purchase discount?

Purchase discounts represent reductions in the amount to be paid if remittance is made within a designated period of time.

51

What is the journal entry for purchases under the gross method with purchase discounts?

Debit: Purchases
Credit: Accounts Payable

52

What is the journal entry for payment under the gross method with purchase discounts?

Debit: Accounts Payable
Credit: Purchase Discounts
Credit: Cash

53

What is the journal entry for final payment under the gross method with purchase discounts?

Debit: Accounts Payable
Credit: Cash

54

What is the journal entry for purchases under the net method with purchase discounts?

Debit: Purchases
Credit: Accounts Payable

55

What is the journal entry for payment under the net method with purchase discounts?

Debit: Accounts Payable
Credit: Cash

56

What is the journal entry for the final payment under the net method with purchase discounts?

Debit: Accounts Payable
Debit: Interest Expense
Credit: Cash

57

What is the average cost method?

The average cost method assumes that items sold in ending inventory come from a mixture of all the goods available for sale.

58

What is the FIFO method?

The FIFO method assumes that items sold are those that were acquired first.

59

What is the LIFO method?

The LIFO method assumes that the items sold are those that were most recently acquired.

60

What is LIFO Liquidation?

LIFO Liquidation is the decline in inventory quantity during the period.

61

If costs have been __________, LIFO liquidations produce __________ net income than would have resulted if the liquidated inventory were included in cost of goods sold at current costs.

increasing (decreasing)
higher (lower)

62

What is Dollar-Value LIFO?

It extends the concept of inventory pools by allowing a company to combine a large variety of good into one pool.

63

__________ units are not used in calculating ending inventory. (Dollar-Value LIFO)

Physical

64

Instead, the inventory is viewed as a __________ of value instead of a physical __________ of goods. (DVL)

quantity

65

Instead of layers of units from different __________, the DVL inventory pool is viewed as comprising of layers of dollar value from different __________.

purchases
years

66

What are the advantages of Dollar-Value LIFO (DVL)?

1. Simplifies the record-keeping process compared to unit LIFO because no information is needed about unit flows.
2. It minimizes the probability of the liquidation of LIFO inventory layers.
3. The method can be used by firms that do not replace units sold with new units of the same kind.

67

What is Lower of Cost or Market (LCM)?

It recognizes the losses in the period that the value of inventory declines below its cost.

68

The LCM approach to valuing inventory was developed to avoid reporting inventory at an amount __________ than the benefits it can provide.

greater

69

What is net realizable value (NRV)?

It is the amount of cash the company expects to actually collect from customers.

70

How do you calculate net realizable value (NRV)?

Selling Price minus Any costs of completion, disposal, and transporation

71

What is the journal entry for inventory write-down in relations to NRV?

Debit: COGS or Loss on Write-Down of Inventory
Credit: Inventory

72

Why is the Gross Profit method useful in inventory estimation?

1. In determining the cost of inventory that has been lost, destroyed, or stolen.
2. In estimating inventory and COGS for interim reports, avoiding the expense of a physical inventory count.
3. In auditor's testing of the overall reasonableness of inventory amounts reported by clients.
4. In budgeting and forecasting.

73

What is the Retail Inventory Method?

It uses the cost-to-retail percentage based on a current relationship between cost and selling price.

74

How do we calculate the cost-to-retail percentage using the Average Cost Method?

COGAS of Cost/ COGAS of Retail

75

How do we calculate the cost-to-retail percentage using the conventional retail method (Average LCM)?

Markdowns are not included in COGAS of Retail

76

How do we calculate the cost-to-retail percentage using the LIFO Retail Method?

We exclude beginning inventory from COGAS of Cost and COGAS of Retail

77

How do we use the Dollar-Value LIFO Retail Method?

1. We use the LIFO Retail Method to calculate the cost-to-retail percentage
2. We use cost indexes to compare the retail ending inventory with the retail beginning inventory

78

What are the steps in changing an inventory method?

1. Revise Comparative Financial Statements
2. Ensure that the appropriate accounts are adjusted
3. A disclosure not provides additional information

79

What are inventory errors?

Inventory errors include the over or understatement of ending inventory due to a mistake in the physical count or a mistake in pricing inventory quantities.

80

If an inventory error is discovered in the same accounting period it occurred, the original erroneous entry should simply be __________ and the appropriate entry _________.

reversed
recorded

81

If a __________ error is discovered in an accounting period subsequent to the period in which the error was made, any previous years' financial statements that were incorrect as a result of the error are __________ restated to reflect the correction.

material
retrospectively

82

What is cash?

Cash includes currency and coins, balances in checking accounts, and items acceptable for deposit in these accounts, such as checks and money orders received from customers.

83

For a Bank Reconciliation, what do you add and subtract from the Bank Balance?

ADD: Deposit in Transit
ADD: Error
SUBTRACT: Outstanding Checks
SUBTRACT: Error

84

For Bank Reconciliation, what do you add and subtract from the Book Balance?

ADD: Interest Revenue
ADD: Bank Collection
ADD: Error
SUBTRACT: Bank Service Charges
SUBTRACT: Electronic Fund Transfer (EFT)
SUBTRACT: Non-sufficient Funds (NSF) Checks
SUBTRACT: Error