ACCT 3110- Exam 3 - Lecture notes 6-7 PDF

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Professor Jeff Jones, Everything covered in chapter 6 & 7 exam material...

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ACCT 3110 - Chapter 6 What is Cash? >Includes coins, currency, balance of checking accounts, and basically any unrestricted fund obtained; must be immediately available > must be available to pay current obligations >most liquid, easiest to steal

**Need to know how to classify - depends on contractual and legal agreements - are the funds available immediately? - are the any restrictions? Short term= original maturities of less than 90 days Cash Equivalent- short-term, highly liquid investments; readily convertible into cash, very little risk due to changes in interest rates; short term maturities. Often reported on the balance sheet combined with cash - Reported as cash, but not really cash Cash Controls > ensures that the financial statements are reliable, that is operations are effective and efficient and that its complying with all applicable laws that it needs to comply with

Reasons for Controls: -Make sure financial statements are accurate - protect from theft Types of Controls - controls over receipts - ex. POS systems, managing cash registers - controls over payments - ex. approval from more than one person when writing checks - Electronic Payments - making all payments by check or electronically so they have an accounting trail - Petty Cash - Bank Reconciliation Petty Cash > keeping a small amount of cash on hand to pay for small cost items > not cash because there’s a restriction, it has to be paid for postage > cash equivalent Custodian- the person given access to handling the money Imprest Petty Cash System- only way the cash goes out is if a receipt comes in; at any point, the contents will always equal the petty cash fund, either in cash or cash + receipts Cash Short or Over Account- Miscellaneous/Other account; Debit if short, Credit if over Bank Reconciliation > Comparing a bank statement and accounting records to figure out why there is a difference Timing Differences- when the bank knows something or the company knows something, but the other party doesn’t know it NSF Check= Nonsufficient Funds, the check bounced

Sales Returns When the Sale is made Accounts Receivable Sales Revenue Return Liability

100 95 5

(expected returns)

When the item is returned (and our estimation was correct) Return Liability 5 Cash 5 When the item is returned (and our estimation is off) Return Liability 5 Sales Revenue 3 Cash

8

(what they actually

returned) Bad Debt > if credit is granted, there will be bad debt Allowance Method- GAAP method, preferred Direct Write-Off Method- Non-GAAP method; don’t write off debt until you actually know the debt is bad Methods to Calculate Allowance for Doubtful Accounts 1. Income Statement Approach a. Est amount of Bad Debt expense as a % of an income statement # 2. Balance Sheet Approach - % of Ending Accounts Receivable a. Est amount of Bad Debt expense base on a Balance Sheet # 3. Balance Sheet Approach- Aging of Accounts Receivable Assignment and Factoring of Receivables - Complete sell of accounts receivable - If a company surrenders the control of their receivables, then they have sold their receivables to a third party - secured borrowing - If it has transferred the receivables but not surrendered control, it is a secured borrowing

Did the company surrender control 1. The receivable has to be isolated from other receivables 2. The other party has complete control 3. The company cannot buy the receivable back Chapter 7 What is Inventory > Items that a company is holding for sale to customers Manufacturing Company Inventories: - Raw Material Inventory-raw materials, inputs - Work-in-Process Inventory- started production but not finished - Finished Goods Inventory- finished product, ready for sale Merchandising Company Inventories: - Merchandising Inventories Flow of Inventory Costs: -

Merchandiser: Beg Inventory + Purchases = CGAS – End Inventory + COGS Manufacturer: Beg Finished Goods Inventory + Cost of Goods Manufactured = CGAS – Ending Finished Goods Inventory = COGS

*Everything available for sell if allocated to either what’s still there or what’s sold How do companies keep track of inventory? - Perpetual Inventory System- continually count inventory, every time inventory comes in or goes out your track it, much greater control over inventory, complex and costly - Periodic Inventory System- Periodically counting inventory, we know what we had available for sale, we know what we still have, everything else must have been sold, simple and low cost How do companies determine Inventory Quantities? – Are Goods Part of Inventory or not? - Goods in Transit- FOB Shipping point (as goods as goods are shipped ownership is transferred to the recipient) FOB Destination (ownership of inventory remains with the seller until the items are received) - Consigned Goods- when there is a consignment arrangement, the consignor retains economic ownership of the assets even though the consignee had physical possession of the items - Product Financing Arrangement- the inventory is not in the buyer’s ownership until the debt to the seller is paid off - Bill and Hold Sales- a sale is made and paid for, but the seller holds the item on their property for the buyer; can be considered a true sale (inventory transferring from the seller to the buyer) if the bill and hold conditions are met - Purchase Obligation- generally a purchase obligation is not the buyer’s inventory until the inventory is purchased and delivered; disclose them in the notes but don’t record How do companies determine inventory costs? - Inventory includes all costs directly or indirectly incurred in bringing an item to its existing condition and location for sale (product vs period costs) - Purchase discounts -gross price vs net price method Cost Flow Assumptions - Specific Identification o Take an actual item of inventory and trace the cost of that item through the entire process; only practical for high dollar-low volume items - First In, First Out (FIFO) o First items bought are first items sold; first items expensed as COGS, last items still in inventory - Last in, First Out (LIFO) o Last items bought are the first items sold; last items bought are expensed as COGS, first items bought are still in inventory (usually results in the lowest amount of taxes) - Average Cost o Cost of items in inventory are an average of first and last items

** when you pick a cost flow assumption you are not constrained by any criteria. The flow of goods doesn’t matter as long as the company is consistent

Gross profit = revenues – COGS Consequences of Alternative Cost Flow Assumptions 1. Income Measurement a. The cost flow assumption should be the one that best matches current cost and revenue 2. Income Tax Effects and the LIFO Conformity Rule a. LIFO produces lower income; LIFO conformity rule prevents you from using LIFO to lower taxes and FIFO to increase revenues; says that you have to use the same method foe taxes and financial reporting 3. LIFO Liquidation a. When you have to liquidate really old inventories then you cannot achieve a good matching because you’re expensing really old costs with new revenues 4. Earnings Management a. LIFO is a method for greater income manipulation than FIFO; If you need to increase revenue, stop buying inventory so you will be expensing really old inventory, the opposite is true for decreasing revenue 5. Inventory Valuation ** in every situation, the average method is always in the middle Disadvantage if LIFO – can end up producing a # that does not accurately match the current cost of inventory with the current replacement value for inventory Primary Reason to Choose LIFO- lower Taxes Primary Reason to Choose FIFO – Increase revenue...