1
Q
What are demand deposits?
A
Monies on deposit with a financial institution that can be withdrawn without notice or penalty.
2
Q
What are requirements for financial assets to qualify as a cash equivalents?
A
Must meet both the convertibility and insignificant risk test.
3
Q
What are examples of cash equivalents?
A
- Term deposits
- Guaranteed investment certificates
- Treasury bills (with a relatively short maturity)
- Banker’s acceptances
- Money Market Mutual Funds
4
Q
What are trade accounts receivable?
A
Receivables arising from ordinary sales transactions.
More commonly refered to as accounts receivable.
5
Q
When are accounts receivable recognized?
A
When the selling party has transferred the risks and rewards of ownership of the goods sold to the purchasing party.
6
Q
Are short-term accounts receivable measured at their transaction price or at fair value plus transaction costs?
A
Transaction price.
This is an exception as most financial assets, including receivables, are initially measured at fair value plus transaction costs.
7
Q
What are the 2 methods for recognizing discounts?
A
- Gross method
- Net method
The gross method is more commonly used.
From a theoretical perspective the net method should be used.
8
Q
What is the “lower of cost or net realizable value” approach?
A
A methodology for valuating receivables where they are valued at their transaction price less an allowance for expected losses.
9
Q
What are 3 methods for bad debts?
A
- Direct write-off method
- Income statement approach (%age of credit sales method)
- Balance sheet approach (aging method)
10
Q
What is the direct write-off method?
A
An approach for doubtful accounts only when acccounts are known to be uncollectible, rather than estimated to be uncollectible.
- Method generally not appropriate as it does not adjust the AR balance to the lower of cost or net realizable value and it may not match the expense of the write-off to revenue in the period that it is earned (p. 6)
DR Bad Debt
CR Accounts Receivable
11
Q
Why do we use Allowance for Doubtful Accounts versus updating A/R?
A
- A/R is like a control account and shouldn’t be changed.
- Also when we think we won’t collect all, we don’t actually know from whom we won’t collect, so we can’t just pick someone. Instead we use AFDA.
12
Q
What are the 3 types of entries in AFDA?
A
- Allowance entry (at end of each accounting period): where we estimate bad debt expense.
- DR Bad Debt Expense
- CR AFDA
- DR Bad Debt Expense
- Write-off (when a specific customer is known): Removing receivable for customer.
- DR AFDA
- CR A/AR
- DR AFDA
- Recovery (when customer whose account has been written off has come in to pay):
- DR A/R
- CR AFDA
- DR Cash
- CR A/R
- DR A/R
13
Q
What is the criteria for A/R derecognition?
A
- The contractual rights to the cash flows from the receivable has expired, or
- The seller transfers the receivable to the buyer under specific conditions as outlined in IFRS 9.
14
Q
What are the 3 categories of inventory?
A
- Raw materials (materials to be used in production or in rendering services)
- Work-in-progress (goods in the process of production)
- Finished goods (goods held for sale in the ordinary course of business)
15
Q
What are the 2 systems to track inventory costs?
A
- Perpetual
- Periodic
16
Q
What is included in the costs of inventory?
A
All costs of purchase, costs of conversion, and other costs incurred in bringing the inventories to their present location and condition.
17
Q
What is included in the costs of purchase?
A
- Purchase price
- Import duties and other non-recoverable taxes
- Transportation in
- Other cost directly attributable to the acquisition of finished goods, materials and services
Less:
- Trade discounts
- Rebates
- Other similar items (such as subsidies)
- Recoverable taxes (e.g., GST, HST)
18
Q
What is included in the costs of conversion?
A
- Direct costs (such as direct labour and direct materials).
- An allocation of fixed and variable production overhead that are incurred in converting materials into finished goods.
19
Q
What is net realizable value?
A
Estimated selling price in the ordinary course of business less the estimated costs of completion and the estimated costs necessary to make the sale.
Caveats:
- Usually written down on item-by-item basis however a group of similar items may be grouped together
- Net realizable value of the quantity of inventory held to satisfy firm sales or service contracts is based on contract price
- Materials and other supplies held for use in the production of inventories are not written down below cost if the finished products in which they will be incorporated are expected to be sold at or above cost
20
Q
What are the 2 primary methods for calculating bad debt for the period?
A
- Income statement approach (%age of credit sales)
- Bad debt expense is a function of credit sales
- You are solving for the bad debt amount
- Balance sheet approach (aging method)
- Focuses on determining the net realizable value of accounts receivable.
- You are solving for the ending AFDA amount
21
Q
In looking at the journal entries, what is the difference between the income statement and balance sheet approaches for bad debt?
A
- Income statement approach, you are looking for value for bad debt
- Balance sheet approach, you are looking for the result in AFDA
22
Q
What is the balance sheet approach for bad debt?
A
In the balance sheet approach the goal is to end up with an AFDA that equals the amount of outstanding accounts receivable expected to be written off.
- Final AFDA is determined by management
- Solve for bad debt expense
23
Q
What is the income statement approach for bad debt?
A
Bad debt is calculated based on a percentage of sales.
24
Q
What are 3 reasons for derecognizing accounts receivable?
A
- They are collected in normal course of business
- They are written off
- They are transferred or sold to a 3rd party (factoring)
25
What are 3 common ways companies can make money from accounts receivable?
1. Pledge them as security and borrow against them
2. Sell them without recourse to a factor - risks and rewards of ownership have been transferred
* DR Cash
* DR Expense (cost of selling)
* CR A/R
3. Sell them with recourse to a factor - purchaser can require the seller to reimburse them for losses over a predetermined level.
* DR Cash
* CR Loan
26
What is a factor?
A company that buys accounts receivable from other companies.
27
What are non-trade (other) receivables?
* Advances to officers and employees
* Dividends receivables
* Income tax receivables
28
When are notes receivables recognized?
When the entity becomes party to the contractual provisions of the instrument.
29
How are notes receivables initially measured?
* At fair value plus costs; or
* At present value of future cash flows discounted at imputed rate.
30
How are notes subsequently measured?
At the amortized cost.
* IFRS: effective interest method
* ASPE: effective interest method or straight-line method
31
What is the imputed interest rate?
The more easily determinable of:
* The prevailing rate for the same or similar note
* A rate of interest that discounts the nominal amount of the note to the current cash sales price of the goods or services for which it was traded
32
How are notes receivable derecognized?
1. Collection in normal course of business:
* _DR Cash_
* _CR Notes Receivable_
2. Write off. The gross amount would include the principle balance with any accrued interest.
* _DR Bad Debt Expense_
* _CR Notes Receivable_
33
What do you journalize for notes receivables?
* Initial notes receivable amount at present value:
* _DR Notes Receivable_ xx-at present value
* _CR Service Revenue_ (?)
* At year end, journalize the interest revenue:
* _DR Notes Receivable_ (amount from above x interest rate x #of days/days in year)
* _CR Interest Revenue_
* __At maturity date of note receivable:
* _DR Notes Receivable_: amount initially identified x interest rate x 365/365 (because it's a year) - interest revenue already recognized above
* _CR Interest Revenue___
* _DR Cash_: original amount
* _CR Notes Receivable_
34
What is the difference between nominal and effective interest rates?
**Nominal Interest Rate:** The periodic interest rate multiplied by the number of periods per year. For example, a nominal annual interest rate of 12% based on monthly compounding means a 1% interest rate per month (compounded).
**Effective Interest Rate:** The effective annual interest rate is a way of restating the annual interest rate so that it takes into account the effects of compounding.
35
What is the effective interest rate?
The interest rate that results in a present value of the financial instrument equal to the initial measurement value of the asset.
This is the rate that we calculate for as I (using financial calculator).
36
How would you calculate compounding monthly?
Example: someone signs a note saying they will pay 25,000 in two years at an interest rate of 6% compounded monthly and we are asked to compute the PV?
N = 2x12=24, interest rate = 6%/12=0.5% and FV = 25,000
Note: if it didn't say compound monthly, then you would do N = 2, interest rate = 6% and FV = 25,000
37
What is the journal entry to calculate COGS?
DR COGS
DR Inventory
CR Purchases
38
What is the difference between gross and net methods for an invoice paid _within_ discount period?
**Gross:**
DR Inventory 100,000
CR Accounts payable 100,000
DR Accounts payable 100,000
CR Cash 98,000
Inventory 2,000
**Net:**
DR Inventory 98,000
CR Accounts payable 98,000
DR Accounts payable 98,000
CR Cash 98,000
39
What is the difference between gross and net methods for an invoice _not paid_ within discount period?
**Gross:**
DR Inventory 100,000
CR Accounts payable 100,000
DR Accounts payable 100,000
CR Cash 100,000
**Net:**
DR Inventory 98,000
CR Accounts payable 98,000
DR Accounts payable 98,000
DR Purchase discounts lost (interest expense) 2,000
CR Cash 100,000
40
If actual production is less than normal capacity, is overhead based on actual or normal capacity?
Normal Capacity
If actual production \> normal capacity then overhead is based on actual capacity.
(notes p.25-26)
41
Are selling costs, storage costs and borrowing costs part of the cost of inventory?
No, these are usually expenses when incurred.
42
How is the reversal of the inventory writedowns shown?
As a reduction in expenses (generally as reduction in COGS)
43
What is costs of goods available for sale?
Opening inventory plus the costs of inventory purchased and/or manufactured
BI + P
Remember that P includes freight and excludes purchase discounts and returns.
44
Can last-in first-out be used to calculcate inventory costs?
No!
Under IFRS and ASPE it is not permitted. It is permitted in the states.
45
With specific identification, is there a difference with the allocation of cost of goods available for sale to cost of goods sold and closing inventory in the perpetual and periodic inventory system?
None
Same for first in, first out
46
What is the difference in determining the cost of goods sold under the weighted average system for periodic and perpetual inventory?
* **Periodic Inventory**: one average is determined for the entire period
* **Perpetual Inventory**: a new average is determined each time a purchase is made.
47
When would you estimate inventory?
1. Interim financial statements
2. Insurance purposes
3. Test accuracy of inventory costs derived by another method
48
What are 2 methods for estimating inventory?
* Gross profit method
* Assumed stable gross margin
* Cannot be used to estimate the value of year-end inventory
* Retail method
* Appropriate for retail stores that use a standard markup rate
* Acceptable method to value year-end inventory under IFRS and GAAP
* Must still do physical inventory count.
49
What are the steps to estimate inventory using the **_gross profit_** method?
1. Obtain the historic (or expected) gross profit percentage.
2. Calculate the cost of goods available for sale (CGAS) for current period. (BI + Purchases + Freight-in)
3. Gross profit (GP) = GP % \* net sales for the period.
4. COGS = Net sales – GP
5. Ending inventory = CGAS – COGS
50
What are the steps to estimate inventory using the **_retail_** method?
1. Calculate the goods available for sale at both cost and retail (include net markups but not markdowns).
2. Calculate the cost ratio as follows: CGAS at cost/CGAS at retail (includes markups but excludes markdowns) - leave out markdowns to have a lower ratio (more conservative)
3. Determine ending inventory at retail as follows: Goods available for sale at retail (after net markdowns) – net sales
4. Ending inventory at cost = cost ratio \* ending inventory at retail
51
If an company overstates the value of final inventory, how will this affect the income before income taxes?
It will overstate it by the same amount
52
When calculating present value, is PV positive or negative if you are receiving money in the future?
PV is negative
* If you are **_receiving money in the future_**, the future value is positive and the present value is negative.
* If you will be **_paying money out in the future_**, then the present value is positive and the future value is negative.
53
When determining journal entries for notes payable, what is a good approach to confirm you are doing it correctly?
Set up 3 columns for:
1. Payment
2. Interest
3. Notes Receivable/Notes Payable
The result should match what you are solving for.
54
What is included in the cost of inventory?
All costs of purchase, costs of conversion and other costs incurred in bringing the inventories to their present location and condition.
*Financial Accounting, 5th Edition. Pearson Learning Solutions, 1/2015. VitalBook file.*
55
Are selling costs included in the sales amount?
No
See inventory practice problem 4.
56
Why are markdowns excluded from the cost ratio calculation?
By leaving out net markdowns, the denominator for the cost ratio is larger, and therefore the cost ratio is lowered. This helps establish a value for inventory that is conservative and approximates its net realizable value.
57
What are employee discounts considered as?
Markdowns
Subtract from cost of goods available for sale to get cost of goods at retail.
*Inventory Practice Problem 8*
