Accounting Accounts Receivable 0

Objectives Identify different types of long-term operational assets. Determine the cost of long-term operational assets. Explain how different depreciation methods affect financial statements. Determine how gains and losses on disposals of long-term operational assets affect financial statements. Explain how expense recognition for natural resources (depletion) affects financial statements. Explain how expense recognition for intangible assets (amortization) affects financial statements. Understand how expense recognition choices and industry characteristics affect financial performance measures. Long-lived Assets Tangible

Plant. , Property, Equipment (depreciate); Natural Resources (deplete); Land Intangible Identifiable Useful Lives Indefinite Useful Lives Intangible assets or amortized verses depreciated or depleted Life Cycle of Operational Assets Acquire Funding Buy Assets Use Asset Retire Asset Depreciation Double-declining-balance – produces more depreciation expense in the early years of an asset’s life, with a declining amount of expense in later years. Determine the straight-line rate of depreciation. Multiply the straight-line rate times two. Multiply the double-declining rate by the book value of the asset at the beginning of the period.

Straight-line method – the same amount of depreciation is taken each accounting period. (Asset Cost – Salvage Value) / Useful Life = Depreciation Expense Units-of-Production – produces varying amounts of depreciation in different accounting periods depending upon the number of units produced. (Cost – Salvage Value) / Total Estimated Units of Production = Depreciation Charge per Units of Production Depreciation Charge * Units of Production = Depreciation Expense Book Value = Cost – Accumulated Depreciation Depletion of Natural Resources follows units of production model [pic] [pic] Goodwill

The excess of cost over fair value of net tangible assets acquired in a business acquisition. Historical Cost Concept An asset is recorded at the amount paid for it, including costs necessary to get the item to the location and condition for its intended use. CHAPTER 5 Objectives Explain how the allowance method of accounting for uncollectible accounts affects financial statements. Determine uncollectible accounts expense using the percent of revenue method. Determine uncollectible accounts expense using the percent of receivables method. Explain how accounting for notes receivable and accrued interest affects financial statements.

Explain how accounting for credit card sales affects financial statements. Identify and measure the cost of extending credit to customers. Percent of Receivables Method Alternative to percent of revenue method Focuses on estimating the most accurate amount for the balance sheet account, Allowance for Doubtful Accounts The longer an account receivable is outstanding, the less likely it is to be collected Aging of accounts classifies all receivables [pic] Characteristics of Notes Receivable Maker Borrower responsible for paying note on due date Payee Loans money to maker; expects payment of principal and interest

Principal Amount of money loaned Credit Card Sales [pic] [pic] Accounts Receivable Turnover = Sales / Accounts Receivable Average Days to Collect Accounts Receivable = 365 / Accounts Receivable Turnover Operating Cycle The operating cycle is the average time it takes a business to convert inventory to accounts receivable plus the time it takes to convert accounts receivable back into cash. It is the average number of days to collect accounts receivable + the average number of days to sell inventory. Net Realizable Value- the amount of receivables a company estimates it will actually collect CHAPTER 4 Objectives

Explain how different inventory cost flow methods (specific identification, FIFO, LIFO, and weighted average) affect financial statements. Demonstrate the computational procedures for FIFO, LIFO, and weighted average. Identify the key elements of a strong system of internal control. Identify special internal controls for cash- Self study Prepare a bank reconciliation. – Selfstudy Explain the importance of inventory turnover to a company’s profitability. Inventory Cost Flow Methods Specific Identification When a company’s inventory consists of many high-priced, low-turnover goods specific identification is more practical.

First-in, First-Out (FIFO) The first-in, first-out cost flow method requires that the cost of the items purchased first be assigned to Cost of Goods Sold. Last-in, First-Out (LIFO) The last-in, first-out cost flow method requires that the cost of the items purchased last be assigned to Cost of Goods Sold. Weighted Average The weighted average cost flow method assigns the average cost of the items available to Cost of Goods Sold. Physical Flow Our discussions about inventory cost flow methods pertain to the flow of costs through the accounting records, not the actual physical flow of goods.

Cost flows can be done on a different basis than physical flow. Effect of Cost Flow on Income Statement [pic] [pic] Inventory Turnover Measures how quickly a company sells its merchandise inventory. Inventory turnover = Cost of Goods Sold / Inventory Average Number of Days to Sell Inventory Measures how many days, on average, it takes to sell inventory. Average Number of Days to Sell Inventory = 365 / Inventory Turnover Fraud A dishonest act by an employee that results in personal benefit to the employee at a cost to the employer.

Three factors that contribute to fraudulent activity are: Opportunity, Financial Pressure, and Rationalization. Key Features of Internal Control Separation of Duties When duties are separated, the work of one employee can act as a check on the work of another employee. The likelihood of fraud or theft is greatly reduced. Quality of Employees The ability of cross-trained employees to substitute for one another prevents disruptions in the workplace. Job rotation may help relieve boredom and increase productivity. Bonded Employees A fidelity bond provides insurance that protects a company from loss caused by employee dishonesty.

To become bonded, an employee’s background is investigated. Required Absences An employee may be able to cover up fraudulent activities if they are always present at work. All employees should be required to take regular vacations and their duties should be rotated periodically. Procedures Manual Accounting and other important procedures should be written in a procedures manual. Periodically, management should conduct an investigation to see that required procedures are actually being followed. Authority and Responsibility General authority applies to all members of the organization.

For example, all employees are required to fly coach and purchase airline tickets from a specific vendor. Specific authority applies only to a specific position within the organization. For example, all checks must be cosigned by the Controller and Treasurer. Prenumbered Documents Prenumbered forms are used for all important documents such as checks, purchase orders, receiving reports, and invoices. The use of prenumbered forms helps keep track of all forms issued during a particular period. Physical Control All companies should maintain adequate physical control over valuable assets that may be misappropriated.

For example, inventory should be properly stored in a secure location. Serial numbers should be placed on all valuable assets to assist in a physical count of these assets. Performance Evaluations Internal controls should include independent verification of employee performance. A physical inventory should be taken at least annually. An independent reconciliation between the general ledger balance and inventory should be compared to the inventory count. Auditors should evaluate the effectiveness of the control system. CHAPTER 3 Identify and explain the primary features of the perpetual inventory system;

Show the effects of inventory transactions on financial statements; Explain the meaning of terms used to describe transportation costs, cash discounts, returns or allowances and financing costs; Explain how gains and losses differ from revenues and expenses; Compare and contrast single and multistep income statements; Show the effect of lost, damaged, or stolen inventory on financial statements; Use common size financial statements and ratio analysis to evaluate managerial performance; Identify the primary features of the periodic inventory System (Appendix)-Self-Study

FOB- Free on Board [pic] Gross Margin Percentage This measure indicates how much of each sales dollar is left after deducting the cost of goods sold to cover expenses and provide a profit. Gross Margin Percentage = Gross Margin / Net Sales Net Income Percentage (Return on Sales) Net income expressed as a percentage of sales provides insight as to how much of each sales dollar is left as net income after all expenses are paid. Net Income Percentage = Net Income / Net Sales APPENDIX (Credit/Debit Material) [pic] [pic] [pic] [pic]