is (1) useful in investment and credit decisions, (2) useful in assessing cash flow

prospects, and (3) about company resources, claims to those resources, and changes

in them.

2.) Define “generally accepted” in GAAP

The common set of standards and procedures.  “generally accepted” means either that an authoritative accounting rule-making body has established a principle of reporting

 in a given area or that over time a given practice has been accepted as appropriate because of its universal application.

3.) Identify to whom corporations are required to submit annual reports

Shareholders, customers, creditors. 

4. List organizations instrumental in creating financial accounting standards

1. Securities and Exchange Commission (SEC)

2. American Institute of Certified Public Accountants (AICPA)

3. Financial Accounting Standards Board (FASB)

6. Cite the primary objective of financial accounting

            To provide financial statements to help external users analyze an organization's activities.

7.) Identify the accounting concept/assumption underlying accruals

(1) economic entity, (2) going concern, (3) monetary unit, and (4) periodicity. 

-The economic entity assumption means that economic activity can be identified with a particular unit of accountability.

            -Most accounting methods rely on the going concern assumption—that the company will have a long life.

Money unit assumption - assume dollar has a stable value (in spite of inflation)

periodicity (or time period) assumption implies that a company can divide its economic activities into artificial time periods.

The accruals concept is used in preparing financial statements such as the profit and loss account and the balance sheet. The accruals concept dictates that income or revenues should be recognized in the accounts when they are earned and not when cash is received

Materiality: Anything that will change assets by 10% or net income by 10%.

 In short, it must make a difference or a company need not disclose it.

You recognize an asset on the books when you have control over an economic resource - when you combine two entities with stuff.  Assets recognized when earned collectable, when you control a benefit.         

            Revenue recognition principle: A company generally recognizes revenue when (a) realized or realizable and (b) earned.
            Expense recognition principle: As a general rule, companies recognize expenses when the service or the product actually makes its contribution to revenue (commonly referred to as matching).

Define “relevant”

To be relevant, accounting information must be capable of making a differ- ence in a decision

predictive value - predicts ultimate outcome of past, present and future events (forecasting annual earnings)

Relevant info has feedback value- helps users confirm or correct prior expectations (feedback on past performance)

11) Describe the difference between comprehensive income and

      income from continuing operations.

Comprehensive Income: Change in equity (net assets) of an entity during

a period from transactions and other events and circumstances from nonowner

sources. It includes all changes in equity during a period except those resulting

from investments by owners and distributions to owners.

Income from continuing operations: includes revenues, expenses, gains and losses that will probably continue in future periods.

-Revenues are inflows of resources resulting from providing goods or services to customers.

-Expenses are outflows of resources incurred in generating revenues.

-Gains and losses are increases or decreases in equity from peripheral or incidental transactions of an entity.

-Income tax expense is reported separately because of its importance and size.

            The difference between net income and comprehensive income is known as other comprehensive income.

            Other comprehensive income includes unrealized gains and losses on certain investments in securities, foreign currency items, and certain pension liability adjustments.

Money unit assumption - assume dollar has a stable value (in spite of inflation)

Calculate present value of a series of cash flows

The present value of an annuity is the single sum that, if invested at compound interest now, would provide for an annuity (a series of withdrawals) for a certain number of future periods.

Calculate Present Value, given future value ==>PV=FV(PVF5, 11%)=$83,253/(1.11^5)=$84,253*(.59345)=$50,000

Example: rental receipts of $6,000 are received once every five years and are discounted at 12%.  What is the present value of all these receipts?

Present value of an ordinary annuity = R (PVF-OAn,i) = $6,000 (PVF-OA5,12%)

= $6,000 (3.60478) = $21,628.68

PVF-OA is calculated by 1.12^5 = 1.76234, 1/1.76234=0.5674, 1-0.5674=0.4326, 0.4326/12%=3.604

The present value of an ordinary annuity is a value is PVF-OA.  If PVF-OA is $3.60 as in this problem, that means that if you invest a single sum of $3.60 today at 12% interest for 5 periods, you can withdraw $1 every year for the next 5 yeras.  Since R (periodic rent) is $6,000 for this problem, an old guy who puts in $21,628 of his savings now into a bank today can get payments of $6,000 each year for the next 5 years ($30,000 total).  

Another way to solve is find PV, or $6,000*(1.12^5), take the difference from the PV and R ($6,000), then divide by the interest rate (0.12)

Future value will be given to you

FV*1/(1+i)^n

or FV*1/1.XX^n, (XX is the interest rate, n is number of periods)

17) Cite the accounting principle underlying “Allowance for Uncollectibles”

1 DIRECT WRITE-OFF METHOD. No entry is made until a specific account has

definitely been established as uncollectible. Then the loss is recorded by crediting

Accounts Receivable and debiting Bad Debt Expense. This method is not

GAAP.

2 ALLOWANCE METHOD. An estimate is made of the expected uncollectible

accounts from all sales made on account or from the total of outstanding receivables.

This estimate is entered as an expense and an indirect reduction in

accounts receivable (via an increase in the allowance account) in the period in

which the sale is recorded. This method is GAAP.

25. Define “FOB shipping point” and “FOB destination”

25. Define “FOB shipping point” and “FOB destination”

For example, a company like Walgreens determines ownership by applying the “passage

of title” rule. If a supplier ships goods to Walgreens f.o.b. shipping point, title passes

to Walgreens when the supplier delivers the goods to the common carrier, who acts as

an agent for Walgreens. (The abbreviation f.o.b. stands for free on board.) If the supplier

ships the goods f.o.b. destination, title passes to Walgreens only when it receives the

goods from the common carrier. “Shipping point” and “destination” are often designated

by a particular location, for example, f.o.b. Denver.

.Identify items of “cash”

Cash and cash equivalents are a) ready convertible to cash, b) so near their maturity that they present insignificant risk of changes in interest rate (investments with maturities of 3 months or less)

Examples: Cash, pretty cash, short-term paper w/3 months or less maturity.  Compensating balance are cash but classified separately.  

Allow for Uncollectibles - the accounting framework assumption is the matching principle (at the point of time the event takes place)

18. Net realizable value - accounts receivable minus allow for uncollectibles

19. Calculate the allowance adjustment: % sales E7-7

20.      “                                                  : % accounts receivable

both methods

Debit Bad debts Expense 

Credit Allow for Doubt Acct

%sales method matches cost with revenues sales because it relates the charge to the period which company records sale.  

% of receivables method simply estimates % of receivables without specifying accounts.  It reasonably estimates receivables' realizable value, not doesn't match cost and revenues.  It matches A/R to Allow for Doubt Acct (balance sheet approach), 

21. Record factoring of receivables with and without recourse

When buying receivables without recourse, the purchaser assumes the risk of col- lectibility and absorbs any credit losses. The transfer of accounts receivable in a non- recourse transaction is an outright sale of the receivables both in form (transfer of title) and substance (transfer of control). 

Cash Due from Factor Loss on Sale of Receivables

Accounts (Notes) Receivable

460,000 25,000* 15,000**

Accounts (Notes) Receivable Due to Crest Textiles Financing Revenue Cash

500,000

500,000

25,000

15,000 460,000

Net Sales / Average Trade Receivables (net) =  A/R Turnover

Divide A/R turnover by 365 days to get DAYS TO COLLECT RECEIVABLE

Calculate the correct cash balance from a bank reconciliation

Balance per bank statement (end of period) Add: Deposits in transit

Undeposited receipts (cash on hand) Bank errors that understate the bank statement balance

Deduct: Outstanding checks Bank errors that overstate the bank statement balance

Correct cash balance

24. An inventory item is an item on consignment for sale, if its shipped by me FOB destination, it is my goods.  Did the customer sign off the receivable?

25. Define “FOB shipping point” and “FOB destination” text

25. FOB shipping point - when title transfer, risk of loss transfers

FOB destination - my goods until the customer signs the receivable 

26. Classify consignment goods as inventory (or not reported)

27. Analyze effects of inventory errors on income and retained earnings E8-5,11

27. If I overstate my ending inventory, I understate my COGS, net income is overstated

importance question - Discrimination on certain test items

Difference in grade rather than performance

Overstatement of ending inventory - overstate goods available, undersate COGS,

Retained earning is correct if two errors cancel out

28. Record perpetual inventory entries

28. Perpetual inventories - debit inventory, credit A/P

Periodic - debit purchases, credit

29. Describe the use/restrictions of LIFO for tax & financial reporting text

30. Contrast effects of FIFO & LIFO on income and retained earnings

29. FIFO restrictions - can you change it?  Yes.  LIFO - you can only use it for tax purposes.  LIFO is lower inventory, lower taxes.  If you use it for lower taxes, you must use it for reporting.

You can switch it once in the life of a corporation.

30. LIFO is lower in prices, inventory, net income, taxes.  

31. Calculate the “cost” of inventory. What is included?

31. Calculate the “cost” of inventory. What is included? E8-1

32. Calculate LIFO inventory and cost of goods sold E8-13

33. Define “market” in lower-of-cost-or-market text;E9-2

34. Describe effects of the direct method adjusting LCM inventory text

35. Calculate “market” in LCM E9-2

36. Calculate LCM E9-2

37. Estimate inventory via gross profit method E9-13

38. Calculate days to sell inventory BE9-9;p.444

39. Describe the relationship between “net realizable value” & “market” text

40. Calculate LCM (conventional) retail value of inventory E9-20

41. Journal entry for factoring accounts receivable with recourse.

42. Compute inventory cost by dollar value LIFO

31. Cost of inventory - Freight in is cost of inventory, freight out is not.  Sales discounts is not.  Purchases discounts is.  

All costs necessary to replace item in operation (delivery cost, modification cost) is cost of inventory 

32. LIFO inventory - 

33. Market - is replacement cost, ceiling (selling price minus cost of disposal), floor (net realizable value minus gross profit margin).

Not given, you must calculate lower-of-cost-or-market

34. Direct method- write down of invetory from cost to market.  

Journal entry - Debit 

How do you know when you know it?  When you can work a question without looking at notes or the book (Brief exercises, exercises, etc.)

38. Days to sell inventory - 365 days / inventory turnover.  

39. Market value is price of selling the good.  Net realizable value is price minus cost of disposal.  Market value is always higher.

40. LCM (congenital) retail value - mark-ups are on the top,  and mark-downs are below

If it were LIFO, both are included, but only for the LIFO layer, not for beginning inventory

41. same as 18 or 19

42. Inventory by dollar value LIFO - where you took the inventory at end of year, at retail price, divided it by index to get base year a dollar, reinflated them with the index (thats dollar value LIFO)

bonus questions - added on if you get any of them right.