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Accounts Receivable, Bad Debt Allowance, Returns Net Accounts Receivable Gain on sales of assets found in SCF (Operating)

Net AR = AR (Total amount owed to customers) BB = Begin Gross A/R Begin All. Cash Collections Disposal/Sale of PPE BB PPE + Acquired PPE
AFDA (net means it is taking allowance into account) Net Sales Revenue = Gross Sales Other Decreases Sale of PPE = EB PPE
(Debit) Bad Debt Expense 231 Rev. BD Expense Sell merchandise costing $80 for $130, cash
(Cr) Allowance for Doubtful A/C 231 Other Increase Cash (A) 130
(Debit) AFDA 72 EB = End Gross A/R End All. Sales Revenue (R) 130
(Cr) Accounts Receivable 72 (If AR increases, NI on SCF is overstated, and hence Cost of goods sold (E) 80
Increases in AFDA result from new periodic should subtract the change of AR) Inventory (A) 80
estimations of default; decreases in AFDA result Cash Collected in a Period = NR (Sales) Accounts Gain: sold PPE for 250, BV of 190 (orig 200, dep 10)
from permanent write-offs of particular AR Receivable (+ Unearned Revenue Account) Cash 250
Gross Sales = Net Sales (from I/S) + BD Expense Cash Paid to SS = COGS + Inventory Payable Accum Dep 10
= Revenue + Allowance Effect of non-operating transactions on Net AR PPE 200
Cash collected from customers = NR - in net AR = change in Net AR in SCF compared to the change in Gain on Disposal 60
Amt. expected to collect from customers = Net AR Net AR from the B/S Loss: (above) disposed of the PPE for only 150
(found in B/S) = EB + Cash Collections BB Net Credit Cash 150
Total amt. owed to company from customers = Net Loss on Disp 40
Sales Accum Dep 10
AR + AFDA EB Item
Estimating Bad Debt 2 Methods PPE 200
Depreciation and Amortization - + NA
Percentage of Credit Sales Method Transactions that Increase PPE:
b/c subtracted to find NI but
Average % of Credit Sales that result in Bad Debt = Acquisitions of PPE by purchase
doesnt affect cash
Total Bad Debt Loses/Total Credit Sales Acquisitions of PPE by self-construction
Accounts Receivable - +
Aging of Accounts Receivable Method Acquisitions of PPE by LT (cap.) lease agreements
Inventory - + Expenditures for improvements and betterments
- Too HIGH Dr. AFDA and Cr. BD Expense (Gain)
Prepaid Expenses - + Foreign Currency Translation Adjustments
- Too LOW Dr. BD Expense (Loss) and Cr. AFDA
Accounts Payable + - Transactions that Decrease PPE:
% of Credit Sales directly compute amount to
Accrued Expense Liabilities + - Depreciation
be recorded as BD Expense on the I/S
Aging compute the final ending balance we Disposal of PPE by sale or abandonment
would like to have in the AFDA on the B/S Depreciation and PPE Permanent impairment of value
Bad Debt Expense = Allowance + Write-Offs Straight Line allocates cost of an asset in equal Foreign Currency Translation Adjustments
- Working Capital (Current Assets Current periodic amounts over useful life To review tangible and intangible A for impairment:
Liabilities) not influenced by Write-Off asset Impairment charges recorded will not impact OCF
account (AR) and contra-asset account (AFDA) (1) Impairment occurs when events or changed
reduced/increase by same amount circumstances cause the estimated future CF (future
Units of Production allocates cost over life based
- Working Capital influenced by Bad Debt Expense benefits) of these A to fall below their BV
on relation of periodic output to total est.output
when BDE recorded, AFDA increases which results in If net BV > estimated FCF, then A is impaired
a decrease in WC AND when BDE recorded, Tax (2) For any A considered to be impaired, companies
Expenses decrease which results in an increase in recognize a loss for the difference between the
WC Net WC = BDE - Taxes Payable assets book value and its fair value
Declining Balance/Accelerated Dep. allocates cost
- Write off has no influence on Net Income - Impairment Loss = Net Book Value Fair Value
over useful life based on a multiple of the straight-
- Bad Debt Expense has an influence on Net Income Recording of 100 impairment charges instead of 0
line rate (Asset more efficient when it is newer)
because BDE reduces income before taxes but also reported in F/S (2 methods)
Dep. = (Cost Accumulated Dep.) * 2 / Useful Life
reduces tax expenses results in a change in NI Lost on impairment150
Accumulated Depreciation, NOT Salvage, used (must
PPE 100
update every year)
Direct Write-Off Method record default when it is (Accumulated depreciation 100)
Asset cannot be depreciated below Book Value
realized the creditor will not pay [incorrect NI]
Acc. Dep. = (Cost BV)*(years held / avg. useful life)
(Debit) Bad Debt Expense $150 Foreign Currency Translation
= BB + Y1 Acc. Amort. + Dep. and Amort. Expenses
(Credit) Accounts Receivable 150 Debit/Credit Accumulated Foreign Currency
(OCF) + Impairment EB Y2 Acc. Amort.
Allowance Method (1) Est. uncollectible A/C Translation Adjustment
Dep. Exp. recognized found in SCF (Operating) or in
Receivable based on history, (2) update Allowance i.e. if Original Cost increases due to a change in
footnotes about depreciable assets
for Doubtful Accounts the exchange rate, debit the increase in PPE and
Dep. method change does not impact OCF because
Retained Earnings will be greater by xxx if company depreciation does not affect cash flow credit accumulated depreciation and Foreign
used direct write-off method instead of allowance, Currency Translation Adjustment
Capital Expenditures increase the productive life,
the xxx figure can be found as the EB of AFDA i.e. if Original Cost decreases due to a change in
operating efficiency, or capacity of the asset and are
New BD Estimations (additions to Bad Debt the exchange rate, debit the accumulated
recorded as increases in asset accounts, not as
Expense) increase AFDA, Write-offs decrease AFDA depreciation and Accumulated Foreign Currency
expenses i.e. Major overhauls, complete
BTNI will be xxx greater if company used direct Translation Adjustment and credit PPE
reconditioning, and major replacements
write-off method instead of allowance, the xxx figure Cash paid to acquire PPE found in SCF (Investing) Always use the exchange rate on last day of year to
= additions charged to expense deductions from convert currencies
BB + New PPE Sales of PPE = EB (BB, EB found in
reserves Always calculate new value compared to oldest,
Footnotes, New PPE found in Investing Cash Flows)
Step Timing Accounts Fin.State. then compare new value to the year prior
Historical Cost of PPE sold/disposed = BB EB +
Affected Effects Comprehensive income due to foreign currency
acquisitions (note: use gross BB and EB, not net)
(1) Record End of BD Net Income translation adjustments can be found from equity
Net BV of PPE sold = Proceeds from sale gain (loss)
estimated period in Expense section of B/S or Statement of SE
bad debts which sales (E) from sale (both figures found in SCF)
Effect of foreign currency translation adjustment on
adjustment are made AFDA (XA) Assets (AR, inventories = SCF in Inv. B/S in Inv.
Net) Accumulated Depreciation
Decrease in foreign currency translation adjustment
(2) Identify Throughout AR (A) Net Income Depreciation on PPE Sold Beginning Balance
Improvements (if charged Depreciation on PPE (from Comprehensive Income xxx
and write period as N/A
off actual bad debts to Accumulated Dep.) St. of Cash Flows) PPE xxx
AFDA (XA) Assets (AR,
bad debts realized Net) N/A Ending Balance
Inventory
Cost of Beginning Inventory + Cost of Acquisitions = (2) Income Tax effects (prefer to pay the least How much greater or less would RE be at date if
Cost of Ending Inventory + Cost of Goods Sold/Use amount of taxes allowed by law as late as possible company had always used the FIFO cost flow
Costs incurred in the manufacturing process (to the least-latest rule) assumption for all of its inventories rather than LIFO.
produce goods for resale) are capitalized as a cost of Primary reason to account for majority of inventory (LIFO Reserve) * (1-tax rate) = increase in RE
Work in Process Inventory as they are incurred using LIFO rather than any other inventory - Balance of LIFO reserve = x, therefore cumulative
Those costs are transferred to the Finished Goods accounting method is to decrease tax payments pre-tax income is lower by x RE is therefore lower
Inventory as production is completed and the goods LIFO-Conformity Rule if LIFO is used on the income by x * (1 tax rate)
become available for sale tax return, it must also be used to calculate - If company always used FIFO, RE is x * (1 t) higher
When goods are sold and delivered to the inventory and COGS for the financial statements How much greater or less would after-tax NI be if it
customer, the cost of producing them are expensed Increasing Cost Inventories use LIFO on tax return had always used direct write-off method instead of
as part of Cost of Goods Sold because it results in lower income taxes the allowance method? (greater or smaller)
When Inv. obsolescence expenses are as follows: Decreasing Cost Inventories use FIFO for both tax = (BD Expenses write-off)* (1 tax rate) = change
COGS xxx return and financial statements in NI * (1 t) (+ve change means greater and ve
Reserves for obsolete inventory xxx Lower of Cost or Market (LCM) Requirement a change means smaller)
Journal entry to record inventory written off: valuation method departing from the cost principle; How much more or less would after-tax income be if
Reserve for obsolete inventory xxx it serves to recognize a loss when replacement cost always used FIFO for its inventory?
Inventories xxx or net realizable value drops below cost = Change in LIFO Reserve * (1 tax rate)
Specific Identification Method identifies the cost - Avoid overstating assets and income Give the best possible approximation of the %
of the specific item that was sold LIFO Liquidation can be found in footnotes change in inventory costs.
Impractical when large QD cost of each item = LIFO inventory quantity reductions = selling more - Change in LIFO Reserve + LIFO Liquidations/FIFO
Weighted Average Cost Method uses the units than have been bought in a period start balance of LIFO inventories
weighted avg. unit cost of goods available for sale for With increasing costs, LIFO COGS > FIFO COGS - FIFO start balance of LIFO inventories = % of
both cost of goods sold and ending inventory FIFO End Inventory > LIFO End Inventory inventory of LIFO x (start inventory + start
- 2nd most common inventory valuation method - New, higher costs allocated to COGS 1st under LIFO LIFO/Total reserve)
after FIFO - Old, lower costs allocated to COGS first under FIFO - If there is stock obsolescence, add to FIFO (corrects
- Avg. C = COG for Sale/# Available for Sale bias that P changes induce on ratio)
- Costs of goods sold and ending Pct. of total Inv. Valued at LIFO (check notes) If company switched to % of sales method from
= LIFO BB Inv. / Total Inv. Value, or aging of AR, estimating 1% of gross sales, how much
inventory are assigned the same greater or less would pre-tax income be?
= (LIFO BB + LIFO Reserve) / FIFO BB Inv.
weighted average cost per unit Percentage change in Inv. Costs - Gross Sales = Net Sales + BDE (Net Sales +
BB Inv. 2 units @ $70 $140 = ( LIFO Rsv. + LIFO LQD) / FIFO val. of LIFO Inv. BB BDE)*0.01
+ Purch. 4 units @ $80 320
= ( LIFO Rsv. + LIFO LQD) / (LIFO Reserve + - X original BDE = greater/less pre-tax income
1 unit @ $100 100
Beginning LIFO Inv) where LIFO Inventory = % LIFO * Assume tax rate is 35%, what is impact of LIFO
Gds for Sale 7 units @ $80 avg. each 560
- EB Inv. 3 units @ $80 avg. each 220 Total STARTING Inventory liquidation on NI?
COGS 4 units @ $80 avg. each 340 = ( LIFO Rsv. + LIFO LQD) / (LIFO Reserve + Total = (LIFO Liquidation) *(1-.35)
First-In, First-Out (FIFO) Method assumes that the reserve)*LIFO%
first goods purchased (the first in) are the first goods LIFO COGS Found on Income Statement Equations
sold Last goods purchased are left in ending Inv. = COGS (from I/S) Change in LIFO Reserve Cash collected from Customers = Revenue
Allocates the oldest unit costs to cost of goods sold in LIFO Reserve = LIFO COGS FIFO COGS Accounts Receivable + Unearned Revenues
and the newest unit costs to ending inventory NIBT FIFO = NBITLIFO + LIFO Reserve Cash paid to suppliers = Cost of Goods Sold +
BB Inv. 2 units at $70 each $140 LIFO Reserve = FIFO Inventory LIFO Inventory Inventory Accounts Payable
+ Purch. 4 units at $80 each 320 = FIFO method of Inv. Cost net inventories Cash paid for selling, general, and administrative
1 unit at $100 each 100 = (LIFO COGS FIFO COGS) expense = SGA Expense + Prepaid Expense
Gds for Sale 560 - if FIFO method of inv. costing used exclusively, inv. Cash paid for operating expenses = E Depreciation
- EB Inv. 2 units @ $80, 1 unit @ $100 260 would have been xxx higher than those reported at Accrued Expense + Prepaid Expense
COGS 2 units @ $70, 2 units @ $80 300 date xxx = LIFO reserve BB or EB Cash paid for interest = Interest E Interest
LIFO the cost of goods sold is derived using Beginning LIFO Reserve (Excess FIFO over LIFO) Payable
relatively newer costs Ending LIFO Reserve (Excess FIFO over LIFO) = Cash paid for taxes = Tax Expense Taxes Payable
Last-In, First-Out (LIFO) Method assumes that the Difference in COGS under FIFO Cash paid for wages, salaries, and related costs =
most recently purchased units (the last in) are sold Inv. Turnover Ratio Wages, Salaries, and Related E Accrued Payroll
first Oldest units are left in ending inventory = (LIFO COGS + LIFO LQD) / (FIFO Av g. Inv.) Book Value of PPE = Proceeds of Sale Gain =
Allocates newest unit costs to cost of Where average inv. = 0.5 * (LIFO Inv. BB + LIFO Proceeds of Sale + Loss = Cost Depreciation
Reserves BB + LIFO Reserve EB + LIFO Inv. EB) if Statement of Retained Earnings: SE = RE + CC; RE =
goods sold and the oldest unit costs to
there is stock obsolescence, add to FIFO (corrects NI Div. = Rev. Exp. + Div.
ending inventory bias that P changes induce on ratio) SE = CC + (REbeginning of period + R E Dividend)
BB Inv. 2 units at $70 each 140 Retained deficit = BB(RD) + NI Div.
+ Purch. 4 units at $80 each 320
Examples Cost of Inv purchased (purchases) = COGS + Inv
1 unit at $100 each 100
Estimate the amount of incomes taxes that company Supplies EB = Supplies BB + Purchases Supplies
Gds for Sale 560 saved or paid in year because it used the LIFO used Supplies sold
- EB Inv. 2 units@ $70, 1 unit @ $80 220 inventory cost flow assumption rather than FIFO. Amount paid to shareholders = RE BB + NI RE EB
COGS 3 units @ $80, 1 unit @ $100 340 RE find LIFO Reserve and multiply by tax Amount paid to suppliers = Purchases + Accts.
When unit costs are rising, LIFO produces lower - When in LIFO Reserve is ve, FIFO COGS > LIFO Payable BB Accts. Payable EB
income (higher COGS) and a lower inventory COGS, FIFO income will be smaller, hence tax paid by Financing CF = Cash from note Cash paid on debt
valuation than FIFO (b/c using older, lower prices) LIFO is bigger, amt paid = LIFO reserve * tax rate
When unit costs are declining, LIFO produces higher - When in LIFO Reserve is +ve, LIFO COGS > FIFO Accruals and deferrals
income (lower COGS) and a higher inventory COGS, LIFO income is smaller, if used FIFO, income Deferrals
valuation than FIFO (b/c using older, higher prices) would be bigger, hence higher tax therefore amt. - Unearned R (cash received before earned)
Managers choose acct. methods based on 2 factors: saved = LIFO reserve * tax rate Increase L and R
(1) Net Income effects (prefer to report higher - Prepaid E (cash paid before incurred)
earnings for their companies) Increase E and decrease A
Accruals
- Accrued R (cash received after earned)
E.g. interest receivable
Increase A and R
- Accrued E (cash paid after incurred)
E.g. wages payable
Increase E and L
Dr. Expenses, Cr. Accts Payable