ACC1002X – Financial Accounting

NUS Business School

Semester 1, AY 2015 – 2016

Lecture 12 Final Review

The Business

2

▪ Operating

▪ Investing

▪ Financing

3

Review

I. Operating activities:

1) Sales and accounts receivable

2) COGS and inventory

II. Investing activities: long-lived assets

III. Financing activities: bonds and equity

4

▪ Sales Revenues and

Accounts Receivable/Unearned Revenue

▪ COGS and

Inventories/Accounts Payable

▪ Expenses and

Prepaid Expense/Wages (Utilities) Payable

5

I. Operating Activities

▪ Items to include in ending inventory

▪ Purchase FOB shipping point (shipping cost Freight-In, added to

value of purchased inventories)

▪ Sale FOB destination (shipping cost Freight-Out, does NOT affect

inventory value)

▪ Relation between COGS and Ending Inventory

COGS = Beg.Inv. + Net Purchases – End. Inv.

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Inventory and COGS

Inventories and COGS

▪ Perpetual vs Periodic Inventory System

▪ Perpetual system keeps updating Inventory and COGS at each sale

▪ Periodic system updates COGS only at the period end

▪ Perpetual system can determine whether there is a shrinkage of

inventory, while periodic system cannot

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Inventories and COGS

▪ Reebok Company had a beginning inventory on April 1 of 400 units of Product A at a cost of $14 per unit. During April, the following purchases and sales were made.

▪ Determine COGS and Ending Inventory under periodic/perpetual FIFO/LIFO/WAVE

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Purchases Sales April 6 375 units at $15 April 4 270 units 14 250 units at $16 8 360 units 21 300 units at $18 17 380 units 28 425 units at $22 24 255 units 1,350 1,265

Inventories and COGS

Units Sold

April 1 400 @ 14$ = 5,600$

April 4 270

April 6 375 @ 15$ = 5,625$

April 8 360

April 14 250 @ 16$ = 4,000$

April 17 380

April 21 300 @ 18$ = 5,400$

April 24 255

April 28 425 @ 22$ = 9,350$

Total 1,750 $29,975 1,265

Goods Available for Sale

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Periodic Methods

▪ Timing of sales does NOT matter

▪ 1,265 units sold, 485 units remaining in ending inventory

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April 1 400 @ 14$ = 5,600$

April 6 375 @ 15$ = 5,625$

April 14 250 @ 16$ = 4,000$

April 21 300 @ 18$ = 5,400$

April 28 425 @ 22$ = 9,350$

Total 1,750 $29,975

Periodic Methods

▪ Periodic FIFO

▪ Ending Inventory (newest layers):

425*$22+(485-425)* $18=9,350+1,080=10,430

▪ COGS (oldest layers):

GAS – End. Inv. = 29,975 – 10,430 = 19,545

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Periodic Methods

▪ Periodic LIFO

▪ Ending Inventory (oldest layers):

400*$14+(485-400)* $15=5,600+1,275 = 6,875

▪ COGS (newest layers):

GAS – End. Inv. = 29,975 – 6,875 = 23,100

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Periodic Methods

▪ Periodic WAVE

▪ Average Cost/Unit = GAS/#Units Available for Sale

= 29,975 / 1,750 = $17.13/unit

▪ Ending Inventory = $17.13/unit * 485 units

= $8,308

▪ COGS = $17.13/unit * 1,265 units = $ 21,669

▪ Or 29,975 – 8,308 = $ 21,667 (difference due to rounding errors)

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Perpetual Method

▪ Timing of sales matters

▪ Determine COGS for each sale, based on inventory layers

available at each sale

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Perpetual Methods

▪ Perpetual FIFO:

▪ The same as periodic FIFO

▪ COGS (oldest layers):

400*$14+375*$15+250*$16+240*$18 = 19,545

▪ Ending Inventory

GAS – COGS = 10,430

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Perpetual Methods

▪ Perpetual LIFO:

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Sale

Date

Units

Sold

April 1 400 @ 14$ = 5,600$ April 4 270 270 @ 14$ = 3,780$ 130 @ 14$

April 6 375 @ 15$ = 5,625$ 130 @ 14$ April 8 360 130 @ 14$

375 @ 15$ 360 @ 15$ = 5,400$ 15 @ 15$

April 14 250 @ 16$ = 4,000$ 130 @ 14$ April 17 380 115 @ 14$ = 1,610$ 15 @ 14$

15 @ 15$ 15 @ 15$ = 225$

250 @ 16$ 250 @ 16$ = 4,000$

April 21 300 @ 18$ = 5,400$ 15 @ 14$ April 24 255 15 @ 14$

300 @ 18$ 255 @ 18$ = 4,590$ 45 @ 18$

April 28 425 @ 22$ = 9,350$ 15 @ 14$ 210$

45 @ 18$ 810$

425 @ 22$ 9,350$

Total 1,750 $29,975 1,265 19,605$ 10,370$

Goods Available for Sale

Inventory

Layers after

SaleCOGS

Inventory

Layers

Perpetual Methods

▪ Perpetual WAVE

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Sale

Date

April 1 400 @ 14$ = 5,600$ 14$ April 4 270 @ 14$ = 3,780$ 130 @ 14$ = 1,820$

April 6 375 @ 15$ = 5,625$ 7,445$ / 505 = 14.74$ April 8 360 @ 14.74$ = 5,307$ 145 @ 14.74$ = 2,138$

April 14 250 @ 16$ = 4,000$ 6,138$ / 395 = 15.54$ April 17 380 @ 15.54$ = 5,905$ 15 @ 15.54$ = 233$

April 21 300 @ 18$ = 5,400$ 5,633$ / 315 = 17.88$ April 24 255 @ 17.88$ = 4,560$ 60 @ 17.88$ = 1,073$

April 28 425 @ 22$ = 9,350$ 10,423$ / 485 = 21.49$ 485 @ 21.49$ = 10,423$

Total 1,750 $29,975 1,265 19,552$ 10,423$

Goods Available for Sale Average Cost Per Unit COGS

Inventory after

Sale

Accounts Receivable – Estimating Uncollectibles

Allowance Method:

There are two basic approaches to estimating uncollectible

accounts that are acceptable under IFRS:

1. Percentage of credit sales

2. Percentage of accounts receivable

The journal entry to record the estimate of uncollectibles is

the same for all three methods:

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Dr. Bad Debt Expense $$

Cr. Allowance for Uncollectibles $$

Percent of Credit Sales

(Income Statement approach):

(1) Calculate this

(2) This “falls out” as a result

Percent of Accounts Receivable &

Aging of Accounts Receivable

(Balance Sheet approach):

(2) This “falls out” as a result

(1) Calculate this

Allowance for Doubtful

Accounts Beginning Balance

Bad debt expense

Ending Balance

Write-off

Allowance for Doubtful

Accounts Beginning Balance

Bad debt expense

Ending Balance

Write-off

Summary of Allowance Method

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End of Year 1:

Ending Accounts Receivable (gross) = $170,000

Credit Sales for the year = $100,000

Percentage of credit sales uncollectible = 2.5%

(1) Journal Entry to record uncollectibles:

Dr. Bad Debt Expense 2,500 (100,000 * 2.5%)

Cr. ADA 2,500

(2) Income Statement Presentation:

$ 2,500 of Bad Debt Expense (which is usually included in selling expense).

(3) Balance Sheet Presentation:

Accounts Receivable, gross $ 170,000

Less: Allowance for Doubtful Accounts 2,500

Accounts Receivable, net $ 167,500

$_____

Estimating Uncollectibles – Income Statement Approach

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?

?

?

?

During Year 2:

The company realizes that $1,700 of accounts receivables will not be collected and must be written off.

Journal Entry to record write-off:

Dr. Allowance for Doubtful Accounts 1,700

Cr. Accounts Receivable 1,700

Estimating Uncollectibles

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End of Year 2:

Credit Sales for the year = $200,000

Ending Accounts Receivable (gross) = $250,000, outstanding as follows:

Estimating Uncollectibles – Balance Sheet Approach

No. of Days

Balance

Uncollectible

% $

Less than 30 80,000 0.5 400

31-60 80,000 1.0 800

61-90 50,000 2.0 1,000

Over 90 40,000 5.0 2,000

TOTAL 250,000 4,200

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(1) Journal Entry to record uncollectibles:

Dr. Bad Debt Expense 3,400

Cr. ADA 3,400

(2) Income Statement:

$ 3,400 of Bad Debt Expense (which is usually

included in selling expense).

(3) Balance Sheet:

Allowance for

Uncollectibles

2,500 (BB)

4,200 (EB)

Accounts Receivable, gross $ 250,000

Less: Allowance for Uncollectible Accounts 3,400

Accounts Receivable, net $ 246,600

$____ 3,400 (Dep Exp) ?

?

?

(write-off)1,700

II. Investing Activities --- Long-Term Assets

▪ Tangible Assets (PP&E) and Intangible Assets

▪ Acquisition: record at acquisition cost, including all

necessary costs to have the assets ready for use

▪ Depreciation or Amortization: allocate acquisition cost

over useful life

▪ Disposal: remove assets from Balance Sheet and record

gain/loss

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Long-Term Assets

▪ Acquisition

▪ PP&E: interest expense excluded from acquisition cost for

purchased assets

▪ Intangible assets: R&D expenditures are expensed immediately and

EXCLUDED from acquisition cost of intangible assets

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Long-Term Assets

▪ Depreciation/Amortization

▪ PP&E: Straight-line, DDB, and Units-of-Production

▪ Intangible: Straight-line

▪ Intangible

▪ Amortization Expense per Period

= Acquisition Cost / # Periods of Useful Life

▪ Dr. Amortization Expense

Cr. Patent (Copyright/Trademark, etc.)

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Long-Term Assets

▪ PP&E Depreciation

▪ Straight line: DepExp Year =Acquisition Cost −Residual Value

# Years in Useful Life

▪ DDB:

▪ DDB Rate = 1

# Years in Useful Life∗ 2

▪ DepExp = Beg. Book Value * DDB Rate

= (Acquisition cost – Beg. A/D) * DDB Rate

▪ Units of Production:

▪ Average Cost per Unit (CPU) =Acquisition Cost −Residual Value

# Units in Useful Life

▪ DepExp = CPU * (# Units produced)

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Long-Term Assets

▪ PP&E Depreciation

▪ Dr. Depreciation Expense

Cr. Accumulated Depreciation

▪ Disposal of PP&E

▪ Update depreciation to date of disposal

▪ Determine Gain/Loss based on Book Value vs Cash

▪ Journal Entry:

Dr. Cash (if applicable)

Accumulated Depreciation

Loss on Disposal

Cr. PP&E

Gain on Disposal

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Straight-Line Double-Declining Balance

Annual

Depreciation Book Value

Annual Depreciation

Book Value

At acquisition $ 41,000 $ 41,000

Year 1 $ 10,000 31,000 $ 20,500 20,500

Year 2 10,000 10,250 10,250

Year 3 10,000 5,125 5,125

Year 4 10,000 4,125* 1,000

Total $ 40,000 $ 40,000

Example: Lettuce Eat Café has equipment costing $41,000, with a 4-

year useful life, and estimated residual value of $1,000.

* The switch to straight-line occurs in year 4, and the depreciation amount is the

amount needed to reduce the book value to the final residual value.

Straight-Line vs. Double-Declining

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III. Financing Activities

▪ Long-term Liabilities

▪ Bonds

▪ Capital Leases

▪ Stockholders’ Equity

▪ Common/Preferred Stock

▪ Treasury Stock

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Bonds

▪ Selling price

= PV of Par + PV of Periodic Interest Payment

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Annuity

< Coupon Rate

= Coupon Rate

> Coupon Rate

Premium

Par Value

Discount

Bonds Sold At Market Rate

Bonds

▪ Issuance

Cash (selling price)

Discount on B/P (par – price, contra liability account)

Bonds Payable (par value)

Premium on B/P (price – par, adjunct liability account)

Carrying value = Par + Unamortized Premium

or Par – Unamortized Discount

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Bonds

▪ The TRUE amount borrowed (principal) is carrying value

(selling price at issuance)

▪ The TRUE cost of borrowing is market rate

▪ Therefore, the interest expense is

Carrying Value * Market Rate

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Bonds

▪ Amortization of Discount/Premium and Interest Expense

At each interest payment:

Interest Expense (carrying value * market rate)

Premium on Bonds Payable (for premium)

Cash (par * coupon rate)

Discount on Bonds Payable (for discount)

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Bonds

▪ Retirement before Maturity

▪ Compare carry value and repurchase price

▪ Repurchase Price < Carrying Value Gain (credit)

▪ Repurchase Price > Carrying Value Loss (debit)

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Capital Leases

▪ Capital Lease vs. Operating Lease

▪ Four criteria for capital lease

▪ Ownership transfers

▪ Bargain purchase option

▪ Lease term ≥ 75% of useful life

▪ Present value of lease payment ≥ 90% asset value

▪ All other leases are operating leases

▪ Record lease expense at each payment

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Capital Leases

▪ Record Capital Lease Liability at present value upon

signing the capital lease

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Capital Leases

▪ Record Interest Expense and amortization of Leased

Assets at each lease payment

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Stockholders’ Equity

▪ Contributed Capital vs Retained Earnings

▪ Received from stockholders, vs

▪ Generated by and accumulated within the firm

▪ Common Stock vs Preferred Stock

▪ Least priority on dividends/liquidation (C/S), vs

▪ Higher priority on dividends/liquidation (P/S) but no voting rights

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Stockholders’ Equity

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Stockholders’ Equity

▪ Issuance of Common Stock/Preferred Stock

▪ Record Common Stock/Preferred Stock at par value * (# shares

issued)

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Stockholders’ Equity

▪ Treasury Stock

▪ A deduction of Stockholder’s Equity

▪ Purchase (record at full cost)

▪ Sale of treasury stock

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Stockholders’ Equity

▪ Dividends

▪ For # Shares Outstanding

(# shares issued - # treasury shares)

▪ Preferred dividends are paid before common stock dividends

▪ Unpaid cumulative preferred dividends are paid first

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Stockholders’ Equity

▪ Cash Dividends

▪ Declaration Date

▪ Record Date

No Entry

▪ Payment Date

43

Stockholders’ Equity

▪ Stock Dividends

▪ No cash involved

▪ Similar to new stock issuance

▪ Record at market price (for small portion, <20% total shares)

44

𝐴 = 𝐿 + 𝑆𝐸

Cash + Noncash Assets = CL + LTL + CC + RE

∆Cash + ∆ CA + ∆ LTA = ∆ CL + ∆ LTL + ∆ CC + ∆RE

∆Cash = ∆RE + ∆ CL - ∆ CA - ∆ LTA+ ∆ LTL+ ∆ CC

∆Cash = (NI – Div )+ ∆ CL - ∆ CA - ∆ LTA+ ∆ LTL+ ∆ CC

∆Cash = (NI – Gain + Loss – Div )+ ∆ CL - ∆ CA

– (LTA Purchase – (LTA Sale + Gain – Loss) – D/E)

+ ∆ LTL+ ∆ CC

∆Cash = (NI – Gain + Loss + D/E + ∆ CL - ∆ CA)

– (LTA Purchase – Proceeds from LTA Sale)

+ (∆ LTL+ ∆ CC – Div)

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Take changes

Re-arrange

Cash Flows and Accounting Equation