ACC 342 Lecture Notes - Lecture 3: Income Statement, Unit, Stock Split
Gross Profit Percentage
Gross Profit / Net sales
- Percentage of sales proceeds left over to cover remaining expenses
- Higher is better
Net Sales
= Sales Revenue - Allowances and Discounts and Returns
Gross Profit
= Net Sales - COGS
Lower of Cost or Market
a valuation rule based on conservatism that allows companies to adjust inventory if it is valued below
replacement cost
LIFO
- Last in, first out.
- used when calculating COGS
- Lowest net income and ending inventory when costs are rising
FIFO
- First in, first out.
- used when calculating COGS
Lowest net income and ending inventory when costs are declining
Weighted Average Cost
- used when calculating COGS
- add up all costs and divide by units
Inventory Turnover Ratio
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- COGS/average inventory
- higher is better
- measures the liquidity of inventory by measuring the number of times average inventory sold during
the period
Days to Sell
= 365/inventory turnover ratio
Receivables Turnover Rate
= Net Sales Revenue/Avg. Net Receivables
- # of times process of selling and collecting on Accounts Receivable is repeated during the period
Days to Collect
= 365/Receivables Turnover Rate
Bad Debt Expense
Avg Net A/R goes down and receivables turnover rate goes up
- calculated by percent credit sales or aging method
Cost of Goods sold
Beginning Inventory-Ending Inventory
Percentage of Credit Sales Method to Calculate Bad Debt
- Income Statement based Approach
Aging of Accounts Receivable Method to Calculate Bad Debt
- Balance Sheet-Based Approach
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Writing off Bad Debt
1. Officially Informed of bad debt/uncollectibility of a specific account
2. Must remove the uncollectible amount from the ADA and subtract it directly from the specific
customer Accounts Receivable
Previously Written off Account is Paid
Interest
= Principal x Rate x Time(y/xmos)
Long-Lived Assets
- Provide long-term benefit to the company (will not be used up within the next year) - Actively used in
operation
Type of Long-Lived Assets
- Tangible: Have physical substance (e.g., land, buildings and equipment, furniture and fixtures)
- Intangible Assets: No physical value, only inherent value
(e.g., Goodwill, Trademarks, Patents, Copyrights)
Cost principle
Put the asset on the company's books at the cost get asset into working condition:
i. Purchase Price (including sales tax)
ii. All expenditures needed to prepare asset for use (shipping costs, installation costs, etc.)
Maintenance of Tangible Assets
- Ordinary repairs and maintenance: Expense
- Extraordinary repairs, replacements, and additions: Capitalize
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Document Summary
Percentage of sales proceeds left over to cover remaining expenses. = sales revenue - allowances and discounts and returns. Lower of cost or market a valuation rule based on conservatism that allows companies to adjust inventory if it is valued below replacement cost. Lowest net income and ending inventory when costs are rising. Lowest net income and ending inventory when costs are declining. Add up all costs and divide by units. Measures the liquidity of inventory by measuring the number of times average inventory sold during the period. # of times process of selling and collecting on accounts receivable is repeated during the period. Avg net a/r goes down and receivables turnover rate goes up. Calculated by percent credit sales or aging method. Percentage of credit sales method to calculate bad debt. Aging of accounts receivable method to calculate bad debt.
