MGCR 211 Study Guide - Final Guide: Inventory Turnover, Gross Margin, Gross Profit

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Published on 9 Feb 2013
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Final Exam Review
Chapter 6
Account Receivables
The balance in the allowance for doubtful accounts might not be reasonable if the
collectability of receivables is not reflective of the industry. This could occur if
customers are less reliable, or if policies for checking and extending credit
are more lenient.
Establishing a reasonable allowance is particularly difficult in the first year of operations.
Better able to assess reasonableness after a few years history comparing its record of
uncollectible accounts to the industry average.
Failure of starting an allowance overstates value of account receivables and shareholders'
equity
Percentage of Credit Sales Method (Income Statement Approach)
credit sales x bad debt rate
focus on amount of expense rather than amount of allowance
existing balance in the allowance account is not taken consideration
not directly related to the account receivable account
allowance/account receivable = bad debt ratio
Setting up an allowance for doubtful accounts based on a percentage of credit sales
is unlikely to result in a close estimate of the accounts that will actually be
uncollectible.
Total Outstanding Gross Receivable Method (Balance Sheet Approach)
receivables as a whole x percentage of expected write-offs
Aging Method (Balance Sheet Approach)
dividing receivables into various age categories
total estimated write-offs = amount of receivables that are deemed to be
noncollectable = allowance
"work backward" in the equation as the
difference between the final allowance and
the beginning balance of the allowance is the amount of bad debt
better picture of the net realizable value
basing the allowance for doubtful accounts upon specific customer balances that
are overdue (i.e. an aging schedule) might result in a better valuation of accounts
receivable.
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Short Term Investment
Debt securities (yielding interest)
Held for Trading (FV; Gains & Losses thru NI)
Held to Maturity (Amortized cost)
Available for sale (FV; Gains & Losses thru OCI)
Equity securities (yielding dividends)
Held for trading (FV; Gains & Losses thru NI) increase/decrease through net
income; increase/decrease retained earnings
Available for sale (FV; Gains & Losses thru OCI)
Always value short term investment at fair market value
Affected account: short-term investment (Asset) & Unrealized/realized gain or loss on
short-term investment (SE)
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Chapter 7
Recognition of Inventory
Asset: controllable, future economic benefits, event that gave control has already
occurred
FOB point, consignment inventory
Gross profit > cost
Costs: comprise all costs of purchase, costs of conversion, and other costs incurred in
bringing the inventories to their present location and condition
Period cost: adminstration is not cost of sales. If i hire a purchasing department,
it is a cost of business but it is not a cost of the item. It is just adminstrative cost.
We don't include them in the cost of manufacturing.
Conversion cost: direct labor or manufacturing cost like overhead costs (factory
rent, depreciation on building)
Work-in-Process cost: collects all the costs that are incurred during the
production of the product
Finished goods cost: work-in-process cost when the production is completed
Freight-in cost: transportation for "purchased" goods
Lower of Cost and Net Realizable Value
LCM is the lower of cost or replacement cost, with the replacement cost
being
no higher
than NRV and
no lower
than NRV minus the normal profit.
NRV= market value (exit price) = current selling price - cost of sales
LCM = All Costs involved during production
Increase in COGS if there is a loss in inventory value due to LCM; increasing supply
of certain inventory will increase COGS for the certain industry
Use formula for periodic inventory system
Generally, a high inventory turnover ratio is desirable. The type of company and
products sold must be taken into consideration in evaluating the turnover ratios. An
exceptionally high ratio may mean that the company is not carrying an adequate stock of
inventory and may be losing sales as a result. It may also mean that production is
required to constantly change from one product to another to meet customer demands.
For example, a fruit and vegetable store should have a high inventory turnover, whereas
you would expect a car dealership to have a much lower one.
Cash Flow Assumptions (for determining cost of goods sold)
FIFO (first in, first out)
match oldest cost to the newest revenue
not respecting the matching principle (or the income statement)
Weighted Average
total cost available for sales/ units available for sales
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