Study Guides (238,524)
Canada (115,195)
MGCR 211 (17)

Intro to financial accounting final exam.pdf

11 Pages
Unlock Document

McGill University
Management Core
MGCR 211
Ralph Cecere

Final ExamReview NNoteboook:: MGCR 211- Intro to Financial Accounting CCreated:: 1/12/2012 15:53 Upddated:: 7/12/2012 14:35 UURL:: 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. 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) 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 LIFO (Last in, first out) match the newest revenue to the newest cost easy for income maximization Inventory Estimation Gross Margin Estimation Method cost to sales ratio (1-GP%) because of common sizing Value of Ending inventory decreases when net profit ratio decreases (COGS increases) The gross margin method will provide reliable results so long as cost patterns remain stable, and the selling price and mark-ups are predictable. In general, all factors affecting the gross profit percentage must remain more or less unchanged for this method to provide reliable results. Conditions that might cause the gross profit method to provide unreliable results include: Price changes that were not recorded or taken into account in determining the gross profit margin. Special merchandise purchases that are sold at a different gross profit margin. Losses of inventory due to damage. Losses of inventory due to theft and other causes. Errors in recording inventory sales or purchases. Reason for a lower GP% Lower prices Higher cost to manufacture (RM, Labour, Freight) Lower margin products were sold Decrease in production volume leads to increase in absorption of fixed costs Sales in countries where margins are lower Effects of foreign currency losses Increase in obsolescence & inventory writedowns Chapter 8 Capital Asset: long-term assets required for production, often used until it is replaced. IFRS permits both historical cost and net realizable value (fair market value) Historical cost method amortize expense throughout usage period change in market value is not reflected until the asset is disposed Capitalizing cost: costs needed to get the asset ready for use Under the matching principle, some costs like depreciation is recorded in future periods purchase price (less any discounts) direct taxes interest cost legal costs shipping or transportation costs preparation, installation, and set-up costs Companies will have to wait until the assets are depreciated before the costs can be deducted for tax purposes Basket Purchase: a bundle value is based on relative fair market values at time of acquisition Depreciation not intended to value fair market value only a cost allocation tool Unit of Activity Method measure by utility, not time Accelerated Depreciation Extra Costs activities that improve the asset (major repair, upgrade) is capitalized (non-regular) activities that restore the asset to its original condition is expensed (regular) Write-downs (Use higher of NET BOOK VALUE or net realizable value ) technology change, damage to the asset, change in asset's market reduce the asset's carrying value recognize impairment losses Use higher of value in use or net realizable value De-recognition Proceeds - Net Book Value If proceeds > NBV, increase in SE, increase in cash (Asset) Intangible Asset If purchased from another entity, record asset value in acquisition price If internally developed, costs of developing it are expensed as incurred ex. R&D and advertisement as exact benefits cannot be measured development cost may be capitalized if it matches certain criterias Definite Life Intangibles: depreciated over EUL Patents: legal life of 20 years This periodwould be based on the remaining legal life of the patent or estimateduseful life whicheveris shorter. Competitive technologies would have to be considered to determine whetherthe patent`s benefits extend to the end of its legal life. Copyright: life of the creator + 50 years or economic life If the economic life of 30 yearperiod is reasonable this would be acceptable since it is less than the legal life of the copyright. Sales projections as estimatedby management wouldhave to be obtainedto evaluate whether this estimate is reasonable. internally developed patents are expensed legal cost and registration fee is depreciated over EUL No residual value Indefinite Life Intangibles: not depreciated Trademark: 15 years or renewed Goodwill is not recognized if its developed internally only recorded when it acquires another company Both equipment and patents are recorded initiallyas the amounts paid to acquire them. Following the date of acquisition, the carrying values are adjusted for depreciation. For equipment, both the original cost and the accumulated depreciation are reported. In the case of patents, the allocation of original cost to a patent expen
More Less

Related notes for MGCR 211

Log In


Don't have an account?

Join OneClass

Access over 10 million pages of study
documents for 1.3 million courses.

Sign up

Join to view


By registering, I agree to the Terms and Privacy Policies
Already have an account?
Just a few more details

So we can recommend you notes for your school.

Reset Password

Please enter below the email address you registered with and we will send you a link to reset your password.

Add your courses

Get notes from the top students in your class.