AFM 291 EXAM PREP.docx

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Department
Accounting & Financial Management
Course
AFM 291
Professor
Robert Ducharme
Semester
Fall

Description
Anum Hussain AFM 291 Tuesday, October 26, 2010 AFM 291 EXAM PREP CHAPTER 7  % of sales approach  ▯existing balance in Allowance for Doubtful Accounts is  not considered in  amount in adjusting entry.  % of receivables approach  ▯the amount of the adjusting entry helps bring the AFDA account to a  specific desired balance.  Long­term loans receivable are recognized at fair value (i.e. the present value of the future cash  flows)     Notes Receivable example: o At date of issue, the company has an unamortized discount of $480 (to be amortized over  the 3 years using effective interest method) o The discount represents interest income to be recognized over the 3 year life of the note o $9,520 x 12% = $1,142  (first year interest income) o Journal Entry to record first $1,000 interest received:     Dr. Cash          1,000     Dr. Notes Receivable       142  Cr.  Interest Income    1,142 Example: Sale without recourse Transferor Cash 460,000 Due from factor (5% x 500,000) 25,000 Loss on sale of receivables (Finance charge of 15,000 3% x 500,000) Accounts receivable 500,000 Factor (Transferee) Accounts receivable 500,000 Due to transferor (5% x 500,000) 25,000 Financing revenue (3% x 500,000) 15,000 Cash 460,000 AFM 291 chapter 7 46  Reversing entries guidelines: o All accrued items should be reversed  o All prepaid items for which the original cash transaction was debited or credited to an  expense or revenue account should be reversed.  Anum Hussain AFM 291 Tuesday, October 26, 2010 o Reversals are made at the beginning of the new fiscal period. CHAPTER 8  Inventory unit cost = Variable production costs + fixed production costs. In other words, no  selling and administrative costs.   NRV for Inventory = Selling price – estimated disposal costs.  Price of EI x Cost­to­retail ratio = Cost of EI Retail Inventory Method: Ratio A • Conventional Retail Inventory Method • Reflects cost percentage that includes net markups – Excludes net markdowns • Approximates lower of cost and NRV • Ending Inventory (at cost) = Ending Inventory (at retail) x Cost Ratio chapter 8 41   Formula for Ratio A = COGAS / (original retail goods available for sale + net markups) Anum Hussain AFM 291 Tuesday, October 26, 2010 Retail Inventory Method: Ratio A RATIO A: At Cost At Retail Beginning Inventory $ 5,000 $ 10,000 Purchases 15,500 26,000 Add: Markups 3,000 Less: Markup cancellations 1,000 20,500 38,000 Cost-to-retail ratio ($20,500 ÷ $38,000) 53.95% Less: Markdowns 2,500 Add: Markdown cancellations 2,000 Goods Available for Sale 37,500 Less: Net Sales 25,000 Ending Inventory $ 6,744 $ 12,500 EI @ cost = $12,500 x 53.95% = $6,744 AFM 291  chapter 8 43  the grid always has to be made exactly like this.  when we figure out the EI at retail, you have to convert it to cost. Retail Inventory Method: Ratio B RATIO B: At Cost At Retail Beginning Inventory $ 5,000 $ 10,000 Purchases 15,500 26,000 Add: Markups 3,000 Less: Markup cancellations 1,000 Less: Markdowns 2,500 Add: Markdown cancellations 2,000 Goods Available for Sale 20,500 37,500 Cost-to-retail ratio ($20,500 ÷ $37,500) 54.67% Less: Net Sales 25,000 Ending In
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