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Part 2 book “Horngren’s financial & managerial accounting - The financial chapters” has contents: receivables, plant assets, natural resources, and intangibles, investments, current liabilities and payroll, long-term liabilities, stockholders'' equity, the statement of cash flows, the statement of cash flows.
www.downloadslide.net Receivables Should Credit Be Extended? J ames Hulsey works for a large department store as a credit manager His main responsibility is managing all credit sales that generate accounts receivable James must evaluate each customer’s request for credit and determine which customers are allowed to purchase goods on credit He does this by reviewing the customer’s credit history and credit score James has an important decision to make He understands that granting credit increases the sales of the department store, but it also has its disadvantages One of those disadvantages is that the department store has to wait to receive cash But, for James, the biggest disadvantage—and the most frustrating part of his job—is when customers don’t pay When this happens, the department store suffers a loss because it will never collect the cash associated with the sale The department store must have a way to take the accounts of customers who will never make payment off the books; this is called a write-off In addition, James must also help the department store estimate the amount of receivables that will be uncollectible It’s important that the department store have a good idea of the amount of cash that will actually be collected on its receivables so it can estimate future cash flows How Are Receivables Accounted For? In this chapter, we determine how companies account for receivables Receivables represent the right to receive cash in the future from a current transaction We begin by looking at how companies such as Sears Holdings Corporation (the parent company of Kmart Holding Corporation and Sears, Roebuck and Co.) record accounts receivable, including when customers don’t make the required payments Then we review notes receivable, which usually extend over a longer term than accounts receivable and typically involve interest We finish the chapter by looking at how companies (and investors) can use financial ratios to evaluate a company’s ability to collect cash on accounts receivable www.downloadslide.net Receivables 459 Chapter Learning Objectives Define and explain common types of receivables and journalize sales on credit Account for notes receivable including computing interest and recording honored and dishonored notes Apply the direct write-off method for uncollectibles Apply the allowance method for uncollectibles and estimate bad debts expense based on the percent-of-sales, percent-of-receivables, and aging-of-receivables methods Use the acid-test ratio, accounts receivable turnover ratio, and days’ sales in receivables to evaluate business performance WHAT ARE COMMON TYPES OF RECEIVABLES, AND HOW ARE CREDIT SALES RECORDED? A receivable occurs when a business sells goods or services to another party on account (on credit) It is a monetary claim against a business or an individual The receivable is the seller’s claim for the amount of the transaction Receivables also occur when a business loans money to another party A receivable is the right to receive cash in the future from a current transaction It is something the business owns; therefore, it is an asset Each receivable transaction involves two parties: • The creditor, who receives a receivable (an asset) The creditor will collect cash from the customer or borrower • The debtor, the party to a credit transaction who takes on an obligation/payable (a liability) The debtor will pay cash later Learning Objective Define and explain common types of receivables and journalize sales on credit Receivable A monetary claim against a business or an individual Debtor The party to a credit transaction who takes on an obligation/payable Types of Receivables The three major types of receivables are: • Accounts receivable • Notes receivable • Other receivables Accounts Receivable Accounts receivable, also called trade receivables, represent the right to receive cash in the future from customers for goods sold or for services performed Accounts receivable are usually collected within a short period of time, such as 30 or 60 days, and are therefore reported as a current asset on the balance sheet Notes Receivable Notes receivable usually have longer terms than accounts receivable Notes receivable, sometimes called promissory notes, represent a written promise that a customer (or another individual or business) will pay a fixed amount of principal plus interest by a certain date in the future—called the maturity date The maturity date is the date on which the notes receivable is due A written document known as a promissory note serves as evidence of Accounts Receivable The right to receive cash in the future from customers for goods sold or for services performed Notes Receivable A written promise that a customer will pay a fixed amount of principal plus interest by a certain date in the future Maturity Date The date when a note is due www.downloadslide.net 460 chapter the debt and is signed by the debtor Notes receivable due within 12 months or within the normal operating cycle if the cycle is longer than a year are c onsidered current assets Notes receivable due beyond one year are long-term assets Other Receivables Other receivables make up a miscellaneous category that includes any other type of receivable where there is a right to receive cash in the future Common examples include dividends receivable, interest receivable, and taxes receivable These other receivables may be either current or long-term assets, depending on whether they will be received within one year or the normal operating cycle if the cycle is longer than a year (current asset) or received more than a year in the future (long-term asset) Exercising Internal Control Over Receivables Businesses that sell goods or services on account receive cash by mail, usually in the form of a check, or online payments via electronic funds transfer (EFT), so internal control over collections is important. As we discussed in the previous chapter, a critical element of internal control is the separation of cash-handling and cash-accounting duties Most large companies also have a credit department to evaluate customers’ credit applications to determine if they meet the company’s credit approval standards The extension of credit is a balancing act The company does not want to lose sales to good customers, but it also wants to avoid receivables that will never be collected For good internal control over cash collections from receivables, separation of duties must be maintained The credit department should have no access to cash, and those who handle cash should not be in a position to grant credit to customers If a credit department employee also handles cash, he or she could pocket money received from a customer The employee could then label the customer’s account as uncollectible, and the company would stop billing that customer In this scenario, the employee may have covered his or her theft Recording Sales on Credit As discussed earlier, selling on account (on credit) creates an account receivable Businesses must maintain a separate accounts receivable account for each customer in order to account for payments received from the customer and amounts still owed For example, Smart Touch Learning provides $5,000 in services to customer Brown on account and sells $10,000 (sales price) of merchandise inventory to customer Smith on account on August The revenue is recorded (ignore Cost of Goods Sold) as follows: Ac Accounts Receivablec L + = Ec Date Service Revenuec Aug Accounts and Explanation Accounts Receivable—Brown Debit Credit 5,000 5,000 Service Revenue Performed service on account Ac Accounts Receivablec L + = Ec Sales Revenuec Accounts Receivable—Smith Sales Revenue Sold goods on account 10,000 10,000 www.downloadslide.net Receivables 461 These separate customer accounts receivable (for example, Accounts Receivable—Brown) are called subsidiary accounts The sum of all balances in subsidiary accounts receivable equals a control account balance In this case, Accounts Receivable serves as the control account This is illustrated as follows: CONTROL ACCOUNT SUBSIDIARY ACCOUNTS Accounts Receivable Bal Accounts Receivable—Brown 15,000 Bal 5,000 Accounts Receivable—Smith Bal 10,000 Total for subsidiary accounts = $15,000 The control account, Accounts Receivable, shows a balance of $15,000 The individual customer accounts in the subsidiary ledger (Accounts Receivable—Brown $5,000 + Accounts Receivable—Smith $10,000) add up to a total of $15,000 When the business collects cash from both customers on August 29—$4,000 from Brown and $8,000 from Smith—Smart Touch Learning makes the following entry and posts the entry to the T-accounts: Date Aug 29 Accounts and Explanation Debit Credit 12,000 Cash Accounts Receivable—Brown 4,000 Accounts Receivable—Smith 8,000 Collected cash on account CONTROL ACCOUNT Bal Bal SUBSIDIARY ACCOUNTS Accounts Receivable 15,000 12,000 Aug 29 3,000 Accounts Receivable—Brown Bal 5,000 4,000 Aug 29 Bal 1,000 Accounts Receivable—Smith Bal 10,000 8,000 Aug 29 Bal 2,000 Total for subsidiary accounts = $3,000 Decreasing Collection Time and Credit Risk One of the many drawbacks of accepting sales on account is that the company must wait for the receipt of cash Sometimes this time period could be delayed as much as 60 to 90 days In addition, there is always the risk that the company will never collect on the receivable Let’s look at some options companies have to decrease the collection time in receiving cash while also transferring the risk of noncollection to a third party AcT Cashc Accounts ReceivableT L = + E www.downloadslide.net 462 chapter Credit Card and Debit Card Sales In the previous chapter, we looked at accepting third party credit cards and debit cards, such as American Express, MasterCard, and Visa, as a way to increase sales By accepting credit cards and debit cards, businesses are able to attract more customers Credit cards offer the customer the convenience of buying something without having to pay cash immediately Debit cards, on the other hand, reduce the customer’s bank account immediately but allow the customer to pay electronically instead of with currency or by writing a check Businesses also benefit from accepting payment by credit and debit cards They not have to check each customer’s credit rating or worry about keeping accounts receivable records or even collecting from the customer because the card issuer has the responsibility of collecting from the customer Thus, instead of collecting cash from the customer, the seller will receive cash from the card issuer While there is almost always a fee to the seller to cover the processing costs charged by the card issuer, most businesses consider the benefits of transferring the risk of not being able to collect from the customer and avoiding the costs associated with credit customers are greater than the costs of the processing fees Factoring and Pledging Receivables When a business factors its receivables, it sells its receivables to a finance company or bank (often called a factor) The business immediately receives cash less an applicable fee from the factor for the receivables The factor, instead of the business, now collects the cash on the receivables The business no longer has to deal with the collection of the receivable from the customer The business receives cash associated with the receivable from the factor instead of the customer Pledging of receivables is another option for businesses that need cash immediately In a pledging situation, a business uses its receivables as security for a loan The business borrows money from a bank and offers its receivables as collateral The business is still responsible for collecting on the receivables, but it uses this money to pay off the loan along with interest In pledging, if the loan is not paid, the bank can collect on the receivables In both situations, the business has managed to receive cash immediately for the receivables instead of having to wait for collection Try It! Match the accounting terminology to the definitions Factoring receivables a A monetary claim against a business or an individual Debtor b The party to a transaction who takes on an obligation/payable Accounts receivable c Using receivables as security (collateral) for a loan Maturity date d The right to receive cash in the future from customers for goods sold or for services provided Receivable e The date when a note is due Pledging receivables f Selling receivables to a finance company or bank Check your answers online in Pearson MyLab Accounting or at http://www.pearsonglobaleditions.com/Sitemap/ Horngren/ For more practice, see Short Exercises S8-1 and S8-2 Pearson MyLab Accounting www.downloadslide.net Receivables 463 HOW ARE UNCOLLECTIBLES ACCOUNTED FOR WHEN USING THE DIRECT WRITE-OFF METHOD? Selling on account brings both a benefit and a cost: Learning Objective • The benefit to a business is the potential increased revenues and profits by making sales to a wider range of customers • The cost, however, is that some customers not pay, creating uncollectible receivables Customers’ accounts receivable are an asset Accounts receivable that are uncollectible must be written off, which means they must be removed from the books, because the company does not expect to receive cash in the future Instead, the company must record an expense associated with the cost of the uncollectible account This expense is called bad debts expense Bad debts expense is sometimes called doubtful accounts expense or uncollectible accounts expense There are two methods of accounting for uncollectible receivables and recording the related bad debts expense: Apply the direct write-off method for uncollectibles Bad Debts Expense The cost to the seller of extending credit It arises from the failure to collect from some credit customers • Direct write-off method • Allowance method Recording and Writing Off Uncollectible Accounts—Direct Write-off Method The direct write-off method of accounting for uncollectible receivables is primarily used by small, nonpublic companies Under the direct write-off method, accounts receivable are written off and bad debts expense is recorded when the business determines that it will never collect from a specific customer For example, let’s assume that on August Smart Touch Learning determines that it will not be able to collect $200 from customer Dan King for a sale of merchandise inventory made on May The company would write off the customer’s account receivable by debiting Bad Debts Expense and crediting the customer’s Accounts Receivable as follows: Date Aug Accounts and Explanation Bad Debts Expense Debit Credit 200 Accounts Receivable—King 200 Wrote off an uncollectible account Once an account receivable is written off, the company stops pursuing the collection Some companies might turn delinquent receivables over to an attorney or other collection agency to recover some of the cash for the company, but generally companies not expect to receive any future payment Recovery of Accounts Previously Written Off—Direct Write-off Method Occasionally after a company writes off an account, the customer will decide to make payment To account for this recovery, the company must reverse the earlier write-off For example, on September 10, Smart Touch Learning unexpectedly receives $200 cash from Direct Write-off Method A method of accounting for uncollectible receivables in which the company records bad debts expense when a customer’s account receivable is uncollectible AT Accounts ReceivableT L = + ET Bad Debts Expensec www.downloadslide.net 464 chapter Dan King The company will reverse the earlier write-off and then record the cash collection as follows: Ac L Accounts Receivablec = Ec Date Bad Debts ExpenseT Sep 10 Accounts and Explanation Accounts Receivable—King Debit Credit 200 Bad Debts Expense 200 Reinstated previously written off account AcT Cashc Accounts ReceivableT L = E 10 Cash Accounts Receivable—King 200 200 Collected cash on account In order to keep accurate records about the collection of cash for a previously written off account, the business should reestablish the Accounts Receivable by debiting the receivable account Then the business can record the receipt of cash for the receivable by debiting Cash and crediting Accounts Receivable This helps restore the credit history of the customer by showing that the customer did fulfill the promise of payment Limitations of the Direct Write-off Method The direct write-off method, as stated earlier, is often used only by small, nonpublic companies This is because the direct write-off method violates the matching principle The matching principle requires that the expense of uncollectible accounts be matched with the related revenue For example, when using the direct write-off method, a company might record sales revenue in 2017 but not record the bad debts expense until 2018 By recording the bad debts expense in a different year than when the revenue was recorded, the company is overstating net income in 2017 and understating net income in 2018 In addition, on the balance sheet at December 31, 2017, Accounts Receivable will be overstated because the company will have some receivables that will be uncollectible but are not yet written off This method is only acceptable for companies that have very few uncollectible receivables Most companies must use a method that does a better job of matching expenses to the associated sales revenue This method is called the allowance method, and it is the method required by GAAP Try It! Williams Company uses the direct write-off method to account for uncollectible receivables On July 18, Williams wrote off a $6,800 account receivable from customer W Jennings On August 24, Williams unexpectedly received full payment from Jennings on the previously written off account Journalize Williams’s write-off on the uncollectible receivable Journalize Williams’s collection of the previously written off receivable Check your answers online in Pearson MyLab Accounting or at http://www.pearsonglobaleditions.com/Sitemap/ Horngren/ For more practice, see Short Exercises S8-3 and S8-4 Pearson MyLab Accounting www.downloadslide.net Receivables HOW ARE UNCOLLECTIBLES ACCOUNTED FOR WHEN USING THE ALLOWANCE METHOD? Most companies use the allowance method to measure bad debts The allowance method is based on the matching principle; thus, the key concept is to record bad debts expense in the same period as the sales revenue The offset to the expense is a contra asset account called Allowance for Bad Debts or Allowance for Doubtful Accounts or Allowance for Uncollectible Accounts The allowance account is subtracted from the asset Accounts Receivable The business does not wait to see which customers will not pay Instead, it records a bad debts expense based on estimates developed from past experience and uses the Allowance for Bad Debts to hold the pool of “unknown” uncollectible accounts Recording Bad Debts Expense—Allowance Method When using the allowance method, companies estimate bad debts expense at the end of the period and then record an adjusting entry Suppose that as of December 31, 2019, Smart Touch Learning estimates that $80 of its $4,400 accounts receivable are uncollectible The accounting clerk will record the following adjusting entry: Date Accounts and Explanation Debit Learning Objective Apply the allowance method for uncollectibles and estimate bad debts expense based on the percent-of-sales, percentof-receivables, and agingof-receivables methods Allowance Method A method of accounting for uncollectible receivables in which the company estimates bad debts expense instead of waiting to see which customers the company will not collect from Allowance for Bad Debts A contra asset account, related to accounts receivable, that holds the estimated amount of uncollectible accounts Credit 2019 Dec 31 AT 80 Bad Debts Expense 465 80 Allowance for Bad Debts Recorded bad debts expense for the period Allowance for Bad Debtsc L = + ET Bad Debts Expensec After posting the adjusting entry, Smart Touch Learning has the following balances in its accounts: Accounts Receivable Dec 31 4,400 Allowance for Bad Debts 80 Dec 31 Bad Debts Expense Dec 31 80 Accounts Receivable will be reported on the balance sheet, but it will now be shown at the net realizable value Net realizable value is the net value the company expects to Net Realizable Value The net value a company expects to collect from its accounts receivable Accounts Receivable less Allowance for Bad Debts www.downloadslide.net 466 chapter collect from its accounts receivable (Accounts Receivable less Allowance for Bad Debts) Smart Touch Learning would report the following on its balance sheet: SMART TOUCH LEARNING Balance Sheet (Partial) December 31, 2019 Assets Under IFRS, receivables are r ecognized and reported similarly to what is required by GAAP Accounts Receivable must be reported at net realizable value The allowance method is used to accomplish the matching of bad debt expense to the sales of the period and to report receivables at net realizable value Under IFRS, the Allowance for Bad Debts may be called the Provision for Bad Debts IFRS provides more detailed criteria than GAAP for determining when an account is uncollectible Current Assets: Accounts Receivable Less: Allowance for Bad Debts $ 4,400 (80) $ 4,320 The balance sheet now reports the amount of accounts receivable that Smart Touch Learning expects to collect, $4,320 The contra account, Allowance for Bad Debts, is subtracted from Accounts Receivable showing that although $4,400 is owed to Smart Touch Learning, the company estimates that $80 of accounts receivable will be uncollectible ETHICS Should the uncollectible accounts be underestimated? Norah Wang is in the process of recording adjusting entries for her employer, Happy Kennels She is evaluating the uncollectible accounts and determining the amount of bad debts expense to record for the year Her manager, Gillian Tedesco, has asked that Norah underestimate the amount of uncollectible accounts for the year Gillian is hoping to get a bank loan for an expansion of the kennel facility, and she is concerned that the net income of the company will be too low for a loan to be approved What should Norah do? Solution It is important that accounts receivable be reported at the appropriate amount on the balance sheet This involves determining an accurate estimate of uncollectible accounts and recognizing the associated bad debts expense In understating the amount of uncollectible accounts, Norah would be misleading the bank on the amount of cash that Happy Kennels expects to collect in the future Norah would also understate Bad Debts Expense and overstate net income on the income statement Writing Off Uncollectible Accounts—Allowance Method Why isn’t Bad Debts Expense debited when writing off an account receivable when using the allowance method? When using the allowance method, companies still write off accounts receivable that are uncollectible However, instead of recording a debit to Bad Debts Expense (as done when using the direct write-off method), the company will record a debit to Allowance for Bad Debts Bad Debts Expense is not debited when a company writes off an account receivable when using the allowance method because the company has already recorded the Bad Debts Expense as an adjusting entry The entry to write off an account under the allowance method has no effect on net income at the time of entry www.downloadslide.net Receivables 467 For example, on January 10, 2020, Smart Touch Learning determines that it cannot collect a total of $25 from its customer, Shawn Clark The accounting clerk would record the following entry to write off the account: Date Accounts and Explanation Debit Credit 2020 Jan 10 AcT 25 Allowance for Bad Debts 25 Accounts Receivable—Clark Wrote off an uncollectible account Smart Touch Learning’s account balances after the write-off are: Accounts Receivable Jan 1, 2020 4,400 25 Jan 10, 2020 Bal 4,375 Allowance for Bad Debts 80 Jan 1, 2020 Jan 10, 2020 25 55 Bal The entry to write off a receivable reduces the amount of the Allowance for Bad Debts account and also the Accounts Receivable account, but it does not affect the net realizable value shown on the balance sheet This is because both Allowance for Bad Debts (contra asset) and Accounts Receivable (asset) were reduced by the amount of the write-off In addition, the write-off of a receivable does not affect net income because the entry does not involve revenue or expenses Accounts Receivable Less: Allowance for Bad Debts Net Realizable Value Before Write-off After Write-off $ 4,400 $ 4,375 (80) (55) $ 4,320 $ 4,320 Recovery of Accounts Previously Written Off—Allowance Method After a company has previously written off an account, the company stops attempting to collect on the receivable Customers will occasionally make payment on receivables that have already been written off A business will need to reverse the write-off to the Allowance for Bad Debts account and then record the receipt of cash In reversing the write-off, the business is reestablishing the receivable account and reversing the write-off from the Allowance for Bad Debts account Recall that Smart Touch Learning wrote off the $25 receivable from customer Shawn Clark on January 10, 2020 It is now March 4, 2020, and Smart Touch Learning unexpectedly Allowance for Bad DebtsT Accounts ReceivableT L = + E www.downloadslide.net I-6 Subject Index Historical cost, 35 Honored notes receivable, 478–480 Horizontal analysis, 827, 829–833 I Impairment, 538 Imprest system, 417 Income from operations, 297 Income statement, 45, 46, 829 for corporations, 719–720 horizontal analysis, 830–831 inventory costing methods and, 364–365 for merchandising companies, 295–297 relationship with other financial statements, 213–214 vertical analysis, 834 worksheets and, 217 Income statement expenditures, 519–520 Income Summary, 220 Income tax expense, 297 payments for, 782 Income tax payable, 606–607 Income tax withholding, 611 Income-statement approach, 468–469, 474 Incorporators, 34 Indirect method, 762, 762–777, 784–786 Industry average, benchmarking against, 837 Inflation, 36 Information system, 408–409 Insider trading, 573 Institute of Management Accountants (IMA), 30 Intangible assets, 215, 538–541 Interest, 475 accruing revenue, 478–480 cash receipts of revenue, 779 computing, 477–478 payments for expense, 782 simple versus compound, 666 Interest period, 476 Interest rate, 476 on bonds, 652–653 Interest-coverage ratio, 622–623, 845–846 Internal auditors, 409 Internal control with bank account, 421–429 for cash payments, 414–415 for cash receipts, 412–413 components of, 408–409 limitations of, 411 for payroll, 616–617 with petty cash fund, 416–419 procedures, 409–411 purpose of, 407 on receivables, 460 SOX (Sarbanes-Oxley Act), 407–408 Internal control reports, 408 International Accounting Standards Board (IASB), 36 International Financial Reporting Standards (IFRS), 29, 36 accounting systems, 86 contingent liabilities, 621 current and long-term liabilities, 605 current fair value, 35 fair market value, 528 financial statement terminology, 212 functional expenses, 295 internal control and audits, 408 inventory costing methods, 360 LCM (lower-of-cost-or-market) rule, 367 net realizable value, 466 operating activities, 762 statement of cash flows, 761 statement of stockholders’ equity, 723 Inventory merchandise inventory See merchandise inventory Inventory costing methods, 357 cost flow assumptions in Excel, 398 FIFO (first-in, first-out) method, 358–359, 374 LIFO (last-in, first-out) method, 359–361, 375 preparing financial statements, 364–366 specific identification method, 357 weighted-average method, 361–363, 375 Inventory shrinkage, 291 Inventory turnover, 372, 842 Investees, 572 Investing activities, 760 cash flows from, 769–771 Investments deciding on, 50 evaluating stock as, 849–850 reasons for, 572–573 types of, 573–574 See also debt securities; equity securities Investors, 30, 572 Invoices, B-22–B-23, 279 Issue price, 702 Issued stock, 699 Issuing stock, 702–706 J Journal entries adjusting entries versus, 160 Journalizing transactions, 91–101 with Excel, 139 L Land costs, 516–517 Land improvements, 516–517 Large stock dividends, 715, 717–718 www.downloadslide.net Last-in, first-out (LIFO) method, 359–361, 375 Ledger, 86 after posting, 101–103 trial balance, 105–107 Legal capital, 711 Leverage, 848 Liabilities, 38, 83 on classified balance sheet, 215 contingent, 620–621 payroll, 609–617 reporting, 662–663 types of, 605 See also specific types of liabilities Liability accounts debits and credits, 87–89 types of, 84 See also accounts payable Licenses, 540 Limited liability, 33–34 Limited-liability companies (LLC), 33 Liquidity, 215 Lock-box system, 413 Long-term assets, 215 disposal of, 766–767, 782–783 Long-term investments, 215, 573 Long-term liabilities, 215, 605, 646 bonds payable, 649–654 effective-interest amortization method, 672–674 evaluating ability to pay, 844–846 long-term notes payable, 646–647 mortgages payable, 647–649 reporting, 662–663 retirement of bonds payable, 660–662 in statement of cash flows, 771–772 straight-line amortization method, 655–660 Long-term notes payable current portion of, 609, 646 with Excel, 694 recording, 646–647 Lower-of-cost-or-market (LCM) rule, 367–368 Lump sum future value, 670–671 present value, 668 Lump-sum purchases, 518–519 M Machinery and equipment costs, 517–518 Makers (on checks), 422 Management’s discussion and analysis of financial condition and results of operations (MD&A), 828 Managerial accounting financial accounting versus, 29 Manual accounting information systems purchases and cash payments in, B-14–B-20 Subject Index sales and cash receipts in, B-5–B-14 Market interest rate, 653 Matching principle, 149 Materiality concept, 354 Maturity date, 459, 476, 651 Maturity value, 476, 650 Members, 33 Memorandum entry, 718 Merchandise inventory, 276 accounting principles, 353–354 accounting systems for, 278 controls, 354–355 costs of, 355–363, 373–375 errors, effect of, 369–370 ethics, 371 evaluating ability to sell, 842–844 LCM (lower-of-cost-or-market) rule, 367–368 physical count adjustments, 291–292 purchases of, 279–285, 301–302 sales of, 286–291, 302–303 Merchandising companies, 276 adjusting entries, 291–292 closing process, 292–294, 303–306 operating cycle, 276–278 preparing financial statements, 295–297, 303 Modified Accelerated Cost Recovery System (MACRS), 526–527 Modified half-month convention, 527 Monetary unit assumption, 36 Monitoring of controls, 409 Mortgages payable, recording, 647–649 Moving-average method, 361–363, 375 Multiple performance obligations, 299–300 Multi-step income statement, 296 with Excel, 345 Mutual agency, 33 N Natural resources, 537 Net cash provided by operating activities, 783 Net change in cash, 775 Net cost of inventory purchased, 285 Net income, 39 closing temporary accounts, 220–222 on worksheets, 218 Net loss, 39 closing temporary accounts, 223 on worksheets, 218 Net pay, 610 Net purchases, 302 Net realizable value, 465 Networks, B-21 No significant interest equity investments, 574 recording, 577–578 reporting, 584 I-7 www.downloadslide.net I-8 Subject Index Nominal accounts See temporary accounts Non-cash assets, issuing stock for, 705 Non-cash expenses, 782–783 Non-cash investing and financing activities, 761, 775–777 Noncumulative preferred stock, 713 Nonsufficient funds (NSF) checks, 425 No-par stock, 701 issuing, 704 Normal balance, 88–89 Note term, 476 Notes payable, 84 Notes receivable, 84, 459–460, 475–480 accruing interest revenue, 478–480 computing interest, 477–478 dishonored, 480 honored, 478–480 maturity date, 476–477 Notes to financial statements, 829 O Obsolete, 521 Operating activities, 760 cash flows from, 765–769, 778–784 formats for, 762 Operating cycle, 215 of merchandisers, 276–278 Operating expenses, 278 categories of, 297 Operating income, 297 Operational assets See property, plant, and equipment (PP&E) Optional deductions, 610 Other income and expenses, 297 Outstanding checks, 424 Outstanding stock, 700 earnings per share (EPS), 720 Overtime, 610 P Paid-in capital, 701 Paid-In Capital in Excess of Par, 703 Par value, 650, 701 issuing common stock, 703 Parent company, 580 Partial-year depreciation, 527 Partners, 33 Partnerships, 33 Patents, 538–539 Pathways Vision Model, 28 Payees (on checks), 422 Payroll employer payroll taxes, 614–616 with Excel, 642 internal control, 616–617 journalizing, 614 recording, 609–617 in statement of cash flows, 781–782 withholding deductions, 610–613 Payroll register, 613–614 Pension plans, 618 Percent-of-receivables method, 469–472, 474 Percent-of-sales method, 468–469, 474 Performance obligations, multiple, 299–300 Periodic inventory system, 278 closing process, 303–306 costs of inventory, 373–375 preparing financial statements, 303 purchases of inventory, 301–302 sales of inventory, 302–303 Permanent accounts, 219 Perpetual inventory system, 278 costs of inventory, 355–363 multiple performance obligations, 299–300 preparing financial statements, 295–297 purchases of inventory, 279–285 sales of inventory, 286–291 Petty cash fund, 416–419 Plant assets See property, plant, and equipment (PP&E) Pledging receivables, 462 Positive cash flows, creating, 768 Post-closing trial balance, 226 with Excel, 268 Posting transactions See transactions, posting Preemptive right, 700 Preferred stock, 701 declaring and paying dividends, 712–714 issuing, 706 Premium, issuing common stock, 703–704 Premium on bonds payable, 651 Prepaid expenses, 84, 151–157 alternative recording method, 172–173 plant assets versus, 154 Present value, 652, 667–668 of annuities, 668–669 of bonds payable, 669–670 of lump sum, 668 tables, A-1–A-2 Price/earnings ratio, 724, 849 Principal, 475, 650 Prior-period adjustments, 722 Privately held corporations, 698 Probable contingent liabilities, 621 Profitability evaluating, 846–849 Promissory notes See notes receivable Property, plant, and equipment (PP&E), 153–157, 215 depreciation See depreciation disposal of, 529–536 exchange of, 543–545 reporting, 528–529 types of, 515–520 www.downloadslide.net Proprietors, 33 Protecting assets See internal control Public companies, 407 Public corporations, 698 Purchase allowances, 282–283, 302 Purchase discounts, 281–282 Purchase invoices, 279 Purchase returns, 282–283, 302 Purchasers, 279 Purchases in manual accounting information systems, B-14–B-20 of merchandise inventory, 279–285, 301–302 Purchases journal, B-14–B-16 Q Qualified opinions, 828 Quick ratio, 482–483, 840–841 QuickBooks, B-22–B-24 R Rate of return on common stockholders’ equity, 724–725, 847–848 Rate of return on total assets, 586, 846–847 Ratio analysis, 827, 838–852 accounts receivable turnover ratio, 843–844 acid-test ratio, 840–841 asset turnover ratio, 847 cash ratio, 840 current ratio, 841 days’ sales in inventory, 842–843 days’ sales in receivables, 844 debt ratio, 844–845 debt to equity ratio, 845 dividend payout, 850 dividend yield, 849–850 earnings per share (EPS), 848–849 gross profit percentage, 843 inventory turnover, 842 price/earnings ratio, 849 profit margin ratio, 846 rate of return on common stockholders’ equity, 847–848 rate of return on total assets, 846–847 times-interest-earned ratio, 845–846 working capital, 839–840 Real accounts See permanent accounts Reasonably possible contingent liabilities, 621 Receivables, 459 evaluating ability to collect, 842–844 factoring and pledging, 462 internal control, 460 notes receivable, 475–480 types of, 459–460 See also accounts receivable Recording transactions See transactions, recording Recovery of write-offs allowance method, 467–468 Subject Index direct write-off method, 463–464 Regulation of corporations, 34 Relative-market-value method, 518–519 Remittance advice, 413 Remote contingent liabilities, 621 Report form, 217 Required deductions, 610 Retailers, 276 Retained earnings, 38, 701 See also statement of retained earnings Retirement of bonds payable, 660–662 of stock, 711 Return on assets (ROA), 50–51, 586 Return on equity, 724–725, 847–848 Returns purchase returns, 282–283, 302 sales returns, 289–290 Revenue expenditures, 519–520 Revenue recognition principle, 148–149 Revenues, 38 accrued, 162–165 deferred, 84, 157–158, 174–175 interest accrued, 478–480 recording early, 230 sales, 287 Reversing entries, 231–234 Risk assessment, 408 Routing numbers, 422 S Salary, 609 Sales in manual accounting information systems, B-5–B-14 of merchandise inventory, 286–291, 302–303 of treasury stock, 707–710 Sales discounts, 288–289 Sales invoices, B-22–B-23, 279 Sales journal, B-7–B-10 Sales on account, 287 allowance method, 465–474 decreasing collection time and credit risk, 461–462 direct write-off method, 463–464, 474 recording, 460–461 Sales prices See prices Sales returns and allowances, 289–290 Sales revenue, 287 Sales tax payable, 606 Salvage value, 521 Sarbanes-Oxley Act (SOX), 37, 407–408 Secured bonds, 651 Securities, 572 Securities and Exchange Commission (SEC), 30, 32 Sellers, 279 I-9 www.downloadslide.net I-10 Subject Index Selling plant assets, 532–534 Selling expenses, 297 Separation of duties, 409 Serial bonds, 651 Servers, B-4 Shareholders See stockholders Short-term investments, 573 Short-term notes payable, 607–609 Signature cards, 422 Significant interest equity investments, 574 recording, 578–580 Simple interest, 666 Single-step income statement, 295 Slide errors, 107 Small stock dividends, 715–717 Social Security (FICA) tax, 611 Software, B-21 entry-level, B-21 Sole proprietorships, 33 Source documents, B-3, 90–91 Special journals, B-5–B-6, B-20 Specific identification method, 357 Spreadsheets preparing statement of cash flows, 784–786 See also Excel State Unemployment Tax Act (SUTA), 615 Stated interest rate, 651 Stated value stock, 701 issuing, 705 Statement of cash flows, 45, 48–49, 759, 829 with Excel, 821 formats for operating activities, 762 preparing with direct method, 778–784 preparing with indirect method, 762–777 preparing with spreadsheet, 784–786 purpose of, 759 sections in, 760–761 Statement of earnings See income statement Statement of financial position See balance sheet Statement of operations See income statement Statement of retained earnings, 45, 46–47 for corporations, 721–722 for merchandising companies, 297 relationship with other financial statements, 213–214 Statement of stockholders’ equity, 722–723, 829 Stock cash dividends, 711–714, 718 categories of, 699–700 earnings per share (EPS), 720 evaluating as investment, 849–850 issuing, 702–706 retiring, 711 in statement of cash flows, 772–773 stock dividends, 714–718 treasury stock, 707–710 Stock certificates, 699 Stock dividends, 714–718 Stock splits, 718 Stockholders, 33–34, 698 equity, 38–39 investment decisions, 50 rights, 700 Stockholders’ equity, 701 on classified balance sheet, 216 evaluating business performance, 723–725 with Excel, 751 reporting, 721–723 statement of, 722–723 See also stock Straight time, 610 Straight-line amortization method, 655–660 Straight-line method, 154, 522–523, 525–526 Subsidiary accounts, 461 Subsidiary company, 580 Subsidiary ledgers, B-6–B-7 Suppliers See vendors T T-accounts, 87 balance of, 89 Take-home pay, 610 Taxes corporate taxation, 34 depreciation and, 526–527 employer payroll taxes, 614–616 income tax withholding, 611 Social Security (FICA) tax, 611 Taxing authorities, 30 Temporary accounts, 219 closing process, summary, 223–224 net income, 220–222 net loss, 223 Term bonds, 651 Time period concept, 148 Time value of money, 652, 665–671 Times-interest-earned ratio, 622–623, 845–846 Timing differences, 424 Trade receivables See accounts receivable Trademark, 540 Trading debt investments, 573 reporting, 580–582 Trading on the equity, 848 Transaction analysis, 39–44 with Excel, 78 Transactions, 39 ethics of changing, B-22 Transactions, posting, 91–101 from cash payments journal, B-18–B-19 from cash receipts journal, B-13–B-14 with Excel, 139 www.downloadslide.net in four-column accounts, 104 ledger accounts after, 101–103 from purchases journal, B-16 from sales journal, B-10 Transactions, recording in cash payments journal, B-18 in cash receipts journal, B-12–B-13 in computerized accounting information systems, B-21–B-24 with Excel, 139 four-column accounts, 103–104 journalizing and posting, 91–101 ledger accounts after posting, 101–103 in purchases journal, B-16 in sales journal, B-7–B-10 source documents, 90–91 in special journals, B-20 Transportation costs, 284–285, 290–291, 302 Transposition errors, 107 Treasurers, 409 Treasury stock, 707–710 purchasing, 707 sales of, 707–710 in statement of cash flows, 772–773 Trend analysis, 832–833 Trial balance, 105–107 adjusted, 166–167, 170–171, 205–206 balance sheet versus, 105 correcting errors, 106–107 financial statements, preparing, 105–106 post-closing, 226 unadjusted, 150 U Unadjusted trial balance, 150 Uncollectible accounts expense, 463 Subject Index Uncollectible receivables allowance method, 465–474 direct write-off method, 463–464, 474 Underwriter, 702 Unearned revenues, 84, 157–158, 607 alternative recording method, 174–175 Unemployment compensation taxes, 615 Units-of-production method, 523–524, 525–526 Unqualified opinions, 828 Useful life, 521 V Vacation benefits, 618 Vendors, B-7, 277 gifts from, 282 payments to, 780–781 Vertical analysis, 827, 833–838 W Wages, 610 Warranties, 618–619 Weighted-average method, 361–363, 375 Wholesalers, 276 Withholding allowances, 611 Withholding deductions, 610–613 Working capital, 839–840 Worksheets adjusting entries and, 170–171 financial statements and, 217–218 Write-offs, 458 allowance method, 465–474 direct write-off method, 463–464, 474 I-11 www.downloadslide.net This page intentionally left blank www.downloadslide.net This page intentionally left blank www.downloadslide.net This page intentionally left blank www.downloadslide.net This page intentionally left blank www.downloadslide.net This page intentionally left blank www.downloadslide.net Company Index A M Amazon.com, Inc., 758, 774, 823 Macy’s, Inc., 249, 257, 323 McCormick & Company, Incorporated, B-1, B-4, B-53 McDonald’s, 488, 516, 542 B Berkshire Hathaway, Inc., 571, 585, 601 Buffalo Wild Wings, Inc., 406, 421, 455 R Raymond James Financial, Inc., 800 D Dick’s Sporting Goods, Inc., 352, 368, 404 F Facebook, Inc., 697, 702, 755 Fry’s Electronics, Inc., 82, 101, 142 H Hyatt Hotels Corporation, 211, 225, 272 I iHeartMedia, Inc., 145, 169, 208 K S Sears Holdings Corporation, 432, 449, 456–457, 485 Starbucks Corporation, 27, 48, 79 T Target Corporation, 25, 184, 247, 325, 379, 431, 487, 543–544, 577, 618, 670, 730, 799, 858 U UnitedHealth Group Incorporated, 578, 594, 617 W The Walt Disney Company, 619, 637, 669 Kohl’s Corporation, 24, 82, 272, 328, 346–347, 379, 403, 431, 455, 544, 560, 577, 596–597, 618, 638, 670, 698–699, 803 I-17 www.downloadslide.net This page intentionally left blank www.downloadslide.net Photo Credits Front Matter Page 3: (top) Bill Woodhull; (middle) Richard Smith; (bottom) Kam-Wah Tsui Chapter Page 27: (top) Bragin Alexey/Shutterstock; (middle right) Barbara Tripp/Shutterstock; (bottom left) lightwavemedia/ Shutterstock; page 28: (top right) Fotolia; page 30: Monkey Business Images/Shutterstock; page 43: (top) Iodrakon/ Shutterstock; page 43: (bottom right) michaeljung/Shutterstock; page 47: Rido/Shutterstock; page 48: Mike Flippo/ Shutterstock Chapter Page 82: (top) Djordje Radivojevic/Shutterstock; (middle left) Amasterphotographer/Shutterstock; (bottom right) Edyta Pawlowska/Shutterstock; page 83: (top right) Denis Vrublevski/Shutterstock; (bottom right) Lithian/ Shutterstock; page 86: Monkey Business Images/Shutterstock; page 87: Iodrakon/Shutterstock; page 96: michaeljung/ Shutterstock Chapter Page 145: (top) Ragnarocks/Fotolia; (middle right) Brand X Pictures/Stockbyte/Getty Images; (bottom left) Yuri Arcurs/Fotolia; page 146: (top right) Illustrart/Fotolia; (bottom) Lisa F Young/Shutterstock; page 155: Rido/ Shutterstock Chapter Page 211: (top) Dimedrol68/Shutterstock; (middle right) Njaj/Shutterstock; (bottom left) Mountainpix/Shutterstock; page 212: (top right) Andrew Buckin/Shutterstock; page 218: Mike Flippo/Shutterstock; page 223: Lithian/ Shutterstock Chapter Page 275: (top) Wasanajai/Shutterstock; (middle right) R Gino Santa Maria/Shutterstock; (bottom left) Pavelbendov/ Fotolia; page 276: (top left) Eimantas Buzas/Shutterstock; (middle right) Diana Taliun/Shutterstock; page 278: Monkey Business Images/Shutterstock; page 281: Iodrakon/Shutterstock Chapter Page 352: (top) Ari N./Shutterstock;(middle left) K Miri Photography/Shutterstock (bottom right) Blend Images/ Alamy; p 353: (top right) Tritooth/Fotolia; (middle right) Steshkin Yevgeniy/Shutterstock; page 365: Shutterstock Chapter Page 406: (top) Todd Taulman/Shutterstock; (middle left) Eric Gevaert/Shutterstock; (bottom right) Michaeljung/ Shutterstock; page 407: (middle right) Krungchingpixs/Shutterstock; page 418: Rido/Shutterstock Chapter Page 458: (top) Jmiks/Shutterstock; (middle left) Nenetus/shutterstock; (bottom left) Andresr/Shutterstock; Artjazz/ Shutterstock; page 459: (top right) Photobac/Shutterstock; page 466: Mike Flippo/Shutterstock; page 471: Lithian/ Shutterstock Chapter Page 514: (top) J Helgason/Shutterstock; (middle left) Kjpargeter/Shutterstock; (bottom right) Dmitry Kalinovsky/ Shutterstock; page 515: (middle right) JPL Designs/Shutterstock; page 527: Monkey Business Images/Shutterstock; page 539: Iodrakon/Shutterstock; page 541: (bottom right) Mim Friday/Alamy Chapter 10 Page 571: (top) Iodrakon/Shutterstock; (middle right) Bambuh/Shutterstock; (bottom left) Peter Bernik/Shutterstock; page 572: (top right) Jeka84/Shutterstock; page 579: Monkey Business Images/Shutterstock Chapter 11 Page 604: (top) Y.H Lim/Alamy; (middle left) Elisanth/Shutterstock; (bottom right) Carlo Dapino/Shutterstock; page 605: (top right) Pan Xunbin/Shutterstock; page 612: michaeljung/Shutterstock Chapter 12 Page 645: (top) Albachiaraa/Fotolia; (middle left) arfo/Fotolia; (bottom left) PeopleImages.com/Getty; page 646: (top left) Shutterstock; (middle right) Alex Staroseltsev/Shutterstock; page 649: Mike Flippo/Shutterstock; page 653: Lithian/Shutterstock P-1 www.downloadslide.net P-2 Photo Credits Chapter 13 Page 697: (top) AG-Photos/Shutterstock; (middle right) Nuttapong/Shutterstock; (bottom left) StockLite Shutterstock; page 698: (top right) David Castillo DominiciShutterstock; page 701: Rido/Shutterstock Chapter 14 Page 758: (top) Nielskliim/Shutterstock; (middle left) Kongsky/Shutterstock; (bottom right) HomeArt/Shutterstock; page 759: (top right) Aaron Amat/Shutterstock; (middle right) Sean Gladwell/Shutterstock; page 767: Iodrakon/ Shutterstock; page 782: michaeljung/Shutterstock Chapter 15 Page 826: (top) Get4net/Fotolia; (middle left) Rangizzz/Fotolia; (bottom right) Imagemore Co Ltd./Alamy; page 827: (middle right) Pokomeda/Shutterstock; page 833: Lisa F Young/Shutterstock Appendix B Page B-1: (top) Zhukov Oleg/Shutterstock; (middle right) Vincent Pen/Fotolia; (bottom left) Nat Ulrich/ Shutterstock; page B-2: (top right) Djama/Fotolia ... Receivable Jan 1, 20 20 4,400 25 Jan 10, 20 20 Bal 4,375 Allowance for Bad Debts 80 Jan 1, 20 20 Jan 10, 20 20 25 55 Bal The entry to write off a receivable reduces the amount of the Allowance for... Adj Dec 31, 20 20, Bal Income statement account: Bad Debts Expense Jan 1, 20 20, Bal Adj Dec 31, 20 20, Bal 300 300 Percent-of-Receivables Method The percent-of-receivables and aging-of-receivables... Debts 80 Jan 1, 20 20, Bal Write-offs 25 55 Unadj Bal 20 0 Adj 25 5 Dec 31, 20 20, Bal Step 2: The bad debts expense adjustment must be calculated based on the target balance $25 5 – $55 = $20 0 Step 1: