Part 2 ebook “corporate financial accounting” has contents: receivables, fixed assets and intangible assets, current liabilities and payroll, investments and fair value accounting, statement of cash flows, financial statement analysis, corporations - organization, stock transactions, and dividends,… and other contents.
Chapter Cavan Images/Riser/Getty Images Receivables Oakley, Inc T he sale and purchase of merchandise involves the exchange of goods for cash However, the point at which cash actually changes hands varies with the transaction Consider transactions by Oakley, Inc., a worldwide leader in the design, development, manufacture, and distribution of premium sunglasses, goggles, prescription eyewear, apparel, footwear, and accessories Not only does the company sell its products through three different company-owned retail chains, but it also has approximately 10,000 independent distributors If you were to buy a pair of sunglasses at an Oakley Vault, which is one of the company’s retail outlet stores, you would have to pay cash or use a credit card to pay for the glasses before you left the store However, Oakley allows its distributors to purchase sunglasses “on account.” These sales on account are recorded as receivables due from the distributors As an individual, you also might build up a trusted financial history with a local company or department store that would allow you to purchase merchandise on account Like Oakley’s distributors, your purchase on account would be recorded as an account receivable Such credit transactions facilitate sales and are a significant current asset for many businesses This chapter describes common classifications of receivables, illustrates how to account for uncollectible receivables, and demonstrates the reporting of receivables on the balance sheet Copyright 2012 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s) Editorial review has deemed that any suppressed content does not materially affect the overall learning experience Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it 362 Chapter Receivables Learning Objectives Example Exercises After studying this chapter, you should be able to: Describe the common classes of receivables Classification of Receivables Accounts Receivable Notes Receivable Other Receivables Describe the accounting for uncollectible receivables Uncollectible Receivables Describe the direct write-off method of accounting for uncollectible receivables Direct Write-Off Method for Uncollectible Accounts EE 8-1 Describe the allowance method of accounting for uncollectible receivables Allowance Method for Uncollectible Accounts Write-Offs to the Allowance Account Estimating Uncollectibles EE 8-2 EE 8-3 EE 8-4 Compare the direct write-off and allowance methods of accounting for uncollectible accounts Comparing Direct Write-Off and Allowance Methods Describe the accounting for notes receivable Notes Receivable Characteristics of Notes Receivable Accounting for Notes Receivable EE 8-5 Describe the reporting of receivables on the balance sheet Reporting Receivables on the Balance Sheet Describe and illustrate the use of accounts receivable turnover and number of days’ sales in receivables to evaluate a company’s efficiency in collecting its receivables Financial Analysis and Interpretation: Accounts Receivable Turnover and Number of Days’ Sales in Receivables EE 8-6 At a Glance Describe the common classes of receivables Page 379 Classification of Receivables The receivables that result from sales on account are normally accounts receivable or notes receivable The term receivables includes all money claims against other entities, including people, companies, and other organizations Receivables are usually a significant portion of the total current assets Accounts Receivable The most common transaction creating a receivable is selling merchandise or services on account (on credit) The receivable is recorded as a debit to Accounts Receivable Such accounts receivable are normally collected within a short period, such as 30 or 60 days They are classified on the balance sheet as a current asset A recent balance sheet of Caterpillar Inc reported that receivables made up over 56% of its current assets Notes Receivable Notes receivable are amounts that customers owe for which a formal, written instru- ment of credit has been issued If notes receivable are expected to be collected within a year, they are classified on the balance sheet as a current asset Notes are often used for credit periods of more than 60 days For example, an automobile dealer may require a down payment at the time of sale and accept a note or a series of notes for the remainder Such notes usually provide for monthly payments Notes may also be used to settle a customer’s account receivable Notes and accounts receivable that result from sales transactions are sometimes called trade receivables In this chapter, all notes and accounts receivable are from sales transactions Copyright 2012 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s) Editorial review has deemed that any suppressed content does not materially affect the overall learning experience Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it Chapter Receivables 363 Other Receivables Other receivables include interest receivable, taxes receivable, and receivables from officers or employees Other receivables are normally reported separately on the balance sheet If they are expected to be collected within one year, they are classified as current assets If collection is expected beyond one year, they are classified as noncurrent assets and reported under the caption Investments Uncollectible Receivables In prior chapters, the accounting for sales of merchandise or services on account (on credit) was described and illustrated A major issue that has not yet been discussed is that some customers will not pay their accounts That is, some accounts receivable will be uncollectible Companies may shift the risk of uncollectible receivables to other companies For example, some retailers not accept sales on account, but will only accept cash or credit cards Such policies shift the risk to the credit card companies Companies may also sell their receivables This is often the case when a company issues its own credit card For example, Macy’s and JCPenney issue their own credit cards Selling receivables is called factoring the receivables The buyer of the receivables is called a factor An advantage of factoring is that the company selling its receivables immediately receives cash for operating and other needs Also, depending on the factoring agreement, some of the risk of uncollectible accounts is shifted to the factor Regardless of how careful a company is in granting credit, some credit sales will be uncollectible The operating expense recorded from uncollectible receivables is called bad debt expense, uncollectible accounts expense, or doubtful accounts expense There is no general rule for when an account becomes uncollectible Some indications that an account may be uncollectible include the following: The The The The The receivable is past due customer does not respond to the company’s attempts to collect customer files for bankruptcy customer closes its business company cannot locate the customer If a customer doesn’t pay, a company may turn the account over to a collection agency After the collection agency attempts to collect payment, any remaining balance in the account is considered worthless Describe the accounting for uncollectible receivables Adams, Stevens & Bradley, Ltd is a collection agency that operates on a contingency basis That is, its fees are based on what it collects The two methods of accounting for uncollectible receivables are as follows: The direct write-off method records bad debt expense only when an account is determined to be worthless The allowance method records bad debt expense by estimating uncollectible accounts at the end of the accounting period The direct write-off method is often used by small companies and companies with few receivables.1 Generally accepted accounting principles (GAAP), however, require companies with a large amount of receivables to use the allowance method As a result, most wellknown companies such as General Electric, Pepsi, Intel, and FedEx use the allowance method Direct Write-Off Method for Uncollectible Accounts Describe the direct write-off method of accounting for uncollectible receivables Under the direct write-off method, Bad Debt Expense is not recorded until the customer’s account is determined to be worthless At that time, the customer’s account receivable is written off The direct write-off method is also required for federal income tax purposes Copyright 2012 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s) Editorial review has deemed that any suppressed content does not materially affect the overall learning experience Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it 364 Chapter Receivables To illustrate, assume that on May 10 a $4,200 account receivable from D L Ross has been determined to be uncollectible The entry to write off the account is as follows: May 10 Bad Debt Expense Accounts Receivable—D L Ross 4,200 4,200 An account receivable that has been written off may be collected later In such cases, the account is reinstated by an entry that reverses the write-off entry The cash received in payment is then recorded as a receipt on account To illustrate, assume that the D L Ross account of $4,200 written off on May 10 is later collected on November 21 The reinstatement and receipt of cash is recorded as follows: Nov 21 21 Accounts Receivable—D L Ross Bad Debt Expense 4,200 Cash Accounts Receivable—D L Ross 4,200 4,200 4,200 The direct write-off method is used by businesses that sell most of their goods or services for cash or through the acceptance of MasterCard or VISA, which are recorded as cash sales In such cases, receivables are a small part of the current assets and any bad debt expense is small Examples of such businesses are a restaurant, a convenience store, and a small retail store Example Exercise 8-1 Direct Write-Off Method Journalize the following transactions, using the direct write-off method of accounting for uncollectible receivables: July Received $1,200 from Jay Burke and wrote off the remainder owed of $3,900 as uncollectible Oct 11 Reinstated the account of Jay Burke and received $3,900 cash in full payment Follow My Example 8-1 July 9 Cash Bad Debt Expense Accounts Receivable—Jay Burke 1,200 3,900 Oct 11 Accounts Receivable—Jay Burke Bad Debt Expense 3,900 Cash Accounts Receivable—Jay Burke 3,900 11 5,100 3,900 3,900 Practice Exercises: PE 8-1A, PE 8-1B Describe the allowance method of accounting for uncollectible receivables Allowance Method for Uncollectible Accounts The allowance method estimates the uncollectible accounts receivable at the end of the accounting period Based on this estimate, Bad Debt Expense is recorded by an adjusting entry To illustrate, assume that ExTone Company began operations August As of the end of its accounting period on December 31, 2013, ExTone has an accounts receivable balance of $200,000 This balance includes some past due accounts Based Copyright 2012 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s) Editorial review has deemed that any suppressed content does not materially affect the overall learning experience Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it Chapter Receivables 365 on industry averages, ExTone estimates that $30,000 of the December 31 accounts receivable will be uncollectible However, on December 31, ExTone doesn’t know which customer accounts will be uncollectible Thus, specific customer accounts cannot be decreased or credited Instead, a contra asset account, Allowance for Doubtful Accounts, is credited for the estimated bad debts Using the $30,000 estimate, the following adjusting entry is made on December 31: 2013 Dec 31 Bad Debt Expense Allowance for Doubtful Accounts Uncollectible accounts estimate 30,000 30,000 The preceding adjusting entry affects the income statement and balance sheet On the income statement, the $30,000 of Bad Debt Expense will be matched against the related revenues of the period On the balance sheet, the value of the receivables is reduced to the amount that is expected to be collected or realized This amount, $170,000 ($200,000 – $30,000), is called the net realizable value of the receivables After the preceding adjusting entry is recorded, Accounts Receivable still has a debit balance of $200,000 This balance is the total amount owed by customers on account on December 31 as supported by the accounts receivable subsidiary ledger The accounts receivable contra account, Allowance for Doubtful Accounts, has a credit balance of $30,000 Note: The adjusting entry reduces receivables to their net realizable value and matches the uncollectible expense with revenues Seller Beware A company in financial distress will still try to purchase goods and services on account In these cases, rather than “buyer beware,” it is more like “seller beware.” Sellers must be careful in advancing credit to such companies, because trade creditors have low priority for cash payments in the event of bankruptcy To help suppliers, thirdparty services specialize in evaluating court actions and payment decisions of financially distressed companies Write-Offs to the Allowance Account When a customer’s account is identified as uncollectible, it is written off against the allowance account This requires the company to remove the specific accounts receivable and an equal amount from the allowance account To illustrate, on January 21, 2014, John Parker’s account of $6,000 with ExTone Company is written off as follows: 2014 Jan 21 Allowance for Doubtful Accounts Accounts Receivable—John Parker 6,000 6,000 At the end of a period, Allowance for Doubtful Accounts will normally have a balance This is because Allowance for Doubtful Accounts is based on an estimate As a result, the total write-offs to the allowance account during the period will rarely equal the balance of the account at the beginning of the period The allowance account will have a credit balance at the end of the period if the write-offs during the period are less than the beginning balance It will have a debit balance if the writeoffs exceed the beginning balance Copyright 2012 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s) Editorial review has deemed that any suppressed content does not materially affect the overall learning experience Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it © Cengage Learning 2014 Integrity, Objectivity, and Ethics in Business 366 Chapter Receivables The Allowance Method ting jus Ad ntry E Adjusting entry fills the bucket or ef L nc wa FU Allo UBT nts DO ccou A Writing off accounts empties the bucket © Cengage Learning 2014 Allowance for DOUBTFUL Accounts To illustrate, assume that during 2014 ExTone Company writes off $26,750 of uncollectible accounts, including the $6,000 account of John Parker recorded on January 21 Allowance for Doubtful Accounts will have a credit balance of $3,250 ($30,000 – $26,750), as shown below ALLOWANCE FOR DOUBTFUL ACCOUNTS Jan Feb 21 Jan Balance 30,000 Dec 31 Unadjusted balance 6,000 3,900 … … Total accounts written off $26,750 3,250 If ExTone Company had written off $32,100 in accounts receivable during 2014, Allowance for Doubtful Accounts would have a debit balance of $2,100, as shown below ALLOWANCE FOR DOUBTFUL ACCOUNTS Jan 21 Balance 30,000 6,000 3,900 … Jan Feb … Total accounts written off $32,100 Dec 31 Unadjusted balance 2,100 The allowance account balances (credit balance of $3,250 and debit balance of $2,100) in the preceding illustrations are before the end-of-period adjusting entry After the end-of-period adjusting entry is recorded, Allowance for Doubtful Accounts should always have a credit balance An account receivable that has been written off against the allowance account may be collected later Like the direct write-off method, the account is reinstated by an entry that reverses the write-off entry The cash received in payment is then recorded as a receipt on account To illustrate, assume that Nancy Smith’s account of $5,000 which was written off on April is collected later on June 10 ExTone Company records the reinstatement and the collection as follows: June 10 10 Accounts Receivable—Nancy Smith Allowance for Doubtful Accounts 5,000 Cash Accounts Receivable—Nancy Smith 5,000 5,000 5,000 Copyright 2012 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s) Editorial review has deemed that any suppressed content does not materially affect the overall learning experience Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it Chapter Receivables 367 Example Exercise 8-2 Allowance Method Journalize the following transactions, using the allowance method of accounting for uncollectible receivables July Received $1,200 from Jay Burke and wrote off the remainder owed of $3,900 as uncollectible Oct 11 Reinstated the account of Jay Burke and received $3,900 cash in full payment Follow My Example 8-2 July 9 Cash Allowance for Doubtful Accounts Accounts Receivable—Jay Burke 1,200 3,900 Oct 11 Accounts Receivable—Jay Burke Allowance for Doubtful Accounts 3,900 Cash Accounts Receivable—Jay Burke 3,900 11 5,100 3,900 3,900 Practice Exercises: PE 8-2A, PE 8-2B Estimating Uncollectibles The allowance method requires an estimate of uncollectible accounts at the end of the period This estimate is normally based on past experience, industry averages, and forecasts of the future The two methods used to estimate uncollectible accounts are as follows: Percent of sales method Analysis of receivables method Percent of Sales Method Since accounts receivable are created by credit sales, uncollectible accounts can be estimated as a percent of credit sales If the portion of credit sales to sales is relatively constant, the percent may be applied to total sales or net sales Business ALLOWANCE PERCENTAGES ACROSS COMPANIES The percent of the allowance for doubtful accounts to total accounts receivable will vary across companies and industries For example, the following percentages were computed from recent annual reports: Connection HCA’s higher percent of allowance for doubtful accounts to total accounts receivable is due in part because Medicare reimbursements are often less than the amounts billed patients Company Industry Apple Inc Computer/technology products Boeing Aerospace & airplanes Delta Air Lines Transportation services HCA Inc Health services Sears Retail Percent of Allowance for Doubtful Accounts to Total Accounts Receivable 1.0% 1.0 2.7 50.7 5.0 Copyright 2012 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s) Editorial review has deemed that any suppressed content does not materially affect the overall learning experience Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it 368 Chapter Receivables To illustrate, assume the following data for ExTone Company on December 31, 2014, before any adjustments: Balance of Accounts Receivable Balance of Allowance for Doubtful Accounts Total credit sales Bad debt as a percent of credit sales $ 240,000 3,250 (Cr.) 3,000,000 ¾% Bad Debt Expense of $22,500 is estimated as follows: Bad Debt Expense = Credit Sales × Bad Debt as a Percent of Credit Sales Bad Debt Expense = $3,000,000 × ¾% = $22,500 The adjusting entry for uncollectible accounts on December 31, 2014, is as follows: Dec 31 Bad Debt Expense Allowance for Doubtful Accounts Uncollectible accounts estimate ($3,000,000 × ¾% = $22,500). 22,500 22,500 After the adjusting entry is posted to the ledger, Bad Debt Expense will have an adjusted balance of $22,500 Allowance for Doubtful Accounts will have an adjusted balance of $25,750 ($3,250 + $22,500) Both T accounts are shown below BAD DEBT EXPENSE Dec. 31 Dec. 31 Adjusting entry Adjusted balance 22,500 22,500 Note: The estimate based on sales is added to any balance in Allowance for Doubtful Accounts 6,000 3,900 … Total accounts written off $26,750 Jan 21 Feb … ALLOWANCE FOR DOUBTFUL ACCOUNTS Jan Balance 30,000 Dec 31 Dec 31 Dec 31 Unadjusted balance Adjusting entry Adjusted balance 3,250 22,500 25,750 Under the percent of sales method, the amount of the adjusting entry is the amount estimated for Bad Debt Expense This estimate is credited to whatever the unadjusted balance is for Allowance for Doubtful Accounts To illustrate, assume that in the preceding example the unadjusted balance of Allowance for Doubtful Accounts on December 31, 2014, had been a $2,100 debit balance instead of a $3,250 credit balance The adjustment would still have been $22,500 However, the December 31, 2014, ending adjusted balance of Allowance for Doubtful Accounts would have been $20,400 ($22,500 – $2,100) Example Exercise 8-3 Percent of Sales Method At the end of the current year, Accounts Receivable has a balance of $800,000; Allowance for Doubtful Accounts has a credit balance of $7,500; and net sales for the year total $3,500,000 Bad debt expense is estimated at ½ of 1% of net sales Determine (a) the amount of the adjusting entry for uncollectible accounts; (b) the adjusted balances of Accounts Receivable, Allowance for Doubtful Accounts, and Bad Debt Expense; and (c) the net realizable value of accounts receivable Follow My Example 8-3 a $17,500 ($3,500,000 × 0.005) b Accounts Receivable Allowance for Doubtful Accounts ($7,500 + $17,500) Bad Debt Expense Adjusted Balance $800,000 25,000 17,500 c $775,000 ($800,000 – $25,000) Practice Exercises: PE 8-3A, PE 8-3B Copyright 2012 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s) Editorial review has deemed that any suppressed content does not materially affect the overall learning experience Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it Chapter Receivables 369 Analysis of Receivables Method The analysis of receivables method is based on the assumption that the longer an account receivable is outstanding, the less likely that it will be collected The analysis of receivables method is applied as follows: Step Step The due date of each account receivable is determined The number of days each account is past due is determined This is the number of days between the due date of the account and the date of the analysis Step Each account is placed in an aged class according to its days past due Typical aged classes include the following: Not past due 1–30 days past due 31–60 days past due 61–90 days past due 91–180 days past due 181–365 days past due Over 365 days past due Step The totals for each aged class are determined Step The total for each aged class is multiplied by an estimated percentage of uncollectible accounts for that class Step The estimated total of uncollectible accounts is determined as the sum of the uncollectible accounts for each aged class The preceding steps are summarized in an aging schedule, and this overall process is called aging the receivables To illustrate, assume that ExTone Company uses the analysis of receivables method instead of the percent of sales method ExTone prepared an aging schedule for its accounts receivable of $240,000 as of December 31, 2014, as shown in Exhibit Exhibit Aging of Receivables Schedule, December 31, 2014 A Customer Ashby & Co B T Barr Brock Co B Balance 1,500 6,100 4,700 C Not Past Due D E 1–30 31–60 1,500 F G Days Past Due 61–90 4,700 91–180 H I 181–365 Over 365 3,500 2,600 Steps 1–3 Saxon Woods Co 23 Total 24 Percent uncollectible Estimate of 25 uncollectible accounts 22 Step Step Step 600 240,000 125,000 64,000 13,100 8,900 600 5,000 10,000 14,000 2% 5% 10% 20% 30% 50% 80% 2,500 3,200 1,310 1,780 1,500 5,000 11,200 26,490 Assume that ExTone Company sold merchandise to Saxon Woods Co on August 29 with terms 2/10, n/30 Thus, the due date (Step 1) of Saxon Woods’ account is September 28, as shown below Credit terms, net Less: Aug 29 to Aug 31 Days in September 30 days 2 days 28 days Copyright 2012 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s) Editorial review has deemed that any suppressed content does not materially affect the overall learning experience Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it © Cengage Learning 2014 21 370 Chapter Receivables As of December 31, Saxon Woods’ account is 94 days past due (Step 2), as shown below Number of days past due in September Number of days past due in October Number of days past due in November Number of days past due in December Total number of days past due 2 days (30 – 28) 31 days 30 days 31 days 94 days Exhibit shows that the $600 account receivable for Saxon Woods Co was placed in the 91–180 days past due class (Step 3) The total for each of the aged classes is determined (Step 4) Exhibit shows that $125,000 of the accounts receivable are not past due, while $64,000 are 1–30 days past due ExTone Company applies a different estimated percentage of uncollectible accounts to the totals of each of the aged classes (Step 5) As shown in Exhibit 1, the percent is 2% for accounts not past due, while the percent is 80% for accounts over 365 days past due The sum of the estimated uncollectible accounts for each aged class (Step 6) is the estimated uncollectible accounts on December 31, 2014 This is the desired adjusted balance for Allowance for Doubtful Accounts For ExTone Company, this amount is $26,490, as shown in Exhibit Comparing the estimate of $26,490 with the unadjusted balance of the allowance account determines the amount of the adjustment for Bad Debt Expense For ExTone, the unadjusted balance of the allowance account is a credit balance of $3,250 The amount to be added to this balance is therefore $23,240 ($26,490 – $3,250) The adjusting entry is as follows: Note: The estimate based on receivables is compared to the balance in the allowance account to determine the amount of the adjusting entry Dec 31 Bad Debt Expense Allowance for Doubtful Accounts Uncollectible accounts estimate ($26,490 – $3,250) 23,240 23,240 After the preceding adjusting entry is posted to the ledger, Bad Debt Expense will have an adjusted balance of $23,240 Allowance for Doubtful Accounts will have an adjusted balance of $26,490, and the net realizable value of the receivables is $213,510 ($240,000 – $26,490) Both T accounts are shown below BAD DEBT EXPENSE Dec 31 Dec 31 Adjusting entry Adjusted balance 23,240 23,240 ALLOWANCE FOR DOUBTFUL ACCOUNTS Dec 31 Dec 31 Dec 31 Unadjusted balance Adjusting entry Adjusted balance 3,250 23,240 26,490 Under the analysis of receivables method, the amount of the adjusting entry is the amount that will yield an adjusted balance for Allowance for Doubtful Accounts equal to that estimated by the aging schedule To illustrate, if the unadjusted balance of the allowance account had been a debit balance of $2,100, the amount of the adjustment would have been $28,590 ($26,490 + $2,100) In this case, Bad Debt Expense would have an adjusted balance of $28,590 However, the adjusted balance of Allowance for Doubtful Accounts would still have been $26,490 After the adjusting entry is posted, both T accounts are shown below BAD DEBT EXPENSE Dec. 31 Dec. 31 Adjusting entry Adjusted balance 28,590 28,590 ALLOWANCE FOR DOUBTFUL ACCOUNTS Dec. 31 Unadjusted balance 2,100 Dec 31 Dec 31 Adjusting entry Adjusted balance 28,590 26,490 Copyright 2012 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s) Editorial review has deemed that any suppressed content does not materially affect the overall learning experience Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it Company Index N New York Stock Exchange (NYSE), 583, 599 News Corporation, 583, 601 Nike Inc., 138, 174, 319, 570, 629, 681, 697, 720, 748 Nokia Corporation, 423 Norfolk Southern Corporation, 414, 427 O Oakley, Inc., 361 Occidental Petroleum Corporation, 448 Office Depot Inc., 214, 407 Office Max, 214, 530 Overhill Flowers, Inc., 651 P Pacific Gas and Electric Company, 530 Pandora, 593 Panera Bread Company, 449, 470, 641 PayPal, 618 Peet’s Coffee & Tea Inc., 32 PepsiCo, Inc., 27, 363, 734 Polo Ralph Lauren Corporation, 393 Procter & Gamble Company, 31, 55, 404, 482, 599 Q Qwest Communications International, Inc., R R.J Reynolds Tobacco Company, 500 RadioShack Corporation, 114, 441 Ralph Lauren Corp., 737 RealNetworks, 103, 125 Research in Motion, Inc., 661 Rhapsody, 103 Risk Management Association, 704 Rite Aid Corp., 451 Ruby Tuesday, Inc., 427 S Safeway Inc., 305 Sears, 187, 367 Sears Holding Corporation, 215 Societe Generale, 347 Southern Airways, 54 Southwest Airlines Co., 10, 426, 427, 572 Speedway Motorsports, Inc., 732 Staples, Inc., 530, 581 Starbucks Corporation, 2, 32, 195, 426, 470, 500, 641 Sun Microsystems, Inc., 500 SunTrust Banks Inc., 31, 593 T Take-Two Interactive Software, Inc., 175 Target Corporation, 32, 90, 174, 187 TearLab Corp., 360 The Wall Street Journal, 601 3M, 500 Tiffany & Co., 187, 253, 315 Toyota Motor Corporation, 223 Twitter, U Under Armour, Inc., 195 Unilever Group, 637 I-13 Union Pacific, 737 United Airlines, Inc., 386, 426 United Continental Holdings, 555–556 United Parcel Service, Inc (UPS), 407 V Verizon Communications, Inc., 407, 441, 555–556, 602, 661 VISA, 219, 364 W Walgreen Co., 174, 407 Walmart Stores, Inc., 3, 8, 10, 31, 90, 174, 215, 315, 404, 407, 448 Walt Disney Company, The, 2, 174, 585 Washington Post Company, The, 500 Wells Fargo & Company, 326, 516, 599 Whirlpool Corporation, 404, 500 Winn-Dixie Stores Inc., 215, 305 WorldCom, 409, 535 Worthington Industries, Inc., 285 X Xerox Corporation, Y Yahoo!, 31, 536, 717 Yahoo! Finance, 601 YRC Worldwide, 737 Z Zacks Investment Research, 704 Zale Corporation, 290 Copyright 2012 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s) Editorial review has deemed that any suppressed content does not materially affect the overall learning experience Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it Copyright 2012 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s) Editorial review has deemed that any suppressed content does not materially affect the overall learning experience Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it Copyright 2012 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s) Editorial review has deemed that any suppressed content does not materially affect the overall learning experience Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it Copyright 2012 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s) Editorial review has deemed that any suppressed content does not materially affect the overall learning experience Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it Copyright 2012 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s) Editorial review has deemed that any suppressed content does not materially affect the overall learning experience Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it Copyright 2012 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s) Editorial review has deemed that any suppressed content does not materially affect the overall learning experience Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it Copyright 2012 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s) Editorial review has deemed that any suppressed content does not materially affect the overall learning experience Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it Copyright 2012 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s) Editorial review has deemed that any suppressed content does not materially affect the overall learning experience Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it Copyright 2012 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s) Editorial review has deemed that any suppressed content does not materially affect the overall learning experience Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it Copyright 2012 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s) Editorial review has deemed that any suppressed content does not materially affect the overall learning experience Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it Abbreviations and Acronyms Commonly Used in Business and Accounting AAA American Accounting Association ABC Activity-based costing AICPA American Institute of Certified Public Accountants CIA Certified Internal Auditor CIM Computer-integrated manufacturing Certified Management Accountant CMA CPA Certified Public Accountant Cr Credit Dr Debit EFT Electronic funds transfer EPS Earnings per share FAF Financial Accounting Foundation FASB Financial Accounting Standards Board FEI Financial Executives International FICA tax Federal Insurance Contributions Act tax FIFO First-in, first-out FOB Free on board GAAP Generally accepted accounting principles GASB Governmental Accounting Standards Board GNP Gross National Product IMA Institute of Management Accountants IRC Internal Revenue Code IRS Internal Revenue Service JIT Just-in-time LIFO Last-in, first-out Lower of C or M Lower of cost or market MACRS Modified Accelerated Cost Recovery System n/30 Net 30 n/eom Net, end-of-month P/E Ratio Price-earnings ratio POS Point of sale ROI Return on investment SEC Securities and Exchange Commission TQC Total quality control Copyright 2012 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s) Editorial review has deemed that any suppressed content does not materially affect the overall learning experience Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it The Basics Accounting Equation: Assets = Liabilities + (Stockholders’ Equity) Owner’s Equity T Account: Account Title Left Side Right Side debit credit Rules of Debit and Credit: Statement of Cash Flows A summary of the cash receipts and cash payments of a business entity for a specific period of time, such as a month or a year Accounting Cycle: Transactions are analyzed and recorded in the journal Transactions are posted to the ledger An unadjusted trial balance is prepared Adjustment data are assembled and analyzed An optional end-of-period spreadsheet is prepared Adjusting entries are journalized and posted to the ledger An adjusted trial balance is prepared Financial statements are prepared Closing entries are journalized and posted to the ledger 10 A post-closing trial balance is prepared Types of Adjusting Entries: Prepaid expense (deferred expense) Unearned revenue (deferred revenue) Accrued revenue (accrued asset) Accrued expense (accrued liability) Depreciation expense Each entry will always affect both a balance sheet and an income statement account Closing Entries: Analyzing and Journalizing Transactions Carefully read the description of the transaction to determine whether an asset, liability, capital stock, retained earnings, revenue, expense, or dividends account is affected by the transaction For each account affected by the transaction, determine whether the account increases or decreases Determine whether each increase or decrease should be r ecorded as a debit or a credit, following the rules of debit and credit Record the transaction using a journal entry Periodically post journal entries to the accounts in the ledger Prepare an unadjusted trial balance at the end of the period Financial Statements: Income Statement A summary of the revenue and expenses of a business entity for a specific period of time, such as a month or a year Retained Earnings Statement A summary of the changes in the retained earnings of a business entity that have occurred during a specific period of time, such as a month or a year Balance Sheet A list of the assets, liabilities, and stockholders’ equity of a business entity as of a specific date, usually at the close of the last day of a month or a year Revenue account balances are transferred to an account called Income Summary Expense account balances are transferred to an account called Income Summary The balance of Income Summary (net income or net loss) is transferred to Retained Earnings The balance of the owner’s drawing account is transferred to Retained Earnings Special Journals: Providing services on account → recorded in → Revenue (sales) journal Receipt of cash from any source → recorded in → Cash receipts journal Purchase of items on account → recorded in → Purchases journal Payments of cash for any purpose → recorded in → Cash payments journal 10 Shipping Terms: FOB Shipping Point Ownership (title) passes to buyer when merchandise is delivered to freight carrier Freight costs are paid by buyer FOB Destination delivered to buyer seller Copyright 2012 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s) Editorial review has deemed that any suppressed content does not materially affect the overall learning experience Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it 11 Format for Bank Reconciliation: Cash balance according to bank statement $xxx Add: Additions by company not on bank statement $xx Bank errors xx xx $xxx Deduct: Deductions by company not on bank statement $xx Bank errors xx xx Adjusted balance $xxx Cash balance according to company’s records $xxx Add: Additions by bank not recorded by company $xx Company errors xx xx $xxx Deduct: Deductions by bank not recorded by company $xx Company errors xx xx Adjusted balance $xxx 17 Break-Even Sales (Units) = Fixed Costs Unit Contribution Margin 18 Sales (Units) = Fixed Costs + Target Profit Unit Contribution Margin 19 Margin of Safety = Sales – Sales at Break-Even Point Sales 20 Operating Leverage = Contribution Margin Income from Operations 21 Variances Direct Materials Actual Price – = × Actual Quantity Price Variance Standard Price 12 Inventory Costing Methods: Direct Materials = Actual Quantity – × Standard Price Quantity Variance Standard Quantity Direct Labor = Actual Rate per Hour – × Actual Hours Rate Variance Standard Rate per Hour First-in, First-out (FIFO) Last-in, First-out (LIFO) Average Cost 13 Interest Computations: Interest = Face Amount (or Principal) Rate Time 14 Methods of Determining Annual Depreciation: Cost – Estimated Residual Value STRAIGHT-LINE: Estimated Life Double-Declining-Balance: Rate* Book Value at Beginning of Period *Rate is commonly twice the straight-line rate (1/Estimated Life) 15 Adjustments to Net Income (Loss) Using the Indirect Method Increase (Decrease) Net income (loss) $ XXX Adjustments to reconcile net income to net cash flow from operating activities: Depreciation of fixed assets XXX Amortization of intangible assets XXX Losses on disposal of assets XXX Gains on disposal of assets (XXX) Changes in current operating assets and liabilities: Increases in noncash current operating assets (XXX) Decreases in noncash current operating assets XXX Increases in current operating liabilities XXX Decreases in current operating liabilities (XXX) Net cash flow from operating activities $ XXX or $(XXX) 16 Contribution Margin Ratio = Sales – Variable Costs Sales Direct Labor = Actual Direct Labor Hours – Time Variance Standard Direct Labor Hours × Standard Rate per Hour Actual Variable Variable Factory Budgeted Variable Factory Overhead Controllable = – Factory Overhead Overhead Variance Fixed Factory Standard Hours Standard Fixed Factory Overhead = for 100% of – Hours for × Overhead Volume Normal Actual Units Rate Variance Capacity Produced 22 Rate of Return on Income from Operations = Invested Assets Investment (ROI) Alternative ROI Computation: Income from Operations Sales × ROI = Sales Invested Assets 23 Capital Investment Analysis Methods: Methods That Ignore Present Values: A Average Rate of Return Method B Cash Payback Method Methods That Use Present Values: A Net Present Value Method B Internal Rate of Return Method 24 Average Rate = Estimated Average Annual Income of Return Average Investment 25 Present Value Index = Total Present Value of Net Cash Flow Amount to Be Invested 26 Present Value Factor = Amount to Be Invested for an Annuity of $1 Equal Annual Net Cash Flows Copyright 2012 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s) Editorial review has deemed that any suppressed content does not materially affect the overall learning experience Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it Classification of Accounts Account Title Account Classification Accounts Payable Current liability Accounts Receivable Current asset Accumulated Depletion Contra fixed asset Contra fixed asset Accumulated Depreciation Advertising Expense Operating expense Allowance for Doubtful Accounts Contra current asset Amortization Expense Operating expense Bonds Payable ZLong-term liability Fixed asset Building Capital Stock Stockholders’ equity Cash Current asset Cash Dividends Stockholders’ equity Cash Dividends Payable Current liability Stockholders’ equity Common Stock Cost of Merchandise (Goods) Cost of merchandise Sold (goods sold) Deferred Income Tax Payable Current liability/Long- term liability Delivery Expense Operating expense Operating expense Depletion Expense Discount on Bonds Payable Long-term liability Dividend Revenue Other income Stockholders’ equity Dividends Employees Federal Income Tax Current liability Payable Fixed asset Equipment Exchange Gain Other income Other expense Exchange Loss Factory Overhead (Overapplied) Deferred credit Deferred debit Factory Overhead (Underapplied) Federal Income Tax Payable Current liability Federal Unemployment Tax Current liability Payable Finished Goods Current asset Cost of merchandise Freight In sold Freight Out Operating expense Other income Gain on Disposal of Fixed Assets Gain on Redemption of Bonds Other income Other income Gain on Sale of Investments Goodwill Intangible asset Income Tax Expense Income tax Income Tax Payable Current liability Insurance Expense Operating expense Interest Expense Other expense Current asset Interest Receivable Interest Revenue Other income Investment in Bonds Investment Investment in Stocks Investment Investment in Subsidiary Investment Land Fixed asset Loss on Disposal of Fixed Assets Other expense Loss on Redemption of Bonds Other expense Normal Financial Balance Statement Credit Debit Credit Credit Debit Credit Debit Credit Debit Credit Debit Debit Credit Credit Debit Balance sheet Balance sheet Balance sheet Balance sheet Income statement Balance sheet Income statement Balance sheet Balance sheet Balance sheet Balance sheet Retained earnings statement Balance sheet Balance sheet Income statement Credit Balance sheet Debit Debit Debit Credit Debit Credit Income Statement Income statement Balance sheet Income statement Retained earnings statement Balance sheet Debit Credit Debit Credit Debit Credit Credit Balance sheet Income statement Income statement Balance sheet (interim) Balance sheet (interim) Balance sheet Balance sheet Debit Debit Balance sheet Income statement Debit Credit Credit Credit Debit Debit Credit Debit Debit Debit Credit Debit Debit Debit Debit Debit Debit Income statement Income statement Income statement Income statement Balance sheet Income statement Balance sheet Income statement Income statement Balance sheet Income statement Balance sheet Balance sheet Balance sheet Balance sheet Income statement Income statement Copyright 2012 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s) Editorial review has deemed that any suppressed content does not materially affect the overall learning experience Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it Account Title Account Classification Normal Financial Balance Statement Loss on Sale of Investments Other expense Debit Income statement Marketable Securities Current asset Debit Balance sheet Materials Current asset Debit Balance sheet Current liability Credit Balance sheet Medicare Tax Payable Merchandise Inventory Current asset/Cost of Debit Balance sheet/Income merchandise sold statement Notes Payable Current liability/Long- Credit Balance sheet term liability Current asset/Investment Debit Balance sheet Notes Receivable Organizational Expenses Operating expense Debit Income statement Patents Intangible asset Debit Balance sheet Paid-In Capital from Sale of Stockholders’ equity Credit Balance sheet Treasury Stock Stockholders’ equity Credit Balance sheet Paid-In Capital in Excess of Par (Stated Value) Payroll Tax Expense Operating expense Debit Income statement Operating expense Debit Income statement Pension Expense Current asset Debit Balance sheet Petty Cash Preferred Stock Stockholders’ equity Credit Balance sheet Long-term liability Credit Balance sheet Premium on Bonds Payable Prepaid Insurance Current asset Debit Balance sheet Prepaid Rent Current asset Debit Balance sheet Cost of merchandise Debit Income statement Purchases sold Cost of merchandise Credit Income statement Purchases Discounts sold Purchases Returns and Cost of merchandise Credit Income statement Allowances sold Rent Expense Operating expense Debit Income statement Other income Credit Income statement Rent Revenue Retained Earnings Stockholders’ equity Credit Balance sheet/Retained earnings statement Operating expense Debit Income statement Salaries Expense Salaries Payable Current liability Credit Balance sheet Revenue from sales Credit Income statement Sales Sales Discounts Revenue from sales Debit Income statement Sales Returns and Allowances Revenue from sales Debit Income statement Current liability Credit Balance sheet Sales Tax Payable Sinking Fund Cash Investment Debit Balance sheet Investment Debit Balance sheet Sinking Fund Investments Social Security Tax Payable Current liability Credit Balance sheet State Unemployment Tax Payable Current liability Credit Balance sheet Stock Dividends Stockholders’ equity Debit Retained earnings statement Stock Dividends Distributable Stockholders’ equity Credit Balance sheet Supplies Current asset Debit Balance sheet Supplies Expense Operating expense Debit Income statement Treasury Stock Stockholders’ equity Debit Balance sheet Uncollectible Accounts Expense Operating expense Debit Income statement Unearned Rent Current liability Credit Balance sheet Utilities Expense Operating expense Debit Income statement Vacation Pay Expense Operating expense Debit Income statement Vacation Pay Payable Current liability/Long- Credit Balance sheet term liability Work in Process Current asset Debit Balance sheet Copyright 2012 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s) Editorial review has deemed that any suppressed content does not materially affect the overall learning experience Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it ... Due Date Balance May 22 , 20 13 Oct. 10, 20 13 Sept. 29 , 20 13 Oct. 20 , 20 13 Nov. 7, 20 13 Nov. 28 , 20 13 Dec. 7, 20 13 Jan. 20 , 20 14 $5,000 4,900 8,400 7,000 3,500 2, 400 6,800 4,400 Trophy... accounts estimate ($3,400,000 × 0.0 125 = $ 42, 500) 42, 500 1,100 2, 220 775 1,360 990 3,650 5,500 3,650 3,650 1,100 2, 220 775 1,360 990 42, 500 Copyright 20 12 Cengage Learning All Rights Reserved... Hair Designs Visions Hair & Nail Balance Aug 17, 20 13 Oct. 30, 20 13 July 3, 20 13 Sept. 8, 20 13 Nov 23 , 20 13 Nov 29 , 20 13 Dec. 7, 20 13 Jan. 11, 20 14 $10,000 8,500 7,500 6,600 3,600 1,400 4,000