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How do you find gross profit percentage?
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Journal Entry for a Sale using the Installment Sales Method:
- D: Installment Receivables
- C: Inventory
- C: Deferred Gross Profit
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Journal Entry to recognize gross profit using the Installment Sales Method:
- D: Deferred Gross Profit
- C: Realized Gross Profit
Find the amount of Deferred Gross Profit by multiplying the cash received by the gross profit percentage.
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When do you recoginze gross profit using the Cost Recovery Method?
Once all costs of the goods sold have been recovered.
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With both the completed contract and percentage-of-completion methods, where are all costs of construction recorded?
In an asset account called "Construction in Progress"
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What is the name of the contra asset account associated with Construction in Progress?
Billings on Construction Contract
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Percentage-of-Completion Method journal entry for sending a bill:
- D: Accounts Receivable
- C: Billings on Construction Contract
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Percentage-of-Completion Method journal entry for profit recognition:
- D: Construction in progress (gross profit)
- D: Cost of construction
- C: Revenue from long-term contracts
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How do you determine the amount of gross profit currently recognized using the percentage-of-completion method?
(Total estimated gross profit times percentage completed to date) minus gross profit previously recognized.
Find percentage completed to date by dividing actual costs to date by the total estimated cost.
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Using the percentage-of-completion method, how do you record a journal entry for a periodic loss of a profitable project?
- D: Cost of construction
- C: Revenue from long-term contracts
- C: Construction in progress (loss)
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If the Construction in Progress account is greater than the Billings on Construction Contract, how do you record it on the balance sheet?
- As a Current Asset:
- Costs and profit (amount) in excess of billings (amount)
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If the Billings on Construction Contract account is greater than the Construction in Progress account, how do you record it on the balance sheet?
- As a Current Liability:
- Billings (amount) in excess of costs (amount)
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What account do you put gross profit into when it is recognized, using the percentage-of-completion method? Why?
Construction in Progress account because it will now reflect the total value (cost + gross profit = sales price) of the asset.
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Using the percentage-of-completion method, what would the journal entry look like when the title officially passes to the customer?
- D: Billings on Construction Contract
- C: Construction in progress
This will close out both accounts.
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When does ownership change hands with f.o.b. shipping point?
As soon as it is shipped.
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When does ownership change hands with f.o.b. destination?
When the customer receives their goods.
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When do you recognize revenues and costs with the installment sales method?
Only when cash payments are received.
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When do you recognize gross profit using the cost recovery method?
After the cost of the item has been recovered.
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Using the completed contract method, when are revenues recognized?
When the earnings process is complete.
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What is Construction in Progress?
An asset accont similar to work in progress account.
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How do you record construction costs using the percentage-of-completion method?
- D: Construction in Progress
- C: Cash, materials, etc.
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How do you find total estimated gross profit?
Total estimated revenue - total estimated cost
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How do you find the amount of revenue reported each year, using the percentage-of-completion method?
(Contract price x percentage of completion) minus any previously recorded revenue.
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Under which method should you report a loss if the loss is projected on the entire project?
Both the percentage-of-completion method and the completed contract method.
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How do you recognize revnue with software?
Using VSOE (vendor specific objective evidence) of fair values and determing what percentage each item is of the total fair value. You then multiply this percentage by the revenue received, and recognize revenue accordingly. If VSOE does not exist, revenue recognition is deferred until VSOE is available or all elements of arrangement are delivered.
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What are the three activity ratios?
- Asset turnover ratio
- Receivables turnover ratio
- Inventory turnover ratio
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How do you calculate asset turnover ratio? What does it tell you?
- Net Sales / Average Total Assets
- Measures company's efficiency in using assets to generate revenue.
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How do you calculate the receivables turnover ratio? What does it tell you?
- Net Sales / Average accounts receivable (net)
- Shows how quickly a company is able to collect its accounts receivable. The higher the ratio, the shorter the average time between credit sales and cash collections.
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How do you calculate inventory turnover ratio? What does it tell you?
- Cost of Goods Sold / Average Inventory
- Indicates how quickly inventory is sold.
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How do you calculate the average collection period? What does it tell you?
- 365 / Receivables turnover ratio
- The number of days the average accounts receivable balance is outstanding.
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How do you calculate average days in inventory?
365 / Inventory turnover ratio
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What are three profitability ratios? What do they all have in common?
- Profit margin on sales
- Return on assets
- Return on shareholder's equity
- All of these ratios have "net income" as their numerators.
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How do you calculate profit margin on sales? What does it tell you?
- Net Income / Net Sales
- It shows what percentage of sales dollars actually show up as net income.
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How are two ways you can calculate return on assets? What does it tell you?
- Net income / average total assets OR
- Profit Margin x Asset Turnover
- This ratio shows the return generated by a company's assets.
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How do you calculate return on shareholder's equity? What does it tell you?
- Net Income / Average shareholder's equity
- Profit management can generate from resources provided by the owners.
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What is the DuPont framework?
A way to depict return on equity by multiplying Profit Margin x Asset Turnover x Equity Multiplier, where the Equity Multiplier is (avg. total assets / avg. total equity). Note also that Profit Margin x Asset Turnover is equivalent to Return on Assets.
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How do you calculate the equity multiplier?
Average total assets / average total equity
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How do you find future value?
- FV = Investment x FV factor
- Use the number of compounding periods and the interest rate per period to find the FV factor.
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How do you find present value?
PV = FV x PV factor.
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What is one way of finding the Present Value factor?
1 / FV factor
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How do you find the interest rate per compounding period?
Annual Interest Rate / Number of Periods
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How often is interest compounded semiannually, quarterly, and monthly?
- 2 times a year
- 4 times a year
- 12 times a year
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What should you remember about noninterest-bearing notes?
The interest is included implicitly.
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What is an annuity?
A series of equal cash flows to be paid or received each period.
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When do cash flows occur with an ordinary annuity?
At the end of each period.
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When do cash flows occur with an annuity due?
At the beginning of each period.
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When is the first cash flow of an ordinary annuity made?
One compounding period after the date on which the agreement begins.
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When is the first cash flow of an annuity due made?
On the first day of the agreement.
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When is the last payment made of an annuity due?
One period before the end of the agreement.
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When is does the final cash flow take place with an ordinary annuity?
On the last day covered by the agreement.
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With what type of annuity will the last cash payment earn interest?
Annuity due.
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Will the last cash payment of an ordinary annuity earn interest?
No.
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When can you not solve a problem using annuity tables?
If unequal amounts are invested each year. You must calculate the future value of each payment separately.
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How do you calculate the future value of an ordinary annuity?
Annuity amount x FVOA factor
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How do you calculate the future value of an annuity due?
Annuity amount x FVAD factor
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How do you calculate the present value of an ordinary annuity?
Annuity amount x PVA factor
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What order do you present items on the Statement of Cash flows?
- Cash flows from Operating Activities
- Cash flows from Investing Activities
- Cash flows from Financing Activities
- =Net Increase (Decrease) in Cash
- +Beginning Cash Balance
- Ending Cash Balance
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What does the Statement of Cash Flows do?
- Helps creditors and investors asses:
- future net cash flows
- liquidity
- long-term solvency
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How do you classify dividends received?
Operating Activity
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How do you classify interest paid and recieved?
Operating Activity
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How do you classify purchase of inventory?
Operating Activity
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How do you classify the purchase and sale of long lived assets used in the business?
Investing Activity
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How do you classify the purchase of stocks and bonds?
Investing Activities
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How do you classify loans to other entities?
Investing Activities
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How do you classify sale of shares to owners?
Financing Activity
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How do you classify the payment of dividends to owners?
Financing Activity
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How do you classify borrowing from creditors?
Financing Activities
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How do you classify the repayment of debt principal?
Financing Activity
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With operating activities, how do you account for increase in current liabilities?
Increase in Cash
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With operating activities, how do you account for increase in current assets?
Decrease in Cash
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What equation can you use to help determine the effect of operating activities on cash flows?
ΔCash = ΔL + ΔE - ΔNon Cash Assets
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What is money set asidefor the repayment of debts referred to, and how is it classified?
Sinking Fund. If the liability is long-term, classify the sinking fund as noncurrent investments or other assets. If the liability is current, classify the sinking fund as current cash and make a disclosure note.
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What is a compensating balance?
A specified balance a borrower of a loan is asked to maintain in a low or no interest bearing bank account.
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What are Account Receivables also known as?
Trade Receivables.
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What is a trade discount? How do you recognize the discount?
Percentage reduction from the list price. Example: quantity discounts to large customers. The discount is recognized indirectly by recording the sale at the net of discount price rather than the list price.
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What is a cash discount? And how are they conveyed in writing?
- Cash discounts are reductions in the amount to be paid by a credit customer if they pay their debt within a specific period of time.
- 2/10, n/30. (2% discount if paid off in 10 days, otherwise full payment within 30 days)
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What are the two ways to record cash discounts?
- Gross Method (most commonly used)
- Net Method
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Describe the net method of recording cash discounts.
Sales revenue is recorded as the net amount after discount. Any discounts not taken by the customer are recorded as interest revenue.
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Under the Net Method, what would the full payment of accounts receivable look like, including the portion of the discount not taken by the customer?
- D: Cash (entire cash received)
- C: Accounts Receivable (for remaining balance)
- C: Interest Revenue (discount not taken)
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Describe the gross method of recording cash discounts.
Views discount not taken by customer as part of sales revenue. Record initial sale at entire amount. Recognize discount if customer pays in discount time period using the contra to sales revenue account "Sales Discounts."
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What would a journal entry for customer discounts received look like using the gross method?
- D: Cash (amount received)
- D: Sales discounts (percentage of AR discounted)
- C: Accounts receivable (cash received + discount amount)
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Under which method do customer discouns taken reduce sales revnue?
Both the gross method and the net method.
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What is the name of the contra account to Sales Revenue?
Sales Discounts.
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What journal entries do you make when someone returns something?
- D: Sales returns
- C: Accounts Receivable
- D: Inventory
- C: Cost of goods sold
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What does the adjusting journal entry look like to estimate the amount of sales returns?
- D: Sales Returns
- C: Allowance for Sales Returns
- D: Inventory - estimated returns
- C: Cost of goods sold
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What is the name of the contra account to Sales Revnue?
Sales Returns
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What are the 2 methods for estimating future bad debts?
- Income Statement Approach
- Balance Sheet Approach
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What does the adjusting entry for bad debt estimates look like?
- D: Bad Debt Expense
- C: Allowance for Uncollectible Accounts
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What journal entry do you make when an account is deemed uncollectible?
- D: Allowance for Uncollectible Accoutns
- C: Accounts Receivable
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What journal entry do you make if a previously written off account is collected?
- D: Accounts Recivable
- C: Allowance for Uncollectible Accounts
- D: Cash
- C: Accounts Recivable
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How do you record he issuance of a non-interest bearing note?
- D: Note receivable (face amount)
- C: Discount on note receivable (face amount x discount rate x time period)
- C: Sales Revenue (Note Receivable - Discount)
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What is the name of the contra account of Note Receivable?
Discount on Note Receivable
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On a non-interest bearing note, what does the discount become?
- Interest Revenue.
- Journal Entry (when payment is collected):
- D: Discount on note receivable
- C: Interest Revenue
- D: Cash
- C: Note Receivable (face amount)
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How is a note receivable reported in the balance sheet?
Net amount of note receivable less any remaining discount.
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