Accounting: What the Numbers Mean Study Outline and Overhead Master Chapter 5

CURRENT ASSETS DEFINITION ACCOUNTS THAT COMPRISE CURRENT ASSETS   CURRENT ASSETS ARE CASH AND THOSE ASSETS EXPECTED TO BE CONVERTED TO CASH OR USED UP IN THE OPERATING ACTIVITIES OF THE ENTITY WITHIN ONE YEAR. ACCOUNTS THAT COMPRISE CURRENT ASSETS CASH MARKETABLE (OR SHORT-TERM) SECURITIES ACCOUNTS AND NOTES RECEIVABLE INVENTORIES PREPAID EXPENSES KEY IDEA EVERY ENTITY HAS AN OPERATING CYCLE IN WHICH PRODUCTS AND SERVICES ARE PURCHASED, SERVICES ARE PERFORMED ON ACCOUNT (USUALLY), PAYMENT IS MADE TO EMPLOYEES AND SUPPLIERS, AND FINALLY CASH IS RECEIVED FROM CUSTOMERS. IF THE ENTITY IS A MANUFACTURER, PRODUCT IS MADE AND HELD AS INVENTORY BEFORE IT IS SOLD. CURRENT ASSETS REFLECT THE INVESTMENT REQUIRED TO SUPPORT THIS CYCLE.

CASH AND MARKETABLE SECURITIES KEY IDEAS THE CASH AMOUNT ON THE BALANCE SHEET IS THE AMOUNT OF CASH OWNED BY THE ENTITY ON THE BALANCE SHEET DATE.   THUS THE LEDGER ACCOUNT BALANCE OF CASH MUST BE RECONCILED WITH THE BANK STATEMENT ENDING BALANCE, AND THE LEDGER ACCOUNT BALANCE MUST BE ADJUSTED AS NECESSARY. THE ADJUSTMENT WILL REFLECT BANK TIMING DIFFERENCES AND BOOK ERRORS.    SHORT-TERM MARKETABLE SECURITIES THAT WILL BE HELD UNTIL MATURITY ARE SHOWN ON THE BALANCE SHEET AT COST, WHICH IS USUALLY ABOUT THE SAME AS MARKET VALUE. SECURITIES EXPECTED TO BE HELD FOR SEVERAL MONTHS AFTER THE BALANCE SHEET DATE ARE SHOWN AT THEIR MARKET VALUE. INTEREST INCOME FROM MARKETABLE SECURITIES THAT HAS NOT BEEN RECEIVED MUST BE ACCRUED.

ACCOUNTS RECEIVABLE KEY ISSUES   ACCOUNTS RECEIVABLE ARE REPORTED ON THE BALANCE SHEET AT THEIR “NET REALIZABLE VALUE,” WHICH IS THE AMOUNT OF CASH EXPECTED TO BE COLLECTED FROM THE ACCOUNTS RECEIVABLE. WHEN SALES ARE MADE ON ACCOUNT, THERE IS A VERY HIGH PROBABILITY THAT SOME ACCOUNTS RECEIVABLE WILL NOT BE COLLECTED. THE MATCHING OF REVENUES AND EXPENSES CONCEPT REQUIRES THAT THE “COST” OF UNCOLLECTIBLE ACCOUNTS RECEIVABLE BE REPORTED IN THE SAME PERIOD AS THE REVENUE THAT WAS RECOGNIZED WHEN THE ACCOUNT RECEIVABLE WAS CREATED. KEY POINTS THE "COST" OF UNCOLLECTIBLE ACCOUNTS (BAD DEBTS EXPENSE) MUST BE ESTIMATED. THIS LEADS TO A VALUATION ADJUSTMENT.    THE AMOUNT OF ACCOUNTS RECEIVABLE NOT EXPECTED TO BE COLLECTED IS RECORDED AND REPORTED IN AN “ALLOWANCE FOR BAD DEBTS” ACCOUNT. THE ALLOWANCE FOR BAD DEBTS ACCOUNT IS A “CONTRA ASSET” REPORTED IN THE BALANCE SHEET AS A SUBTRACTION FROM ACCOUNTS RECEIVABLE.

INTERNAL CONTROL STRUCTURE KEY IDEA   THE ENTITY NEEDS TO HAVE ADMINISTRATIVE CONTROLS AND ACCOUNTING CONTROLS TO SUPPORT ACHIEVEMENT OF ORGANIZATIONAL GOALS AND SOUND ACCOUNTING AND FINANCIAL REPORTING PROCEDURES. ACCOUNTING CONTROLS ASSURE ACCURACY OF BOOKKEEPING RECORDS AND FINANCIAL STATEMENTS. PROTECT ASSETS FROM UNAUTHORIZED USE OR LOSS.  ADMINISTRATIVE CONTROLS ENCOURAGE ADHERENCE TO MANAGEMENT'S POLICIES.  PROVIDE FOR EFFICIENT OPERATIONS. KEY OBSERVATION INTERNAL CONTROLS ARE POSITIVE; THEY SUPPORT ACHIEVEMENT OF ORGANIZATIONAL OBJECTIVES.

INVENTORIES WHAT'S GOING ON? THE INVENTORY ASSET ACCOUNT CONTAINS THE COST OF ITEMS THAT ARE BEING HELD FOR SALE. WHEN AN ITEM OF INVENTORY IS SOLD, ITS COST IS TRANSFERRED FROM THE INVENTORY ASSET ACCOUNT (IN THE BALANCE SHEET) TO THE COST OF GOODS SOLD EXPENSE ACCOUNT (IN THE INCOME STATEMENT).   THIS IS A TRANSACTION SEPARATE FROM THE SALE TRANSACTION, WHICH RESULTS IN AN INCREASE IN AN ASSET ACCOUNT IN THE BALANCE SHEET (EITHER ACCOUNTS RECEIVABLE OR CASH), AND AN INCREASE IN SALES, A REVENUE ACCOUNT IN THE INCOME STATEMENT. KEY ISSUE WHEN THE INVENTORY INCLUDES THE COST OF SEVERAL UNITS OF THE ITEM SOLD, HOW IS THE COST OF THE ITEM SOLD DETERMINED?

INVENTORY COST FLOW ASSUMPTIONS ALTERNATIVE COST FLOW ASSUMPTIONS SPECIFIC IDENTIFICATION WEIGHTED AVERAGE FIFO  FIRST COST IN TO INVENTORY, FIRST COST OUT TO COST OF GOODS SOLD LIFO  LAST COST IN TO INVENTORY, FIRST COST OUT TO COST OF GOODS SOLD  KEY ISSUES   HOW DO CHANGES IN THE COST OF INVENTORY ITEMS OVER TIME AFFECT COST OF GOODS SOLD UNDER EACH OF THE COST FLOW ASSUMPTIONS? HOW DO CHANGES IN THE QUANTITY OF INVENTORY ITEMS AFFECT COST OF GOODS SOLD UNDER EACH OF THE COST FLOW ASSUMPTIONS? KEY POINT ROI, ROE, AND MEASURES OF LIQUIDITY WILL BE AFFECTED BY THE INVENTORY COST FLOW ASSUMPTION USED WHEN THE COST OF INVENTORY ITEMS CHANGES OVER TIME.

PREPAID EXPENSES WHAT'S GOING ON?   PREPAID EXPENSES RESULT FROM THE APPLICATION OF ACCRUAL ACCOUNTING. SOME EXPENDITURES MADE IN ONE PERIOD ARE NOT PROPERLY RECOGNIZABLE AS EXPENSES UNTIL A SUBSEQUENT PERIOD. IN THESE SITUATIONS, EXPENSE RECOGNITION IS DEFERRED UNTIL THE PERIOD IN WHICH THE EXPENSE APPLIES. PREPAID EXPENSES FREQUENTLY INCLUDE: INSURANCE PREMIUMS RENT