oper. decisions - 1 operating decisions. uncollectible accounts receivable n when credit is...

Oper. Decisions - 1

OPERATING DECISIONS

UNCOLLECTIBLE ACCOUNTSRECEIVABLE

When credit is extended, some amount of uncollectible receivables is generally inevitable.

If uncollectible receivables are probable and can be estimated, an estimate should be made of the amount uncollectible and recorded in the period in which the revenue was produced (allowance method).(allowance method).

The Allowance for Doubtful Accounts is a contracontra accountaccount to Accounts Receivable..

P E R I O D I C M E T H O D

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P E R P E T U A L M E T H O D

I N V E N T O R Y R E C O R D I N G M E T H O D S

INVENTORY RECORDING METHODS

Periodic inventory system

-- Inventory value is determined only at particular times, such as end of the accounting period.

-- Purchases recorded in “Purchases” account

-- Cost of goods sold determined at the end of the period following a physical count

INVENTORY RECORDING METHODS

Perpetual inventory system

-- The ongoing physical flow of inventory is monitored, and the cost of the inventory items is maintained on a continual basis.

-- Purchases recorded directly in “Inventory” account

-- Cost of goods sold is determined at the point sales revenue is recognized

COST FLOW METHODS

An allocation of total cost of goods available for sale:

Ending inventory

Cost of goods sold

Cost of goodsAvailable

(Beg. Inven. + Purch)

The cost flowcost flow assumption used for accounting purposescan be different from the physical flowphysical flow of goods throughthe company.

INVENTORY VALUESCOST FLOW ASSUMPTIONS

Specific costidentification

Average cost

First-in, first-out (FIFO)

Last-in, first-out (LIFO)

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FIRST-IN, FIRST-OUT

Cost of the oldest inventory items are included in Cost of Goods Sold

Cost of the newest items are included in the Ending Inventory

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LAST-IN, FIRST-OUT

Cost of the newest inventory items are included in Cost of Goods Sold

Cost of the oldest items are included in the Ending Inventory

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PENSIONS

A pension is cash compensation received by an employee after the employee has retired

There are two types of pension plans:– Defined contribution plan– Defined benefit plan


POSTRETIREMENT BENEFITS OTHER THAN PENSIONS

Other employee benefits provided after retirement include– Health care plans– Life insurance plans

Accounting rules require that these benefits be recognized as an expense and a liability as they are incurred


INCOME TAXES

Income tax expense and the amount paid for income tax during a period are different for two reasons:– Income taxes are not paid in the

same year in which they are incurred– A firm may choose one accounting

method for tax purposes and another for financial reporting purposes


INCOME TAXES

Differences in financial income and taxable income are due to timing differences

Timing differences can be– Permanent or– Temporary


TIMING DIFFERENCES

Permanent differences– Enter into accounting income, but

never into taxable income– These are statutory differences

between GAAP and the Internal Revenue Code

– For example, interest on state and local bonds is included in financial income, but not in taxable income


TIMING DIFFERENCES

Temporary differences– Some transactions affect taxable

income in a different period from financial accounting income• Depreciation methods• Rent received in advance

– The affects of these differences are recorded as deferred tax assets or liabilities and shown on the balance sheet


DEFERRED TAXES

Deferred Tax Liability– Requires a payment in the future– Is the expected income tax on income

earned but not yet taxed– Is not an existing legal liability

Income Taxes Payable, based on taxable income on the tax return, is an existing legal liability


DEFERRED TAXES

Deferred Tax Asset– Represents the expected benefit of a

future tax deduction for an expense item that has already been incurred but is not yet deductible for tax purposes

– It can only be recognized if it is “more likely than not” that future income will be realized against which the deduction can be offset


CAPITALIZE VERSUS EXPENSE

An expenditure that is expected to benefit future periods is capitalized as an asset

All other expenditures are treated as expenses



Research and development costs

– Research is defined as• Those activities undertaken to discover new

knowledge that will be useful in developing new products, services, or processes or that will result in significant improvement of existing products or processes

– Development • Applies the research findings to develop a

plan or design for new or improved products and processes



Research and development costs are expensed in the period incurred due to the uncertainty surrounding the future economic benefits of R&D activities



Software development requires special treatment– All costs incurred up to the point

where technological feasibility is established are to be expensed as research and development

– After technological feasibility is established, costs incurred are capitalized•Determining technological feasibility

is a matter of judgement



Oil and gas exploration costs– Two methods of accounting for

the cost of “dry holes”:•Full cost method

All exploratory costs are capitalized and allocated to the cost of successful wells

•Successful efforts methodExploratory costs for dry holes are

expensed, and only exploratory costs for successful wells are capitalized



Advertising costs– Generally, advertising costs are

expensed due to the uncertainty of their future economic benefits

– In selected cases where the future benefits are more certain, advertising costs should be capitalized


CONTINGENCIES

A contingency is an uncertain circumstance involving a potential gain or loss that will not be resolved until some future event occurs


CONTINGENCIES

Three important definitions:– Probable

• Likely to occur

– Remote• Not likely to occur

– Reasonably possible• More than remote but less than likely


CONTINGENT LOSSES

LikelihoodProbable

Reasonably possible

Remote

Accounting Action Recognize a probable

liability if the amount can be reasonably estimated.

Disclose a possible liability in a note.

No recognition or disclosure unless contingency represents a guarantee. Then, note disclosure is required.


CONTINGENT GAINS

LikelihoodProbable

Reasonably possible

Remote

Accounting Action An asset may be recorded if

it seems assured and the amount can be reasonably estimated. Normally you would simply disclose facts in a note.

Disclose a possible asset in a note, but be careful to avoid misleading implications. In practice, possible contingent gains are often not disclosed.

No recognition or disclosure.


ACCOUNTING FOR LAWSUITS

If the facts of the case indicate that a loss is probable and the amount of the loss can be estimated, a loss should be reported on the income statement and a liability should be reported on the balance sheet


ACCOUNTING FOR ENVIRONMENTAL LIABILITIES

Most companies do not reflect these loss contingencies as liabilities on the balance sheet because the future cost of the cleanup is very difficult to estimate

oper. decisions - 1 operating decisions. uncollectible accounts receivable n when credit is...

Documents

inventory account

financial income

oldest inventory items

newest inventory items

income taxesdifferences

accounting period

different period

accounting method