Concepts for the Midterm

Midterm Review MIDTERM REVIEW ¶ Review of Key Concepts • Revenue Recognition • Accounts Receivable • Inventory (LIFO vs. FIFO) • PP&E • Statement of Cash Flows ¶ Problems • E4-5 • P6-4 • P7-9 • P9-8 • P14-14 ¶ Checklist ¶ Famous Last Words for Midterm ¶ Questions Midterm Review REVENUE RECOGNITION Revenue is recognized when the firm has: ¶ Performed all, or a substantial portion of, the services to be provided ¶ Incurred a substantial majority of the costs, and the remaining costs can be estimated ¶ Received either cash, a receivable, or some other asset for which • A reasonable precise value can be measured • Collectibility can be assured Midterm Review E4-5 See Problem E4-5 in the course textbook. Midterm Review ACCOUNTS RECEIVABLE ¶ Two methods for determining Allowance for Bad Debts • Percentage of (Credit) Sales − Fixes the Bad Debt Expense recorded for the year • Aging Method − Fixes the Ending Balance of Allowance for Bad Debts − Bad Debt Expense is as a “Plug-in” ¶ Relevant Formulae vs. “tables” (Don’t use them blindly!!) • A/REB = A/RBB + Credit Sales – Cash Received – Write-off + Recovery • ADAEB = ADABB + Bad Debt Expense – Write-off + Recovery ¶ Write-offs and Recovery of bad debt only affects the Balance Sheet (not the Income Statement). They affect the Gross A/R and ADA but not the Net A/R. ¶ Watch the sign convention for ADA! Midterm Review P6-4 See Problem P6-4 in the course textbook. Midterm Review INVENTORY (LIFO VS. FIFO) ¶ ¶ ¶ ¶ LIFO and FIFO produce temporary differences in accounting numbers No approach is superior Firms using LIFO will give information to make numbers comparable across firms1 Relevant formulae • LIFO Reserve = cumulative difference in FIFO – LIFO inventory **or** • LIFO Reserve = Ending InvFIFO – Ending InvLIFO • Change in LIFO Reserve = COGSLIFO – COGSFIFO 2 • INVEB = INVBB + P – COGS ¶ Make sure you know when to use the absolute amount in the LIFO Reserve and when to use changes in the LIFO Reserve Midterm Review P7-9 See Problem P7-9 in the course textbook. Midterm Review PP&E ¶ Key formulae vs. “table” • PPEEB = PPEBB + Acquisitions – Disposals • AccDepEB = AccDepBB + Depreciation – AccDepDisposal • MV / Proceeds from sales = BV + gain/loss ¶ Three key ways to depreciate a fixed asset: 1) Straight-line Depreciation Method 2) Production (Depletion) Method 3) Accelerated Depreciation ¶ Four simple steps to depreciation: 1) Assess total cost to be allocated over time 2) Estimate the salvage value (all methods except for double-declining balance) 3) Estimate useful life 4) Choose depreciation method ¶ Watch the sign convention for Accumulated Depreciation! Midterm Review P9-8 See Problem P9-8 in the course textbook. Midterm Review STATEMENT OF CASH FLOWS Two major approaches to Statement of Cash Flows: Direct and Indirect ¶ The major difference between these two methods is in how Cash Flows from Operating Activities are presented; most companies use the Indirect approach. • Direct Approach: − Analyze operating cash transactions and classify them as either cash sales or cash expenses (i.e., look down the “Cash” column of the BSE) • Indirect Approach: − Start with net income derived from accrual-based accounting − Decrease net income for operating income(s) that did not generate cash (i.e. A/R) − Increase the net income for operating expenses that did not use up cash (e.g., depreciation and amortization) − Adjust the net income for operating cash items that were not expensed ¶ The investing and financing sections are the same for both Direct SCF and Indirect SCF Midterm Review P14-14 (PARTS A+B ONLY) See Problem P14-14, parts A and B, in the course textbook. Midterm Review P14-14 (CONTD.) Assets = Cash Inv A/R P-Rent3 PP&E -AccDep = A/P = # 1 2 = 3 = 4 = 5 = = 6 = 7 = 8 = 9 = 10 = 11 = 12 = EB = 3 Prepaid Rent Liabilities Int Pay Div Pay N/P Equity CS RE Notes Midterm Review Income Statement Statement of Retained Earnings Statement of Cash Flows Midterm Review FAMOUS LAST WORDS BEFORE THE MIDTERM ¶ Put some effort into your cheat sheet… you learn a lot through the preparation • Examples are useful ¶ Review • Homework/problem sets • Midterms from previous years • Lecture notes • Recitation notes • Chapter summaries • Optional problems (time permitting) ¶ Get some sleep the night before the midterm ¶ And, most important of all (… the one piece of advice I always hated… )