Accounting

COGS

Begin Ending

inventory inventory

net purchase

Freight in

TOT

TOT= debit income summary

Beginning

inventory

+ net purchase

+ freight in

COG AVAIBLE FOR

SALE

- Ending

inventory

COGS

EBITDA

earnings before interests, taxes, depreciation(= tangible assets)and

depreciation(=intangible asset)

depreciation and amortization decrease asstes

EBIT: earnings before interest and taxes

Is a measure of performance 10/15% BAD, 15/20% NORMAL, >20% GOOD

If ebitda or ebit are negative liquidity issues

Sales revenue

- COGS

Gross profit

- Other

operations

- expenses

Operational income (=

EBIT)

- financial

expense

- income taxes

NET INCOME inventory sales period

Product costs (inventoriable) income statement

 

costs

MERCHANDISE INVENTORY

Accounting principles help to classify and report data in income statement

1. Cosistency

2. Disclosure

3. Materiality

4. Accounting conservativism

CONSISTENCY

Hel external users to compare different statement period

a business should use the same accounting method and procedures through



periods

DISCLOSURE

Faithfull and relevant information

have to report enough information to permit the knowledge of the company



decisions

MATERIALITY

The information have to permit the perfect knowledge of the company situation

the business have to keep precise information only for items who are



significant for the business

CONSERVATIVISM

The business has to report the least favorable figures where there are possible

negatives scenarios

MERCHANDISE COSTS (perpetual system)

=N

ENDING MERCHANDI INVENTORY ° OF UNITS ON HAND∗UNIT COSTS

COST OF GOODS SOLD=N ° OF UNITS SOLD∗UNIT COST

COSTING METHODS

Approximations of the inventory costs in a business

4 types:

1. SPECIFIC IDENTIFICATION

2. FIFO first in, first out

3. LIFO last in, first out

4. WHEIGHTED-AVARAGE

SPECIFIC IDENTIFICATION

Specific cost of particular units of inventory

Foto 12

FIFO first in, first out

The first unit purchased is the first unit sold

Cost of goods available for sale

Total cost (spent on inventory), available to be sold

BENEFIT PROBLEMS

Benefit in high cost period More net income= more taxes

Foto 13

LIFO last in, first out

The last unit bought is the first unit that will be sold

Income statement price increase = lifo>fifo

Net income lifo<fifo less taxes

Balance sheet cost increase= lifo<fifo

This is an understanding of the inventory named LIFO RESERVE

allows

GAAP this method

not allows

ASPE AND IAS/IFRS this method

FOTO 14

WHEIGHTED-AVARAGE

New compute every sell

Ending inventory COGS= cost per unit

WHEIGHTED−AVARAGE=COST OF GOODS AVAILABLE FOR SALE / N ° OF UNITS

FOTO 15

VATRIATION COSTS

Foto 16

LCM lower cost of market

Inventory reported in financial statement at the lower of historical value or

market value

If market value> inventory value

Impairment loss the inventory is not covered

2 ways:

1. Reduce value: write down

2. Remove item: write off

INVENTORY TURNOVER

INVENTORY TURNOVER=COGS / AVARAGE MERCHANDISE INVENTORY

( )

=

AVARAGEMERCHANDISEINVENTORY BENIGINNING+ ENDINGMERCHANDISEINVENTORY / 2

Days sales in inventory: number of days the inventory is held by the company

( )

=365 ¿

D AYSSALESININVENTORY 366 INVENTORYTURNOVER

MERCHANDISE COSTS (periodic system)

Different results from perpetual

because the count of the inventory is made at the end of the period

LIFO-FIFO-(W-A)

Beginning merchandise inventory

+ net cost of purchase

COST OF GOODS AVAIBLE FOR SALE TOT COUNT

- Ending merchandise inventory

COGS

Errors

Foto 16

RECEIVABLES monetary claim of the business to the debtors

Business sells goods or services on account

Creditor have the right to receive cash



Debtor part of the transaction that have the duty to pay



Account receivables (current asset) trade receivables



Right to receive cash in the future 15,30,60,90

Notes receivables more formal that a receivable more time

 imply interest

Payable at the maturity day

Maturity day delay legal consequences: constitution in MORA, inscription in

big book k bad payer

Other receivables other type of receivbables: dividends, interests, taxes …

DIRECT WRITE OFF METHOD

USED BY SMALL NON PUBLIC COMPANY

1 method after the failure to collect receivables

ST

Method to collect bad debt expenses when the receivables are non collected

Recorder only when the debt is sure stop purchasing the collection

limitation

Violate matching principles acceptable only if there are few uncollectible

receivables

ALLOWACE METHOD GAAP METHOD APPROVED

FOTO 21-22

Most used method follow matching principles

record bad debt at the same time of sales revenue

 reduce the net realizable value

Use contra asset allowance for bad debt

ACCOUNT RECEIVABLES AND ALLOWANCE FOR ACCOUNT RECEIVABLES

Estimation is based on:

1. Past experience

2. Industry in which they operate

3. Other variables

There are 3 methods of recording:

1. Percent of sales

2. Percent of receivables

3. Aging of receivables

PERCENTAGE OF SALES

Percentage of net credit sales someone use all the sales

Is an income statement approach

PERCENTAGE OF SALES=NET CREDIT SALES∗X %

PERCENTAGE OF RECEIVABLES

Percentage of accounts receivables

TARGET BALANCE=ENDING BALANCE OF ACCOUNTS RECEIVABLES∗X %

BAD DEBT EXPENS=¿

TARGET BALANCE

−UNJUSTIFIED CREDIT BALANCE OF ALLOWANCES

+UNJUSTIFIED DEBIT BALANCE FOR DEBT

AGING OF RECEIVABLES

Similar to percentage

How long is a receivables outstanded different percentage from all others

Follows bad debt equation

TARGET BALANCE=ENDING BALANCE OF ACCOUNTS RECEIVABLES∗X %

Foto 18

NOTES RECEIVABLES

Written promise to pay a specific amount of money

can be traded or exchanged (note 2008 crise) as guarantee (bank loan)



PRINCIPAL: amount loaned by the payee and borrowed by the maker of the

note

INTERESTS: revenue (%) to the payee for loaning money

Expens revenu

e e

debtor Credito

r

INTEREST PERIOD: (note term), period during the interests in computed

from original data to maturity data



INTEREST RATE: percentage rate of interest usually for the year

MATURITY VALUE: sum of principal and interests due the maturity

amount payable to the creditor



SYMPLE INTEREST METHOD

FV: future value

PV: present value

i: interest rate

t: time

=PV +

FV I

=PV ∗i∗t

I ( )

Fv=PV 1+i∗t

DISCOUNT METHOD

D= discount

=FV −D

PV

D=FV∗d∗r∗t

( )

=FV

PV 1−d∗t

COMPOUNDED INTEREST METHOD

t

( )

FVt=PV 1+i

DISCOUNT VALUE

Amount of cash payable at the discount data

Method:

1. calculate interest

2. Calculate discount

3. Make the sum

4. journalize

DISHONOR A NOTE RECEIVABLE

Failure of the note maker to pay at the maturity data

1. Transfer note in account receivable

2. Write off

P, P e E (property, plant and equipment)

Long lived tangible assets used in the business operations

matching principle)

Cost allocation during the years (follow apply

depreciation

Cost principle: first time an asset appear in the balance sheet is going to be

measured at his historical cost (purchase price, taxes, commissions, …)

P, P e E are recorded following their historical cost

COST OF LAND paid by the purchaser

Include: Brokerage commission, purchase price, survey and legal fees, title of

transfer fees, delinquent property taxes, cost of charing the land

Not include: facing, paving, lightning, signs, sprinkler system, land

improvements

Land improvements: depreciable improvement of the land

Capitalize an asset: asset debited (increased) because company acquire a new

one

not all cash paid is an expense

 Increase asset

Buildin x Decrease asset

g foto 22

cash X MACHINARY AND EQUIPMENT

composed by: Purchase price (less discount), transportation, transportation

insurance, taxes, commissions, installation cost, testing costs

FORNITURE desks, chairs, file cabinet, …

Purchase price (less discounts), cost of preparing to the use

RELATIVE MARKET VALUE METHOD

Match the allocate total cost of multiple asset purchased at one time

total cost divided by assets at their relative market value

 ( )

+BUILDING

TOTALMARKETVALUE= LAND / MARKETVALUE

PERCENTAGEOFTOTALVALUE=( )

LANDORBUILDING / TOTALMARKETVALUE

CAPITAL AND OPERATING EXPENDITURE

Monetary output not expenses

Capital expense (CAPEX): increase asset capacity or asset useful life

Operating expenses (OPEX): expenses incurred to maintain the asset

Foto 23

Obsolete: an asset who’s passed by a new better tant can perform more

efficiently

Depreciation: process matching expense and revenues generated using the

asset

Not: process of evaluation based on market value

 Business who’s setting aside cash to replace the obsolete asset



3 factors:

1. Capitalized cost

2. Estimated useful life--> not certain

3. Estimated residual life not certain

Useful life: expressed generally in time, is the service period expected for the

asset

Residual life: expected value of a depreciable asset at the and of the useful life

=COST −ESTIMATED

DEPRECIABLE COST RESIDUAL VALUE

DEPRECIATION METHODS

1. Straight line method

2. Units of production method

3. Double declining method

+ one other method used for tax purpose

= modify accelerated cost recovery system (=MACRS)

Depreciation have to keep in mind the going to concern accounting principle

A business do not follow the accounting principle at all, because of the utility of

a certain asset keep and it makes no senso sell a useful asset only because of

economic reason disposal assets

STRAIGH LINE METHOD

Allocate an equal amount of depreciation every year

Match the value of the asset for the company, not for the market

=( )

−RESIDUALVALUE

S−LMETHOD COST / USEFULLIFE

DEPRECIATION income statement

BOOK VALUE balance sheet

Cost-accounting depreciation

FOTO 24

UNITS OF PRODUCTION METHOD

Allocate a varying amount of depreciation each year based on the asset usage

Useful if the asset usage chang