AI Accounting Tool Shop

 

Cash and Receivables

​

Credit sales, tax refund claims, interest receivable, note receivable, and advances to employees

​

 

• Key issues we address:

 

• Cash and cash equivalents: Internal control and classification in the balance sheet.

 

• Receivables: Valuation and the related income statement effects of transactions involving accounts receivable and notes receivable.

 

• Internal control:

 

• We can help your business with effective systems of internal control: 

 

• Establish

 

• Modernize 

 

• Maintain 

 

• Improve

 

• Our goals to help you modernize your company’s internal control are to:

 

• Encourage adherence to company policies and procedures.

 

• Promote operational efficiency.

 

• Minimize errors and theft.

 

• Enhance the reliability and accuracy of accounting data.

 

• Focus on controls intended to improve the accuracy and reliability of accounting information and to safeguard your company’s assets.

 

• Cash receipts: Internal control procedures:

 

• A well-designed and functioning system of internal control must surround all cash transactions.

 

• Separation of duties is critical:

 

• Individuals that have physical responsibility for assets should not also have access to accounting records.

 

• Employees who handle cash should not be involved in the reconciliation of cash book balances to bank balances.

 

• Cash disbursements: Internal control procedures:

 

• Proper controls for cash disbursement should be designed to prevent any unauthorized payments and ensure that disbursements are recorded in the proper accounts that apply important elements of a cash disbursement control system that include the following:

 

• All disbursements, other than very small disbursements from petty cash, should be made by check to provide a permanent record of all disbursements.

 

• All expenditures should be authorized before a check is prepared, for example, in the case of a vendor invoice for the purchase of inventory should be compared with the purchase order and receiving report to ensure the accuracy of quantity, price, part numbers, and so on.

 

• This process should include verification of the proper ledger accounts to be debited.

 

• Checks should be signed only by authorized individuals.

 

• Whenever possible, separate responsibilities for:

 

• Check signing

 

• Check writing

​​

• Check mailing

​

• Cash disbursement documentation

 

• Recordkeeping

 

• We advise periodic reconciliation of book balances and bank balances to the correct balance.

 

• A petty cash system should be in place.

 

• Restricted Cash

 

• Report cash that is restricted in some way and not available for current use as a noncurrent asset that includes items such as investments or other assets.

 

• Contractually imposed cash restrictions on debt instruments, for example, frequently require a borrower to set aside funds referred to as a sinking fund for future payment of a debt and can be classified in either of two ways:

 

• Noncurrent investments or other assets if the debt is classified as noncurrent.

 

• Current when the liability is current.

 

• Disclosure notes should describe any material restrictions of cash and indicate the amounts and line items in which the restricted cash appears in the balance sheet.

 

• On the statement of cash flows restricted cash and cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period cash balances.

 

• Compensating Bank Balances

 

• We can assist your company in getting the lowest compensating balance from a lender. In effect, the compensating balance results in your company paying an effective interest rate higher than the stated rate on the debt, which can be lowered with targeted covenant agreements.

 

• Banks frequently require cash restrictions or a compensating balance in connection with loans or loan commitments (lines of credit) whereby a borrowing company is asked to maintain a specified balance in a low interest or noninterest-bearing account at the bank which is some percentage of the committed amount (say 2% to 5%).

 

• A compensating balance should be classified and in the disclosure notes to reflect the nature of the restriction and the classification of the related debt in either of two ways:

 

• Legally binding: The compensating balance restricted cash is classified as either current or noncurrent (investments or other assets) depending on the classification of the related debt.

 

• Nonbinding: The compensating balance can be reported as part of cash and cash equivalents with a disclosure note of the arrangement.

 

• Accounts Receivable

 

• For most products or services, the performance obligation is satisfied at the point of delivery of the product or service, so revenue and the related receivable are recognized at that time and is normally due in 30 to 60 days after the sale.

 

• Revenue recognition and accounts receivable recognition are closely related which means that some of the complexities that affect revenue recognition also affect accounts receivable.

 

• We can steer you through the complexities related to determining transaction prices for accounts receivable when contracts allow for cash discounts, sales returns, and allowances.

 

• Discounts: Trade discounts and cash discounts:

 

• Trade discounts to customers are usually a percentage reduction from the list price to customers that can be large quantity buyers like Home Depot, college students, senior citizens, or maybe to disguise real prices from competitors.

 

• Sales discounts, often called cash discounts, represent reductions in the amount to be received by the company from a customer that makes payment within a specified period of time as an incentive for quick payment.

 

• The amount of a sales discount and the time period within which it is available usually are conveyed by terms like 2/10, n/30:

 

• A 2% discount if paid within 10 days, otherwise full payment within 30 days.

 

• Since it is usually difficult for a seller to estimate the amount of discount that will be taken with every sale sellers use two methods in practice that simplify the process of recording sales discounts followed by subsequent accounting that depends on whether payment occurs within the discount period:

 

• Gross Method: Initially record the revenue and related receivable at the full price.

 

• Net Method: Record revenue and the related accounts receivable at the agreed-upon price less the discount offered yielding a lesser amount of revenue at the time of sale.

 

• Sales Returns

 

• Recognizing returns only at the time they happen might cause revenue and profit to be overstated in the period the sale is made and understated in the return period.

 

• The balance sheet also is affected in the period of the sale with a refund liability understated and inventory value understated.

 

• Actual returns and estimated returns: Reconciliation in these two categories is accounted for in different ways by debiting sales returns (a contra revenue account), inventory-estimated returns, and in the event the estimate for future returns is wrong adjust the accounts to reflect the change in estimated returns with any effect on income recognized in the period in which the adjustment is made.

 

• Allowances

 

• Allowance for uncollectible accounts, a contra-asset account, is used to reduce the carrying value of accounts receivable to the amount of cash a company expects to collect.

 

• Allowance method system: 

 

• Bad debt expense is not recognized when specific accounts are written off.

 

• Bad debt expense is recognized earlier when accounts are estimated to be uncollectible, and the allowance is created.

 

• Later, when a specific account receivable is deemed actually uncollectible, both the allowance and the specific account receivable are reduced to write off the receivable.

 

• When previously written-off accounts are reinstated because a company gets new information and now believes the receivable will be collected in part or in full the entry to write off the account is reversed.

 

• Estimating the allowance for uncollectible accounts:

 

• Balance sheet approach

 

• Income statement approach

 

• Combined Balance sheet and income statement approaches

 

• Balance sheet approach: Using “Current Expected Credit Loss” model (CECL) reasonably captures expectations of receivable credit losses so the receivable reflects the cash the company expects to collect by considering:

 

• Historical experience

 

• Current conditions

 

• Reasonable and supportable forecasts

 

• Estimation that can be done one of two ways:

 

• By analyzing each customer account and applying an estimate of the percentage of bad debts to the entire outstanding receivable balance.

 

• By applying different percentages to accounts receivable balances depending on the length of time outstanding that employs an accounts receivable aging schedule.

 

• Income statement approach: Estimate bad debt expense directly as a percentage of each period’s net credit sales.

 

• This percentage usually is determined by reviewing the company’s recent history of the relationship between credit sales and actual bad debts.

 

• The income statement approach should be used only if it doesn’t provide a distorted estimate of the net amount of cash that is expected to be collected from accounts receivable.

 

• Combined Balance sheet and income statement approaches:

 

• Estimate bad debts on a quarterly basis using the income statement approach and then refine the estimate by employing the balance sheet approach at the end of the year based on an aging of receivables.

 

• Notes receivable

 

• SMBs that use notes receivable arise from loans made from the sale of merchandise, or other assets, or services under relatively long-term payment arrangements.

 

• Notes receivable are classified as either current or noncurrent depending on the expected collection date(s).

 

• Notes receivable can have several different valuation characteristics:

 

• Short-term interest-bearing notes

 

• Short-term noninterest-bearing notes

 

• Long-term notes receivable

 

• Subsequent valuation of notes receivable

 

• Financing with receivables

 

• This is an area where our CFO, Danielle Cary, with decades-long expertise in commercial banking can get your company the best financing terms with the best interest rates to raise capital quickly.

 

• Financial institutions have developed a wide variety of ways for companies to use their receivables to obtain immediate cash.

 

• Companies can find this attractive because it shortens their operating cycles by providing cash immediately rather than having to wait until credit customers pay the amounts due.

 

• Many companies can avoid the difficulties of servicing, billing, and collecting receivables by having financial institutions take on that role.

 

• Financial institutions require compensation for providing these services, usually interest and/or a finance charge.

 

• The various approaches used to finance with receivables differ with respect to which rights and risks are retained by the company who was the original holder of the receivables and which rights and risks are passed on to the new holder, the financing receivable service provider.

 

• There is a diversity of approaches to financing receivables as follows:

 

• Secured borrowing

 

• Sale of receivables with recourse or without recourse:

 

• Factoring

 

• Securitization

 

• Transfers of notes receivable

 

 

 

 

Inventories

 

• Inventory usually is one of the most valuable assets listed in the balance sheet for manufacturing, wholesale, and retail merchandise companies.

 

• Cost of goods sod typically is the largest expense in the income statement of these companies.

 

• It is usually difficult to measure inventory and cost of goods sold at the exact cost of the actual physical quantities on hand and sold.

 

• Our accounting firm uses one of several techniques to approximate the desired result and satisfy your measurement objectives. The following is a list of categories and techniques to consider:

 

• Types of inventory:

 

• Merchandising inventory

 

• Manufacturing inventories:

 

• Raw materials

 

• Work-in-process (WIP) inventories

 

• Finished goods

 

• Types of inventory systems:

 

• Perpetual inventory system

 

• Technology and inventory accounting using inventory software linking items such as radio frequency identification (RFID) tags and internet of things (IoT) that is a network of interconnected devices, sensors, and objects that collect and exchange data over the Internet.

 

• Periodic inventory system

 

• Items to include in inventory:

 

• Physical units included in inventory:

 

• Physical units in a company’s possession

 

• Goods in transit

 

• Goods on consignment

 

• Sales Returns

 

• Transactions affecting net purchase:  

 

• All necessary expenditures to acquire the inventory and bring it to its desired condition and location for sale or for use in the manufacturing process:

 

• Purchase price of the goods

 

• Product costs paid by the buyer:

 

• Freight charges on incoming goods

 

• Insurance costs incurred by the buyer while the goods are in transit if shipped f.o.b. shipping point

 

• Costs of unloading, unpacking, and preparing merchandise inventory for sale or raw materials inventory for use.

 

• Freight-in or transportation-in on Purchases

 

• Purchase returns

 

• Purchase discounts

 

• Inventory cost flow assumptions:

 

• Regardless of whether the perpetual or periodic system is used, it is necessary to assign dollar amounts to the physical quantities of goods sold and goods remaining in ending inventory.

 

• When various portions of inventory are acquired at different costs it is necessary to decide which units were sold and which remain in inventory using one of several techniques that is most suitable for your company and your line of business:

 

• Specific identification

 

• Average cost

 

• Perpetual average cost

 

• First in, first out (FIFO)

 

• Last in, first out (LIFO)

 

• Unit LIFO

 

• LIFO inventory pools

 

• Dollar Value LIFO

 

• Cost indexing

 

• Company-specific generated cost indexes:

 

• Double-extension method

 

• Link-chain method

 

• Factors influencing which inventory flow method to choose:

 

• Physical flow of inventory

 

• Timing of reported income and income tax expense

 

• How well costs are matched with associated revenues

 

• Inventories: Additional Issues for:

 

• Measuring inventories at the end the period

 

• Inventory estimation techniques

 

• Methods of simplifying LIFO

 

• Changes in inventory method

 

• Inventory errors

 

• Subsequent measurement of inventory

 

• Lower of cost or net realizable value (LCNRV)

 

• Lower of cost or market (LCM)

 

• Inventory estimation techniques

 

• Gross profit method

 

• Retail inventory method

 

• Cost-to-retail percentage calculations

 

• Changing retail prices of merchandise inventory:

 

• Initial markup

 

• Additional markup

 

• Markup cancellation

 

• Markdown

 

• Markdown cancellation

 

• Inventory errors

 

• Over- or understatement of ending inventory due to a mistake in physical count or a mistake in pricing inventory quantities can occur.

 

• When a material inventory error is discovered in an accounting period subsequent to the period in which the error was made, any previous years’ financial statements that were incorrect as a result of the error are retrospectively restated to reflect the correction.

 

• Any account balances that are incorrect as a result of the error are corrected by journal entry.

 

• If, due to an error affecting net income, retained earnings is one of the incorrect accounts, the correction is reported as a prior period adjustment to the beginning balance on the statement of shareholders’ equity.

 

• A disclosure note is needed to describe the nature of the error and the impact of its correction on net income and each line item affected.

 

• Map out the way cost of goods sold, net income, and retained earnings are determined when analyzing inventory errors.

 

• Errors in the following areas will reflect in overstatement or understatement of cost of goods sold:

 

• Beginning inventory

 

• Net purchases

 

• Ending inventory

 

• Overstatement or understatement of cost of goods sold will affect overstatement or understatement of:

 

• Net income

 

• Income taxes

 

• Ending retained earnings

 

 

 

 

Property, plant, and equipment and intangible assets - - Acquisition   

 

These are the long-lived assets used in the production of goods and services.

​

 

• Valuation at acquisition for different types of assets:

 

• Property, plant, and equipment

 

• Natural resources

 

• Intangible assets such as patents, copyrights, trademarks, franchises, and goodwill

 

• Costs to be capitalized

 

• Cost of equipment

 

• Cost of Land

 

• Land improvements

 

• Cost of buildings

 

• Cost of natural resources such as timber tracts can be distinguished from other assets by the fact that their benefits are derived from their physical consumption.

 

• Acquisition costs paid to acquire the rights to explore for undiscovered natural resources or to extract proven natural resources.

 

• Exploration costs

 

• Development costs

 

• Restoration costs that include costs to restore land or other property to its original condition after extraction of the natural resource ends which represents an obligation incurred in conjunction with an asset retirement.

 

• Asset retirement obligations (AROs): Generally accepted accounting principles (GAAP) require that an existing legal obligation associated with the retirement of a tangible, long-lived asset be recognized as a liability and measured at fair value, if value can be reasonably estimated.

 

• Intangible assets

 

• Lump sum purchases in two categories:

 

• Indistinguishable assets, for example, 10 identical delivery trucks purchased for a lump sum price will have a valuation that is obvious.

 

• Different distinguishable assets where it is necessary to allocate the lump sum acquisition price among the separate items.

 

• The assets acquired may have different characteristics and different useful lives such as the acquisition of a factory may include assets that are significantly different such as land, building, and equipment which requires allocation to be made in proportion to the individual assets’ relative fair values.

 

• Noncash acquisitions

 

• The controlling principle in noncash acquisitions is that in any noncash transaction, the asst acquired is recorded at its fair value.

 

• The first indicator of fair value is the fair value of the assets or debt.

 

• Deferred Payments

 

• When creating a liability, the initial valuation of the asset is simple as long as the note payable explicitly requires the payment of interest at a realistic interest rate.

 

• When an interest rate is not specified such as in a noninterest bearing note payable or is unrealistic in determining the cost of an asset like custom-built machinery it is necessary to look beyond the form of the transaction and record its substance.

 

• Donated assets

 

• On occasion, a donated asset is an enticement to do something that benefits the donor. For example, the developer of an industrial park might pay some of the costs of building a manufacturing facility to entice a company to locate in its park.

 

• Companies record assets donated by unrelated parties at their fair values based on either an available market price or an appraisal.

 

• The donated asset setup is equivalent to the donor contributing cash to the company and the company using the cash to acquire the asset which requires certain accounting methods be employed to meet the guidelines of GAAP.

 

• Exchanges

 

• Sometimes a company will acquire a new asset by giving up an existing asset. For example, in a nonmonetary asset exchange a company might purchase a new delivery truck by trading in its old delivery truck. When in most cases the values of those nonmonetary assets are not equal to one another, cash will be re received or paid to equalize those values.

 

• Recording nonmonetary asset exchanges requires certain accounting methods to be used to meet the guidelines of GAAP.

 

• Self-constructed assets

 

• Many companies decide to construct an asset for its own use rather than buy an existing one.

 

• Quite often companies that self-construct assts such as manufacturing facilities will act as the main contractor and then subcontract most of the actual construction work.

 

• The critical accounting issue in these instances is identifying the cost of the self-constructed asset because there is no external transaction to establish an exchange price.

 

• Two difficulties arise in connection with assigning costs to self-constructed assets:

 

• Determining the amount of the company’s indirect manufacturing overhead costs to be allocated to the construction.

 

• Deciding on the proper treatment of actual interest or implicit interest incurred during construction.

 

• Research and development (R&D)

 

• Companies are willing to spend large amounts on research and development because they believe the project will eventually provide benefits that exceed the current expenditures. However, it is difficult to predict which individual research and development projects will ultimately provide benefits.

 

• When research and development projects do succeed, a direct relationship between research and development costs and specific future revenue is difficult to establish.

 

• Moreover, when research and development leads to future benefits, it is difficult to objectively determine the size of the benefits and in which periods the costs should be expensed if they are capitalized.

 

• For the preceding reasons, the Financial Accounting Standards Board (FASB) takes a conservative approach and requires research and development costs to be expensed immediately.

 

• As a result, the requirement to expense research and development immediately leads to assets being understated and expenses being overstated in the current period.

 

• Generally Accepted Accounting Principles (GAAP) distinguishes research and development as follows:

 

• Research is planned search or critical investigation aimed at discovery of new knowledge with the hope that such knowledge will be useful in developing a new product or service or a new process or technique or in bringing about a significant improvement to an existing product or process.

 

• Development is the translation of research finding or other knowledge into a plan or design for a new product or process or for a significant improvement to an existing product or process whether intended for sale or use.

 

• Research and development costs include:

 

• Salaries

 

• Wages

 

• Other labor costs of personnel engaged in research and development activities

 

• The costs of materials consumed, equipment, facilities, and intangibles used in research and development

 

• The costs of services performed by others in connection with research and development activities, and a reasonable allocation of indirect costs related to those activities.

 

• Research and development costs pertain to activities that occur prior to the start of commercial production which is the point in time where the company has no other plans to materially change the product prior to beginning production for intended sales to customers.

 

• Any costs incurred after the start of commercial production are not classified as research and development costs. These costs would be either expensed or treated as manufacturing overhead and included in the cost of inventory.

 

• Research and development performed for others:

 

• The rules requiring the immediate expensing of research and development do not apply to companies that perform research and development for other companies under contract.

 

• Research and development costs are capitalized as inventory and carried forward into future years until the project is completed.

 

• These expenditures are contract revenues that can be recognized over time or at a point in time depending on the specifics of the contract.

 

• Research and development purchased in business acquisitions:

 

• In the event one company buys another company in order to obtain technology that the acquired company has developed or is in the process of developing the company values the tangible and intangible assets acquired at fair value.

 

• Developed technology

 

• When it is determined technological feasibility has been achieved the technology is considered “developed” and you capitalize its fair value by recording it as an asset and amortizing that amount over its useful life just like any other finite-life intangible asset.

 

• In-process research and development

 

• For in-process research and development that has not reached technological feasibility GAAP requires capitalization of its fair value and in- process research and development is viewed as an indefinite-life intangible asset.

 

• Research and development completed successfully

 

• You switch to the way you account for developed technology and amortize the capitalized amount over the estimated period the product or process developed will provide benefits.

 

• Abandoned research and development project

 

• Expense the entire balance immediately.

 

• Start-up costs

 

• Start-up costs also include organization costs related to organizing a new entity such as legal fees and state filing fees to incorporate, for example, as a limited liability company (LLC).

 

• Companies are required to expense all the costs related to a company’s start-up and organization activities in the period incurred, rather than capitalize those costs as an asset.

 

 

 

 

Utilization and Disposition - - [Property, plant, and equipment and intangible assets]: Depreciation, depletion, and amortization

 

• Property, plant, and equipment and intangible assets are purchased to be used as part of the revenue-generating operations that usually span several years. Costs should be allocated as follows:

 

• Acquisitions initially should be recorded as assets.

 

• Assets should be allocated to expense over the reporting periods benefited by their use.

 

• Costs are reported with the revenues they help generate.

 

• Measuring cost allocation

 

• Service life: The estimated use the company expects to receive from the asset.

 

• Allocation base: The cost of the asset expected to be consumed during its service life.

 

• Allocation method: The pattern in which the allocation base is expected to be consumed.

 

• Depreciation

 

• In determining how much cost to allocate to periods of an asset’s use, a method of depreciation should be selected that corresponds to the pattern of benefits received from the asset’s use.

 

• Two general approaches that attempt to obtain this systematic and rational allocation are:

 

• Time-based methods that allocate the cost base according to the passage of time.

 

• An activity-based method that allocates an asset’s cost base using a measure of the asset’s input or output. For example, one can measure the service life of a machine in terms of its input (such as the number of hours it will operate) or in terms of output (such as the estimated number of units it will produce).

 

• Therefore, a company should depreciate an asset’s cost in a way that is specific to its asset and operations.

 

• Also, a company should pay particular attention to the Internal Revenue Tax Code (IRC) which can fluctuate significantly from year to year for asset depreciation that can result in asset credits and asset deductions that can benefit a company’s bottom line.  

 

• Time-based depreciation methods

 

• Straight-line method

 

• Accelerated methods:

 

• Declining-balance methods

 

• Double declining balance (DDB) method

 

• Activity-based depreciation methods

 

• Units of production method:

 

• The measure of output used is the estimated number of units such as pounds, items, barrels, and so on to be produced by a machine.

 

• The method becomes useful when an asset’s value is more closely related to the number of units it produces than to the number of years it is in use. This method often results in greater deductions being taken for depreciation in years when the asset is heavily used, which can then offset periods when the equipment experiences less use.

 

• Group and Composite Depreciation

 

• Depreciation records can become quite cumbersome and costly if a company has hundreds of depreciable assets. However, the burden can be lessened if the company uses the group or composite method to depreciate assets collectively rather than individually.

 

• Group depreciation method:

 

• Defines the collection as depreciable assets that share similar service lives and other attributes. For example, group depreciation could be used for fleets of vehicles or collections of machinery.

 

• Composite depreciation method:

 

• Used when assets are physically dissimilar but are aggregated anyway to gain the convenience of a collective depreciation calculation. For instance, composite depreciation can be used for all of the depreciable assets in one manufacturing plant, even though individual assets in the composite may have widely diverse service lives.

 

• Dispositions

 

• After using property, plant, and equipment you will sell or retire those assets.

 

• When selling property, plant, and equipment for cash or as a receivable you as the seller recognizes a gain or loss for the difference between the selling price and the book value of the asset sold.

 

• Assets held for sale:

 

• Management plans to sell property, plant, and equipment or an intangible asset but that sale has not yet happened which meets all the following criteria:

 

• Management commits to a plan to sell the asset.

 

• The asset is available for immediate sale in its present condition.

 

• An active plan to locate a buyer and sell the asset has been initiated.

 

• The completed sale of the asset is probable and typically expected to occur within one year.

 

• The asset is being offered for sale at a reasonable price relative to its current fair value.

 

• Management’s actions indicate the plan is unlikely to change significantly or be withdrawn.

 

• An asset that is classified as held for sale is no longer depreciated or amortized.

 

• A “held for sale” asset is reported at the lower of its current book value or its fair value less any cost to sell.

 

• Retirements

 

• Instead of selling a used asset you can retire or abandon the asset.

 

• Retirements are treated similarly to selling an asset for cash or as a receivable.

 

• At the time of retirement, the asset account and the corresponding accumulated depreciation account are removed from the books and a loss equal to the remaining book value of the asset is recorded because there will be no monetary consideration received (cash or receivable).

 

• When there is a formal plan to retire an asset, but before the actual retirement, there may be some revision in depreciation due to a change in the estimated service life or residual value.

 

• Depletion of natural resources

 

• Because the usefulness of natural resources generally is directly related to the amount of the resources extracted such as timber and fishing aquaculture in the Pacific Northwest, the activity-based units of production method is widely used to calculate periodic depletion.

 

• Depletion base is cost less any anticipated residual value.

 

• Service life is therefore the estimated amount of natural resource to be extracted here in the Pacific Northwest such as:

 

• Timber

 

• Commercial fishing aquaculture resources:

 

• Dungeness crab

 

• Salmon

 

• Halibut

 

• Spot prawns: These prawns grow over 12 inches with a texture that is delicate, almost buttery, providing a sort of melt-in-your-mouth sensation, and the flavor is sweet, fresh, and briny.

 

• Pink shrimp

​

• Clams

​

• Manila clams: Small clams with sweet flavor and tender texture that pack a wallop of flavor are a chef’s delight.

 

• Geoducks clams: Giants of the Pacific Northwest clam industry offer a meaty texture and mild flavor that is much loved by connoisseurs of haute cuisine.

 

• Razor clams: These clams are a meaty seafood delicacy that grow as long as 6 inches, beefy, egg-shaped, and have far more protein than other clams. They have sweet tender meat which makes them perfect for making clam fritters and clam chowder.  

​​

• Petrale and Dover Sole

 

• Albacore Tuna

 

• Sardine

 

• Anchovy

 

• Lingcod

 

• Sablefish

 

• Whiting pacific hake

 

• Rockfish

 

• Amortization of intangible assets

 

• Intangible assets subject to amortization:

 

• Most intangible assets have a finite useful life that is limited in nature.

 

• We allocate the capitalized cost less any estimated residual value of an intangible asset to the periods in which the asset is expected to contribute to your company’s revenue generating activities.

 

• This requires that we determine the asset’s useful life, its amortization base (cost less estimated residual value), and the appropriate allocation method, similar to depreciating tangible assets.

 

• Useful life:

 

• Legal, regulatory, or contractual provisions often limit the useful life of an intangible asset.

 

• The useful life of a patent may sometimes be considerably less than its legal life if obsolescence were expected to limit the longevity of a protected product.

 

• Residual value:

 

• The expected residual value of an intangible asset usually is zero unless there is a commitment from another company to purchase a patent, for example, at the end of its useful life at a determinable price so we can use that price as the residual value.

 

• Allocation method:

 

• The method of amortization should reflect the pattern of use of the asset in generating benefits.

 

• Amortization expense traditionally is credited to the asset account itself rather than to accumulated amortization.

 

• The use of a contra account is acceptable.

 

• You can choose to report intangible assets for their net amount on the face of the balance sheet and then report the amount of amortization in a disclosure note.

 

• Goodwill:

 

• Goodwill is an intangible asset with an indefinite useful life.

 

• Goodwill is measured as the difference between the purchase price of a company and the fair value of all the identifiable net assets acquired:

 

• Tangible and intangible assets minus the fair value of liabilities assumed.

 

• Impairment of value

 

• A building destroyed by fire before an asset is fully depreciated would cause significant decline or impairment of an asset’s benefits or service potential.

 

• Sometimes the impairment of future value is more subtle.

 

• The way we recognize and measure an impairment loss differs depending on whether the assets are classified as:

 

• Held and used

 

• Partial write down of property, plant, and equipment and intangible assets that remain in use.

 

• Held for sale

 

• Asset or group of assets classified as held for sale is measured at the lower of its book value, or fair value minus cost to sell.

 

• An impairment loss is recognized for any write down to fair value minus cost to sell.

 

• Accounting is different, too, for assets with finite lives and those with indefinite lives.

 

• Expenditures subsequent to acquisition

 

• Many long-lived assets require expenditures to repair, maintain, or improve them after their acquisition.

 

• These expenditures can present accounting problems if they are material and therefore require specific accounting treatment to meet GAAP guidelines.

 

• Repairs and maintenance

 

• Additions

 

• Additions involve adding a new major component to an existing asset and should be capitalized because future benefits are increased.

 

• Improvements

 

• Improvements involve the replacement of a major component of an asset, which can be a new component with the same characteristics as the old component or a new component with enhanced operating capabilities.

 

• Rearrangements

 

• Expenditures made to restructure an asset without addition, replacement, or improvement where the objective is to create a new capability for the asset and not necessarily to extend its useful life.

 

• If these expenditures are material and they clearly increase future benefits, they should be capitalized and expensed in the future periods benefitted.

 

 

 

 

Current liabilities

 

• Before a business can invest in an asset if first must acquire the money to pay for it either by owners or the funds must be borrowed that can result in various liabilities which constitute creditors’ claims on a company’s assets.

 

• Characteristics of liabilities:

 

• The most common type of liability is one to be paid in cash and for which the amount and timing are specified by a legally enforceable contract.

 

• However, to be reported as a liability, an obligation need not be payable in cash. Instead, it may require the company to transfer other assets or to provide services.

 

• A liability does not have to be represented by a written agreement nor be legally enforceable.

 

• Even the amount and timing of repayment need not be precisely known.

 

• From a financial reporting perspective, a liability has three essential characteristics:

 

• Liabilities are probable, future sacrifices of economic benefits.

 

• Liabilities arise from present obligations to transfer assets or provide services to other entities.

 

• Liabilities result from past transactions or events.

 

• Current liabilities are obligations payable within one year from the balance sheet date or withing a company’s operating cycle, whichever is longer.

 

• The most common obligations reported as current liabilities for SMBs are accounts payable, notes payable, income tax liability, and accrued liabilities.

 

• Open accounts and notes

 

• Accounts payable and trade notes payable

 

• Most trade credit is offered on an accounts payable open account which means the only formal credit instrument is the invoice that is noninterest-bearing, and it is reported at its face amount because the time until payment usually is short (often 30, 45, or 60 days).

 

• Trade notes payable differ from accounts payable in that they are formally recognized by a written promissory note.

 

• Trade notes payable often are of a somewhat longer term than open accounts and bear interest.

 

• Short-term notes payable

 

• The most common way for SMBs to obtain temporary financing is to arrange a short-term bank loan, sign a promissory note, and for the company to report the liability as a note payable.

 

• About two-thirds of bank loans are short term, but because many are routinely renewed, some tend to resemble long-term debt and in some cases a company will report them as long-term debt.

 

• Very often, small companies are unable to tap into the major sources of long-term financing to the extent necessary to provide for their working capital needs. So, they must rely heavily on short-term financing.

 

• The benefits of short-term financing for SMBs are:

 

• Short-term funds usually offer lower interest rates than long-term debt.

 

• SMBs have flexibility.

 

• Managers increase their funding stack by having as many financing alternatives as possible.

 

• Credit lines

 

• Usually, short-term bank loans are arranged under an existing line of credit with a bank with amounts withdrawn by the borrower only when needed.

 

• Lines of credit that typically last for several years can be noncommitted or committed:

 

• A noncommitted line of credit is an informal agreement that permits a company to borrow up to a prearranged limit without having to follow formal loan procedures and paperwork. In this type of agreement banks sometimes require the company to maintain a compensating balance on deposit with the bank, say, 5% of the line of credit.

 

• A committed line of credit is a more formal agreement that usually requires the company to pay a commitment fee to the bank to keep a credit line amount available to the company. A typical annual commitment fee is ¼% of the total committed funds and may also require a compensating balance.

 

• Secured loans

 

• Secured loans most frequently are secured by inventory or accounts receivable.

 

• Accounts receivable can either be:

 

• Pledged as collateral.

 

• Factored by selling the receivables outright to a finance company as a means of short-term financing.

 

• Accrued liabilities

 

• Accrued liabilities represent expenses already incurred but not yet paid and are recorded by adjusting entries at the end of the reporting period, prior to preparing financial statements.

 

• Common examples of accrued liabilities are:

 

• Salaries payable

 

• Income taxes payable

 

• Interest payable

 

Although recorded in separate liability accounts, accrued liabilities usually are combined and reported under a single category or perhaps two accrued liability categories in the balance sheet.

 

• Accrued interest payable

 

• Accrued interest payable arises in connection with notes payable as well as other forms of debt.

 

• Salaries, commissions, and bonuses

 

• Compensation for employee services can be in the form of hourly wages, salary, commissions, bonuses, and so on.

 

• Accrued liabilities arise in connection with compensation expense when employees have provided services but will be paid after the financial statement date.

 

• These accrued expenses/accrued liabilities are recorded by adjusting entries at the end of the reporting period, prior to preparing financial statements.

 

• Annual bonuses

 

• Sometimes compensation packages include annual bonuses tied to performance objectives such as net income or operating income designed to provide incentives to managers.

 

• Nonfinancial performance measures such as customer satisfaction and product or service quality also are used.

 

• Bonuses are compensation expense of the period in which they are earned, so unpaid bonuses are accrued as a liability at year-end.

 

• Liabilities from advance collections

 

• Deposits and advances from customers, as well as collections for third parties, present situations where liabilities are created to either make payments or provide products or services in the future.

 

• Deposits and advances from customers

 

• Collecting cash from a customer as a refundable deposit or as an advance payment for products or services creates a liability to return the deposit or to supply the products or services.

 

• Refundable deposits

 

• In some businesses it is typical to require customers to pay cash as a deposit that will be refunded when a specified event occurs.

 

• Advances from customers

 

• At times, businesses require advance payments from customers that will be applied to the purchase price when products are delivered, or services provided such as:

 

• Special order deposits for a one-off custom order from a client suitable only for them or a batch of product is reserved for a certain client.

 

• Subscriptions

 

• Gift certificates

 

• These customer advances are accounted for as deferred revenue or unearned revenue and represent liabilities until the related product or service is provided.

 

• Gift cards

 

• Gift cards or gift certificates are particularly common forms of advanced payments.

 

• When a company sells a gift card:

 

• A company initially records the cash received as deferred revenue.

 

• The company recognizes revenue either when:

 

• The gift card is redeemed

 

• The probability of redemption is viewed as remote known as gift card breakage which is determined by the expiration date of the gift card or the company’s experience.

 

• Collections for third parties:

 

• Companies often make collections for third parties from customers or from employees and periodically remit these amounts to the appropriate governmental or other units for items like:

 

• Sales tax

 

• Payroll related deductions:

 

• Withholding taxes

 

• Social Security taxes

 

• Employee insurance

 

• Employee contributions to retirement plans

 

• Union dues

 

• Amounts collected this way represent liabilities until remitted.

 

• Contingencies

 

• The feature that distinguishes loss contingencies from liabilities is uncertainty as to whether an obligation really exists.

 

• The circumstance giving rise to the contingency already has occurred, but there is uncertainty about whether a liability exists that will be resolved only when some future event occurs or does not occur.

 

• Loss contingencies

 

• A loss contingency is an existing, uncertain situation involving potential loss depending on whether some future even occurs.

 

• Whether a contingency is accrued and reported as a liability depends on:

 

• The likelihood that the confirming event will occur, and

 

• What can be determined about the amount of loss.

 

• Generally accepted accounting principles (GAAP) require that the likelihood that the future event(s) will confirm the incurrence of the liability be categorized as:

 

• Probable

 

• Reasonably possible

 

• Remote

 

• Also key to reporting a contingent liability is its dollar amount. The amount of the potential loss is classified as either:

 

• Known

 

• Reasonably estimable

 

• Not reasonably estimable

 

• A liability is accrued if it is both probable that the confirming event will occur, and the amount can be at least reasonably estimated.

 

• The most common loss contingency is an uncollectible receivable. Your company has recorded an uncollectible receivable before without knowing you were accruing a loss contingency in the form of:

 

Debit record (DR): Bad debt expense

 

Credit record (CR): Allowance for uncollectible accounts

 

• Not all loss contingencies are accrued.

 

• If one or both criteria for accrual are not met, but there is at least a reasonable possibility that a loss will occur, a disclosure note would describe the contingency.

 

• The disclosure note also should provide an estimate of the potential loss or range of loss, if possible.

 

• If an estimate cannot be made, a statement to that effect is needed.

 

• Product warranties and guarantees

 

• Manufacturer’s quality assurance warranty such as:

 

• Satisfaction guaranteed

 

• Your money back if not satisfied

 

• If anything goes wrong in the first five years

 

• One year guarantee of workmanship or free replacement

 

• These are guarantees by the seller that the customer will be satisfied with the products or services the seller provided.

 

• Boosting sales is the reason sellers offer quality assurance warranties.

 

• There may be a future sacrifice of economic benefits (cost of satisfying the guarantee) due to an existing circumstance (the guaranteed products have been sold) that depends on an uncertain future event (customer claim).

 

• The criteria for accruing a contingent loss almost always are met for product warranties or product guarantees.

 

• While your company usually cannot predict the liability associated with an individual sale, reasonably accurate estimates of the total liability for a period usually are possible, because prior experience makes it possible to predict how many warrantees or guarantees on average will need to be satisfied.

 

• Extended warranty contracts

 

• Revenue from extended warranty contracts is not recognized immediately, but instead is recorded as a deferred revenue liability at the time of sale and recognized as revenue over the contract period, typically on a straight-line depreciation basis.

 

• Litigation claims

 

• While companies may accrue estimated lawyer fees and other legal costs, they usually do not record a loss until after the ultimate settlement has been reached or negotiations for settlement are substantially completed.

 

• Internal company records should include descriptions of the range of losses that are reasonably possible to occur.

 

• Unasserted claims and assessments

 

• Sometimes companies are aware of a potential claim that has not yet been made. Such unasserted claims may require accrual or disclosure of a contingent liability.

 

• If management feels an assessment is probable, an estimated loss and contingent liability would be accrued only if an unfavorable outcome is probable, and the amount can be reasonably estimated.

 

• However, a disclosure note alone would be appropriate if an unfavorable settlement is only reasonably possible or if the settlement is probable but cannot be reasonably estimated.

 

• No action is needed if the chances of that outcome occurring are remote.

 

• Gain contingencies

 

• A gain contingency is an uncertain situation that might result in a gain. For example, in a pending lawsuit, one side – the defendant – faces a loss contingency; the other side – the plaintiff – has a gain contingency.

 

• Loss contingencies are accrued when it is probable that an amount will be paid, and the amount can reasonably be estimated.

 

• However, gain contingencies are not accrued.

 

• The nonparallel treatment of gain contingencies is an example of conservatism, following the reasoning that it is desirable to anticipate losses, but recognizing gains should await their realization.

 

• Though gain contingencies are not recorded in the accounts, material ones are disclosed in notes to the financial statements