Financial Accounting

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Previous Lessons
Open Chapter Ch. 1: Basics of Financial Accounting
Lesson #1 Introduction to Financial Accounting
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Lesson #2 Structures of a Business
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Lesson #3 Comparing Internal vs. External Users
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Lesson #4 Business Activities
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Lesson #5 Financial Statements
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Lesson #6 Elements of Financial Accounting
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Open Chapter Ch. 2: Assets, Liability, and Equity
Lesson #7 Assets
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Lesson #8 Liabilities
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Lesson #9 Equity
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Open Chapter Ch. 3: The Double-Entry System and Conceptual Framework
Lesson #10 Accounting Equation
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Lesson #11 Conceptual Framework
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Lesson #12 Double Entry Accounting System
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Lesson #13 Debits and Credits
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Lesson #14 Normal Balances and RED Accounts
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Exam Exam 1
Open Chapter Ch. 4: The Accounting Cycle
Lesson #15 Journalizing and the Accounting Cycle
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Lesson #16 Posting to the General Ledger
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Lesson #17 Trial Balance
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Lesson #18 Adjusting Entries for Accrued Expenses
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Lesson #19 Adjusting Entries for Prepaid Expenses
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Lesson #20 Adjusting Entries for Unearned Revenue
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Lesson #21 Adjusting Entries for Accrued Revenue
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Lesson #22 Adjusting Entries for Amortization and Depreciation
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Lesson #23 Adjusted Trial Balance
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Lesson #24 Preparing the Financial Statements
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Lesson #25 Permanent vs. Temporary Accounts
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Lesson #26 Closing Entries
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Open Chapter Ch. 5: Merchandise Inventory
Lesson #27 Introduction to Merchandise Inventory
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Lesson #28 Periodic vs. Perpetual Inventory Systems
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Lesson #29 Journalizing Purchase Entries
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Lesson #30 Journalizing Sales Transactions
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Lesson #31 Preparing a Multiple-Step Income Statement
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Lesson #32 Periodic Inventory System Purchases
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Lesson #33 Periodic System and the Multiple-Step Accounting System
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Exam Midterm Exam
Open Chapter Ch. 6: Cost Flow Assumptions: FIFO, LIFO, and Average Cost Methods
Lesson #34 Specific Identification Method and Inventory Costing
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Lesson #35 FIFO Method and Inventory Costing
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Lesson #36 Average Cost Method and Inventory Costing
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Lesson #37 The LIFO Method
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Lesson #38 Average Cost Method for the Perpetual System
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Lesson #39 Comparing Inventory Costing Methods
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Open Chapter Ch. 7: Receivables and Bad Debts
Lesson #40 Allowance Method and Uncollectibles
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Lesson #41 The Allowance Method
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Lesson #42 Percentage of Sales Method
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Lesson #43 Percentage of Receivables Method
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Lesson #44 Receivables Method and the Aging Table
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Lesson #45 Write Off Receivables Using the Allowance Method
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Lesson #46 Direct Write-Off Method
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Open Chapter Ch. 8: Revenue Recognition
Lesson #47 Revenue Recognition
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Lesson #48 Revenue Recognition Examples
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Lesson #49 Revenue Recognition and Long Term Contracts
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Lesson #50 Percentage of Completion Method
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Lesson #51 Percentage of Completion Method Journal Entries
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Lesson #52 Percentage of Completion Method and Journalizing Losses
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Lesson #53 Cost Recovery Method
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Lesson #54 Completed Contract Method and Journal Entries
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Lesson #55 Completed Contract Method and Losses
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Exam Exam 3
Open Chapter Ch. 9: Depreciation of Fixed Assets and Gains and Losses
Lesson #56 Depreciation, Amortization and Depletion
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Lesson #57 Straight Line and Declining Balance Methods
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Lesson #58 Straight Line and Double Declining Balance Depreciation Examples
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Lesson #59 Gains and Losses on Disposals of Property, Plant & Equipment
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Open Chapter Ch. 10: Intangible Assets
Lesson #60 Intangible Assets
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Lesson #61 Amortizing Intangible Assets
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Lesson #62 Impairment of Intangible Assets
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Lesson #63 Recording Goodwill, Amortization and Impairment
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Open Chapter Ch. 11: The Indirect Cash Flow Statement
Lesson #64 Preparing a Cash Flow Statement Using the Indirect Method Part 1
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Lesson #65 Cash Flow Statement Using Indirect Method Part 2, Receivables
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Lesson #66 Cash Flow Statement Using Indirect Method Part 3, Inventory
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Lesson #67 Cash Flow Statement Using Indirect Method Part 4, Payables
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Lesson #68 Cash Flow Statement Using Indirect Method Part 5, Non Cash Expenses
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Lesson #69 Cash Flow Statement- Investing and Financing Activities
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Exam Final Exam

Assignments:

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Lesson Objectives:

- Recording goodwill and how it is used in a real world example
- Defining bargain pricing and gains
- How amortization applies to goodwill



Let's continue reviewing the concept of intangible assets by explaining what goodwill assets are and how they are measured.

The best way to understand goodwill, is by looking at a real life example of a company such as a well established investment company ABC that is looking to acquire company XYZ. Let's say they offer $200,000 to take over the company and company XYZ accepts the acquisition offer.

We would take a look at their balance sheet to see the total amount of assets and liabilities are $171,900. These amounts are the same to ensure both sides of the accounting equation are balanced. The investment company offered $200,000 which is greater than the amount listed on the balance sheet of $171,900.



In order for the investment company ABC to record the acquisition, we would need to write out a journal entry that shows they took on all of the assets on the balance sheet. The accounts are increasing, therefore they would be debited.

Next, we would credit the accounts on the liabilities side. This side of the journal entry would also need to show the $200,000 that the investment company paid out to acquire company XYZ.

At this point, we would have an imbalance in the journal entry because the right side would equal $349,950 and the left side would equal $171,900. We would then need to record the difference on the debits side for the goodwill which would be a debit of $178,050.

The goodwill would also be listed on the balance sheet. Essentially, goodwill is used to show the difference of the fair value and net assets of the company that was acquired.



If the cost of the acquisition is less than the fair value, the company would be getting a "bargain" and goodwill would not apply because the cost is not over the amount of net assets.
 
An example of this would be if the investment company paid only $20,000 instead of $200,000. The left side would still equal $171,900 but the right side would only be $169,950. In this case, they would need to record of $1,950.

In the past, this type of transaction has been considered an extraordinary gain but updates in IFRS standards have eliminated the use of the term "extraordinary". Now, we just call the difference between the fair value and the bargain price as the gain.
 
Next, let's talk about amortization.



Earlier in this lesson, we recorded a goodwill amount of $178,050 and this was perceived as an asset when the new company was acquired. The only way that the goodwill asset would no longer is exist is if the investment company went under. This also means that there is no defined usable life for this asset, therefore it would be considered an indefinite asset.
 
Due to the fact that the usable life time period cannot be determined for an indefinite asset, we would never need to worry about amortization. The value of the asset would be looked at using the concept of impairment and you can always refer back to the previous lesson if you need to review how impairment works.