Accounting Test 2

Perpetual Inventory System

Continuously updates inventory records after each purchase/sale.

Periodic Inventory System

Updates inventory only at the end of the accounting period, using a formula to determine COGS.

Cost of Goods Sold (COGS) formula

COGS = Beginning Inventory + Net Purchases - Ending Inventory

Inventory Purchase Entry on Account

Dr. Inventory, Cr. Accounts Payable.

Freight Costs (FOB Shipping Point)

Dr. Inventory, Cr. Cash.

Purchase Returns & Allowances

Dr. Accounts Payable (or Cash), Cr. Inventory.

Purchase Discounts Entry During Discount Period

Dr. Accounts Payable, Cr. Cash (Amount Paid), Cr. Inventory (Discount Amount).

Sales Revenue Recording

Dr. Accounts Receivable (or Cash), Cr. Sales Revenue.

Cost of Goods Sold Recording

Dr. COGS, Cr. Inventory.

Sales Returns Entry

Dr. Sales Returns & Allowances, Cr. Accounts Receivable (or Cash); Dr. Inventory, Cr. COGS.

Sales Discounts Entry

Dr. Cash (Amount Paid), Dr. Sales Discounts (Discount Amount), Cr. Accounts Receivable.

Multi-Step Income Statement

More detailed than a single-step income statement, includes Gross Profit and Operating Income.

Current Assets

Includes Cash, Accounts Receivable, Inventory, Prepaid Expenses.

Gross Margin Ratio

Measures profitability of sales before expenses; formula: (Net Sales - COGS) / Net Sales.

Specific Identification Method

Tracks exact cost of each unit sold; used for unique, high-value items.

FIFO (First-In, First-Out)

Oldest costs are recognized as COGS, effects are higher profits in inflation.

LIFO (Last-In, First-Out)

Newest costs are recognized as COGS, effects are lower taxable income in inflation.

Weighted Average Inventory Costing

Averages cost per unit for inventory; formula: Total Cost of Inventory Available / Total Units Available.

Lower of Cost or Market (LCM) Rule

Inventory is recorded at the lower of cost or market value (replacement cost).

Inventory Turnover Ratio

Measures how quickly inventory is sold; formula: COGS / Average Inventory.

Days’ Sales in Inventory Ratio

Measures how long inventory stays before being sold; formula: (Ending Inventory / COGS) x 365.

Purpose of Internal Controls

Protect assets, ensure reliable financial reporting, promote efficiency, enforce compliance.

Principles of Internal Controls

Include establishing responsibilities, maintaining adequate records, and performing regular reviews.

Control Over Cash Receipts

Immediate deposit of cash and use of cash registers and receipts.

Bank Reconciliation Process

Compares bank statement to cash ledger, adjusting for outstanding checks and deposits in transit.

Petty Cash Definition

A small fund for minor expenses that is replenished when funds are low.

Days’ Sales Uncollected Ratio

Measures how long it takes to collect receivables; formula: (Accounts Receivable / Net Sales) x 365.

Perpetual Inventory System

Continuously updates inventory records after each purchase/sale.

Periodic Inventory System

Updates inventory only at the end of the accounting period.

Cost of Goods Sold (COGS)

Calculated using the formula: COGS = Beginning Inventory + Net Purchases - Ending Inventory.

Merchandise Purchases Entry

Entry to purchase inventory on account: Dr. Inventory, Cr. Accounts Payable.

Merchandise Sales Entry

Recording a sale: Dr. Accounts Receivable (or Cash), Cr. Sales Revenue.

Multi-Step Income Statement

Includes detailed sections: Net Sales, Gross Profit, Operating Income, Net Income.

Acid-Test (Quick) Ratio

Measures a company's ability to pay short-term obligations without relying on inventory.

FIFO (First-In, First-Out)

Cost flow method: oldest costs become COGS; newer costs remain as ending inventory.

LIFO (Last-In, First-Out)

Cost flow method: newest costs become COGS; older costs remain as ending inventory.

Days’ Sales Uncollected

Measures how long it takes to collect receivables: Formula = Accounts Receivable / Net Sales × 365.

Bank Reconciliation

Process of comparing the bank statement balance to the cash ledger balance to make adjustments.

Outstanding Checks

Checks issued by the company but not yet cleared by the bank.

Deposits in Transit

Deposits made by the company but not yet recorded by the bank.

Journal Entry for Bank Fees

Dr. Miscellaneous Expense, Cr. Cash.

Petty Cash

Small fund for minor expenses, replenished when funds are low.