Accounting Chapters 4-6

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56 Terms

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Aug. 1 Purchased merchandise from Aron Company for $7,000 under credit terms of 1/10, n/30, FOB destination, invoice dated August 1

D: Merch Inventory $7000
C: Accounts Payable - Aron $7000

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Aug. 5 Sold merchandise to Baird Corp. for $4,900 under credit terms of 2/10, n/60, FOB destination, invoice dated August 5. The merchandise had cost $3,000.

D: Accounts Receivable - Baird $4900
C: Sales $4900

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Record cost of merchandise sold, $3,000.

D: Cost of Goods Sold $3000
C: Merch Inventory $3000

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Aug. 8 Purchased merchandise from Waters Corporation for $6,000 under credit terms of 1/10, n/45, FOB shipping point, invoice dated August 8.

D: Merch Inventory $6000
C: Accounts Payable - Waters $6000

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Aug. 9 Paid $120 cash for shipping charges related to the August 5 sale to Baird Corp.

D: Delivery Expense $120
C: Cash $120

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Aug. 10 Baird returned merchandise from the August 5 sale that had cost Lowe's $500 and was sold for $1,000. The merchandise was restored to inventory.

D: Sales returns and allowances $1000
C: Accounts Receivable - Baird $1000

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The merchandise, which had cost $500, was restored to inventory.

D: Merch Inventory $500
C: COGS $500

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Aug. 12 After negotiations with Waters Corporation concerning problems with the purchases on August 8, Lowe's received a credit memorandum from Waters granting a price reduction of $600 off the $6,000 of goods purchased.

D: Accounts Payable - Waters $600
C: Merch Inventory $600

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Aug. 14 At Aron's request, Lowe's paid $280 cash for freight charges on the August 1 purchase, reducing the amount owed to Aron.

D: Accounts Payable - Aron $280
C: Cash $280

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Aug. 15 Received balance due from Baird Corp. for the August 5 sale less the return on August 10

D: Cash $ 3822
D: Sales Discounts $78
C: Accounts Receivable $3900

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Aug. 18 Paid the amount due Waters Corporation for the August 8 purchase less the price allowance from August 12

D: Accounts Payable - Waters $5400
C: Merch Inventory $54
C: Cash $5346

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Aug. 19 Sold merchandise to Tux Co. for $4,200 under credit terms of n/10, FOB shipping point, invoice dated August 19. The merchandise had cost $2,100.

D: Accounts Receivable - Tux Co. $4200
C: Sales $4200

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Record cost of merchandise sold, $2,100.

D: Cost of Goods Sold $2100
C: Merch Inventory $2100

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Aug. 22 Tux requested a price reduction on the August 19 sale because the merchandise did not meet specifications. Lowe's sent Tux a $700 credit memorandum toward the $4,200 invoice to resolve the issue.

D: Sales Returns & Allowances $700
C: Accounts Receivable - Tux $700

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Aug. 29 Received Tux's cash payment for the amount due from the August 19 sale less the price allowance from August 22.

D: Cash $3500
C: Accounts Receivable - Tux $3500

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Aug. 30 Paid Aron Company the amount due from the August 1 purchase.

D: Accounts Payable - Aron $6720
C: Cash $6720

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Net Sales

Gross Sales - Sales returns, allowances, and discounts

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Perpetual Inventory System

continually updates accounting records for merchandising transactions—specifically, for those records of inventory available for sale and inventory sold.

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Periodic Inventory System

updates the accounting records for merchandise transactions only at the end of a period

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FOB Shipping Point

Belongs to the buyer when being shipped

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FOB Destination

Belongs to the buyer what it gets delivered

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Gross margin ratio

(Net Sales - Cost of Goods Sold) / Net Sales

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Merchandiser

earns net income by buying and selling merchandise

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Wholesaler

is an intermediary that buys products from manufacturers or other wholesalers and sells them to retailers or other wholesalers

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Retailer

is an intermediary that buys products from manufacturers or wholesalers and sells them to consumers.

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COGS

expenses of buying and preparing the merchandise

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Merchandise Inventory

products that a company owns and intends to sell

The cost of this assets includes the cost incurred to buy the goods, ship them to store, and make them ready for sale.

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Acid test Ratio

(Cash and cash equivalents + short-term investments + current receivables)/Current liabilities

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Gross profit

Net sales - COGS

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Identify the items making up merch inventory

Includes all goods that a company owns and holds for sale: goods in transit, goods on consignment, and goods damaged or obsolete

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Identify costs of merch inventory

Includes costs of expenditures necessary to bring an item to a salable condition and location. Includes the cost of invoice minus any discount plus any incidental charges

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Analyze the effects of inventory methods for both financial and tax reporting

FIFO: Lowest amount of COGS --> HIGHEST gross profit and net income
LIFO: Highest amount of cost of goods sold --> lowest gross profit and net income (temporary tax advantage)
Weighted average: results between FIFO and LIFO
Specific Identification: results depend on which units are sold

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Analyze the effects of inventory errors on current and future financial statements.

If ending inventory is understated, in year 1 COGS is overstated and net income is understated. (Opposite in year 2)
If ending inventory is overstated, in year 1 COGS is understated and net income is overstated. (Opposite in year 2)

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Lower of Cost or Market (LCM)

A basis whereby inventory is stated at the lower of either its cost or its market value as determined by current replacement cost.

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Inventory Turnover

COGS/ Average Inventory

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Days' Sales in Inventory

ending inventory/COGS x 365

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Cost = $ necessary to bring item to salable condition and location

PRICE 75,000
TRANSPORTATION IN 2,400
INSURANCE 300
CLEANING 980
TOTAL COST 78,680

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COGS Equation

Unit costs available for sale - Ending Income

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Gross Profit

Sales - COGS

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Income Statement

COGS = BI + Purchases - EI
If BI = EI, COGS = P

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Internal Control System

Protect company assets
Ensure reliable accounting
Go by company policies
Promote efficient operations

These all help avoidable loses.

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Sarbanes-Oxley Act (SOX)

Increase confidence in firms financial reports
For public companies

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Principles of internal control

1. establish responsibilities
2. maintain adequate records
3. insure assets and bond key employees
4. separate record keeping from custody of assets
5. divide responsibility for related transactions
6. apply technological controls
7. perform regular and independent reviews

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Limitations of internal control

*human error
* human fraud

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Cost-benefit principle:

Benefits of system must exceed their cost

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3 Guidelines to Control of Cash

Handling cash is separate from record keeping
Cash goes directly goes to bank
Cash given by check

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Petty Cash

small payments (ex. postage, repairs, and supplies)

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Establish the petty cash fund

D: Petty Cash
C: Cash

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Reimbursing petty cash

list expenses as debits
credit cash

to increase: increase petty cash, decrease cash
to decrease: decrease petty cash, increase cash

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Outstanding checks

are already subtracted from the books balance, and the bank reconciliation must be subtracted from the bank balance

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Deposits in transit

Are already added to the book balance and must be added to the bank balance

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Bank fees

are already subtracted from the bank balance and must be subtracted from the book balance

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NSF checks

Are already subtracted from the bank balance, and must be subtracted from the book balance

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Interest earned

Is already added to the bank balance, and must be added to the book balance

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IMPORTANT

ONLY ITEMS RECONCILING THE BOOK BALANCE REQUIRE ADJUSTMENT!!

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Days' sales uncollected

(accounts receivable/net sales) x 365