Accounting Exam 2 Review

FOB shipping point

Inventory changes hands when it is shipped. Buyer owns it when it is shipped.

Fixed assets

physical assets like land equipment buildings

Who pays the shipping and takes on the risk in FOB shipping point?

The buyer

FOB destination point

Inventory changes hands when it arrives. Buyer owns it when it is delivered

Who pays the shipping and takes on the risk in FOB desitnation point?

The seller

Lower cost of market

We change the numbers for inventory on the books if the price drops a lot from original cost. Cant change it if the value goes up.

What are the three parts of the discount writing?

% / time you have to pay by to get the discount… net days until its due. Ex: 5/10 net 30 is 5% discount if you pay within 10 days and the whole thing is due in 30 days.

What do you debit when you are paying back something with a discount?

Accounts payable FOR THE FULL AMOUNT WIHTOUT DISCOUNT

What do you credit when you are paying back something with a discount?

Inventory for the discount amount and cash for the part you are paying the company.

How do you return inventory?

Just flip all the accounts around and do the opposite. Debit AP and credit inventory.

What are the four accounts impacted when you sell something?

Cash or AR, sales revenue, COGS, and inventory.

What do you debit when you are selling inventory?

Cash/AR for the amount that you sold the goods for, and COGS for how much they originally cost.

What do you credit when you are selling inventory?

Sales revenue for the amount that you sold the goods for, and inventory for how much they originally cost.

What accounts are linked when selling inventory?

COGS and cash, Revenue and Inventory.

How do you handle a discount when selling inventory?

Record everything normally, and if they pay in time then debit cash how much they pay after discount, debit sales disocunt for the % off they dont have to pay, then credit AR

How do you handle someone returning inventory?

Just reverse all the previous accounts. Debit sales reutrns (just sales under a different name) and inventory, credit AR and COGS.

How do you find inventory

Beginning inventory + purchases - COGS

FIFO- First in First out

First inventory bought in will be the first to be bought

LIFO- Last in first out

The last inventory to be bought in will be the first to be bought.

With inflation, does FIFO or LIFO have lower COGS?

FIFO=lower COGS

With inflation, does FIFO or LIFO have lower income?

LIFO= lower income

With inflation, does FIFO or LIFO have lower taxes?

LIFO= lower taxes.

Allowance method of AR

Company estimates how much AR is not going to be collected during the period when the sales happen. Pre pays peoples tabs by setting aside from todays income statement.

How do you find net accounts receivable

Gross A/R - bad debt allowance= net accounts receivable (how much youre owed - how much you think you wont get paid back = how much youll collect)

Cash equivalent

Any short term investment with 3 or less months matuirty that acts similarly to cash.

What are the factors that contribute to AR?

Beginning balance + sales on credit - cash collections and write offs

What do you add to the AR account

Beginning balance and sales on credit

What do you subtract from the AR account

Cash collections and write offs

How do we estimate bad debt?

Debit bad debt expense and credit allowance with an adjusting entry.

How do we estimate bad debt numerically?

Beginning allowance + credited bad debt estimate - write off as a debit.

How do you write off an account when you think they wont pay you?

Debit allowance and credit AR

How do you record a recovery?

Debit AR and credit allowance

Percent of credit sales allowance method

Overall number we estimate and take out of every sale uniformly.

Cumulative/Percent of ending AR method

Look at how much left in AR and estimate how much we aren’t going to get back.

What does the percentage amount given to you in year by year give you?

Bad debt expense estimate (comes from the percent of credit sales)

What does the percentage amount given to you in cumulative give you?

Ending allowance (comes from the percent of AR)

How do you record bad debt expense no matter the method?

Debit bad debt expense, credit allowance.

PPE

Property, pant, and equipment.

How do we expense PPE?

Allocate the purchase price evenly over its lifespan

How do we handle PPE repairs?

Just expense it

How do we handle PPE improvements

Add to historical cost and recalculate the deprecation like its a new purchase.

How do you find the annual depreciation expense

Historical cost - salvage value / expected life in years.

How do you record depreciation

Debit depreciation and credit accumulated depreciation

Book value of PPE

How much of an asset still needs to depreciated (historical cost - accumulated depreciation)

Salvage value

What you think you can sell the asset for later. Estimated up front and can not be changed later.

What is step 1 for selling PPE

Credit PPE at its historical cost

What is step 2 for selling PPE

Debit all of the accumulated depreciation

What is step 3 for selling PPE

Debit cash for the amount received/how much you sold it for.

What is step 4 for selling PPE

Either debit a loss or credit a gain (balancing number)

What does gross profit margin represent?

How many pennies per dollar we get to keep from sales adrer subtracting direct costs of inventory.