Financial Accounting Ch. 4-7 Test

merchandise inventory includes:

costs to purchase, shipping costs, and costs to prepare for sale

order of operating cycle for merchandiser

1. Cash purchase of merchandise

2. Inventory for sale

3. Credit sales

4. Accounts receivable

5. Receipt of cash for credit sales

cost of goods available for sale =

beginning inventory + net purchases

cost of goods sold =

beginning inventory + additional costs - ending inventory

a perpetual inventory system updates the accounting records _______.

for each purchase and each sale

a periodic inventory system updates the accounting records _______.

at the end of the period

gross margin =

net sales - cost of goods sold

gross margin ratio =

gross margin (net sales - cost of goods sold) / net sales

when there are future expected sales discounts arising from current-period sales record using an adjusting entry of ________.

debit sales discounts

credit allowance for sales discounts

allowance for sales discounts is a _______.

contra asset account

estimates of future sales and returns are made with an adjusting entry to ________.

debit sales returns and allowances

credit sales refund payable

sales refund payable is a _______.

current liability

an estimate of future inventory returns is recorded with

debit inventory returns estimated

credit cost of goods sold

inventory returns estimated is a ________.

current asset, debit

new revenue recognition tools can be used using ______.

adjusting entries

A type of business that earns income by buying and selling merchandise

merchandiser

Inventory is updated for each purchase and each sale of inventory.

perpetual inventory system

Time period that can pass before a customer's full payment is due.

credit period

Goods a company owns and expects to sell to its customers

merchandise inventory

Information not included in the typical ledger accounts.

supplementary records

Inventory is updated for purchases and sales of inventory only at the end of a period.

periodic inventory system

Time period in which a cash discount is available.

discount period

Difference between net sales and the cost of goods sold.

gross profit

inventory is _____.

an asset representing what a company owns and intends to sell

inventory is always a _______.

current asset

goods available for sale (GAFS) =

beginning inventory + purchases

ending inventory is ______.

an asset that is found on the balance sheet

ending inventory is found on the ______.

balance sheet

cost of goods sold (COGS) is _____.

the expense associated with selling merchandise. it is the cost of the merchandise to the seller.

COGS is found on the ______.

income statement

in a perpetual system, the customer records a transaction as a _______.

debit inventory

credit cash (or AP)

in a perpetual system, the merchandiser records a transaction as a _______.

debit cash (or AR)

credit sales

debit COGS

credit inventory

what constitutes inventory?

goods in transit, consigned goods, and damaged or obsolete goods

what are goods in transit?

- items shipped free on board (FOB) destination are NOT counted in inventory until they are received. they belong to the purchaser until they arrive

- items shipped FOB shipping point are counted into inventory once they are placed on the common carrier

what are consigned goods?

items placed with another company who sells the items on behalf of the company for a fee

- ownership had NOT transferred and these items should be counted in inventory

- EX: jewelry stores

what are damaged or obsolete goods?

items that should NOT be counted into inventory as though they were viable items to be sold.

- if some residual sale can be made, they are valued at sale prices (minus) the cost of making the sale called "net realizable value"

- EX: football jerseys for the team that didn't win the Super Bowl

net relizable value =

sale price - cost of making the sale

what costs attach to inventory?

purchase price - any sales discount or sales allowance + insurance when goods are shipping FOB shipping point + freight cost when shipping FOB shipping point + any other costs including tariffs, storage costs, refurbishment costs, etc.

- the focus is whatever costs are needed to bring an item to its location in a salable condition

inventory methods

1. FIFO

2. LIFO

3. specific identification

4. weighted average

FIFO method

an inventory costing method that assigns the most recent costs to ending inventory

- assume oldest inventory is what is being sold

LIFO method

an inventory method that assigns the most recent costs to cost of goods sold.

- assume newest inventory is what is being sold

if LIFO is used for tax purposes, it also must be used for _______.

financial statements

specific identification method steps

1. start with beginning inventory

2. add all purchases throughout month

3. subtract all sales- since it is specific identification, you will be given the cost of each item sold

4. the remainder will be ending inventory

specific identification usage examples

real estate, cars, rolexes, etc.

weighted average method

a process costing method that blends together units and costs from both the current and prior periods

for weighted average, cost per unit =

ending inventory / running balance

inventories must be valued at ______.

the lower of cost or market (conservatism constraint)

If the market value of the item (today's purchase price) is lower than the original purchase amount, then...

the inventory item must be valued at market—today's purchase price.

If the market value is higher than the original purchase price, then...

it remains in inventory at the original price

Lower of Cost or Market (LCM) can be applied to...

individual items, classes of items or inventory as a whole.

when cost of purchasing inventory rises, FIFO:

EI will be higher and COGS lower (EI higher and net income higher)

- Profit planning: company is more profitable

when cost of purchasing inventory rises, LIFO:

EI will be lower and COGS higher (EI higher and net income lower)

- Tax advantage: will pay lower taxes

when cost of purchasing inventory rises, weighted average:

Yields a result between FIFO and LIFO

- Smoother results

when the cost of purchasing inventory becomes cheaper, FIFO:

- EI will be lower and COGS higher

- EI lower and net income lower

when the cost of purchasing inventory becomes cheaper, LIFO:

- EI will be higher and COGS lower

- EI higher and net income higher

when the cost of purchasing inventory becomes cheaper, weighted average:

- Yields a result between FIFO and LIFO

- Smoother results

cash over and short is ________.

an income statement account recording the income effects of cash overages and cash shortages.

cash Over and Short account usually is combined with _________.

other miscellaneous expenses on the income statement

cash over and short is on the ______.

income statement

To record cash over and short, follow these simple rules:

1. Record the cash count as a debit to Cash (Physically how much cash the company has)

2. Record the cash register record as a credit to Sales (Theoretically how much cash the company should have from the cash register report)

3. The difference will be either a debit or a credit to Cash Over and Short

If a cash register's record shows $600 should be in the register but the cash count from the register is $595, the journal entry is:

debit cash 595

debit cash Over and Short 5

credit sales 600

The balance of a checking account reported on the bank statement rarely equals ______.

the general ledger cash balance in the accounting records.

In preparing a bank reconciliation, always reconcile _____.

the bank side (left side below) first because there are generally only two reconciling items

deposits in transits are _______.

deposits not yet recorded by the bank but recorded in the general ledger

outstanding checks are _______.

checks written and recorded by the company but not yet received by the bank

deposits in transits and outstanding checks are _______.

the 2 reconciling items

the ending Adjusted Bank Balance will help you determine _________.

if you have properly recognized all reconciling items from the book or right-hand side

Deposits in Transit, Outstanding Checks and Bank Errors do not require_______.

a journal entry.

The ending Adjusted Bank Balance must agree ________.

to the ending Adjusted Book Balance.

Reconciling items on the book side, will come from the _______.

bank statement

Reconciling items on the book side, each will require a _______.

journal entry.

on the book/general ledger side, add:

- any interest received

- any collections from your customers which the bank has performed on behalf of the company

- any previously unrecorded deposits.

on the book/general ledger side, subtract:

- any bank service charges

- EFT payments

- insufficient funds (NSF) checks you deposited

- any fees for NSF checks

- any loan payments to the bank.

(This is not an exhaustive list but a review of the bank statement will show what has been deducted from the bank account).

steps for journal entry errors

1.Reverse the original entry as though it did not happen (easier to explain and also to remember)

2. Record the proper amount.

used by banks employees to verify signatures on checks

signature card

lists items such as currency and checks along with their dollar amount

deposit ticket

a transfer of cash from one party to another that does not involve a paper document

electronic funds transfer

signed by the depositor instructing the bank to pay a specified amount of money to a designated recipient

check

A bank issues a debit memorandum to notify a depositor of:

a deduction to a depositors account

items that must be adjusted to the book balance:

book error, interest earned on checking account, collections of accounts receivable by the bank

steps for preparing bank reconciliation:

1. identify the bank statement balance

2. identify and add unrecorded deposits to the bank balance

3. identify and deduct outstanding checks from the bank balance

4. compute the adjusted bank balance

5. identify the company's book balance

6. identify and add unrecorded interest earned to the book balance

7. identify and deduct service charges from the book balance

8. commute the adjusted book balance

9. verify that the bank statement balance and the book balance are equal

for interest on cash balance:

book, addition, adjusting entry required

for bank service charges:

book, subtraction, adjusting entry required

for minimum balance charges:

book, subtraction, adjusting entry required

for outstanding checks:

bank, subtraction, no adjusting entry required

for credit memo on collection of note:

book, addition, adjusting entry required

for NSF checks:

book, subtraction, adjusting entry required

for outstanding deposits:

bank, addition, no adjusting entry required

merchandise inventory includes:

goods held for sale, goods located in the warehouse, goods located in an off site warehouse

include or exclude from inventory: goods in transit shipped to purchaser FOB destination

exclude from inventory

include or exclude from inventory: goods in transit shipped to purchaser FOB shipping point

include in inventory

include or exclude from inventory: goods in transit shipped by seller FOB destination

include in inventory

include or exclude from inventory: goods in transit shipped by seller FOB shipping point

exclude from inventory

a consignee is the ________.

purchaser

a consignor is the ________.

seller

include or exclude from inventory: obsolete inventory that can be sold

include in inventory

include or exclude from inventory: damaged inventory that cannot be resold

exclude from inventory

If a perpetual inventory system is in use _______.

a physical inventory count should be taken at least annually, even though the inventory account is updated for each purchase and sale

During a period of regularly rising purchase costs, the method yields the highest reported cost of goods sold amount on the income statement. (FIFO or LIFO)

LIFO

During a period of regularly rising purchase costs, the method yields the lowest income tax expense. (FIFO or LIFO)

LIFO