ACCY 201 Test 2

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Accounting

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71 Terms

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Closing process
occurs at the end of an accounting period after financial statements are completed; applies only to temporary accounts
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1. identify accounts for closing
2. record and post the closing entries
3. prepare a post-closing trial balance
3 step closing process
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temporary accounts
relate to one accounting period; income statement accounts, dividends account, and income summary account
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permanent accounts
report on activities related to one or more future accounting periods; asset, liability, and equity accounts (all balance sheet accounts); not closed each period and carry their ending balance into future periods
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closing entries
transfer the end-of-period balances in revenue, expense, and dividends accounts to the permanent Retained Earnings account
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revenue, expense, and dividends accounts
what accounts must end each period with a zero balance?
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income summary
temporary account used only in the closing process to which the balances of revenue and expense accounts (including any gains or losses) are transferred
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1. close credit balances in revenue accounts to income summary
2. close debit balances in expense accounts to income summary
3. close income summary to retained earnings
4. dividends account to retained earnings
(all temporary accounts should equal zero)

(REID)
4 steps to closing process
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post-closing trial balance
a list of permanent accounts and their balances after all closing entries; only balance sheet (permanent) accounts are on it; verifies that
1. total debits equal total credits for permanent accounts
2. all temporary accounts have zero balances
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accounting cycle
the steps in preparing financial statements; repeated each reporting period
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1. analyze transactions
2. journalize
3. post
4. prepare unadjusted trial balance
5. adjust and post accounts
6. prepare adjusted trial balance
7. prepare financial statements
8. close accounts
9. prepare post closing trial balance
10 steps of accounting cycle
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unclassified balance sheet
broadly groups accounts into assets, liabilities, and equity
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classified balance sheet
organizes assets and liabilities into subgroups
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operating cycle
the time span from when cash is used to acquire goods and services until cash is received from the sale of goods and services; most operating cycles are less than one year
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current assets
cash and other resources that are expected to be sold, collected, or used within one year or the company's operating cycle, whichever is longer; ex: cash, short-term investments, a/r, short-term n/r, merchandise inventory, prepaid expenses
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plant assets
tangible assets that are both long-lived and used to produce or sell products and services; also called PP&E (property, plant, and equipment) or fixed assets; ex: equipment, machinery, buildings, and land that are used to produce or sell products and services
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intangible assets
long-term assets that benefit business operations but lack physical form; patents, trademarks, copyrights, franchises, and goodwill
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current liabilities
liabilities due to be paid or settled within one year or the operating cycle, whichever is longer; ex: a/p, wages payable, taxes payable, interest payable, unearned revenue
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long-term liabilities
liabilities not due within one year or the operating cycle, whichever is longer; ex: notes payable, mortgages payable, bonds payable, and lease obligations
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equity
the owner's claim on assets; not separated into current and noncurrent categories
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work sheet
a document that is used internally by companies to help with adjusting and closing accounts and with preparing financial statements; an internal accounting aid and is not a substitute for journals, ledgers, or financial statements
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merchandise
refers to products, also called goods, that a company buys to resell
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merchandiser
earns net income by buying and selling merchandise; wholesalers or retailers
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wholesaler
buys products from manufacturers and sells them to retailers
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retailer
buys products from manufacturers or wholesalers and sells them to consumers
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cost of goods sold
the expense of buying and preparing merchandise
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sales
revenue from selling merchandise
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gross profit/margin
net sales minus cost of goods sold
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merchandise inventory (inventory)
refers to products that a company owns and intends to sell
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perpetual inventory system
records cost of goods sold at the time of each sale
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periodic inventory system
records cost of goods sold at the end of the period
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credit terms
include the amounts and timing of payments from a buyer to a seller
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credit period
the amount of time allowed before full payment is due
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cash discount
granted to buyers from the seller encouraging earlier pay
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purchases discount
buyer's view of a cash discount
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sales discount
a seller's view of a cash discount
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discount period
time period in which a cash discount is available and the buyer can make a reduced payment
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gross method
method of recording purchases at the full invoice price without deducting any cash discounts
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FOB
(free on board) the point when ownership of goods passes to the buyer
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FOB shipping point
the buyer accepts ownership when the goods depart the seller's place of business; the buyer pays shipping costs and has the risk of loss in transit (called freight-in)
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FOB destination
ownership of goods transfers to the buyer when the goods arrive at the buyer's place of business; the seller pays shipping charges and has risk of loss in transit (called freight-out)
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Supplementary records
information outside the usual accounting records
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2 entries: one for revenue and one for cost
1. revenue recorded (and asset increased) from the customer
2. cost of goods sold incurred (and asset decreased) to the customer
what does the perpetual accounting system require for each sales transaction for a merchandiser?
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it is a contra revenue account, meaning the sales discounts account is subtracted from the sales account when computing net sales; has a normal debit balance
what is special about the sale discount account?
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Sales returns and allowances
contra-revenue account to sales; refunds or credits given customers for unsatisfactory merchandise are recorded (debited) in sales returns and allowances
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shrinkage
the loss of inventory
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multi-step income statement
details net sales and expenses and reports subtotals for various types of items
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1. gross profit: net sales- cost of goods sold
2. income from operations: gross profit - operating expenses
3. net income: income from operations plus or minus non-operating items
3 main parts of multi-step income statement
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selling expenses
costs to market and distribute products and services such as advertising
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general and administrative expenses
costs to administer a company's overall operations such as office salaries, office equipment, and office suppies
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single-step income statement
income statement format that subtracts total expenses, including cost of goods sold, from total revenues with no other subtotals
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consignor
owner of goods held by another party who will sell them for the owner
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consignee
receiver of goods owned by another who holds them for purposes of selling them for the owner; sells the goods for the owner
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1. Specific Identification
2. FIFO
3. LIFO
4. Weighted Average
4 inventory methods
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FIFO inventory method
(first in, first out); work from top down; in inflation, CGS is lower, therefore higher NI
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LIFO inventory method
(last in, first out); work from bottom down; in inflation, has highest CGS, therefore lower NI and lower taxes
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Weighted average inventory method
divide cost of inventory by total units to get average
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specific identification
when the purchase cost of each item in inventory is identified and used to compute cost of goods sold and/or cost of inventory
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Lower of cost or market (LCM)
required method to report inventory at market replacement cost when that market cost is lower than recorded cost
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current assets - current liabilities = working capital
working capital formula
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current assets / current liabilities = current ratio
current ratio formula
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Sales - CGS = Gross profit (gross margin) - selling expenses - general and admin expense = net income
merchandising income statement format
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purchase of merchandise -> on shelf as inventory for sale -> sales on credit -> billed as A/R -> receipt of cash
merchandising operating cycle
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beginning inventory + purchases = goods available for sale - ending inventory = cost of goods sold
cost of goods sold calculation
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physical inventory
count taken of inventory at least once per year under both methods - accounts for shrinkage
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general ledger
control accounts -> summary of subsidiary (A/R, A/P, inventory)
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subsidiary ledger
detail of each individual account
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2% discount if paid in 10 days, full payment due in 30 days
what do credit terms 2/10, n30 mean
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invoice cost - purchase discount - purchase returns and allowances + freight in = net cost of purchases
cost of purchases format
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CGS / average inventory
inventory turnover formula
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365 / inventory turnover
Days sales in inventory formula