ACCT 202 Exam 3- Chapter 5,6,8,12

How does a retailer differ from a wholesaler?

A retailer is a merchandising company that purchases and sells directly to consumers.

A wholesaler is a merchandising company that sells to retailers.

What is flow of costs? What is the equation?

Perpetual and periodic systems.

Beginning inventory + cost of goods purchased= cost of goods available for sale

What is an example of a merchandising company?

Walmart

What is the difference between merchandising and manufactoring?

Manufactoring companies create the product themselves.

What is the definition of operating cycle?

Time it takes to get product from seller and then sell the product. No regulations on how short the cycle can be.

Who has a longer operating cycle? Merchandising company or service company?

Merchandising company

What is the definition of a perpetual inventory system?

Companies keep detailed records of each inventory purchase and sale. Continuously shows inventory that should be on hand

How often does the perpetual inventory system determine cost of goods sold?

The perpetual inventory system determine cost of goods sold each time a sale occurs

Do you have to count inventory at the end of the period for perpetual inventory?

yes

What is the definition of periodic inventory system?

companies do not keep detailed inventory records of the goods on hand throughout the period.

When is cost of goods sold determined in a periodic inventory system?

cost of goods sold are determined at the end of the accounting period.

What kind of entry is made at the end of the period when using periodic inventory system?

An adjusting entry to record ending inventory.

When do we record purchases under the perpetual system(buying inventory?

When the company receives goods from the seller

What is FOB Shipping Point?

Ownership of goods passes to the buyer when the public carrier ACCEPTS goods from the seller.

Who pays for FOB Shipping Point?

The buyer

What is FOB Destination?

Ownership of goods remains with the seller until goods reach the buyer.

Who pays for FOB Destination?

The seller

What are freight costs incurred by the buyer? How would this affect the inventory account?

Considered part of cost of inventory(merchandise). Debit(increase) to inventory

What are freight costs incurred by the seller? What account would this affect?

Operating expense to the seller. Increase Freight-Out Expense.

What type of account is Purchase Return and Allowances? What is the normal balance

contra expense, credit

What type of account is Purchase Discount? What is the normal balance?

contra expense, credit

How does Purchase Return and Allowances differ from Purchase Discount?

A purchase discount is something a company gets from paying early.

A purchase return and allowance is something that the buyer returns because they don’t want it anymore.

What is a purchase(sales) return and allowance?

Transactions in which the seller either accepts goods back from the purchaser (return) or grants a reduction in the purchase price (an allowance) so that the buyer will keep the goods

What is a purchase discount?

a cash discount claimed by a buyer for prompt payment of a balance due

What is a sales discount?

a reduction given by a seller for prompt payment of a credit sale

What type of account is cost of goods (merchandise) sold?

expense

What accounts are used to record sales under a perpetual system? How many journal entries are used?

Accounts Receivable

Sales Revenue

\
COGS

Inventory

What type of account is Sales Return and Allowances? What is its normal balance?

contra-revenue, debit

What type of account is Sales Discount? What is its normal balance?

conta-revenue, debit

How do we record sales return and allowances? What does it mean if sales return and allowances is high?

To keep of inventory. There is a problem with their supplier. The company should find a new supplier.

What is the journal entry for sales discount?

Cash

Sales Discount

Accounts Receivable

What is the difference between a single step and a multiple step inome statement?

Multiple step income statement highlights componets of net income (gross profit)

What is the equation for calculating gross profit?

Net sales- COGS

What is the formula for calculating COGS under the periodic system?

Beginning Inventory + Cost of Goods Purchased= Cost of Goods Available for Sale

Ending Inventory- Cost of Goods Available for Sale= COGS

What is the formula for calculating COGS under the perpetual system?

Beginning inventory+purchases- purchase returns and allowances- purchase discounts + freight-in= Cost of goods purchased

Beginning inventory + Cost of Goods purchased - Ending inventory = Cost of Goods Sold

What are two categories of expenses used by a merchandising company?

Opearting expenses and COGS

What are operating expenses?

purchase of invenotry and sales lengthen the cycle.

What is cost of goods sold?

The total cost of merchandise sold during the period

What are nonoperating expenses?

expenses that are unrelated to the company’s main line of operations

What are some examples of nonoperating expenses?

interest expense, loss on sale of equipment, and income tax expense

In a merchandising company, inventory has two common characteristics

Inventory is owned by the company

Inventory is available for sale (finished goods)

What are some types of inventory a manufacturing company might have on hand?

Raw materals

Work-in process

Finished goods

What are the two reasons a perpetual inventory system must take a year-end physical inventory?

To check the accurary of their records

To determine how much was lost due to theft and damage

What are the two reasons that a periodic inventory must take a physical inventory?

Determine inventory on hand on the balance sheet date

Determine cost of goods sold for the period

What are the two steps when determining inventory quantities?

Check accruacy of perpetual inventory records

Determine amount of inventory lost due to wasted raw materials, shoplifting, employee theft

When does the legal title of goods transfer for FOB shipping point?

Once the item ships, the buyer owns it

When does the legal title of goods transfer for FOB destination?

once the item is received by the buyer

What are cosigned goods?

goods held for sale by one party although ownership of goods is retained by another party

What is the average cost method?

Allocates the cost of goods available for sale on the basis of weighed-average unit cost.

What is FIFO?

Assumes the earliest goods purchase are the first to be sold. Sell the oldest units first. Cost of oldest units are recognized first. Ex: one listed on the bottom (Nov 27) will be sold before Jan 1.

What is LIFO?

Assumes the latest goods purchased are the first to be sold. Costs of the latest goods purchased are the first to be recognized in determining COGS. Ex: Jan 1 will be sold before Nov. 27th of the previous year

Are expenses greater for LIFO or FIFO?

LIFO

Are income taxes greater for FIFO or LIFO?

FIFO

Does LIFO or FIFO pay more taxes?

FIFO

What is the average cost formula?

Cost of goods sold available for sale/ total units available for sale= weighed-average cost

Units on hands times weighed-average cost

How does LIFO affect net income when there is inflation?

Net income is lower with inflation

What is LIFO’s inventory?

Very small inventory, understate current cost

What happens to the inventory for FIFO?

Cost of allocated ending inventory will approximate current cost

What are 3 things on the income statement?

1. Cost of Goods Sold
2. Gross profit
3. Net income

What is 3 accounts on the balance sheet?

1. Ending inventory
2. Total current assets
3. Total assets
4. Owner’s capital (due to the incorrect net income being added to the capital account)

What is an advantage of FIFO related to the balance sheet?

Ending inventory amount on balance sheet approximates current replacement costs

What is one disadvantage of FIFO during inflation?

Creates “illusory profits” during times of high inflation

What is an advantage of LIFO related to the income statement?

Matches current costs against current revenues on income statement

What is a disadvantage of FIFO related to the income statement?

Ending inventory amount on income statement may be substantially different from current replacement cost

What is an advantage of average cost method?

Easy to understand, yields the same answer whether prices start at $1 and increase to $2 or start at $2 and decrease to $1

What is an disadvantage of average-cost method related to the income statement?

Ending inventory amount on income statement may not represent current replacement cost

What are the three receivable categories?

1. Accounts Receivable
2. Notes Receivable
3. Other Receivables

What are some receivables that go into the other receivable categories?

Interest receivable, income tax receivable, trade receivables

When do ‘service organizations’ recognize receivables?

Once you do the service

When do ‘merchandising organizations’ recognize recognize receivables?

at the point of sale

What is the definition of the direct write-off method?

Charging receivables balance to Bad Debt Expense at time receivable from a particular company is determined to be uncollectible

What is the definition of the allowance method?

Estimates uncollectible accounts at the end of the period

Is the direct write off method or the allowance method followed by GAAP?

allowance method

What are the two methods used for bad debts?

1. Direct write-off method
2. Allowance method

What is the definition of bad debt expense?

Expense account to record losses from extending credit

What is cash (net) realizable value?

net amount a company expects to receive in cash from receivables.

What is another name for cash (net) realizable value?

Accounts receivable (net)

What is the equation for cash (net) realizable value?

accounts receivable - allowance for doubful accounts= cash realizable value

What is the first essential feature of the allowance method?

1. Estimate uncollectible accounts receivable. Estimate expenses against revenues in the same accounting period in which they record revenues

What is the second essential feature of the allowance method?

2. Debit estimated uncollectibles of Bad Debt Expense, credit Allowance for Doubtful Accounts through an adjusting entry

What type of account is Allowance for Doubtful Accounts? What is AFDA normal balance?

Contra-asset, credit

What is the thrid essential feature for the allowance method?

Write off accounts. Debit actual uncollectibles to Allowance for Doubtful Accounts. Credit Accounts Receivable

How do companies estimate the allowance?

Match estimated expense against revenues in the same accounting period in which they record revenues

What is a note receivable?

Grant credit in exchange for a formal credit instrument know as promissory note

What are the five issues in accounting for notes receivable?

1. Determining the maturity date
2. Computing interest
3. Recognizing notes receivable
4. Valuing notes receivable
5. Disposing notes receivable

What are three things that can be used to determine the maturity date?

on demand, on a stated date, end of a stated period of time

How do you compute interest?

Face value times annual interest rate times time in terms of 1 yr

What do you record notes receivable at?

Face value

What do you value notes receivable at?

record at net receivable value

What does disposing notes receivable mean?

can be held at maturity date

What does on demand mean?

“On demand I promise to pay”

What does on a stated value mean?

On a specific date they will pay the note

What does at the end of a stated period mean?

At the end of a stated period the note will be paid

What are the 4 reasons that the statement of cash flows helps investors, creditors and other users?

1. Entity’s ability to generate future cash flows
2. Entity’s ability to pay dividends and meet obligations
3. Reason for difference between net income and net cash provided(used) by operating activites
4. Cash investing and financing transactions during the period

What are 3 classifcations of cash flow?

1. Operating activites
2. Investing activities
3. Financing activites

What are operating activites?

day to day operations

What are investing activities?

long-term assets (PP & E)

What are financing activities?

issuing common stock, long-term liabilities (loans)

What are some non-cash activities?

Exchanging common stock for current assets

Conversion of bonds for common stock

Exchange of plant assets

Direct issuance of debt to purchase assets

What are some operating activites in cash inflow?

From sale of goods/services, interest received and dividends, received