Financial Accounting Midterm 2 Review

What does FOB destination mean?

The seller has ownership and bears the shipping costs until the goods arrive at the buyer's location.

What does FOB shipping point signify?

The buyer takes ownership of the goods and assumes responsibility for shipping costs once the seller ships the goods.

What are consigned goods?

Goods placed with another company who sells the items on behalf of the company for a fee, with ownership not transferred.

How should consigned goods be treated in inventory?

should be counted into inventory.

What should be done with damaged or obsolete goods regarding inventory?

should not be counted into inventory.

What is FIFO in inventory management?

Ending inventory will be lower and COGS will be higher, leading to lower net income.

What is LIFO in inventory management?

Ending inventory will be higher and COGS will be lower, leading to higher net income.

How does LIFO match costs with revenues?

LIFO matches latest costs with current revenues.

How does FIFO match costs with revenues?

FIFO matches earliest costs with current revenues.

What is the journal entry for selling receivables?

Cash xxx

Factor fee xxx.

What does recognition of an account receivable into a note involve?

Notes Receivable XXX

Accounts Receivable XXX.

What is accrued interest?

Interest that has accrued but not yet received by period end requires an adjusting entry.

What is the journal entry for accruing interest?

Interest Receivable XXX

      Interest Revenue XXX.

What happens to ownership in consigned goods?

Ownership has not transferred when goods are consigned.

What is the financial effect of FIFO on net income?

It results in a lower net income due to higher COGS.

What is the financial effect of LIFO on net income?

It results in a higher net income due to lower COGS.

When do buyers take ownership in FOB shipping point?

Buyers take ownership once the seller ships the goods.

What is the factor fee in a journal entry for selling receivables?

It is a cost incurred for the service of selling the receivables.

What is on the revenue section of a multistep income statement? 

Sales

• Less: sales discounts, sales returns and allowances

Net Sales

What is on the COGS section of a multistep income statement?

Beginning inventory

• add: purchases 

Cost of goods available for sale

• less: ending inventory

Cost of goods sold

gross profit

What is on the operating income section of the multistep income statement?

Operating expenses

Total expenses

operating income

What is on the non-operating income section of the multistep income statement? 

interest

gain on sale of asset

depreciation expense 

What is on the net income section of the multistep income statement? 

net profit 

Allowance method

estimating bad debt in advance 

What is the journal entry for the allowance method?

bad debt expense    xxx

      allowance for bad debt expense   xxx

allowance for doubtful accounts     xxx

           accounts receivable                          xxx

Direct write-off method

debt is recognized when it becomes clear the account is uncollectible, the amount won’t be collected 

What is the journal entry for the direct write-off method?

bad debt expense xxx
        accounts receivable xxx

Under the direct write-off method, if a customer pays the amount due, what journal entry is made? 

accounts receivable xxx

                         bad debt  xxx

Merch is sold under the perpetual system

Accounts receivable   xxx

         sales revenue           xxx

cost of goods sold     xxx
                inventory            xxx

merch is sold under the periodic system

Accounts receivable xxx

Sales revenue xxx

A buyer returns goods to a perpetual inventory system

Sales returns xxx

      Accounts receivable xxx

inventory    xxx

      cost of goods sold  xxx

a buyer returns goods to a periodic inventory system

Sales returns xxx
       Accounts receivable xxx

Shipping costs (freight out) for perpetual and periodic

freight out   xxx

             cash   xxx

an entry is made for what shipping method?

FOB destination

purchases under the perpetual inventory system

inventory xxx

accounts payable xxx

purchases under the periodic inventory system

purchases xxx

accounts payable xxx

perpetual system returns a good to supplier

accounts payable xxx

inventory xxx

periodic system returns a good to supplier

accounts payable xxx

      purchase returns xxx

Shipping (freight in) perpetual 

inventory xxx

      cash xxx

Shipping (freight in) periodic

freight in xxx

       cash xxx

Cost of goods sold

goods available for sale  - ending inventory

or

beginning inventory + purchases - ending inventory 

goods available for sale

beginning inventory + purchases 

ending inventory

goods available for sale - cost of goods sold

gross profit

sales - cost of goods sold

net realizable value

accounts receivable  - allowance 

net income

sales - cost of goods sold 

or

revenue  - expenses 

accounts receivable turnover ratio

net credit sales/average accounts receivable

what does AR turnover ratio measure?

efficiency of collections

net sales

sales revenue - returns and allowances - discounts

gross profit %

gross profit/net sales x 100

What is lower cost/NRV rule applied to?

each item or category 

A note receivable is dishonored by expected to be collected

accounts receivable xxx

       notes receivable xxx