accounting test 2

Purchase Discount

a buyer is buying from a seller and the seller offers a purchase discount if they pay early

example: 2/10 n/30

what does 2/10 n/30 mean?

the buyer needs to pay the total amount in 10 days to get a 2% discount or they have 30 days to pay it without a discount.

gross sales minus what minus what equals what

gross sales - sales returns and allowances - sale discounts = net sales

net sales - what = what

net sales - cost of goods sold = gross profit

how do you find net sales and gross profit

gross sales - sales returns and allowances - sales discounts = net sales

net sales - cost of goods sold = gross profit

is first in first out good during inflation?

yes, because it produces the highest net income because it shows the Lowest cost of goods sold - because it sold the oldest inventory it creates the highest net income

is last in last out good during inflation?

no because it would be the highest priced and get the lowest net income

outstanding checks

deduct from bank balance

deposits in transit

add to bank balance

deductions for uncollectible items and for services

deduct from book balance

additions for collections and for interest

add to book balance

errors

adjust: add or deduct from bank or book balance

bank balance

add to bank

what side is bank on

left

what side is book on

right

customer collections

add to book

debit memos

deduct from book

bank charges

deduct from book

NSF checks

deduct from book

is cost of goods sold found in a merchandising firm, a service firm, or both

merchandising firm

is service revenue found in a merchandising firm, a service firm, or both

service firm

is purchase returns and allowances found in a merchandising firm, a service firm, or both

merchandising firm

is inventory found in a merchandising firm, a service firm, or both

merchandising firm

is accounts revenue found in a merchandising firm, a service firm, or both

both

is accounts payable found in a merchandising firm, a service firm, or both

both

is sales revenue found in a merchandising firm, a service firm, or both

both

is freight-out found in a merchandising firm, a service firm, or both

merchandising firm

having one person responsible for the related activities of ordering merchandise, receiving the merchandise, and paying for the merchandise:

increases the potential of fraud

internal controls do what?

protect assets from theft, evaluate the performance of employees, and increase the likelihood that any errors will be caught

what do internal controls not do

guarantee the accuracy of the accounting records

cash includes what

money orders, currency, finds in a checking account

what does cash not include

a postdated check

wholesalers

a company that buys finished products from manufacturing firms in large quantities and resells the products to retailers

manufacturers

a company that converts raw materials and components into finished goods through the application of skilled labor and machine operations

retailers

a company that buys goods from wholesale distributors and sells the goods to individual customers

merchandise inventory

a stock of goods that a company buys from another company and makes available for sale to its customers

sale on credit

a sale of merchandise made on a credit basis

sale on account

a sale of merchandise made on a credit basis. and uses that weighted-average unit cost to determine the cost of goods sold for all sales

perpetual inventory system

a system that records the cost of merchandise inventory in the inventory account at the time of purchase and updates the inventory account at the time of purchase and updates the inventory account for subsequent purchases and sales of merchandise as they occur.

periodic inventory system

a system that records merchandise transactions in a variety of accounts the inventory account and cost of goods sold account are not updated until the end of the period when a physical count of the inventory is taken

open account

a charge account provided by a retailer for its customers

FOB shipping point

Free on board shipping point indicates that the items being shipped are owned by the buyer while the items are in transit

invoice price

the price that a seller charges a purchaser for merchandise

purchase allowance

a reduction in the selling price of merchandise granted by a seller due to dissatisfaction by the purchaser

purchase return

shipping unsatisfactory merchandise from a purchaser back to the seller for a purchase allowance

cash discount

an amount that a purchaser of merchandise may deduct from the purchase price for paying within the allowed discount period

discount period

the maximum amount of time

credit period

the maximum time period

cost of goods sold (cost of sales)

the total cost of merchandise sold to customers during the accounting period, COGS

list price

the suggested price or reference price of merchandise in a catalog or price list

return on sales ratio (profit margin)

the ratio of net income divided by net sales

Cost of goods available for sale

an amount that represents the inventory available to be sold

work in process inventory

a manufacturers inventory that consists of units of product that have been entered into production in the factory but have not yet been completed

raw materials inventory

a manufactures inventory that includes raw materials and components that have been purchased for use in the factory but have not yet been placed into production

inventory carrying costs

costs created by just in case inventories

just in case inventory

the extra quantity of inventory that a firm carries just in case suppliers do not deliver when scheduled or just in case the company decides to make previously unplanned quantities of product for sale to customers

just in time manufacturing (JIt)

a manufacturing philosophy that seeks to minimize or eliminate just in case inventory quantities through careful planning of raw material purchases and manufacturing management

consignment goods

items held for sale by parties other than the items owner, changes in accounting principle

Goods in transit

items that are being shipped by a common carrier

inventory overage

the increase in the inventory account that occurs when the physical inventory count is greater than the inventory account balance

inventory shrinkage

the decrease in the inventory account that occurs when the physical inventory count is less than the inventory account balance

physical count of inventory

a year end procedure that involves counting the quantity of each inventory item

cost flow

the actual or assignment of costs to goods sold and to ending inventory

goods flow

the actual physical movement of inventory through a business

LIFO conformity rule

a section of the internal revenue code requiring that any company that selects LIFO for income tax reporting must also use LIFO for financial reporting to stock holders

lower of cost or market (LCM)

A measurement method that provides for the recognition of an inventory write down loss when the inventory replacement cost declines below its recorded acquisition cost

net realizable value

an asset measure calculated by subtracting the expected disposal cost from an assets expected selling price

inventory turnover ratio

a ratio computed by dividing cost of goods sold by the average ending inventory

LIFO inventory reserve

the difference between the value of ending inventory reported under LIFO and what the inventory would have been valued at under FIFO

First in, first out (FIFO) method

an inventory costing method that assumes that the oldest (earliest purchased) goods are sold first

fraud triangle

the three elements of fraud; motive/pressure, rationalization, opportunity

Fraud

any act by the management or employees of a business involving an intentional deception for personal gain

prevention control

an internal control designed to discover problems before they arise

internal controls

the measures undertaken by a company to ensure the reliability of its accounting data, protect its assets from theft or unauthorized use, insure that employees follow the company’s policies and procedures and evaluate the performance of employees, departments, divisions, and the company as a whole

detection control

an internal control designed to discover problems soon after they arise

segregation of duties

an internal control principle that requires that duties should be allocated to separate individuals

control numbers

preprinted numbers on documents such as purchase orders

budget

a planning device that forecasts a business’s future operating activities using financial data. the budget serves as an internal control device by providing a benchmark to compare actual performance against so that material deviations can be investigated

internal auditing

a companys function that provides independent appraisals of the company’s financial statements

employee collusion

when one or more employees work together to circumvent an internal control

fidelity bond

an insurance policy that provides financial compensation or theft by employees specifically covered by the insurance

compensating balance

a minimum amount that a financial institution requires a firm to maintain in its bank account as a condition of a borrowing arrangement

restricted cash

cash that is restricted for a specific use and not available for general use

postdated check

a check from another person or company with a calendar date that is later than the current date. a postdated check does not become cash until the calendar date of the check

not sufficient funds check (bounced check)

a check from an individual or company that had an insufficient cash balance in the bank when the holder of the check presented it to the bank for payment

cash

an asset category representing the amount of a firms paper money, coins, checks, money orders, traveler’s checks, and funds on deposit at a bank in a company’s checking accounts and savings accounts.

cash and cash equivalents

the sum of cash plus short-term, highly liquid investments such as u.s. treasury bills and money market funds

certificates of deposit

an investment security offering a fixed rate of return for a specified period of time

remittance advice

a form that accompanies a check to inform the person receiving the check about the purpose of the check

remittance list

a list of the checks received from customers to pay their accounts receivable

petty cash fund

a special, relatively small cash fund established for making minor cash disbursements in the operation of a business

deposits in transit

cash deposits made to bank account near the end of a month that do not appear on that months bank statement

bank reconciliation

a procedure explaining the various items such as deposits in transit, checks outstanding, bank charges, and errors that lead to differences between the balance shown on a bank statement and the related cash account in a company’s general ledger.

outstanding check

checks issued by a firm that have not yet been presented to its bank for payment

financial statement audit

an examination of a company’s financial statements by a firm of independent certified public accountants

operational audit

an evaluation of activities, systems, and internal controls within a company to determine their efficiency, effectiveness, and economy.

audit report

a report issues by an independent auditor that reports the auditors opinion regarding a company’s financial statements.

bad debts expense (provision of bad debts)

the expense stemming from the inability of a business to collect an amount previously recorded as receivable. it is normally classified as a selling or administrative expense.

credit-collection policy

a policy establishing the amount of time that customers are allowed before they must pay their outstanding accounts receivable