Financial Accounting-Test 2 (Lauren Milbach)

Calculate Inventory Turnover Ratio, and interpret.

COGS/Ending Inventory Balance

Higher number wanted

Calculate Operating Income

Gross Margin-Operating Expenses

Journal Entry for Replenishing Petty Cash

Postage Expense: Debit

Entertainment Expense: Debit

Cash: Credit

cash must equal sum of expenses

Adjustments to book side of bank reconciliation

Add A/Rec. collections

Add interest earned

Deduct bank service charges

Deduct NSF check

All equals: true cash balance

Role of Audits

Guarantee that financial statements are materially correct and in accordance w/ GAAP

Types of Audit Opinions

Unqualified=best

Qualified=okay

Adverse=worst

Disclaimer=unsure

LIFO

Cost of most recently purchased goods is assigned to COGS first. Cost of oldest goods is in ending inventory balance. Results in lowest net income and lowest ending inventory balance. Higher COGS means lower GM. Taxed lower because net income is lower

What type of event is petty cash reimbursement (before replenishment)?

Nothing done in the journal

Two line journal entry for collection of accounts receivable.

Cash: Debit

Accounts Receivable: Credit

What is petty cash replenishment?

Asset use

How does a sales discount affect the accounting equation?

Reduction in sales revenue and accounts receivable.

What is the purpose of the cash short and over account? Debit versus credit?

To account for mistakes in collecting cash. If cash is short=expense (debit). If cash is over=revenue (credit).

What are non-operating items?

Gains or losses on sales of long-term assets (i.e. land). Interest revenue or interest expense.

How do you find ending inventory?

COGAS-COGS

COGAS Equations

Beginning inventory+puchases=COGAS

COGAS-COGS=Ending Inventory

COGAS-Ending Inventory=COGS

Ending Inventory+COGS=COGAS

How to find COGS?

COGAS-Ending Inventory

Period Cost

Costs not directly traced to products. Expenses that are recognized in the period in which they are incurred regardless of when cash payments are made.

Product Cost

All costs directly traceable to acquiring inventory and getting it ready for sale, including transportation-in.

Return on Sales Percentage (ROS)

ROS% =Net Income/Net Sales

Indicates how much profit an entity makes after paying for costs of production.

What are the cost flow methods?

LIFO

FIFO

Weighted average

What type of event is a petty cash fund establishment?

Asset Exchange

Gross Margin

Sales Revenue-COGS=GM

The product mark-up

Journal entry establishing petty cash

Petty cash: debit

Cash: credit

Is there a difference in net cash flows from operating activity between different cost flow methods?

Yes, FIFO has higher cash outflows compared to the rest. Differences in cost flows methods will cause a difference in taxable income, and taxes paid.

Calculate average days to sell inventory.

365/inventory turnover ratio

Want a lower #

Calculate cash and over

Original fund-known uses=amount we should have.

What we should have-what we actually have left=cash short and over

Adjustments for bank side bank reconciliation

Add deposits in transit

Deduct outstanding checks

and...

you get true cash balance

Calculate Net Income

Operating income-non operating items=Net Income

Calculated COGS for weighted average

# of units sold x average cost per unit

Calculate weighted average cost per unit.

COGAS/Total Units= cost/unit

Calculate market cost

# units by inventory type x $unit market cost

inventory balance using aggregate LCM method=sum of this column

Individual LCM method

1. By ROW, compare book cost versus market cost; lower one is chosen.

2. Add up #'s in this column and this total is inventory balance with individual item method

Two line journal entry for sales discount (if taken by customer).

Sales Revenue: Debit

Cash or A/Rec.: Credit

Calculate book cost

#units by inventory type x $unit cost of that item

total inventory balance on books=sum of this column

What is the purpose of offering a cash discount?

To encourage customers to pay promptly

How does a sales allowance affect the accounting equation

Decreases sales revenue & decreases accounts receivable

Sales----> Seller's perspective

How to compute purchase discount amount?

Will look like...

2/10 n/30; meaning you can take a 2% discount in 10 days (if you pay), or pay at full price within 30 days.

You would take 2% of purchase price and credit the inventory account that much, and debit accounts payable.

What is special about book side adjustments

Any adjustments on book side requires a Journal Entry

Cash: Debit

A/Rec.: Credit

Utilities Expense: Credit

--------------------------

Bank service charge: Debit

A/Rec.: Debit

Cash: Credit

What does "market" mean?

Current replacement cost (NOT sales price).

Two line journal entry for sales allowance.

Only affects sales revenue and accounts receivable

Sales revenue: Debit

Cash or A/Rec.: Credit

Calculate ending inventory balance for weighted average.

# units not sold x cost/unit

Journal entry for shipping/transportation costs on inventory sales.

Transportation-out: Debit

Cash: Credit

This does not affect GM, b/c transportation out is a period cost, not product

How do you prepare a multi-step income statement that includes gains/losses and/or interest revenue or interest expense

Sales Revenues

less: COGS

=GM

less: operating expenses

=operating income

+/- Non-operating items

=Net Income

How does a purchase return/allowance affect the accounting equation?

Simply, do opposite of orginal purchase inventory

Ex: @ time of purchase

Merch. Inventory: 11,000 Debit

Accounts Payable 11,000 Credit

Ex: @ time of return/allowance

Accounts Payable 1,000 Debit

Merchandise Inventory 1,000 Credit

What is the four line journal entry for sale of inventory?

A/Rec. Debit

Sales Revenue Credit

Then

COGS Debit

Inventory Credit

Weighted Average

Uses average unit cost based on

$COGAS/# of units available (total)

Four line journal entry for sales returns?

Part A:

Sales Revenue: Debit

Cash or A/Rec.: Credit Part B: Inventory: Debit COGS: Credit

How to find COGAS

Beginning inventory+Purchases=COGAS

Ending Inventory+COGS=COGAS

How to do journal entries for purchases with cash?

Debit inventory

Credit Cash

Journal Entry for purchase return

Debit accounts payable

Credit inventory

Journal entry for purchases on account

Debit inventory

Credit accounts payable

Journal entry for purchases paid in discount period

Debit accounts payable

Credit merchandise inventory

Debit accounts payable

Credit cash

How to determine cost of purchases?

Total purchases=the original purchase price +/-

(+) Freight-in

(-) Purchase returns

(-) Purchase allowances

(-) Purchase discounts (cash discounts)

Compute sales discount amount, and amount of cash colleced if a sales discount is taken?

Same as purchase discount, but applies to accounts receivable and sales revenue/

I.e. a 10% discount on a sale of $100 would result in $10 less of a sales revenue.

How does a purchase discount affect the accounting eequation?

Buyer pays less than original price. Cos of inventory is lower than recorded; amount paid to settle accounts payable is less than accorded.

FOB Shipping Point

Buyer bears the transportation-in costs. Transportation-in is the cost of freight on goods purchased under FOB shipping point terms.

FOB Destination

Seller bears the transportation-in costs. Transportation-out is the freight cost for goods delivered to customers under FOB destination terms.

Calculate GM%

GM/Sales (or net sales)

FIFO

Cost of oldest goods is assigned to COGS first. Cost of most recently purchased goods in ending inventory balance. FIFO overstates income, results in highest net income, and highest ending inventory balance of the three methods. Lower COGS means higher GM. Highest taxable cost flow method.

How does a sales return affect the accounting equation?

Increases inventory and decreases COGS, and...

Decreases Sales Revenue and decreases accounts receivable.

What is the proper phrasing for the date header on an income statement?

For the period ended... MM/DD/YYYY

Journal entry for a LCM write down (individual)

COGS: Debit

Merchandise Inventory: Credit

Journal entry for a LCM write down (aggregate)

COGS: Debit

Merchandise Inventory: Credit

Internal Controls

Required to evaluate internal controls and publish the results. COSO's internal framework is benchmark of effective internal control system.