Acc 220 Test 2

Merchandising Company

A company that sells products

Service Company

Sells time (No inventory)

Goods Available for Sale

Beginning Inventory vs. Net Purchases

Cost of Goods Sold

Beginning Inventory + Purchases (GAfS) - Ending Inventory

Gross Profit

Net Sales - Cost of Goods Sold

Net Income

Gross Profit - Operating Expenses

Ending Inventory

Cost of Goods Available for Sale - Cost of Goods Sold

Credit Terms

2/10,n/30

2% discount within 10 days; otherwise due within 30 days

How to Journal a Discount

Credit the discounted amount from merchandising inventory

Purchase Returns

Inventory credited accounts payable debited

Purchase Allowances

Money given back to keep bad merchandise

Inventory credited; Accounts Payable debited

FOB Shipping Point

Ownership transfers at shipping point, good in transit owned by buyer, buyer pays and is responsible

FOB Destination

Ownership transfers at destination, goods in transit are owned by the seller, seller pays shipping

Recording revenue and cost side journal entries

Each sale has two parts, revenue recorded and cost of goods sold

Revenue side = accounts receivable debit and sales credit

Cost side = cost of goods sold debit and merch inventory credit

Sales with discounts (Seller POV)

Debit account called sales discounts

Sales Returns/Allowances (Seller POV)

Debit account called sales returns and allowances.

Inventory Items

Merchandising inventory includes all goods that a company owns and holds for saleto customers, including raw materials, work in progress, and finished goods.

Goods on Consignment

Goods that are held by one party (the consignee) for sale but are owned by another party (the consignor). The consignor retains ownership until the goods are sold.

Inventory Costing Methods

Four methods used to assign costs to inventory and to cost of goods sold

Specific Identification

Look at how much each individual thing costs (Not typically used) (Cars, jewelry)

FIFO

First in First out

(Cost of goods will be lower if prices are rising, less COGS)

LIFO

Last in First out

(If prices are rising cost of goods sold will be higher, higher COGS)

Weighted Average

Take average prices of different inventory items and sell amount at that average price

Cost Flow of Inventory

Beginning Inventory +Net Purchases = Merch Available for Sale

Cost of Goods Sold + Ending Inventory = Merch Available for Sale

Purpose of Internal Control

1. Protect Assets

2. Ensure Reliable Accounting

3. Uphold Company Policies

4. Promote Efficient Operations

Principles of Internal Control

1. Establish Responsibilities

2. Maintain Adequate Records

3. Insure Assets and Bond Key Employees

4. Separate Record Keeping from Custody of Assets

5. Divide Responsibility for Related Transactions

6. Apply Technological Controls

7. Perform Regular and Independent Reviews

Limits of Internal Control

Human error and fraud

Control of Cash

Cash handler is separate from record keeper, use a bank, use electronic bank transfers

Cash Management

Collect cash as soon as possible, pay bills as late as possible, and invest excess cash

Included in Cash

Currency coins, deposits, customer checks, cashier checks, certified checks, money orders, cash equivalents, short term highly liquid investments

Accounts Receivable

When selling something, we have an account receivable and we want to collect that as soon as possible (reason for sales discount)

Bad Debts

Some customers will not pay their balance, uncollectible amounts are referred to as bad debts, two methods to account for bad debts are direct write off and allowance

Allowance Method

Set up an allowance for bad debts, reverse debts we won’t be able to collect

Plant Assets

Tangible, expected to be used longer than a year, called property, plant, and equipment

Depreciation of Plant Assets

We use up plant assets (other than land) and depreciate it over years used

Acquisition Cost

Entire cost to get asset in place and ready to use

Revenue and Capital Expenditures

Revenue Expenditure do not increase plant assets life or capabilities, recorded as an expense in the current period, reported on the income statement

Capital ExpenditureOriginals provide benefits for longer than the current period, recorded as an addition to the asset account, reported on the balance sheet

Book Value

Original Cost - Accumulated Depreciation

Depreciation Straight Line

Cost - Salvage Value/Useful Life

Depreciation Units of Production

Cost - Salvage Value/ Total Estimated Units of Production