ACCT201 Test 2 Review

How do you calculate net income for a service company?

Net income = Revenues-Expenses

How do you calculate net income for a merchandiser?

Net income = Net sales - Cost of Goods Sold - Expenses

How do you calculate gross profit?

Gross Profit = net sales - COGS

What are the two types of inventory systems?

perpetual and periodic

How do you calculate Merchandise available for sale?

Beginning inventory + net purchases

What is the basic entry for merchandise purchased with cash?

debit: merchandise inventory

Credit: cash

What do the credit terms 2/10, n/30 mean?

A 2% discount is given if payment is made within 10 days. Otherwise, the full balance is due in 30 days.

What is the journal entry for when we (the company) purchased merchandise and we paid within the discount period?

Debit: accounts payable

Debit: merchandise inventory

Credit: Cash

What entry is made when we (the company) return merchandise or we are given a allowance for unacceptable merchandise?

Debit: accounts payable

Debit: merchandise inventory

What is FOB shipping point?

the buyer accepts ownership when goods depart the seller and the buyer pays for the shipping costs

What is FOB destination?

the seller retains the ownership until the goods arrive to the buyer and the seller pays for the shipping costs

How many lines (in the journal entry) are there for the merchandiser for a sales transactions?

4 lines

What is the Basic entry for a sales transaction for a merchandiser (*remember 4 line entry*)?

(to recognize the revenue associated with the sale)

DR. A/R (or cash)

CR. Sales

(to recognize the cost associated with the merchandise sold)

DR. COGS

CR. Merchandise Inventory

How does a merchandiser (the seller of the good) recognize payment with a sales discount taken?

DR. Cash

DR. Sales Discount

CR. A/R

What is the entry for Sales Returns and Allowances for merchandiser when merchandise is returned back into inventory(*4 line entry*)?

(reverse the revenue amount related to returned goods)

DR. Sales returns and allowances

Cr. A/R

DR. Merchandise inventory

Cr. COGS

What is shrinkage?

any loss of merchandise including theft and deterioration

What is the entry for the buyer for FOB shipping point when shipping costs are paid for merchandise?

DR. Merchandise inventory

Cr. Cash

How does the buyer account for paying for merchandise inventory within the discounted period (what is the journal entry)?

DR. Accounts Payable

CR. Merchandise Inventory

CR. Cash

What is the contra-account to Sales?

Sales Returns and Allowances

What journal entry is needed for a merchandise returned back when the merchandise is to be destroyed and not put back into inventory?

DR. Sales Returns and Allowances

Cr. Accounts Receivable

** no entry related to COGS or inventory is needed because the inventory is already destroyed and will not be put back into inventory**

What type of account is cost of goods sold?

It is an expense account related to the sale of merchandise

What is included in merchandise inventory cost/valuation?

includes all expenditures necessary to bring an item to a salable condition and location

What are the four types of inventory cost flow assumption methods?

-Specific Identification

-FIFO (first-in-first-out)

-LIFO (last-in-first-out)

-Weight Average

What is FIFO?

Assumes costs flow in order incurred

-we first expense the inventory that we purchased first

What is LIFO?

assumes cost flow in the reverse order incurred

-we first expense inventory that we last purchased

What is Weighted average cost flow assumption?

assumes costs flow at an average of the costs available

What is the average cost ratio to calculate the weighted average of each unit in inventory to assign to cost of goods sold?

Cost of goods available for sale/ total units in inventory

What are internal control systems used for?

Internal control systems are used to monitor and control business activities

What are the policies and procedures of internal control systems used to do?

-protect assets

-ensure reliable accounting

-uphold company policies

-promote efficient operations

Why is seperation of duties important as a part of internal control?

it helps ensure that the work of one person acts as a check on the other to prevent fraud or errors

Why is good record keeping important as apart of internal controls?

protects assets and helps managers monitor company activities

What are 2 limitations of internal controls?

-Human error

-Human fraud

What are the three compnents of the fraud triangle?

Opportunity, pressure and rationalization

What is the cost-benefit constraint?

Costs of internal controls must not exceed their benefits

What are the two main goals of cash management?

1. Plan cash receipts to meet cash payments when due (have enough money to cover debt or expenses)

2. Keep a minimum level of cash necessary to operate

What is a Deposit Ticket?

-used to deposit money in the bank

-list cash and checks along with the amounts

-serves as proof of deposit

What is a bank statement?

Bank will send each depositor, usually once a month, a bank statement showing the activity in the account throughout the month

Why is a bank reconciliation prepared periodically?

Prepared to explain the difference between cash reported on the bank statement and the cash balance on company's books

What are the adjustments made to the bank balance when doing a bank reconciliation?

Add: Deposits in transit

Subtract: outstanding checks

Add/Subtract: corrections of bank errors

What are the adjustments made to the book balance when doing a bank reconciliation?

Add: interest earned and unrecorded cash receipts

Subtract: bank fees and NSF checks

Add/Subtract: Corrections of book errors

What are deposits in transit?

Cash deposits that have not actually been cleared or included in balance in the bank account

(would mean that our shown bank balance is understated)

What are outstanding checks?

Checks written that have not been cleared/have not reduced our bank balance yet

(would mean that our shown bank balance is overstated)

What are NSF checks?

Non-Sufficient Fund check (a bounced check)

When do we need to make adjusting entries for reconciling items in a bank reconciliation?

Anytime we have a reconciling item on the book side of the reconciliation

(only items reconciling the book balance require adjustment)