Intro to Financial Accounting Midterm 2

Sales revenue (net sales) - cost of goods sold =

Gross profit

Gross profit - operating expenses =

Net income

FOB shipping point

Ownership of goods belongs to buyers when they are in transit

FOB destination

Ownership of goods remains with the seller (in transit) until the goods reach the buyer.

Multi-step income statement

Key sections

• sales section: sales revenue, less sales returns and allowances, sales discounts

• cost of goods sold

• gross profit (calculate by subtracting net sales and cogs)

• operating expenses: a bunch of them

• income from operations

• other revenues and gains: could include interest revenue, gain on disposal of plant assets

• other expenses and losses: interest expense, casualty loss from vandalism, etc

• net income: calculated using income from operations + total of other revenues and gains - total of other expenses and losses

Single step income statement

sections are revenues (net sales, interest revenues, gain on disposal of plant assets, etc), expenses (cogs, different types of expenses, casualty loss, etc) and net income

When a company estimates a certain amount will be uncollectible

Debit bad debt expense, credit allowance for doubtful accounts

Entry to record a write off (when a specific account is judged/written off as uncollectible)

Debit allowance for doubtful accounts, credit accounts receivable

Entry to reverse write off

Debit accounts receivable, credit allowance for doubtful accounts

(to reverse write off)

Debit cash, credit allowance for doubtful accounts

(to record collection)

Entry for credit card sales

Debit cash and service charge expense, credit sales revenue

Recognizing notes receivable (record note at face value)

Debit notes receivable, credit accounts receivable

Honor of notes receivable, entry for recording amount due at maturity

Debit cash (nr + interest rev), credit notes receivable and interest revenue

Accrual of interest receivable

Debit interest receivable, credit interest revenue

At a note’s maturity when the company must receive principal + interest

Debit cash

Credit notes receivable, interest receivable, interest revenue

Accounts receivable turnover formula

Net credit sales / average net accounts receivable

Average collection period formula

365 days / accounts receivable turnover