Accounting Exam 2

Service Revenue

sell time in exchange for money (ex. accounting firms, plumbers, law firms)

Merchandising Revenue

sell products to earn revenue (ex. sporting goods store, clothing, auto parts store)

Two type of merchandising and what they are

Whole sale- acts a middle main between manufactures and retailers (sells to retailers)
Retailers- buy products from wholesale and sell to consumer

gross profit =

rev- cogs

net income =

gross profit - expenses

operating cycle

time it takes a company to buy goods, sell them and receive cash from the sale

steps to operating cycle

purchases to inventory to credit sales to accounts receivable to cash collection

merchandise for sale =

begging inventory + net purchases
ending inventory + cost of goods sold

BI =100 NP = 50 MFS = 150
if 60 sold how much is in ending inventory

90

Perpetual system

updates accounting records immediately after each purchase/sale

Periodic system

updates accounting records only at the end of a period

2/10, n/30

2% discount if paid within 10 days if not full payment due in 30 days

why might a company offer a cash discount

to encourage buyers to pay earlier

purchase return

buyer purchases merchandise but then return to seller

purchase allowance

granting price reduction to buyer due to defectiveness or unacceptable condition

FOB shipping point

ownership transfers at the shipping point so goods in transit owned by buyer and cost is paid by buyer

FOB destination

ownership transferred at destination goods in transit owned by seller and cost is paid by seller

what does FOB stand for

free on board

how to document a sale of merchandise

2 parts
1) revenue from sale
2) cost of inventory

what accounts does revenue for sale involve

accounts receivable and sales

what accounts does cost of inventory involve

cost of goods sold and inventory

historical cost principle

can only value assets at what they cost us
(can't mark up to fair market value)

what are adjusting entries needed for in merchandise

loss of merchanside

shrinkage

loss of inventory or when you records don't match your physical count

make a journal entry:
inventory account = $21,250
physical count = $21,000

cost of goods sold debit 250
inventory credit 250

what merchandise accounts need to be closed out

sales disounts, sales returns/ allowances and cogs

multi step income statement

breaks down expenses into specifics

classifed balance

list assets in order from most to least liquid

liquidity

how fast an asset can be converted to cash

list of assets in order from most to least liquid

cash, accounts receivable, merchandise inventory, office supplies, store supplies, prepaid insurance

acid- test ratio

= quick assets/ current liablities
-used to determine if you could cover a situation where you needed quick cash
-want a high number

quick assets

-most liquid assets
-cash, short-term investment, and receivables

gross margin ratio

= net sales - cogs/ net sales
-determines percentage of dollar sales available to cover expenses and provide a profit
-want higher value

Journal entry for $3,400 merch purchased on july 5th with 2/10, n/30 terms under perpetual system

debit merchandise 3,400
credit accounts payable 3400

Journal entry for payment (july 27th) of $3,400 merch purchased on july 5th with 2/10, n/30 terms under perpetual system

accounts payble debit 3400
cash credit 3400

NP: 45000 Merch for sale : 83,000 EI: 21,000
BI:
COGS:

BI= 38000 (83-45)
COGS = 62000 (83-21)

COGS: 100 gross profit 575
net sales?

675 (575= x -100, x = 675)

sales: 325 discounts: 17.5 allowance: 5 COGS: 85
net sales = ?
gross profit = ?

net sales = 303 (325-17.5-5)
gross profit = 218 (303- 85)

sold merch for 8.2 credit terms 2/15, n/35 COGS= 3 what is the journal entry?

accounts receivable debit 8.2
sales credit 8.2
cogs debit 3
inventory credit 3

merchandise inventory includes ....

all goods that a company owns regardless of where they are located

goods in transit

in the process of being shipped by seller to buyer

goods on consignment

an arrangement btwn 2 parties in which goods are left in the possession of the consignee to sell

who's inventory are consignment goods counted in

consignor only never the consignee

damaged or obsolete goods

not reported in inventory if can't be sold
if able to sell must be sold at net realizable value

net realizable value

sales price - cost of damage

inventory cost =

sales price - discount + other costs (shipping, storage insurance, import duties)

inventory costing methods

average weight, first in first out, last in first out, and specific identification

average cost method

based on average cost per unit of inventory at end of period (average = price/ units available for sale)

FIFO

First in first out
- first cost into inventory are the first costs assigned to cost of goods sold

LIFO

Last in first out
-last cost into inventory go immediately to cost of goods sold

specific identification method

used for businesses with unique inventory (collectables, antiques, real estate) or businesses where items have indivualized prices/ different values
(ex. houses range in prices but phones are all the same price)

If cost are increasing what does FIFO and LIFO show

FIFO= decrease cogs increase gross profit and increase ending inventory
LIFO= increase cogs decrease gross profit and decrease ending inventory

if cost are decreasing what do FIFO and LIFO show

FIFO= increase cogs decrease gross profit and decrease ending inventory
LIFO= decrease cogs increase gross profit and increase ending inventory

LIFO conformity rule

IRS requires that when LIFO is used for tax reporting it must also be used for financial reporting

Lower of Cost Market

requires inventory to be reported at the lower value of historical cost or current market value

Inventory turn over

= cost of goods sold/ average inventory
-tells how many times inventory turns over in a period
-low = you have more than you're able to sell
-high= you are missing out on potential sales

Days' Sales in Inventory

= ending inventory/ cost of goods sold
-reveals how much inventory is available in terms of days' sales
-if no new items purchased, how many days can a company survive selling its current inventory

Purpose of internal controls

-protect assets
-ensure reliable accounting
-uphold company policies
-promote efficient operations

the larger the company....

the more controls needed

Sarbanes-Oxley Act

-passed in early 2000s in response to several large scale accounting frauds
-requires managers and auditors of public companies to document and assess the effectiveness of all internal control processes that can impact financial reporting

purpose of bank reconciliation

account for differences between bank statements and company records

bank side adjustments

+ deposits in transits
- outstanding checks
errors

deposits in transit

cash deposits a company made and added to their books but the bank hasn't received yet

outstanding checks

checks written by a company that payee has yet to deposit

book side adjustments

+ interest earned
- bank fees and NSF checks
errors

NSF check

Non sufficent funds check
checks written to the company that don't have enough funds to transfer

collection of note journal entry

debit cash
credit notes recievable

NSF check journal entry

debit accounts receivable
credit cash

interest earned journal entry

debit cash
credit intrest rev

check printing journal entry

debit miscellaneous expense
credit cash

day sales uncollected ratio

= accounts receivable/ net sales X 365
-how long is it going to take to turn receivables into cash

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 responsibilities for related transactions
6. applying technological controls
7. preform regulars and independent reviews

who preforms internal control reviews

external auditors

human error

innocent mistakes with no evil intention

human fraud

intentionally going against internal controls for personal gain

fraud triangle

1. opportunity
2. pressure
3. rationalization

cash

anything that represents actual cash- physical cash, money in bank account, checks

cash equivalents

short-term high liquid investments that are readily convertible and close (within a year) to maturity date and not sensitive to market value changes

control of cash

1. separation of duties
2. cash receipts promptly deposited in bank
3. cash payments are promptly made by check or EFT

separate record keeping from custody of assets

one person should not have access to both physical asset and its records

PCAOB

Public Company Accounting Oversight Board
-created by SOX in order to oversee accounting professionals who audit reports for publicly traded companies