ACCT 2301 Study Guide Exam 2

What is the effect of adjusting entries on financial statements?

Adjusting entries affect the income statement and balance sheet by updating revenues and expenses to reflect the correct financial position.

What are the two general types of adjusting entries?

Accruals and deferrals.

What is an example of an accrual adjusting entry?

Recording wages earned by employees but not yet paid.

What is an example of a deferral adjusting entry?

Adjusting prepaid insurance to reflect the amount that has expired.

What are the nine steps in the accounting cycle?

1. Collect and analyze data 2. Prepare journal entries 3. Post to ledger accounts 4. Prepare trial balance 5. Journalize adjusting entries 6. Prepare adjusted trial balance 7. Prepare financial statements 8. Journalize closing entries 9. Prepare post-closing trial balance.

What is the revenue recognition principle?

Revenue is recognized when it is earned and realizable, regardless of when cash is received.

What does accumulated depreciation represent?

Accumulated depreciation represents the total amount of a fixed asset's cost that has been expensed over time and is a contra asset account.

What are the features of the perpetual inventory system?

Keeps continuous track of inventory balances and cost of goods sold; updates inventory and cost accounts in real-time.

How do you calculate gross profit?

Gross profit = Sales Revenue - Cost of Goods Sold.

What is a merchandising company?

A business that purchases and sells goods to consumers.

What are the features of the periodic inventory system?

Updates inventory records at the end of an accounting period and determines cost of goods sold based on a physical count.

How does a purchaser account for the return of goods in a perpetual inventory system?

By debiting accounts payable or cash and crediting inventory.

How does a purchaser account for transportation costs in a perpetual inventory system?

Transportation costs are added to the cost of inventory if they are freight-in.

What is the journal entry for the sale of goods in a perpetual system?

Debit Cash/Accounts Receivable and credit Sales Revenue; also debit Cost of Goods Sold and credit Inventory.

What do credit terms like 2/10, net 30 mean?

A 2% discount is available if paid within 10 days, otherwise the full amount is due in 30 days.

How do you calculate payment for purchases when some goods are returned?

Total purchase cost - cost of returned goods.

How do you calculate the gross profit percentage?

Gross Profit Percentage = (Gross Profit / Sales Revenue) x 100.

How do you calculate profit margin?

Profit Margin = (Net Income / Sales Revenue) x 100.

What factors require inclusion of goods into inventory?

Goods owned by the company, on-hand, in transit (if FOB shipping point), and any consigned goods.

What do FOB shipping point and FOB destination mean?

FOB shipping point means the buyer takes responsibility at shipment; FOB destination means the seller takes responsibility until goods reach the buyer.

Why do companies take a physical inventory?

To verify inventory records, account for shrinkage, and calculate cost of goods sold in periodic systems.

How do companies treat consignment goods?

Consigned goods are excluded from the company's inventory until sold.

What are the three cost-flow assumptions for inventory?

FIFO (First-In, First-Out), LIFO (Last-In, First-Out), and weighted average.

How do you determine cost of goods sold and ending inventory for FIFO?

Under FIFO, oldest costs are used for cost of goods sold, and the newer costs remain in ending inventory.

How do you determine cost of goods sold and ending inventory for LIFO?

Under LIFO, the most recent costs are used for cost of goods sold, leaving older costs in ending inventory.

How do you determine cost of goods sold and ending inventory for weighted average?

Calculate the average cost of all inventory items for both cost of goods sold and ending inventory.

What is the effect of inventory cost flow methods on net income during rising prices?

FIFO results in higher net income, LIFO results in lower net income, and weighted average results in middle net income.

What companies typically use the specific identification method?

Companies with unique or high-value items, such as car dealerships or fine art galleries.