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Exam 2 Review Flashcards

Cash Equivalents

  • Definition: Highly liquid investments with a maturity of 3 months or less.
  • Financial Statement Treatment: Included on the balance sheet as a separate line item from cash.

Sarbanes-Oxley Act

  • Requirement: Managers and auditors must certify the company’s system of internal control.
  • Goal: Reduce the opportunity for fraud in financial reporting.

Employee Fraud Incentives

  • Situation: An employee's spouse has large medical bills not fully covered by insurance.
  • Result: This situation creates an incentive for the employee to commit fraud.

Bank Reconciliation Example (Cyclone Company)

  • General Ledger Month-End Cash Balance: $10,325
  • Bank Statement Ending Balance: $10,050
  • Deposits in Transit: $1,000
  • Outstanding Checks: $950
  • NSF Check: $175
  • Bank Service Fee: $50
  • Adjusted Cash Balance Calculation:
    • Cash Balance: $10,050 + Deposits in Transit: $1,000 - Outstanding Checks: $950 - NSF check: $175 - Bank Fee: $50 = $10,100

Consignment Inventory

  • Inclusion in Inventory: Should be included in the inventory of the original owner.

Cost of Goods Sold Example (Precious Pets)

  • Beginning Inventory: $50,000
  • Purchases during Quarter: $7,900
  • Ending Inventory Balance: $26,500
  • Cost of Goods Sold Calculation:
    • COGS = Beginning Inventory + Purchases - Ending Inventory
    • $50,000 + $7,900 - $26,500 = $31,400

Inventory Shrinkage Example (Jewell Corporation)

  • Beginning Inventory: $40,000
  • Purchases: $80,000
  • Inventory Sold: $90,000
  • Ending Inventory on Hand: $27,000
  • Shrinkage Calculation:
    • Shrinkage = Beginning + Purchases - Sold - Ending Inventory
    • $40,000 + $80,000 - $90,000 - $27,000 = $3,000

Merchandise Purchases Calculation (Oak Company)

  • Sales: $100,000
  • Beginning Inventory: $8,000
  • Ending Inventory: $6,000
  • Cost of Goods Sold: $60,000
  • Purchases Calculation:
    • Purchases = COGS + Ending Inventory - Beginning Inventory
    • $60,000 + $6,000 - $8,000 = $58,000

Net Sales Calculation (Johnson Corporation)

  • Operating Income: $45,000
  • Tax Expense: $10,000
  • Operating Expenses: $25,000
  • Cost of Goods Sold: $50,000
  • Net Sales Calculation:
    • Net Sales = Operating Income + Operating Expenses + Cost of Goods Sold
    • = $45,000 + $25,000 + $50,000 = $120,000

Credit Sale and Discounts

  • Terms: 2/10, net 30 (Customer pays on May 19)
  • June 19 Entry Impact:
    • Increase to cash equals the decrease to accounts receivable.
    • Discount recorded on the day of the sale, thus affecting accounts on May 10.

Net Sales from Account Balances

  • Accounts Receivable: $38,000
  • Allowance for Doubtful Accounts: $1,200
  • Sales Revenue: $95,000
  • Sales Returns and Allowances: $1,000
  • Sales Discounts: $2,100
  • Net Sales Calculation:
    • Net Sales = Sales Revenue - (Sales Returns + Sales Discounts)
    • = $95,000 - ($1,000 + $2,100) = $91,900

COGS and Ending Inventory Calculation (Kelley’s TV Corporation)

  • Periodic LIFO Method
  • COGS: $1,485,000, Ending Inventory: $800,000

Effect of Inventory Understatement

  • Scenario: $20,000 understatement of ending inventory.
  • Financial Statement Effect: COGS was overstated, and net income was understated.

Rising Prices Inventory Accounting

  • Results with Methods:
    • LIFO: Lower net income and higher inventory valuation than FIFO.
    • FIFO: Higher net income and higher inventory valuation than LIFO.

Writing Off Accounts Receivable

  • Effect on Total Assets: Total assets decrease.

Recognizing Bad Debt Expense

  • Action: Increase the allowance for doubtful accounts.

Calculating Bad Debt Expense

  • Unadjusted Allowance for Doubtful Accounts: $1,700
  • Bad Debt Expense Calculation Based on Aging Report: $6,400

Cash Collections from Customers

  • Beginning Accounts Receivable: $30,000
  • Credit Sales: $100,000
  • Ending Accounts Receivable: $50,000
  • Cash Collected Calculation:
    • Cash Collection = Beginning AR + Credit Sales - Ending AR
    • = $30,000 + $100,000 - $50,000 = $80,000

Allowance for Doubtful Accounts End Balance

  • Beginning Balance: $500
  • Bad Debt Expense: $1,200
  • Write-offs: $1,500
  • End Balance Calculation: End Balance = Beginning + Expense - Write-offs = $500 + $1,200 - $1,500 = $200

Review Ratios

  • Important Ratios:
    • Gross Profit Margin
    • Inventory Turnover Ratio
    • Days to Sell
    • Receivables Turnover Ratio
    • Days to Collect
  • Reminder: Practicing calculations and interpretations is crucial for success in exams.