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.