Bootcamp Review for Midterm Exam 2

  • Worth 25% of course grade

  • Covers Chapters 5 to 8

  • Exam is closed book

  • Duration: 80 minutes

  • Required items: calculator and photo ID

  • If missing the exam due to serious and unavoidable issues, notify instructor in advance and apply for a deferred exam. If not approved, score on the exam will be zero.

Study Outline

Chapter 5: Merchandising Operations (53%)

  • Journal Entries for Merchandising Transactions: Includes account for purchase and sale of inventory, returns, payments (including early payment discounts), shrinkage, etc.

    • Purchase of Merchandise: Journal entries reflecting the acquiring of inventory

      • Debit: Inventory

      • Credit: Cash or Accounts Payable

    • Sale of Merchandise: Journal entries for selling goods to customers

      • Debit: Cash or Accounts Receivable

      • Credit: Sales and Cost of Goods Sold

  • Preparation of Multiple-Step Income Statement.

  • Closing Entries for a Merchandiser: Involves resetting temporary accounts to zero in preparation for the next accounting period.

Chapter 6: Inventory (7%)

  • Inventory Costing: Methods include:

    • Specific Identification

    • FIFO (First In, First Out)

    • MWA (Moving Weighted Average)

  • LCNRV Inventory Valuation (Lower of Cost or Net Realizable Value): Involves calculations and journal entries relating to inventory valuation.

Chapter 7: Internal Controls and Cash (22%)

  • Purpose of Internal Controls: Four primary purposes are:

    • Encourage compliance with laws, regulations, and company policies.

    • Promote efficient and effective operations.

    • Protect assets from waste, fraud, and theft.

    • Ensure reliable financial reporting.

  • Internal Control Procedures

  • Timing differences and errors in Bank Reconciliation

  • Journal Entries for Petty Cash Transactions: Procedures for managing petty cash funds.

Chapter 8: Receivables (18%)

  • Journal Entries for Accounts Receivable Transactions: Handling transactions involving estimated and actual uncollectible accounts.

  • Journal Entries for Notes Receivable Transactions: Includes transactions related to interest charges.

Review of Chapter 5: Accounting for a Merchandising Operation and Multiple-Step Income Statement (Perpetual System)

Summary of Purchase Transactions

  • Purchasing Merchandise for Resale:

    • Journal Entry:

    • Debit: Inventory - XX

    • Credit: Cash or Accounts Payable - XX

  • Paying Freight Costs on Merchandise Purchased (FOB shipping point):

    • Journal Entry:

    • Debit: Inventory - XX

    • Credit: Cash - XX

  • Receiving Purchase Returns or Allowances:

    • Journal Entry:

    • Debit: Cash or Accounts Payable - XX

    • Credit: Inventory - XX

  • Paying Creditors on Account within the Discount Period:

    • Journal Entry:

    • Debit: Accounts Payable - XX

    • Credit: Inventory - XX

    • Credit: Cash - XX

  • Paying Creditors on Account after Discount Period:

    • Journal Entry:

    • Debit: Accounts Payable - XX

    • Credit: Cash - XX

Summary of Sale Transactions

  • Selling Merchandise to Customers:

    • Journal Entry:

    • Debit: Cash or Accounts Receivable - XX

    • Credit: Sales - XX

    • Credit: Refund Liability - XX

    • Debit: Cost of Goods Sold - XX

    • Debit: Estimated Inventory Returns - XX

    • Credit: Inventory - XX

  • Sales Returns by Customers:

    • Journal Entry:

    • Debit: Refund Liability - XX

    • Credit: Cash or Accounts Receivable - XX

    • Debit: Inventory - XX

    • Credit: Estimated Inventory Returns - XX

  • Paying Freight Costs on Sales (FOB destination):

    • Journal Entry:

    • Debit: Freight Out - XX

    • Credit: Cash - XX

  • Receiving Payment on Account from Customers:

    • Journal Entry:

    • Debit: Cash - XX

    • Credit: Accounts Receivable - XX

Journal Entry Metaphor

  • The Journal Entries for Inventory and Cost of Goods Sold are figuratively stated as being like a peanut butter and jam sandwich; they often go together in a journal entry.

Transportation / Shipping Costs

  • FOB Destination: Ownership is transferred to the buyer when the inventory arrives at the buyer’s premises. The supplier will pay for transportation and insurance costs.

  • FOB Shipping: Ownership is transferred when goods leave the supplier's premises. The buyer pays for transportation costs and insurance.

Problem 5-2B Example Details

  • Travel Warehouse Ltd. distributes suitcases. At the end of June 2021, they had an inventory of 60 suitcases purchased at $50 each.

  • During July, a series of merchandising transactions occur including purchasing, returning, and selling suitcases, as well as accounting for payments received and credit issued.

Solution for Problem 5-2B

  • Journal Entries:

    • July 2:

      • Debit: Inventory (75 x $60) = $4500

      • Credit: Accounts Payable = $4500

    • July 3:

      • Debit: Accounts Payable = $240

      • Credit: Inventory (4 x $60) = $240

    • The accounting flow continues in a similar pattern for each transaction through July 27.

Closing Entries

  • Reset Temporary Accounts: Reset temp accounts to zero, ready to start the next fiscal year.

  • Accounts affected include all revenue accounts, all expense accounts, and owner’s withdrawals/dividends.

  • Upon closing, effects are transferred to the owner’s permanent equity accounts (Capital account for proprietorships/partnerships, Retained Earnings for corporations).

Overview of Inventory

  • Inventory: Goods owned and held for sale to customers.

Valuation Formula for Inventory Tracking

  • Formula:

    • Beginning Inventory + Net inventory purchases = Goods available for sale

    • Goods available for sale - Cost of goods sold = Ending inventory

Inventory Valuation Methods

Specific Identification

  • Each item is tracked uniquely with its exact cost. Suitable for high-value unique items.

FIFO (First In First Out)

  • Assumes oldest goods are sold first, leading to the most recent goods in ending inventory.

MWA (Moving Weighted Average)

  • Calculates average cost at each sale.

Advantages of Costing Methods

  • Specific Identification:

    • Exact matching of revenue and expense; tracks actual flow.

  • FIFO:

    • Ending inventory approximates current replacement cost.

  • Weighted Average:

    • Smoothes out price changes over periods.

Year-End Valuation of Inventory

  • Inventory valuation must follow the lower of cost or market value principle; if market value is lower than cost, it must be reported at market value.

  • Generally calculated based on net realizable value (NRV).

Example for Lower of Cost or Market Value

  • Presents calculation for total inventory and assessment of value; adjustments to inventory accounts if necessary are also noted.

Review of Chapter 7: Internal Controls, Petty Cash, Bank Reconciliation, and Cash Reporting

  • Reinforces the importance of internal controls.

  • Petty Cash fund management, bank reconciliation processes specified, and treatment of errors and timing differences discussed.

Review of Chapter 8: Receivables

  • Discussion on the Matching Principle and estimated uncollectibles.

  • Use of Allowance for Doubtful Accounts as a contra asset account.

  • Various methods of estimating uncollectible accounts discussed, with examples for both income statement and balance sheet approaches.

  • Write-offs and collections on accounts previously written off detailed in example format.

Notes Receivable Transactions

  • Method of accruing and recognizing interest on notes.

  • Treatment upon maturity and consequences of non-payment detailed in solution examples.