Accounting Test 2

Non-Operating revenues and expenses

After operating income, the company reports this. Examples are dividends, interest earned, gains of long term assets. Not typical operating activities but still produce profit.

Average Collection period

Approximate number of days the average accounts receivable balance is outstanding. 365 / receivables turnover ratio

FIFO

Balance Sheet Approach: The amount it reports only approximates cost of inventory. It doesn't usually represent today's cost. However, FIFO better approximates actual cost because most companies actual physical flow is FIFO.

Cost of goods sold is also known as

Cost of sales, Cost of merchandise sold, or Cost of products sold

Operating Activities

Cost transactions involving reenue and expense events.

customer has returned merchandise and has not paid any for the goods. What is the entry

Debit to sales returns, and a credit to accounts receivable.

On Nov. 1 a 40,000, 12%, 3-month interest-bearing loan is accepted. What is the formula to calculate the entry for december 31st

December 31st would include two months of the loan. 40,000 x .12 x (2/12)

What is FOB, FOB Shipping, and FOB Destination

FOB stands for free on board FOB Shipping means the title passes when the seller ships the inventory, not when the buyer receives it. FOB destination means the title transfer to the buyer when the inventory reaches them.

Freight-IN

Freight charges on incoming shipments from suppliers. These charges are normally added into the balance of the inventory costs.

Operating Income

Includes selling, interest, and general and administrative expenses. It's the gross profit - the operating expenses. It measures profitability from normal operations, predicting the future profit generating ability of a company

LIFO

Income Statement approach: the amount it reports matches current costs of inventory.

What does the gross profit ratio do, and what is it

It measures the amount by which the sale price of inventory exceeds its cost. the equation is Gross Profit / Net Sales

Inventory Turnover Ratio is

It shows the number of times the firm sells its average inventory during a reporting period. The ratio = cost of goods sold / average inventory

LCMM

Lower of Cost or Market Method - picking the lowest priced item to record.

The direct write-off method is not normally permitted because it violates the

Matching principle

What is the formula for receivable turnover ratio

Net credit sales divided by average accounts receivable.

Separation of Duties and E-commerce are examples of

Preventive controls

What are the three costs related to manufacturing products

Raw materials, direct labor, and overhead

What is the inventory include in a manufacturing company

Raw materials, work-in-process, and finished goods.

What is cost of goods sold

The remaining inventory is the cost of inventory NOT sold. The amount that was sold is what the company reports as the cost of goods sold in the income statement.

What are the effects of uncollectible accounts

They reduce assets, and they increase expenses (bad debt expense)

A write off for an uncollectible account includes

a debit to allowance for uncollectible accounts a credit to accounts receivable

During reconciliation, what must we adjust on the companies account

amounts the company didn't know until it received the bank statement.

Accounts readily available to pay off debt or use in operations are considered ______ while highly liquid investments with a maturity date of 3 months are considered _____.

cash, cash equivalents.

What are the disadvantages of extending credit

delays in collecting accounts. Accounts may never be collectible.

the LCM method was developed to avoid reporting amounts that are ______ than the benefits.

greater

A good internal control system would have the employee who handles cash not be involved in

reconciling the bank statement.

Average collection period is calculated as 365 divided by

the receivables turnover ratio

Short-Term high liquid investments with maturity of ___ months or less can be converted to cash.

three.

What is the gross profit margin

It indicates the percentage of each sales dollar available to COVER OTHER EXPENSES

How do you find Gross Profit

Net sales minus cost of goods sold

What is the conservative approach

There is more potential to harm users if estimated gains turn out false than estimated losses. It makes companies typically not report estimated gains.

To record bad debts at the end of the period, you would credit

allowance for uncollectible accounts.

The asset most easily stolen

cash

Claim to receive cash

receivable

Returned merchandise for a refund or for credit

sales return

with FOB destination, the shipping costs are

shipping costs are paid by the supplier