accounting test 2
Hunter Company purchased merchandise inventory with an invoice price of $6,000 and credit terms of 2/10, n/30. What is the net cost of the goods if Hunter Company pays within the discount period?
$5,880
Dishonored note
A note that is not paid in full at maturity -a dishonored note rechecked is no longer negotiable
Concentration of credit rise
A threat of nonpayment from a si for large customer/class of customers that could adversely affect the financial the health of a company
When an account becomes uncollectible and must be written off
Accounts Receivable should be credited.
Average cost method
Allocates the costs of goods available for sale in the basis of weighted-average unit cost
The maturity value
Amount value
Receivable
Amounts due from individuals and corporations -claims that are expected to be collected in cash -classified as accounts receivable, notes revivable, other receivables
Last in, first out (LIFO)
Assumed that the latest goods purchased are the 1st to be sold -the cost of the latest goods purchased are 1st to be recognized in determining octs if goods sold
First in, first out method (FIFO)
Assumes that the earliest goods purchased are the 1st to be sold -ex it would go November 27 the august 24 -companies determine cost of ending inventory by taking he unit costs of the most recent purchase and working back until all units have been costsed
raw materials inventory
Basic goods that will be use in production but have not yet been placed into production
Merchanding conpanies
Buy and sell merchandise rather than perform services as their primary source of revenue
Periodic Inventory System
Companies do not keep detailed inventory records of the goods on hand throughout the period -they determined the costs of goods sold only at the end of accounting period
Perpetual inventory system
Companies maintain detailed records of the costs of each purchase and sale -these records continuously-perpetually-show the inventory that should be on hand for each item
LIFO reserve
Companies using LIFO are required to report the different bt inventor toy reported using LIFO and inventory using FIFO
Manning Company uses the percentage of receivables method for recording bad debts expense. The accounts receivable balance is $200,000 and credit sales are $1,000,000. Management estimates that 5% of accounts receivable will be uncollectible. What adjusting entry will Manning Company make if the Allowance for Doubtful Accounts has a credit balance of $2,000 before adjustment?
Debit Bad Debts Expense, $8,000; Credit Allowance for Doubtful Accounts, $8,000
Gross Profit
Excess of net sales of costs and goods sold -merchandising profit -not a measure if overall profit bc expenses have not been deducted
Two companies report the same cost of goods available for sale but each employs a different inventory costing method. If the price of goods has increased during the period, then the company using
FIFO will have the highest ending inventory.
Amount due at maturity
Face value of the otw plus interest for the length of time specified on the note
goods in the transit
Goods a company has purchased that have not yet been received, or it may sold goods that have not yet been delivered
Which of the following should not be included in the physical inventory of a company?
Goods held on consignment from another company.
Inventory turnover
I dictated the liquidity of the inventory by measuring the number of times the schedule inventory "turns over"(sold) during the year
Days in Inventory
Indicated the above number of days inventory is held
purchase invoice
Indicated the total purchase price and other relevant info (free on board)
cost flow assumptions
Instead father than keep track of the cost each particular item sold, most companies make assumptions -first in, first out(FIFO) -lady in, first out(LIFO) -average cost
Allowance method
It involves estimating uncollectible accounts at the end of each period -provides better matching of expenses w revenues on the income statement -ensures that receivable are states at their cash (net) realized value on balance sheet
In a period of increasing prices, which inventory flow assumption will result in the lowest amount of income tax expense?
LIFO
trade receivables
Let's and accounts receivables that result from sale transaction
Percentage of receivable basis
Management establishes a percentage relationship by the amount of receivables and expected losses from uncollectible accounts
Finished goods
Manufactured items that are completed and ready for sale
Average Collection Period
Measures the average amount of time that a receivable is outstanding -asses the effectiveness of a company's credit and collection policies
Profit Margin
Measures the per d face if each dollar of sales that results in net income -measures the extent by which selling price covers all expenses
If a purchaser using a perpetual inventory system pays the transportation costs, then the
Merchandise Inventory account is increased.
The journal entry to record a return of merchandise purchased on account under a perptual inventory system would credit
Merchandise Inventory.
Retailers
Merchandising companies that purchase and sell directly to consumers
Wholesalers
Merchandising companies that sell to retailers
Aging the accounts receivable
More accurately estimates the ending balance in the allowance account company prepares a schedule -it classifies customer balance by the length of time they have been unpaid
Cash(net) realizable value
Net amount a company expects to revive in cash from receivables -companies must use the allowance method for financial reporting purposes when bad debts are material in account
Other receivables
Non trade reviewable such as interest receivable, loans to company officers, advances to employees and income tax refundable
Interest expense would be classified on a multiple-step income statement under the heading
Other Expenses and Losses
FOB( free on board) shipping point
Ownership of the goods remain w the seller until the goods reach the buyer
FOB destination
Ownership of the goods remains with the seller until the goods reach the buyer
Comprehensive income statement
Presents items that are not included in the determination of net, referred to as other comprehensive income
Sales invoice
Provides support for each sale -the original copy goes to customer and seller keeps a copy for use in recording
Cash sales
Retailer considers sales resulting from the use of visa and master card
Purchaser Allowance
Th purchaser may choose to keep the merchandise if the seller is willing to grant a reduction in purchase price
Current replacement cost
The cost of purchasing the same goods at the present time from the usual suppliers in the usual quantities -used bc a decline in the replacement costs of an turn usually lead to a decline in selling price of an item
Purchase discount
The credit terms of a purchaser on account may permit buyer to claim a cash discount for prompt payment
Maker
The party making the promise to pay
Payee
The party to whom payment is to be made
work in process inventory
The portion of manufactured inventory that has begun the production process BUT is not complete
Accounts Receivable turnover
The ratio that analyst use to asses the liquidity of receivable -measures the number of times an average a company collects receivables during a period
FOB shipping point
The seller places the goods free in board the carrier, and the buyer pays the freight cost -buyer pays
FOB destination
The seller places the goods free on board to he buyer place of business and seller pays for the freight -seller pays
Costs of goods sold
Total cost of merchandiser sold during that period
Sales returns and allowances
Transactions where the seller either accepts goods back from a purchaser(return) or grants a reduction in the purchase price(an allowance) so that the buyer will keep the goods
Just in time(JIT) inventory
Under adjust in time method, companies manufactured/purchase goods only when needed -it significancy lowered inventory levels and costs
No operating activities
Various revenues and expenses and gains and losses that are unrelated to company's main line of operation
Direct write-off method
When a company determines receivables from a particular company to be uncollectible, it charges loss to bad debt expense
Net sales
When company subtracts sales return and allowances and sales discounts from the sales return
Honored
When it's maker pay in full at its maturity date
Purchase return
When purchaser wants to return goods bc are dissatisfied, damages or defective and get the way back they paid
Sales discount
When the all offers the customer a cash discount for the prompt payment of the balance she -contra revenue account -sellers use this account instead of devoting sales revenues, to disclose the amount of cash taken my customers
bad debt expense
When the seller records losses in accounts receivable/when it becomes uncollectible that results from extending credit
Comprehensive income
When unrealized gains/looses are not included in net income but these excluded items are reported as part of a more inclusive earnings measure -examples--adjustments to pension plan assets, gains and looses in foreign currency translation
Specific identification method
When you can identify when particular units is sold and which are still in ending inventory
consigned goods
When you haven't of goods of other parties and try to sell the goods for them for a free, but w/o taking ownership of goods
Lower-of-cost-market(LCM)
Whereby inventory is stated at the lower of either its costs or market value as determined by current replacement costs -example if conservatism -period in which the price decline occurs
Promissory note
a written promise to pay a specified amount of money on demand or at a definite
Accounts Receivable
amounts cud tomers owe on account that result from a sale of goods and services. They expect this w/in 30-69 days. Usually the most significant type of claim
The term "receivables" refers to
amounts due from individuals or companies.
Which sales account(s) normally have a debit balance?
both sales discount and sales returns and allowances
To record estimated uncollectible accounts using the allowance method, the adjusting entry would be a
debit to Bad Debts Expense and a credit to Allowance for Doubtful Accounts.
An aging of a company's accounts receivable indicates that $3,000 are estimated to be uncollectible. If Allowance for Doubtful Accounts has a $1,200 credit balance, the adjustment to record bad debts for the period will require a
debit to Bad Debts Expense for $1,800.
Sales revenues are usually considered earned when
goods have been transferred from the seller to the buyer.
A merchandise will earn an operating income of exactly $0 when
gross profit equals operating expenses.
Freight costs incurred by a seller on merchandise sold to customers will cause an increase
in operating expenses for the seller.
The matching rule relates to credit losses by stating that bad debt expense should be recorded
in the period of the sale.
The factor which determines whether or not goods should be included in a physical count of inventory is
legal title.
The receivable that is usually evidenced by a formal instrument of credit is a(n)
notes receivable.
If an account is collected after having been previously written off
there will be both a debit and a credit to accounts receivable.
Under the allowance method, when a specific account is written off
total assets will be unchanged.
notes receivable
written promise (as evidenced by a formal instrument) for amounts to be received. Normally requires collection of interest me extends for time period of 60-90 days
Merchandising company inventory....
1. they are owed by the company 2. They are in a form ready for sale to customers in ordinary course if business
Holt Company sells merchandise on account for $1,500 to Jones Company with credit terms of 2/10,n/30. Jones Company returns $300 of merchandise that was damaged, along with a check to settle the account within the discount period. What is the amount of the check?
1176
Using the percent of sales method for recording bad debts expense, estimated uncollectible accounts are $25,000. If the balance of the Allowance for Doubtful Accounts is $8,000 debit before adjustment what is the balance after adjustment?
25,000
During the year, Carla's Pet Shop's merchandise inventory decreased by $25,000. If the company's cost of goods sold for the year was $375,000, purchases must have been
350,000
Merchandising company has 2 expenses
-costs of goods sold -operating expenses
3 parties involved when national credit cards are used in making retail sales
1. Credit card issues who is independent of retailer 2. Retailer 3. The customer
To determine the costs of goods sold under a periodic inventory system steps
1. Determine the costs of goods on hand at the beginning of the accounting period 2. Add to it the costs of goods purchased 3. Subtract the costs of goods on hand as determined by the physical inventory count and end of accounting period
Managing receivables
1. Determine to whom to extend the credit 2. Establish a payment period 3. Monitor collections 4. Evaluate the liquidity of receivables 5. Accelerate cash receipts from recievables when necessary
Merchandising inventory is...
1. Finished goods 2. Work in process 3. Raw materials
Reasons companies adopt different inventory cost flow methods
1. Income statement effects 2. Balance sheet effects 3. Tax effects
A promissory note is used when...
1. Individuals and companies lend/borrow money 2. When the amount of transaction and the credit period exceed normal limits 3. settlement in accounts receivable
Maturity date of a promissory note may be stated
1. On demand 2. States date 3. At end of stated time period
When a company collects from a customer other the account has been written off as uncollectible
1. Reverse entry made off the account, reinstates customer account 2. Journalizes collection in usual manner
Determining inventory quantities involves....
1. Taking physical inventory of goods on hand 2. Determine ownership of the good
Methods used in accounting for uncollectible accounts
1. The direct write off method 2. Allowance method
Presentation entails the disclosure of...
1. The major inventory classifications 2. The basis of accounting(cost, or lower of cost or market) 3. The cost method (FIFO, LIFO or av cost) and
Which of the following statements is true regarding inventory cost flow assumptions?
A company may use more than one costing method concurrently.
Factor
A finance company/bank that buys receivables from a business for a fee and then collects the payment directly from customers
