Accountings Exam 1
Mogul Company ships merchandise to Ski Outfit in a consignment arrangement. The arrangement specifies that Ski Outfit will attempt to sell the merchandise, and in return, Mogul will pay to Ski Outfit a 20% sales commission on any merchandise sold. During the year, Mogul ships inventory with a cost of $80,000 to Ski Outfit. By the end of the year, $60,000 of the merchandise has been sold to customers for a total of $85,000. What amount of inventory will Mogul report at year end?
$20,000
Average cost
(Total cost of goods available for sale)/(Total quantity available for sale)
Credit
-A decrease in an account on the asset section of the balance sheet -A decrease in an expense account on the income statement -An increase in an account on the liabilities or shareholders' equity sections of the balance sheet
Periodic Inventory System
-Actual physical count is taken at the end of each accounting period -You record COGS at the end of the accounting period after the inventory count, not at the time of sale
Debit
-An increase in an account on the asset section of the balance sheet -An increase in an expense account on the income statement -A decrease in an account on the liabilities or shareholders' equity sections of the balance sheet
Inventory includes:
-Assets intended to be sold in the normal course of business -Assets in production for future sale (work in process) -Assets used in the production process that ultimately end up being sold (raw materials)
Perpetual Inventory System
-Continuous record of inventory is maintained. -Just-in-time (JIT) requires perpetual system
Inventory
-an asset reported on the balance sheet -Inventory increases when a company buys raw materials and/or merchandise for resale -Inventory decreases when a company makes a sale
Securities and Exchange Commission (SEC)
-governs all public companies -requires public companies to abide by the FASB rules and enforces the rules
Sarbanes-Oxley Act of 2002
-the product of several accounting scandals from the early 2000s, including Enron and WorldCom -The Act strengthens audits for public companies -Mandates internal control audits
The Phoenix Corporation's fiscal year ends on December 31. Phoenix determines inventory quality by a physical count of inventory on hand at the close of business on December 31. The company's controller has asked for your help in deciding if the following items should be included in the year end inventory count. 1. Merchandise held on consignment for Trout Creek Clothing. 2. Goods shipped f.o.b. destination on December 28 that arrived at the customer's location on January 4. 3. Goods purchased from a vender shipped f.o.b. shipping point on December 26 that arrived on January 3. 4. Goods shipped f.o.b. shipping point on December 28 that arrived at the customer's location on January 5. 5. Phoenix had merchandise on consignment at Lisa's Markets, Inc. 6. Goods purchased from a vendor shipped f.o.b. destination on December 27 that arrived on January 3. 7. Freight charges on goods purchased in 3.
1. No/excluded 2. Yes 3. Yes 4. No 5. Yes 6. No 7. Yes
Identify and briefly describe the three categories of cash flows reported in the statement of cash flows.
1. Operating activities—Inflows and outflows of cash related to the transactions entering into the determination of net income from operations. 2. Investing activities—Involve the acquisition and sale of (1) long-term assets used in the business and (2) nonoperating investment assets. 3. Financing activities—Involve cash inflows and outflows from transactions with creditors (excluding trade payables) and owners.
Income statement
A complete list of all the income earned and expenses incurred over the accounting period (usually January 1-December 31 of a given year)
Grocery Stores/Convenience Stores/Clothing Stores are most likely to utilize which inventory system?
A periodic inventory helps these stores improve the accuracy of their inventory records by accounting for shoplifting and spoilage, which can escape automated computerized systems of inventory management.
What is a proxy statement? What information does it provide?
A proxy statement must be reported each year to all shareholders. It is usually reported at the same time as the annual report. The statement invites shareholders to the shareholders' meeting to elect board members and to vote on issues before the shareholders. It also permits shareholders to vote using an enclosed proxy card. The proxy statement also provides for more disclosures on compensation to directors and executives, and in particular, stock options granted to executives.
Balance sheet
A summary of what the company owns and owes as of the balance sheet date (usually on December 31 of a given year)
Each economic event or transaction will have a dual effect on financial position. Explain what is meant by this dual effect.
According to the accounting equation, there is equality between the total economic resources of an entity, its assets, and the claims to those resources, liabilities, and equity. This implies that, since resources must always equal claims, the net effect of any transaction cannot affect one side of the accounting equation differently than the other side.
Describe what is meant by posting, the fourth step in the processing cycle.
After transactions are recorded in a journal, the debits and credits must be transferred to the appropriate general ledger accounts. This transfer is called posting.
Shareholders' Equity =
Assets - Liabilities
The accounting equation is:
Assets = Liabilities + Shareholders' Equity
What is the main difference between a perpetual inventory system and a periodic inventory system? Which system is used more often by major companies?
Beginning inventory plus net purchases for the period equals cost of goods available for sale. The main difference between a perpetual and a periodic system is that the periodic system allocates cost of goods available for sale to ending inventory and cost of goods sold only at the end of the period. The perpetual system accomplishes this allocation by decreasing inventory and increasing cost of goods sold each time goods are sold. The perpetual inventory system is used by nearly all major companies.
_______ is typically responsible for shipping costs
Buyer
Inventory is expensed at cost as...
COGS
How does the following effect the accounting equation? Issued 30,000 shares of no-par common stock in exchange for $300,000 in cash.
Cash increase by 300,000 (Asset) & Common Stock increased by 300,000 (S/E)
Statement of cash flows
Cash paid and cash received over the accounting period
Define comprehensive income. What are the two ways companies can present comprehensive income?
Comprehensive income is the total change in equity for a reporting period other than from transactions with owners. Reporting comprehensive income can be accomplished with a continuous statement of comprehensive income that includes an income statement and other comprehensive income items or in two statements, an income statement and a separate statement of comprehensive income.
For a typical sale, companies credit inventory and debit:
Cost of goods sold
One difference between periodic and perpetual inventory systems is:
Cost of goods sold is not recorded under a periodic system until the end of the period.
How does the following effect the accounting equation? Purchased equipment at a cost of $40,000. $10,000 cash was paid and a note payable to the seller was signed for the balance owed.
Equipment increase by $40,000 (Asset), Cash decrease by $10,000 (Asset), Note Payable increase by $30,000 (Liability)
Carter Co. sells lumber. Over the past two years, lumber prices have increased dramatically, forcing Carter Co. to pay more for its inventory than ever before. Which method of accounting for inventory is likely to yield the lowest cost of goods sold for Carter Co.?
FIFO
If costs increase over time, _______ produces the highest net income
FIFO
T/F? During periods of falling inventory costs, LIFO ending inventory will be less than FIFO ending inventory.
False
T/F? Inventory shipped f.o.b. shipping point remains in the seller's accounting inventory records during transit.
False
T/F? Privately held companies must produce financial statements that conform to U.S. GAAP.
False
T/F? Retained earnings is equivalent to a company's net income for an accounting period.
False
T/F? The Securities and Exchange Commission creates accounting standards.
False
T/F? The main reason companies make adjusting entries is to remediate instances of accounting fraud.
False
What is meant by GAAP? Why should all companies follow GAAP in reporting to external users?
GAAP are a dynamic set of both broad and specific guidelines that a company should follow in measuring and reporting the information in their financial statements and related notes.
GAAP
Generally accepted accounting principles
As part of a restructuring plan, Patagonia informs 100 of its employees that they will be laid off and given cash as part of a severance plan. No additional work is required of employees to receive the cash payment. Patagonia should record its obligation to make these payments:
Immediately after communicating the plan to employees
Describe the three types of inventory of a manufacturing company.
Inventory for a manufacturing company consists of (1) raw materials, (2) work in process, and (3) finished goods.
How does the following effect the accounting equation? Purchased inventory on account at a cost of $90,000. The company uses the perpetual inventory system.
Inventory increase by $90,000 (Asset), Accounts Payable increase by $90,000 (Liability)
If costs decrease over time, _____ produces the highest net income
LIFO
Assets =
Liabilities + Shareholders' Equity
Explain why the balance sheet does not portray the market value of the entity.
Most assets are not reported at fair value, but instead are measured according to historical cost. Also, there are certain resources, such as trained employees, an experienced management team, and a good reputation, that are not recorded as assets at all.
closing process
Necessary end-of-period steps to prepare the accounts for recording the transactions of the next period.
Is accounting an exact science?
No
Microsoft's main business is producing software and technology services. However, Microsoft incidentally earns revenue from its investments in stocks and bonds. This revenue should be classified as:
Non-operating income
Explain what is meant by noncash investing and financing activities pertaining to the statement of cash flows. Give an example of one of these activities.
Noncash investing and financing activities are transactions that do not increase or decrease cash but are important investing and financing activities. An example would be the acquisition of property, plant, and equipment (an investing activity) by issuing either long-term debt or equity securities (a financing activity) to the seller. These activities are reported either on the face of the statement of cash flows or in a disclosure note.
Most U.S. public companies produce financial reports:
Once per quarter
When a sale occurs, when does ownership of the good change?
Once the good is delivered
Funds a company receives from shareholders are often called:
Paid-in capital
What does the FASB want from accounting?
Relevance, Reliability, Timeliness, Comparability, Consistency
Shareholders' Equity
Represents what stockholders own
The FASB is powerless without the...
SEC
What the firm owns - What the firm owes =
Shareholders' Equity
Sasha wants to learn how much cash a company received last year related to interest and dividends from its investments. You should advise Sasha to look at that company's:
Statement of cash flows
Foreign currency translation adjustments typically appear on the:
Statement of comprehensive income
The income statement is a change statement. Explain what is meant by this.
The income statement is a change statement that reports transactions—revenues, expenses, gains, and losses—that cause owners' equity to change during a specified reporting period.
What is the Primary objective of financial accounting?
The primary objective of financial accounting is to provide investors and creditors with information that will help them make investment and credit decisions.
Describe the purpose of the balance sheet.
The purpose of the balance sheet, also known as the statement of financial position, is to present the financial position of the company on a particular date. Unlike the income statement, which is a change statement that reports events occurring during a period of time, the balance sheet is a statement that presents an organized list of assets, liabilities, and shareholders' equity at a point in time. It is a freeze-frame or snapshot picture of financial position at the end of a particular day marking the end of an accounting period.
Describe what is meant by transaction analysis.
Transaction analysis is the process of reviewing the source documents to determine the dual effect on the accounting equation and the specific elements involved.
T/F? Cost of goods on consignment is included in the consignor's inventory until sold.
True
T/F? Shipping paid for incoming inventory goods is included as a cost of inventory on the balance sheet.
True
It's common in the electronics industry for unit costs of raw materials inventories to decline over time. In this environment, explain the difference between LIFO and FIFO in terms of the effect on cost of goods sold and ending inventory. Assume that inventory quantities remain the same for the period.
When costs are declining, LIFO will result in a lower cost of goods sold and higher net income than FIFO. This is because LIFO will include in cost of goods sold the most recently purchased lower-cost merchandise. LIFO also will provide a higher ending inventory in the balance sheet when costs are declining because the inventory has units purchased at an earlier date, when costs were higher.
Last in, first out (LIFO)
When sale occurs, the newest items in inventory are sold first
First in, first out (FIFO)
When sale occurs, the oldest items in inventory are sold first
Rules-based accounting standards
a list of rules for choosing the appropriate accounting treatment for a transaction.
Retained earnings
accumulated accounting profits minus dividends paid to shareholders over the company's entire life
Principles-based accounting standards
approach to standard setting stresses professional judgement, as opposed to following a list of rules
Entering each accounting period, the ______ tells investors about the company's current financial standing.
balance sheet
The dollar value of the inventory balance equals the
cost of acquiring the inventory
When inventory is sold, it becomes a company's
cost of goods sold
Financial Accounting Standards Board (FASB)
creates accounting rules
For every debit, there is a corresponding...
credit
Inventory cost methods must be _____ in the notes
disclosed
When a company switches from FIFO to LIFO, a...
disclosure note is needed to explain (a) the nature of the change; (b) the effect of the change on current year's income and earnings per share.
Paid-in capital
dollars invested in the firm by shareholders
internal events
events that directly affect the financial position of the company but don't involve an exchange transaction with another entity.
external events
exchange between the company and a separate economic entity.
Over the accounting period, economic events occur that change the company's financial standing. These events are represented in the ________.
income statement
US GAAP ignores any increases in the value of...
inventory
If it is determined that the lower of cost and net realizable value is below the current carrying value of inventory, we must adjust the...
inventory's value on the balance sheet
U.S. GAAP requires that inventory be reported at the...
lower of cost and net realizable value
Net income reflects the
net effect of all revenues and expenses over the accounting period.
At the end of each accounting period, we sum all the temporary accounts and create an account called ________.
net income
revenue minus expenses =
net income
No such timing difference =
no accrual needed
Timing Differences
occur when the company records transactions either before or after the bank records the same transactions
Accruals arise when a good or service is...
provided to a customer who pays cash beforehand or afterwards
What is the function and primary focus of financial accounting?
providing relevant financial information about various kinds of organizations to different types of external users
Net income is added to ________, which is a permanent account
retained earnings
During an accounting period, we keep a running tab of that period's revenues, expenses, and other gain/loss items using ________.
temporary accounts
Cost of goods sold (COGS)
the cost of inventory sold during an accounting period
Net realizable value
the selling price of a good or service minus the cost to deliver the good or service
Retained earnings equals...
the sum of the company's net income over the company's lifespan
Free on board shipping point
title to goods changes hands when seller delivers goods to a carrier
Free on board destination
title to goods changes hands when seller delivers goods to the buyer
Definition of accrue
to come into existence as a legally enforceable claim
Accounting information should help investors decide...
whether to buy, sell, or hold a company's stock and debt
