ACCT exam #2
Average Inventory Formula
(Beginning Inventory + Ending Inventory) / 2
3 entries for inventories for perpetual method (purchase made on account): 1. to record purchase of inventory 2. to record sale of merchandise 3. end of year adjustments
1. inventory xx acct payable xx 2. a) cash xx sales revenue xx b) COGS xx inventory xx 3. loss xx inventory xx
3 entries for inventories for periodic method (purchase made on account): 1. to record purchase of inventory 2. to record sale of merchandise 3. end of year adjustments
1. purchases xx accounts payable xx 2. cash xx sales revenue xx 3. ending inventory xx cogs xx purchases xx
3 steps of gross profit method estimation
1. determine gross profit % --- gross profit/net sales 2. find cogs --- sales x (1-gross profit %) 3. find ending inventory estimate --- GAS-COGS
2 methods of recording bad debts
1. direct write-off method 2. allowance method
2 primary uses of gross profit method
1. estimate inventory for interim financial statements: quarterly, monthly 2. estimate value of inventory destroyed/lost by casualty/theft
2 disadvantages of FIFO
1. it fails to match most recent costs with revenues 2. if prices are rising, matches oldest unit costs with current revenues (overstatement of net income)
2 Advantages of LIFO
1. matches current costs with current revenues 2. in periods of rising prices, net income is always less
cash equivalents must be: 1. 2.
1. readily convertible into known amount of cash 2. so near maturity that interest rate changes won't affect their market value
what are the 2 entries when making a sale for the perpetual inventory method
1. record the sale 2. update the inventory
4 Examples of Cash Equivalents
1. treasury bill (t-bill) 2. certificate of deposit (CD) 3. commercial paper 4. money market fund
inventory erros take __ years to correct
2
What does 2/10 net 30 mean?
2% discount if customer pays within 10 days or full amount due in 30 if not
how many inventory cost flow methods exist
4
formula for net realizable value (which goes on the balance sheet)
A/R - ADA --------- NRV
COGS formula in periodic system
Beg Invt + Net Purch ------------------------------ Goods Available for Sale - Ending Inventory ------------------------------- Cost of Goods Sold
the amount we paid for goods we have sold
COGS
what is the formula used for the periodic method
COGS formula
in periods of declining prices, is cost of goods sold higher with FIFO or LIFO
FIFO
in periods of rising prices, is ending inventory higher with FIFO or LIFO
FIFO
in periods of rising prices, is net income higher with FIFO or LIFO
FIFO
who required that you record your account receivable at the amount you expect to receive in cash
GAAP
LIFO conformity rule
IRS rule requiring a company that uses LIFO for tax reporting to also use LIFO for financial reporting
in periods of declining prices, is ending inventory higher with FIFO or LIFO
LIFO
in periods of declining prices, is net income higher with FIFO or LIFO
LIFO
in periods of rising prices, is cost of goods sold higher with FIFO or LIFO
LIFO
when prices are rising, which inventory cost flow method produces the lowest net income
LIFO
which inventory cost flow method is not allowed by the IASB
LIFO
net purchases formula
Purchases - (Purchase Returns & Allowances) - (Purchase Discounts) + Freight-In
Ship goods FOB destination on December 28th-- goods arrive at buyers warehouse on January 3rd. Year-end for both companies is December 31st. Who includes in ending inventory?
Seller
amounts due from customers from sale of goods/services
accounts receivable
for balance per bank: add- 1. 2. less- 1. 2.
add- 1. deposits in transit 2. bank errors less- 1. outstanding checks 2. bank errors
for balance per books: add- 1. 2. 3. less- 1. 2. 3. 4.
add- 1. notes collected by bank (on our behalf) 2. interest collected 3. book errors less- 1. NSF checks 2. Service checks 3. Overdraft charges 4. book erros
which goods are included in ending inventory
all goods in which the company has legal title
bad debt recording method which estimates uncollectible accounts at the end of the year
allowance method
which bad debt recording method is preferred
allowance method
advantage of average cost method
assigns cost an equal unit basis to both ending inventory and cogs
advantage of FIFO method
assigns current cost to inventory
How does the allowance method work?
at year end, a company will estimate (based on prior experience or industry averages) what they expect not to collect and record Bad Debt Expense through an adjusting entry. This places the expense in the same accounting period as the credit to sales revenue.
in the period method for inventories, when is the adjusting entry made to update inventories
at year-end
inventory cost flow method which uses weighted average of all costs for goods available for sale and assigns average cost to both ending inventory and cogs
average cost method
which 3 inventory cost flow methods are called cost flow assumptions
average cost, FIFO, LIFO
cost of doing business on credit
bad debt expense
what is the entry for the direct-write off method when the bad debt customer is identified
bad debt expense xx accounts receivable xx
what is the adjusting entry at year end for bad debt in allowance method
bad debt expense xx allowance for doubtful accounts xx
ending inventory amount effects which 2 statements
balance sheet and income statement
after reconciliation, record journal entries for everything on ____ side
book
Ship goods FOB shipping point on Dec. 28th-- goods arrive at buyers warehouse on January 3rd. Year end for both companies is December 31st. Who includes in ending inventory?
buyer
Who pays for shipping in FOB shipping point?
buyer
short term investments with an original maturity of three months or less
cash equivalents
allowance for doubtful accounts is a
contra asset account
Inventory Turnover Ratio formula
cost of goods sold/average inventory
bank increases your cash account, addition on bank statement
credit memo
what is inventory reported as on balance sheet
current asset
where does cash equivalents belong the balance sheet
current assets
working capital formula
current assets - current liabilities
current ratio formula
current assets/current liabilities
bank reduces your cash account, deduction on bank statement
debit memo
which bad debt expense recording method requires that you wait until you can specifically identify the bad debt customer and then record bad debt expense
direct write-off method
find ending inventory and cost of goods sold using the specific identification method for the following problem: A company purchases 3 identical bicycles for resale at costs of $300, $350, and $400. During the year, two bicycles are sold at $800 each. At December 31, the $350 bicycle is still on hand.
ending inventory= $350 COGS= $700
what is COGS recorded as
expense
where do we close the loss account in closing entries in the perpetual method
expenses
for the FIFO inventory method, cost of first item purchased=cost of _______
first item sold
for FIFO method, cogs starts at the ___ date and ending inventory starts at the ___ date
first, last
disadvantage of LIFO
gives non-current value to inventory on balance sheet
goods ordered but not yet received
goods in transit
gross profit ratio formula
gross profit/net sales
direct-write off method can only be used if accounts receivable are _______
immaterial
when should we record uncollectible receivables
in the same period as we record the revenue (use an estimate)
2 ways to estimate bad debts (using the allowance method)
income statement method and balance sheet method
what are all cash equivalents considered
interest bearing
goods held for resale
inventory
a measure of the number of times inventory is sold during the period
inventory turnover ratio
for LIFO method, cogs starts at the ___ date and ending inventory starts at the ___ date
last, first
for LIFO, cost of ___ item purchased= cost of ____ item sold
last, first
what is the adjusting entry for the loss for the perpetual method
loss xx inventory shirts xx
reporting bad debt expense follows which principle
matching
the allowance method follows which principle
matching
what principle does the direct-write off method violate
matching
how often are bank reconciliations prepared
monthly
the amount of account receivable that you expect to receive in cash
net realizable value
for consigned goods, when does title transfer
never
is the purchases account an asset
no, it's just part of the COGS formula
bad dept expense is reported as an ___ ___ on the ____ statement
operating expense, income
method of accounting for inventories which updates inventory at the end of the period
periodic method
2 methods of accounting for inventories
perpertual method and periodic method
method of accounting for inventory which keeps a running total of the inventory on hand and recognizes a loss
perpetual method
in the periodic method of accounting for inventories, all items purchased for resale are debited to a ______ account
purchases
the more _____ a company can sell (turn over) its inventory the better
quickly
net sales revenue formula
sales revenue -(sales returns and allowances) (sales discounts)
who pays for shipping in FOB destination?
seller
if buyer agrees to pick up goods at seller's location, title passes to buyer when
seller completes the goods and identified them to the contract (once sorted and separated)
inventory cost flow method which tracks the actual physical flow of the goods. each item of inventory is marked, tagged, or coded with a specific unit cost
specific identification
what should NEVER be included as a cash equivalent
stock
is purchases a temporary or permanent account
temporary
what does a bank reconciliation report
timing differences and errors
average cost per unit formula for average cost method
total cost of GAS/total # units GAS
in FOB shipping point, when is the title transferred to the buyer
when goods are accepted by the carrier (at the shipping point)
in FOB destination, when is title of ownership transferred to the buyer
when goods are delivered to the destination of the buyer
when is FIFO good for
when inventory turnover is rapid (like a bakery)