Intro to Financial Accounting (Chapter 14, 5, 6, and 8)
FOB Destination
Seller pays the freight
Two categories of operating expenses
Selling expenses and administrative expenses
Two possible results of inventory
Sold or still in inventory
How to prepare a Merchandising Company's Income statement
Step 1: Header - "Company name" - Income statement - Year Ended "Month last day number, year" Step 2: Calculating gross profit - Net sales revenue - subtract Cost of Goods Sold - to get Gross Profit Step 3: Operating Expenses - list out each operating expense - total operating expense Step 4: Net income - Subtract total operating expenses from Gross Profit
How to record a sales return transaction
Step 1: record the refunds payable Debit: refunds payable for the amount of the return Credit: cash/accounts receivable for the amount of the return Step 2: update the merchandise inventory Debit: merchandise inventory for the cost of goods returned amount Credit: estimated returns inventory for the cost of goods returned amount
Payee of the note (creditor)
The entity to whom the maker promises future payment; the payee of the note is the creditor; The creditor is the company that loans the money.
Purchase agreements specify...
When the title of the goods transfers to the purchaser who pays the freight
When a customer does not pay within the discount period
You must credit the "sales discounts forfeited"
Invoice
A seller's request for payment from the purchaser. also called bills sellers have sales invoices purchasers have purchase invoices
Inventory turnover equation
cost of goods sold/average inventory
estimated returns inventory
An asset account used to estimate the cost of merchandise inventory a company will receive in returns
specific identification method
An inventory costing method based on the specific cost of particular units of inventory MOST accurate used for automobiles, jewels, and real estate
Inventory costing method
Approximates the flow of inventory costs in a business and is used to determine the amount of cost of goods sold and ending merchandise inventory
Non-cash Investing and Financing Activities
Are transactions that do not have direct cash flow effects appear as a separate schedule at the bottom of the statement of cash flows on in the notes to the financial statements examples: buying a car on account
LIFO Method
As inventory is sold, the cost of the newest item in inventory is assigned to each unit as Cost of Goods Sold -cost of goods sold closely reflects current replacement cost -Ending inventory contains the oldest costing units
FIFO Method
Assumes the first unites purchased are the first to be sold (Most common) -cost of goods sold is based on the oldest purchases -ending inventory closely reflects current replacement cost
Which of the following is an example of a non-cash transaction? a) paying off a note to a bank b) purchasing treasury stock for a note c) receiving interest income d) receiving 6 months of prepaid rental income
B) purchasing treasury stock for a note
FOB shiping point
Buyer pays the freight
Purchase discount transaction
Debit: Accounts Payable for full amount Credit: Cash for (full price - discount) Credit: Merchandise Inventory for the discount
Transportation costs transaction
Debit: Merchandise Inventory for freight charge Credit: Cash for freight charge
How to record a return transaction
Debit: accounts payable Credit: merchandise inventory
How to record a received sales allowance
Debit: accounts payable credit: merchandise inventory
How to record payment within discount period transaction
Debit: accounts payable for (full amount - allowances - returns) *do not include discount* Credit: merchandise inventory for the amount of the discount Credit: cash for the full amount - discount (DO NOT INCLUDE TRANSPORTATION COSTS)
How to record returns transaction
Debit: accounts payable for amount of return Credit: merchandise inventory for amount of return
How to record a received payment transaction (within discount period)
Debit: cash for the (original sold price - discount) - allowances and/or returns Credit: accounts receivable for the (original sold price - discount) - allowances and/or returns
How to record a received payment transaction (not within discount period)
Debit: cash for the ORIGINAL sold price Credit: accounts receivable for original sold price - discount Credit: sales discounts forfeited for discount amount
How to record inventory shrinkage
Debit: cost of goods sold for unadjusted balance of inventory - physical count of inventory Credit: merchandise inventory for unadjusted balance of inventory - physical count of inventory
The inventory account of the ABC Company shows a balance of $40,000 before the year end inventory count. The count shows there's only $39,000 of actual inventory. The adjustment needed to the ledger is:
Debit: cost of sales $1,000 Credit: Inventory $1,000
How to record a transportation costs transaction (FOB destination point)
Debit: delivery expense for the value of the freight cost Credit: cash for the value of the freight cost
How to record a purchase transaction
Debit: merchandise inventory for original purchase price (without discount) Credit: cash for original purchase price (without discount)
How to record a transportation costs transaction (FOB shipping point)
Debit: merchandise inventory for the value of the freight cost Credit: cash for the value of the freight cost
How to record a given sales allowance transaction
Debit: refunds payable Credit: accounts receivable
Knowing the net cost of inventory allows a business to...
Determine the actual cost of the merchandise purchased
Low turnover rate
Difficulty of selling
High turnover rate
Ease of selling
The purposes of the statement of cash flows are to...
Evaluate management decision determine ability to pay debts and dividends predict future cash flows
disclosure principle
Financial statements should report enough information for outsiders to make knowledgeable decisions about the company
Identify each item as operating, investing, financing, or non-cash: Cash payment of dividends
Financing
Identify each item as operating, investing, financing, or non-cash: Cash receipt from the issuance of common stock
Financing
Identify each item as operating, investing, financing, or non-cash: Cash received from borrowing money
Financing
Identify the category of the statement of cash flows in which each transaction would be reported Paid cash for common stock
Financing
Identify the category of the statement of cash flows in which each transaction would be reported Paid cash to bonds payable
Financing
Identify the category of the statement of cash flows in which each transaction would be reported Paid dividends payable
Financing
Identify the category of the statement of cash flows in which each transaction would be reported Sold treasury stock for cash
Financing activity
Two entries required to record sales transactions
First entry: records sales revenue (sales revenue and cash received) Secondary entry: records inventory sold (cost of goods sold and the reduction of merchandised inventory)
Operating activities cash out flows
For the purchase fo merchandise inventory and payment of operating expenses for interest expense and income tax expense
Operating activities cash inflow
From customers for the les of merchandise inventory and services for interest revenue and dividend income
Sales returns reduction the...
Future cash collected from the customer or require a refund be made to the customer
Gross profit percentage formula
Gross profit / Net sales revenue higher the better
The inventory turnover ratio measures
How rapidly inventory is sold
INDIRECT METHOD: Identify each item as a(n) Operating activity—addition to net income (O+) or subtraction from net income (O−) Investing activity—cash inflow (I+) or cash outflow (I−) Financing activity—cash inflow (F+) or cash outflow (F−) Non-cash investing and financing activity (NIF) Activity that is not used to prepare the indirect statement of cash flows (N) Cash sale of land (no gain or loss)
I+
INDIRECT METHOD: Identify each item as a(n) Operating activity—addition to net income (O+) or subtraction from net income (O−) Investing activity—cash inflow (I+) or cash outflow (I−) Financing activity—cash inflow (F+) or cash outflow (F−) Activity that is not used to prepare the indirect statement of cash flows (N) Purchase of equipment
I-
Selling expenses
Related to marketing and selling the company's goods and services
GAAP and taxes must be
Reported in the same inventory method
Investing activities
Reports cash receipts and cash payments that increase or decrease LONG-TERM assets second category cash inflow from selling and the cash outflow from purchasing long-term assets
Statement of cash flows
Reports on a business's cash receipts and cash payments for a specific period.
Operating activities
Reports on activities that create revenue or expense in the entity's business Involves current assets and current liabilities The first section and MOST IMPORTANT CATEGORY
Direct method of reporting operating activities
Restates the income in terms of cash shows actual cash receipts and cash payments
Financing activities cash outflows
for payment of dividends and buying treasury stock for repayments of loans
Financing activities cash inflows
from issuance of stock and selling treasury stock from receipt of borrowing money
Investing activities cash inflow
from sale of property, plant, and equipment From the collection of long-term notes receivable
Operating income equation
gross profit - operating expenses
Single-step income statement
groups all revenues together and then lists and deducts all expenses together without calculating any subtotals
Administrative expenses
include expenses not related to marketing the company's goods and services
Perpetual inventory system
keeps a running computerized record of merchandise inventory
The allowance method is based on the
matching principle
3/15, n/30
means a 3% discount if paid within 15 day
The entry to write off an account under the allowance method has no effect on
net income at the time of entry
Ending Merchandise Inventory equation
number of units on hand x unit cost
Cost of goods sold equation
number of units sold x unit cost
Three basic types of cash flows
operating, investing, and financing
Net cost of inventory
purchase cost of inventory - purchase returns and allowances - purchase discounts + freight in
the allowance method
records bad debts in the same period as the sales revenue
Sales discounts
reduction in the amount of revenue earned on sales for early payment must be recorded at the net amount/ amount of sell - sales discount
Other income and expenses
reports revenues or expenses that are outside the normal, day-to-day operations of a business, such as a gain or loss on the sale of plant assets or interest expense
Income tax expense
reports the federal and state income taxes that are incurred by the corporation
periodic inventory system
requires a physical count of inventory to determine inventory on hand
Lower-of-cost-or-market (LCM) rule
requires that the inventory be written down to the lower value and that a loss be recorded
Indirect method of reporting operating activities
starts with accrual net income and adjusts to net cash uses account relationship to determine changes in cash
Sales revenue
the amount a business earns from selling its inventory
Principal
the amount loaned by the payee and borrowed by the maker of the note
once an account receivable is written off
the company stops pursuing the collection
Maturity date
the date when final payment of the note is due; also called due date
Maker of the note (debtor)
the entity that signs the note and promises to pay the required amount; the maker of the note is the debtor
Credit terms
the payment terms of purchase or sale as stated on the invoice (the discount, time period, and final due date)
Interest rate
the percentage rate of interest specified by the note; interest rates are almost always stated for a period of one year
Interest
the revenue to the payee for loaning money; the expense to the debtor and revenue to the creditor
Maturity Value
the sum of the principal plus interest due at maturity; maturity value is the total amount that will be paid back
The direct write-off method is only acceptable for companies that have
very few uncollectible receivables
The direct write-off method
violates the matching principle *generally a violation of GAAP
Allowance for bad debts expense normal balance
Credit (contra assset)
Accounts that affect operating cash flows
Current assets and current liabilities
invoice price for a purchaser may need to be adjusted for
Purchase returns or purchase allowances
The company buys 300 pens from a manufacturer for $600. The goods are shipped FOB shipping point and the shipping costs are $50. The company takes a $100 credit allowance for the pens arriving late. What is the final cost to the company per pen?
$1.83 How it works: Net cost inventory purchased = purchase cost of inventory - purchase returns and allowances - purchase discount + freight in 600 - 100 - 0 + 50 = 550 550/300 pens = $1.83/pen
The Canon Company borrowed $2,500,000 on April 18, 2013. The note is payable in 6 months and interest is due and payable monthly. The interest rate on the note is 5.35%. How much is Canon's interest expense for the month of July?
$10,937.50 How it works: *Time is 1/12 because it asks for the month of July which is one month out of 12 months* Principal x rate x time 2,500,000 x .0525 x 1/12 = 10,937.50
The Cohn Company used the weighted average method for valuing it's inventory. Based on the following transaction, what as the Company's gross profit for the month of may? May 1- purchased 100 pens @ $1.20 each May 5- sold 30 pens @ $2.50 each May 10- Purchased 70 pens @ $1.40 each May 15- sold 40 pens @ $2.50 Each May 30- sold 10 pens @ $2.80 each
$102
The Cohn Company's inventory transactions were as follows: May 1- Purchased 20 pens @ $2.00 each May 31- Purchased 25 pens @ $2.25 each June 15- Purchased 30 pens @ $2.45 each June 27- Sold 27 pens @ $3.00 each June 30- Sold 17 pens @ $3.00 each How much was the Company's COST OF GOODS SOLD for the period using LIFO inventory?
$105 How it works: Calculate cost of goods sold June 27- sold 27 pens June 30- sold 17 pens 27 + 17 = 44 pens sold Last price purchased was 30 pens for $2.45 30 pens * $2.45 = $73.50 Leaving 44-30= 14 pens left Last price purchased before that was 25 pens for $2.25 14 pens * $2.25 = $31.50 Cost of goods sold = $73.50 + $31.50 = $105
Rutgers buys computers for $1,200 a piece. On March 15th, 2015 it buys 100 computers. The computers are shipped FOB shipping point and Rutgers is charged $600 for shipping. The terms of payment are 3/10, net 30 and Rutgers pays for the computers on March 20th, 2015 taking advantage of the discount. How much is the cost per computer?
$1170 How it works: Net cost inventory purchased = purchase cost of inventory - purchase returns and allowances - purchase discount + freight in 1,200 x 100 computers = $120,000 = purchase cost of inventory $120,000 * 0.03 = 3,600 = discount $120,000 - 0 - $3,600 + $600 = 117,000 total cost with discount and shipping $117,000/100 computers = $1170
The company buys 300 pens from a manufacturer for $600 on June 10th under the terms of 3/10 net 30. The pens are shipped fob destination with the shipping costs of $100 being paid by the seller. The Company returns 30 of the pens on June 12th and pays for the balance on June 22nd. What is the final cost per pen to the Company?
$2 How it works: Net cost inventory purchased = purchase cost of inventory - purchase returns and allowances - purchase discount + freight in *Seller paid the shipping cost = no shipping cost *no discount since it was paid 12 days later not 10 $600/300 pens = $2/pen $2 * 30 returned pens = $60 of purchase returns $600 - 60 = $540 = total cost $540/270 remaining pens = $2 cost per pen
The company buys 300 pens from the manufacturer for $600. The pens are shipped FOB shipping point with the buyer paying the $100 shipping cost. The next day they return 20 pens. The company then takes a $50 purchase allowance on the remaining pens. The terms of the invoice were 2/10, net 30. the pens were sold on May 15th and paid for on may 20th taking advantage of the discount. How much was the inventory cost per pen?
$2.142 Net cost inventory purchased = purchase cost of inventory - purchase returns and allowances - purchase discount + freight in $600/300 pens = $2/pen $2 x 20 pens = $40 worth of returned pens $600 - $40 - $50 = $510 = total cost before shipping and discount $510 * .98 = $499.8 = total cost after discount $499.8 + $100 = $599.8 = total cost $599.8/280 remaining pens = $2.142/pen
A company borrowed $50,000 on January 25, 2014 on a 90 day not with interest at 6%. What should be the balance in accrued interest payable on February 28, 2014 (365 day year)?
$279.45 How it works: Days surpassed from Jan 25 - Feb 28: 34 Principal x rate x time 50,000 x .06 x (34/365) = $279.45
On January 1st, the ABC Company purchased 50 chairs for $20 a piece. They purchased another 50 chairs for $25 a piece on June 15th. In July, they sold 75 chairs. During December, the manufacturer reduced the price for chairs to $15 a piece. The company uses the FIFO method for valuing inventory. What is the correct value for ABC's inventory at December 31st?
$375 How it works: January 1st- purchased +50 June 15th- purchased +50 July- sold 75 50+50-75= 25 Changed price to $15 a piece 25 chairs * $15 = $375
Ending inventory and cost of goods sold must equal
Cost of goods available
Weighted-average cost per unit equation
Cost of goods available for sale / Number of units available
The Cohn Company inventory transactions were as follows: May 1- Purchased 12 pens @ $1.50 May 2- Sold 6 pens @ $3.00 May 9- Sold 2 pens @ $3.25 May 15- Purchased 20 pens @ $1.75 What is the Company's inventory balance (in $) at May 15th using the FIFO method of inventory?
$41 how it works: Calculate total purchased inventory May 1- 12 pens * $1.50= 18 May 15- 20 pens * $1.75= 35 Total purchased inventory = $53 Calculate Cost of goods sold May 2- sold 6 pens costing $1.50 6 pens *$1.50 = $9 May 9- sold 2 pens for $1.50 2 pens * $1.50 = $3 Total sold inventory = $12 Inventory balance = total purchased - total sold $53-$12 = $41
Based on the following facts, compute the balance in Net Accounts Receivable at December 31, 2014 Accounts Receivable at December 31, 2014-$653,00 Allowance for uncollectibles, Dec 31, 2013-$32,500 Account receivable write offs for 2014-$82,500 Recoveries for 2014-$12,500 Bad debt expense for 2014-$65,000
$625,500 How it works:
A company sells merchandise to a customer with the terms of 2/10, net 30. The customer ALWAYS pays during the discount period. The customer buys 400 tables at $250 per table. They return 20 tables for full credit and in addition get an additional allowance on the remaining tables of $20 per table. What is the cost for buyer?
$85,652 How it works: Net cost inventory purchased = purchase cost of inventory - purchase returns and allowances - purchase discount + freight in $250 * 400 = $100,000 purchase cost of inventory 20 tables * $250 = $5,000 cost of returned tables $20 * 380 remaining tables = $7,600 allowance on the remaking tables $100,000 - $5,000 - $7,600 = $87,400 cost BEFORE discount $87,400 *.98 = $85,652 to account for 2% discount
At year end the Brite Company had A/R as follows: 0-30 days-$10,000 30-60 days-$25,000 Over 60 days-$45,000 It reserves %1 on 0-30 day accounts, 2% on 30-60 day accounts, and 3% on accounts over 60 days. If the balance in the A/R reserve was $1,000 before the year end adjustment, how much should the year end adjustment be?
$950 How it works: 0-30 days= $10,000*0.01=100 30-60 days=$25,000*0.02=500 Over 60 days =$45,000*0.03=1350 total=100+500+1350=1950 Bad debts expense=Target balance -Unadjusted credit balance of allowance for bad debts Bad debts expense = 1950-1,000 = 950
At the end of the period...
-Count the units in ending inventory and assign dollar amounts to the account -determine the units sold during the period and assign dollar amounts to cost of goods sold
Two methods of accounting for uncollectible receivables
-Direct write-off method -Allowance method (GAAP method) *on tax returns, you can only use direct write-off method
Subtotals multi-step income statements include
-Gross profit -operating income -other income and expenses -income before income tax expense -net income
Companies estimate bad debts expense based upon
-Past experience -The industry in which they operate -Other variables
The methods to estimate uncollectibles using the allowance method
-Percent-of-sales (income statement approach) -Percent-of receivables (balance sheet approach) -*Aging-of-receivables (balance sheet approach)*
Four basic inventory costing methods are allowable by GAAP:
-Specific identification -First-in, first-out (FIFO) -Last-in, first-out (LIFO) -Weighted-average
Direct write-ff method
-a method of accounting for uncollectible receivables in which the company records bad debts expense when a customer's account receivable is uncollectible -primarily used by small, non public companies
Accounting rules around conservatism
-anticipate no gains, but provide for all probable losses -record an asset at the lowest reasonable amount and a liability at the highest reasonable amount -when there's a question, record an expense rather than an asset -choose the option that undervalues, rather than overvalued, your business
Weighted-average method
-computes a new weighted-average cost per unit after each purchase -ending inventory and cost of goods sold are based on the same weighted-average cost per unit
The accounting principles associated with merchandise inventory
-consistency -disclosure -materiality -accounting conservatism
Ensure that inventory purchases and sales are properly accounted for by:
-ensuring inventory is purchased with proper authorization -tracking and documenting recipes of inventory -recording and damaged inventory properly -performing physical counts of inventory annually -recording and removing inventory from merchandise inventory when sold
Merchandisers two new asset accounts:
-merchandise inventory -estimated returns inventory
Relevant comparisons of "actual gross profit" is compared to the
-prior year -industry norm -budgeted gross profit -my closest competitor
Merchandisers additional current liability
-refunds payable
Cash flows statements does the following
-reports why cash increased or decrease during the period -covers a span of time and is dated the same as the income statement -predict future cash flows -evaluate management -predict ability to pay debts and dividends
When ending inventory is incorrect, the following numbers will also be incorrect
Cost of goods sold gross profit net income
Operating Cycle for a Merchandiser
1) Purchase inventory from vendor -> inventory 2) Sell the inventory -> accounts receivable 3) Collect cash from customers -> cash
Another word for cost of goods sold
Cost of sales
The Income statement of a merchandiser reports...
1. sales revenue (not service rev) 2. Cost of goods sold (price vendor charged) 3. gross profit (net sales revenue minus cost of goods) 4. operating expenses (Expenses other than COGS)
Calculate Inventory turnover Inventory-December 31, 2012 $525,000 Cost of goods sold $1,750,000 Inventory-December 31, 2013 $575,000
3.18 how it works: average merchandise inventory = (525,000 + 575,000)/2 =550,000 1,750,000/550,000 = 3.18
Consistency principle
A business should use the same accounting methods and procedures from period to period.
Merchandiser
A business that sells merchandise, or goods, to customers.
Refunds payable
A liability account used to estimate the amount of refunds that will be paid to customers in the future
On February 1st the company purchased 10 chairs for $50 a piece. On February 5th they purchased another 10 chairs for $55 a piece. And on February 10th, they purchased 20 chairs for $47 a piece. On February 20th they sold 8 chairs. On an accounting basis which group did they sell the chairs from?
Can't determine from information given
Financing activities
Cash inflows and outflows involved in long-term liabilities and equity Last category
Accounts receivable doesn't turn into an expandable until
Cash is received
Which item does not appear on a statement of cash flows prepared but the indirect method? Collections from customers Depreciation expense Net Income Gain on sale of land
Collections from customers
Multi-step income statement
Contains subtotals to highlight significant relationships. In addition to net income, it reports gross profit and operating income.
INDIRECT METHOD: Identify each item as a(n) Operating activity—addition to net income (O+) or subtraction from net income (O−) Investing activity—cash inflow (I+) or cash outflow (I−) Financing activity—cash inflow (F+) or cash outflow (F−) Activity that is not used to prepare the indirect statement of cash flows (N) Issuance of common stock
F+
INDIRECT METHOD: Identify each item as a(n) Operating activity—addition to net income (O+) or subtraction from net income (O−) Investing activity—cash inflow (I+) or cash outflow (I−) Financing activity—cash inflow (F+) or cash outflow (F−) Non-cash investing and financing activity (NIF) Activity that is not used to prepare the indirect statement of cash flows (N) Issuance of common stock
F+
INDIRECT METHOD: Identify each item as a(n) Operating activity—addition to net income (O+) or subtraction from net income (O−) Investing activity—cash inflow (I+) or cash outflow (I−) Financing activity—cash inflow (F+) or cash outflow (F−) Non-cash investing and financing activity (NIF) Activity that is not used to prepare the indirect statement of cash flows (N) Issuance of long-term note payable to borrow cash
F+
INDIRECT METHOD: Identify each item as a(n) Operating activity—addition to net income (O+) or subtraction from net income (O−) Investing activity—cash inflow (I+) or cash outflow (I−) Financing activity—cash inflow (F+) or cash outflow (F−) Activity that is not used to prepare the indirect statement of cash flows (N) Payment of dividends
F-
INDIRECT METHOD: Identify each item as a(n) Operating activity—addition to net income (O+) or subtraction from net income (O−) Investing activity—cash inflow (I+) or cash outflow (I−) Financing activity—cash inflow (F+) or cash outflow (F−) Non-cash investing and financing activity (NIF) Activity that is not used to prepare the indirect statement of cash flows (N) Payment of cash dividend
F-
INDIRECT METHOD: Identify each item as a(n) Operating activity—addition to net income (O+) or subtraction from net income (O−) Investing activity—cash inflow (I+) or cash outflow (I−) Financing activity—cash inflow (F+) or cash outflow (F−) Non-cash investing and financing activity (NIF) Activity that is not used to prepare the indirect statement of cash flows (N) Purchase of treasury stock
F-
INDIRECT METHOD: Identify each item as a(n) Operating activity—addition to net income (O+) or subtraction from net income (O−) Investing activity—cash inflow (I+) or cash outflow (I−) Financing activity—cash inflow (F+) or cash outflow (F−) Non-cash investing and financing activity (NIF) Activity that is not used to prepare the indirect statement of cash flows (N) payment of long-term debt
F-
If costs had been declining instead of rising, which inventory costing method would have produced the highest cost of goods sold?
FIFO
Net cost of inventory equation
Net cost inventory purchased = purchase cost of inventory - purchase returns and allowances - purchase discount + freight in
The statement of cash flows explains why ______ ______________ as reported on the income statement does not equal the change in the _________ _______________
Net income; cash balance
Another word for net sales revenue
Net sales
Gross profit equation
Net sales revenue - cost of goods sold
The Mayer company takes a physical inventory every December 31st and adjusts its records to the actual physical count. On December 31, 2017, they make a mistake when recording the inventory. The count indicates there is $24,000 of inventory, but they record $42,000 in error. At December 31, 2018 they record the inventory incorrectly. As a result
Income for 2017 is overstated and income for 2018 is understated
Identify each item as operating, investing, financing, or non-cash: Cash receipt from the collection of long-term notes receivable
Investing
Identify each item as operating, investing, financing, or non-cash: Cash receipt from the sale of land
Investing
Identify each item as operating, investing, financing, or non-cash: Cash received from the sale of land
Investing
Identify the category of the statement of cash flows in which each transaction would be reported Paid cash for land
Investing
Identify the category of the statement of cash flows in which each transaction would be reported Sold equipment for cash
Investing activity
Examples of financing activities
Issuing stock, paying dividends, and buying and selling treasury stock
Accounts that affect investing cash flows
Long-term assets
Accounts that affect financing cash flows
Long-term liabilities and equity
Inventory shrinkage
Loss of inventory occurring from theft, damage, and errors
Days' sales in inventory = 365 days/ inventory turnover
Measures the average number of days inventory is held by the company
Gross profit percentage
Measures the profitability of each sales dollar above the cost of goods sold.
INDIRECT METHOD: Identify each item as a(n) Operating activity—addition to net income (O+) or subtraction from net income (O−) Investing activity—cash inflow (I+) or cash outflow (I−) Financing activity—cash inflow (F+) or cash outflow (F−) Non-cash investing and financing activity (NIF) Activity that is not used to prepare the indirect statement of cash flows (N) Acquisition of building by issuance of common stock
NIF
INDIRECT METHOD: Identify each item as a(n) Operating activity—addition to net income (O+) or subtraction from net income (O−) Investing activity—cash inflow (I+) or cash outflow (I−) Financing activity—cash inflow (F+) or cash outflow (F−) Non-cash investing and financing activity (NIF) Activity that is not used to prepare the indirect statement of cash flows (N) Acquisition of equipment by issuance of note payable
NIF
Is there discount on freight?
No
Identify each item as operating, investing, financing, or non-cash: Purchase of equipment in exchange for notes payable
Non-cash
Identify the category of the statement of cash flows in which each transaction would be reported Bought a building on notes payable
Non-cash
Identify the category of the statement of cash flows in which each transaction would be reported Purchased land on notes payable
Non-cash
INDIRECT METHOD: Identify each item as a(n) Operating activity—addition to net income (O+) or subtraction from net income (O−) Investing activity—cash inflow (I+) or cash outflow (I−) Financing activity—cash inflow (F+) or cash outflow (F−) Activity that is not used to prepare the indirect statement of cash flows (N) Decrease in accounts receivable
O+
INDIRECT METHOD: Identify each item as a(n) Operating activity—addition to net income (O+) or subtraction from net income (O−) Investing activity—cash inflow (I+) or cash outflow (I−) Financing activity—cash inflow (F+) or cash outflow (F−) Activity that is not used to prepare the indirect statement of cash flows (N) Depreciation expense
O+
INDIRECT METHOD: Identify each item as a(n) Operating activity—addition to net income (O+) or subtraction from net income (O−) Investing activity—cash inflow (I+) or cash outflow (I−) Financing activity—cash inflow (F+) or cash outflow (F−) Activity that is not used to prepare the indirect statement of cash flows (N) Loss on sale of land
O+
INDIRECT METHOD: Identify each item as a(n) Operating activity—addition to net income (O+) or subtraction from net income (O−) Investing activity—cash inflow (I+) or cash outflow (I−) Financing activity—cash inflow (F+) or cash outflow (F−) Activity that is not used to prepare the indirect statement of cash flows (N) increase in accounts payable
O+
INDIRECT METHOD: Identify each item as a(n) Operating activity—addition to net income (O+) or subtraction from net income (O−) Investing activity—cash inflow (I+) or cash outflow (I−) Financing activity—cash inflow (F+) or cash outflow (F−) Non-cash investing and financing activity (NIF) Activity that is not used to prepare the indirect statement of cash flows (N) Decrease in Merchandise inventory
O+
INDIRECT METHOD: Identify each item as a(n) Operating activity—addition to net income (O+) or subtraction from net income (O−) Investing activity—cash inflow (I+) or cash outflow (I−) Financing activity—cash inflow (F+) or cash outflow (F−) Non-cash investing and financing activity (NIF) Activity that is not used to prepare the indirect statement of cash flows (N) Depreciation expense
O+
INDIRECT METHOD: Identify each item as a(n) Operating activity—addition to net income (O+) or subtraction from net income (O−) Investing activity—cash inflow (I+) or cash outflow (I−) Financing activity—cash inflow (F+) or cash outflow (F−) Non-cash investing and financing activity (NIF) Activity that is not used to prepare the indirect statement of cash flows (N) Increase in Salaries payable
O+
INDIRECT METHOD: Identify each item as a(n) Operating activity—addition to net income (O+) or subtraction from net income (O−) Investing activity—cash inflow (I+) or cash outflow (I−) Financing activity—cash inflow (F+) or cash outflow (F−) Non-cash investing and financing activity (NIF) Activity that is not used to prepare the indirect statement of cash flows (N) Increase in accounts payable
O+
INDIRECT METHOD: Identify each item as a(n) Operating activity—addition to net income (O+) or subtraction from net income (O−) Investing activity—cash inflow (I+) or cash outflow (I−) Financing activity—cash inflow (F+) or cash outflow (F−) Non-cash investing and financing activity (NIF) Activity that is not used to prepare the indirect statement of cash flows (N) Loss on sale of land
O+
INDIRECT METHOD: Identify each item as a(n) Operating activity—addition to net income (O+) or subtraction from net income (O−) Investing activity—cash inflow (I+) or cash outflow (I−) Financing activity—cash inflow (F+) or cash outflow (F−) Non-cash investing and financing activity (NIF) Activity that is not used to prepare the indirect statement of cash flows (N) net income
O+
INDIRECT METHOD: Identify each item as a(n) Operating activity—addition to net income (O+) or subtraction from net income (O−) Investing activity—cash inflow (I+) or cash outflow (I−) Financing activity—cash inflow (F+) or cash outflow (F−) Activity that is not used to prepare the indirect statement of cash flows (N) Decrease in accrued liabilities
O-
INDIRECT METHOD: Identify each item as a(n) Operating activity—addition to net income (O+) or subtraction from net income (O−) Investing activity—cash inflow (I+) or cash outflow (I−) Financing activity—cash inflow (F+) or cash outflow (F−) Activity that is not used to prepare the indirect statement of cash flows (N) Gain on sale of building
O-
What is the accounting difference between a purchase return and a purchase allowance?
Purchase return doesn't change the price just lessens quantity purchase allowances doesn't change quantity just lessens price
INDIRECT METHOD: Identify each item as a(n) Operating activity—addition to net income (O+) or subtraction from net income (O−) Investing activity—cash inflow (I+) or cash outflow (I−) Financing activity—cash inflow (F+) or cash outflow (F−) Activity that is not used to prepare the indirect statement of cash flows (N) Increase in merchandise inventory
O-
INDIRECT METHOD: Identify each item as a(n) Operating activity—addition to net income (O+) or subtraction from net income (O−) Investing activity—cash inflow (I+) or cash outflow (I−) Financing activity—cash inflow (F+) or cash outflow (F−) Non-cash investing and financing activity (NIF) Activity that is not used to prepare the indirect statement of cash flows (N) Decrease in accrued liabilities
O-
INDIRECT METHOD: Identify each item as a(n) Operating activity—addition to net income (O+) or subtraction from net income (O−) Investing activity—cash inflow (I+) or cash outflow (I−) Financing activity—cash inflow (F+) or cash outflow (F−) Non-cash investing and financing activity (NIF) Activity that is not used to prepare the indirect statement of cash flows (N) Increase in Prepaid expenses
O-
Identify each item as operating, investing, financing, or non-cash: Cash payment for income taxes
Operating
Identify each item as operating, investing, financing, or non-cash: Cash payment of salaries
Operating
Identify each item as operating, investing, financing, or non-cash: Cash purchase of merchandise inventory
Operating
Identify each item as operating, investing, financing, or non-cash: Cash receipt from interest income
Operating
Identify the category of the statement of cash flows in which each transaction would be reported Depreciation expense on equipment
Operating
Identify the category of the statement of cash flows in which each transaction would be reported Loss on Disposal of Equipment
Operating
Identify the category of the statement of cash flows in which each transaction would be reported Received cash from sales revenue
Operating activity
Results of understated inventory
Overstated cost of goods sold understated gross profit understated net income
Per unit cost only changes when you...
PURCHASE inventory NOT when you sell it
Two Inventory Accounting Systems
Periodic inventory system Perpetual inventory system
How to record a sale transaction
Step 1: record the sale Debit: Accounts receivable/cash for the sold amount - anticipated discount Credit: sales revenue for the sold amount - anticipated discount Step 2: record the cost of goods sold Debit: cost of goods sold Credit: merchandise inventory
Cost of goods sold or cost of sales
The amount cash received for the amount of products you sold
FOB shipping point
The buyer takes ownership (title) to the goods after the goods leave the seller's place of business (shipping point) - the buyer (owner of the goods while in transit) usually pays the freight
FOB destination
The buyer takes ownership (title) to the goods at the delivery destination point - the seller (owner of the goods while in transit) usually pays the freight
When a seller grants a sales allowance
The company issued a credit memo that the company will reduce the customer's Accounts Receivable or issue a cash refund and estimated refunds payable account
Interest period
The period of time during which interest is computed. It extends from the original date of the note to the maturity date.
The cycle of a merchandiser begins with
The purchase of merchandise inventory
Sales returns
The return of goods by a customer
Sales allowance
The seller reduces the amount owed by a customer, but the customer does not return of merchandise inventory
Cost of goods available for el
The total cost spent on inventory that was available to be sold during a period
Freight in
The transportation cost to ship goods in the purchaser's warehouse; thus, it is freight on purchased goods
Freight out
The transportation cost to ship goods out of the seller's warehouse and to the customer; thus, it is freight on goods sold to a customer
Investing activities cash outflows
To purchase property, plant, equipment, and investments for loans made to borrowers
Results of overstated ending inventory
Understated cost of goods sold overstated gross profit overstated net income
Conservatism
a business should report the least favorable figures in the financial statements when two or more possible options are presented
Materiality concept
a company must perform strictly proper accounting only for items that are significant to the business's financial situation information is significant when it would cause someone to change a decision
Reserve/Allowance for Bad Debts
a contra asset account that reduces the accounts receivable to the net realizable value
Purchase discounts
a discount that businesses offer to purchasers as an incentive for early payment
Promissory note
a written promise to pay a specified amount of money on demand or at a definite time
Purchase allowances
amounts granted to purchasers as an incentive to keep goods that are not "as ordered"
Bad debts expense
arises from failure to collect from some customers who purchase on account
Percent-of-sales equation
bad debt expense = net credit sales * %
Wholesaler
buys goods from a manufacturer and sells them to retailers
Retailer
buys merchandise from manufacturers or a wholesaler and then sells the goods to consumers
Percent-of-sales method
computes bad debts expense as a percentage of net credit sales
Two formats for reporting operating activities
direct method indirect method
An allowance is established for the
estimated uncollectible accounts
Purchase returns
exist when sellers allow purchaser to return merchandise that is defective, damaged, or otherwise unsuitable