Accounting 1 Sheridan College Winter Term

Cost of Goods Sold (COGS)

represents the amount paid to purchase inventory that is sold

Define Shareholders' Equity

two parts common shares and retained earning

Net profit

= Gross profit - operating expenses

Gross profit

= Revenue - Cost of Goods Sold

If a discount term is written as 3/10, n/30, what does this mean?

A 3% discount is applied if paid within 10 days, the net amount owing is due in 30 days

What is a Corporation?

A business that is a separate legal entity from its owners - Liable for its own debts - The owners are separate and financial risk is limited to their investment - Net worth of a corporation is called Shareholders' Equity

Dividends

A dividend represents the portion of a company's earning pie (profits) which is divided amongst the stockholders according to their share Corporations can declare dividends

What is a merchandising business?

A merchandising business can be defined as any business that buys and sells product for the purpose of making a profit.

What is one difference between a non-multistep income statement and a multistep income statement?

A multistep income statement divides revenue and expenses further to show subtotals such as gross profit, operating expenses and operating income.

In a periodic inventory system, how often are inventory levels updated?

A period inventory system only updates the inventory and cost of goods sold once the items on hand are physically counted.

In a perpetual inventory system, how often are inventory levels updated?

A perpetual inventory system updates inventory levels after every purchase and sale.

What is the entry to record a payment towards an account that is due?

Accounts Payable Debt Cash Credit

What are administrative expenses?

Administrative expenses are expenses related to running the business, which are not directly tied to selling inventory.

What is a Merchandising Company?

Any business that buys and sells products for the purpose of making a profit Examples: retailers, supermarkets, Car Dealerships

Classified Balance Sheet

Assets and liabilities are subdivided into current and long-term categories to further define a company's financial position

What is the entry to record paying cash for rent?

Cash Credit Rent Expense Debit

What are considered a current assets?

Cash, Accounts Receivable, Inventory, Prepaid Expenses - payable in less than 12 months

Shareholders' Equity equation

Common shares + Retained Earnings = Shareholders' Equity

What do common shares in a corporation represent?

Common shares represent money invested directly in a company by its owners, who received shares of the company in return.

Define current assets.

Current assets are assets that are likely to be converted into cash or used up within the next 12 months through the day-to-day operations of the business.

What are current liabilities? Provide two examples of current liabilities.

Current liabilities are amounts due to be paid within the next 12 months. Accounts payable and interest payable are examples of current liabilities.

An increase to an asset should always be a?

Debit

An increase to an expense is always?

Debit

What is the affect on retained earnings if a company pays dividends for a given period?

Decreases retained earnings

Multistep Income Statement

Divides revenues and expenses further to show subtotals such as Cost of Goods Sold, gross profit, operating expenses and operating income

What does FIFO assume

FIFO stands for first-in-first-out. In other words, it assumes that the first goods purchased or manufactured by a company are also the first goods sold to the customer

In a period where the cost of purchases increases over time, will FIFO or weighted average method result in the higher value of ending inventory

FIFO will result in the higher value of ending inventory in times of rising prices

What does FOB destination indicate

FOB destination indicates that ownership of items being purchased changes when the goods arrive at the buyer's place of business. The seller pays for shipping

What are the two possible Freight on Board (FOB) points

FOB shipping and FOB destination

What does FOB shipping point indicate

FOB shipping point indicates that ownership of items being purchased changes when the goods leave the seller's place of business. The buyer pays for shipping

If a company sells a product on account accounts receivable will be credited.

False

True or False - if a company sells a product on account, accounts receivable will be credited?

False - Accounts Payable will be credited

At what levels of the organization can fraud related to inventory occur? Explain

Fraud can sometimes occur from the top down so that net income can be unduly inflated. Fraud can also occur from the bottom up when employees or thieves steal items from inventory.

What are some reasons purchase returns occur?

Goods often need to be returned for reasons such as incorrect product, over-shipments and inferior product quality

Which line is included in a multistep income statement, but not in a tradition single step income statement?

Gross Profit

What does gross profit equal?

Gross Profit = Sales - Cost of Goods Sold

What is the formula for gross profit margin?

Gross Profit Margin = Gross Profit ÷ Net Sales × 100%

How often are inventory records updated in a periodic inventory system?

In a periodic inventory system, inventory records are updated only when a physical count of the inventory takes place

How often are inventory records updated in a perpetual inventory system?

In a perpetual inventory system, inventory records are updated continuously

On July 15th, Skyline Enterprise purchased $1,000 of inventory using cash. How should the purchase of inventory be recorded?

Inventory Debit $1000 Cash Credit $1000

Define inventory in the context of a merchandising corporation.

Inventory is the collection of products that are purchased by the merchandising business for resale purposes.

Define inventory

Inventory represents physical goods that a company has bought or manufactured in order to sell to its customers. The inventory has a value that can change unpredictably and even decrease over time

In a typical multistep income statement, which category will items such as interest revenue and loss from a lawsuit fall under?

Items such as interest revenue and loss from a lawsuit fall under a separate category called "Other Income and Expenses."

In the debit and credit system, debits are always recorded on which side?

Left

Gross Profit Margin

Measures gross profit as a percentage of revenue. The higher the percentage, the higher the contribution per dollar of revenue. Gross Profit Margin = Gross Profit / Revenue

Common Shares

Money invested directly in a company by its owners in the form of stocks

On July 15th, Skyline Enterprise purchased $1,000 of inventory using cash. What happened to equity?

No change to equity. One assets was exchanged for another

Define non-current assets.

Non-current assets are assets that are used to operate a business and are not expected to turn into cash or be used up within the next 12 months unless they are sold for reasons other than the day-to-day operations of the business.

What are non-current liabilities? Provide two examples of non-current liabilities.

Non-current liabilities are amounts due to be paid after 12 months. Examples of non-current liabilities would include bank loans (long-term portion) and mortgages.

Define operating expenses.

Operating expenses are the expenses incurred in promoting and selling products or services and in running the operations that make and sell the products or services.

Retained Earnings

Profits that the business has retained (not distributed to the owners)

What are considered non-current assets?

Property, Plant, and Equipment - payable longer than 12 months

When does a purchase allowance occur?

Purchase allowances occur when the buyer agrees to keep the undesirable goods at a reduced cost

What does shareholders' equity equal?

Retained Earnings + Common Shares

What does retained earnings in a corporation represent?

Retained earnings represents all the profits that the business has retained (i.e. not paid to the owners).

What type of account is sales returns and allowances and what is it used for

Sales returns and allowances is a contra-revenue account. It is used to track the amount of sales returns or allowances given to customers.

Shareholders' Equity

Shareholders' Equity is divided amongst the shareholders in proportion to the number of shares they own. Each owner would be entitled to their proportion of profits, or sale price if the business were sold. The net worth of the company

A company holds and sells real estate property as its main business activity. Each piece of property is sold for cash within one year after it is bought. What type of asset is the property?

Short-term

Suppose that a bank loan is due within one year. What type of debt is the bank loan considered?

Short-term

Current vs. Non-Current Assets

Short-term Assets - converted to cash in less than 12 months Long-term Assets - used for the long-term (more than 12 months)

Current vs. Non-Current Liabilities

Short-term debt - paid in less than 12 months Long-term debt - paid over a period longer than 12 months

List three possible methods used to determine the value of inventory

Specific identification, weighted average cost method and FIFO

On July 21st, Skyline Enterprise sold $1,000 of inventory for $1,500. How should the sale of inventory be recorded?

Step 1 Cash debit $1,500 Sales revenue credit $1,500 Step 2 Cost of Goods debit $1000 Inventory credit $1,000

Under the weighted average cost method, how do you determine the cost per unit

The average cost for each unit is equal to the total inventory value divided by the total quantity (in units) on hand

What is one difference between a non-classified balance sheet and a classified balance sheet?

The classified balance sheet would group the assets and liabilities into current and non-current items. A non-classified balance sheet does not have this grouping.

How do you calculate the current ratio and what does it measure?

The current ratio is equal to current assets divided by current liabilities. The current ratio measures a company's ability to pay off short-term debt.

Provide three common reasons why a seller gives a discount?

Three common reasons include: to avoid changes in price catalogue, to hide the true invoice price from competitors, and to encourage early payments

Operating expenses

are all those expenses incurred in the order to sell products or services