Accounting

What is usually the largest current asset for a merchandiser?

Inventory

Specific identification method is most used in these industries

Jewellery, artwork, pianos, and automobiles

What accounts are debit/credited for a credit purchase?

Merchandise Inventory debited Accounts Payable credited

In a perpetual inventory, what accounts would be debit/credited for inventory overages?

Merchandise Inventory debited Cost of Goods Sold credited

Terms 2/10, n/30

This means the entire balance is due within 30 days of the invoice, but the buyer can take a 2% cash discount if the bill is paid within 10 days

How to check FIFO inventory calculations

Total cost of goods sold + Ending inventory should = Beginning inventory + Purchases

Purchase discounts are recorded separately in the accounting records (T/F)

True! when an invoice is paid within the discount period, the amount of the discount decreases the cost recorded in the Merchandise Inventory account.

The calculation of net sales is the same whether the company uses a perpetual or periodic inventory system. T/F

Trueeee

Subsidiary ledger

a group of accounts that share a common characteristic (for example, they are all receivable accounts)

Periodic inventory system

detailed inventory records of the merchandise are not kept throughout the period as a result, cost of goods sold is determined only at the end of the accounting period (when a physical count is done to determine the cost of the goods on hand)

Perpetual inventory system

detailed records are maintained for the cost of each product that is purchased and sold records continuously show the quantity and cost of the inventory purchased, sold, and on hand

Accured expenses

expenses incurred but not yet paid in cash or recorded

Prepaid expenses

expenses paid in cash and recorded as assets before they are used

Operating expenses

expenses that incurred in the process of earning sales revenue ex. salaries, insurance, utilities, depreciation

Receivables are considered...

financial assets

FOB means

free on board

Quantity discount

gives a reduction in price according to the volume of the purchase (larger the number of items purchased, better the discount)

Sales taxes that are collected from selling a product or service are recorded as a(n) _______ until they are paid to the government.

liability

Finished goods

manufactured items that are completed and ready for sale

Retailers

merchandising companies that purchase and sell directly to consumers

Wholesalers

merchandising companies that sell to retailers

Purchase discount

offered to encourage customers to pay the amount owed early

Where are purchase discounts noted?

on the invoice through credit terms

Work in progress

portion of inventory on which production has started but is not yet complete

Inventory is usually classified into these 3 categories

raw materials work in progress finished goods

Accured revenues

revenues earned but not yet received in cash or recorded

Gross profit

sales revenue less the cost of goods sold

In a service company, revenue is known as ____, rather than sales revenue

service revenue

3 examples of prepaid expenses

supplies insurance depreciation

Raw materials

the basic goods and materials that are on hand and will be used in production but have not yet been sent into production

FOB shipping point

the buyer is responsible or the freight costs from the shipping point to buyer's destination (and responsible for loss/damage)

In a periodic inventory, the ending inventory must be determined at the end of the accounting period before we can calculate...

the cost of the goods sold during the period

FOB destination

the seller is responsible for delivering the goods to the destination (seller pays freight costs and is responsible for loss or damage along the way)

Revenue should be recognized when

the service is performed or when goods are delivered at the point of sale

Operating cycle

the time it takes to go from cash to cash in producing revenues

Cost of goods sold

the total cost of the merchandise that was sold during the period

A merchandising company keeps track of its inventory to determine...

1. what is available for sale (inventory) 2. what has been sold (cost of goods sold)

In order for investments to be considered Current Assets they have to meet certain criteria. What are the criteria they would have to meet to be considered Temporary Investments?

-Intention is to convert to cash (sell) within 1 year -OR trading for profit

Criterion that must be met before a firm can call something a revenue in the current period

-Revenue can be measured - know the final selling prices -Cash or a reasonable promise to pay has been received by the firm -Goods or services have been substantially provided -Expenses have been incurred or can be reasonably estimated by the firm.

How do companies decide to use a perpetual or periodic inventory system?!

-compare the cost of the detailed record keeping that is required for a perpetual inventory system with the benefits of having the additional information -widespread availability of computerized softwares has made most companies enjoy perpetual inventory benefits at a reasonable cost

Multi-step income statement shows these 5 main steps

1. Net sales 2. Gross profit 3. Profit from operations 4. Non-operating revenues and expenses 5. Profit

Determining inventory quantities involves these 2 steps

1. Physical inventory 2. Determining ownership of goods

What are the 2 types of adjusting entries?

1. Prepayments 2. Accruals

Merchandising entries in a perpetual inventory system include both

1. an entry to record the sale (or return) at the sales price 2. an entry to record the cost of goods sold (or returned)

What steps are in determining the cost of goods sold under a periodic inventory system?

1. beginning inventory (same as previous accounting period's ending inventory) 2. cost of goods available for sale (just add the cost of goods purchased to the beginning inventory) 3. ending inventory (determine this from the physical count). subtract this from #2. the result is the cost of goods sold.

Expenses for a merchandising company are divided into these 2 categories

1. cost of goods sold 2. operating expenses

straight-line depreciation steps

1. depreciable amount is determined by deducting the residual value from the cost of the asset 2. depreciable amount is divided by the asset's useful life to calculate the annual depreciation expense (to get a percentage, just divide 100 by the amount of useful life and you will get the rate to deduct every year)

what are the 3 methods to calculate depreciation?

1. straight-line 2. diminishing balance 3. units of production

A second entry is not required during merchandise returns if...

1. the merchandise is damaged 2. when the seller gives the buyer an allowance

In a perpetual inventory, what accounts would be debit/credited for inventory shortages?

Cost of goods sold debited Merchandise Inventory credited -although the missing inventory has not been sold, the Cost of Goods Sold account is debited because inventory losses are considered part of the cost of selling the goods

Under a perpetual inventory system, the cost of goods sold and the reduction in inventory-both its quantity and cost-are recorded each time a sale occurs

As a result, the Merchandise Inventory account reflects the amount of ending inventory on hand

Under the perpetual inventory system, how often is a physical count taken?

At least once a year (and ideally more often)

Basic objectives of control systems

Fraud/Error Prevention/Detection Optimize Asset Usage Ensure accurate records Safeguard Assets

Sales taxes in Canada include

GST (Goods and services tax) (federal) PST (Provincial sales tax)

Formula for the calculation of net sales

Gross Sales - Sales Returns & Allowances - Sales Discounts = Net Sales

What type of GAAP must a publicly-traded company use?

IFRS (international financial reporting standards)

What types of GAAP can a private company use?

IFRS or ASPE (Accounting standards for private enterprises)

Accounts receivable

amounts owed by customers on account

depreciation stops in the diminishing-balance method when...

an asset's carrying amount equals its residual value

While the cost of goods sold is determined each time a sale is made in a perpetual inventory system, it is only determined ______ in a periodic inventory system.

at the end of each period

unlike other depreciation methods, the diminishing-balance method uses the asset's ____ amount, not the depreciable amount, to calculate depreciation

carrying

Unearned revenues

cash received and recorded as liabilities before revenue is earned

Notes receivable

claims where formal instruments of credit are issued as evidence of the debt

Manufacturers

companies that produce goods for sale to wholesalers