Accounting Chapters 4,5,6

to increase accounts payable

credit

what does the cash account include

currency, coins, checks, and deposits in bank accounts

how to compute goods available for sale

current inventory + net purchases

if less cash is received than recorded cash sales

debit cash debit cash over and short the small value needed credit sales the cash amount plus the cash over and short value

buyer pays after discount period

debit cash full amount, credit accounts receivable full amount

sales discounts

debit cash the full amount minus the discount amount debit sales discounts (discount amount) credit accounts receivable the full amount

Adjusting entry for merchandisers: Inventory Shrinkage

debit cost of goods sold credit merchandise inventory

fob destination

debit delivery expense credit cash

Reimburse and record expenses for petty cash

debit expenses credit cash amount (get this value by adding all the expenses)

paid for freight charges

debit merchandise inventory

fob shipping point

debit merchandise inventory credit cash

FOB shipping point with terms

debit merchandise inventory credit accounts payable full amount

buyer returns goods (cost)

debit merchandise inventory, credit cost of goods sold (cost amount)

how to record bank fees

debit misc expenses credit cash

how to record when petty cash fund has an unexplained shortage

debit misc expenses debit cash over and short credit cash (add misc expenses and cash over and short values)

entry to set up petty cash fund

debit petty cash credit cash

increasing a petty cash fund after reimbursement

debit petty cash credit cash

buyer granted allowances (seller offers a price reduction so the buyer keeps the goods)

debit sales returns and allowances, credit accounts receivable

buyer returns goods (revenue)

debit sales returns and allowances, credit cash (the amount the product was sold for)

each bank deposit has a...

deposit ticket, which lists currency. the bank gives the customer a copy of this

gross margin ratio

excludes all costs except cost of goods sold gross margin (net sales minus COGS)/ net sales

how has technology affected the perpetual system

gives managers immediate access to information

goods on consignment

goods sent by the owner (consignor) to another party (consignee) -consignee never reports consigned goods

LIFO

inventory accounting in which the most recently acquired items are assumed to be the first sold; method is supposed to create the lowest ending inventory in a period of rising prices. Also create a lower taxable income, lower gross profit.

FIFO

inventory accounting in which the oldest items (those first acquired) are assumed to be the first sold; creates a higher ending inventory and lower cost of goods sold, higher gross profit and higher taxable income.

FIFO advantages

inventory approximates current cost follows the actual flow of goods for most businesses

inventory vs accounts receivable

inventory is converted less quickly to cash than accounts receivable because inventory must be sold first before cash can be received

what happens to merchandise available for sale?

it is either sold (expensed on the income statement as cost of goods sold) or kept for future sales (current asset on the balance sheet)

specific identification advantages

matches the costs of items with the revenues they generate

purchase returns

merchandise a buyer acquires and returns

after recording payment within the discount period

merchandise inventory equals the large amount minus the discount amount and accounts payable has a zero balance

classified balance sheet

merchandise inventory is a current asset, after accounts receivable

damaged goods in inventory

net realizable value (sales price - cost of making the sale)

single step income statement

only one subtotal for expenses, expenses are grouped into categories

limitations of internal control

opportunity, pressure, rationalization

internal control system uses policies and procedures to

protect assets, ensure reliable accounting, promote efficient operations, uphold company policies

bank balance adjustment: deposits in transit

recorded in the depositor's books but not listed on the bank statement

periodic inventory system

records cost of goods sold at the end of the period

perpetual inventory system

records cost of goods sold at the time of each sale

LIFO

reports the highest cost of goods sold, yielding lowest gross profit and net income

FIFO

reports the lowest cost of goods sold, yielding the highest gross profit and net income

How to compute gross profit

revenue - cost of goods sold

how to compute net income

revenue - expenses

cash equivalents

safe and highly liquid assets that many firms list with their cash holdings on their balance sheet

operating expenses in a multiple step income statement

selling expenses and general administrative expenses

weighted average advantages

smooths out erratic changes in costs

what does 2/5 n/60 mean

there is a 2 percent discount if it is paid in 5 days and the whole balance must be paid in 60 days

when to do a bank reconciliation

to explain differences between the checking account balance in the depositor's records and the balance on the bank statement

weighted average

yields results between FIFO and LIFO

when costs regularly decline,

-FIFO gives the highest cost of goods sold- yielding the lowest gross profit and income -LIFO gives the lowest cost of goods sold- yielding the highest gross profit and income

steps for closing entries for merchandisers

1. close credit balances in temporary accounts (debit sales and credit income summary) 2. close debit balances in temporary accounts (debit income summary and credit all expenses as well as sales discounts, sales returns and allowances, and cost of goods sold) 3. Close income summary (debit income summary and credit retained earnings for the same amount) 4. close dividends (debit retained earnings and credit dividends)

principles of internal control

1. establish responsibilities 2. maintain adequate records 3. insure assets and bond key employees 4. separate record keeping from custody of assets 5. divide responsibility for related transactions 6. apply technological controls 7. perform regular and independent reviews

how to calculate days sales in inventory

365/inventory turnover

committee of sponsoring organizations

control environment risk assessment control activities information and communication monitoring

electronic transfer fund

A computer-based system that enables you to move money from one account to another without writing a check or exchanging cash.

Sarbanes-Oxley Act

A law passed by Congress that requires the CEO and CFO to certify that their firm's financial statements are accurate;

BANK BALANCE ADJUSTMENTS

ADD deposits in transit subtract outstanding checks add or subtract corrections of bank errors

multiple step income statement

An income statement that shows several steps in determining net income.

periodic inventory system

An inventory system in which a company does not maintain detailed records of goods on hand throughout the period and determines the cost of goods sold only at the end of an accounting period. Merchandise inventory account is updated at the end of the period

weighted average

Average of data that takes other factors such as the number of incumbents into account.

how to calculate inventory errors

cost of goods sold = beginning inventory + net purchases - ending inventory

LIFO advantages

cost of goods sold approximates current cost matches current costs with revenues

how to calculate inventory turnover

cost of goods sold/average inventory

payment after discount period

Debit Accounts Payable (large amount) Credit Cash (large amount)

Payment within discount period

Debit Accounts Payable (largest amount) Credit Merchandise Inventory (discount amount) Credit Cash (large amount minus discount amount)

how to record collection of a note

debit cash credit notes receivable

LOL Music Store uses the perpetual inventory system to account for its merchandise. On November 17, it purchased $1,000 of merchandise with terms of 2/5,n/60. If payment is made on November 21, demonstrate the required journal entry to record the payment by selecting all of the correct actions below. (Check all that apply.)

Debit accounts payable 1000 credit cash 980 credit Merch inventory 20

inventory costs

Invoice Cost - Returns - Discounts + shipping cost + storage costs + Insurance costs + Import Duties. Excludes negligence and fines

sales on credit

Payment at a later date; debit accounts receivable credit sales AND debit cost of goods sold credit merchandise inventory

cash equivalents

Short-term, highly liquid investments that can be readily converted to a specific amount of cash and which are relatively insensitive to interest rate changes.

decreasing a petty cash fund after reimbursement

debit cash credit petty cash

FOB destination

a price indicating the producer is absorbing shipping costs

liquidity

ability to pay current liabilities

general and administrative expenses

accounting, financing, Human Resources, etc

COGS

accounts remain in inventory

measure of a merchandisers ability to pay its current liabilities (liquidity)

acid test ratio; quick assets divided by current liabilities

BOOK BALANCE ADJUSTMENTS

add interest earned and unrecorded cash receipts subtract bank fees and NSF checks add or subtract corrections of book errors

selling expenses

advertising, making sales, etc

petty cash

an amount of cash kept on hand and used for making small payments

how to calculate merchandise available for sale

beginning inventory + net purchases

what is included in merchandise available for sale

beginning inventory + net purchases

How to compute Cost of Goods Sold

beginning inventory + net purchases - ending inventory (goods available for sale - ending inventory)

what is included on bank statements

beginning of period account balance checks and other debits decreasing the account during the period deposits and other credits increasing the account during the period end of period account balance

FOB shipping point

buyer pays the shipping costs

quick assets

cash and cash equivalents, short term investments, current receivables

bank balance adjustment: outstanding checks

checks written by the depositor, and subtracted on the depositor's books

what kind of account is sales discounts

contra revenue

how to record purchase returns

debit accounts payable (full amount), credit inventory (full amount)

how to record a return

debit accounts payable credit merchandise inventory

how to record purchase allowances

debit accounts payable credit merchandise inventory

perpetual inventory system, company purchases 1000 with terms. what is involved and what do you do?

debit accounts payable the 1000 credit cash 1000 minus the discount credit merchandise inventory the discount amount

how to record paying for goods within a discount period

debit accounts payable, credit merchandise inventory and cash

how to record NSF checks

debit accounts receivable credit cash

if more cash is received than recorded cash sales

debit cash credit cash over and short the excess amount debit sales the cash amount minus the excess cash amount

how to record interest earned

debit cash credit interest revenue