acct test 2

merchandiser

A type of business that earns income by buying and selling merchandise.

Sarbanes-Oxley Act of 2002: SOX requires public companies to document internal control measures, and the auditors of such companies to evaluate internal control.

(Section 404 ).

Example: On June 18, 2012 a company sold merchandise on account for $2,700. Credit terms are 3/5, n/30. The inventory cost was $1,620. Company uses perpetual inventory system. 1. Record the sale AND adjust inventory: 2. Collect payment within discount period:

1. AR 2700 sales 2700 COGS 1620 inventory 1620 2. cash 2619 (97%) sales discount 81 (3%) AR 2700

To reimburse the petty cash fund:

1. Record expenses (given to you) DR 2. Restore the fund **important** CR fund balance - cash left 3. Plug to "cash/short" Cash over/short (an expense account reported on the Income Statement).

FOB shipping point

1. Title transfers when the goods are delivered by the seller to the shipper. 2. Who owns the good during transit? purchaser 3. Who pays for shipping charges? Purchaser - inventory cost The nature of the cost when we pay shipping cost of the purchaser, that cost is part of inventory

Example: A company sold merchandise that cost $1,500 to a customer for $1,950. 1. Record the sale: 2. Update inventory and COGS:

1. cash (AR) 1950 sales (revenue account) 1950 2. COGS 1500 inventory 1500

petty cash ex 1. Establish fund. Impact: insignificant 2. Reimburse fund. Impact:

1. petty cash cash 2. expense cash

merchandise inventory

A current asset that includes the cost to buy goods and make them ready for sale.

merchan. JE 2

AR sales COGS MI Sales R &A AR MI COGS AR sales COGs MI

1. At year-end, Barr Co. had shipped $13,700 of merchandise FOB destination to Lee Co. Which company should include the $13,700 of merchandise in transit as part of its year-end inventory?

Barr

JE to "write down" inventory to market value:

COGS 5,000 Inventory 5,000

gross profit

Calculated as net sales minus cost of goods sold.

Committee of Sponsoring Organizations (COSO) established five elements of internal control:

Control environment (high standards) Risk assessment (management practice to examining risk) Control activities Information and communication (financial statements)

Gross profit

Difference between net sales and the cost of goods sold.

GAAP balance sheet

GAAP requires inventory to be reported on the Balance Sheet at Lower of Cost or Market.

perpetual inventory system

Inventory is updated for each purchase and each sale of inventory.

Adjusting Entries (Perpetual)

Merchandisers require the same Adjusting Journal Entries as service companies (deferrals and accruals). In addition, an adjustment to inventory maybe required.

Impact of technology:

Pros: eliminate calculation errors, less room for error, easier to find backup, Cons: more conscious of recording approval and review, blind acceptance

quiz 2 #2

Sales (180 units × $15.00 price) = $2,700. Specific identification (180 × $4.50) + (5 × $5.00) + (35 × $6.00) $1,045.00 $2,060 - $1,045 $1,015.00 (b) Weighted average ($2,060 / 400 units = $5.15* average cost per unit) 180 × $5.15 $927.00 (c) FIFO (150 × $6.00) + (30 × $5.00) $1,050.00 (d) LIFO (180 × $4.50) $810.00

Sales discount

Seller's description of a cash discount granted to buyers in return for early payment.

sales discount

Seller's description of a cash discount granted to buyers in return for early payment.

The Closing Process (Perpetual)

Steps: 1. Close temporary credit balances to Income Summary. (Revenue, now Sales) 2. Close temporary debit balances to Income Summary. (Expenses, now also Sales Discounts, Sales Returns and Allowances, and COGS) 3. Close Income Summary to Retained Earnings. 4. Close Dividends to Retained Earnings

The company devotes resources towards keeping accurate accounting records for machinery.

Strength Maintain adequate records

The company does not allow employees with access to cash to modify accounting records.

Strength Separate recordkeeping from custody of assets

COGS

The expense of purchasing and preparing the merchandise sold during a period.

Discount period

Time period in which a cash discount is available.

The owner does not use ID scanners to limit access to expensive merchandise. Instead, the owner argues they hire honest employees.

Weakness Apply technological controls

Several sales clerks share the same cash drawer.

Weakness Establish responsibilities

quiz 4

Which method yields the highest gross profit?LIFO Does gross profit using weighted average fall between that using FIFO and LIFO?Yes If costs were rising instead of falling, which method would yield the highest gross profit?FIFO

2. Parris Company has shipped $21,200 of goods to Harlow Co., and Harlow Co. has arranged to sell the goods for Parris. Identify the consignor and the consignee. Which company should include any unsold goods as part of its inventory?

consignor: parris consignee: harlow unsold goods included: parris

Purchase Returns & Allowances

debit ap credit inventory

Example: On April 1, 2012 a company purchases inventory on account for $5,000 terms are 2/15, n/30. Prepare the JE for the purchase and payment of the invoice within the discount period.

debit inventory - 5000 credit ap (on account) -5000 ap 5000 (100%) cash 4900 (98%) inventory 100 (2%) Calculate cash withing discount period x% of what you owe (Debit crash for collect, credit cash for pay) - 98% = 5000(98%) = $4,900 Clear payable - 100% = clear it by making it a debit Plug the difference to inventory - 2% Why pay on the 16th? Delay payment and accelerate collection Have as much time possible to collect the money

Rarely used equipment is rented rather than purchase

good - keep only necessary assets

Cash receipts and cash payments are regularly planned and reviewed.

good - plan expenditures

merchandising JE

merchandise inventory AP AP merchandise inven AP Cash merchandise inven

Gross profit =

net profits -cost of goods sold

acid-test ratio

quick assets/current liabilities

Consignee

the owner of the selling location

The same employee requests, records, and makes payment for purchases of inventory.

weakness Divide responsibility for related transactions

Limitations of Internal Control:

1. Error 2. Fraud can happen with separation of jobs 3. Cost-Benefit eliminate theft if you take extreme precautions

Internal Control System set of principles to help do these things Internal Control System: the set of policies and procedures managers use to:

1. Protect assets (theft, misuse of property by employees, cash -> machinery) 2. Ensure reliable accounting (system that will facilitate finding and fixing errors but to find them and fix them in the first place) humans are insolvent and imperfect 3. Promote efficient operations (sop, standard operating procedure - this is how we do xyz in this company) 4. Ensure adherence to the policies and procedures (establish a system, implement and monitor)

Purchase Discounts

1. credit period/trade credit the time allowed to pay in full 2. discount period the time allowed to receive a discount Receivable - right to collect money when recording revenue Payable - when you will pay in the future purchased on account ,purchase on credit

Merchandise inventory

Goods a company owns and expects to sell to its customers.

Goods damaged or obsolete

If merchandise is in such a condition that it cannot be sold, it is not included in inventory. If, however, the goods can be sold, but at a reduced price, the reduction in value must be recognized by reporting the goods at:

technology

Note: Due to technology, most companies enjoy the benefits of the Perpetual Inventory System that updates COGS and the Inventory account each time a purchase and/or sale occurs. But here, we use the Periodic Inventory System so that we can more easily analyze the flow of cost.

Petty Cash

Often it is necessary for businesses to maintain a small amount of cash on-site. Cash on hand, buy lunch (spend than reimburse)

Adjusting Entries (Periodic)

Only record the entries to record deferrals and accruals. NO adjustment to inventory. Why?

FOB destination

Ownership of goods is transferred when delivered to the buyer's place of business.

FOB shipping point

Ownership of goods is transferred when the seller delivers goods to the carrier.

Specific Identification

Practice: Diamond Ring Inventory cost data: Diamond Ring #1 = $2,000 Diamond Ring #2 = $1,700 Diamond Ring #3 = $3,000 Total Inventory Cost = $6,700 4/1/13 - Diamond Ring #1 is sold: COGS = $2000 Ending inventory = $4700

Perpetual inventory system

Provides more timely information to managers. Gives managers immediate access to detailed information on inventory. Requires an adjusting entry to record inventory shrinkage. Records cost of goods sold each time a sales transaction occurs. everytime a purchase occurs

Purchases discount

Purchaser's description of a cash discount received from a supplier of goods.

purchases discount

Purchaser's description of a cash discount received from a supplier of goods.

Periodic inventory system

Records goods purchased during the period in a "purchases" account. at the end of a period

Sales Discounts

Remember the credit terms discussed when we calculated the Purchase Discounts? Now we are the seller - we are the company offering the discount. The sales discount is offered as an incentive to accelerate cash collection. The Sales Discount account is a contra account; it is subtracted from Sales. · Contra account , revenue · Paired with and account and opposite the normal balance · Subtracted from sales to get net sales · Sales discounts and sales returns and allowances are debits

Service Operations

Revenues - Expenses Net Income

income statement single-step

Revenues Net Sales Other Revenue/Gains Total Revenue Expenses COGS Selling Expenses Operating Expenses (SGA) General and Admin Expenses Other Expenses/Losses Total Expenses Net Income

Goods in transit

The FOB point determines who owns the goods during transit and therefore who should include the items in inventory. And therefore, who pays for it and the nature of that cost

Control of Cash

What are liquid assets? Very easily converted to cash Cash: most liquid asset, includes cash on deposit, cash in hand (petty cash), customer checks that have been received but not yet deposited) Cash Equivalents: short-term investments

Credit/Debit Memo

When a change to the original invoice is required, the purchaser and supplier communicate the adjustment via memos. @ return Purchaser = debit memo (AP) Supplier - credit memo (AR) Issuer does what it says, receiver does the opposite Receive = debit

Inventory Valuation

When similar units are purchased at different costs, how does a company assign the appropriate cost value to COGS and the inventory ending balance?

Bills are paid as soon as they are received.

bad - delay payment of liabilities

Customers are regularly allowed to pay after due dates without concern.

bad - encourage collection of receivables

Excess cash is put in checking accounts, earning no interest income.

bad - invest excess cash

FOB shipping:

buyer owns the goods when the seller delivers the goods to the carrier.

Consignor

the owner of the goods. The consignor retains title to the goods until they are sold. Therefore, goods on consignment should be included in the inventory of the consignor, Be careful to remember this is NOT consistent with the physical location of the merchandise.

weakness

the same employee is in charge of recordkeeping and depositing cash reciepts

liquidity

the term __ refers to a company's ability to pay for its current liabilities

Cost of Inventory (Net Purchases)

· Net purchases: cost of the inventory - purchase discounts - purchase returns and allowances + freight (shipping) + other · Report inventory of the asset · Inventory will have a beginning balnce + net purchase + shipping = increase in debit to get ending balance in inventory · Discount - return for credit

petty cash ex 2 On January 1, XYZ Company establishes a $200.00 petty cash fund to be reimbursed monthly. On January 31, the fund shows $28.00 in cash along with the following receipts: Shipping - $32.00; Meals - $51.00; Taxi - $87.00 On March 1, management decides to increase the petty cash fund to $500.00. 1. Prepare the journal entries. 2. Reimburse, record expense and restore and plug in 3. Change fund balance, increase to 500

1. petty cash 200 cash 200 2. shipping expense 32 meals expense 51 taxi expense 87 cash over/short 2 cash 172 3. petty cash 300 cash 300

Merchandising Operations - all cost

Net Sales ------- product cost - Cost of Goods Sold Gross Profit ------- period cost - Expenses . Net Income

Credit/Debit Memo: Example 1 (purchase, return, payment): On March 5, 2013 Company purchases, on account, 500 units of widgets at a cost of $5 per unit. Terms of the sale are 2/10, n/60. On March 7, 2013, Company returns 50 defective units and receives full credit. On March 15, 2013, Company pays for the purchase.

AP T-Account: Debit - credit 250 -- 2500 3/5/13 inventory 2500 ap 2500 ap 250 inventory 250 ap 2250 cash 2205 (98%) inventory - reduce the cost 45 (2%)

What is included in inventory?

All goods owned by the business that are held for sale. Regardless of the physical location of the goods.

Inventory Errors

An error in inventory is significant. It affects several accounts and more than one period. Current assets/inventory COGS Gross profit Net income equity

COGS Calculation:

Beginning balance + purchases ----------------------- = goods available - ending balance (we usually know this because we go out and count and know what's left) ----------------------- = COGS (difference is what's sold)

FOB destination:

seller owns the goods until they are delivered to the buyer's location. Seller owns it while in transit

cash

the ___ category includes currency, coins, and deposits in bank accounts

invoice terms - 2/ 10, n/ 30

Discount percentage/ Discount period (days) , net (full amount that you owe) / credit period 2 percent off / if I pay within 10 days , or I owe the full amount / within 30 days

Financial Statement Effects

During a period of rising prices: LIFO: assigns the highest costs to COGS, resulting in lower Net Income. FIFO: assigned the lowest costs to COGS, resulting in higher Net Income

Income Statement - multi step

Net Sales - COGS Gross Profit - Operating Expenses a. Selling Expenses b. General and Admin Expenses Income from Operations + Other Revenue/Gains - Other Expenses/Losses Net Income

1. Specific Identification

Each unit of inventory is assigned its actual invoice cost. Used for high price, low quantity items.

LIFO

Ending Inventory: 10,000 x $7 77,500 1,000 x $7.50 =11,000 COGS: 1,552,650 -775,00 = 1,475,150 cost assigned is different

FIFO

Ending Inventory: 11,000 units - the $9.00 = 99,000 COGS: USE THIS FORMULA, USE DOLLARS TO CALCULATE COGS Beginning balance + purchases ----------------------- = goods available - ending balance (we usually know this because we go out and count and know what's left) ----------------------- = COGS (difference is what's sold) 1,552,650 - 99,000 = 1,453,650 -> COGS

Principles of Internal Control: "control activities"

Establish responsibility (ex: when we have cash, we have to take it to the bank daily- someone must have that responsibility) Recordkeeping (impacted by tech, easys with what we can pull backup, careful document design, pre-numbered documents insuring approval of certain items, preparer and viewer) Insurance/bonding (mitigate some loss, loss in property, bonding- result of a behavior of an employee Separation of duties (you cannot have the same person responsible for asset record keeping and have custody of the asset) Regular, independent reviews (constantly monitoring the system)

inventory cost

Information: # inventory 1. 1,500 pairs are in the outside storage shed. Upon inspection she discovers 400 pairs were in standing water and are ruined. 1100 pairs 2. 50 pairs left the storage area this morning to be shipped across country FOB. Destination per customer order. We own it, 50 units are counted 50 pairs 3. 20 pairs are held on consignment. Consignee = do not include 0 4. Yesterday, 25 pairs were shipped FOB Shipping Point per customer order. The customer has yet to receive the order. In transit, customer owns it 0 5. 35 pairs are out on consignment at another retail store in the next town. consigner 35 Final Count: 1185

periodic inventory system

Inventory is updated for purchases and sales of inventory only at the end of a period.

Goods in Transit

It is important to determine the point at which ownership transfers from the seller to the purchaser. The point of transfer is referred to as FOB point (free on board) - free to the purchaser

Physical Count of Inventory

Merchandising companies conduct a physical count of inventory periodically. If the physical count is less than the amount recorded in the inventory account, shrinkage has occurred. The inventory balance must be adjusted to properly reflect the inventory on hand.

Sales Returns/Allowances

Sales Returns and Allowances is another contra revenue account. It is used to track returns from customers and allowances granted to customers to compensate for defective sales. The activity in this account is carefully monitored by management. Why? From example 1. Debits and credits are switched but sales changes to SRA Sales return and allowances (debit) AR (credit) Inventory (debit) COGS (credit) When the seller receives returned goods or agrees to an allowance, the seller issues a credit memo to inform the purchaser that he/she is adjusting the receivable to reflect the proper amount.

General guidelines for cash control:

Separation of duties Prompt deposit Disperse via check rather than cash

Goods on consignment

Sometimes the owners of merchandise arrange for the goods to be shipped to another party's location to be sold.

The Closing Process (Periodic)

Steps: 1. Credit Income Summary for the sum of the following amounts: Temporary Credit Balance Accounts: Sales, Purchase Discounts, Purchase Returns and Allowances. PLUS: Debit Inventory for the correct physical count amount. 2. Debit Income Summary for the sum of the following amounts: Temporary Debit Balance Accounts: Expenses, Sales Discounts, Sales Returns and Allowance, Purchases, Freight-in) PLUS: Credit Inventory to remove the beginning balance. 3. Close Income Summary to Retained Earnings. 4. Close Dividends to Retained Earnings The impact to Income summary is the same under the Perpetual and Periodic Inventory Systems! The Perpetual System uses the COGS account. The Periodic System uses the entries to Inventory (at the end of the period), Purchase discounts, Purchase Returns and Allowances, Purchases, and Freight-in.

consistency and comparability

The cost flow selected does NOT need to be the same as the physical flow of inventory! Any of these options is in accordance with GAAP. Organizations should maintain consistency to enhance comparability.

Net Sales

The difference between gross sales and net sales is: Gross sales - sales discounts - sales returns and allowances = net sales

2. FIFO (first in first out)

The first acquired units of inventory (beginning inventory) are the first to sell. The cost of the items sold is expensed via COGS. The most recently acquired units of inventory remain in ending inventory.

3. LIFO (last in first out)

The last acquired units of inventory (most recent purchases) are the first to sell. The cost of the items sold is expensed via COGS. The first acquired units of inventory remain in ending inventory.

Accounting for Inventory Sales (Perpetual)

The sale of inventory requires 2 journal entries. 1. One entry is to record the revenue/sale. Use the selling PRICE. 2. The second entry is to record the impact to inventory. Use the inventory COST. Inventory cost balance sheet Current asset /inventory income statement = Net sales - COGS = gross profit-expenses = NI *Important to understand the flow of inventory cost here!* *What Income Statement figure is impacted?* COGS or Gross Profit

Credit period

Time period that can pass before a customer's full payment is due.

4. weighted average

Total cost divided by total units = average cost per unit. The average cost per unit is multiplied by the number of units in ending inventory to calculate COGS.

Periodic Inventory System

Under the Periodic Inventory System, the INVENTORY ACCOUNT IS NOT UPDATED DURING THE PERIOD. Special accounts accumulate purchase activity (Purchases, Purchase Discounts, Purchase Returns and Allowances, Freight-in). The impact to COGS is calculated at the end of the period based on a physical count of inventory. The following is a comparison of transactions under each system.

Identify the appropriate value of each inventory item. If an adjustment is required, calculate the amount and record the JE.

Unit Cost Market Adjustment A $10,000 $10,000 no adjustment B $15,000 $12,000 (3) C $35,000 $40,000 no adjustment D $7,000 $5,000 (2) Total Adjustment to Inventory: 5

Cash disbursements:

Use checks Voucher System: controls how employees can incur a 1. Purchase requisition (approved by someone) internal document -> 2. Purchase order (PO) what we want to purchase, how many, all the specs and the price at which we purchase it - outside 3. Invoice (from our supplier, receiving it, it's a bill) 4. Receiving report (it must be blind (they don't know what we have ordered and invoiced from) of the purchase order and the invoice) received rather than ordered, accurate independent record 5. Some party compares (2, 3 & 4) 6. File for payment

Inventory Cost

Valuation of inventory is important because for merchandisers, it comprises a significant portion of these financial statements: Balance Sheet: Inventory is the largest portion of Current Assets Income Statement/P&L: COGS is the largest Expense ALL COST

Weighted Average

Weighted Average Cost per unit: = $total available dollars ------------------------------ #total available units 1,552,650 ------------ -> intermediate figure 195,000 Ending Inventory: 11,000 x ratio above = 87,585 COGS: 1,552,650 x 87,585 = 1,465,055

Compute the amount to be paid for each of the four separate invoices assuming that all invoices are paid within the discount period.

a.$9,600 times 1-2 2/10, n/60 =$9,408 ex: 1,000 * (1-discount %) = pay $970

Costs of $9,500 were incurred to acquire goods and make them ready for sale. The goods were shipped to the buyer (FOB shipping point) for a cost of $650. Additional necessary costs of $1,300 were incurred to acquire the goods. No other incentives or discounts were available. Compute the buyer's total cost of merchandise inventory.

add all number together = 11450

strength

all large payments are made by electronic funds transfer (EFT)

weakness 2

cash receipts of large amounts are kept in an office drawer and deposited every 6 months

cash equivalents

category includes short-term, highly liquid investment assets that are readily convertible to a known cash amount and sufficiently close to their due dates so that their market value will not greatly change

cost market

cost = value assigned to inventory using one of the costing methods (discussed below) market = current replacement cost of the inventory (for LIFO last in first out) Rule: If cost > market = write down asset JE: Debit COGS Credit inventory If cost < market = no entry. GAAP does not allow an adjustment to revalue inventory to an increase in market value. (Conservatism Principle)

Cash receipts:

over the counter or through the mail, we may collect cash from our customer, when we do that, we operate the cash register and a cash register provides an independent record of what's collected. $ -> record -> general ledger ... $ -> cash deposited... bank reconciliation

Return When goods are returned, the seller must reverse the sale AND put the goods back into inventory (if the item can be resold). The JE is essentially a reversal (via use of the Sales Returns and Allowances account) of the entry recorded at the time of sale:

sales returns and allowance (SRA) cash (AR) inventory COGS

Allowance When a seller grants a sales allowance it must record the reduction in selling price. Because there is no return of goods, an inventory adjustment is not required (the original cost of inventory is unaffected).

sales returns/allowance cash