AC210 Test 2

receivables turnover ratio

# of times per year the average AR balance is collected

Beta company bought 80 units of inventory for $12 each and 20 units of inventory for $12.50 each. It sold 90 units for $25 each. Betas weighted average cost is

$12.10

if the company accountant mistakenly recorded a $58 deposit as $85, the error would be shown on the bank reconciliation as an

$27 deduction from the book balance

Ace electronics had COGS of $20,000. If purchases of inventory were $23,000 and EI was $6,000, Ace's BI must have been

$3,000

BI consists of 4 items at $10 each. During the month, the company purchased 3 items for $11 each and it sold 3 items. Using first in, first out, COGS equals

$30

Delta Diamonds had 5 one-carat diamonds available for sale this year: 1 purchased June 1 for $500, 2 purchased July 9 for $550 each, and 2 purchased September 23 for $600 each. On December 24, it sold 1 of the diamonds that was purchased on July 9. Use the periodic spending identification, its COGS is

$550

bad debt expense

(income statement account) tracks the amount of ARs not expected to be paid

which of the following are contra-asset accounts

-accumulated depreciation -allowance for doubtful accounts

3 types of fraud

-corruption (involves misusing ones position for inappropriate personal gain) -asset misappropriation(debt embezzlement) -financial statement fraud (adjusting financial statements to portray the company as more favorable)

three objectives of SOX

-counteract incentives for committing fraud such as stiffer fines and prison terms -reduce opportunities for fraud, which is the part of the fraud triangle most effected by these changes -encouraging through anonymous tip lines, whistleblower protection, and code of ethics

what are the reasons internal controls can never completely prevent and detect errors or fraud

-human error -costs exceed benefits -collusion

3 components of the fraud triangle

-incentive (employee has a reason for committing fraud) -opportunity -rationalization (employee perceives the misdeed as unavoidable or justfied)

categories of internal control

-operations -reporting -compliance

Which of these will require a credit to the inventory account in a perpetual inventory system?

-selling inventory for cash -selling inventory on account

signs a write down may be necessary

1. declining inventory turnover 2. low gross profit percentage

to reduce fraud opportunities and improve companies internal control over financial reporting, SOX requires all public companies to:

1. establish an audit committee of independent directors. this committee strives to ensure the company's accounting, internal control, and audit functions are effective 2. evaluate and report on the effectiveness of internal control over financial reporting

5 key components of internal control

1. establish responsibility 2. segregate duties 3. restrict access 4. document procedures 5. independently verify

disadvantages of extending credit

1. increased wage costs 2. bad debt costs 3. delayed receipt of cash

advantages for extending credit

1. increases the sellers revenue

the value of inventory can fall below its recorded cost for two reasons

1. its easily replaces by identical goods at a lower cost, or 2. its become outdated or damaged

the primary goals of inventory managers are to:

1. maintain a sufficient quantity of inventory to meet customer needs 2. ensure quality meets customer expectations and company standards 3. minimize the cost of acquiring and carrying the inventory

reasons inventory can lose value

1. newer items are/become cheaper 2. outdated or damaged items

steps to reconcile the bank account

1. reconcile the bank's cash balance 2. reconcile the company's cash balance 3. prepare journal entries necessary to adjust the company's cash balance

internal control for cash

1. the volume of cash transactions is enormous, so the risk of cash handling errors is significant 2. cash is valuable, portable, and "owned" by the person who possesses it, so it poses a high risk if theft to reduce these risks, internal controls are vital

2/10, n/30 "two ten, net thirty"

2% discount if paid within 10 days; if not paid within 10 days, net (full balance) is due within 30 days

Alpha company bought inventory from Omega company, FOB shipping point. On December 31, the last day of the accounting year, the goods were on a truck owned by Theta inc, in transit halfway between Alpha and Omega. which company should include these goods in its Dec31 inventory?

Alpha

FOB shipping point

BUYER pays shipping costs; title passes when goods are SHIPPED

Breyer company bought inventory FOB shipping point from Cellar Company for $4,000 cash, including shipping charges. On December 31, the last day of the accounting year, the goods wee on a truck owned by Common Carrier Company, ad not expected to arrive until January 3. Which company should include these goods in its December 31 inventory?

Breyer company should include the $4,000 in its inventory

Using a perpetual inventory system, when a company records a sale of merchandise, it must also record

COGS, which will be reported on the income statement and a decrease in its inventory

Broyer company bought inventory from Cellar Company, FOB destination. on December 31, the last day of the accounting year, the goods were on a truck owned by Common Carrier Inc, in transit between Broyer an Cellar. Which company should include these goods in its December 31 inventory?

Cellar Company

(BI in units) + (# of units purchased) -(# of units sold)

EI in units equation

during the periods of RISING costs, ____ results in higher EI, lower COGS, and higher GP

FIFO

which inventory costing methods are based on assumptions that accountants make about the flow of inventory costs?

FIFO and LIFO

Risen Inc has BI of $16 which consists of 2 units at $8 each. It purchased 10 units at $10 each. It sold 5 units for $20 each, which would result in higher gross profit, FIFO, and LIFO and why?

FIFO because the older, less expensive units are assumed to be sold first making COGS lower ansd gross profit higher than LIFO

Why is bad debt expense an estimate?

GAAP require the expense to be debit in the same period as the credit sale, which is before knowing who specifically will not pay

IFRS does not allow ____

LIFO

during periods of DECLINING costs, ____ results in higher EI, lower COGS, and higher GP

LIFO

calculating interest

P x R x T (principle x rate x time) -interest rates are annual (yearly) rates time is expressed as a portion of a year (govt uses 365 days, banks often use 360)

FOB destination

SELLER pays for shipping costs; title passes when goods are RECEIVED BY CUSTOMER

LIFO conformity rule

a company that uses LIFO for taxes must also use it for financial reporting

periodic inventory system

adjusts inventory and records COGS at the end of each reporting period. requires a physical count of inventory at the end o each reporting period

bundled transactions

allocate transaction prices in proportion to stand alone selling prices and determine the timing of revenue recognition for each performance obligation individually

revenues

amounts earned from providing products or services

contra

an account which offsets another account; normal balance is opposite of the main account

sales discount

an incentive for early payment that, if taken, reduces that a customer owes us

purchase discounts

an incentive for early payment that, if taken, results in a reduction in the amount owed for a purchase; also called "cash discount"

weighted average

assumes COGS and ending inventory consist of a mix of all GAFS

Beginning AR + Ending AR / 2

average AR

AI = (BI+EI)/2

average inventory equation

current assets appear on the __ __

balance sheet

adjust the ___ balance for things such as: -errors made by the bank -time lags: deposits in transit and outstanding checks

bank

in a bank reconciliation, interest revenue on the bank account balance is added to the ___ balance

bank

merchandising companies

buy goods in finished form to re-sell to customers (retailers and wholesalers) -inventories on balance sheet, SR and COGS on income statement

adjust the ___ balance for things such as: -interest in the bank has put into your account -electronic funds transfer (EFT's) -service charges taken out of your account -customer checks you deposited for which the customer did not have sufficient funds (NSF) -errors made by the company

company

internal control

consists of actions taken by people at every level of an organization to achieve its objectives

Perpetural Inventory System

continuously records both changed in the inventory quantity and inventory costs. "COGS" account is a adjusted every time goods are sold or returned -can estimate shrinkage

cost of goods sold (COGS)

cost of inventory sold to customers -expense on the income statement

expenses

costs associated with generating revenues (from providing products or services)

sarbanes oxley (SOX)

created in response to financial statement frauds -a set of laws established to strengthen corporate reporting in the US

At the end of the day, the cashiers rung up sales of $5,000 and counted on the cash count sheets deposited $5,100, the accounting department would make a journal entry for the days sales that includes

credit to cash overage of $100, credit to sales revenue of $5,000, and a debit to cash for $5,100

365 / inventory turnover ratio

days to sell formula

on October 25, YachtDoc received $200,000 for a yacht valued at $180,000 and a 4 month service contract. During November, the yacht was delivered and 1 month of the service contract was performed. the remaining services are to be performed evenly over the next 3 months. what is the entry YachtDoc should record on October 25?

debit cash; credit deferred revenue

cost is recorded as...

debit to COGS and a credit to inventory in a perpetual system

Management estimates that 1% of the $100,000 of credit sales will be uncollectible. The allowance for doubtful accounts has a $100 unadjusted debit balance. The adjusting entry to record estimated bad debts includes a

debit to bad debt expense of $1,000 and a credit to allowance for doubtful accounts of $1,000

sale price is recorded as....

debit to cash or AR, and a credit to sales revenue

the journal entry to record the payment of cash to FedEx for shipping costs for inventory purchased FOB shipping point includes a

debit to inventory and credit to cash

sales discounts should appear in the financial statements as a

deduction from sales

an example of an EFT is

direct deposit of employee paychecks

percentage of credit sales method

estimates bad debts based on a percent of credit sales. this ic called the "income statement approach"

Aging of Accounts Receivable Method

estimates uncollectible accounts based on a percentage of existing ARs, using a higher percentage for "old" accounts than "new" ones -the adjustment needed to reach the desired ending ADA balance is the amount recorded for bad debts expense. this is called the "balance sheet metho"

compliance

focus on adhering to laws and regulations

operations

focus on completing work effectively and efficiently, and protecting assets reducing risks of fraud

notes receivable

formal credit arrangements evidences by a written debt instrument (note) ; classified as either short term or long term depending on the expected collection date

BI + P =COGS avail -COGS =EI

formula for calculating ending inventory

consignment inventory

goods a company is holding on behalf of the goods owner

gross profit / net sales

gross profit percentage formula

reporting

include producing reliable and timely accounting information for use by people internal and external to the organization

cash

includes currency, coins, balances in bank accounts, EFT collections, checks and money orders received by customers, petty cash funds, cash equivalence. DOES NOT INCLUDE RESTRICTED CASH

Sales on account....

increase assets and stockholders equity, and increased accounts receivable on the balance sheet and sales revenue on the income statement

as inventory quality increases, its cost usually ___

increases

match the principle of internal control with the accounting departments internal control responsibility

independent verification --> the accounting department compares the cashiers count sheet to the cash register and to the bank slip document procedures --> the accounting department records a journal entry for cash receipts segregation of duties --> the accounting department does not have access to the cash

why is inventory reported as a current asset?

inventory is reported as a current asset because it will be converted into cash within a year of the balance sheet date

goods in transit

inventory items being transported

COGS / average inventory

inventory turnover formula

cash equivalents

investments that mature within 3 months, examples are money market funds, treasury bills, and certificates of deposit

a $250 bank deposit made on the last day of the month did not appear on this months bank statement. how would this item be treated on the bank reconcilliation?

it would be added to the bank balance

merchandise inventory

items acquired in finished condition to re sell to customers

work in progress

items in the process of being manufactured that are not complete

raw materials

items that will become part of a finished product

if a company were to ignore the fact that the market value of its inventory is lower than its cost, then

its assets and stockholder equity would be overstated

which requires companies to achieve financial targets, such as maintaining specific levels of assets or stockholders equity and sometimes lead to dishonest managers to misreport the company's financial statements?

loan covenants

specific identification

matches each unit of inventory with its actual cost (this often used for high dollar, easily identifiable items)

bank reconciliation

matches the balance of cash in the bank with the balance in the company's records

gross profit percentage

measures the % of profit earned on each dollar of sales

restricted cash

money set aside

the entry to record bad debts reduces both...

net AR and net income

LIFO uses the ___ unit cost for COGS on the income statement and the ___ unit cost for inventory on the balance sheet

newest;oldest

Iris Inc uses FIFO for financial reporting purposes and LIFO for its income tax return. Iris' accounting treatment of its inventory is

not in accordance with the LIFO conformity rule

BI + P - EI = COGS

periodic updating equation

BI + P - COGS = EI

perpetual updating equation

manufacturing companies

provide goods to sell to wholesalers, retailers, etc

service companies

provide services for customers (lawn mowing, babysitting, gym memberships) -supplies on balance sheet, SR on income statement

finished goods

ready to sell items for which the manufacturing process is complete

net (credit) sales revenue / average AR

receivables turnover ratio formula

allowance method

record an adjustment at the end of each period to allow for the possibility of future uncollectible accounts

direct write off method

record bad debt expense at the time we learn that account is uncollectible -used for tax purposes, but usually not permitted for financial reporting -leads to improper matching of revenues and expenses

control environment

refers to the attitude people in the organization hold regarding internal control

accounts receivable (AR)

result from the sale of products or services to customers on account

why use notes instead of AR

stronger legal protection, opportunity to earn interest, se payment schedule

in a strong system of internal control, which employee should be the one to verify cash count sheets and prepare deposit slips and take the cash to the bank?

supervisor

the primary benefit of LIFO is...

tax savings and lower taxable income

days to sell

the # of days the average inventory is held

inventory turnover ratio

the # of items a firm sells its average inventory balance during a period

gross profit ratio

the amount by which sales price of inventory exceeds the cost per dollar of sales gross profit / net sales

allowance for doubtful accounts

the amount of ARs we do not expect to collect (contra AR)

a major drawback to the periodic inventory system is

the amount of inventory on hand and sold is unavailable during the accounting period

shrinkage

the cost of inventory lost to theft, fraud, or errors

replacement cost

the cost to replace an inventory item in its identical form

FIFO (first in first out)

the first units purchased are assumed to be sold and the ending inventory is made up of the most recent purchases

LIFO (last in first out)

the last units purchased are assumed to be sold and the ending inventory is made up of the first purchases

how should thr seller of a bundle sale for $8,000 be recorded when the sale involves delivery of a copier machine and a one year service agreement?

the seller must split the $8,000 between the product and service contract and recognize the revenue for the product when delivered and the service when performed

What effect does a write off have on the income statement and the net receivable balance on the balance sheet?

there is no effect on either

net AR

total AR minus allowance for doubtful accounts

net sales

total revenues minus sales returns, sales discounts, and allowances

T/F COGS may include the write down of inventory to market even though the goods havent been sold

true

T/F internal control goal for cash receipts is to ensure that the business documents the correct amount of cash received and safely deposits the cash into its bank account

true

T/F specific identification is an inventory method typically used when accounting expensive and unique items

true

T/F the inventory method selected by management does not have to correspond to the physical flow of goods to be in accordance with GAAP

true

a __ system is a process for approving and documenting all purchases made on account

voucher

(total cost of goods available) / (total units available for sale)

weighted average cost per unit equation

factoring

when ARs are sold for immediate cash (minus a fee)

purchase returns and allowances

when a COMPANY returns items they have purchased

sales returns and allowances

when a CUSTOMER returns items they have purchased from our company

total cost of inventory - writedown

written down inventory equation