accounting exam 2

ending merchandise inventory

# of units on hand X unit cost

LIFO

when inventory costs are rising LIFO results in the highest cost of goods sold and the lowest gross profit. lower profits mean lower taxable income; thus, LIFO lets companies pay the lowest income taxes when inventory costs are rising.

days sales inventory

365 days/inventory turnover

wholesaler

a merchandiser who buys goods from a manufacturer and then sells them to retailers.

post closing trial balance

after closing entries are recorded and posted, the accounting cycle ends with a post-closing trial balance. this step lists the accounts and their balances after closing. only assets, liabilities, common stock, and retained earnings accounts appear on the post closing trial balance. no temporary accounts revenues, expenses, income summary, or dividends are included because they have been closed (their balances are zero).

Sales revenue

at the time of the sale 2 entries must be recorded in the perpetual inventory system. one entry records the sales revenue and the cash (or accounts receivable) at the time of the sale. the second entry records the cost of goods sold (debit the expense) and reduces the merchandise inventory (credit the asset).

retailer

buys merchandise either from a manufacturer or a wholesaler and then sells those goods to consumers.

closing process

consists of journalizing and posting the closing entries in order to get the accounts ready for the next period. The closing process zeroes out all revenue accounts and expense accounts in order to measure each period's net income separately from all other periods. It also updates the retained earnings account balance for net income or loss during the period and any dividends paid to the stockholders.

disclosure principle

holds that a company should report enough information for outsiders to make knowledgeable decisions about the company. this includes disclosing the method used to account for merchandise inventories such as fifo or lifo.

gross profit

is calculated as net sales revenue - cost of goods sold and represents the markup on the merchandise inventory.

the current ratio

measures a company's ability to pay its current liabilities with its current assets Current ratio= total current assets/total current liabilities

Liquidity

measures how fast an account can be converted to cash (because cash is the most liquid asset). Accounts receivable are relatively liquid because receivables are collected quickly. Office supplies are less liquid,and buildings and furniture are even less so because they take longer to convert to cash or to be used up.

gross profit percentage

measures the profitability of each sales dollar above the cost of goods sold and is computed as follows: gross profit percentage = gross profit/net sales revenue. the gross profit percentage is one of the mos carefully watched measures of profitability. it reflects a business's ability to earn a profit on its merchandise inventory.

lower of cost or market rule

shows accounting conservatism in action and requires that merchandise inventory be reported in the financial statements at whichever is lower of the following: historical cost of inventory or market value of the inventory. market value generally means the current replacement cost (that is the cost to replace the inventory on hand)

reversing entries

special journal entries that ease the burden of accounting for transactions in a later period. reversing entries are the exact opposite of certain adjusting entries. reversing entries are used in conjunction with accrual type adjustments, such as accrued salaries expense and accrued service revenue.

4 step closing process

step 1: using the periodic inventory system, sales revenue and discounts forfeited are still closed with a debit via the income summary account. step 2: the beginning merchandise inventory purchases and freight in are also closed via the income summary account. step 3 &4; closing the income summary and dividends accounts are the same under both methods.

Cost of goods sold

the cost of the merchandise inventory that the business has sold to customers.

Inventory shrinkage

the merchandise inventory account should stay current at all times in a perpetual inventory system. however, the actual amount of inventory on hand may differ from what the books show. this difference can occur because of theft, damage, and errors and is referred to as inventory shrinkage.

income summary

the revenues and expenses may be transferred first to an account titles income summary. the income summary account summarizes the net income or net loss for the period by collecting the sum of all expenses (a debit) and the sum of all revenues (a credit). the income summary account is like a temporary holding tank that shows the amount of net income or net loss of the current period. its ending balance--net income or net loss-- is then transferred (closed) to the retained earnings account (the final account in the closing process).

other income and expenses

this category reports revenues and expenses that fall outside the business's main, day to day, regular operations. examples include interest of revenue, sales discounts forfeited, interest expense, and gains and losses on the sale of plant assets. these examples have nothing to do with the business's normal operations. as a result, they are classified as "other" items.