Accounting exam 2

• When using LIFO/FIFO, which inventory layers are expensed to COGS (newest or oldest) and which layers make up the ending inventory balance on the balance sheet (oldest or newest).

lifo-results in the lowest value of ending inventory during a period of rising inventory costs

• As indicated above, understand and account for Sales Discounts, Returns and Allowances

o A contra-revenue account that keeps track of all the products returned (or allowances given) over a period of time. o Normal balance = debit o An income statement account linked to sales revenue - so it is also deducted from sales revenue to arrive at net sales. o Journal entries to record the return of inventory: Refund the sale at the sales price of those goods: Sales Returns and Allowances $XXX Accounts Receivable (or Cash) $XXX Return the goods into inventory for the cost of thTose goods: Inventory $XXX Cost of Goods Sold $XXX

• As indicated above, understand and account for Purchase Discounts, Returns and Allowances

o A merchandiser may (a) return unwanted merchandise or (b) accept unsatisfactory merchandise in return for a reduction in the amount owed for the inventory. Accounts Payable (or Cash, if receiving cash back) $XXX Inventory $XXX

• What are the 3 components of the fraud triangle that drive employees to commit fraud?

opportunity, rationalization, pressure

• What costs are included in the inventory account?

ordering, holding, administrative

subtotal

• First important subtotal is: Net Sales Revenue: Sales Revenue Less: Sales Returns and Allowances and Sales Discounts • Then another important subtotal: Gross Profit (also called gross margin): Net Sales Revenue Less Cost of Goods Sold

• Difference between a manufacturer, wholesaler and retailer

A wholesaler is a merchant or a firm that purchases and stores a large quantity of products from manufacturers and vendors before reselling them to retailers, commercial users and other merchants.

• Is a company required to use a certain inventory tracking system or can they choose the one they want to use?

According to generally accepted accounting principles (GAAP), companies can choose to use either a periodic or perpetual inventory system. Understanding the difference between the two systems can help you figure out which method works best for your business.

• Is a physical inventory count necessary for both the periodic and perpetual method? Why or why not

An annual physical inventory count is performed in a periodic system to adjust the inventory account, and in a perpetual system to ensure the accuracy of the accounting records and identify shrinkage.

ratios

An important use of the classified balance sheet is for calculating a company's Current Ratio. This ratio assesses a company's ability to pay its short-term debts. It answers the question: can we meet short-term obligations (liabilities) with short-term resources (assets). It is calculated as: Current Assets/Current Liabilities A more conservative way of calculating our ability to meet our short-term obligations is the Quick Ratio (or Acid Test Ratio). This is similar to the current ratio but EXCLUDES less liquid current assets such as inventory and prepaids that take longer to be converted to cash. It is calculated as: (Cash + Short-term Investments + Accounts Receivable)/Current Liabilities The higher the current and quick ratios the more able the business is to pay its current liabilities. Ratios over 1.0 means that there are enough current assets to cover current liabilities. Ratios under 1.0 means the current liabilities exceed current assets and a company could face challenges in covering current liabilities

• Why would a company use LIFO? If they use LIFO for tax can FIFO be used for financial reporting purposes?

Another reason for a company to use the LIFO cost flow assumption is to improve the matching of costs with sales. Under LIFO, the recent costs will be matched on the income statement with the recent sales revenues.Under current tax laws in the United States, a company which uses the FIFO method for tax purposes must use the FIFO method for financial reporting purposes.

• Know and understand the reconciling items discussed in class; which items are added to or subtracted from the bank balance and which items are added to or subtracted from the book balance to arrive at the true cash balance.

Balance per Bank Statement $XXXX Balance per Books $XXXX ADD: ADD: Deposits in transit XXX Interest Revenue XXX Bank Errors XXX Electronic Fund Transfers XXX Book Errors XXX LESS: LESS: Outstanding checks (XXX) NSF Checks (XXX) Bank Errors (XXX) Bank fees (XXX) Electronic Fund Transfers (XXX) _______ Book Errors (XXX)

• Lower of Cost or Market; what does it mean and what is the required entry to apply the LCM rule?

Debit (Cost of Good Sold) - Credit (Merchandise Inventory) The lower of cost or market rule states that a business must record the cost of inventory at whichever cost is lower - the original cost or its current market price. This situation typically arises when inventory has deteriorated, or has become obsolete, or market prices have declined.

• Difference between periodic and perpetual inventory

In perpetual inventory system, merchandise inventory and cost of goods sold are updated continuously on each sale and purchase transaction. In periodic inventory system, merchandise inventory and cost of goods sold are not updated continuously.

• Which reconciling items require journal entries to be posted in the accounting system?

Only the items reconciling the books balance require adjustmen

• What causes differences between the bank balance and the cash account balance?

Some of the reasons for a difference between the balance on the bank statement and the balance on the books include: Outstanding checks; Deposits in transit; Bank service charges and check printing charges; Errors on the company's books; Electronic charges and deposits that appear on the bank statement but are not yet recorded in the company's records

• How is the balance sheet of a merchandiser different from the balance sheet of a service business

This difference is found in the asset section. Merchandising companies will have an asset for inventory, whereas service companies do not. This is listed as a current asset. Other differences can include the types of accounts payable a merchandising company has.

• Define bank reconciliations - why are they used

This process of confirming the amounts is referred to as reconciling the bank statement, bank statement reconciliation, bank reconciliation, or doing a "bank rec." The benefit of reconciling the bank statement is knowing that the amount of Cash reported by the company (company's books) is consistent with the amount of cash shown in the bank's records.

• Know and define the 4 different inventory methods.

Which inventory valuation method is used for unique items Specific identification Which inventory costing method results in the highest value of ending inventory during a period of rising inventory costs FIFO Which inventory costing method results in the lowest value of ending inventory during a period of rising inventory costs LIFO What the weighted-average method is- Is the costing method that requires the calculation of a new average after each purchase

• Know the shipping terms, who is responsible for shipping and what accounts are debited when shipping is paid by the buyer or when shipping is paid by the seller

Who pays the shipping costs under the terms FOB shipping point The buyer

Inventory: type of account; normal balance.

debit, asset

• COGS: type of account; normal balance.

expense debit account

• Calculate: Net Sales Revenue, Gross Profit, and Gross Profit Percentage

gross profit-NET sales revenue - Cost of goods sold net- gross sales-deductions profit %-

• Sales Returns and Allowances: type of account; normal balance; definition

revenue debit

• Sales Discounts: type of account; normal balance; definition

revenue, debit

• What is the purpose of tracking inventory costs

the availability of stock for production, sales and delivery and services of a business to maximize the volume of business and profits.

• Inventory Shrinkage - what causes shrinkage and what entry is needed when the balance in the inventory account is different from the physical count.

theft, fraud The entry to record inventory shrinkage includes a debit to the Merchandise Inventory account.