ACC Exam 2

How does the phrase lower-of-cost-or-market apply to inventory valuation?

"Lower of cost or market" is an accounting convention that helps to reduce over stating inventory (assets) when the market value of certain items has fallen below the original cost. It is a conservative accounting measure that helps to prevent any material overstatement of the asset inventory.

What effect does a debit memo in a bank statement have on the cash account? What effect does a credit memo in a bank statement have on the cash account?

A debit memo included with the bank statement reduces the amount of cash and a credit memo increases the amount of cash.

Which inventory cost flow method produces the highest net income in a deflationary period?

A deflationary period, i.e., a period of falling prices, would produce results opposite of those for an inflationary period. FIFO would produce the lowest amount of net income, because the goods purchased fist would cost more than the goods purchased last. This would cause a larger amount of cost to be expensed resulting in a lower net income. LIFO would produce the highest net income.

What are the implication of an unqualified audit opinion?

An unqualified opinion implies that the financial statements are free from material error or departures from GAAP. It does not imply that the financial statements are 100% accurate.

Explain the difference between gains and revenues.

Gains are increases in assets or decreases in liabilities which results from peripheral or incidental transactions. Revenue is earned as a result of ordinary business operations.

In an inflationary period, which cost flow method, FIFO or LIFO, produces the larger cash flow? Explain.

In an inflationary period, for a business subject to income tax, LIFO would produce the larger amount of cash flow because the lower net income (higher cost of goods sold) would result in a smaller amount of income tax being paid.

What are the attributes of a high-quality employee?

Quality employees should have the necessary ability to perform that required task and be adequately trained to perform a variety of other task. In addition, employees should have high personal integrity.

What is meant by separation of duties? Give an illustrations.

Separation of duties is the procedure whereby different individuals each separately perform the authorization, recording, and custody functions for a business. An example would be to have one individual write the checks and attach appropriate documentation and have another individual sign the checks and approve payment.

If goods are shipped FOB shipping point, which party (buyer or seller) is responsible for the shipping cost?

Shipping cost of goods shipped FOB shipping point will be paid by the buyer of the goods.

Define transportation-out. Is it a product cost or a period cost for the seller?

Transportation-out is the freight cost on goods sold. It is a period cost.

Name and briefly define the 5 components of COSO's internal control framework.

1. Control Environment- The control environment is the integrity and ethical values of the company that set the tone of the organization. 2. Risk Assessment- Risk assessment is the process that management uses to identify possible risk that could result in misstated financial statements and address the risks. 3. Control Activities- Control activities safeguard assets and allow a company to produce reliable financial statements in a timely manner through internal control procedures. 4. Information and Communication- the information and communication section gives an overview of internal and external reporting processes and the technology environment. 5. Monitoring- Monitoring reviews the quality of a company's internal controls to ensure they continue to address the risk of the company.

Name and describe the four cost flow methods discussed in chapter 5?

1. First in, first out (FIFO) - The inventory cost flow method that assumes that the first items purchased are the first items sold for the purpose of computing cost of goods sold and inventory. 2. Last in, First out (LIFO) - The inventory cost flow method that assumes that the last items purchased are the first items sold for the purpose of computing cost of goods sold and inventory. 3. Weighted Average - The inventory cost flow method that allocates cost between cost of goods sold and the inventory based on an average cost per minute. 4. Specific identification - The inventory cost method that assigns cost to cost of goods sold based on the specific cost of each unit sold.

What information is normally included in a bank statement?

1. The balance of the account at the beginning of the period. 2. Additions to the account during the period (deposits, credit memo and other items that increase the account balance) 3. Subtractions made during the period for paid checks, debit memos and other items that decrease the account balance. 4. A running balance of the account or the beginning and ending balance of the account

What are the three basic types of auditors' opinions can be issued on audited financial statements? Describe each.

1. Unqualified Opinion- Financial statements are in compliance with GAAP. 2. Adverse Opinion- Financial statements are not in compliance with GAAP 3. Qualified Opinion- For the most part, financial statements are in compliance with GAAP, but the auditor has reservations about something in the statements or has been restricted from preforming duties necessary in the audit.

Dyer Department Store purchased goods with the terms 2/10, n/30. What do these terms mean?

2/10, n/30 means that a @% discount may be taken off the selling prices if payment is made within 10 days of the invoice date. If the discount is not taken, the amount of the invoice is due in 30 days.

What is a certified check?

A certified check is a check guaranteed by a bank to be a check drawn on an account with sufficient funds to pay the check. The amount of the certified check is deducted from the customer's bank account at the time the bank issues the certified check.

What is a deposit in transit?

A deposit in transit is a deposit that has been recorded on the depositor's books but has not yet been recorded by the bank.

When might an auditor issue a disclaimer on financial statements?

A disclaimer is issued if the auditor is unable to preform audit procedures necessary to determine whether financial statements are prepared in accordance with GAAP.

What is a fidelity bond? Explain its purpose.

A fidelity bond is insurance that a company can purchase to protect against loss due to employee dishonesty.

What is a financial audit? Who is qualified to preform it?

A financial statement audit is detailed examination of a company's financial statements and the documents that support the information presented in those statements. A financial statement audit is conducted by an independent CPA.

What are several features of an effective internal control system?

A strong internal control system should have: 1. Separation of duties 2. Quality of employees 3. Bonded employees 4. Period of absence 5. A procedures manual 6. Clear lines of authority and responsibility 7. Renumbered documents. 8. Physical control over assets 9. Periodic performance evaluation

What is the difference between accounting controls and administrative controls?

Accounting controls are composed of procedures that are designed to safeguard assets and to ensure that the account records contain reliable information. Administrative controls are concerned with performance evaluation and assessment of the degree of compliance with company policies and public laws.

In what circumstances can an auditor disclose confidential information about a client without the client's permission?

An auditor can disclose confidential client information only when called to testify in a count of law or in response to certain questions from a successor auditor or professional investigations of ethics and work-paper reviews.

What makes an error in the financial statements material?

An error is material if knowing about the error would have affected the decision of the user who is a reasonable person with business and accounting knowledge.

What is an independent auditor? Why must auditors be independent?

An independent auditor is a CPA who is independent from the client. Independence assures user of the audited financial statements that the auditor is relatively free from the influences or control of the client.

What is an outstanding check?

An outstanding check is a cash disbursement that has been recorded on the payer's books but has not been deducted from the payer's bank account by the bank (i.e., has not "cleared" the bank)

Northern Merchandising Company sold inventory that cost $12,000 for $20,000 cash. How does this event affect the accounting equation? What financial statements and accounts are affected? (Assume that the perpetual inventory system is used.)

Assets would both increase and decrease (cash increases by $20,000 and inventory decrease by $12,000) and stockholders' equity both increases and decreases (revenue is increase by $20,000 and cost of goods sold is increases by $12,000). All four financial statements are affected.

Assume that Key Co. purchased 1,000 units of merchandise in its first year of operation for $25 per unit. The company sold 850 units for $40. What is the amount of cost of goods sold using FIFO? LIFO? Weighted Average?

Beginning Inventory= 0 Merchandise Purchased=1000x25=25,000 Cost of goods sold=850x25=21,250 Ending Inventory= 150x25=3,750 Cost of goods sold will be the same for all methods because all items were purchased for the same cost. Consequently, it will not make any difference whether the first unit sold is assumed to be the first or last purchased. Weighted average will also be the same.

Explain how COSO's Enterprise Risk Management- An Integrated Framework project relates to COSO's Internal Control - An Integrated Framework project.

COSO's framework, Internal Control- An Integrated Framework, is used for the required statement of management's responsibility under SOX and covers 5 areas of internal controls. COSO later provided an updated framework, Enterprise Risk Management (ERM) - An Integrated Framework to help companies design and implement enterprise-wide risk management. This is a more comprehensive report which covers both internal controls and risk management. SOX applies only to U.S. public companies, but ERM framework is used by both public and private companies worldwide.

What is the purpose of giving a cash discount to charge customers?

Cash discounts are offered to customer to encourage prompt payment.

What items are considered cash?

Cash includes currency and other items payable on demand such as checks, money orders, bank drafts, an savings accounts.

What is cash more susceptible to theft or embezzlement than other assets?

Cash is more susceptible to theft and embezzlement because it is not easily identifiable. In most cases, possession equates to ownership.

What is the advantage of using common size income statements to present financial information for several accounting periods?

Common size income statements covering several accounting periods help management identify changes and trends in various operating costs relative to sales. For example, net income may be declining as a percentage of sales. Comparison on common size income statements over several years will help management identify which expenses have been rising disproportionately with sales and take corrective action.

What motivated Congress to pass the Sarbanes-Oxley Act (SOX) of 2002?

Congress passed the Sarbanes-Oxley Act (SOX) in 2002 to require public companies to evaluate and report on the internal controls due to major accounting scandals in 2 large U.S. companies that cost investors billion of dollars.

What procedures can help to protect cash receipts?

Control procedures over cash receipts include: 1. timely deposit, 2 limiting cash on hand, 3. timely recording of cash receipts, 4. written customer receipts, 5. timely reconciliation of actual cash to records of cash receipts

How is the cost of goods available for sale determined?

Cost of goods available for sale is the total of inventory on hand at the beginning of the period plus inventory purchased and other product cost incurred during the period.

What is an example of a business that would have a high inventory turnover? A low inventory turnover?

Discount merchandisers such as Wal-Mart and K-Mart should have a high inventory turnover. Specialty stores such as exclusive jewelers and antique shops will have low inventory turnover.

What types of expenditures are usually made from a petty cash fund?

Examples of expenditures made from a petty cash fund include postage, delivery charges, taxi fares, supper money, small purchases of office supplies, and any other small items that are frequently paid with cash.

What are some advantages and disadvantages of using the FIFO method of inventory valuation?

FIFO allocates the cost of the first units purchased to the first units sold; consequently, in a period of rising prices, this would produce a higher net income. This may be an advantage for the purpose of financial reporting if reporting a higher profit is desired. However, this is a disadvantage for tax reporting if reporting because a higher profit means paying more tax. FIFO also tends to best match physical flow for most products. However, FIFO may present a disadvantage because a higher ending inventory and lower CGS would produce a lower inventory turn over.

What is the difference between the flow of cost and the physical flow of goods?

Flow cost refers to the assumption that is made for the purpose of determining the cost of the inventory items that are sold when preparing financial statements. The cost flow assumption that a business makes may have nothing to do with the actual timing of when goods are sold. For example, a grocery store may use a FIFO cost flow assumption for financial statement purpose and this may reflect the physical flow of some inventory items but not others. The grocer will out the newer items at the back on the shelf and pull the oldest items to the front for the customer to purchase (FIFO) but the customer may look for the freshest item at the back of the shelf (e.g. milk) to purchase (LIFO).

If some merchandise declined in value because of damage or obsolescence, what effect will the lower-of-cost-or-market ruler have on the income statement?

For merchandise that has declined in value, the "lower of cost or market" rule will cause a reduction in the asset account inventory and result in an overall reduction of total assets. This causes more cost to be shifted to cost of goods sold, thus causing the net income to be lower.

Giving written copies of receipts to customers can help prevent what type of illegal acts?

Giving customers receipts helps to prevent theft of cash receipts. Any missing receipts or quantities of money can be detected on a timely basis. The customer serves as a control to assure that the amount of the sale is correct (i.e., no overcharging or undercharging) and that cash paid is properly recorded.

If the amount of goods available for sale is $123,000, the amount of sales is $130,000, and the gross margin is 25% of sales, what is the amount of ending inventory?

Goods Available for sale = $123,000 Sales= $130,000 Less Estimated Gross Margin (130000x.25) = 32,500 Cost of goods sold = (97500) Estimated Ending Inventory = 25,500

In an inflationary period, which inventory cost flow method will produce the largest amount of total assets on the balance sheet? Explain.

IN an inflationary period, FIFO will produce the largest amount of total assets. Inflation is a period where prices are consistently rising; FIFO will produce the highest amount of income. This is true because the items purchased first (and at lowest cost) are the items that are deemed sold first whose cost is charges to expense. The highest cost items remain in the asset account inventory. Since the lowest cost items have been expensed, net income will be higher than it would be assuming LIFO. The unsold items, inventory, are the highest cost items. Consequently, assuming rising prices, FIFO produces higher inventory amount than would be the case under LIFO.

Eastern Discount Stores incurred a $5,000 cash cost. How does the accounting for this cost differ if the cash were paid for inventory versus commissions to sales personnel?

If the $5,000 is for the purchase of inventory, this is an asset exchange in that inventory is increased and cash is decreased. A $5,000 payment for commissions is an asset use transaction; assets are decrease and stockholders' equity is decreased (commissions expense is increased).

Does the choice of cost flow method (FIFO, LIFO, or weighted average) affect the statement of cash flows? Explain.

In a world where there is no income tax, the choice of cost flow method would not affect the statement of cash flows because it is simply allocating some of the cost of inventory purchased to expense and the remainder to assets. The statement of cash flows is affected when cash is received for goods sold and when cash is paid for good purchased. However, most business do face income tax assumption would cause a difference in the cash flow statement. In a period of rising prices, LIFO would produce a smaller cash outflow for the payment of tax, because a smaller amount of income tax would be paid on a smaller amount of income.

In an inflationary period, which inventory cost flow method will produce the highest net income? Explain.

In an inflationary period, i.e., a period where prices are consistently rising, FIFO will produce the highest amount of income. This is true because the items purchased fist (and at the lowest cost) are the items that are deemed sold first whose cost is charged to expense. The highest cost items remain in the asset account inventory. Since the lowest cost items have been expensed, net income will be higher that it would assuming a LIFO flow.

What is a situation on which estimates of the amount of inventory may be useful or even necessary?

In certain situations it is not possible or practical to take a complete inventory. One such situation is when the inventory or part of it has been destroyed by some disaster or similar event. Another situation where it is not practical to take inventory us when monthly or quarterly financial statements are prepared when the periodic inventory method is used. It is not cost effective to physically count inventory of any size on a regular basis. In a third situation, when the periodic method is used, inventory may be estimated on a monthly or weekly basis to provide information for insurance coverage.

What is the purpose of independent of performance?

Independent verification of performance provides an objective evaluation. It also requires the employee to be accountable under predetermined standards. Independent verification of the internal control system assures that the system is functioning properly

Define the term internal control.

Internal control is a process used by businesses to ensure financiail reports are reliable, operations are effective and efficient, and laws and regulations are followed. In addition, internal control protects assets against theft and unauthorized use, acquisition, or disposal.

How can management manipulate net income using inventory fraud?

It is generally easier to manipulate net income when a periodic inventory system us used. There is no accounting for inventory at the time it is sold. There is very little control over the inventory (as far as the accounting records are concerned) except at the end of the year. The only measurement available is the amount of inventory still on hand. There is no control over the amount that was sold, damaged, or stolen. In addition, if the inventory is counted wrong or priced wrong, the amount of cost of goods sold will also be determined incorrectly. For a business owner wishing to manipulate profit, it is easy to either overstate of understate the amount of ending inventory .

Refer to the two questions above. Which method might be preferable for financial statements? For income tax reporting? Explain.

It may be advantageous to use FIFO for financial statement purposes because it produces the smallest cost of goods sold and consequently, the highest gross margin and net income.It also produces the largest amount of assets. However a larger net income produces higher income tax expense, so LIFO would be more desirable strictly from an income tax perspective in that the cost of goods sold would be higher, and consequently the net income and income tax will be lower. Since each cost flow method is desirable for a specific group of user, the cost flow assumption chosen must be the best for the business overall. A part of the consideration is the ease of applying each method.

What are some advantages and disadvantages of using the LIFO method of inventory valuation?

LIFO allocates the cost of the last units purchased to the first units sold; consequently, in a period of rising prices, this would produce a lower net income. This may be an disadvantage for the purpose of financial reporting if reporting a higher profit is desired. However, for tax reporting, lower profit means paying less tax. LIFO also matches current cost with current revenues. For financial statement analysis, there may be an advantage because higher cost of goods sold and lower ending inventory would produce a higher inventory turnover.

Explain the difference between losses and expenses.

Losses are decreases in assets or increases in liabilities which results from peripheral or incidental transactions. Expenses are assets and services consumed to generate revenue in the ordinary business operations.

Define merchandise inventory. What types of cost are included in the merchandise inventory account?

Merchandise inventory is finished goods that are held for sale to customers. Costs that are included in "merchandise inventory" include the cost of the product, transportation-in cost, transit insurance, etc.

If PetCo had net sales of $600,000, goods available for sale of $450,000, and cost of goods sold of $375,00, what is its gross margin? What amount of inventory will be shown on its balance sheet?

Net Sales - Cost of Goods Sold = Gross Margin 600,000 - 375,000 = 225,000 Cost of Goods Available for sale - Cost of Goods Sold = Ending Merchandise Inventory 450,000 - 375,000 = 75,000

How is net sales determined?

Net sales is gross sales less sales returns and allowances and less sales discounts.

Assume that inventory is overstated by $1,500 at the end of 2016 but is correct in 2017. What effect will this have on the 2016 income statement? The 2016 balance sheet? The 2017 income statement? The 2017 balance sheet?

On 2016 income statement: If the ending inventory is overstated by $1,500, the cost of goods sold is reflected with a same lower amount. Eventually, net income increases by $1,500. On 2016 balance sheet: If the ending inventory is overstated by $1,500, assets reflect the increase of same amount. Since cost of goods sold is understated, retained earning increase by the same amount. On 2017 income statement: If the error is corrected in 2017, the cost of goods sold increases. Eventually, net income is understated by $1,500. On 2017 balance sheet: If the ending inventory overstated in 2016 is corrected in 2017, assets (inventory) value is corrected. The retained earnings also is corrected for prior period adjustments.

What are some advantages and disadvantages of the specific identification method of accounting for inventory?

One advantage of the specific identification method is that both the inventory account and the cost of goods sold reflect the actual amount on hand and sold. This method usually required for high cost items such as automobiles, boats, etc. One disadvantage of this method is that record-keeping can become burdensome for high-volume, lower-price items.

When are period cost expensed? When are product cost expensed?

Period costs are expensed in the period they are incurred or used. Product cost are expensed in the period in which the inventory is sold.

What procedures are important in the physical control of assets and accounting records?

Physical controls are designed to safeguard assets. Storerooms should be kept locked with limited access. Serial numbers on equipment should be recorded. Unannounced physical counts should be taken to account for the physical presence of the assets. Valuable papers should be kept in lock-box, with limited access. Accounting records should be kept in a fireproof vault with backup copies kept off premises whenever possible. Assets should be adequately insured.

What procedures can help protect cash disbursements?

Procedures that will help cash disbursements include making all disbursements by check, using prenumbered checks kept in a secure place, and separation of the authorization, recording, and custody function for cash disbursements. Supporting documentation and authorized signatures should also be required for payment. Paid documents should be clearly labeled and filed for reference.

What is the difference between product cost and a selling and administrative cost?

Product costs are cost associated with goods for resale, usually inventory cost. Selling and administrative expenses , called period cost, are cost that are not directly traceable to products, for example, operating expenses.

Explain the difference between purchase returns and sales returns. How do purchase returns affect the financial statements of both buyer and seller? How do sales returns affect the financial statements of both buyer and seller?

Purchase returns refer to the situation where the buyer of the goods returns them. Sales returns refer to the situation where goods sold by the seller are returned to the seller. Generally a sales return on the seller's books is a purchase return on the buyer's books. Sales return cause an increase in assets (inventory) to the seller as previously sold merchandise is returned. Stockholders' equity is increase as cost of goods sold is reduced by the original cost of the goods. A sales return will also cause a reduction of cash or accounts receivable as money must be refunded or credit given on accounts receivable. Stockholders' equity will decrease by a corresponding reduction in revenue. The net effect of a sales return is to decrease asset exchange or asset use. Either cash is increased or accounts payable is decreased and merchandise inventory is decrease.

Explain the relation between SOX ans COSO.

SOX refers to the Sarbanes-Oxley Act of 2002, which requires public companies to evaluate and report on their internal controls. COSO is the Committee of Sponsoring Organizations of the Treadway Commissions, which established the framework for the SOX statement of management's responsibility and is the standard by which SOX compliance is judged.

What is the difference between specific and general authorizations?

Specific authorizations outline the limitations that apply to different levels of management. These authorizations generally apply to specific positions withing the organization. For example, sale of major assets can only be authorized by the board of directors, price reductions must be authorized by the sales manager, etc. General authorizations apply across different levels of management, For example, checks for purchases should be written only if supported by a purchase order and receiving documents. All paid invoices must be stamped "PAID" to avoid duplicate payments.

Quality Cellular Co. paid $80 for freight on merchandise that it had purchased for resale to customers (transportation-in) and paid $135 for freight on merchandise delivered to customers (transportation-out). What account is debited for the $80 payment? What account is debited for the $135 payment?

The $80 transportation-in is a product cost and is debitted to the merchandise inventory account. The $135 transportation-out is period cost and is debitted to the expense account transportation-out.

What is the purpose of the Cash Short and Over account?

The Cash Short and Over account is an account that is used to record minor overages and shortages when balancing cash receipts or disbursements.

How is an NSF check accounted for in the accounting records?

The amount of a customer check that was deposited and is later found to be NSF must be deducted from the depositor's account. The amount of the NSF check plus any service charges are shown as an account receivable (i.e., the customer owes the depositor the amount)

Assume the Key Co. purchased 1,500 units of merchandise in its second year of operation for $27 per unit. Its beginning inventory was determined in Question 38 ($3,750). Assuming that 1,500 units are sold, what is the amount of cost of goods sold using FIFO? LIFO? Weighted average?

The amount of cost of goods sold for Key Co. will be different cost flow assumptions because the units purchased during the second year have a different cost that those purchased the previous year. Beginning Inventory=150x25=3,750 Merchandise Purchased=1500x27=40,500 Total= 1,650 = 44,250 Units Sold 1,500 FIFO: 150X25= 3,750 1350X27= 36,450 Cost of Goods Sold = 1500 = 40,200 LIFO: 1500X27= 40,500 Cost of goods sold = 40,500 Weighted Average: 44,250/1,650= 26.82 Cost of Goods sold: 1500x26.82= 40,230

What is the purpose of a bank reconciliation?

The bank reconciliation is a schedule prepared to identify items causing differences between the bank statement and the cash account balance. Preparation of a bank reconciliation also helps determine the true cash balance as of the date of the bank statement.

Why might a bank statement reflect a balance that is larger than the balance recorded in the depositor's books? What would cause the bank balance to be smaller than the book balance?

The bank's balance will be larger than the book balance if there are outstanding checks that exceed outstanding deposits. The bank's balance will be smaller if the outstanding deposits exceed the outstanding checks. Errors also will cause differences.

What portion of cost of goods available for sales is shown on the balance sheet? What portion is shown on the income statement?

The cost of the items that have not been sold are allocated to merchandise inventory (asset) and are shown on the balance sheet. The cost of the items that have been sold are allocated to cost of goods sold (expense) and are shown on the income statement.

Ball Co. purchased inventory with a list price of $4,000 with the terms 2/10, n/30. What amount will be debitted to the merchandise inventory account?

The inventory account will be debitted by the gross amount of $4,000. If the invoice is paid within the discount period, the inventory account us reduced by the amount of the discount take, $80 ($4,000x.02).

What information does inventory turnover provide?

The inventory turnover tells the user how many times on average inventory has been sold during the year.

What is the difference between a multi-step income statement and a single-step income statement?

The multi-step income statement provides more information on the results of various business activities. For example, operating income is computed separately from other gains and losses. Also, any unusual operating items are reported separately from normal operating activities. The single-step income statement shows a single comparison of total revenues with total expenses.

What information is provided by the net income percentage (return on sales ration)?

The net income percentage, (return on sales ratio) is the amount of net income generated per dollar of sales. The ratio is computed by dividing net income by net sales.

Suda Company sold land that cost $40,000 for $37,000 cash. Explain how this transaction would be shown on the statement of cash flows.

The only amount that would be shown on the statement of cash flows would be the $37,000 cash received in the transaction. It would be shown as $37,000 cash inflow from investing activities.

Why does the periodic inventory system impose a major disadvantage for management in accounting for lost, stole, and damaged goods?

The periodic inventory system does not separate the cost of lost, damaged, or stolen merchandise from the cost of goods sold. This system fails to provide management with information necessary to make decisions on controlling such inventory losses.

What is the purpose of a petty cash fund?

The petty cash fund is a small cash fund that is kept on the premises and is used to pay small disbursements where it is not practical to write a check. For example, a payment of $1.24 for postage might be paid out of petty cash.

What are the purpose and importance of a procedures manual?

The procedures manual set forth the proper procedures for processing transactions. The manual should be kept up-to-date and periodic reviews should be conducted to ensure that the procedures outlined in the manual are being followed.

What is the purpose of internal controls in an organization?

The purpose of internal controls is to reduce the possibility of errors or the opportunity for fraud.

Why should documents (check, invoices, receipts) by prenumbered?

The use of prenumbered documents (i.e., checks, receipts, and invoices) is a control to help ensure that all transactions are properly accounted for and recorded, and that no transactions are unrecorded or missing,

Define transportation-in. Is it a product or period cost?

Transportation-in is the cost of freight and shipping charges on goods purchased. It is a product cost because it is a part of the cost of the goods purchased.

Describe how the perpetual inventory system works. What are some advantages of using the perpetual inventory system? Is it necessary to take a physical inventory when using the perpetual inventory system?

Under the perpetual inventory system, the balance in the inventory account is increase each time goods are purchased and decreased each time goods are sold. The major advantage of the perpetual system is the inventory account will reflect changes to inventory on a continual basis. Another advantage of the perpetual method is that it allows for better internal control of inventory. A physical inventory should be taken even when the perpetual method is used. A physical count is necessary under the perpetual method in order to adjust the balance of the inventory account for items that have been lost, stolen, or damaged.

Why would seller grant an allowance to a buyer of the seller's merchandise?

When allowances are granted it is usually because the customer received inferior or damaged merchandise. When granting an allowance, the seller does not take back the goods and saves the cost of shipping and replacing the product. In addition. it saves time in handling the problem.

Why is it important that every employee periodically take a leave of absence or vacation?

When employees are not required to take extended periods of leave or vacation, the employee may be able to cover up illegal or unscrupulous activities while being present in the work environment. If jobs are rotated or someone else does the job while the employee is absent, improprieties may be discovered.

Explain how the periodic inventory system works. What are some advantages of using the periodic inventory system? What are some disadvantages of using the periodic inventory system? Is it necessary to take a physical inventory when using the periodic inventory system?

When using the periodic inventory system, a temporary account, purchases, is used to accumulate the purchases transactions for the year. Inventory is not adjusted until the end of the accounting period. At the end of the accounting period, inventory is physically counted and cost of goods sold is determined by adding beginning inventory and purchases and the subtracting ending inventory. The inventory is then adjusted, cost of goods sold is recorded, and purchases is closed in the entry. The periodic inventory system is easy to use in that when goods are sold, the cost of goods sold does not have to be determined. Cost of goods sold is calculated by determining goods available for sale and the subtracting the actual ending inventory. One of the primary disadvantages of the periodic inventory system is that the business owner has no account of the amount lost, stolen, or damaged goods. Also, it is difficult to determine the amount of inventory on hand throughout the accounting period, since there is no running balance in the inventory account. It is necessary to take a physical inventory at the end of the accounting period. That is the only way to determine the amount of ending inventory except for some estimation techniques.

What is the purpose of preparing a schedule of cost of goods sold?

When using the periodic method of accounting for inventory, the schedule of cost of goods sold is prepared to determine the dollar amount of the cost of sales. It is generally used only for internal reporting purposes.

What are the effects of the following types of transaction on the accounting equations? Also identify the financial statements that are affected. (Assume that the perpetual inventory system is used.) a. Acquisition of cash from the issue of common stock b. Contribution of inventory by an owner of a company. c. Purchase of inventory with cash by a company d. sale of inventory for cash

a. Asset increase (cash), stockholders' equity increases - the balance sheet, statement of cash flows, and statement of changes in stockholders' equity are affected. b. Asset increase (inventory), stockholders' equity increases - This is similar to an acquisition of cash capital from the owner except that inventory is increased instead of cash . The balance sheet and statement of changes in stockholders' equity are affected. c. This is an asset exchange and total assets would not change. The balance sheet and statement of cash flows are affected. d. Assets both increase and decrease (cash increases, inventory decreases) and stockholders' equity both increases and decreases (revenue increased and cost of goods sold is increased and this nets to an increase in retained earnings). The balance sheet, income statement, statement of changes in stockholders' equity, and statement of cash flows are affected.