Accounting Exam Two

How do you find ending merchandise inventory?

Add beginning merchandise inventory + total cost of merchandise purchases, cost of goods sold

How do you find Sales?

Add cost of goods sold + Gross profit

Committee of Sponsoring Organizations (COSO) lists five ingredients of internal controls that add to the quality of accounting information.

1. Control environment: company structure, ethics, and integrity for internal controls. 2. Risk assessment: Identify, analyze, and manage risk factors. 3. Control activities: Policies and procedures to reduce risk of loss. 4. Information and communication: reports to internal and external parties. 5. Monitoring: regular review of internal control effectiveness.

1. Dollar Store purchases merchandise for $1,600 on terms of 2/5, n/30, FOB shipping point, invoice dated November 1. 2. Dollar Store pays cash for the November 1 purchase. 3. Dollar Sobre discovers and returns $200 of defective merchandise purchased on November 1, and paid for on November 5, for a cash refund. 4. Dollar Store pays $80 cash for transportation costs for the November 1 purchase. 5. Dollar Store sells merchandise for $1,728 with terms n/30 6. The cost of merchandise is $864 7. Merchandise is returned to the Dollar Store from the November 13th transaction. The returned items are priced at $215. 8. The returned items cost $108; the items were not damaged and were returned to inventory.

1. Debit $1,600 merchandise inventory. Credit $1,600 accounts payable. 2. Debit $1,600 accounts payable. Credit $1,568 cash ($1,600 - .02 discount) Credit $32 merchandise inventory (.02 discount) 3. Debit $196 cash ($200 x .02) Credit $196 merchandise inventory. 4. Debit $80 merchandise inventory. Credit $80 cash. 5. Debit $1,728 accounts receivable. Credit $1,728 sales. 6. Debit $864 cost of goods sold. Credit $864 merchandise inventory. 7. Debit $215 sales returns and allowances. Credit $215 accounts receivable. 8. Debit $108 merchandise inventory Credit $108 cost of goods sold.

1. Allied made its first and only purchase of inventory for the period on May 3 for 2,000 units at a price of $11 cash per unit (for a total cost of $22,000) 2. Allied sold 1,000 of the units in inventory for $15 per unit (invoice total: $15,000) to Macy Co. under credit terms 2/10, n/60 3. Record the cost of goods sold. 4. Macy returns 100 units because they did not fit the customer's needs (invoice amount $1,500) 5. Allied retires the units, which costs $1,100, to its inventory. 6. Macy discovers that 100 units are scuffed but are still of use and, therefore, keeps the units. Allied gives a price reduction (allowance) and credits Macy's accounts receivable for $700 to compensate for the damage. 7. Allied receives payment from Macy for the amount owed on the May 5 purchase; payment is net of returns, allowances, and any cash discount.

1. Debit $22,000 merchandise inventory Credit $22,000 Cash 2. Debit $15,000 accounts receivable Credit $15,000 Sales 3. Debit $11,000 Cost of goods sold. Credit $11,000 Merchandise inventory. 4. Debit $1,500 sales returns and allowances Credit $1,500 accounts receivable. 5. Debit $1,100 Merchandise inventory. Credit $1,100 cost of goods sold 6. Debit $700 sales returns and allowances. Credit $700 accounts receivable. 7. Debit $12,544 cash (original amount if $15,000 - $1,500 return - $700 allowance - $256 (.02 discount). Debit sales discount $256 Credit $12,800 accounts receivable

1. Purchased $4,600 of merchandise from Lyon Company with credit terms of 2/15, n/60, invoice dated April 2, and FOB shipping point. 2. Paid $230 cash for shipping charges on the April 2 purchase. 3. Returned to Lyon Company unacceptable merchandise that had an invoice price of $550. 4. Sent a check to Lyon Company for the April 2 purchase, net of the discount and the returned merchandise.

1. Debit $4,600 merchandise inventory. Credit $4,600 Accounts payable 2. Debit $230 merchandise inventory Credit $230 cash. 3. Debit $550 accounts payable. Credit $550 merchandise inventory. 4. Debit $4,050 accounts payable (the original $4,600 - the returned merchandise of $550) Credit $3,969 Cash ($4050 x .02 for 2/15 discount) Credit $81 merchandise inventory (from the .02 discount)

1. Purchased $8,500 of merchandise from Frist Corp. with credit terms of 1/10, n/30, invoice dated April 18, and FOB destination. 2. After negotiations over scuffed merchandise, received from Frist a $500 allowance toward the $8,500 owed on the April 18th purchase. 3. Sent check to Frist paying for the April 18th purchase, net of the annowance and the discount.

1. Debit $8,500 merchandise inventory. Credit $8,500 accounts payable. 2. Debit $500 accounts payable. Credit $500 merchandise inventory. 3. Debit $8,000 accounts payable (original $8,500 - allowance of $500) Credit $7,920 cash ($8,000 x .01 for discount) Credit $80 merchandise inventory (for .01 discount)

1. Record closing of credit balances in temporary accounts. 2. Record closing of debit balances in temporary accounts. 3. Record closing of income summary account. 4. Record closing of withdrawals account.

1. Debit Sales Credit Income summary. 2. Debit income summary Credit cost of goods sold, sales discounts, sales returns and allowances, and expenses. 3. Debit income summary Credit Capital 4. Debit Capital Credit Withdrawals.

Merchandise Income Statement 1. Revenue 2. Expenses 3. Other revenues, gains, expenses and losses. (not needed)

1. Sales, (less:) sales discounts, and (less:) sales returns and allowances. Net sales Cost of goods sold Gross profit. 2. Selling expenses: rent expense--selling space, sales commission expense, sales salaries expense, and tv advertising expense. Total selling expenses. General and administrative expenses: depreciation expense (not sale related), insurance expense, office salaries expense, and office supplies expense. Total general and administrative expenses. Total expenses. 3. Gains on sale of equipment and interest revenue NET INCOME

The principles of internal controls

1. establish responsibilities 2. maintain adequate records 3. insure assets and bond key employees 4. separate record keeping from custody of assets 5. divide responsibility for related transactions 6. apply technological controls 7. perform regular and independent reviews

Total cost of merchandise purchased from Invoice cost of merchandise purchased, purchases discounts received, purchases returns and allowances, and cost of transportation in.

Add invoice cost of merchandise purchased + cost of transportation in - purchases discounts received = purchases returns and allowances.

How do you find total cost of merchandise purchases?

At cost of goods sold + Merchandise inventory ending, subtract merchandise inventory beginning.

At year end, Barr Company has shipped $14,300 of merchandise FOB destination to Lee Company. Which company should include the $14,300 of merchandise in transit as part of its year-end inventory?

Barr Company.

How do you find cost of goods sold?

Beginning merchandise inventory + total cost of merchandise purchases - Ending merchandise inventory or Sales - gross profit

What is the Acid-test Ratio?

Cash, short term investments, and current receivables(quick assets) / current liabilities.

Paris Company has shipped $21,800 of goods to Harlow Company, and Harlow Company has arranged to see the goods for Paris. Identify the consignor and the consignee. Which company should include any unsold goods as part of its inventory?

Consignor: Paris Company Consignee: Harlow Company Unsold Inventory: Paris Company

What is the Days' Sales Inventory equation?

Days' sales in inventory = Ending inventory/Cost of goods sold x 365

How do you find net income?

Gross profit - Expenses

What is the inventory turnover equation?

Inventory turnover = Cost of goods sold/Average inventory

What are internal control systems?

Policies and procedures used to protect assets, ensure reliable accounting, promote efficient operations, and uphold company policies.

Walberg Associates purchased goods for $39,500. Terms of the purchase were FOB shipping point, and the cost of transporting the goods to Walberg Associates' warehouse was $2,200. Walberg Associates insure the shipment at a cost of $350. Prior to putting the goods up for sale, they cleaned and refurbished them at a cost of $690. Determine the cost of inventory.

Price: $39,500 Transportation-in: $2,200 Insurance on shipment: $350 Cleaning and refurbishing: $690 Total cost of inventory: $42,740

How do you find gross profit?

Sales - Cost of goods sold. (If you have sales, sales discounts, sales returns and allowances, and cost of goods sold; you add sales discounts, sales returns, and cost of goods sold and subtract it from sales.

Sarbanes-Oxley Act (SOX)

requires managers and auditors of companies whose stock is traded on an exchange (called public companies) to document and verify internal controls. Requirements: the company must have effective internal controls, auditors must evaluate internal controls, violators receive harsh penalties—up to 25 years in prison with fines, and auditors' work is overseen by the Public Company Accounting Oversight Board (PCAOB)