Accounting Test #2
The purchase discount term 2/10, n/30 means that the purchaser may receive a discount of
2% if paid within 10 days of the purchase date
Received a $560 utility bill for electricity usage in July to be paid in August.
Accounts Payable: $560 Utilities Expense: -$560
Accrual vs Deferral
An accrued expense is a liability that represents an expense that has been recognized but not yet paid. A deferred expense is an asset that represents a prepayment of future expenses that have not yet been incurred.
Adjustments
An expense or revenue has been deferred if we have postponed reporting it on the income statement until a later period.
Balance Sheet
Assets are reported at amounts representing the economic benefits that remain at the end of the period. Liabilities are reported at amounts owed at the end of the period.
Costs of goods sold
Beginning inventory+purchases-ending inventory
Magnificent Magazines received $7,800 on December 31, 2015, for subscription services related to magazines that will be published and distributed in January through December 2016.
Cash 7,800 Unearned Revenue 7,800
Internal Control Components
Control Environment, Risk Assessment, Control Activities, Information and Communications, Monitoring Activities
Two closing journal entries are needed.
Debit Revenue accounts and credit Expense accounts. Debit or credit the difference to Retained Earnings. Credit Dividends Declared and debit Retained Earnings.
blank is the process of allocating the cost of buildings, vehicles, and equipment to the accounting periods in which they are used.
Depreciation
Abercrombie received a telephone bill for services this month, which must be paid next month.
Expense has been incurred. Liability has been incurred.
The Tiger Woods Foundation used up some of the benefits of its 35,000-square-foot building.
Expense has been incurred. Liability has been incurred.
the purchaser of inventory pays for shipping if the shipping terms are FOB blank
FOB Shipping Point
Hockey Helpers paid $5,400 cash on September 30 to rent an arena for the months of October and November.
Hockey Helpers paid $5,400 cash on September 30 to rent an arena for the months of October and November.
Income Statement
Income Statement Revenues are recorded when earned. Expenses are recorded in the same period as the revenues to which they relate.
The company's income tax rate is 39%. After making the above adjustments, SPC's net income before tax is $10,000. No income tax has been paid or recorded.
Income Tax Expense 3,900 Income Tax Payable 3,900
Control Limitations
Internal controls can never completely prevent and detect errors and fraud for two reasons: Benefits must exceed the costs Human error or fraud
Internal control companies
Most organizations use the following control components as a framework when analyzing their internal control system
Permanent Accounts
Permanent accounts track financial results from year to year.
Prepaid Insurance shows a balance of zero at September 30, but Insurance Expense shows a debit balance of $2,232, representing the cost of a three-year fire insurance policy that was purchased on September 1 of the current year.
Prepaid Insurance 2,170 Insurance Expense 2,170
Super Stage Shows received $17,400 on September 30 for season tickets that admit patrons to a theatre event that will be held twice (on October 31 and November 30).
Rent Expense 2,700 Prepaid Rent 2,700
GSD + M completed work on an advertising campaign that will be collected next month.
Revenue has been earned. Asset has been acquired.
Delta Airlines provided flights this month for customers who paid cash last month for tickets.
Revenue has been earned. Liability has been fulfilled.
Income Statement
Revenues are recorded when earned. Expenses are recorded in the same period as the revenues to which they relate.
Super Stage Shows received $16,000 on September 30, for season tickets that admit patrons to a theatre event that will be held twice (on October 31 and November 30).
September 30: Cash (+A) 16,000 Unearned Revenue (+L) 16,000 October 31 AJE: Unearned Revenue (-L) 8,000 Service Revenue (+R, +SE) 8,000 ($16,000/2=$8,000 per month)
On August 31 of this year, Cash was debited and Service Revenue was credited for $1,410. The $1,410 related to fees for a three-month period beginning September 1 of the current year.
Service Revenue 940 Unearned Revenue 940
Temporary Accounts
Temporary accounts track financial results for a limited period of time
Walker Window Washing paid $780 cash for supplies on December 31, 2015. As of January 31, 2016, $130 of these supplies had been used up.
Unearned Revenue 650 Service Revenue 650
gross profit percentage tells you
a higher ratio means that more is available
gross profit margin tells
a higher ratio means that more is available to cover operating costs
Deferral adjustments are used to decrease balance sheet accounts
and increase corresponding income statement accounts.
inventory is on the
balance sheet
inventory is reported as an asset on the
balance sheet
purchase transactions affect the
balance sheet and not the income statement
Internal control consists of the actions taken by people at every level of an organization to achieve its objectives.
consists of the actions taken by people at every level of an organization to achieve its objectives.
inventory consists of all
costs needed to get the inventory ready for sale
Adjustments are not made on a
daily basis because it's more efficient to do them all at once at the end of each period.
When a customer pays within the discount period, the seller will record the sales discount with a blank
debit
using a perpetual inventory system, the entry to record the return of goods you previously purchased on account includes a
debit to accounts payable, credit to inventory
When a company provides $1,000 of service to a customer on account with payment terms of 2/10, n/30, the entry it records when it records the sale includes a debit blank and a credit to blank
debit to accounts receivable for $1,000 and credit to sales for $1,000
Accrual adjustments are needed when a company has
earned revenue or incurred an expense in the current period but has not yet recorded it because the related cash will not be received or paid until a later period.
Which is found on the debit side of the of the inventory t account
freight in, purchases, beginning balance
merchandisers record revenue when they
fulfill their promises
gross profit %
gross profit/net sales *100
the fraud triangle
incentive, opportunity, rationalization
Beginning Inventory equals
inventory purchases-cost of goods sold=ending inventory
under the periodic inventory system
inventory records are updated only at the end of the accounting period
Gross Profit
inventory-sale revenue
gross profit equals
net sales minus cost of goods sold
Each deferral adjustment involves
one asset and one expense account, or one liability and one revenue account.
adjustments ensure that liabilities are reported as all amounts blank at the end of the accounting period
owed
when adjustments are deferred they are
postponed
no cash is involved in a
sale on accounts
Net sales on the income statement equals
sales revenue-sales returns-allowance
gross profit is a
subtotal, not an account, found on the income statement
Internal control consists of
the actions taken by people at every level of an organization to achieve its objectives.
Solution: Adjustments are made to the accounting records at the end of
the period to state assets, liabilities, revenues, and expenses at appropriate amounts.
Depreciation is
the process of allocating the cost of buildings, vehicles, and equipment to the accounting periods in which they are used
in a perpetual inventory system what should happen
the purchaser should record freight-in as in asset, inventory, the seller should record freight-out as a selling expense
FOB shipping point
the sale is recorded when the goods leave the seller's shipping department.
FOB destination
the sale is recorded when the goods reach their destination (the customer).
Internal controls for cash are important because
the volume of cash transactions is enormous and because cash is valuable and portable and therefore poses a high risk of theft.
The recording of a company's purchase returns and purchase allowances are similar because
there is a decrease in accounts payable and and decrease in inventory
The primary goal of internal controls for all cash payments is to
to ensure that the business pays only for properly authorized transactions.
