exam 2 financial accounting (accounts)

Gross profit rate =

Gross profit / revenue

international differences in GAAP-allowed inventory methods (Internationally LIFO is not allow

In principle, LIFO may create a distortion to net income when prices are rising (inflation); LIFO inventory amounts are based on outdated and obsolete numbers, and LIFO liquidations may provide unscrupulous managers with the means to artificially inflate earnings.

cost of goods sold =

beginning inventory + cost of goods purchased - ending inventory

perpetual FIFO

company charges to cost of goods sold the cost of the earliest goods on hand PRIOR TO EACH SALE. The results under FIFO in a perpetual system ARE THE SAME as in a periodic system

Inventory Turnover

cost of goods sold/average inventory indicated the liquidity of inventory by measuring the number of times the average inventory "turns over" (is solid) during the year

current ratio

current assets divided by current liabilities

paper of phantom profits

earnings that do not really exist

LIFO

means that the goods last added to inventory are assumed to be the first goods removed from inventory for sale. Companies obtain the cost of the ending inventory by taking the unit cost of the earliest goods available for sale and working forward until all units of inventory have been costed This cost of goods assumptions matched the more recent costs against current revenues to provide a better measure of net income. During periods of inflation, many challenge the quality of non-LIFO earnings, noting that failing to match current costs against current revenues leads to an understatement of cost of goods sold and an overstatement of net income. LIFO results in lower income taxes (because of lower net income)

accounts payable

money owed by a company to its creditors. Creditors: a person or company to whom money is owed. Credit account

accounts receivable

money owed to a company by its debtors. Debtors: a person or institution that owes a sum of money. Debit account

quality of earnings ratio

net cash from operating activities / net income / Sales Discounts / Purchase Discounts

FOB shipping point

ownership of the goods passes to the buyer when the public carrier accepts the goods from the seller

FOB destination

ownership of the goods remains with the seller until the goods reach the buyer

Gross profit =

revenue - cost of goods sold

weighted average

the Weighted Average Cost (WAC) method of inventory valuation uses a weighted average to determine the amount that goes into COGS. ... The weighted average cost method divides the cost of goods available for sale by the number of units available for sale. cost of goods available/ number of units for sale

freight in

(blank) is the transportation cost associated with the delivery of goods from a supplier to the receiving entity. For accounting purposes, the recipient adds this cost to the cost of the received goods. This expense has a normal debit balance. Increases are recorded as debits while decreases are recorded as credits. In relation to other accounts, this Expense account is similar to the "Cost of Sales-Freight" account, but are two totally different entities.

reasons companys adopt different inventory cost flow methods:

1) income statement effects a) In a period of inflation, FIFO produces a higher net income because lower unit costs of the first units purchased are matched against revenue b) In a period of inflation, LIFO producers a lower net income because higher unit costs of the last goods purchased are matched against revenue c) If prices are falling, the results from the use of FIFo and LIFO are reversed. FIFO will report the lowest net income and LIFO the highest D) Regardless of whether prices are rising or falling, average cost produces net income between FIFO and LIFO 2) balance sheet effects Advantage of FIFO method: in a period of inflation: the costs allocated to ending inventory will approximate their current cost Disadvantage of LIFO: in a period of inflation, the costs allocated to ending inventory ay be significantly understated in terms of current cost 3) tax effects

Effects of inventory errors:

1) income statement effects a) The ending inventory of one period automatically becomes the beginning inventory of the next period. Thus, inventory errors affect the computation of cost of goods sold and net income in two periods. b) If beginning inventory is understated, cost of goods sold will be understated. c) If ending inventory is understated, cost of goods sold will be overstated. d) an error in the ending inventory of the current period will have a reverse effect on net income of the next accounting period 2) balance sheet effects a) companies can determine the effect of ending inventory error on the balance sheet by using the basic accounting equation: Assets = liabilities + stock holders equity

Land

A long-term asset account that reports the cost of real property exclusive of the cost of any constructed assets on the property. This usually appears as the first item under the balance sheet heading of Property, Plant and Equipment. Generally, This is not depreciated. Cash and other assets are debited to increase their balances. A credit will DECREASE the Cash account (or any asset account) balance. Since this is an asset, you debit the account to increase its balance.

cost flow assumption

3 methods: 1) Lifo 2) FIFO 3) average cost important: there is no accounting requirement that the cost flow assumption be consistent with the physical movement of the goods

Days in Inventory

365/inventory turnover Both help to determing how long an item is in inventory

Net income =

= Gross profit - operating expenses - non-operating expenes

Purchase discounts

A (blank) discount, also called a cash discount, is a reduction in the price of a good if the buyer pays for it within the allowable period. In other words, this is an incentive that the seller gives to the buyer in hopes that the buyer will pay for the purchase in full before the actual due date. This normal balance is a credit, a reduction in costs for the business. The discount is recorded in a contra expense account which is offset against the appropriate purchases or expense account in the income statement.

dividends

A (blank) is a payment made by a corporation to its shareholders, usually as a distribution of profits. When a corporation earns a profit or surplus, the corporation is able to re-invest the profit in the business and pay a proportion of the profit as a dividend to shareholders. When a corporation declares a cash (blank) on its common stock, it will credit a current liability account Dividends Payable and will debit either: Retained Earnings, or. Dividends.

Purchases

A temporary account used in the periodic inventory system to record the purchases of merchandise for resale. ... This account reports the gross amount of purchases of merchandise. Net purchases is the amount of purchases minus purchases returns, purchases allowances, and purchases discounts. Image result for are purchases a debit or credit For example, you would debit the purchase of a new computer by entering the asset gained on the left side of your asset account. A credit is an entry made on the right side of an account. It either increases equity, liability, or revenue accounts or decreases an asset or expense account.

Tax lowering effect of LIFO choice by companies that have persistent inflaion

But costs do change. For many products, costs rise every year. Businesses that sell those products benefit from using LIFO.

Gain on disposal of plant assets

By comparing an asset's book value (cost less accumulated depreciation) with its selling price (or net amount realized if there are selling expenses), the company may show either a gain or loss. If the sales price is greater than the asset's book value, the company shows a gain.

Profit margin =

Net income / revenue

Revenue Recognition Principle

The accounting guideline requiring that revenues be shown on the income statement in the period in which they are earned, not in the period when the cash is collected. This is part of the accrual basis of accounting (as opposed to the cash basis of accounting).

accumulated depreciation - equipment

The contra asset account which accumulates the amount of Depreciation Expense taken on something since the asset was acquired. As a contra asset account it will have a credit balance. Credit account

loss of disposal of plant assets

The disposal of assets involves eliminating assets from the accounting records. This is needed to completely remove all traces of an asset from the balance sheet (known as derecognition). An asset disposal may require the recording of a gain or loss on the transaction in the reporting period when the disposal occurs. Loss on sale. Debit cash for the amount received, debit all accumulated depreciation, debit the loss on sale of asset account, and credit the fixed asset. Gain on sale. Debit cash for the amount received, debit all accumulated depreciation, credit the fixed asset, and credit the gain on sale of asset account.

Lifo method using perpetual system

The latest units purchased PRIOR TO EACH SALE are allocated to cost of goods sold. In contrast, in a periodic system, the latest units purchased DURING THE PERIOD are allocated to gods of goods sold. Thus, when a purchase is made after the last sale, the a LIFO periodic system will apply this purchase to the previous sale.

Purchase returns and allowances

The temporary contra purchases account used in a periodic inventory system which represents the amounts of merchandise that were returned to suppliers and the amounts allowed as deductions by suppliers for goods not returned. This will normally have a debit balance since it represents additions to the inventory, an asset. The contra account purchases returns and allowances will have a credit balance to offset it.

sales discounts and allowances

These are deducted from gross sales to arrive at the company's net sales. Hence, the general ledger account Sales Discounts is a contra revenue account. Sales allowances occur when customers agree to keep such merchandise in return for a reduction in the selling price. ... Therefore, sales returns and allowances is considered a contra‐revenue account, which normally has a debit balance.

Salaries and wages expense

This Expense are used to record the amounts earned by employees during the accounting period under the accrual basis of accounting. debit this account

cash based accounting

This accounting recognizes revenue and expenses only when money changes hands,

intrest expense

This expense is a non-operating expense shown on the income statement. It represents interest payable on any borrowings - bonds, loans, convertible debt or lines of credit. It is essentially calculated as the interest rate times the outstanding principal amount of the debt. this is a debit. This is because expenses are always debited in accounting. Debits increase the balance of this expense account. Credits usually belong to the interest payable account.

Rent expense

This expense is an account that lists the cost of occupying rental property during a reporting period. ... Under the cash basis of accounting, the amount of the expense reported in a period is the amount of cash paid during that period. Since cash was paid out, the asset account Cash is credited and another account needs to be debited. Because the rent payment will be used up in the current period (the month of June) it is considered to be an expense, and This Expense is debited. ... A credit to a liability account increases its credit balance.

income tax expense

This expense is the amount of expense that a business recognizes in an accounting period for the government tax related to its taxable profit. ... Some corporations put so much effort into delaying or avoiding taxes that their income tax expense is nearly zero, despite reporting large profits Companies record This expense as a debit and income tax payable as a credit in journal entries. If companies use the same cash method of accounting for both financial and tax reporting, the completed journal entries include an equal debit and credit to income tax expense and income tax payable, respectively.

utilities expense

This expense is the cost incurred by using utilities such as electricity, water, waste disposal, heating, and sewage. The expenses are incurred over the course of the reporting period, calculated, and payment is rendered. With the accrual basis

Maintenance and repairs expense

This expense is the cost incurred to ensure that an asset continues to operate. This may involve bringing performance levels up to their original level from when an asset was originally acquired, or merely maintaining the current performance level of an asset. To record this expense in your records, debit this expense account by the amount of the expense in a journal entry. A debit increases an expense account. Credit either the cash or accounts payable account by the same amount depending on how you will pay for the expense.

Amortization expense

This expense is the write-off of an intangible asset over its expected period of use, which reflects the consumption of the asset. This is most commonly used for the gradual write-down of intangible assets. Examples of intangible assets are: Broadcast licenses Copyrights Patents Taxi licenses Trademarks The basic journal entry for depreciation is to debit the Depreciation Expense account (which appears in the income statement) and credit the Accumulated Depreciationaccount (which appears in the balance sheet as a contra account that reduces the amount of fixed assets)

supplies expense

This expense refers to the cost of consumables used during a reporting period. Depending on the type of business, this can be one of the larger corporate expenses. There are two types of supplies that may be charged to expense, which are: Factory supplies. When you debit office supplies as an expense to an account such as Office Supplies, you would credit a Cash account if you paid for the supplies with cash. But if you use a credit card or receive a billing invoice you have to pay, you record the office expense in the Accounts Payable account.

Perpetual inventory systems

This involves tracking inventory after every or almost every major purchase. This is the opposite of the other inventory system, where a company maintains its inventory through physical counts on a definite scheduled and reoccurring basis.

accumulated depreciation - buildings

This is a contra long-term asset account which is credited for the depreciation associated with Buildings. Since it is a balance sheet account, the accumulated depreciation account balance does not close at the end of each year; therefore, its credit balance will increase each year. However, its balance cannot become greater than the cost of the buildings. Credit account

specific identification

This is a method of finding out ending inventory cost. It requires a detailed physical count, so that the company knows exactly how many of each goods brought on specific dates remained at year end inventory.

Accrual Basis Accounting

This is a method of recording accounting transactions for revenue when earned and expenses when incurred. ... A key advantage of this is that it matches revenues with related expenses, so that the complete impact of a business transaction can be seen within a single reporting period.

Buildings

This is a noncurrent or long-term asset account which shows the cost of a building (excluding the cost of the land). This will be depreciated over their useful lives by debiting the income statement account Depreciation Expense and crediting the balance sheet account Accumulated Depreciation.

Sales discounts

This is a reduction in the price of a product or service that is offered by the seller, in exchange for early payment by the buyer. This may be offered when the seller is short of cash, or if it wants to reduce the recorded amount of its receivables outstanding for other reasons. Debit this account by the amount of the discount. A debit increases both of these accounts. In this example, debit cash by $99 and debit this by $1. Credit the accounts receivable account in the same journal entry by the full invoice amount.

periodic inventory systems

This is a system of inventory in which updates are made on a periodic basis. This differs from perpetual inventory systems, where updates are made as seen fit. In a periodic inventory system no effort is made to keep up-to-date records of either the inventory or the cost dala of goods sold. == all goods purchased during the period are assumed to be available for the first sale, regardless of the date of purchase

income taxes payable

This is a type of account in the current liabilities section of a company's balance sheet. It is compiled of taxes due to the government within one year. The calculation of income tax payable is according to the prevailing tax law in the company's home country. this is a liability account that is shown on the balance sheet. ... When you do your adjusting entry each period and debit income tax expense, you will credit This. When you actually pay the income tax liability, you will debit This and credit cash.

depreciation expense

This is the amount of depreciation that is reported on the income statement. In other words, it is the amount of an asset's cost that has been allocated and reported as an expense for the period (year, month, etc.) shown in the income statement's heading. The basic journal entry for depreciation is to debit the (blank) account (which appears in the income statement) and credit the Accumulated Depreciation account (which appears in the balance sheet as a contra account that reduces the amount of fixed assets).

Retained earnings

This is the amount of net income left over for the business after it has paid out dividends to its shareholders. A business generates earnings that can be positive (profits) or negative (losses). this has a credit balance, receiving a credit when it increases and a debit when it decreases. However, it is possible that a business distributes more to its owners than it earns and ends up with negative retained earnings with a debit balance.

sales revenue

This is the amount realized by a business from the sale of goods or services. You would post this revenue as a credit. Increases in revenue accounts, the cash sales, are recorded as credits. Cash, an asset account, is debited for the same amount. An asset account is debited when there is an increase, such as in this case.

salaries and wages payable

This is the liability incurred by an organization for wages earned by but not yet paid to employees. ... When a business pays its employees salaries as of the end of a reporting period, there is no wages payable liability, since salary payments match the amount earned by employees through the payment date. credit

unearned service revenue

This is the money received by an individual or company for a service or product that has yet to be provided or delivered. It is recorded on a company's balance sheet as a liability because it represents a debt owed to the customer. As a company earns the revenue, it reduces the balance in the unearned revenue account (with a debit) and increases the balance in the revenue account (with a credit). This account is usually classified as a current liability on the balance sheet.

prepaid insurance

This is the portion of an insurance premium that has been paid in advance and has not expired as of the date of a company's balance sheet. This unexpired cost is reported in the current asset account (blank) You pay upfront and use the insurance throughout the year. When you buy the insurance, debit the prepaid expense account to show an increase in assets. And, credit the cash account to show the loss of cash.

freight - out

This is the transportation cost associated with the delivery of goods from a supplier to its customers. This cost should be charged to expense as incurred and recorded within the cost of goods sold classification on the income statement. In other words, when you are shipping freight to your customers, the cost of making that delivery is an expense that comes out of your ledger as a debit. This is considered a selling expense and is known as (blank). When you make a purchase and the supplier bills you for shipping, that is referred to as freight-in.

common stock

This is the type of ownership interest (expressed in "shares") that exists at every U.S. corporation. ... The balance in Common Stock will be reported in the corporation's balance sheet as a component of paid-in capital, a section within stockholders' equity. For example, common stock and retained earnings have normal credit balances. This means an increase in these accounts increases shareholders' equity. The dividend account has a normal debit balance; when the company pays dividends, it debits this account, which reduces shareholders' equity.

cost of goods sold

This refers to the direct costs of producing the goods sold by a company. This amount includes the cost of the materials and labor directly used to create the good. It excludes indirect expenses, such as distribution costs and sales force costs. This is the inventory cost to the seller of the goods sold to customers. This is an EXPENSE item with a normal debit balance (debit to increase and credit to decrease).

The statement of cash flows

This reports the sources and uses of cash by operating activities, investing activities, financing activities, and certain supplemental information for the period specified in the heading of the statement. this is also known as the cash flow statement.

expense recognition principle

This states that expenses should be recognized in the same period as the revenues to which they relate. If this were not the case, expenses would likely be recognized as incurred, which might predate or follow the period in which the related amount of revenue is recognized.

insurance expense

Under the accrual basis of accounting, this expense is the cost of insurance that has been incurred, has expired, or has been used up during the current accounting period for the non-manufacturing functions of a business. ... Any prepaid insurance costs are to be reported as a current asset. When the asset is charged to expense, the journal entry is to debit this expense account and credit the prepaid insurance account. Thus, the amount charged to expense in an accounting period is only the amount of the prepaid insurance asset ratably assigned to that period.

inventory

a complete list of items such as property, goods in stock, or the contents of a building. This is a current asset with a normal debit balance meaning a debit will increase and a credit will decrease.

FIFO

the oldest inventory items are recorded as sold first but do not necessarily mean that the exact oldest physical object has been tracked and sold. In other words, the cost associated with the inventory that was purchased first is the cost expensed first. Important: under FIFo: companies obtain the cost of the ending inventory by taking the unit cost of the most recent purchase and working backward until all units of inventory have been costed When prices are rising (which is usually the case), companies tend to prefer FIFO because it results in higher net income

administrative expenses

these expenses are the expenses an organization incurs not directly tied to a specific function such as manufacturing, production, or sales. ... Salaries of senior executives and costs associated with general services such as accounting and information technology (IT) are examples of administrative expenses Probably a debit account

advertising expenses

this Expense is the income statement account which reports the dollar amount of ads run during the period shown in the income statement. This Expense will be reported under selling expenses on the income statement. When you receive a bill for this, debit your advertising expense and credit your accounts payable account. When you pay the bill, you would reverse the entry and debit accounts payable and credit cash.

Rent revene

this Revenue is the title of an income statement account which (under the accrual basis of accounting) indicates the amount of rent that has been earned during the period of time indicated in the heading of the income statement. The account (blank) revenue is also known as Rental Income.

notes payable

this is a general ledger liability account in which a company records the face amounts of the promissory notes that it has issued. ex: loan from a bank This is a liability (debt) account that normally has a credit balance. When money is borrowed from the bank, the accountant will debit the Cash account to reflect the increase in the amount of cash and credit this account to show the corresponding debt.

Intrest revenue

this is the earnings that an entity receives from any investments it makes, or on debt it owns. ... If an entity is in the business of earning interest revenue, such as a lender, then it should record interest revenue in the revenue section at the top of the income statement. You would post thus revenue as a credit. Increases in revenue accounts, the cash sales, are recorded as credits. Cash, an asset account, is debited for the same amount. An asset account is debited when there is an increase, such as in this case.

intrest payable

this is the interest expense that has been incurred (has already occurred) but has not been paid as of the date of the balance sheet. [this does not include the interest for periods after the date of the balance sheet.]

Mortgage payable

this payable is the liability of a property owner to pay a loan that is secured by property. From the perspective of the borrower, the mortgage is considered a long-term liability. Any portion of the debt that is payable within the next 12 months is classified as a short-term liability. The borrowing and receipt of cash is recorded with an increase (debit) to cash and an increase (credit) to (blank) payable.