Accounting Chapters 4,5,6
to increase accounts payable
credit
what does the cash account include
currency, coins, checks, and deposits in bank accounts
how to compute goods available for sale
current inventory + net purchases
if less cash is received than recorded cash sales
debit cash debit cash over and short the small value needed credit sales the cash amount plus the cash over and short value
buyer pays after discount period
debit cash full amount, credit accounts receivable full amount
sales discounts
debit cash the full amount minus the discount amount debit sales discounts (discount amount) credit accounts receivable the full amount
Adjusting entry for merchandisers: Inventory Shrinkage
debit cost of goods sold credit merchandise inventory
fob destination
debit delivery expense credit cash
Reimburse and record expenses for petty cash
debit expenses credit cash amount (get this value by adding all the expenses)
paid for freight charges
debit merchandise inventory
fob shipping point
debit merchandise inventory credit cash
FOB shipping point with terms
debit merchandise inventory credit accounts payable full amount
buyer returns goods (cost)
debit merchandise inventory, credit cost of goods sold (cost amount)
how to record bank fees
debit misc expenses credit cash
how to record when petty cash fund has an unexplained shortage
debit misc expenses debit cash over and short credit cash (add misc expenses and cash over and short values)
entry to set up petty cash fund
debit petty cash credit cash
increasing a petty cash fund after reimbursement
debit petty cash credit cash
buyer granted allowances (seller offers a price reduction so the buyer keeps the goods)
debit sales returns and allowances, credit accounts receivable
buyer returns goods (revenue)
debit sales returns and allowances, credit cash (the amount the product was sold for)
each bank deposit has a...
deposit ticket, which lists currency. the bank gives the customer a copy of this
gross margin ratio
excludes all costs except cost of goods sold gross margin (net sales minus COGS)/ net sales
how has technology affected the perpetual system
gives managers immediate access to information
goods on consignment
goods sent by the owner (consignor) to another party (consignee) -consignee never reports consigned goods
LIFO
inventory accounting in which the most recently acquired items are assumed to be the first sold; method is supposed to create the lowest ending inventory in a period of rising prices. Also create a lower taxable income, lower gross profit.
FIFO
inventory accounting in which the oldest items (those first acquired) are assumed to be the first sold; creates a higher ending inventory and lower cost of goods sold, higher gross profit and higher taxable income.
FIFO advantages
inventory approximates current cost follows the actual flow of goods for most businesses
inventory vs accounts receivable
inventory is converted less quickly to cash than accounts receivable because inventory must be sold first before cash can be received
what happens to merchandise available for sale?
it is either sold (expensed on the income statement as cost of goods sold) or kept for future sales (current asset on the balance sheet)
specific identification advantages
matches the costs of items with the revenues they generate
purchase returns
merchandise a buyer acquires and returns
after recording payment within the discount period
merchandise inventory equals the large amount minus the discount amount and accounts payable has a zero balance
classified balance sheet
merchandise inventory is a current asset, after accounts receivable
damaged goods in inventory
net realizable value (sales price - cost of making the sale)
single step income statement
only one subtotal for expenses, expenses are grouped into categories
limitations of internal control
opportunity, pressure, rationalization
internal control system uses policies and procedures to
protect assets, ensure reliable accounting, promote efficient operations, uphold company policies
bank balance adjustment: deposits in transit
recorded in the depositor's books but not listed on the bank statement
periodic inventory system
records cost of goods sold at the end of the period
perpetual inventory system
records cost of goods sold at the time of each sale
LIFO
reports the highest cost of goods sold, yielding lowest gross profit and net income
FIFO
reports the lowest cost of goods sold, yielding the highest gross profit and net income
How to compute gross profit
revenue - cost of goods sold
how to compute net income
revenue - expenses
cash equivalents
safe and highly liquid assets that many firms list with their cash holdings on their balance sheet
operating expenses in a multiple step income statement
selling expenses and general administrative expenses
weighted average advantages
smooths out erratic changes in costs
what does 2/5 n/60 mean
there is a 2 percent discount if it is paid in 5 days and the whole balance must be paid in 60 days
when to do a bank reconciliation
to explain differences between the checking account balance in the depositor's records and the balance on the bank statement
weighted average
yields results between FIFO and LIFO
when costs regularly decline,
-FIFO gives the highest cost of goods sold- yielding the lowest gross profit and income -LIFO gives the lowest cost of goods sold- yielding the highest gross profit and income
steps for closing entries for merchandisers
1. close credit balances in temporary accounts (debit sales and credit income summary) 2. close debit balances in temporary accounts (debit income summary and credit all expenses as well as sales discounts, sales returns and allowances, and cost of goods sold) 3. Close income summary (debit income summary and credit retained earnings for the same amount) 4. close dividends (debit retained earnings and credit dividends)
principles of internal control
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
how to calculate days sales in inventory
365/inventory turnover
committee of sponsoring organizations
control environment risk assessment control activities information and communication monitoring
electronic transfer fund
A computer-based system that enables you to move money from one account to another without writing a check or exchanging cash.
Sarbanes-Oxley Act
A law passed by Congress that requires the CEO and CFO to certify that their firm's financial statements are accurate;
BANK BALANCE ADJUSTMENTS
ADD deposits in transit subtract outstanding checks add or subtract corrections of bank errors
multiple step income statement
An income statement that shows several steps in determining net income.
periodic inventory system
An inventory system in which a company does not maintain detailed records of goods on hand throughout the period and determines the cost of goods sold only at the end of an accounting period. Merchandise inventory account is updated at the end of the period
weighted average
Average of data that takes other factors such as the number of incumbents into account.
how to calculate inventory errors
cost of goods sold = beginning inventory + net purchases - ending inventory
LIFO advantages
cost of goods sold approximates current cost matches current costs with revenues
how to calculate inventory turnover
cost of goods sold/average inventory
payment after discount period
Debit Accounts Payable (large amount) Credit Cash (large amount)
Payment within discount period
Debit Accounts Payable (largest amount) Credit Merchandise Inventory (discount amount) Credit Cash (large amount minus discount amount)
how to record collection of a note
debit cash credit notes receivable
LOL Music Store uses the perpetual inventory system to account for its merchandise. On November 17, it purchased $1,000 of merchandise with terms of 2/5,n/60. If payment is made on November 21, demonstrate the required journal entry to record the payment by selecting all of the correct actions below. (Check all that apply.)
Debit accounts payable 1000 credit cash 980 credit Merch inventory 20
inventory costs
Invoice Cost - Returns - Discounts + shipping cost + storage costs + Insurance costs + Import Duties. Excludes negligence and fines
sales on credit
Payment at a later date; debit accounts receivable credit sales AND debit cost of goods sold credit merchandise inventory
cash equivalents
Short-term, highly liquid investments that can be readily converted to a specific amount of cash and which are relatively insensitive to interest rate changes.
decreasing a petty cash fund after reimbursement
debit cash credit petty cash
FOB destination
a price indicating the producer is absorbing shipping costs
liquidity
ability to pay current liabilities
general and administrative expenses
accounting, financing, Human Resources, etc
COGS
accounts remain in inventory
measure of a merchandisers ability to pay its current liabilities (liquidity)
acid test ratio; quick assets divided by current liabilities
BOOK BALANCE ADJUSTMENTS
add interest earned and unrecorded cash receipts subtract bank fees and NSF checks add or subtract corrections of book errors
selling expenses
advertising, making sales, etc
petty cash
an amount of cash kept on hand and used for making small payments
how to calculate merchandise available for sale
beginning inventory + net purchases
what is included in merchandise available for sale
beginning inventory + net purchases
How to compute Cost of Goods Sold
beginning inventory + net purchases - ending inventory (goods available for sale - ending inventory)
what is included on bank statements
beginning of period account balance checks and other debits decreasing the account during the period deposits and other credits increasing the account during the period end of period account balance
FOB shipping point
buyer pays the shipping costs
quick assets
cash and cash equivalents, short term investments, current receivables
bank balance adjustment: outstanding checks
checks written by the depositor, and subtracted on the depositor's books
what kind of account is sales discounts
contra revenue
how to record purchase returns
debit accounts payable (full amount), credit inventory (full amount)
how to record a return
debit accounts payable credit merchandise inventory
how to record purchase allowances
debit accounts payable credit merchandise inventory
perpetual inventory system, company purchases 1000 with terms. what is involved and what do you do?
debit accounts payable the 1000 credit cash 1000 minus the discount credit merchandise inventory the discount amount
how to record paying for goods within a discount period
debit accounts payable, credit merchandise inventory and cash
how to record NSF checks
debit accounts receivable credit cash
if more cash is received than recorded cash sales
debit cash credit cash over and short the excess amount debit sales the cash amount minus the excess cash amount
how to record interest earned
debit cash credit interest revenue