Accounting

Sales Returns and Allowances Merchandising operations

" Flip side" 1) Sales returns and allowances Accounts receivable or cash (to record credit granted to buyer for returned goods) 2) Inventory COGS ( to record cost of goods returned)

Recording process

1. Analyze the transaction 2. Enter transaction in journal 3. Transfer journal information to ledger accounts

Time Period Assumption - Adjusting Entries

Accountants divide the economic life of a business into artificial time periods

Expense Recognition Principle - Adjusting Entries

Efforts (expenses) should be matched with results (revenues).

just in time inventory

Inventory system in which companies manufacture or purchase goods only when needed of use.

REVENUE RECOGNITION PRINCIPLE - Adjusting Entries

Recognise revenue in the accounting period in which the performance obligation is satisfied.

Gross Profit Rate Merchandising operations

gross profit/net sales

Cost of Goods Sold - Merchandising operations

the total cost of merchandise sold during the period. This expenses directly related to the revenue recognised from the sale of goods.

The characteristic that most distinguishes a partnership from a proprietorship is

transferability of ownership.

The characteristic that most distinguishes a partnership from a corporation is - Adjusting Entries

unlimited liability.

Rent Expense is an expense (E): Service Revenue is a revenue (R): Dividends is a distribution to shareholders (D); Salaries and Wages Expense is an expense (E); - Adjusting Entries

● Rent Expense is an expense (E); it decreases equity. ● 2.Service Revenue is a revenue (R); it increases equity. ● 3.Dividends is a distribution to shareholders (D); it decreases equity. ● 4.Salaries and Wages Expense is an expense (E); it decreases equity.

intangible assets - - COMPLETING ACC CYCLE

(e.g. goodwill, copyrights, patents, trademarks) that give the company EXCLUSIVE RIGHT of use for a specific period of time.

Periodic System - flow of cost Merchandising operations

- Do not keep detailed inventory records of the goods on hand. - instead, they determine Cost of goods sold ONLY at the end of the accounting period. Calculation of COGS: beginning inventory: Add purchases, net Goods available for sale less: Ending inventory ---------- = Cost of Goods Sold

Revenue expenses =

Net income

Income Measurement Process Merchandising operations

Sales Revenue - Cost of Goods Sold = Gross Profit - Operating Expenses = Net Income (loss)

Trial Balance - Adjusting Entries

a list of accounts and their balances at a given time

companies tend to prefer FIFO

because it results in higher net income.

Defferals - Adjusting Entries

prepaid expenses expenses paid in cash before they are consumed unearned revenues: cash received before services are performed.

Income statement representation of sales: Merchandising operations

*Sales* sales revenue less: sales return and allowances sales discounts_______________ Net sales

Trial balance may balance even when

1. A transaction is not journalized. 2. A correct journal entry is not posted. 3. A journal entry is posted twice. 4. Incorrect accounts are used in journalising or posting. 5. Offsetting errors are made in recording the amount of a transaction.

Accounting Cycle Steps - COMPLETING ACC CYCLE

1. Analyze business transactions 2. Journalize the transactions 3. Post to ledger accounts 4. Prepare a trial balance 5. Journalize and post adjusting entries 6. Prepare an adjusted trial balance 7. Prepare financial statements 8. Journalize and post closing entries 9. Prepare a post-closing trial balance

Cost Flow Assumptions

1.First-in, first-out (FIFO) 2.Average-cost

GOODS IN TRANSIT

1.When the terms are FOB (free on board) shipping point, ownership of the goods passes to the buyer when the public carrier accepts the goods from the seller. 2.When the terms are FOB destination, ownership of the goods remains with the seller until the goods reach the buyer

days inventory

365/inventory turnover This measures the average number of days inventory is held

Revenues

= gross increases in equity resulting from business activities entered into for the purpose of earning income.

Perpetual versus periodic inventory systems Merchandising operations

A perpetual inventory system provides better control over inventories than the periodic system

Accrual Basis Accounting - Adjusting Entries

Accounting basis in which companies record transactions , in the periods in which the events occur, that change a company's financial statements, even if cash was not exchanged.

Adjusting entries versus Correcting Entries versus - - COMPLETING ACC CYCLE

Adjusting Entries: ONLY AT THE END of the accounting period. Correcting entries: made when they discover an error and MUST BE POSTED BEFORE closing entries.

creditors

All persons or entities to whom the company owes money

Calendar year - Adjusting Entries

An accounting period that extends from January 1 to December 31.

reversing entry - COMPLETING ACC CYCLE

An entry made at the beginning of the next accounting period; the exact opposite of the adjusting entry made in the previous period.

Dividends

Are always declare an paid immediately

Current Assets- - COMPLETING ACC CYCLE

Are assets that a company expects to convert to cash or use up within one year or it's operating cycle, whichever is longer. Current assets: -Inventories -Trade and other receivables -Derivative financial instruments -Current tax assets -Short-term investments -cash and equivalents

Inventory presentation of in the statement of financial position Merchandising operations

Assets Property plant & equipment Equipment less: accum depreciation equipment CuRRENT Assets: Prepaid insurance *INVENTORY: Accounts receivable Cash_____________________________ Total assets= *INVENTORY: cost of inventory on hand not its expected selling price.

Basic Accounting Equation

Assets = Liabilities + Equity

A local hardware store is calculating its end of year assets. What expanded version of the basic accounting equation will it need to use based on revenues and expenses for the just concluded year?

Assets = Liabilities + Revenues - Expenses - Dividends + Retained Earnings at the Beginning of the Year + Share CapitalOrdinary

equity

Assets Liabilities = equity ( left over after creditors' claims are satisfied). Equity generally consist of: Share capital ordinary: describes the amount paid in by shareholders for the ordinary shares they purchase. Retained earnings: revenues ( sales, fees, services, commissions, interest, dividends, royalties, and rent.) , expenses ( salaries expense, rent expense, utilities expense, property tax expense, etc.) and dividends (ARE NOT EXPENSES), income summary.

deferrals before adjustment - Adjusting Entries

Assets overtated expenses understated Net income overstated

closing the books - COMPLETING ACC CYCLE

At the end of the period, the company makes the accounts ready for the next period. This is called closing the books. In closing the books the company distinguishes between temporary and permanent accounts.

Liquidity - COMPLETING ACC CYCLE

Availability to pay obligations expected to be due within the next year. Users of financial statements look closely at the relationship between current assets and current liabilities to evaluate a companies liquidity.

The Flow of Costs of a merchandising company is Merchandising operations

Beginning inventory + the cost of goods available for sale. As goods are sold, they are assigned to COST OF GOODS SOLD. Those goods that are not sold at the end of the accounting period represent ENDING INVENTORY. Companies use either perpetual or periodic inventory system to account inventory.

Although bookkeeping is part of the accounting process, there is a difference between bookkeeping and recording. What is the difference? - Adjusting Entries

Bookkeeping is the recording of only economic events, whereas recording also includes classification and summarisation.

DEPRECIATION - Adjusting Entries

Buildings, equipment, and motor vehicles (assets that provide service for many years) are recorded as assets, rather than an expense, on the date acquired. Depreciation is the process of allocating the cost of an asset to expense over its useful life. Depreciation does not attempt to report the actual change in the value of the asset.

cost of goods sold Inventory

COGS= (beginning invetory + purchases) - ending inventory. The value assigned to the ending inventory will depend on which cost flow method we use. No matter which cost flow assumption we use, though, the sum of cost of goods sold plus the cost of the ending inventory must equal the cost of goods available for sale.

Cash basis vs. Accrual basis

Cash basis recognises the impact of transactions on the financial statements only when a company receives or pays cash. Accrual basis recognises the impact of transactions on the financial statements in the time periods when revenues and expenses occur.

Liabilities

Claims against assets All payables

Reversing Entries - COMPLETING ACC CYCLE

Companies make a reversing entry at the beginning of the next accounting period. EACH REVERSE ENTRY IS THE OPPOSITE OF THE ADJUSTING ENTRY MADE IN THE PREVIOUS PERIOD.

TAKING A PHYSICAL INVENTORY

Companies take a physical inventory at the end of the accounting period. Taking a physical inventory involves actually counting, weighing, or measuring each kind of inventory on hand. In many companies, taking an inventory is a formidable task.

Merchandising operations

Companies that buy and sell merchandise rather than perform perform services as their primary source of revenue. *Merchandising companies that sell directly to consumers are called retailers. ** Merchandising companies that sell to retailers are called wholesalers.

Other Income and Expenses Merchandising operations

Consist of various revenues and gains and expenses and losses that are unrelated to the main line of operations. Other income: - Interest revenue: from notes receivable and marketable securities. - Dividend revenue: from investments in ordinary shares. -Rent revenue: from subleasing a portion of the store Gain: from the sale of property , plant and equipment. Other expense: - Casualty losses: vandalism and accidents - loss from the sale or abandonment of property, plant and equipment - Loss from strikes by employees and suppliers

Inventory turnover

Cost of Goods Sold ÷ Average Inventory (beginning inventory + ending inventory / 2 = Inventory Turnover measures the number of times on average the inventory is sold during the period

Statement of Financial Position Effects

Ending Inventory Error Assets Liabilities Equity Overstated Overstated No effect Overstated Understated Understated No effect Understated

closing entries - COMPLETING ACC CYCLE

Entries at the end of an accounting period to transfer the balances of temporary accounts to a permanent stockholders' equity account, Retained Earnings.

Equity - COMPLETING ACC CYCLE

Equity: - Share-capital ordinary - Share premium -Other reserves - Retained earnings

INCOME STATEMENT EFFECTS

FIFO or Average-Cost Sales revenue Beginning inventory Purchases Cost of goods available for sale Ending inventory Cost of goods sold Gross profit Operating expenses Income before income taxesa Income tax expense ome

Adjusting entries Merchandising operations

For merchandising using perpetual system: Journal entry : COGS Inventory

freight costs Merchandising operations

Freight terms are expressed as either -FOB shipping pont: BUYER PAYS FREIGHT COST - FOB destination: SELLER PAYS FREIGHT COST. Entry for freigth cost: Inventory 150 cash 150 (Freight cost incurred in the buyer are part of the merchandised purchased) Journal entry to record sale: 1) Cash or account receivable sales revenue 2) COGS Inventory

Long-term investments - COMPLETING ACC CYCLE

Generally, (1) investments in ordinary shares and bonds of other companies that companies hold for more than one year; (2) long-term assets, such as land and buildings, not currently being used in the company's operations. Long-term investments: - Investments of property - Investments in associates - Other Financial Investments

CONSIGNED GOODS

Goods held for sale by one party although ownership of the goods is retained by another party. For example, you might have a used car that you would like to sell. If you take the item to a dealer, the dealer might be willing to put the car on its lot and charge you a commission if it is sold. Under this agreement, the dealer would not take ownership of the car, which would still belong to you. Therefore, if an inventory count were taken, the car would not be included in the dealer's inventory. Many car, boat, and antique dealers sell goods on consignment to keep their inventory costs down and to avoid the risk of purchasing an item that they will not be able to sell. Today, even some manufacturers are making consignment agreements with their suppliers in order to keep their inventory levels low.

standard statement of financial position - - COMPLETING ACC CYCLE

Groups together similar assets and similar liabilities, using a number of standard clarifications and sections. this is useful because items within a group have similar economic characteristics. Assets: -intangible assets (e.g. goodwill, copyrights, patents, trademarks) - property plant and equipment -long-term investments current assets Equity and liabilities: - Equity - Non- current liabilities - Current liabilities

Accounting consist of 3 basic activities

Identifies the economic events relevant to its business Records_ those events in order to provide history of its financial activities Communicates: the collected information to interested uses = accounting reports

Who uses accounting data?

Internal users: marketing managers, production supervisors, finance directors and company officers External users: investors, creditors

Inventory Costing

Inventory is accounted for at cost. Cost includes all expenditures necessary to acquire goods and place them in a condition ready for sale. For example, freight costs incurred to acquire inventory are added to the cost of inventory, but the cost of shipping goods to a customer are a selling expense. After a company has determined the quantity of units of inventory, it applies unit costs to the quantities to compute the total cost of the inventory and the cost of goods sold.

bookkeeping

Involves only one step of the accounting process

Journal

Is a book of original entry ● Transactions are recorded in chronological order

What is Accounting?

Is the financial information system that provides insights in what is happening financially inside a company

In a period of rising prices, FIFO will have Inventories

Lower cost of goods sold than average cost.

EXPENSE RECOGNITION PRINCIPLE also referred as matching principle. - Adjusting Entries

Match expenses with revenues in the period when the company makes efforts to generate those revenues.

Interim periods - Adjusting Entries

Monthly or quarterly accounting time periods

What is a company's balance in Share CapitalOrdinary account if its assets are valued at NT$425,000, liabilities are NT$175,000, and retained earnings are NT$200,000?

NT$50,000

Net Realizable Value (NRV)

Net amount that a company expects to realize (receive) from the sale of inventory. Specifically, it is the estimated selling price in the normal course of business, less estimated costs to complete and sell.

Comprehensive Income Merchandising operations

Net income *other comprehensive income unrealizable holding gain on investment securities___________ comprehensive income=

Retained earnings

Net income or net loss dividends

Determining inventory quantities Inventories

No matter whether they are using a periodic or perpetual inventory system, all companies need to determine inventory quantities at the end of the accounting period. 1.To check the accuracy of their perpetual inventory records. 2.To determine the amount of inventory lost due to wasted raw materials, shoplifting, or employee theft. Companies using a periodic inventory system take a physical inventory for two different purposes: to determine the inventory on hand at the statement of financial position date, and to determine the cost of goods sold for the period. Determining inventory quantities involves two steps: (1) taking a physical inventory of goods on hand and (2) determining the ownership of goods.

An information system can organize, store and retrieve data. Accounting is considered a financial information system. How does it organize its data?

Once transactions are identified, they are recorded, classified, and summarised.

DETERMINING OWNERSHIP OF GOODS

One challenge in computing inventory quantities is determining what inventory a company owns. To determine ownership of goods, two questions must be answered: Do all of the goods included in the count belong to the company? Does the company own any goods that were not included in the count?

Operating expenses Merchandising operations

Operating expenses: Salaries & Wages expense Utilities expense Advertising expense Depreciation expense Freight-ou expense Insurance expense_________________ Total operating expenses

specific identification method

Specific identification requires that companies keep records of the original cost of each individual inventory item. For example, if Crivitz sold the TVs it purchased on February 3 and May 22, then its cost of goods sold is , and its ending inventory is £750 . Using this method, companies can accurately determine ending inventory and cost of goods sold. The reality is, however, that this practice is still relatively rare. Instead, rather than keep track of the cost of each particular item sold, most companies make assumptions, called cost flow assumptions, about which units were sold.

temporary versus permanent accounts - COMPLETING ACC CYCLE

TEMPORARY: These accounts closed. - All revenue accounts - ALL Expense accounts - Dividends (NOT AND EXPENSE) (DO NOT CLOSE DIVIDENDS THROUGH INCOME SUMMARY) ** closing entries produce a zero balance to each temporary account by sending it to Income summary > then retained earnings. Closing entries are only made AT THE END OF THE ANNUAL ACCOUNTING PERIOD. PERMANENT: these accounts are not closed. - All assets accounts - All liability accounts - Equity - Retained earnings is a permanent account

Income Summary - COMPLETING ACC CYCLE

Temporary account used only in the closing process to which the balances of revenue and expense accounts (including any gains or losses) are transferred; its balance is transferred to the capital account (or retained earnings for a corporation).

Faithful representation means

That financial information is factual

Operating Cycle - COMPLETING ACC CYCLE

The average time required to purchase inventory, sell it on account, and then collect cash from customers—that is, go from cash to cash. Except where noted, we will assume that companies use one year to determine whether an asset or liability is current or non- current.

AVERAGE-COST

The average-cost method allocates the cost of goods available for sale on the basis of the weighted-average unit cost incurred. The average-cost method assumes that goods are similar in nature. weighted-average unit cost = cost of goods available for sale / total units available for sale

First-In, First-Out (FIFO) Another way of thinking about the calculation of LIFO ending inventory is the FISH assumption—first in still here.

The last-in, first-out (LIFO) method assumes that the latest goods purchased are the first to be sold. Under perpetual FIFO, the company charges to cost of goods sold the cost of the earliest goods on hand prior to each sale

Assets

The resources a business owns

Posting

Transfers journal entries to ledger accounts

Lower-of-Cost-or-Net Realizable Value

Units x net realizable value = LCNRV When the value of inventory is lower than its cost, companies must "write down" the inventory to its net realizable value. This is done by valuing the inventory at the lower-of-cost-or-net realizable value (LCNRV) in the period in which the price decline occurs. LCNRV is an example of the accounting concept of prudence, which means that the best choice among accounting alternatives is the method that is least likely to overstate assets and net income. Companies apply LCNRV to the items in inventory after they have used one of the inventory costing methods (specific identification, FIFO, or average-cost) to determine cost.

Income Statement Effects - Inventory Errors

When Inventory Error: Cost of Goods Sold Is: Net Income Is: Understates beginning inventory: Understated Overstated Overstates beginning inventory Overstated Understated Understates ending inventory Overstated Understated Overstates ending inventory Understated Overstated

Inventory Errors

When errors occur, they affect both the income statement and the statement of financial position.

Acrruals - Adjusting Entries

accrued revenues: revenues for services performed but not yet received in cash. accrued expenses: expenses incurred but not yet paid in cash or recorded.

property plant and equipment - - COMPLETING ACC CYCLE

are assets with relatively long useful lives that are currently used in operating the business. property plant and equipment: - Land - Buildings - Structures - Machinery - Vehicles - other Less accumulated depreciation

Non-current liabilities - COMPLETING ACC CYCLE

are obligations that a company expects to pay AFTER one year. Non-current liabilities: Long-term dept Bond payable Mortgage payable Long-term notes payable Lease liabilities Pension plans Liabilities Provisions deferred tax liabilities

fair value principle - COMPLETING ACC CYCLE

assets and liabilities should be reported at fair value (the price received to sell an asset or settle a liability)

FIRST-IN, FIRST-OUT (FIFO) Another way of thinking about the calculation of FIFO ending inventory is the LISH assumption—last in still here. Inventories

assumes that the earliest goods purchased are the first to be sold. FIFO often parallels the actual physical flow of merchandise. That is, it generally is good business practice to sell the oldest units first. Under the FIFO method, therefore, the costs of the earliest goods purchased are the first to be recognised in determining cost of goods sold. (This does not necessarily mean that the oldest units are sold first, but that the costs of the oldest units are recognized first). Note the sequencing of the allocation: 1.compute ending inventory, and 2.determine cost of goods sold. 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

perpetual inventory system - flow of cost Merchandising operations

companies keep detailed records of the cost of each inventory purchased and sale. -these records are CONTINIOUSLY- PERPETUALLY show the inventory that should be on hand for every item. - Maintained detailed records of the cost of each inventory purchase and sale. - company determines cost of goods sold each time a sale occurs

Which form of business is most attractive to individuals who wish to participate in profits without sharing in the management function of the business?

corporation

Merchandising companies has two categories of expenses: Merchandising operations

cost of good sold and operating expenses.

Historical Value Principle ( or cost principle) - COMPLETING ACC CYCLE

dictates that companies record assets at their cost.

Purchased discount - Merchandising operations

discount of 2% on 35,000 for 20 days = annual rate of 36.5% = $3,500 x 36.5% x 20/365= $70 seller journal entry to record collection within 2/10, n/30: Cash Sales discounts Account receivables

Sally Harkins owns a bookstore and often takes cash out of the cash drawer to pay her apartment rent. Which of the following principles is Sally violating? - Adjusting Entries

economic entity assumption

Computing Interest - Adjusting Entries

face value x annual interest rate x time in terms of year = interest

Current Liabilities - COMPLETING ACC CYCLE

generally are obligations that the company is to pay within the coming year coming year of its operating cycle, whichever is longer. Current Liabilities: - Account payable - Salaries and wages payable - bank loans payable - interest payable - taxes payable - income tax payable - CURRENT MATURITIES OF LONG-TERM DEPT.

Operating cycles of merchandising company ordinarily is Merchandising operations

longer than that of a service compane

In periods of rising prices, average-cost will produce Inventories

lower net income than FIFO

Gross Profit Merchandising operations

net sales - cost of goods sold

MONETARY UNIT ASSUMPTION

requires that companies include in the accounting records only transaction data that can be expressed in terms of money.

The primary source of revenues for Merchandising companies the sale of merchandise often called Merchandising operations

sales revenue.

A business owner's personal expenses must be

separated from expenses of the business to comply with accounting economic entity assumption

Book Value - Adjusting Entries

the difference between the cost of a depreciable asset and its related accumulated depreciation