ACCT exam #2

Average Inventory Formula

(Beginning Inventory + Ending Inventory) / 2

3 entries for inventories for perpetual method (purchase made on account): 1. to record purchase of inventory 2. to record sale of merchandise 3. end of year adjustments

1. inventory xx acct payable xx 2. a) cash xx sales revenue xx b) COGS xx inventory xx 3. loss xx inventory xx

3 entries for inventories for periodic method (purchase made on account): 1. to record purchase of inventory 2. to record sale of merchandise 3. end of year adjustments

1. purchases xx accounts payable xx 2. cash xx sales revenue xx 3. ending inventory xx cogs xx purchases xx

3 steps of gross profit method estimation

1. determine gross profit % --- gross profit/net sales 2. find cogs --- sales x (1-gross profit %) 3. find ending inventory estimate --- GAS-COGS

2 methods of recording bad debts

1. direct write-off method 2. allowance method

2 primary uses of gross profit method

1. estimate inventory for interim financial statements: quarterly, monthly 2. estimate value of inventory destroyed/lost by casualty/theft

2 disadvantages of FIFO

1. it fails to match most recent costs with revenues 2. if prices are rising, matches oldest unit costs with current revenues (overstatement of net income)

2 Advantages of LIFO

1. matches current costs with current revenues 2. in periods of rising prices, net income is always less

cash equivalents must be: 1. 2.

1. readily convertible into known amount of cash 2. so near maturity that interest rate changes won't affect their market value

what are the 2 entries when making a sale for the perpetual inventory method

1. record the sale 2. update the inventory

4 Examples of Cash Equivalents

1. treasury bill (t-bill) 2. certificate of deposit (CD) 3. commercial paper 4. money market fund

inventory erros take __ years to correct

2

What does 2/10 net 30 mean?

2% discount if customer pays within 10 days or full amount due in 30 if not

how many inventory cost flow methods exist

4

formula for net realizable value (which goes on the balance sheet)

A/R - ADA --------- NRV

COGS formula in periodic system

Beg Invt + Net Purch ------------------------------ Goods Available for Sale - Ending Inventory ------------------------------- Cost of Goods Sold

the amount we paid for goods we have sold

COGS

what is the formula used for the periodic method

COGS formula

in periods of declining prices, is cost of goods sold higher with FIFO or LIFO

FIFO

in periods of rising prices, is ending inventory higher with FIFO or LIFO

FIFO

in periods of rising prices, is net income higher with FIFO or LIFO

FIFO

who required that you record your account receivable at the amount you expect to receive in cash

GAAP

LIFO conformity rule

IRS rule requiring a company that uses LIFO for tax reporting to also use LIFO for financial reporting

in periods of declining prices, is ending inventory higher with FIFO or LIFO

LIFO

in periods of declining prices, is net income higher with FIFO or LIFO

LIFO

in periods of rising prices, is cost of goods sold higher with FIFO or LIFO

LIFO

when prices are rising, which inventory cost flow method produces the lowest net income

LIFO

which inventory cost flow method is not allowed by the IASB

LIFO

net purchases formula

Purchases - (Purchase Returns & Allowances) - (Purchase Discounts) + Freight-In

Ship goods FOB destination on December 28th-- goods arrive at buyers warehouse on January 3rd. Year-end for both companies is December 31st. Who includes in ending inventory?

Seller

amounts due from customers from sale of goods/services

accounts receivable

for balance per bank: add- 1. 2. less- 1. 2.

add- 1. deposits in transit 2. bank errors less- 1. outstanding checks 2. bank errors

for balance per books: add- 1. 2. 3. less- 1. 2. 3. 4.

add- 1. notes collected by bank (on our behalf) 2. interest collected 3. book errors less- 1. NSF checks 2. Service checks 3. Overdraft charges 4. book erros

which goods are included in ending inventory

all goods in which the company has legal title

bad debt recording method which estimates uncollectible accounts at the end of the year

allowance method

which bad debt recording method is preferred

allowance method

advantage of average cost method

assigns cost an equal unit basis to both ending inventory and cogs

advantage of FIFO method

assigns current cost to inventory

How does the allowance method work?

at year end, a company will estimate (based on prior experience or industry averages) what they expect not to collect and record Bad Debt Expense through an adjusting entry. This places the expense in the same accounting period as the credit to sales revenue.

in the period method for inventories, when is the adjusting entry made to update inventories

at year-end

inventory cost flow method which uses weighted average of all costs for goods available for sale and assigns average cost to both ending inventory and cogs

average cost method

which 3 inventory cost flow methods are called cost flow assumptions

average cost, FIFO, LIFO

cost of doing business on credit

bad debt expense

what is the entry for the direct-write off method when the bad debt customer is identified

bad debt expense xx accounts receivable xx

what is the adjusting entry at year end for bad debt in allowance method

bad debt expense xx allowance for doubtful accounts xx

ending inventory amount effects which 2 statements

balance sheet and income statement

after reconciliation, record journal entries for everything on ____ side

book

Ship goods FOB shipping point on Dec. 28th-- goods arrive at buyers warehouse on January 3rd. Year end for both companies is December 31st. Who includes in ending inventory?

buyer

Who pays for shipping in FOB shipping point?

buyer

short term investments with an original maturity of three months or less

cash equivalents

allowance for doubtful accounts is a

contra asset account

Inventory Turnover Ratio formula

cost of goods sold/average inventory

bank increases your cash account, addition on bank statement

credit memo

what is inventory reported as on balance sheet

current asset

where does cash equivalents belong the balance sheet

current assets

working capital formula

current assets - current liabilities

current ratio formula

current assets/current liabilities

bank reduces your cash account, deduction on bank statement

debit memo

which bad debt expense recording method requires that you wait until you can specifically identify the bad debt customer and then record bad debt expense

direct write-off method

find ending inventory and cost of goods sold using the specific identification method for the following problem: A company purchases 3 identical bicycles for resale at costs of $300, $350, and $400. During the year, two bicycles are sold at $800 each. At December 31, the $350 bicycle is still on hand.

ending inventory= $350 COGS= $700

what is COGS recorded as

expense

where do we close the loss account in closing entries in the perpetual method

expenses

for the FIFO inventory method, cost of first item purchased=cost of _______

first item sold

for FIFO method, cogs starts at the ___ date and ending inventory starts at the ___ date

first, last

disadvantage of LIFO

gives non-current value to inventory on balance sheet

goods ordered but not yet received

goods in transit

gross profit ratio formula

gross profit/net sales

direct-write off method can only be used if accounts receivable are _______

immaterial

when should we record uncollectible receivables

in the same period as we record the revenue (use an estimate)

2 ways to estimate bad debts (using the allowance method)

income statement method and balance sheet method

what are all cash equivalents considered

interest bearing

goods held for resale

inventory

a measure of the number of times inventory is sold during the period

inventory turnover ratio

for LIFO method, cogs starts at the ___ date and ending inventory starts at the ___ date

last, first

for LIFO, cost of ___ item purchased= cost of ____ item sold

last, first

what is the adjusting entry for the loss for the perpetual method

loss xx inventory shirts xx

reporting bad debt expense follows which principle

matching

the allowance method follows which principle

matching

what principle does the direct-write off method violate

matching

how often are bank reconciliations prepared

monthly

the amount of account receivable that you expect to receive in cash

net realizable value

for consigned goods, when does title transfer

never

is the purchases account an asset

no, it's just part of the COGS formula

bad dept expense is reported as an ___ ___ on the ____ statement

operating expense, income

method of accounting for inventories which updates inventory at the end of the period

periodic method

2 methods of accounting for inventories

perpertual method and periodic method

method of accounting for inventory which keeps a running total of the inventory on hand and recognizes a loss

perpetual method

in the periodic method of accounting for inventories, all items purchased for resale are debited to a ______ account

purchases

the more _____ a company can sell (turn over) its inventory the better

quickly

net sales revenue formula

sales revenue -(sales returns and allowances) (sales discounts)

who pays for shipping in FOB destination?

seller

if buyer agrees to pick up goods at seller's location, title passes to buyer when

seller completes the goods and identified them to the contract (once sorted and separated)

inventory cost flow method which tracks the actual physical flow of the goods. each item of inventory is marked, tagged, or coded with a specific unit cost

specific identification

what should NEVER be included as a cash equivalent

stock

is purchases a temporary or permanent account

temporary

what does a bank reconciliation report

timing differences and errors

average cost per unit formula for average cost method

total cost of GAS/total # units GAS

in FOB shipping point, when is the title transferred to the buyer

when goods are accepted by the carrier (at the shipping point)

in FOB destination, when is title of ownership transferred to the buyer

when goods are delivered to the destination of the buyer

when is FIFO good for

when inventory turnover is rapid (like a bakery)