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Acc 200, Exam 3 Study Guide

by: Brynna Williams

Acc 200, Exam 3 Study Guide ACC 200

Brynna Williams
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This study guide covers everything that will be on our next and final exam
Foundations of Accounting
Ellen Anderson
Study Guide
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This 13 page Study Guide was uploaded by Brynna Williams on Sunday May 1, 2016. The Study Guide belongs to ACC 200 at University of Tennessee - Knoxville taught by Ellen Anderson in Spring 2016. Since its upload, it has received 109 views. For similar materials see Foundations of Accounting in Accounting at University of Tennessee - Knoxville.


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Date Created: 05/01/16
ACCOUNTING 200 EXAM 3 STUDY GUIDE Merchandising Businesses  Both buyers and sellers of goods  Buy from manufacturers  Sell to consumers  3 types of expenses  #1 expense  Buying and selling of goods o This is what merchandisers do for a living o When buying, cost of purchase is recorded on balance sheet as the current asset Inventory until sold o When selling, cost of good sold is removed from Inventory and recorded on income statement as expense  #2 expense  Selling expense and administrative expense  #3 expense  Other income and other expenses o Other income  Interest revenue  Rent revenue o Other expense  Sales tax expense  Interest expense  Multi-step income statement separates expenses  First part  Revenue  3 steps o Sales (gross sales) o Sales returns and allowances  Contra revenue, subtracted o Sales discounts  Contra revenue, subtracted  Second part  Expenses  Cost of goods/merchandise sold expense o #1 expense  Selling and administrative expenses o #2 expense  Selling expenses  Store utilities, rent, salaries, etc.  Administrative expenses  Office  Third part  Others  Don’t have to do with normal operations of business  Other income o Rent o Interest if business loaned money to someone  Other expense o #3 expense o Income taxes o Interest if business borrows  12 step process 1. Add Sales 2. Subtract Sales Returns & Allowances 3. Subtract Sales Discounts 4. equals Net Sales 5. subtract Cost of Merchandise Sold expense 6. equals Gross Profit 7. subtract Selling Expense 8. subtract Administrative Expense 9. equals Income from Operating Activities 10.add Other Income 11.subtract Other Expense 12.equals Net Income  Gross profit percentage o Gross profit divided by net sales  Profit per dollar of sales  Net income percentage o Net income divided by net sales  Often around 3%  Gets split between retained earnings and dividends  Sometimes called margin  Businesses are usually run on very thin margins  Returns and Allowances o Sales returns and allowances  Contra revenue that reduces sales revenue of the seller for the period  Seller receives the return and puts it back in inventory  Up on sales returns and allowances, down on cost of goods sold o Purchase returns and allowances  Reduce buyer’s cost of inventory  Down on inventory o Journal Entry  Seller  Reverse the sale o Down accounts receivable o Up Sales Returns and Allowances o Up Merchandise Inventory o Down Cost of Merchandise Sold Expense  Buyer  Down accounts payable  Down merchandise inventory  Discounts o Seller  Gives discount  Increases Discounts o Contra revenue o Decreases revenue o Buyer  Receives discount  Reduces cost of merchandise inventory o Decreases merchandise inventory o Typical discount terms  Written into purchase-sale contract  2/10, n/30  2% off price of goods if payment is made within 10 days, otherwise whole amount is due within 30 days  n/30  no discount, full amount is due within 30 days  The seller sets the discount, and they can decide on whatever terms they want  Seller can’t record anything about the discount until the buyer either pays or passes it up o Discount still applies if paid on the final day of the discount period o Discounts are off PRICE of goods  Never includes freight  If there is a return and the buyer pays within discount period, discount is calculated based on cost of unreturned goods  If discount is 3% and $10000 of goods are shipped, but then $2000 are returned, discount will be 3% of $8000  Freight cost o Cost of transportation (shipping) of goods o 2 kinds  FOB shipping point  Buyer owns goods during transit o From the minute they leave the seller’s dock, the buyer owns them o Buyer pays shipping cost  Up Merchandise Inventory  FOB destination  Seller owns goods during transit o Up until the minutes goods are dropped off at the buyer’s dock, the seller still owns them o Seller pays shipping cost  Up Transportation Out Expense  Selling Expense (#2 operating expense) o Common for sellers to prepay freight costs even when it falls on buyer because freight companies often demand payment before transport o Journal entry  Seller  Down cash  Up transportation out expense o #2 operating expense  Receipt of Payment o Journal entries  Seller  Up cash  Down accounts receivable  Up Sales Discounts if within discount period  Buyer  Down cash  Down accounts payable  Down merchandise inventory if within discount period Business Activity Differences  Differences between manufacturing businesses and merchandising businesses o Balance sheet  Merchandising businesses report only one kind of inventory because all products are actually finished when they have them  Manufacturers have 3 types of inventory  Raw Materials Inventory o Just materials o Production has not begun yet  Work in Process Inventory o Production has begun but has not yet finished  Began before the period ended but did not get completed in time  Finished Goods Inventory o Goods that have been completed o Biggest difference between merchandisers and manufacturers is how expenditures are classified  2 ways  Asset on the balance sheet o Product costs  3 kinds  Direct Materials Cost  Direct Labor Cost o Can be people or machines  Factory Overhead Cost o Everything takes overhead and labor to create  Expense on the income statement o Period costs  Product Costs  Combination of Direct Materials Cost, Direct Labor Cost, and Factory Overhead Cost o Equals Total Manufacturing Cost  Will be on Balance Sheet as current asset until products are sold o Becomes Cost of Goods Sold Expense once sold  #1 expense  3 sections o Direct Materials  Big  Cost of materials that are  Significant portion of total cost  Easily traced to final product  Integral to product o Only the stuff you really need to make the ACTUAL product, like wood for a desk o Direct Labor  Big  Cost of labor that is  Significant portion of total cost  Easily traced to final product  Integral to product o Making of actual product  Wages of production line employees o Factory Overhead  3 parts  Indirect Materials o Small but necessary o Not significant portion of total cost o Not easily traced to final product  Indirect labor o Not significant portion of total cost o Not easily traceable to final product  E.g. guy sweeping sawdust at factory  Other costs of operating factory o Utilities, rent, depreciation, insurance, supplies, taxes  Only on stuff within the factory o Research and development costs are product costs  The word “factory” is automatically indicative of a product cost  Period Costs  Selling expense and administrative expense o #2 operating expense  The word “office” is automatically indicative of a period cost o How do manufacturers accumulate product costs  Why  To help set a price that will generate profit  To evaluate profitability o Control operations  Compare actual costs by departments or processes with budgeted costs’  To develop financial statements o Cost of ending inventory on Balance Sheet o Cost of Goods Sold on Income Statement  Manufacturing (Product) Cost Flow o Inside business  Asset on Balance Sheet  Warehouse o When materials are purchased  Production Floor o When work has begun on product  Showroom o When product is complete o Outside of business  #1 expense on income statement  No longer here o When product is sold  Inventories o Raw Materials Inventory  Increases when you buy original materials  Decreases when materials are issued to production  Beginning balance + purchases + issuances = ending balance o Work in Process Inventory  Start creating goods  Materials have been issued to production and transferred to WIP inventory  Journal entry o Up WIP Inventory (direct materials) o Up Factory Overhead (Indirect Materials) o Down Raw Materials Inventory  Cost of labor  Journal entry o Up WIP Inventory (direct labor) o Up Factory Overhead (Indirect Labor) o Up Wages Payable  Cost of Other Factory Overhead  Journal entry o Up Factory Overhead (other) o Up expenses o Up accounts payable  Application of Factory Overhead  Applied means “sent costs to production” o Journal entry  Up WIP Inventory  Down Factory Overhead  Factory Overhead always has a balance of 0 at the beginning and end of the period o It only exists to gather indirect material, indirect labor, and other costs o Finished Goods Inventory  When work is completed  Journal entry o Up Finished Goods Inventory o Down WIP Inventory  Cost of Goods Manufactured  Makes WIP inventory go down  “Transferred from WIP to Finished Goods”  WIP inventory can have a beginning balance  Will be whatever job/s didn’t get finished  When goods are sold  Every manufacturer becomes a merchandiser when they sell junk o Journal entry  Up Sales Revenue  Up Accounts Receivable  Up Cost of Goods Sold expense  Down Finished Goods Inventory  Product Cost Flow relationship o Sequential order of costs  Income statement and inventory balance  Raw Materials Inventory  Beginning balance  + purchases  - issuances  = ending balance  WIP Inventory  Beginning balance  + Total Manufacturing Costs o Direct Materials o + Direct Labor o + Factory Overhead  - Cost of Goods Manufactured  = ending balance  Finished Goods Inventory  Beginning balance  + Cost of Goods Manufactured  - Cost of Goods Sold  = ending balance  Expense on Income Statement  - Cost of Goods Sold o Ending balances for inventories are just things that haven’t moved yet  Job Order Cost Systems o Accumulate product costs in total AND by job  Individual product & product type  Needs to be done this way  Splits up costs by job so you can get an accurate cost per unit and decide on a profitable selling price Budgeting  Budget o Financial plan written in advance of operation period  Game plan for what we’re going to do o Master budget  Plan for all facets of operation  Budgeted income statement, budgeted balance sheet, etc. o Continuous budgeting  Budget projected 12 months into the future at all times  When current month finishes, we add on another month to the end of the budget o After May of this year is over, we create the budget for May of next year o Budget formats  There are 2  Static o Budget for only one activity level  Probably stupid o One size fits all o Ineffective when actual level of activity is different from budgeted level of activity  Flexible o Side-by-side comparative budgets for multiple activity levels  Smarter o Budget for actual units produced o Flex budget by applying costs to actual hours o 3 objectives of Budgeting  Planning  Write budget BEFORE year begins  Takes the longest because everybody has to agree  Directing  Execute budget DURING the year  Controlling  Observe deviation from the budget at the END of the year o Variance  2 methods of budgeting o Incremental budgeting  Stupid  Budgets based on revenue and expense levels of past periods with projected increases  Never think they can do with less money than they had in past periods  Fosters budgetary slack  Fosters overspending o Excess funds at the end that we need to either spend or lose o Zero-based budgeting  Start with $0 in the budget  New figures every period  Managers must justify all budget requests o Last period’s funds are not a given  Variance o Difference between actual and standard costs  Standard  Budgeted, planned, expected, etc.  What the company thought they were going to pay for things o Standard price  Amount company planned to pay to produce product o Standard quantity  Amount of materials, etc. company planned to use o Standard cost  Standard price multiplied by standard quantity  Actual  What the company actually did end up using o As opposed to what they planned for o Budget performance report  Actual Cost – Standard Cost = Variance  2 types of variance o Favorable  Under budget  When number is negative o Unfavorable  Over budget  We paid too much  When number is positive o Both are bad o Price Variance and Quantity Variance  Material cost variance  Price Variance o (Actual Price – Standard Price) x Actual Quantity  Quantity Variance o (Actual Quantity – Standard Quantity) x Standard Price  Amounts must be turned into dollars o Off budget is off budget  Labor Cost Variance  Rate Variance o (Actual Rate – Standard Rate) x Actual Time  Time Variance o (Actual Time – Standard Time) x Standard Rate  When multiplying by price outside of parentheses, use standard  When multiplying by quantity outside of parentheses, use actual Cost Behavior & Sales-cost-volume-profit analysis  Sales-Cost-Volume-Profit Analysis o Sales  Selling price per unit o Cost  Total cost per unit o Volume  Number of units o Profit  FAT STACK$  Cost behavior o How a cost changes when business activity (volume) changes over relevant range  Relevant range  Normal range for number of units produced and sold o 3 types of costs  Variable cost  Constant cost per unit  Total cost increases as volume increases and decreases as volume decreases  Fixed cost  Constant total cost  Cost per unit will decrease as volume increases and increase as volume decreases  Mixed cost  Neither total cost nor per unit cost is constant  Contains part fixed cost and part variable cost  Have to be split into separate parts to be able to create a cost formula and predict costs o High-low method  Find variable cost first  Variable cost per unit = (highest total cost – lowest total cost)/ (highest volume – lowest volume)  Total cost = (Variable Cost per Unit x Number of Units) – Fixed Cost  Contribution Income Statement o Traditional income statements are required by GAAP  These don’t help with predicting future costs at all  We need the contribution income statement to do that o Sales Revenue – Variable Costs = Contribution Margin o Contribution Margin – Fixed Costs = Income from Operations  Fixed costs  Unchangeable lump o Important Ratios  Contribution Margin Ratio  Divide Contribution Margin by Total Sales to get Contribution Margin Ratio o Number of cents each dollar of sales contributes to profit  Unit Contribution Margin  Divide total sales by number of units, then subtract cost of production for 1 unit to get Unit Contribution Margin o Amount of profit garnered from the sale of one unit  Helps managers predict future costs, revenues, and profits  CM ratio x Change in Sales = Change in Profits  Unit CM x Change in Units = Change in Profits  Break-even point  Number of units business must sell for profit to equal 0 o Total revenue = total expenses o Contribution margin = fixed costs o Calculation  (Total Fixed Costs)/(Unit CM) = Break-even number of units  Helps managers plan for future o Margin of safety  How far sales can fall before we start losing money  Current Units – Break- even Units o Bottom Line  How far can selling price per unit fall before we start losing money?  4 things to do to improve bottom line o Sell more o Increase price o Decrease variable cost o Decrease fixed cost  Target Profit  Number of units business must sell to garner a specific profit o Exactly like break-even, but target profit in break-even is 0 o Calculation  (Total Fixed Costs + Target Profit)/Unit CM = Target Profit Units  Sales Mix  For companies and businesses that sell more than 1 product o Most of them do  Break-even point is slightly different o Formula is the same, but if you have more than one fixed cost, there is more than one Unit CM o You have to construct a weighted CM  Multiply the percentage of total sales each product makes up by its Unit CM and add those up together to get the weighted unit CM  Break-even units = (Total Fixed Costs)/Weighted Unit CM  To find the number of units of each product that must be sold, multiply percentage of total sales each product makes up by the calculated number of units


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