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Financial Accounting Principles Midterm StudyGuide

by: Janey Wensel

Financial Accounting Principles Midterm StudyGuide ACT222

Marketplace > Chatham University > Accounting (ACCT) > ACT222 > Financial Accounting Principles Midterm StudyGuide
Janey Wensel

GPA 3.7

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About this Document

This study guide covers chapters 4, 5, and 6.
Financial Accounting Principles I
James Pierson
Study Guide
Accounting, financial statements, Income Statments, pettycash, Net, sales
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This 4 page Study Guide was uploaded by Janey Wensel on Friday October 14, 2016. The Study Guide belongs to ACT222 at Chatham University taught by James Pierson in Fall 2016. Since its upload, it has received 20 views. For similar materials see Financial Accounting Principles I in Accounting (ACCT) at Chatham University.

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Date Created: 10/14/16
Accounting MIDTERM Study Guide Chapters 4, 5, 6 [Chapter 4] Merchandising Operations Manufacturer > Wholesaler > Retailer > Consumers Manufacturers make the products, wholesalers buy the products and sells them to retailers, retailers sell to consumers Merchandiser earns an income buy buying and then selling Net sales – Cost of Goods sold = Gross profit - Expenses = Net income Cost of goods sold- the expense of buying and preparing the merchandise Operating Cycle begins with purchase of merchandise ends with collection of cash from sale of merchandise (a) Purchases (b) Merchandise Inventory (c) Credit Sales (d) Accounts Receivable (e) Cash Collection Merchandise Available for Sale (beginning inventory + net purchases) Perpetual Systems Periodic Systems Continually update accounting records for Accounting records relating to merchandising transactions merchandise transactions are only updated at the end of the accounting period Credit Terms A deduction form the invoice price granted to induce early payment of the amount due Seller requires payment in 10 days, n/10 Sellers can grant cash discounts. Buyers see that as a purchase discount, sellers see it as a sales discount.EX: Full payment is due in 60 days, if you pay in 10 days there will be a 2% deduction 2/10 n/60. These 10 days are called a discount period. On 11/12, Zmart paid the amount due on the purchase of 11/2 Accounts Payable 500 Me rchandise Inventor10 Cash 490 *Paid for goods within discount period Purchase Returns & Allowances Return- merchandise returned by the purchases to the supplier Allowances- a reduction in the cost of defective or unacceptable merchandise received by a purchaser from a supplier When a buyer returns or takes an allowances the buyer issues a debit memorandum Transportation Costs FOB shipping point> Buyer > Costs paid by Buyer FOB destination > seller> costs paid by Seller [Chapter 5] Analyzing Inventories Merchandise Inventory includes all goods that a company owns and holds for sale, regardless of where the goods are located when inventory is counted Cosignor- owner of inventory Consignee- sells goods for owner Damaged goods are not counted Net realizable value = sales price – the cost of making sales Inventory Cost Flow Assumptions 1. First-in, First-out (FIFO)2. Last-in, First-out (LIFO) 3. Weighted Average Specific Identification Method- specific cost of each unit sold is known Weighted Average- assign an average cost per unit of the goods available for sale to cost of goods sold, determined by dividing the cost of goods available for sale by units on hand FIFO, assigns the lowest COGS, yielding the highest gross profit LIFO, assigns the highest COGS, yielding the lowest gross profit Weighted Average yields results between FIFO and LIFO Specific Identification always yields results that depend on which particular units are sold *LIFO is used for tax reporting Consistency Principle- requires a company to use the same accounting methods period after period so that financial statements are comparable across periods Inventory Turnover = COGS / Average Inventory [Chapter 6] Cash, Fraud, and Internal Controls Internal Control System- policies and procedures managers use to protect assets, ensure reliable accounting, urge adherence to company policies, and promote efficient operations. (SOX) Sarbanes-Oxley Act requires managers and auditors of public companies to document the system of internal controls. Principles of Internal Control 1. Establish responsibilities 2. Maintain adequate records 3. Insure assets and bond key employees 4. Separate recordkeeping from custody of assets 5. Divide responsibility for related transactions 6. Apply technological controls 7. Perform regular and independent reviews Human Error occurs from negligence, fatigue, misjudgment or confusion Human Fraud involves intent by people to defeat internal controls Control of Cash Cash includes currency and coins, checks, money orders / Cash equivalents are short-term investments, readily convertible to cash amount Cash Over & Short Errors in making change are discovered from differences between cash in the registers and the record of receipts Records show $550 but the count of cash in the drawer is actually $550 Cash 555 Cash over and short 5 Sales 550 *Record cash sales and cash average Voucher System 1. Verify, approve, and record obligations for eventual cash disbursements 2. Issue checks for payments of verified, approved, and recorded obligations *Voucher – a record summarizing a transaction Petty Cash Small payments required in most companies for items like, postage, courier fees, repairs and supplies Establishing a Petty Cash fund: Petty Cash is debited to increase Cash is credited to decrease Reimbursement of Petty Cash fund: All petty cash payments are recorded and report with receipts. Cash is credited to increase the cash amount in the fund Bank Reconciliation Prepared periodically to explain the difference between cash reported of the bank statement and the cash balance on the company’s books *used to report the accuracy of its cash records You must prove the accuracy of both records and reconcile the two balances. - Deposits in transit -outstanding checks -additions for collection and for interest - Deductions for uncollectable items for service - Errors Identifies unrecorded items that need recording by the company and vice versa Days’ Sales Uncollected Estimation of how much time is likely to pass before the amount of accounts receivable is received in cash Day’s sales uncollected = Accounts Receivable / Net sales X 365 Documentation and Verification - Purchase Requisition: lists the merchandise needed and requests that it be purchased - Purchase Order: a document the purchasing department uses to place an order - Invoice: itemized statement of goods prepared by the vendor listing customer name, items sold, sale price, and terms of sale - Receiving Report: used within the company to notify the appropriate persons that the correct order goods have be received


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