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Test 3 Study Guide- Chapters 5 and 6

by: Callisa Ruschmeyer

Test 3 Study Guide- Chapters 5 and 6 ACCT 2110 - 002

Marketplace > Auburn University > Accounting > ACCT 2110 - 002 > Test 3 Study Guide Chapters 5 and 6
Callisa Ruschmeyer
GPA 4.0

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About this Document

Study guide for Financial Account- Chapters 5 and 6 Inventory Inventory Cost Methods Perpetual vs. Periodic
Principles of Financial Accounting
Elizabeth G Miller
Study Guide
Financial Accounting; Miller; Auburn University; Chapters 5 and 6
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This 4 page Study Guide was uploaded by Callisa Ruschmeyer on Wednesday March 23, 2016. The Study Guide belongs to ACCT 2110 - 002 at Auburn University taught by Elizabeth G Miller in Fall 2015. Since its upload, it has received 82 views. For similar materials see Principles of Financial Accounting in Accounting at Auburn University.


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Date Created: 03/23/16
Chapter 5 and 6 Study Guide Chapter 5  The allowance for doubtful accounts is a contra-revenue account o Normal debit balance o Sales returns are also contra-revenue accounts  "Principal" dealing with note receivables refer to the amount of cash borrowed Allowance Method- how to write off bad accounts  Splits the accounting into two entries 1. Record an estimate of bad debt expense  Debit bad debt expense  Credit the allowance for doubtful accounts 2. Write off receivables when they become uncollectible  Debit the allowance for doubtful accounts  Credit accounts receivable Percentage of Credit Sales Method  Income statement  Estimate bad debt expense based on percentage of credit sales during the period  Percentage of Credit Sales Method = Credit Sales * Percentage that will be written off  Estimated Bad Debt Expense = Total Credit Sales X Percentage of Credit Sales Estimated to Default Aging Method  Balance sheet (Debit- Bad Debt Expense; Credit- Allowance for Doubtful Accounts)  Journal entry- the entire purpose is record what you need in order to achieve the "desired ending balance"  Estimating the appropriate balance for the allowance for doubtful accounts results in the appropriate value for net accounts receivable on the balance sheet  Accounts Receivable = [Accounts Receivable Balance (at the beginning of the year) + Credit Sales] - [Accounts Receivable Collected + Customer Defaults]  Balance in Allowance for Doubtful Accounts = Allowance for Doubtful Accounts - Customer Defaults Percentage of Credit Sales Method vs. Aging Method  Percentage of credit sales method o Estimates bad debt expense on the income statement o Concerned with bad debt expense  Aging Method o Balance sheet approach o Analyzes the accounts receivable to estimate its net realizable value o Concerned with allowance for doubtful accounts  Both o Both are acceptable under GAAP because they both use the Allowance Method Important Formulas and Ratios  Gross Profit Margin = gross profit/net sales o Gross profit = set sales - cost of goods sold  Net Profit Margin = net income/net sales  Accounts Receivable Turnover = net sales/average net trade accounts receivable  Interest = Principal (X) Annual Rate of Interest (X) Time Outstanding Chapter 6 Cost of Goods Sold Model Beginning Inventory (+) Net Purchases _________________ Cost of Goods Available for Sale (-) Ending Inventory _________________ Cost of Goods Sold Perpetual- Buyer Journal Entries  Adding to Inventory o Debit- Inventory o Credit- Cost of Goods Sold  Reduction to Inventory o Debit- Purchase and Freight-in costs o Credit- purchase return or allowance, discounts, cost of goods sold Perpetual- Seller Journal Entries  Recording Revenue, Journal Entry o Debit- Sales Revenue or Cash o Credit- Sales  Recording Expense, Journal Entry o Debit- Cost of Goods Sold o Credit- Inventory Inventory Cost Methods- Perpetual System  Four ways to determine the cost of inventory sold 1. Specific Identification 2. First-in, First-out (FIFO)  Assuming that costs move through inventory- the earliest purchases (first in) are assumed to be the first sold (the first out) 3. Last-in, Last-out (LIFO)  Assuming that the latest purchases (last in) are sold first (first out) 4. Average Cost  Weighted Avg. Cost per Unit = Cost of Goods Available for Sale / Units Available for Sale  Ending Inventory = Units on Hand X Weighted Average Cost per Unit  Cost of Goods Sold = Units Sold X Weighted Average Cost per Unit Review Formulas  Beginning Inventory + Sales - Collections = Ending Inventory Effects of Alternative Inventory Cost Methods  FIFO  When purchase prices rise  Highest ending inventory  Lowest cost of goods sold  Highest income  When purchase prices fall  Lowest ending inventory  Highest cost of goods sold  Lowest income  LIFO  When purchase prices rise  Lowest ending inventory  Highest cost of goods sold  Lowest income  When purchase prices fall  Highest ending inventory  Lowest cost of goods sold  Highest income Income Tax Effects of Alternative Costing Methods  When there are rising prices, companies tend to choose LIFO because it produces the lowest current taxable income and the lowest current income tax payment Perpetual vs. Periodic Inventory Systems  Activity Perpetual System Periodic System Purchase Inventory account Purchase account Sale 1. Record sales revenue 1. Record sales revenue 2. Increasing Cost of  NO OTHER ENTRY Goods Sold; decrease Inventory Costing Ending Balanced in the Taking physical count of inventory- Inventory Inventory account- items on a given date are identified and verified by a physical counted count of inventory Determining Balanced in the Cost of Apply the cost of goods sold model- at Cost of Goods Goods Sold account- at the end of the period Sold the end of the period


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