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