Exam 2 Study Guide
Exam 2 Study Guide ACG 2021
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This 13 page Study Guide was uploaded by JillianRing on Tuesday November 3, 2015. The Study Guide belongs to ACG 2021 at Florida State University taught by Ronald Pierno in Summer 2015. Since its upload, it has received 90 views. For similar materials see Financial Accounting in Accounting at Florida State University.
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Date Created: 11/03/15
ACG 2021 Exam 2 Chapter 5-‐ Multi-‐Step Income Statement Primary source of income for retailers – sales/ sales revenue Primary expenses – cost of goods sold; operating expenses Cost of goods sold: total cost of merchandise sold during the period -‐ Directly related to sale of good Sales Revenue Less: Cost of Goods Sold Gross Profit Less: Operating Expenses Net Income Flow of Costs Beginning inventory + cost of goods purchased = Cost of goods available for sale Perpetual Inventory System-‐ Company maintains detailed records of the cost of each inventory purchases and sale -‐ Record each time sale occurs (ex. grocery store checkout) Purchase Invoice-‐ indicates the total purchase price and other relevant info. Ex: JR &Co. receives an invoice from PW Suppliers-‐ increase (debits) inventory and increases (credits) Accounts Payable May 4 Inventory 3,800 Accounts Payable 3,800 Terms 2/10, n/30 í î 2% Cash Full invoice price to Discount: Must be be paid within 30 paid with in 10 days. days to receive discount. Freight Costs FOB = free on board FOB Shipping Point-‐ seller places the goods free on bard the carrier, BUYER pays the freight cost FOB Destination-‐ seller places the goods free on board to buyers place of business; SELLER pays for freight costs Buyer: -‐ Buyers pays for transportation cost – considered part of the purchasing inventory o Inventory is increased (debited) Seller: -‐ Freight costs incurred by seller on outgoing merchandise is an operating expense to seller o Freight Out (account) is debited Purchase Allowance/Returns Purchase Return-‐ purchaser may return the goods to the seller for credit if the sale is on credit, or cash for refund Purchase Allowance-‐ purchaser may choose to keep the merchandise is seller is willing to grant reduction in price. Ex: JR & Co. returned goods costing $300 to PW Supplier on May 8. Entry by JR & Co. for the returned merchandise decreases (debits Accounts Receivable) and decreases (debits) Inventory May 8 Accounts Payable 300 Inventory 300 Purchase Discounts-‐ credit terms specify the amount of cash discount and the time period, which it is offered (ex. 2/10, n/30) Ex. Jr & Co. pays the discounts of 2/10, n/30 the last day discount offered. Gross invoice price is $3,500 (-‐ 300 of returns and allowances from 3,800) Cash discount = $70 ($3,500 x 2%), the amount of cash paid = $3,430 ($3,500 -‐ $70) May 14 Accounts Payable 3,500 Cash 3,430 Inventory 70 Recording Sales of Merchandise *Companies record sales revenue when performance obligation is satisfied -‐ Sales Invoice provides support for sale with 2 entries: Date Accounts Debit Credit 1. Debits A/R or Cash Date Accounts Receivable 1300 Credits Sales Revenue Sales 1300 2. Debits Cost of Goods Cost of Goods Sold 1000 Inventory 1000 Sold Sold $1000 of Inventory for $1300 on account Credits Inventory Sales Returns/Allowances Contar revenue account (debit revenue account) Return-‐seller accepts goods back from purchaser Allowance-‐ grants a reduction in purchase of price Returned Good: 1. Debit Sales Returns/Allowance (contra to Sales Rev.) Credit A/R at selling price 2. Debit Inventory (at cost) Credit Cost of Goods Sold Date Accounts Debit Credit date Sales Returns/Allowances 300 Accounts Receivable 300 Inventory 150 Cost of Goods Sold 150 Returned $150 of Inventory purchased at $300 on account Sales Discount-‐ seller may offer the customer a cash discount (Contra revenue account) (Debit for Rev. Account) -‐ Prompt payment for balance due -‐ Seller increases (debits) the Sales Discounts accounts for discounts that are taken 1. Debit Cash 2. Debit Sales Discount 3. Credit A/R Ex. Entry by PW Suppliers to record cash receipt on May 14 from JR &Co. within the discounts period May 14 Cash 3,430 Sales Discounts 70 Accounts Receivable 3,500 (Record collection within 2/10, n/30 discount period) Sales Rev Sales R/A Sales Discounts 3800 300 70 = NET SALES $3,430 Income Statement Multistep Net Sales – CGS = Gross Profit Gross Profit – Operating Exp = Income from Operations +/-‐ results of activities not related to operations = Net Income Other rev-‐ Interest, Dividends, Rent, Gain Other Exp-‐ Interest casualty losses, loss of sale, loss of strikes Multi Step Income Statement Shipping Costs: -‐ Costs incurred by purchasing inventory, are included as a part of the cost of the inventory -‐ Costs for a sales are an operating expenses – “Freight Out” Account Gross Profit Rate = Gross Profit Net Sales Profit margin-‐ % of each dollar of sales that results in net income Profit margin = Net Income Net Sales Chapter 6-‐ Reporting/Analyzing Inventory Manufacturing Company: -‐ Finished Good Inventory-‐ items that are completed and ready for sale -‐ Work in Process-‐ portion of manufactured inventory that has begun production process, no completed -‐ Raw Materials-‐ basic that will be used in production but have not yet been placed in production FOB Shipping Point – ownership of goods passes to buyer when carrier accepts the goods from seller FOB Destination – ownership of the goods remains with seller until goods reach buyers Cost Flow Assumptions: assume flows of cost that may be unrelated to actually physical flow of goods 1. First-‐in, First-‐out (FIFO) 2. Last-‐in, First-‐out (LIFO) 3. Average Cost -‐ No requirement that the cost flow assumption be consistent with physical movement of goods FIFO-‐ earliest goods purchased are the first to be sold Does NOT mean oldest units are sold first, but the cost of the oldest units are recognized first LIFO-‐ latest goods purchased are the first to be sold (seldom parallels physical flow of merchandise) -‐ Does NOT mean newest units sold first, but the costs of the newest units are recognized first 1. Cost of Goods Sold 2. Inventory Beg. Inventory + Purchases Beg. Bal -‐ COGS + Purchases Goods Available for Sale -‐(Ending Inventory) Cost of Goods Sold Ending Inventory Sales Discount – debit Sales Returns/Allowances-‐ debit Sales Revenue-‐ credit Journal Entry: 1. A/R xxx Sales xxx 2. COGS xxx Inventory xxx Example: April 1 st Beginning Inventory 83 units @ $11.00 per unit 5 Purchase 110 units @ $12.50 per unit 13 Purchase 90 units @ $14.00 per unit th 16 Purchase 100 units @ $15.50 per unit 383 units available for Sales (add up all units) FIFO (First-‐in, First-‐out) – start from the top of the inventory, adding more units until total is reached Sold 212 units. Cost of Goods Sold= 212 83 x 11.00 = 913 -‐83 110 x 12.50 = 1375 129 19 x 14.00 = 266 -‐110 $2554 cost of goods sold 19 LIFO (Last-‐in, First-‐out)-‐ start from the bottom of the inventory, adding more units until total is reaches Sold 127 units. Cost of Goods Sold= 127 100 x 15.50 =21080 -‐100 72 x 14.00= 378 27 $21,458 cost of goods sold ** To check, calculate remaining units/ending inventory, should match with ending Inventory balance in Inventory account ** Chapter 7-‐ Fraud, Internal Control, and Cash Internal Control over cash : use of bank -‐ Minimize the amount of currency on hand -‐ Created a double record of bank transactions -‐ Bank reconciliation balancing checkbook Bank Reconciliation-‐ need for calculating an adjusted (true) cash balance -‐ Balance per bank -‐ Balance per books o Company’s books need to be updated Bank Statement-‐ monthly statement of checking account/financial activities -‐ Outstanding checks-‐ a check written that has not cleared the bank yet (bank does not know about the check yet) -‐ Deposit in transit-‐ a deposit that the company has made and recorded, but it has not reached the bank’s records yet -‐ NSF check-‐ “bounced check”, bad check written by customer, customer has insufficient funds-‐ bank will have already deducted it from the company’s balance Adjustment to Book Balance: Adjustment to Bank Balance: + Notes Collected by + Deposits in Transit Bank -‐ NSF Checks -‐ Outstanding Checks +/-‐ Book Errors -‐ Bank Charges +/-‐ Book Errors Journal Entries of Adjusting Book Balance: Notes Collected by Bank: Cash 1000 N/R 1000 NSF check: A/R 300 Cash 300 Bank Charges: Bank Charge 20 Cash 20 Example: Cash Balance Per Bank 3,677.20 Cash Balance Per Books 3,975.20 NSF check 450 Bank Service Charge 28 Deposits in transit 590 Outstanding checks 770 What is the adjusted balance per bank? Per books? Balance per Bank 3,677.20 Add: Deposit in Transit 590 4267.20 Less: Outstanding Check 770 Adjusted Bank Bal. $3,497.20 Balance per Books 3,975.20 Add: -‐-‐ Less: NSF check 450 Service Charge 28 Adjusted Book Bal. $3,497.20 (Balance per bank) $3,497.20 = $3,497.20 (Balance per book) Chapter 8-‐ Allowance for Doubtful Accounts Accounts Receivable -‐ Reported at face value – allowances for the amounts which are likely to be uncollectible -‐ Expected to be collected : cash (net) realized value (CRV) -‐ Book value or carrying value Allowance Method-‐ companies estimate uncollectible accounts receivable Write-‐offs-‐ amounts that uncollectible Allowance for Doubtful Accounts (ADA)-‐ contra-‐asset account, credit balance -‐ Shows how much A/R not expected to be collects Balance Sheet: Cash A/R Less: Allowance for Doubtful Accounts Example: At the end of 2014, JR & Co. has Accounts Receivable or $812,400 and an Allowance for Doubtful Accounts of $23,180. 1. On March 11, 2015, it is learned that the company’s receivable from Adams Inc. is NOT collectible and needs to be written-‐off. 2. On August 28, 2015, JR & Co. recovers the accounts previously deemed uncollectable in full for $3,080 from Adams Inc. A/R ADA 1. Beg Bal. 2. writeoff 2. Writeoff 1.Beg Bal 812,400 3,080 080 3, 3.Recovery 4.Collections 3.Recovery 3,080 3,080 3, 080 Journal Entries: ADA 3,080 A/R 3,080 Write-‐off A/R 3,080 Recovery ADA 3,080 Cash 3,080 Collections A/R 3,080 ** Bad Debt Expense ALWAYS Debited ** 1. Sales Rev-‐ BDE 2. Ending A/R-‐ end number in ADA 3. Aging of A/R-‐ ending number in ADA Example: 1. ADA Beg. 3900 Subtract Beg. Bal from End Bal. to BDE calculate BDE-‐ ONLY if both CREDIT balances Bal. 31,320 BDE 27,420 ADA 27,420 2. ADA Beg. 2500 Add Beg. Bal and End Bal. to calculate BDE-‐ ONLY if Beg. Bal is Debit balance Bal. 31,320 BDE 33,820 ADA 33,820 Chapter 9-‐ Double Declining Depreciation Cost of Plant Assets: -‐ Land-‐ all necessary costs incurred in making land ready for its intended use (debit Land account-‐ increase) o Cost include: 1. The cash purchase price 2. Closing costs such as title and attorney’s fees 3. Real estate brokers commissions 4. Accrued property taxes and other liens on the land assumed by purchaser -‐ Land Improvements-‐ includes all expenditures necessary to make the improvement ready for their intended use o Driveways, parking lots, fences, landscaping, etc. o Limited useful lives o Expense (depreciate) the cost of land improvements over their useful lives -‐ Buildings-‐ all cost related directly to purchase or construction o Purchase price, closing costs, etc. o Remodeling, replacing, repairing roof, floors, electric etc. -‐ Equipment-‐ all costs incurred in acquiring the equipment and preparing it for use o Cash purchase price o Sales taxes o Freight charges o Insurance during transit o Expenditures required in assembly, installing, testing Depreciation: 1. Straight-‐Line method-‐ amount of times asses used 2. Units of Activity-‐ actual activity assets is used; units of output, miles, hours etc. a. Original Cost-‐ salvage value = xxx/ total working hours= cost per hour 3. Double Declining Balance-‐ accelerated method 1. Decreasing annual depreciation exp Useful life 2. Take more depreciation in earlier years than later years Journal Entries: Depreciation Expense Accumulated Depreciation Accumulated Depreciation-‐ full amount of depreciation taken over the life of asset Straight-‐Line Depreciation Exp. per year = Depreciable cost (Depreciable cost= cost-‐ salvage value) Useful life Dep. Exp per year = 30,000 = $6,000 5 Historical Cost-‐ all cost included in cost of asset (shipping, repairs, etc.) Double Declining-‐balance Method Need to calculate rate: divide 2 by the number of years of useful life Annual Depreciation Expense = book value x rate ( 2 ) Useful life Example: Asset cost $40,000, residual (salvage) value $10,000, and a useful life of 5 years. Calculate the depreciation expense for all 5 years of asset’s life. Rate = 2 / 5 (useful life)= .4 – 40% First year’s depreciation: Book Value Book value x rate Cost $40,000 $40,000 x .40 = $16,000 Less: AD $16,000 $24,000 Less: AD $ 9,600 $14,400 Second year’s depreciation: Book value x rate $24,000 x ,40 = $9,600 Third year’s depreciation: $14,400 x .40 = *$5,760 *Not depreciation expense for year three. We have a total of $25,600, at most we can take $30,00 (40,000 cost – 10,000 salvage value) 30,000 – 25,600 = 4,400 – Depreciation expense for year three Plant Asset Disposal-‐ companies dispose of plant assets in 3 ways; 1. Retirement 2. Sales 3. Exchange Sales Disposal-‐ compare book value with proceeds from sale -‐ Proceeds exceed book value = Gain (credited) -‐ Proceeds less than book value = Loss (debited) -‐ Gain/Loss reported on Income Statement Example: Gain/Loss On June 30 2014, sold a computer purchased on January 1, 2011. The computer cost $26,800 and had a useful life of 5 years with no salvage value. The computer sold for $10,720. 26,800 = 5,360 (Yearly depreciation expense) 5 $5,360 x 3.5 years (amount of years used) = $18,760 (Accumulated Depreciation) $26,800 -‐ $18,70 = $8,040 (worth now in the books) ( original cost)(Acc. Dep) $10,720 -‐ $8,040 = $2,680 – Gain in books (Sold for)(book worth) On December 31, 2014, JR & Co. discarded a delivery truck purchased on January 1, 2009. The truck cost $49,000 and was depreciated based on 8-‐year useful life, with a $5,300 salvage value. 49,000– 5,300 (cost) (salvage value) = 5,462 per year (year depreciation expense) 8 (Useful life) 5,462 x 6 years (amount of years used for) = 32,775 (Accumulated Depreciation) 49,000 (original cost) – 32,775 (Acc. Dep) = $16,225 Loss of Disposal of Plant Asset
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