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Exam 2 Study Guide

by: JillianRing

Exam 2 Study Guide ACG 2021

GPA 3.7

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Study Guide for Exam 2 Chapter 5-9 includes definitions, examples and charts!
Financial Accounting
Ronald Pierno
Study Guide
Study Guide, Exam 2, financial accounting
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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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