RETL 261 1st EditionExam # 2 Study Guide Lectures: 9 - 16Lecture 9 (September 24)Accounting Cycle:Worksheet:- Helps with year end processing- Accountants tool (helps get the job done)- 11 column spreadsheeto 1 column for account titleso 5 sets of debit and credit columns- Pgs. 140-143Lecture 10 (September 26)Closing Process:- Set of journal entries (everything in accounting is done through journal entries)- Only recorded at year end- Close out (bring to zero) all temporary accountso Temporary accounts= nominal accounts- Zero out 4 different types of accounts:o Revenueso Expenseso Income summary (only used for closing)o Owner’s withdrawals- Pgs. 144-146Closing Entries:1. Close out (bring to zero) all revenue accounts**revenue accounts have credit balance so you do the opposite…WorksheetPostingGeneral JournalLedgers Trial BalanceAdjusting Process Financial StatementsClosing ProcessPost Closing Trial Balance- Debit each revenue account- Credit Income Summary for total revenue2. Close out (bring to zero) all expense accounts**expense accounts have debit balance so you do the opposite…- Credit each expense account- Debit Income Summary for total expenses3. Close out (bring to zero) Income summary to owner’s capitalCapitalD C+Net Income:Debit Income Summary ($ Net Income)Credit Owner’s CapitalNet Loss:Debit Owner’s Capital ($ NetLoss)Credit Income Summary4. Close out (bring to zero) the owner’s withdrawals**withdrawals have credit balance so you do the opposite…- Debit Owner’s Capital- Credit Owner’s WithdrawalsLecture 11 (October 1) Selling Inventory you don’t make yourself o Buys inventorymake it upsell for a profito Ex. Department stores, book stores, shoe stores, etc. Merchandise InventoryCurrent Asset Sold to customers=inventory Used for running business = Plant Asseto Ex. “purchased equipment” Tracks Inventory cost.Income SummaryD C(1) Revenue(2) Expenses(Net Loss) Net Income BalanceMerchandise Inventory Debit Credit+ - Take out discounts Returns Freight ChargesClassic Balance Sheet:- Balance Sheets are:o Assetso Liabilitieso Owner’s Equity o A= L + OE- Classic Balance Sheet provides more information/details about the companyCategories of Assets:- Current assetsconverted to cash or used up in one year; Most Liquid.o Liquid assets are easy to convert into casho Anything prepaid- Long-term Investmentsstocks, bonds of other companies; unused land- Plant Assets (Fixed Assets)land you are using; building, equipment, vehicles- Intangible Assetsdon’t have physical properties; rights to do thingsCategories of Liabilities:- Current Liabilitiesthings you owe in next 12 monthso Ex. Accounts Payable, ALWAYS, always revolving- Long-term Liabilitiesthings you owe in long-term (more than 12 months)Owner’s Equity:- Owner’s Capital (Ending Balance)Lecture 12 (October 3)- Two ways of keeping up with inventory:o Periodic inventory systemo Perpetual inventory system Most companies now use thisCash discountsoffered by seller to entice buyer to pay quicklyTerms:2/10, n/30  2% discount off invoice price if buyer pays in 10 days, net pay due in 30 days1/15, n/EOM  1% discount off invoice price if buyer pays in 15 days, net pay due by end of month3/10/EOM, n/60  3% discount off invoice price if buyer pays within 10 days of the end of the month, net pay due in 60 days1/EOM, n/60  1% discount off invoice price if buyer pays by end of the month, net pay due in 30 daysCash Discounts:Invoice: October 3Terms: When Discount Ends:2/10, n/30 October 131/15, n/EOM October 183/10/EOM, n/60 November 101/EOM, n/60 October 31June 12 Purchased $8000 of inventory (terms 1/10, n/60)Merchandise Inventory 8000Accounts Payable 8000June 228000 8000X .01 - 8080 discount 7920 cash paidAccounts Payable 8000Cash 7920Merchandise Inventory 80Lecture 13 (October 8)Freight/Transportation Charges- FOB—destination (FOB=Free on Board) seller pays freight charges- FOB—shipping pointbuyer/purchaser pays freight charges (transfer point of ownership)**ownership is sellers until gets into buyer’s hand- Seller pays:o Debit freight expense/delivery expense- Buyer pays:o Debit Merchandise Inventory (buyer sees it as additional cost) Increase cost of inventory of buying inventoryFinancial Statements for a Merchandise Business- Balance Sheet:o Assets = Liabilities + Owner’s EquityMerchandise Inventory (current asset)- Statement of Owner’s Equityo No changes from a service business- Income StatementSales Revenue-sales discounts-sales returns and allowances=net sales (what to expect to collect for certain sales period)-cost of goods sold=gross profit margin (how much $ make on just sale of inventory)-expenses= operating income/loss+/- other revenues/expenses in class, will only be interest or dividends= net income/lossLecture 14 (October 10)Gross Profit Rate = gross profit margin  (net sales – cost of goods sold)Net salesPg. 210 # 5 Gross margin ratio (rate) = net sales – CGS Net sales = 675000-459000 = 216000 = .32 (32%)675000 675000- Inventory Evaluation Methodso Specific identificationo First-in, first-out (FIFO)o Last-in, last-out (LIFO)o Weighted AverageIn inflationary periods FIFO gives highest net income LIFO gives lowest net incomeLecture 15 (October 15)Periodic Inventory System vs. Perpetual Inventory SystemOnly at end of period do count how continuously updating inventory much is sold/lefBeg. Inventory 5 @ $25Jan 10 Purchased 10 @ $26Jan 25 Purchased 4 @ $28Sold 3 items on Jan. 20Periodic: (ignore dates)FIFO 3 x 25 = 75 CGSLIFO 3 x 28 = 84 CGSPerpetual: (pay attention to dates)FIFO 3 x 25 = 75 CGSLIFO 3 x 26 = 78 CGSLecture 16 (October 22)Estimating Ending Inventory:- Interim financial statements (monthly and quarterly statements)o Ofen estimated- Claim for lost inventory Gross Profit Method of Estimating Ending Inventory (page 255):1.) 100% - Gross Profit Rate = Cost of goods sold rate(%) (%)2.) Net Sales x CGS % = CGS $3.) Total Cost of Inventory – CGS in $ = E.I. in