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TAMU ACCT 209 - Exam 2 Study Guide
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ACCT 209 1nd EditionExam # 2 Study Guide Lectures: 5 - 8Note: This study guide is organized by topicThe Accounting Cycle (Lecture 5 - September 24)Equations needed: (1) Working Capital: Current Assets – Current Liabilities(2) Current Ratio: Current Assets / Current Liabilities(3) Ratio of Liabilities to assets: Total Liabilities / Total assetsNote that decline or increase in Working capital, current Ratio, and debt to total assets ratio is not necessarily a good thing or a bad thing. Definitions needed:Current Assets: Expected to be used or converted to cash in 1 year. Should be listed in order of liquidity (How easily they can be converted to cash)Ex: Cash, Marketable securities, Accounts Receivable, Notes Receivable, inventory, Supplies, prepaid expensesNoncurrent: All other assets; Spilt into two categories: Property, plant & equipment, and Intangible assets.Ex: Property, plant & equipment – Land, Buildings, FurnitureEx: Intangible – Patents & TrademarksTemporary accounts: Also called Nominal Accounts. They are Revenues, expenses, and dividends. At the end of each period, the account balance must be set to zero by transferring balance amount to Retained Earnings.Permanent Accounts: Also called real accounts. They are the balance sheet accounts. Note that period 1 ending balance of a real account = period 2 beginning balance.Accounting Cycle:1. Analyze Transactions2.Record Transactions in journal and post to ledger “T” accounts3.From Ledger info, Prepare a trial balance before adjustments4.Adjust balances by recording adjusting entries in journal and posting to ledger5.Prepare adjusted trail balance6.Report with financial statements prepared from adjusted account balance7.Prepare for next accounting period with closing entries (In journal and ledger)8.Prepare post-closing trial balance; Start new accounting period. What kind of problems are from this section?- Preparing closing entries. To see an example look at the Closing Entries example on lecturenote 5- Determining Working capital, current Ratio, and debt to total assets ratio for 2013. To see an example look at the last example on lecture note 5Merchandising Transactions and Inventories Part one (Lecture 6 - September 26)Equations needed: (1) Net Sales<Cost of goods sold>Gross Profit<Operating Expenses>Net Income(2) Beginning InventoryNet purchasesGoods available for sale<End inventory>Cost of Goods Sold(3) Gross sales<Sales returned><Sales allowances><Sales discounts >Net sales(4) Gross Purchases<Purchases returned><Purchases allowances><Purchases discounts >Net PurchasesDefinitions needed:Merchandising companies- Purchase goods for resaleEx: Walmart and AmazonService companies- Do somethingEx: Lawn car, dry cleaners, doctorManufacturing companies- Use raw materials and other resources to create new products for sale to customersEx: Dell and AdidasOperating cycle of a merchandising company – Buy merchandise -> Sell merchandise -> Collect cash from customer -> Start overPeriodic Inventory – inventory account balance is updated and the amount of expense is determined at end of accounting periodUse adjustment process at end of the year to update inventoryPerpetual Inventory – inventory account balance and amount of expense is calculated continuously throughout the accounting periodMore expensive because it requires more extensive record keeping. Also offers better control of supply.Inventory – Recorded at cost incurred to get the asset in the location and condition required for use. This means that the cost includes purchase price, taxes, tariffs, shipping costs, assembly, modified costs, and insurance while in transit. Credit terms – Offered by seller to encourage prompt paymentEx: 2/10, n/30 – Means there is a 2% discount if paid in 10 days and the full amount or “Net amount” is due in 30 days.Freight charges - Transportation inFree on Board shipping point – Buyer pays shippingFree on Board destination – Seller pays shippingInventory cost flow methods1. Specific ID method – Only used when each item can be uniquely identified2. Weighted average method – Assume all units have the same average costs3. FIFO (First in First out) – Assumes that goods are sold in the same order as purchased4. LIFO (Last in Frist out) – Assumes that goods are sold in the reverse order as purchasedWhat kind of problems are from this section?-Using the first four equations to calculate things like Net Profit. To see an example look at the Second Example in lecture note 6-Determining costs of assets. To see an example look at example one in lecture note 6 Important things to note:-In general, The party that pays freight has the title to the goods-Ending inventory is an asset-Cost of goods sold is an expense- This semester we will only be doing calculations for Periodic system.- Freight out is an operating expense while Freight in is a part of net purchases Merchandising Transactions and Inventories Part Two (Lecture 7 - October 8)Equations needed:(1) In the weighted average method –Weighted average cost/unit = Total $ Goods Available for Sale (GAFS)/ Total # GAFSCost of goods sold (COGS) = Average cost/unit * (GAFS – Ending Inventory units)Ending Inventory = Average Cost/Unit * Ending Inventory UnitsFor the FIFO and LIFO calculation of COGS and EI, use method shown on lecture note 7 example one. (Not shown here because it is a method not a formula)(2) Net sales<COGS % of Net Sales>GP% of Net salesNote that Net sales is always equal to 100%(3) Beginning RENI<Dividends>End RENote that this is an equation from last test(4) Ending inventory should be <Ending inventory actually> Inventory Lost(5) Cost of goods sold $ = Net sales * COGS % of net sales(6) Gross Profit $ = Net sales *GP % of net sales(7) Inventory Turnover: COGS / Avg. Inventory(8) Avg. inventory : (End Inventory + Beginning inventory) / 2Definitions needed:Consistency Principle - Once a Company picks a method, they need to stay with the same method.What kind of problems are from this section?-Calculating EI and COGS using weighted average, FIFO, and LIFO methods. To see an example look at Example one on lecture 7.-Correcting Inventory Errors. To see an example look at Inventory errors example on lecture7.-Estimating Inventory. To see an example look at estimating ending inventory example on lecture 7.Important things to note:-FIFO does a good job of reporting current cost on balance sheet (Most recent


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