ACCT 209 1nd Edition Exam 2 Study Guide Lectures 5 8 Note This study guide is organized by topic The 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 assets Note 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 expenses Noncurrent All other assets Spilt into two categories Property plant equipment and Intangible assets Ex Property plant equipment Land Buildings Furniture Ex Intangible Patents Trademarks Temporary 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 Transactions 2 Record Transactions in journal and post to ledger T accounts 3 From Ledger info Prepare a trial balance before adjustments 4 Adjust balances by recording adjusting entries in journal and posting to ledger 5 Prepare adjusted trail balance 6 Report with financial statements prepared from adjusted account balance 7 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 lecture note 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 5 Merchandising 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 Inventory Net purchases Goods 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 Purchases Definitions needed Merchandising companies Purchase goods for resale Ex Walmart and Amazon Service companies Do something Ex Lawn car dry cleaners doctor Manufacturing companies Use raw materials and other resources to create new products for sale to customers Ex Dell and Adidas Operating cycle of a merchandising company Buy merchandise Sell merchandise Collect cash from customer Start over Periodic Inventory inventory account balance is updated and the amount of expense is determined at end of accounting period Use adjustment process at end of the year to update inventory Perpetual Inventory inventory account balance and amount of expense is calculated continuously throughout the accounting period More 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 payment Ex 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 in Free on Board shipping point Buyer pays shipping Free on Board destination Seller pays shipping Inventory cost flow methods 1 Specific ID method Only used when each item can be uniquely identified 2 Weighted average method Assume all units have the same average costs 3 FIFO First in First out Assumes that goods are sold in the same order as purchased 4 LIFO Last in Frist out Assumes that goods are sold in the reverse order as purchased What 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 GAFS Cost of goods sold COGS Average cost unit GAFS Ending Inventory units Ending Inventory Average Cost Unit Ending Inventory Units For 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 sales Note that Net sales is always equal to 100 3 Beginning RE NI Dividends End RE Note 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 2 Definitions 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 lecture 7 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 costs assigned to inventory But older costs matched against revenue LIFO Does a good job of matching current cost against revenue on income statement Potentially VERY outdated costs are reported on balance sheet for inventory Lost items using Periodic System Physical count determines of units left