ACCOUNT 244 1st Edition Exam 2 Study Guide Chapters 4 6 Chapter 4 Completing the Accounting Cycle What is a worksheet What is the process of closing the books What is the purpose of postclosing trial balances What are the required steps in the accounting cycle What are the sections of a classified balance sheet Worksheeto It is a multiple column form used in preparing adjusting entries and financial statements They are not a permanent accounting record and they are not required o They prepare adjusting entries by journalizing and posting from the Adjustment columns They prepare financial statements by income statements and prepared from the income statement columns and by the balance sheet and retained earnings statement are prepared from the balance sheet columns Closing the Bookso Dividends are closed directly to retained earnings and not to Income Summary because dividends are not an expense o Retained Earnings is a permanent account all other accounts are temporary accounts Post Closing Trial Balanceso It contains the balances in permanent accounts that are carried forward to the next accounting period o Purpose to prove the equality of these balances Steps in Accounting Cycle o 1 Analyze business transactions 2 Journalize the transactions 3 Post to ledger accounts 4 Prepare the trial balance 5 Journalize and post adjusting entries 6 Prepare and adjusted trial balance 7 Prepare financial statements 8 Journalize and post closing entries 9 Prepare a post closing trial balance Balance Sheeto It categorizes assets as current assets long term investments property plant equipment and intangible liabilities as either current or long term investments Current Assets Assets that a company expects to convert to cash or use up within a year or until its operating cycle whichever is longer Long Term Investments Stocks and bonds of other companies long term assets such as land or buildings that a company is not currently using in its operating activities Property Plant Equipment Long term assets such as land buildings equipment etc that have long useful lives are currently used in operations or are usually depreciated except for land Intangible Assets assets that do not have physical substance Long term liabilities Obligations a company expects to pay after one year Stockholder s Equity Proprietorship one capital account Partnershipone capital account for each partner Corporation two capital accounts Common Stock and Retained Earnings Chapter 5 Accounting for Merchandising Operations Identify the difference between service and merchandising companies What is the recording process of purchases under a perpetual inventory system What is the recording process of sales revenues under a perpetual inventory system Explain the steps in the accounting cycle for a merchandising company What is the difference between a multiple step and single step income statement Service vs Merchandisingo Because of inventory a merchandising company has sales revenue cost of goods sold gross profit To account for inventory a merchandising company must choose between a perpetual and periodic inventory system Purchases in Perpetual System o The company debits the inventory account for all purchases of merchandise and freight in and credits it for purchase discounts and purchase returns and allowances o The cost principle is used as the measurement principle for inventory o Cost consists of all expenditures necessary to acquire and asset and make it ready for its intended use Recording of Sales Revenue in Perpetual System o It debits Accounts Receivable or Cash and credits Sales Revenue for the selling price of the merchandise At the same time it debits Cost of Goods sold and credits Inventory for the cost of the inventory items sold Sales Returns and Allowances and Sales Discounts are debited Multi step vs Single step o A multiple step income statement shows numerous steps in determining net income including non operating activity sections A single step income statement classifies all data under two categories revenue or expenses and determines net income in one step Chapter 6 Inventories Identify the differences between inventory classifications of merchandising and manufacturing companies What are the steps in determining inventory quantities What is the financial effects of the inventory cost flow assumption Explain the lower of cost or markets basis of accounting for inventories Indicate the effects of inventory errors on the financial statements What is the inventory turnover ratio Apply the inventory cost flow methods to the perpetual inventory system Merchandising vs manufacturing companies o Merchandising One classification Inventory o Manufacturing Three classifications Raw Materials Work in Process and Finished Goods Inventory quantitieso 1 Take a physical inventory of good on hand and 2 Determine the ownership of goods in transit or on consignment Financial effects of Inventory Cost Flow Assumptiono Companies may allocate the cost of good available for sale to cost of goods sold and ending inventory b specific identification or by a method based on an assumed cost flow When prices are rising FIFO method results in a lower cost of goods sold and higher net income than the other methods The revenue is true when prices are falling Lower of cost or market Basiso Companies may use the lower of cost or market LCM basis when the current replacement cost is less than cost under LCM companies recognize the loss in the period in which the price decline occurs o The cost principle is violated by the lower or cost or market basis of accounting for inventories o The concept of conservatism allows us to violate this principle This means that we never want to state our assets or income as too high o The market value is defined as current replacement cost Inventory Errorso In the income statement of the current year 1 An error in the beginning inventory will have a reverse effect on net income 2 An error in ending inventory will have a similar effect on net income In the following period its effect on net income for that period is reversed and total net income for the two years will be correct In the balance sheet ending inventory errors will have the same effect on total assets and total stockholder s equity and no effect on liabilities Inventory Turnover Ratioo It s the cost of goods sold divided by the average inventory To convert it to average days in inventory divide 365 days by inventory turnover ratio