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UWW ACCOUNT 244 - Exam 2 Study Guide

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ACCOUNT 244 1st EditionExam # 2 Study Guide Chapters 4-6Chapter 4Completing the Accounting CycleWhat is a worksheet? What is the process of closing the books? What is the purpose of post-closing trial balances? What are the required steps in the accounting cycle? What are the sections of a classified balance sheet?- Worksheet-o 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 Books-o Dividends are closed directly to retained earnings and not to Income Summary because dividends are not an expenseo Retained Earnings is a permanent account; all other accounts are temporary accounts.- Post-Closing Trial Balances-o 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 Cycleo 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 Sheet-o 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, Partnership- one capital account for each partner, Corporation- two capital accounts (Common Stock and Retained Earnings)Chapter 5Accounting for Merchandising OperationsIdentify 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 salesrevenues 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. Merchandising-o 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 Systemo 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 Systemo 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-stepo 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 6InventoriesIdentify the differences between inventory classifications of merchandising and manufacturing companies. What are the steps in determining inventory quantities? What is the financial effectsof 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- Inventoryo Manufacturing: Three classifications- Raw Materials, Work in Process, and Finished Goods-Inventory quantities-o 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 Assumption-o 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 Basis-o 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 thatwe never want to state our assets or income as too high. o The market value is defined as current replacement cost.-Inventory Errors-o 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 twoyears 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


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UWW ACCOUNT 244 - Exam 2 Study Guide

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