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WVU ACCT 201 - Exam 2 Study Guide
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ACCT 201 1st EditionExam # 2 Study Guide Lectures: 16-25Lecture 16 (February 21)Matching Principle- matches expenses with revenues in the period in which the company makesefforts to generate those revenues.Merchandising has two categories of expenses, the cost of goods sold and operating expenses.Lecture 17 (February 24) In a perpetual inventory system, companies maintain detailed records of the cost of each inventory purchase and sale. These records continuously show the inventory that should be on had for every item. Under a perpetual inventory system, a company determines the cost of goods sold each time a sale occurs.In a periodic inventory system, companies do not keep detailed inventory records of the goods on hand throughout the period. They determine the cost of goods sold only at the end of the accounting period. At that point, the company takes a physical inventory count to determine thecost of the goods on hand.To determine the cost of goods sold under a periodic inventory system, the following steps are necessary:1. Determine the cost of goods on hand at the beginning of the accounting period.2. Add it to the cost of goods purchased3. Subtract the cost of goods on hand at the end of the accounting period.**You can find a comparison between the two inventory systems in the book on pg. 255Lecture 18 (February 26)Sales Returns and Allowances is a contra revenue account to sales revenue, which means it is offset against a revenue account on the income statement. The normal balance of sales returns and allowances is a debit. Companies use a contra account instead of debiting sales revenue, to disclose in the accounts and in the income statement the amount of sales returns and allowances.Lecture 19 (February 28)Professor did example of a periodic inventory systemMissed notes will upload ASAPLecture 20 (March 5)To prevent fraud, the Sarbanes-Oxley Act (SOX) states that all publicly traded U.S. corporations are required to maintain an adequate system of internal control. In addition, independent outside auditors must attest to the adequacy of the internal control system. Companies that fail to comply are subject to fines, and company officers can be imprisoned. Companies are assessed once a year. This helps the general public to trust the companies so that they may make investments.Common examples of internal controls:1. Physical security- a lock on a door, fences, alarms, cameras2. Establishment of responsibility- identifying who is in trouble if the company doesn’t do what they’re supposed to- management sign-offs 3. Segregation of duties- different individuals should be responsible for related activities, 4. Independent internal verification- involves the review of data prepared by employees, like cameras showing tellers counting money, or casinos watching the dealers5. Document procedures- writing down a list of the rules, documents that provide evidencethat transactions and events have occurred (ex: WVU code of ethics)6. Human resources controls- background checks, bond employees who handle cash, security clearanceLecture 21 (March 17)Inventory1. Physical count—companies take the physical inventory at the end of the accounting period2. Goods in transit—inventory being shippeda. Freight on board (FOB) shipping point—customer/buyer pays for shipping, b. FOB destination—seller pays for shipping3. Consigned Goods (ex: Ebay)—holding goods of other parties to try to sell the goods for them for a fee, but without taking ownership of the goodsLecture 22 (March 19)Inventory Assumptions1. FIFO—first in, first out (oldest first) –highest profit2. LIFO—last in, last out (newest first)3. Average Cost (weighted average)Specific Identification—low volume, high valueEx: cars-VIN number, jewelry stores- embedded barcode on merchandiseLecture 23 (March 21)Professor goes over FIFO and LIFO more and shows example from book--Do it! 6-2Lecture 24 (March 24) The seller records their losses that result from extending credit as Bad Debt Expense. Allowance method of accounting for bad debts involves estimating uncollectible accounts at theend of each period. Net realizable value is the net amount a company expects to receive in cash from receivables. Itexcludes amounts that the company estimates it will not collect.Under the direct write-off method, when a company determines receivables from a particular company to be uncollectible, it charges the loss to Bad Debt Expense. Under this method, bad debt expense will show only actual losses from uncollectibles. The company reports accounts receivable at its gross amount without any adjustment for estimated losses for bad debts.Lecture 25 (March 26)Chapter Five:Inventory—Merchandising company- Perpetual inventory system—real time, inventory account for purchases- Periodic inventory system—adjusted, purchases account for new inventoryWhen inventory sells, there are two entries:A = L + SE+ Cash/AR +Revenue (Sales $)- Inventory -COGS (Purchase $) = Gross ProfitChapter Six:Inventory Count1. Physical count (what’s in front of you)2. Goods in transit (being shipped)- FOB shipping point—buyer pays- FOB destination—seller pays3. Consigned Goods—ownership does not change handsInventory Methods1. FIFO—first in, first out (oldest)  highest profit2. LIFO—last in, first out (newest)3. Average cost—weighted average Specific identification: high value, low volumeEx: cars, jewelryA/R --$ full amountLess (Allowances): $ assume not collect  contra asset*Almost always a percentage, usually included with all other adjusted entriesA/R (Net) $ we might actually get --- Net Realizable Value (NRV)A = L + SE-Allowance -Bad Debt ExpenseMuch of these definitions are taken from the book:Weygant, Kieso, and Kimmel. Financial Accounting : Tools for Business Decision Making. 7th edition, New Jersey: Wiley Publishing,


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