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GSU ACCT 2101 - Principles of Accounting 1

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Principles of Accounting 1 Fall 2019Study Guide for Midterm 2Chapter 5:- Analyze the flow of costs for a merchandising company.Beginning inventory + Cost of Goods Purchased = Cost of Goods Available for Sale. As goods are sold, they are assigned to Cost of Goods Sold. Those goods that are not soldby the end of the accounting period represent Ending Inventory.- Analyze freight costs, returns & allowances, and discounts associated with the purchasing and selling of inventory.Freight Costs is the sales agreement that indicates who (the seller or buyer) is paying for the of the goods to the buyer’s place of business.Freight terms: FOB = Free on Board FOB Shipping Point- The buyer pays the freight costs. The items belong to the buyer when the seller puts it on the carrier to transport it to the buyer. Freight cost incurred by the buyer will be included in “inventory” when journalizing.FOB Destination- The seller payer the freight costs. The items belong to the seller until the carrier delivers it to the buyer. Freight Costs incurred by the seller on outgoing merchandise are an operating expense to the seller and will be journalized as “freight-out”. Purchase Returns and Allowances (Buyer)Purchase Return - A return of goods from the buyer to the seller for cash or credit.Purchase Allowance – A deduction made to the selling price of merchandise, granted by the seller, so that the buyer will keep the merchandise.Debit “Accounts Payable or Cash” and Credit “Inventory”Sales Returns and Allowances (Seller)Transactions in which the seller either accepts goods back from the purchaser (a return) or grants a reduction in the purchase price (an allowances) so that the buyer will keep the goods.Debit “Sales Returns and Allowances” and Credit “Accounts Receivable”ANDDebit “Inventory” for the costs of the goods and Credit “Cost of Goods Sold”Purchase Discount- A cash discount claimed by a buyer for prompt payment of a balance due. For example, “2/10 , n/30” means that the buyer will receive a 2% discount off ofthe full amount of the purchase if they pay within 10 days or there is no discount and they will have to pay the full amount within 30 days.2/10, Buyer will debit “Accounts Payable” then credit “Cash and Inventory (the discount)”2/10 Seller will debit “Cash” and “Sales Discount” and credit “Accounts Receivable”n/30 Buyer will Debit “Accounts Payable” the credit “Cash”n/30 Seller will debit “Cash” then credit “Accounts Receivable”- Identify characteristics of perpetual and periodic inventory systems.Perpetual Inventory System - A detailed inventory system in which a company maintains the cost of each inventory item, and the records continuously show the inventory that should be on hand. Most places with high value items use this. Physical inventories are done frequently to verify inventory levels.Periodic Inventory Systems- An inventory system in which a company does not maintain detailed records of goods on hand throughout the period and determines the cost of goods sold only at the end of an accounting period by doing a physical inventory once. Small merchandise businesses use this inventory system.- Identify and calculate items found on a multiple-step income statement.The multistep income statement has three important line items: Net Sales, Gross Profits, Income from Operations.Sales Revenue – Sales Returns and Allowances – Sales Discounts = Net SalesNet Sales – Costs of Goods Sold = Gross Profit (Gross Margin)Gross Profit – Operating Expenses = Income from OperationsThey are determined as followed:1. Subtract cost of goods sold from net sales to determine gross profit.2. Deduct operating expenses from gross profit to determine income from operations.3. Add or subtract the results of activities (other revenues and expenses) not related to operations to determine net income.- Calculate cost of goods sold under a periodic inventory system.Purchases – Purchase Returns and Allowances – Purchase Discounts + Freight in = Cost of goods purchased Beginning Inventory + Cost of Goods Purchased – Ending Inventory = Costs of Goods Sold - Calculate gross profit and the gross profit rate.Net Sales – Cost of Goods Sold= Gross Profit Gross Profit/Net Sales = Gross Profit Rate Net Income/ Net Sales = Profit MarginChapter 6:- Calculate ending inventory based upon the physical count and ownership of goods.Consigned Goods (Consignment) – Goods held for sale by one party although ownership of the goods is retained by another party. Consigned goods are not counted towards your ending inventory.- Calculate and analyze cost of goods sold and/or ending inventory under FIFO, LIFO, or average cost.- Define LIFO reserve.- Given sales, inventory transactions, expenses, and tax rate, calculate net income.Sales- Cost of Goods Sold - Operating Expenses –Tax =Net Income- Apply the lower of cost or market basis to inventory and identify the accounting convention it represents.When the value of the inventory is lower than its cost. - Calculate inventory turnover and days in inventory.(Beginning Inventory + Ending Inventory)/ 2 = Average InventoryCost of goods Sold / Average Inventory = Inventory Turnover365/ Inventory Turnover = Days in Inventory- Interpret the effect on the financial statements of an error in the physical inventory count.Chapter 7:- Identify the three factors that contribute to fraudulent activity.Opportunity - The most important factor in the fraud triangle. For an employee to commit fraud, the workplace environment must provide opportunities that an employee can exploit. Opportunities occur when the workplace lacks sufficient controls to deter and detect fraud.Financial Pressure – Employees with financial problems caused by too much debt or leading a lifestyle that they cannot afford on their current salary are prime candidates to commit fraud.Rationalization – In order to justify their fraud, employees rationalize their dishonest actions to make it seem like what they are doing are right. - Identify the objectives of a system of internal controls.A control environment – The responsibility of top management to make it clear that the organization values integrity and the unethical behavior will not be tolerated. Risk Assessment – Companies must identify and analyze the various factors that create risk for the business and determine how to manage these risks.Control Activities- To reduce the


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GSU ACCT 2101 - Principles of Accounting 1

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