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ACG 2021: Exam 2 Study GuideACG 2021: Exam 2 Study GuideThe Classified Balance SheetThere is a specific order in which accounts appear on the Balance Sheet.- The assets are listed in order of their liquidity (the amount of time it takes to convert the asset intocash).Current Assets – (more liquid) cash and other assets that are expected to be converted into cash, sold, or used up/consumed within one year. Current assets are sources of cash within a year. Ex. Cash, Accounts Receivable, Notes Receivable, Inventory, Supplies, Prepaid Rent, Prepaid Insurance, Prepaid Advertising, Short-Term Investment in Stock, etc. Long-Term Assets – (less liquid) assets that are not expected to be converted into cash, sold, or used up/consumed within one year. Ex. Land, Equipment, Buildings, Accumulated Depreciation, Long-Tern Receivables, Long-Term Investments in Stock, etc. - The liabilities are listed in order of their due date. Current Liabilities – (due earlier) obligations that will come due within one year. Current liabilities are demands on cash within a year. Ex. Accounts Payable, Wages Payable, Notes Payable, Interest Payable, Unearned Revenue, etc. Long-Term Liabilities – (due later) obligations that will not come due within one year. Ex. Long-Term Payables, etc. The Relationship Between Current Assets and Current Liabilities It helps predict a company’s short-term liquidity (aka can they pay their bills?).Working CapitalWorking Capital = Current Assets – Current Liabilities Do we have enough cash to pay off our current liabilities?Current RatioCurrent Ratio = Current Assets / Current Liabilities How many times can the current assets cover our current liabilities? Example: if the ratio is 2:1, then our current assets can cover two times our current liabilities. Types of CompaniesService Companies have no inventory. Merchandising Companies have inventory that they sell to customers. Manufacturing Companies will be discussed in ACG 2071.Merchandise Inventory1Goods that the company has purchased in finished form and is holding for sale to customers. When it is sold, it becomes an expense called Cost of Goods Sold. - This is different than supplies. Although they are both current assets, merchandise inventory is sold and supplies are only used internally. When supplies are used, it becomes supplies expense. - This is different than equipment. Merchandise inventory is current asset, while equipment is a long-termasset. Merchandise inventory is for sale and equipment is for internal use only and is not for sale to customers. When equipment is sold it becomes depreciation expense. Example: Office Depot both sells and uses office supplies and office equipment. They would have several accounts to categorize these into. - Office supplies that they internally use would be called the supplies account. - Office supplies that they sell would be called inventory. - Office equipment that they use would be called equipment. - Office equipment that they sell to customers would be called inventory. Example Inventory Journal Entries1. Shoe Warehouse purchases inventory on credit. Assume the purchase consists of 10 pairs of flip-flops at $1 a pair. Inventory $10 Current AssetA/P $10 Current Liability2. The business pays for the inventory purchased above. A/P $10 Current LiabilityCash $10 Current Asset2. The business sells the inventory purchased above for cash. Assume the selling price of each pair is $5. Cash $50 Current AssetSales Revenue $50 Revenue Cost of Goods Sold Expense $10 ExpenseInventory $10 Current AssetMulti-Step Income StatementPrincipal ActivitiesSales Revenue, Costs of Goods Sold, Gross Margin, Selling and Administrative Expense, and Operating Incomedeals with principal activities, aka what you are in the business of selling. 2Sales RevenueSales Revenue has to be from sales of whatever you’re in the business of selling. Selling and Administrative (Operating) Expenses Examples of Selling and Administrative expenses include: utility expense, rent expense, wage expense, deprecation expense, supplies expense, insurance expense, FOB destination, and advertising expenses.Operating Income Income from principle activities is calculated by the following equation. Operating income = Gross Margin – Sales and Administrative ExpensesSecondary ActivitiesOther Revenues and Gains, Other Expenses and Losses, Income before Tax, Income Tax Expense, and Net Income deals with secondary activities, aka other ways for you to make money that aren’t what you are in the business of selling. Income Before TaxIncome before tax = operating income + other revenues (interest revenue) – other expenses (interest expenses) Cost of Goods SoldCost of Goods Sold is the cost of inventory sold during a period CGS = # of units sold x cost per unitThis is NOT the same thing as purchases. No matter what you CGS is, your total cost from purchases will remain the same. Gross Margin or ProfitGross Margin (Profit) = Sales Revenue – Cost of Goods SoldGross Margin RateThe percentage of sales that can go to other expenses. Gross Margin Rate = Gross Margin / Sales Revenue The higher the Gross margin, the more profitable the company. Net Income and the Profit Margin RatioThe percentage of sales going to net income.Net Income and Profit Margin Ratio = Net Income / Sales Quality of EarningsIncome that comes from what a company is supposed to be doing (their principle activities) is considered repetitive income and results in a higher quality of earnings. Historical Cost Principle (in the eyes of the purchaser)The cost of an asset = the purchase price + all of the cost necessary to get the asset to the location and in the condition required for its intended use. 3Inventory Cost From The Eyes of the PurchaserPurchase Discounts (in the eyes of the purchaser)Percentage discount offered by the seller to the purchaser to encourage prompt payment. This reduces the cost of inventory. Ex. 5/15. n45 means that the purchaser will receive a 5% discount if they pay within 15 days, otherwise the full amount is due in 45 days. Purchase Returns (in the eyes of the purchaser)Merchandise purchases that are returned by the purchaser to the seller. Purchase Allowances (in the eyes of the purchaser)This is a price reduction offered by the seller to the purchaser due to some problem with the merchandise. Purchase allowances are offered to encourage the purchaser to accept the merchandise and to keep them


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FSU ACG 2021 - Exam 2 Study Guide

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