ACG Test 2 Study Guide CHAPTER 4 Revenue Recognition Principle revenue recognized in the accounting period in which the performance obligation is satisfied Expense Recognition Principle Matching Principle match expenses with revenues in the period when the company makes efforts to generate those revenues Accrual Basis Accounting GAPP means the transactions that change a company s finical statements are recorded in the periods in which the events occur even if the cash was not exchanged Cost Basis Accounting companies record revenue when they receive cash Is not in accordance with GAAP Need for adjusting entries when are adjusting entries made in the accounting cycle adjusting entries are needed because the trial balance the first pulling together of transaction date may not contain up to date and complete date They are required every time a company prepares financial statements Types of Adjusting Entries deferrals and accruals 1 Prepaid Expenses expenses paid in cash before they are used or 2 Unearned Revenues Cash received before services are performed 1 Accrued Revenues Revenues for services performed but not yet received 2 Accrued Expenses Expenses incurred but not yet paid in cash or recorded Deprecation is the process of allocating the cost of an asset to expense over its useful life Unearned Revenues companies record cash received before services are performed by increasing crediting a liability account Deferrals consumed Accruals in cash CHAPTER 5 Difference between a service company and a merchandising company sale cost of goods sold Service Company perform services as primary source of income Merchandising Company buy and sell merchandise rather then perform services as their primary source of revenue Sale the primary source of revenues for merchandising companies is the sale of the merchandise can be referred to as sales revenue Cost of goods sold total cost of merchandise sold during the period Perpetual vs periodic inventory systems Perpetual companies maintain detailed records of the cost of each inventory purchase and sale Periodic companies do not keep Advantages of perpetual inventory system Better inventory control Journalize entries to record the purchase of inventory p 233 freight costs know terms FOB shipping point and destination incurred by buyer p 235 purchase returns and allowances p 236 purchase discounts know credit terms p 237 Using the perpetual system journalize entries to record the sale of merchandise p 238 freightcosts incurred by the seller p 235 sales returns and allowances p 239 sales discounts Contra revenue accounts Sales Returns and Allowances is a contra revenue account to Sales If the debit had been to Sales then the return would have been buried in that account Calculate net sales Net sales is total revenue less the cost of sales returns allowances and discounts 1 000 000 Gross sales 10 000 Sales returns 5 000 Sales Allowances 15 000 Discounts 970 000 Net sales Calculate gross profit Sales Cost of Goods Sold Gross Profit Review multiple step income statement breaks net income or loss into several components which financial statement users find useful Pg 245 Calculate cost of goods sold under a periodic system To determine cost of goods sold it is necessary first to determine the cost of goods purchased Gross purchases Less Purchase returns and allowances Purchase discounts Net purchases Add Freight in Cost of goods purchased Cost of goods sold is then computed as follows Beginning inventory Plus Cost of goods purchased Cost of goods available for sale Less Ending inventory Cost of goods sold Calculate the gross profit rate the gross profit rate is computed by dividing gross profit by net sales CHAPTER 6 What is the purpose of taking physical count of inventory It is generally more accurate Goods in transit at the time of the physical count then ownership is deter mined by who has legal title to the goods and legal title is determined by the terms of the sale FOB shipping point ownership of the goods passes to the buyer when the public carrier accepts the goods from the seller EX iPhone is yours when it gets out of the factory FOB destination ownership of the goods remains with the seller until the goods reach the buyer EX amazon goods are yours once it gets to your door Consigned goods some companies hold the goods of other parties and try to sell them for a fee but do not take ownership of the good EX used car lots take your car and sell it for a fee but you still own it Specific identification method of inventory costing identify which particular units it sold and which are still in ending inventory Cost flow assumptions 1 FIFO assumes that the earliest goods are sold first 2 LIFO assumes that the latest goods are sold first 3 AVERAGE COST removes the effects of rising or falling prices An average unit cost is computed by dividing the cost of goods available for sale by the total units available for sale Calculate ending inventory and cost of goods sold using FIFO Ill 6 6 6 7 p 290 291 Calculate ending inventory and cost of goods sold using LIFO Ill 6 8 6 9 p 291 293 Calculate ending inventory and cost of goods sold using average cost Ill 6 10 6 11 p 293 Know income statement effects of inventory cost flow assumptions Ill 6 13 6 14 p 294 295 Know balance sheet effects and tax effects of inventory cost flow assumptions p 296 Calculate inventory turnover and days in inventory Ill 6 17 p 299 300
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