! ! Prepared!by:!Sara!Toynbee!!1!Exam%II%Study%G u ide %Disclaimer:!The!following!guide!is!intended!to!provide!a!brief!overview!of!some!of!the!material!that!we!have!covered!in!chapte rs !6 = 9!in!ACC T G !2 15 .!T h is!is !not!int en d e d!t o!provide!a!comprehensive!overview!of!all!material!that!could!be!examined!in!Exam!II.!This!should!not!substitute!for!your!own!study!no r!do!I!guarantee!that!it!is!free!from!errors.!!I!encourage!you!to!read!the!textbook!on!your!own!and!also!attempt!the!“not!required”!practice!problems!on!Connect.!Doing!practice!problems!is!very!important!and!helpful!in!accounting!as!it!is!important!to!learn!how!to!apply!the!concepts!you!learn!in!class!!Happy!studying!!J!!Chapter!6:!Sales!Revenue,!Receivables!and!Cash!• Revenue!Realization!Principle!–!revenues!are!recorde d!w hen !they!are!earn ed!• Motivations!for!accepting!credit!cards!• Contra=revenue!accounts !(ha ve!a!deb it!balanc e)!–!e.g.,!sales!discounts,!sales!returns!and!allowances,!credit!card!discounts!• Sales!discounts!(e.g.,!2/10,!n/30)!vs.!trade!discounts!(e.g.,!a!20%!student!discount)!o Sales!discounts!are!recorded!in!a!separate!contra=revenue!account!o Trade!discounts!affect!gross!sales!revenue!(i.e.,!no!contra!account!is!used)!!• Net!sales!=!Sales!revenue!–!credit!card!discounts!–!sales!discounts!–!sales!returns!and!allowances!• Net!sales!–!Cost!of!goods!Sold!=!Gross!profit!• Accounts!receivable!are!reported!at!net!realizable!value!à!therefore ,!we!n eed!to !adjus t!for!amou n ts !tha t!th e !firm !d o es !no t!ex p ec t!to !co llec t!(kept!in!contra=asset!account!called!allowance!for!bad!debts=!has!a!credit!balance)!• Allowance!method!–!estimates!expected!amount!of!bad!debts!based!on!current!period!receivables!(see!p.285!of!textbo ok!for!a!sum mary!of!affects!on!financial!statements):!o Making/end1of1period/adjusting/entries/to/record/bad/debt/expense/Bad!debt!expense!(E+/SE=)! ! ! xx!! Allowance!for!bad!debts!(XA+/A=)! ! xx! ! !o Writing/off/specific/accounts/deemed/uncollectible/during/the/period/Allowance!for!bad!debts!(XA!=/A+)! ! xx!! Accounts!Receivable!(A=)! ! ! xx!o Reversal/of/a/previously/written/off/account!Accounts!Receivable!(A+)! ! ! xx!Allowance!for!bad!debts!(XA!+/A=)! ! xx!Cash!(A+)! ! ! ! ! xx!! Accounts!Receivable!(A=)! ! ! xx!• Net!accounts!receivable!=!Accounts!receivable!–!Allowance!for!bad!debts!• Estimating!bad!debts!!o Percentage/of/credit/sales!–!multiply!the!credit!sales!by!the!percentage!given!in!the!question!to!find!the!bad!debt!expense!for!the!period,!which!is!d ire c t ly !r e c o r d e d !a s !an!expense!in!an!adjusting!entry!! ! Prepared!by:!Sara!Toynbee!!2!o Aging/of/accounts/receivable–!in!this!meth o d ,!us e!t he !fo llo wing!steps!t o!s o lve !for!bad!debt!expense:!(i)!find!the!balance!th at!the!firm !w an ts!to!hav e!in!its!allow an ce!for!bad!de b ts!a cco unt!at!the!end!of!the!period!via!the!aging!schedule!(e.g.,!page!288),!(ii)!com pare!the!existin g!ba lanc e!in!the!ac cou nt!to !the!ba lanc e!they !wa nt!(calculated!in!step ( i))!à!difference!in!these!amounts!gives!bad!debt!expense!for!the!period,!w h ic h!we!rec o rd!as!an!ad j u s ti n g !e n t ry!• Cash!and!cash!equivalents!• Internal!contro ls!ove r!cash !–!separation!of!duties!and!prescribed!policies!and!procedures!• Bank!Reconciliation!–!what!is!the!purpose!of!performing!a!bank!reconciliation?!!• Key!ratios!o Receivables!Turnover!=!Net!(credit)!Sales/!Average!(Net)!Accounts!Receivable!o Average!Collection!Period!=!365/Receivables!Turnover!o Gross!profit!margin!=!Gross!profit/Net!sales!!Chapter!7:!Cost!of!Goods!Sold!and!Inventory!• Manufacturing!inventory!accounts!=!o Raw!materials!inventory!o Work=in=process!inventory!o Finished=goods!inventory!• Merchandising!inventory!account!=!!o Inventory!• Different!methods!for!tracking!inventory!(inventory!systems)!o Perpetual!–!§ “Perpetually”!update!the!inven tory!accou nt!as!transaction s!occur.!Transac tions!involvin g!in v en to r y!a re !ta ke n !d ire ctly!to!the!inventory!acco unt!du ring!the!yea r!§ When!recording!sales!of!inventory,!will!also!account!for!the!cost!of!the!item!at!the!time!of!the!sale!(Dr:!CO GS;!Cr:!Inven tory)!!o Periodic!–!!§ “Periodically”!update!the!inventory!acc oun t!based!on!physical!stock!counts!of!the!inventory.!Tra nsa ction s!invo lving!inv en tory !are!reco rde d!usin g!tem p ora ry!accounts!such!as!purchases,!purchase!returns,!etc.!during!the!period!and!then!closed!into!inventory!at!the!end!of!the!period.!§ No!journal!entry!to!record!the!outflow!of!inventory!during!the!year!§ Need!to!calculate/cost/of/goods/sold/(COGS)/at/end/of/the/period!–!2!approaches!! ! Prepared!by:!Sara!Toynbee!!3!1. Close!temporary!accounts!such!as!purchases,!purchase!returns,!freight!in!to!purchases!(write!these!balances!down!to!zero!in!their!ledger)!to!the!invento ry !ac co u n t.!(e .g.!D r :!Inv e n to ry ;!Cr :!Fr eig h t!in ).!T h en !c alc u la te !!COGS/=/Beginning/Inventory/+/Net/Purchases/–/Ending/Inventory/2. Journal!en tr y!to !clo se !th es e!a cc ou n ts!d ire ct ly!(s ee !so lu tio ns!for!section!8)!• Cost!of!goods!available!for!sale!=!Beginning!Inventory!+!Net!Purchases!à!will!then!be!split!between!cost!of!goods!sold!and!ending!inventory!(see!exhibit!7.3!on!page!332)!• Difference!in!calculating!COGS!and!inventory!under!perpetual!and!periodic!under!the!different!cost!flow!methods!(recall!the!method!we!covered!in!class!to!track!purchases!and!sales!of!inventory)!o Perpetual!–!need!to!account!for!outflow!of!goods!after!each!transaction.!!o Periodic!–!record!the!total!good s!available!for!sale!(be ginning !invento ry!+!purchases)!and!then!account!for!outflow!at!the!end!(after!recording!all!the!goods!available!for!sale)!• When!doing!inventory!valuation!methods!under!cost!flow!assumptions,!remember!to!be!careful!with!your!working!and!read!the!question!carefully!to!note!whether!the!firm!in!the!pro b le m!is!using!a!p er io dic !o r!p er p et u al !inv e nt o ry !sy ste m,!and!wh ich !co s t!flo w!method!is!being!used…!• Cost!flow!assumption!methods:!o Specific!identification!–!track!sp ecific!item s!of!inve nto ry!(“big=ticket”!items)!o First=in,!first=out!(FIFO)!–!record!the!cost!of!the!first!units!of!inventory!that!were !purchased!when!recording!the!cost!of!inventory!outflows!(will!be!the!same!for!periodic!and!perpetual!system)!o
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