Financial Accounting ACG2021 Test 2 study guide Chapter 5 Purchase discounts 3 10 n 30 this means that a 3 discount will be given if paid within 10 days otherwise the full amount must be paid within 30 days The ledger would show accounts payable xxx if discount deadline is missed then ledger would show accounts payable xxx Cash xxx Inventory xxx Cash xxx As a seller cash xxx Sales discount xxx Purchasing inventory as a buyer Accounts receivable xxx Inventory xxx Cash xxx Selling inventory As the buyer Revenue accounts receivable xxx Expense of sold inventory CGS xxx Revenue xxx As the seller Sales returns xxx Accounts receivable xxx Inventory xxx reverse the revenue Inventory xxx CGS xxx reverse the expense Purchase return Buyer Cash xxx Inventory xxx this is just a reverse of the purchase Shipping point destination point Buyer responsible inventory xxx Cash xxx Seller responsible freight out expense xxx o Shipping point means the buyer is responsible for the shipping costs o Destination point means the seller is responsible for the shipping costs Putting it together as a buyer Cash xxx Total inventory purchase price shipping purchase returns purchase discount purchase allowances Putting it together as a seller Net sales sales sales returns sales discounts sale allowances do not include shipping costs as a seller Single step income statement Revenue expenses net income The multistep income statement Sales revenues Less sale returns Sale discounts xxx xxx xxx xxx xxx xxx xxx xxx xxx xxx xxx xxx Net sales Cost of Goods sold Gross profit Operating expenses Income from operations Non operating activities Income before income taxes Income tax expenses Net income Chapter 6 Oak tree formula used to calculate CGS Beginning inventory net purchases goods available for sale Goods available for sale ending inventory cost of goods sold Who owns merchandise when product is in transit If terms are FOB shipping point then buyer owns the product when in transit If terms are in FOB destination point then seller owns the goods while in transit The buyer will own them when the goods are actually delivered If costs of inventory is rising then CGS expense will be low If cost of inventory is falling then CGS expense will be high Chapter 7 Formula the calculate the cash balance from the unadjusted bank balance Unadjusted bank balance deposits in transit outstanding checks bank errors true cash Formula to calculate true cash balance for the unadjusted book balance Unadjusted book balance accounts and notes payable interest payable bank service charge NSF checks book errors true cash To record uncollectible BDE xxx ADA xxx accounts Net value of receivables accounts receivable allowance for doubtful Key Terms Contra revenue account An account that is offset against a revenue account on the income statement Cost of goods sold The total cost of merchandise sold during the period Gross profit The excess of net sales over the cost of goods sold Gross profit rate Gross profit expressed as a percentage by dividing the amount of gross profit by net sales Net sales Sales less sales returns and allowances and sales discounts Periodic inventory system 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 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 Profit margin Measures the percentage of each dollar of sales that results in net income computed by dividing net income by net sales Purchase allowance A deduction made to the selling price of merchandise granted by the seller so that the buyer will keep the merchandise Purchase discount A cash discount claimed by a buyer for prompt payment of a balance due Purchase invoice A document that provides support for each purchase Purchase return A return of goods from the buyer to the seller for cash or credit Quality of earnings ratio A measure used to indicate the extent to which a company s earnings provide a full and transparent depiction of its performance computed as net cash provided by operating activities divided by net income Sales discount A reduction given by a seller for prompt payment of a credit sale Sales invoice A document that provides support for each sale Sales returns and allowances Transactions in which the seller either accepts goods back from the purchaser a return or grants a reduction in the purchase price an allowance so that the buyer will keep the goods Sales revenue Primary source of revenue for a merchandising company Average cost method An inventory costing method that uses the weighted average unit cost to allocate the cost of goods available for sale to ending inventory and cost of goods sold Consigned goods Goods held for sale by one party although ownership of the goods is retained by another party Current replacement cost The cost of purchasing the same goods at the present time from the usual suppliers in the usual quantities Days in inventory Measure of the average number of days inventory is held calculated as 365 divided by inventory turnover Finished goods inventory Manufactured items that are completed and ready for sale First in first out FIFO method An inventory costing method that assumes that the earliest goods purchased are the first to be sold FOB destination Freight terms indicating that ownership of goods remains with the seller until the goods reach the buyer FOB shipping point Freight terms indicating that ownership of goods passes to the buyer when the public carrier accepts the goods from the seller Inventory turnover A ratio that indicates the liquidity of inventory by measuring the number of times average inventory sold during the period computed by dividing cost of goods sold by the average inventory during the period Just in time JIT inventory Inventory system in which companies manufacture or purchase goods just in time for use Last in first out LIFO method An inventory costing method that assumes that the latest units purchased are the first to be sold LIFO reserve For a company using LIFO the difference between inventory reported using LIFO and inventory using FIFO Lower of cost or market LCM A basis whereby inventory is stated at the lower of either its cost or its market value as determined by current replacement cost Raw materials Basic
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