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UIUC ACCY 202 - Exam 1 Study Guide

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ACCY 202 1nd EditionExam # 1 Study Guide Lecture: 1 - 10Lecture 1 (August 25)Introduction to Week 1 MaterialsMonthly Entries for purchase of inventory- Typically these are external transactions which is an exchange between the business and an outside party Accounting Information System (AIS) is a set of interrelated activities, documents and technologies designed to collect data, process it, and report information to a diverse group of internal and external decision makers in organizations- It also facilitates external investment and therefore the allocation of scare resources amongst investment alternatives- Input: Raw transaction details (Source Document)  Process Information  Output: Summarized Financial Information- High quality accounting information - Basically people are happy when accounting information is correct and timely!- An example of low quality accounting information is someone using letters of recommendation that all came from their mother.- Accounting is a formal system of activities within each business organization that identifies, measures, and converts detailed information about the company’s economic activities into a summary report for internal and external decision makers.- Source Documents are the original documents that are created when the transaction is first executed. Purchase and Disbursement transaction cycleStep 1: Request Goods & Services- Requests should be based on a documented or “monitored need”- For example, an employee on the front lines will notice that the company is running out of a certain stock- Some companies have a self-sufficient system that electronically monitors inventory levels and generates purchase requestsStep 2: Authorize Purchase- All requests must be formally authorized before a “departmental purchase requisition”- Copies go to the following: the requisition department, Centralized purchasing (notification to start the purchase process), and accounting departmentStep 3: Purchase goods/services- Purchasing selects an approved vendor- The P.O. (purchasing order) is the only source document send to an outside partyand it is the only document which represents a legally binding contract- P.O. copies go to the following: purchasing, the vendor, the receiving party to do a “blind count”, accounting department, and the original department- “blind count” means that the receiving party does not know the quantity of items being sent to them, so they have to count it themselves. The quantity is blacked out on the order sent to receiving. It is supposed to add up to the amount that was sent, if not there was a problem in the process of sending the items.- Centralized Purchasing: An efficient and effective system that filters all company orders through one location. This minimizes the risk of unnecessary, low quality/fraudulent orders being placed and/or inconsistencies between various departmentsStep 4: Receive goods & services- The department maintains a log of all deliveries, performs a careful count and inspection of the goods received and prepare a “receiving report” documenting the actual quantity of goods received.- Quantity is blocked out so that a “blind count” happens. This avoids the procedures of background checks, security cameras and bonding- A copy of the receiving report is sent to accounting where it’s filed with other related documents known as a “voucher package”Step 5: Make Paymenti. First, Vendor invoice is received, verified and the purchase is recorded- Entry Date – the date that accounting records reflect the entry- Calendar Date – the date the employee is physically making the entry- Transaction analysis makes sure: purchase was authorized, goods were physicallyordered with quality and accuracy, and the invoice is accurateii. Second, payment is authorized; a check is prepared and mailed to the vendor- Check requests and supporting documents are given to a higher level employee to sign it- Unused checks should be kept in a locked cabinet and numerical sequence should be periodically verified- Segregation of Duties (SOD): (i) Authorization of transaction (ii) Custody of asset (iii) Record KeepingLecture 2 (August 27) Inventory1. Goods held for sale in the normal course of business (merchandiser) or goods which are used to produce goods or services for sale (manufacturer)Merchandise Inventory: Ready to be sold without further processing. Retail industry such as H&M, Forever 21, Sports Authority etc.Manufacturing Inventory: Identified by its stage of production. An example is the haute couture industry in Europe (Italy, France) from the textile stage (such as polyester) to the finished work. Stages are raw materials. Work in progress and finished goods.Balance Sheet vs. Income Statement1. Balance Sheet Assets that are waiting to be sold, sitting or have not been used yet, including cash2. Income StatementExpenses that have already been incurred, including gross profit and net income.3. How things transfer- Inventory goods on balance sheet  Cost of merchandise Sold on Income Statement. Inventory is a current asset while waiting to be sold- Flow chart on page 14 of notes package shows how to record expensesRecording Merchandise Purchases – 4 events to consider- Record the purchase of inventory at negotiated price when the company legally owns the asset- Record any additional costs of acquisition (most frequently seen as shipping costs)- Record all returned inventory amounts to the seller (if any) on the specific date- Record the cash payment net of the purchase discount (if any) on the payment datePurchase Contract1. Trade Discount- The negotiated price stated in step 1 of the recording merchandise purchasesprocess is the result of the trade discount. They are not separate2. Purchase Discount- This gives the buyer an opportunity to obtain another discount if they pay for the merchandise in a specific period of time.- Example: 1/10, n/30 this means that if the buyer pays for inventory within 10 days of legally owning it, then they can obtain a 1% discount. If they pay after 10 days they will have to pay the full amount within 30 days.Lecture 3 (August 29)Journal EntriesBalance Sheet and Income Statement- Remember debits to the left, credits to the right - All assets on the balance sheet increase by debits and things on the income statement increase by credit- The inventory on the Balance Sheet becomes cost of merchandise sold (COMS) on


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