ACCT 2101 1nd Edition Exam 2 Study Guide Chapters 4 7 Chapter 4 September 23 Bank Reconciliations how to prepare a Reconciling items going from the unadjusted bank balance to the true cash balance Deposits in transit Outstanding checks b Reconciling items going from the unadjusted book balance to the true cash balance Interest revenue earned on the account Credit Memo Service charge Debit Memo Automatic debit for a bill Debit Memo Charge for checks Debit Memo NSF checks from customer Debit Memo ATM fees Debit Memo c Which reconciling items result in adjusting entries in the accounting equation Unadjusting Book Balance entries Chapter 5 September 25 1 Definition of the Allowance for Doubtful accounts and the type of account it is Allowance for Doubtful accounts ADA is a contra asset and is the balance of receivables that a business estimates that will not be collected in the future 2 Definition of Net Realizable Value and how it is calculated Net Realizable Value NRV the balance of receivables that a business estimates it will actually collect in cash from customers in the future Net Realizable Value NRV Accounts Receivable ADA 3 When using the allowance method for accounting for bad debts a what are the two methods allowed 1 Record the year end adjusting entry for estimated uncollectables Allowance for Doubtful Account contra asset RE for Bad Debts Expense 2 Record an actual write off of a customer s account balance Account Receivable ADA b the year end adjusting entry to record management s estimate of uncollectibles Record the year end adjusting entry for estimated uncollectables Allowance for Doubtful Account contra asset RE for Bad Debts Expense c calculating the amount to use in the year end adjusting entry using the percent of receivables method understanding the amount that is reported on the income statement as bad debt expense and the amount that is reported on the balance sheet as the ADA balance at year end as a result of the adjusting entry B S Balance Sheet Percent of Receivables Ending Accounts Receivable balance X Uncollectable Allowance for Doubtful Accounts This must be the balance that is reported on the B S at year end The calculated is the number you need to adjust the ADA balance to Ex Adjusting Entry 40 000 End A R X 05 Uncollectable 2 000 ADA balance needed ADA balance needed 2 000 Balance before Adjust 500 Adjusting entry 1 500 d recording an actual write off of an uncollectible account last entry before ending balance is ADA 1 500 RE for BDE 1 500 Record an actual write off of an uncollectable account ADA ending balance is 2 000 Account Receivable ADA 4 When using the direct write off method for accounting for bad debts what is the entry to record an actual write off of an uncollectible account Direct Write off method for accounting for Bad Debts Account Receivable RE for BDE 5 Inventory a What are the 4 inventory cost flow methods that companies can use and what each one means 4 Cost Flow Methods for Accounting for Inventory 1 Specific identification each item of inventory is specifically tagged The actual item sold is expensed to COGS High dollar inventory low sales inventory type items furniture stores auto sales 2 FIFO First in First out the first items purchases are expensed first to COGS oldest inventory 3 LIFO Last in First out the last items purchased are expensed first to COGS newest inventory 4 Weighted Average Average unit cost of Inventory is expensed to COGS b In a period of rising prices which cost flow method results in the lowest COGS reported the highest gross profit and net income and the highest ending inventory balance and vice versa i e which method results in the highest COGS reported the lowest gross profit and net income and the lowest ending inventory balance In the period of rising prices Inflation FIFO COGS is always lowest GP of net income is always highest Ending inventory is always highest LIFO COGS is always highest GP of net income is always lowest Ending inventory is always lowest In the period of decreasing prices Deflation FIFO COGS is always highest GP of net income is always lowest Ending inventory is always lowest LIFO COGS is always lowest GP of net income is always highest Ending inventory is always highest c What is the purpose of these cost flow methods To determine what inventory cost is expensed to cost of goods sold and what inventory cost remains in inventory at year end Cost flow methods are methods used to determine cost of goods sold and ending inventory Companies make certain assumptions about which goods are sold and which goods remain in inventory so this for financial reporting and tax purposes only and does not have to be consistent with the physical flow of the inventory d Know how to calculate Cost of Goods Sold Ending Inventory and Gross Margin Profit using 2 of the methods a FIFO and b weighted average FIFO Cost of goods available for sale Cost of goods sold Ending inventory balance 00 000 0 000 0 000 Sales COGS Gross margin Ending Inventory FIFO 120 100 20 100 Weighted Average 120 105 15 105 FIFO COGS the sum of beginning inventory and purchases based on the amount of units sold FIFO Ending inventory total cost cost of goods sold Weighted Average Cost of goods available for sale goods available for sale Wtd Avg COGS weighted average cost per unit x product units sold Wtd Avg Ending inventory weighted average cost per unit x end inventory of units sold Gross Margin Sales COGS COGS varies depending on the method used Chapter 6 October 2 1 Tangible versus intangible assets and being able to classify an asset between the two types 3 types of Tangible Long Term Assets 2 types of Long term assets 1 Tangible can be touched it has a physical presence 2 Intangible represented by rights documents privileges patent copyrights goodwill amount paid above the assets trademarks 1 Property Plant Equipment PP E Fixed Assets Capital Assets these assets are going to be expensed over time as they are used up Examples Vehicles Machinery equipment Furniture Buildings Office Equipment Computers 2 Natural Resources come from nature not man made Example minerals deposits timber oil and gas reserves 3 Land 2 The entry to record the purchase of PP E Purchase an Asset P P E an Asset Cash 3 What costs are included in the amount that gets added to the PP E account Cost include in PPE Any cost to get the Asset to your place of business and ready for its intended use 1 Purchase price less any cash discounts 2 Transaction In