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ACT 210: EXAM 3
Inventory
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an itemized list of things owned by a business with the beginning value and depreciated value.
Value, not quantity
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Cost of Goods Sold
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Beginning Inventory + Net Purchases - Ending Inventory
Note LIFO + FIFO are different
cost of goods sold is an expense
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FIFO
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First In, First Out Method
An inventory costing method that assumes that the earliest goods purchased are the first to be sold
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LIFO
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Last in, first out method
newest inventory is sold first to show higher sales
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Weighted Average Cost
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= cost of goods available for sale/ number of units available for sale
third inventory cost flow assumption method
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Perpetual vs. Periodic Inventory Systems
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Perpetual - continual tracking of inventory
Better manage inventory levels
Periodic - does not continually modify, but rather adjusts based on physical count of goods on hand.
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Recording an Inventory Purchase
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(Debit) Inventory 2700
(Credit) Accounts Payable 2700
purchase inventory on Account (cash if payed in full)
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Recording an Inventory Sale
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(Debit) Accounts Receivable 4500
(Credit) Sales Revenue 4500
(Debit) Cost of Goods Sold 2500
(Credit) Inventory 2500
Accounts receivable/Cash
depending on purchase method
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Freight Charges
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-Also called shipping
-Cost journaled as a debit to inventory and a credit to cash
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FOB |
FOB shipping point or FOB Destination
When ownership trades hands
Shipping Point - when inventory is shipped
Destination - When it reaches its destination
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Lower-of-Cost-or-Market Method
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When the market value of Inventory falls below cost, it must be adjusted.
Adversely, if the market value rises above cost, nothing is done until sale is made on the item.
Application in Journal form required.
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Applying Lower-of-Cost-or-Market Method
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quantity times the decreased value of item for every item and its purchase price. This value must be credited to Inventory and debited to Cost of Goods Sold.
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How Freight Charges are Recorded in the Perpetual System
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Debit to Inventory
Credit to Cash
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Depreciation Methods
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Straight-Line
Activity-Based
Declining Balance
(land improvement subject to depreciation)
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Straight-Line Depreciation
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Allocates an Equal amount of depreciable cost to each year of the asset's service life.
Time Based Method
original price- residual value / time
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Activity-Based Depreciation
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Allocate an asset's cost based on use rather than time
ex. Dollars per mile on a tractor
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Double Declining-Balance Depreciation
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-An accelerated depreciation method
-depreciates quickly at first, but then slows over time
-will eventually decline the same as straight-line rate, over the products service life
rate (4 years= (1/4)*2)
annual depreciated expense = book value at the beginning of the year*rate)
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DDB Method
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Double-Declining Balance
-2x straight line rate
Original Cost, not value to Residual Rate
straight line rate doubled (very simple
ex. $50000 over five year life, $4000 residual.
DDB=50000*(.2(or 1/5 life)*2(For Double Declining Balance))=30,000 value left after one year. apply this to the new balance and you have year 2, etc.
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Goodwill
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-Value of the company as a whole
-Only recorded when acquisition of a company or part of a company.
-equal to the purchase price minus the fair value of the assets acquired
Goodwill= purchase price- fair value of net assets( assets-liabilities)
(NOT AMORTIZED)
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Three Contingent Liabilities:
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Probable- Record Liability/Disclose
Possible- Disclose
Remote-Do Nothing
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Interest
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Always Compounded Annually!
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Copyrights
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exclusive legal rights protection given by US copywriter office, to the creater of a PUBLISHED work (song, film, painting, photo, book, computer software)
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Trademarks
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a word, slogan, symbol that distinctively identifies a company product or service
can be registered for a period of 10 years, renewed for indefinite amount of 10 year period
when a firm develops a trademark record ADVERTISING COST AS EXPENSE IN THE INCOME STATEMENT
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Patents
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an exclusive right to manufacture a product or use a process (usually granted for a period of 20 years) LEGAL AND FILING FEES RECORDED IN PATENT ASSET ACCOUNT
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Franchises
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local outlets that pay for exclusive rights, to use the franchiser companies name, and sell its products within a specified geographical area
franchiseeee records initial fee as an intangible asset, then EXPENSES it periodically over of the life of the franchise agreement
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amortization of intangible assets
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estimate the intangible assets service life (usually limited by legal, regulatory, or contractual provisions)
estimate its residual value (what you can sell it for when its pretty much useless)
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contra-asset account
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the account is offset against an asset account on the balance sheet
for example
depreciation expense
accumulated depreciation
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capitalized costs
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all expenditures necessary to get the land ready for its intended use.
_includesthe purchase price of the land plus closing costs such as attorney fees; realestate commissions etc.
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current liabilities
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aka short-term liabilities . usually,but not always, due within one year. Notes payable, accounts payable, andpayroll liabilities are the three main categories.
_Note: If a company has an operating cyclelonger than one year, its current liabilities are defined by the operatingcycle rather than by the length of a year.
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contingent liablilities
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an existing uncertain situation that may result in a loss
lawsuits
product warranties
environmental problems
premium offers
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CATEGORIES OF EXPENDITURES
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building, maintenance expense, pre paid insurance, equipment, land improvements, repairs
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Kohl
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you're gonna rock this test!
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Revenue
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then expense!
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money lost is an expense
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