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ACCT 209: EXAM 2
Merchandising business |
buys products for resale to customers |
Transactions involve two parties: |
Buyer - acquires it's merchandise
Seller- sells it to the customers
|
operating cycle |
Purchasing
Selling
Collecting $
|
Perpetual Inventory System |
Each purchase of inventory, and each sale of inventory, is recorded in the inventory account |
Periodic Inventory System |
The inventory account is not updates with each purchase and sale
Added to Purchases account and an adjustment entry is made to update the inventory account to reflect actual merch and cost of it
|
What costs should be included in inventory? |
Purchase price
Freight cost
Cost of transit insurance
Taxes (excise and sales tax)
Any cost to get product ready
|
What are credit terms? |
When a company buys merchandise inventory on account, the invoice shows the term or conditions of the transaction. |
Credit Period |
Amount of time the buyer is allowed before payment is due |
Amount of time the buyer is allowed before payment is due |
Seller offers discount if the invoice is paid within a certain amount of time
seller-sales discount
buyer-purchase discount
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Discount Examples |
3/10, n/30
3% if paid within 10 days and full amount in 30 days
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Discount example 2 |
2/15, n/EOM
2% if payment made within 15 days and full payment by the end of the month
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Sales/purchase return |
sales return recorded by the seller when merch is returned by the buyer |
Sales allowance |
reduction in price of the merchandise allowed by the seller
(usually if damaged)
|
FOB |
"Free on Board"
FOB shipping point: buyer pays shipping
FOB destination: seller pays shipping
|
Revenue Section of the Income Statement |
Sales Revenue
Sales Returns/Allowances
Sales Discounts
Net Sales
|
COGS |
selling company's cost for the merchandise that was sold in the current period
Largest expense
Beginning Inventory
+ Net cost of purchases (including freight in)
Goods available for sale
-- Ending Inventory
Cost of goods sold
|
Gross Profit |
Net sales - COGS |
GP % |
Gross Profit / New sales revenue |
Other Income statement sections |
operating expenses (rent, salaries, ads, utilities)
Income from operations
Other revenues and expenses (not related to primary operations of business)
Income before tax
Income tax expense
Net income
|
Permanent Accounts |
balance sheet accounts
Carries over from one year to the next (start year with that cash balance)
"real accounts" |
Temporary Accounts |
Affect retained earnings
Rev, Exp, and Dividends
not carried over
balances must be zeroed out
"nominal accounts"
|
Purpose of closing entries |
zero-out balance of temp accounts then transfer the balance to retained earnings (goes from beginning RE to ending Re) |
Closing Process |
1. Zero out Rev account
2. Zero out Exp account
3. zero out Income summary account into RE
4. Zero out balance in the dividends account into RE
|
After Closing: |
Balance in retained earnings should = ending RE shown on BS
All temp accounts (rev, exp, div) should be 0
|
Fixed Assets (long term) |
relatively permanent assets such as land, buildings, equipment, and machinery
(also property, plant, equipment)
|
Characteristics of long term asset? |
tangible; physical existence
owned by company for use in operations
Not held for resale
|
Cost of long term assets |
purchase price, plus amounts to get the asset in place
Unnecessary costs are recorded as expenses
|
Depreciation |
lose ability to provide service in producing revenues
cost is expensed over the periods that they are used in generating revenues
|
factors determining depreciation expense? |
asset's initial cost
asset's expected useful life
asset's expected salvage value
|
Methods to calculate depreciation |
Straight line - Equal amounts of expenses for each year of useful life
Units of output- provides equal amounts of expense for each unit of output (based on usage)
Double declining balance - expenses declingin amount each year over life of asset (accelerated)
|
MACRS |
IRS uses "Modified Accelerated Cost Recovery System" to compute depreciation.
Ignores salvage value and assumes all assets are placed in service at the middle of the year
assigns useful life for each asset then determines depreciation value.
Usually only used for tax purposes
|
Capital Expenditure |
Improve the asset, extend the useful life, increase efficiency (asset account) |
Revenue Expenditure |
Ordinary maintenance and repairs
(expense account)
|
Depletion expense |
Cost of natural resources over a period of time |
Intangible Assets |
convey special rights to the owner, but no physical form.
(patents, copyrights, trademarks, franchise, and goodwill.)
|
Amortization |
The process of allocating the cost of an intangible asset to expense |
Goodwill |
special intangible asset.
- only when company purchases another company and pays more than the market value of the net assets of the acquired company.
-examined regularly
|
Investments |
long term asset
usually for future sale
Real estate and securities
|
How long are long term assets reported on the balance sheet? |
after current assets.
PP&E first
then original cost, accumulated depreciation, and book value
|
Inventory Cost flow assumption |
company must determine a consistent method for assigning a cost to both the units sold during the period and to the units left on hand at the end of the period.
(tennis racket example)
|
FIFO |
First in, first out
Assumes the item is sold in the same order as they are purchased.
So the $30 one was in first so they account that one as the one sold and the one left on hand is whichever came next ($38)
|
LIFO |
Last in, First out
sold in reverse
first in $30
second in $38
total = $68
sold the $38 one first
so $30 in ending inventory
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How do errors in counting ending inventory affect the financial statements? |
Using the Periodic inventory system an error could be made in a year and mess up the balance sheet and income statement.
Income=COGS
Balance=Inventory
|
Estimating the goods left in inventory |
Historical gross profit as a percentage of sales
relationship between inventory cost and its selling price
|
Effective inventory management |
1. inventory turnover
2. Day's sales in inventory
|
Perpetual System |
Records cost of goods sold each time a sales transaction occurs
Marked increase in frequency and popularity within the past decade
|
Periodic System |
Updates the inventory account only at year-end.
Quantities left on hand determined only by physical count at the end of the period.
|
FIFO |
Report the lowest ending inventory amount.
Minimize income taxes |
accounting cycle |
Journalize
post to ledger
trial balance
adjusting entries
prepare financial statements
closing entries
|
Current Ratio |
Current assets/Current liabilities |
Current assets |
Cash
Accounts receivable
Prepaid insurance
Supplies
Inventory
|
Current liabilities |
Accounts payable
Salary payable
Unearned revenue
|
Net sales |
Sales - sales discounts - sales returns |
How to find beginning inventory |
First find cogs (net sales-gross profit)
Then find net purchases & freight in (purchases -purchase returns - purchase discounts + freight in)
Use equation (net purchases + Beg. inventory - Ending inventory = COGS)
|