Acc 231 - Exam 2 Study Guide

Front 1

Merchandising Inventory

Back 1

The products a merchandising business buys and sells

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Wholesalers

Back 2

purchase large lots of products from manufacturers and resell them to retailers

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Current Ratio (C/R)

Back 3

Ability of company to pay debts as they become due.

Current Assets (C/A) / Current Liabilities (C/L)

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Gross Profit Margin (GPM) or Gross Profit %

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Indicates how much of every net sales $ is left after COGS

Gross Profit / Revenue

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Elements of an Annual Report / 10K

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1) Cover Page (and Table of Contents)
2) Letter to stockholders
3) Description of company’s products and markets
4) Management discussion and analysis
5) Financial statements
6) Notes to financial statements
-Summary of significant accounting policies
7) Mgt.’s Report on Internal Control
8) Report of independent accountants

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Letter to stockholders (Annual Report/10K)

Back 6

1) usually at beginning of 10K and written by CEO
2) contains info on current year achievements

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Description of company’s products and markets (Annual Report/10K)

Back 7

written by management

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Management discussion and analysis (Annual Report/10K)

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1) discusses changes and explains WHY
2) results of operations, liquidity and operating, investing & financing activities
3) written by management

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Management Report on Internal Control (Annual Report /10K)

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1) Required after Sarbannes-Oxley (SOX)
2) Written by company management
3) Basically states that company management is responsible for financial statement data and internal controls
4) Signed by CEO and CFO

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Cash

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1) Coin and currency
2) Checking & savings accounts
3) Undeposited checks, cashier checks, certified checks and money orders

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Cash Equivalents

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Considered Equal To Cash
1) Money Market Funds
2) U.S. Treasury Bills
3) Certificates of Deposit
All three are "Time" deposits

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Internal Preventative Controls

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1) Separation of Duties
2) Physical Controls
3) Proper Authorization
4) Employee Management

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Internal Detective Controls

Back 13

1) Independent Verification
2) Performance reviews

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Retailers

Back 14

Buy goods from the wholesalers and resell them to the final consumers, the general public. They can also buy straight from the manufacturer.

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Merchandising Business

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Can be either a wholesaler or a retailer.

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Periodic Inventory System

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System of accounting for inventory that does not keep a continuous, running record of inventory as it is bought and sold. Instead, the business physically counts the goods in inventory at the end of the accounting period

Front 17

Periodic Inventory System Formula

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Beginning Inventory
+Purchases
=Cost of Goods Available for Sale
- Ending Inventory
=Cost of Goods Sold

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Perpetual Inventory System

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System of accounting for inventory that keeps a running record of inventory as it is bought and sold. Anytime a transaction involves inventory, the balance in the inventory account is immediately updated. Inventory must still be physically counted to see if any goods have been lost, damaged or stolen.

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Adjusting for lost, stolen or damaged inventory

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Credit Inventory
Debit Cost of Goods Sold

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Subsidiary Ledger

Back 20

Supplier is listed in the purchasing journal entry. The subsidiary ledger contains a record for each separate supplier. If everything has been posted correctly, the total of the account balances in the accounts payable subsidiary ledger will equal the accounts payable balance in the ledger.

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Debit Memorandum

Back 21

a document that supports the return of goods to the supplier. It gets its name from the fact that the issuer's Acct. Pay. will be debited as a result of the returned goods.

Front 22

Debit Memorandum Effect

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If a company is issued a debit memo. it will debit its Acct. Pay for the amount and credit its Inventory Acct. the same amount.

Front 23

Sales Invoice

Back 23

a bill that documents the sale of goods to a business customer. Includes credit terms for customers who buy on account.

Front 24

Credit Terms

Back 24

Payment Terms. Use terms to communicate to the customer when payment is due. Often use n/30, which means payment is due after 30 days. If amount is due at end of month, it reads n/eom or just eom.

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Discount Period

Back 25

The time period in which the merchandiser may pay and receive the discount. This improves a companies cash flow. "3/15 n/30" means that 3% will be taken off the original price if paid in 15 days, otherwise full price is due after 30 days. Discount is credited to the inventory account.

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Sales Revenue

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the account used by merchandisers to track the value of merchandise sold to customers at the price that the merchandiser charges those customers. Debit to cash or Acct. Rec.

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Cost of Goods Sold

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Account that the value of merchandise sold is accounted for (Debited). Inventory is credited this exact amount.

Front 28

Compound Journal Entry

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A journal entry that involves more than two accounts. May include more than one debit amount or more than one credit amount.

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Sales Returns and Allowances

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In order to track returns accurately, the amount of returns is recorded in this account. It is a contra-account, linked to sales revenue, which has a credit balance.

Front 30

Credit Memorandum

Back 30

Document that acknowledges the return of goods from a customer. It gets its name from the effect that it has on the balance of the customer's account. Decreases Acct. Rec. on a customer.

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Sales Discount

Back 31

Contra-Account linked to Sales Revenue. Tracks decreases in sales revenue, which result from a discount to customers. Deducted from Sales Rev. to arrive at net sales. Closed at the end of period like expenses.

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Freight Charges

Back 32

Shipping Costs

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Title

Back 33

Ownership of Goods

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Free on Board (FOB) Shipping Point

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Ownership transferred from seller to buyer at the point items are shipped. Means that the buyer pays freight charges. Buyer adds shipping cost to Inventory by debiting the shipping cost to the inventory account BC increased the cost of goods purchased.

Front 35

Free on Board (FOB) Destination

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Ownership transfers when the goods arrive at their final destination. Seller pays freight charges. Seller records the shipping cost with a debit to Delivery Expense.

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Selling Expenses

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Represent the costs associated with advertising and selling inventory. Ie:
1) Wages, Salaries, commissions
2) Advertising & Promotion
3) Depreciation of property, parking lots, counters displays storage space
4) Delivery of merchandise to customers

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Single-Step Income Statement

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Groups all revenues together & all expenses together. Total expenses are subtracted from total revenues without calculating subtotals. Advantage is that revenues and expenses are clearly distinguished.

Front 38

Multi-Step Income Statement (MSIS)

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Subtotals used to calculate net income or loss.
1) Net Sales Revenue
2) COGS
3) Gross Profit (Gross Margin)
4) Operating Expenses
5) Operating Income
6) Other Revenues & Expenses

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Net Sales Revenue

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Presented first on MSIS & is calculated by subtracting both Sales returns & Allowances and Sales discounts from Sales Revenue.

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COGS (MSIS)

Back 40

Cost of Merchandise Sold

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Gross Profit (Gross Margin)

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Equals Net Sales Revenue minus COGS

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Operating Expenses

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Expenses, other than COGS, of operating the business. Listed after Gross Profit. Usually listed in two categories:
1) Selling Expenses
2) General & Administrative Expenses

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General & Administrative Expenses

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Includes office expenses, such as salaries of the company president and office employees, depreciation of items used in administration, rent, utilities, and property taxes on the office building.

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Operating Income (Income from Operations)

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Measures the results of the entity's primary, ongoing business activities.
Equals: Gross Profit minus Operating Expenses

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Other Revenues & Expenses

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Last section of the MSIS. Reports revenues and expenses that fall outside of a business's main operations. Ie. Interest revenue, interest expense, dividend revenue, and gains and losses on the sale of long-term assets.

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Net Income (Loss)

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Last line of the MSIS. Calculated by adding Other Revenues and subtract Other Expenses from Operating Income. This final result of operations, net inc. (loss), is a company's "Bottom Line."

Front 47

Classified Balance Sheet

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Lists assets in classes in the order of their liquidity. Similar to assets, the liabilities are listed in classes based on how son the obligation will be paid or fulfilled. Helps users to better analyze the business's ability to pay its bills on time.

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Liquidity

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Refers to how close an asset is to becoming cash or being used up.

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Current Assets

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Assets that will be converted to cash, sold, or used up during the next 12 months or within a business's normal operating cycles if longer than one year. Cash, Acct. Rec., Notes due within one year, and Prepaid Expenses are all current assets.

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Operating Cycle

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For most businesses, it is only a few months.

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Long-Term Assets

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Assets that will be converted to cash or used for longer than 12 months. One category is called Plant Assets or Fixed Assets.

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Plant Assets (Fixed Assets)

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Labeled on balance sheet as Property, Plant & Equipment. Land, buildings, furniture, fixtures, and equipment are example of these assets.