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64 Cards in this Set
- Front
- Back
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Inventory
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it's a tangible property that is
1) held for sale in the normal course of business 2) used to produce goods or services for sale Listed as "current asset" on the Balance Sheet |
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Merchandise Inventory
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Goods or merchandise held for resale in the normal course of business.
The goods can be sold as acquired, as they are in finished condition. No further processing needed. This is held by Merchandisers only |
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Raw materials inventory
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This is held up Manufacturing business. Two other types (work in process, finished goods)
Raw materials inventory are items acquired for processing into finished goods. The items are included in "raw materials" until they are used. When used they become -- "Work in Process" inventory |
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Work in process inventory
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This is the 2nd type of manufacturing inventory.
Goods in the process of being manufactured but not yet complete. When completed, work in process inventory becomes finished goods inventory. |
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Finished Goods Inventory
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3nd part of Manufacturing inventory.
The manufactured goods that are complete and ready for sale. |
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Inventory Cost
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It is the sum of the costs incurred in bringing an article to usable or salable condition and location.
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Flow of inventory cost (Merchandiser)
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Merchandise purchased --> Merchandise Inventory -->
Cost of Goods Sold |
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Flow of inventory cost (Manufacturer)
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Raw materials purchased -->
Raw materials inventory --> Work in process inventory --> Finished goods inventory --> Cost of goods sold |
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Direct labor and Factory overhead
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They are both included in "Work in Process" inventory
a) Direct Labor: earnings of employees who work directly on the products being manufactured. b) Factory overhead: manufacturing costs that are not raw material or direct labor costs. ex. cost of heat, power to operate the factory |
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Cost of Goods sold
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Directly related to "sales revenue".
Number of units x Unit Costs |
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Goods available for sale
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Beginning Inventory (BI) + New purchases
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Ending Inventory
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The inventory that is left unsold at the end of the period. Becomes the "Beginning Inventory" for the next period.
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Cost of goods equation
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(Beginning Inventory + Purchases of merchandise) = (Goods available for sale)
(Goods available for sale - Ending Inventory) = Cost of Goods sold |
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Specific Indentification Method
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Cost of each item sold is individually identified and recorded as cost of goods sold.
This can be done by a) coding the purchase cost on each unit before placing it in stock b)keeping a separate record of the unit and identifying it with a serial number This method is useful when dealing with expensive UNQUIE items such as houses or fine jewelry. |
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FIFO
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"First-in, First-out"
Assumes that the EARLIEST goods purchased are the first goods sold. Oldest unit costs --> cost of goods sold Newest purchases --> ending inventory. |
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LIFO
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Last-in, First-out.
The most RECENT purchases are the first ones sold. The newest unit cost --> Cost of goods sold Oldest unit costs --> Ending inventory |
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Manager's Choice
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They either choose FIFO or LIFO based on 2 things:
1) Net income effects (to record higher income) 2)Income tax effects (to record lower amount in taxes) |
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LIFO conformity rule
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If LIFO is used on the income tax return, it must also be used to calculate inventory and cost of goods sold for the financial statemtments.
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Revenue principle
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Requires that revenues be recorded for when 3 factors happen:
a) Goods/services is delivered b) Amount of customer payment known c) Collection is reasonably assured |
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Credit card sales
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Reasons:
a) To increase sales b) Avoid providing credit directly to customers c) Avoid losses due to bad checks d) Avoid losses due to fraudulent credit card sales e) Receive payment quicker But companies pay a small fee to credit card company. |
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Sales Discounts
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This is offered to customers when they open new accounts, to encourage them to send in their payments early.
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Title switch (FOB)
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FOB shipping point: here title switches hands at shipment, and buyer pays for shipping. (shipping)
FOB destination: title switches hands at delivery, and the seller pays for delivery. (Delivery) |
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Motivate consumers to purchase
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1) allowing customers to use credit cards to pay
2) providing discounts for early payments 3) Allowing for returns under certain conditions |
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Sales Discount format
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2/10,n/30
2 - discount percentage 10 -- number of days in discount period n -- net (total sales less returns) 30 -- maximum credit period This means that if the payment is paid within 10 days, then they can take 2% off the total. Otherwise it's due in 30 days. |
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To calculate annual interest rate using "Sales Discount"
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Calculate first for 20 days
[Amount Saved]/[Amount Paid] Calculate annual [Interest rate for 20 day] x [365/20days] |
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Sales Returns and Allowances
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The returns of unsatisfactory or damaged goods are put into this account.
This account then needs to be deducted from gross sales revenue in determining net sales |
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Different accounts to report Net Sales
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You decrease for:
Credit Card discounts Sales discounts Sales returns and allowances -----all of the above are contra-revenue accounts --- Add Sales Revenue |
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Gross Profit
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It is measured in percentage.
[Sales Revenue] - [Cost of goods sold] |
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Classifying receivables (3 types)
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1) Amount receivables (credit sale on a open account) vs. Note receivables (promise in writing, contains principal amount, maturity date, and interest)
2) Trade receivable (normal course of business, sale on credit occurs) vs. nontrade receivable (transactions that are different from the normal course of sales) 3) Current vs. Noncurrent (these two are when cash if expected to be collected) |
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Subsidiary account
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Separate accounts kept for different retailers.
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Allowance method
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A method used to access how much of their accounts receivables is a bad debt.
Matching principle makes it necessary for the bad debt to be accounted for in the same period as the revenue. 1) Making end of the year adjusting entry to record estimated bad debt expense 2)Writing off specific accounts determined to be uncollectable. |
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Bad debt expense
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Expense associated with estimated uncollectible accounts receivables. An adjusting entry is made to account for this at the end of the period.
(debit)Bad Debit expense (+E, -SE) (credit) Allowance for doubtful accounts (+XA, -A) It is included in "Selling" expenses on income statement and decreases net income and S.E. The allowance for doubtful accounts is a contra-revenue account and decreases net book value and decreases total assets |
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Writing off
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A bad debt can also be written off when the customer has been identified (bankrupy).
(debit)Allowances for doubtful accounts (-XA, +A) (credit) Accounts receivables (A-) Doesn't change net income or net book value, or total assets. The "estimated expense" is already recorded as adjusting entry, so not recorded again. |
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Estimating bad debts
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2 GAAP approved methods
1) % of total credit sales for the period 2) aging of accounts receivables |
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Bank Reconciliation
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Explains the difference between the cash reported on the bank statement and cash balance on company's books and provides information for reconciling journal entries.
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Aging accounts
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When allowance accounts has a "debit" balance (ADD)
When allowance accounts has a "credit" balance (SUBTRACT) |
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Banks and books (reconciliation)
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Banks
Deposits in transit (+) Outstanding checks (-) Bank errors (+/-) Books Interest paid by bank (+) NSF checks (-) Service charge (-) Company errors (+/-) |
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Accounts Receivable Turnover Ratio
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Effectiveness of credit-granting and collection.
[Net Sales] / ([Beg Net Trade Accounts Receivables+End Net trade Accounts Receivables]/2 ) Higher the ratio, faster the collection of receivables. |
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Average collection period
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[365]/[Accounts Receivable Turnover Ration]
Average time it takes a customer to pay its accounts. |
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Bank Reconciliation Statement format
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Company's name (first line)
Bank Reconciliation, Date (2nd line) Company's books Ending balance per cash account Additions Total Deductions Total Correct cash balance (Additions total - deductions total) Bank Statement Ending balance per bank statement Same format as above for additions and deductions total to get "Correct cash balance" |
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Bank reconciliation notes
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1) Make sure the bank and books equal with "Correct cash balance"
2) Make required journal entries just when books are affected. --When doing this, go step by step. So do interest first (1), NSF (2), Service charge (3) |
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Correct Names of journey entries (bank reconciliation)
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Interest collected
Cash (+A) [D] Interest Revenue (+R,-SE) [C] NSF, check returned Accounts Receivables (+A) [D] Cash (-A) [C] Service charge Service Expense (E+, SE-) [D] Cash (-A) [C] |
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Starting steps (Reconciliation)
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1) Figure out deposits in transits (compare ledger deposits with bank deposits)
2) Figure out outstanding checks (start marking off amounts that are the same in ledger and bank account. And the amounts left on the ledger are the outstanding checks) |
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Three roles in inventory management process
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1) to provide accurate information for preparation of periodic financial statements/tax returns
2)up-to-date information on inventory quantities, to faciliatate ordering and manufacturing decisions 3) Information needed to protect these important assets (as inventories are subject to theft and misuse). |
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Average Cost Method
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Also called weighted average cost method
[Cost of goods available for sale]/[# of units available for sale] |
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LIFO OR FIFO
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Depends on what the units costs are doing...
If unit costs are RISING, LIFO will produce lower income, lower inventory valuation, and lower taxes. If unit costs are DECLINING, LIFO produces higher income, higher inventory valuation, and higher taxes. |
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Increasing cost inventories
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Use LIFO on tax returns
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Decreasing cost inventories
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Use FIFO on both tax and financial statements
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Lower of cost or market (LCM)
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Goods that are remaining in E.I can be replaced with indentical goods at a lower cost, the lower cost is recorded.
Same way damaged, obsolete, deteriorating goods should be assigned "net realizable value" |
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Conservatism
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It is a departure from "Cost Principle" and it uses the "Lower of cost or market"
It is when replacement cost or net realizable value drops below cost. |
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Importance of LCM
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Lower of cost or market is useful for
1) high technology companies (cost of production/selling price declines) 2) Seasonable stores (american eagle) |
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Replacement cost
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This is recognized under the period where the price of the identical item drops. A "holding cost" is recognized.
This is not recorded in the period where the item is sold, but where the value of the item drops. |
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Holding loss
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[purchase cost] - [lower replacement cost]
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Journal Entry (LCM) -- "Write down"
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Only when the replacement price of the item drops, then the lower cost of the item is recorded.
Figure out the difference between the original cost and Lower cost Cost of goods sold(+E, -SE)[D] Inventory (-A)[C] |
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Effects of a write down
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Current Period:
CGS (increase) Pre-tax income (decrease) E.I on balance sheet (decrease) Next period: CGS (decrease) Pre-tax income (increase) E.I on balance sheet (no change) |
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"Net Realizable Value"
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expected [Sales Price - Cost to Sell]
replacement cost. Such as repair, disposal costs. |
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Net Realizable Value drops below Cost
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It this happens, the difference is subtracted from E.I.
And added to Cost of Goods Sold. Has same effects on "Current" and "Future" periods as Write-down replacement cost. |
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Inventory Turnover Ratio
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[Cost of goods sold]/[Average Inventory]
Higher the ratio, more efficient. |
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Average days to sell inventory
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[365]/[Inventory turnover ratio]
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Cash Flow
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ADD to net income:
a) decrease inventory b) increase accounts payable [these increases cash] SUBTRACT to net income: a) increase inventory b) decrease accounts payable [these decrease cash] |
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LIFO reserves
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"Excess of FIFO over LIFO"
Big FIFO - Big LIFO = x Ending FIFO - Ending LIFO = y x-y = difference of cost of goods sold under FIFO |
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Goods available for sale
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Just add beg, and purchases.
Don't worry about any sales (that will result in ending inventory) |
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FIFO
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When doing ending inventory (compute from bottom up).. because first in, is sold. the latest purchases are left in the E.I
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Sales Revenue (Gross Profit)
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[GAS - E.I] x unit price
Then you subtract Sales Revenue from CGS = Gross Profit |
