Reading...
Play button
Play button
Use LEFT and RIGHT arrow keys to navigate between flashcards;
Use UP and DOWN arrow keys to flip the card;
H to show hint;
A reads text to speech;
70 Cards in this Set
- Front
- Back
|
Chapter 5
|
Chapter 5
|
|
|
What is the primary source of revenue for a Merchandising Firm?
|
Sales Revenue: the sale of inventory.
|
|
|
What are the two expenses for a Merchandising Firm?
|
Cost of Goods Sold (COGS): Cost of the inventory that was sold.
Operating Expenses: Selling and administrative expenses. |
|
|
What is the Flow of Costs?
|
Beginning Inventory + Cost of Goods Purchased = Cost of Goods Available for Sale
Cost of Goods Available for Sale - Cost of Goods Sold = Ending Inventory |
|
|
What are the two types of Inventory Systems?
|
Perpetual Inventory System
Periodic Inventory System |
|
|
What is the Perpetual Inventory System?
|
Companies maintain detailed records of the cost of each inventory purchase and sale. These records continuously--perpetually-- show the inventory that should be on hand for every item.
Under a Perpetual Inventory System a company determines the cost of goods sold each time a sale occurs. Companies that sell merchandise with high unit values, such as automobiles, furniture, and major home appliances, have traditionally used the Perpetual system. The growing use of computers and electronic scanners has enabled many more companies to install perpetual inventory systems. |
|
|
What is the Periodic Inventory System?
|
Companies do not keep detailed inventory records of the goods on hand throughout the period. They determine the cost of goods sold only at the end of the accounting period--that is, periodically. At that point, the company takes a physical inventory count to determine the cost of goods on hand.
Cost of goods on hand at beginning of accounting period + costs of goods purchased - cost of goods on hand at the end of the accounting period. Used in small businesses where it is either unnecessary or uneconomical to invest in a perpetual system. |
|
|
What are the 2 types of Freight costs and what are they?
|
1. Freight costs incurred by Seller
-Freight-Out -FOB Destination 2. Freight Costs incurred by Buyer -Freight-In -FOB Shipping Point |
|
|
Explain Freight-in/out for perpetual.
|
In = Buyer pays for it, only the buyer records it in journal. Shipping + Price of good purchased = Inventory. Debit Inventory, Credit Cash or A/P
Out = Seller Pays for it. Only the Seller records it in journal. Debit Freight Out, Credit Cash. |
|
|
When do Companies record their Sales Revenue?
|
-When it is earned (Rev. Recognition Principle)
-It is typically "earned" when the goods are transferred from the seller to the buyer. At this point the sales transaction has been completed and the sales price is established. |
|
|
What are the 5 key figures found in a multi-step income statement?
|
Net Sales
Gross Profit Income from Operations Income Before Income Taxes Net Income |
|
|
How do you find Net Sales?
|
Service Revenue - Sales R&A - Sales Discounts
|
|
|
How do you find Gross Profit?
|
Net Sales - COGS
|
|
|
How do you find Income from Operations?
|
Gross Profit - Operating Expenses
|
|
|
What are Operating Expenses?
|
Selling, General, and Administrative Expenses
Examples: -S&W Expenses -Utilities Exp -Advertising Exp -Depreciation Exp -Freight-Out -Insurance Exp |
|
|
How do you find Income before Income Taxes?
|
Income from Operations + Other Revenues and Gains - Other Expenses and Losses
|
|
|
How do you find Net Income?
|
Income before Income Taxes - Income Tax Expense
|
|
|
How do you determine the Cost of Goods Sold (COGS) under a Periodic System?
|
Beginning Inventory + Cost of Goods Purchased = Cost of Goods Available for Sale
Cost of Goods Available for Sale - Ending Inventory = Cost of Goods Sold (COGS) |
|
|
How do you find the Cost of Goods Purchased for that?
|
Purchases - Purchase R&A - Purchase Discounts = Net Purchases
Net Purchases + Freight-In = Cost of Goods Purchased |
|
|
What are the 2 Ways to Evaluate Profitability and what are they?
|
Gross Profit Rate = Gross Profit / Net Sales
*Expressed as percentage *Higher the percentage the better *Measures the margin by which selling price exceeds COGS. Profit Margin Ratio = Net Income / Net Sales *Expressed as a Percentage *3.3% = 3.3 cents of profit on each dollar of Sales *Measures the extent by which selling price covers all expenses |
|
|
Chapter 6
|
Chapter 6
|
|
|
What is a physical count?
|
Physical Counts of units in ending inventory and then assign a value based on inventory cost flow assumption
|
|
|
How do you determine ownership of goods in transit?
|
Goods in Transit = On board a truck, train, ship, or plane
FOB Shipping Point = Buyer owns goods on public carrier FOB Destination = Seller owns goods on public carrier. |
|
|
What are Consigned Goods?
|
When someone holds the goods and tries to sell them for a commission but doesnt take ownership of them.
Many Car, Boat, and Antique dealers sale goods on consignment to keep their inventory costs down and to avoid the risk of purchasing an item that they wont be able to sell |
|
|
What is inventory accounted at?
|
Inventory is accounted for at cost. Cost includes all expenditures necessary to acquire goods and place them in a condition ready for sale.
I.E. Freight Costs incurred to acquire inventory are added to inventory. |
|
|
What is the Specific Identification Method?
|
When a company can identify which particular units it sold and which are still in the ending inventory it can use the Specific Identification Method.
|
|
|
Is periodic or perpetual normally used for the three cost flow methods?
|
Periodic, very few companies use perpetual LIFO, FIFO, or Average-Cost
|
|
|
Cost of goods available for sale must equal what?
How do you find COG Available for Sale? |
COGS + Cost of Ending Inventory
Beg Inv + Purchases |
|
|
How do you find Ending Inventory?
|
Beg Inv + Purchases - Sales = End Inv
|
|
|
How do you find Average Cost?
|
Cost of Goods Available for Sale / Total Units Available for Sale
|
|
|
What are the Value and Tax effects of FIFO, LIFO, and Average Cost?
|
FIFO = Higher net income & Taxes
LIFO = Lower net income & Taxes Avg Cost = Middle net income & Taxes |
|
|
What is the Accounting Concept of Conservatism?
|
The best choice is the method that is least likely to overstate assets and net income
|
|
|
What is Lower-of-Cost-or-Market?
|
Applied to items in inventory after they have used one of the cost flow methods (FIFO, LIFO, Avg-Cost) to determine cost.
LCM is an example of the Concept of Conservatism Under LCM basis, the market is defined as current replacement cost, not selling price. Market = The cost of purchasing the same goods at the present time from the usual suppliers in the usual quantities. Cost = Is what you paid for it initially Choose the Lower of Cost or Market price. Current replacement cost is used because a decline in the replacement cost of an item usually leads to a decline in the selling price of the item. |
|
|
What is Inventory Turnover Ratio?
How do you find how many Days in Inventory? |
COGS / Average Inventory
365 / Inventory Turnover Ratio |
|
|
FIFO, LIFO, and Average Cost for Perpetual System?
|
You use the (100 @ $10) system thing to keep track of the transactions while it happens.
FIFO is the same for Perpetual as it is Periodic LIFO in Perpetual will usually produce different cost allocations than Periodic Average Cost: In a perpetual system, a new average cost is calculated each time the company makes a purchase. |
|
|
Chapter 7
|
Chapter 7
|
|
|
What is fraud?
|
Fraud is a dishonest act by an employee that results in personal benefit to the employee at the cost of the employer
|
|
|
What are the three elements of the Fraud Triangle? Give an Example of each.
|
Opportunity, Financial Pressure, and Rationalization
Opportunity: -most important element -for an employee to commit fraud, the work place must present an opportunity that an employee can exploit. -opportunity occurs when the workplace lacks sufficient controls to deter and detect fraud. Financial Pressure: -Employees sometimes commit fraud because of personal finance problems caused by too much debt -or because the employee wants to lead a lifestyle that they cant afford Rationalization: -In order to justify their fraud, employees rationalize their dishonest actions -employees sometimes justify fraud because they feel they are underpaid while company is making lots of money |
|
|
What action did Congress take to prevent fraud?
|
They made the Sarbanes-Oxley Act of 2002 (SOX).
Under SOX, all publicly traded US corporations are required to maintain an adequate system of internal control. |
|
|
What are the 5 primary components of Internal Control Systems? Explain each.
|
-Control Environment (Resposibility of management to make it clear the company's value on integrity and that unethical behavior will not be tolerated; "The tone at the top")
-Risk Assessment (Companies must indetify and analyze the various factors that create risk for the business and must determine how to manage those risks) -Control Activities (To reduce the occurance of fraud, management must design policies and procedures to address the specific risks faced by the company) -Information and Communication (The Internal control system must capture and communicate all pertinent info both down and up the organization, as well as communicate information to appropriate external parties -Monitoring (Internal control systems must be monitored periodically for the adequacy. Significant deficiencies need to be reported to top management and/or the board of directors |
|
|
What are they 6 principles of Internal Control Activities?
(Review on Page 347) |
-Establishment of Responsibility
-Segregation of Duties -Documentation Procedures -Physical Controls -Independent Internal Verification -Human Resource Controls |
|
|
What is Establishment of Responsibility?
|
-An essential principle of internal control is to assign responsibility to specific employees
-Control is most effective when only one person is responsible for a given task Example: Only let one person operate register so if money is missing you know who to place responsibility on. |
|
|
What is Segregation of Duties?
|
-Different Individuals should be responsible for related activities
-The responsibility for record keeping for an asset should be separate from the physical custody of that asset. -The work of one employees should provide a reliable basis for evaluating the work of another employee Segregation of Related Duties: Making one individual responsible for related activities increases the potential for errors and irregularities Segregation of Record-Keeping From Physical Custody: Have one guy maintain cash balances for books and a different guy maintain custody of cash on hand |
|
|
What is Documentation Procedures?
|
-Companies should document the transaction when it occurs
-Companies should use prenumbered documents whenever possible and all documents should be accounted for. -Should make employees promptly forward source documents for accounting entries to the accounting department. |
|
|
What is Physical Controls?
|
-Relates to the safeguarding of assets and enhance the accuracy and reliability of the accounting records.
Example: Safes, Vaults, Locked Warehouses, Computer Passwords, Alarms to prevent break ins, Television monitors and clothes sensors, time clocks for recording time worked. |
|
|
What is Independent Internal Verification?
|
-The review of data prepared by employees
-Especially useful in comparing recorded transactions with existing assets. 3 steps: 1. Companies should verify records periodically or on a surprise basis 2. An employee who is independent of the personnel responsible for the information should make the verification. 3. Discrepancies and exceptions should be reported to a management level that can take appropriate corrective action. -Companies often use Internal Auditors for this. |
|
|
What is Human Resource Controls?
|
1. Bond employees who handle cash (Bonding involves obtaining insurance protection against theft by employees... insurance company will also be on the look out for theft now)
2. Rotate employees duties and require them to take vacations 3. Conduct thorough background checks |
|
|
*New Section* What are the Limitations of Internal Control?
|
-Design systems to provide reasonable assurance of proper safeguarding of assets and reliability of the accounting records.
-The concept of reasonable assurance rests on the premise that the costs of establishing control procedures should not exceed their expected benefit -Human Element: A good system can become ineffective as a result of employee fatigue, carelessness or indifference. -Collusion of 2 employees working together can significantly reduce the effectiveness of a system. -NO system of internal control is perfect -Size of the business: A small company may find it more difficult to segregate duties |
|
|
What is the asset most susceptible to fraudulent activities?
|
Cash
|
|
|
What is over-the-counter receipts centered around?
|
Cash registers with the price that the customer can see
|
|
|
What payment method is recommended for better internal control over cash disbursements?
|
Companies should pay by check rather than cash for better internal control
|
|
|
The use of a _____ contributes significantly to good internal control over cash.
|
Bank
|
|
|
What is a Bank Reconciliation?
|
It is the process of comparing the bank's balance with the company's balance, and explaining the differences to make them agree.
The company's balance and the bank's balance are rarely the same at any given time, and both differ from the "correct or true" balance. The need for Bank Reconciliation: 1. Time Lags 2. Errors (by either party in recording the transaction) |
|
|
What is the Reconciliation Procedure?
|
-It is customary to reconcile the balance per books and balance per bank to their adjusted (correct or true) cash balances.
-To obtain maximum benefit from a bank reconciliation, an employee who has not other responsibilities related to cash should prepare the reconciliation. -Important for companies to follow the internal control principle of Independent Internal Verification to prevent cash embezzlements. -They do credits/debits from bank perspective (Opposite, credits are first column, debits are 2nd column). |
|
|
What is cash?
|
Coins, Currency (paper money), checks, money orders, and money on hand
|
|
|
What is Cash Equivalents?
|
Short-term, High Liquidity Investments that are both:
1. Readily convertible to known amounts of cash 2. So near their maturity that their market value is relatively insensitive to changes in interest. Examples: Treasurey Bills, Commercial Paper (short-term corporate notes), and money market funds. |
|
|
What is a petty cash fund?
|
A cash fund used to pay relatively small amounts.
Better to pay small amounts with cash rather than checks Company expects funds in the petty cash fund to cover 3 to 4 weeks worth of anticipated disbursements |
|
|
What operations go into a petty cash fund?
|
1. establishing fund
2. making payments from fund 3. replenishing fund |
|
|
What are the 2 essential steps in establishing a petty cash fund?
|
1. Appointing a petty cash custodian to be responsible for the fund
2. determining the size of the fund |
|
|
What does the term Receivables mean?
What are Accounts Receivable? What are Notes Receivable? |
It refers to amounts due from individuals and companies
A/R = Amounts customers owe on account. N/R = Represent claims for which FORMAL INSTRUMENTS of credit are issued as evidence of the debt. |
|
|
What is the Allowance Method of accounting for Bad Debts?
|
It involves estimating uncollectible accounts at the end of each period. This method ensures that receivables are stated at their cash (net) realizable value on the balance sheet. It also provides better matching of expenses with revenues on the income statement.
|
|
|
What is Cash (net) realizable value?
|
It is the net amount a company expects to receive in cash from receivables. It excludes amounts that the company estimates it will not collect.
|
|
|
What are the 3 essential features in the Allowance Method for Bad Debts?
|
1. Companies estimate uncollectible A/R and match them against revenues in the same accounting period in which they are recorded.
2. Companies record estimated uncollectibles as an increase (debit) to Bad Debt Expense and a an increase (credit) to Allowance for Doubtful Accounts. 3. Companies debit actual uncollectibles to Allowance for Doubtful Accounts and credit them to Accounts Receivable at the time the specific account is written off as uncollectible. The amount of the Bad Debts expense adjusting entry is the difference between the required balance (ending balance in Allowance for Doubtful Accounts) and the existing balance in the allowance account. |
|
|
What type of account is Allowance for Doubtful Accounts?
|
A contra account to Accounts Receivable.
It is deducted from Accounts Receivable in the current assets section of a balance sheet. Companies do NOT close Allowance for Doubtful Accounts at the end of the fiscal year. Has the normal balance of a credit |
|
|
Where do companies report Bad Debt Expense?
|
In the Income Statement as an operating expense (usually as a selling expense).
Bad Debt Expense has the normal balance of a Debit. |
|
|
What happens when a company collects on an account that they had previously written off?
|
They must do two entires:
1. They must reverse the entry that wrote off the account (reinstating the customers account). 2. Then journalize the collection in the usual manner (debit cash credit A/R). The recovery of a bad debt, like the write-off of a bad debt, affects only balance sheet accounts. You must go back to that original entry that wrote off the account and fix it there. |
|
|
What is the equation to calculate Interest?
|
Face Value of Note X Annual Interest Rate X Time in Terms of One Year
|
|
|
What do Notes Receivable require?
|
A payment of Interest
|
|
|
How do you journalize Notes Receviable?
|
Typically with a debit to Notes Receivable then a debit to A/R (if it is to settle an account) or to whatever the N/R is for.
When the N/R gets payed back the entry is a debit to cash (N/R + Interest) with a credit to N/R (for the original amount) and Interest Revenue (for the interest amount). |
|
|
What is Accrual of Interest Receivable?
|
Example: 6 month Note for $100 made on November 1st at 12% interest. At Dec. 31st it is recorded as
(debit) Interest Receivable $2 (credit) Interest Revenue $2. At end of the note is is recorded as: (debit) Cash 106 (credit) N/R 100 (credit) Int Rec 2 (credit) Int Rev 4 |
