Financial Accounting Chapter 5

Front 1

Finished Inventory

Back 1

Inventory held by retailers and wholesalers

Front 2

Materials inventory

Back 2

Inventory held by manufacturers

Front 3

3 types of manufacturing costs

Back 3

Direct materials, direct labor, manufacturing overheads

Front 4

Direct materials

Back 4

Also called raw materials, they are the ingredients used in making a product.

Front 5

Direct labor

Back 5

Amounts paid to workers to manufacture the product.

Front 6

Manufacturing overheads

Back 6

All other costs that are related to the manufacturing process but cannot be directly matched to specific units of output.

Front 7

Three forms of Inventory

Back 7

Direct materials, work in process, finished goods.

Front 8

Direct Materials

Back 8

The inventory of a manufacturer before the addition of any direct labor or manufacturing overhead

Front 9

Work in process

Back 9

Cost of unfinished products in a manufacturing company

Front 10

Finished goods

Back 10

A manufacturer's inventory that is complete and ready for sale.

Front 11

Sales revenue

Back 11

Representation of the inflow of assets, either cash or accounts receiveable, from the sale of a product during the period.

Equation: net sales= sales- sales return and allowances- sales discount

Gross profit= net sales -cost of goods sold

Front 12

Net sales equation

Back 12

Net sales=sales -sales return and allowances - sales discount

Front 13

Gross profit equation

Back 13

Gross profit= net sales- cost of goods sold.

Front 14

Sales returns and allowances

Back 14

Contra- revenue account used to record refunds to customers and reductions of their accounts

Front 15

Sales Discounts

Back 15

Contra- revenue account used to record discounts given to customers for early payment of their accounts.

Front 16

Credit terms

Back 16

Firms policy for granting credit

Front 17

n/30

Back 17

The net amount of the selling price is due within 30 days of the date of the invoice

Front 18

Net, 10 EOM

Back 18

The net amount is due anytime within ten days after the end of the month.

Front 19

1/10, n/30

Back 19

The customer can deduct 1% from the selling price if the bill is paid within ten days.

Front 20

Sales revenue

Back 20

Inflow of assets, cash or accounts receivable

Front 21

Cost of goods sold

Back 21

Outflow of Asset, inventory

Front 22

Cost of goods available for sale equation.

Back 22

Beginning inventory + cost of goods purchased

Front 23

Cost of goods sold equation

Back 23

Cost of goods available for sale- ending inventory

Front 24

Inventory system: perpetual

Back 24

The inventory account is increased at the time of each purchase and decreased at the time of each sale.

Front 25

Inventory Systems: periodic

Back 25

The inventory account is updated only at the end of the period.

Front 26

Purchase Discounts

Back 26

A contra-purchases account used to record reductions in purchase price for early payment to a supplier

Front 27

Cost Principle

Back 27

All costs necessary to prepare an asset for its intended use should be included in its cost.

Front 28

FOB destination point

Back 28

Seller incurs the transportation costs

Front 29

FOB shipping point

Back 29

Buyer incurs the transportation costs

Front 30

What does FOB stand for?

Back 30

FREE ON BOARD

Front 31

What does the gross profit ratio mean?

Back 31

-Important measure of profitability

- Indicates a company's ability to cover operating expenses and earn a profit

-Relationship between gross profit and net sales--- measured by the gross profit ratio---one of the most important measures to assess the performance of a company

Front 32

Gross profit ratio equation

Back 32

Gross profit ratio=Gross/Net sales

Front 33

The Ratio Analysis Model five steps

Back 33

1. How much of the sales revenue is used for the cost of the products, and thus, how much remains to cover other expenses and to earn net income?

2. Gather the information about net sales and cost of goods sold.

3. Calculate the gross profit ratio

4. Compare the ratio with prior years and with competitors

5. Interpret the ratios--- showing increase or decrease

Front 34

The business decision five step model

Back 34

1. If you were an investor, would you buy stock in a company?

2. Gather information from the financial statements and other sources

3. Compare the company's gross profit ratio with industry averages and look at trends.

4. Buy stock of find an alternative use for the money

5. Monitor the investment periodically

Front 35

What is Inventory Cost

Back 35

Price paid or consideration given to acquire an asset( this includes expenditures directly or indirectly incurred in bringing inventory to its existing condition or location

Front 36

What are the 4 inventory costing methods with a periodic system?

Back 36

1. Specific Identification

2. Weighted Average

3. First-in, first-out (FIFO)

4. Last-in, First Out (LIFO)

Front 37

How does the specific Identification Method Work?

Back 37

It relies on matching unit costs with the actual units sold

Front 38

How does the Weighted Average Cost Method Work?

Back 38

Assigns the same unit cost to all units available for sale during the period.

Front 39

Weighted Average Cost Equation

Back 39

Weighted Average= Cost of goods available for sale/ Units available for sale.

Front 40

Ending Inventory Equation

Back 40

Ending Inventory= Weighted Average Cost x Number of units in ending inventory

Front 41

How does First- In, First-Out Method (FIFO) work?

Back 41

It Assigns the most recent costs to ending inventory

Front 42

How does the Last-In, First-Out Method(LIFO) work?

Back 42

It assigns the most recent costs to cost of goods sold.

Front 43

How to select an inventory costing method.

Back 43

A company should choose the method that results in the most accurate measure of net income for the period

2.The primary determinant in selecting an inventory costing method should be the ability of the method to accurately reflect the net income of the period

Front 44

What are the LIFO Issues

Back 44

LIFO Liquidation

LIFO conformity rule

LIFO reserve

Front 45

LIFO liquidation

Back 45

The result of selling more units than are purchased during the period

Negative tax consequences

Front 46

LIFO conformity rule

Back 46

If lifo is used on a tax return, it must also be used in reporting income to stockholders

Front 47

LIFO reserve

Back 47

The excess of the value of a company's inventory stated at FIFO over the value stated at LIFO

Front 48

Replacement Cost

Back 48

current cost of a unit of inventory

Front 49

Inventory profit

Back 49

The portion of the gross profit that results from holding the inventory during a period of rising prices

Front 50

How do Inventory valuations differ in other countries

Back 50

- GAAP in the United States allows LIFO

- IASB strictly prohibits the use of LIFO

Front 51

What are some of the reasons we need to LIFO to survive

Back 51

It is a matter of convergence with international standards

LIFO allows companies with rising inventory costs to report lower income

Front 52

What are some inventory Errors

Back 52

If inventory is overstated, cost of goods sold will be understated and thus net income for the period overstated

Front 53

Different types of inventory errors

Back 53

Mathematical Erros

Physical Count of inventory at the year-end

Cutoff problems- in-transit---at year-end

Front 54

What is Lower of Cost or Market Rule

Back 54

A conservative inventory valuation approach

Require that inventory be written down the end of the period if the market value of the inventory is less than its cost.

Front 55

What 3 things can lower of cost or market rule be applied to?

Back 55

1. Entire Inventory

2. Individual Items

3. Groups of items

Front 56

What policies is Lower-of-cost rule under?

Back 56

It is required under both U.S GAAP and IFRS

Front 57

What is the difference between U.S GAAP AND IFRS?

Back 57

U.S GAAP - define market value as replacement cost, subject to a maximum and a minimum amount.

- New amount becomes basis for future adjustments

IFRS- Uses net realizable value with no upper or lower limits

- Write-downs of inventory can be reversed in later periods

Front 58

Inventory Turnover Ratio

Back 58

- Measures company's ability to sell its inventory quickly

-Number of times inventory is sold during a period

Front 59

Inventory Turnover Ratio Equation

Back 59

Inventory Turnover Ratio= Cost of goods sold/ Average Inventory

Front 60

Number of Days' Sales in Inventory

Back 60

Measures of how long it takes to sell inventory

Front 61

Number of Days' Sales in Inventory Equation

Back 61

Number of Days' Sales in Inventory= Number of Days in the period/ Inventory Turnover Ratio

Front 62

What are the 5 steps of the Ratio Analysis Model?

Back 62

1. How liquid the company is?

2. Gather the cost of goods sold from the income

3. Calculate the inventory turnover ratio

4. Compare the ratio with other ratios

5. Interpret the ratios--- measure of how long it takes to sell inventory

Front 63

The five steps of the Business Decision Model?

Back 63

1. If you were an investor, would you buy stock in the company?

2. Gather information from the financial statements and other sources

3. Compare trends in inventory turnover ratios, net income with industry averages

4. Buy stock or find an alternative

5. Monitor your decision periodically

Front 64

What is the moving average?

Back 64

An average cost method when a weighted average cost assumption is used with a perpetual inventory system

Front 65

What is the definition of Cash

Back 65

Readily available to pay debts

Front 66

What are the various forms of cash?

Back 66

coin and currency on hand

Cash on deposit in the form of checking and savings accounts

Undeposited, Cashier, and certified checks.

Front 67

Cash Equivalents

Back 67

Investment readily convertible to known amount of cash.

Also maturity --- three months or less

Front 68

What are examples of cash equivalents?

Back 68

Commercial paper

Treasury bills issued by the federal government

Money market funds

Front 69

What are the tools of cash management?

Back 69

1. Cash flows statement

2. Cash budgets

3. bank reconciliations

4. Petty cash funds

Front 70

Bank Statement?

Back 70

a detailed list, provided by the bank, of all activity for a particular account during the month

Front 71

Outstanding check?

Back 71

check written by a company but not yet presented to the bank for payment

Front 72

Deposit in transit

Back 72

deposit recorded on the books but not yet reflected on the bank statement

Front 73

Bank reconciliation?

Back 73

Reconcile or resolve any differences between balance on the bank statement with balance shown in the accounting records

Front 74

What are the 5 steps used in preparing a bank reconcilation?

Back 74

1. Prepare a list of the deposits in transit

2. Prepare a list of the outstanding checks

3. prepare a list of credit memoranda

4. prepare a list of debit memoranda

5. Identify any errors

Front 75

Credit Memoranda?

Back 75

Additions on a bank statement for such items as interest paid on the account and notes collected by the bank for the customer

Front 76

Debit Memoranda

Back 76

Deductions on a bank Statement for items such as NSF checks and Various service charges

Front 77

What does it mean to prepare a list of the deposits in transit?

Back 77

1. Trace deposits listed on the bank statement to the books

Identify the deposits in transit

Add to the bank balance

Front 78

What does it mean to prepare a list of the outstanding checks?

Back 78

1. Arrange the canceled checks in numerical order.

2. Trace each of them to the books

3. Subtract from the bank balance

Front 79

What does it mean to prepare a list of Credit Memoranda?

Back 79

1. List all items, other than deposit, shown as additions on the bank statement.
2. For these items, bank increases, or credits, its liability to the company on its own books.

Front 80

Prepare a list of Debit Memoranda?

Back 80

1. List all amounts, other than canceled checks, shown as subtractions on the bank statement.

2. A liability is created on the books of the bank

3. Bank reduces the amount of its liability for these various items and debits the liability on its own books.

Front 81

What does it mean to identify any errors?

Back 81

Identify any errors made by the bank or by the company in recording cash transactions.

Front 82

What is the petty cash fund?

Back 82

1. Money kept on hand for making minor disbursements rather than by writing checks.

2. Periodically, the fund is replenished.

3. When fund is replenished, an adjustment is made to record its replenishment and to recognize the various expenses incurred.

Front 83

Internal Control System?

Back 83

Policies and procedures necessary to ensure

- Safeguarding of an entitys assets.

- Reliability of accounting records

-Accomplishments of overall company objectives

Front 84

What was the Sarbanes-Oxley Act if 2002?

Back 84

Intended to bring reform to corporate accountability and stewardship in the wake of a number of major corporate scandals.

Front 85

What is Internal Control report of the Sarbanes-Oxley act of 2002? What does it do?

Back 85

Internal Control Report: A report required by section 404 of the Sarbanes-Oxley act

- Maintain an adequate internal control structure

- Assesses effectiveness of internal control structure

-Outside auditor must issue report on company's internal control

Front 86

What is the PCAOB( Public company accounting oversight board):

Back 86

Five member body created by SOX

Front 87

Who/What enacted the PCAOB?

Back 87

Sarbanes- Oxley- Act

Front 88

What is the Board of Directors of the PCAOB?

Back 88

Consists of key officers of a corporation and outside members responsible for general oversight of the affairs of the entity

Front 89

What is the Audit Committee of the PCAOB?

Back 89

A subset of the board of directors

-Provides direct contact between the stockholders and the independent accounting firm

Front 90

What are factors that influence internal control?

Back 90

-Management's Competence and operating style

- Personnel policies and practices

- Board of Directors, particularly audit committee

Front 91

What is the accounting system?

Back 91

-Methods and records used to accurately report entity's transactions and maintain accountability for assets and liabilities

- Use of journal is an integral part of all accounting systems

- Can be completely manual, fully computerized, or a mixture of both

Front 92

What are two types of internal control procedures?

Back 92

Administrative Controls, Accounting Controls

Front 93

Administrative Controls?

Back 93

-Procedures concerned with efficient operation of the business and adherence to managerial policies

Front 94

Accounting controls?

Back 94

-Procedures concerned with safeguarding the assets or the reliability of the financial statements

Front 95

Internal Control System Important Procedures?

Back 95

-Proper authorizations

- Segregation of duties

-Independent Verification

-Safeguarding of assets and records

- Independent review and appraisal

- Design and use of business documents

Front 96

What is the internal audit staff?

Back 96

department responsible for monitoring and evaluating the internal control system

Front 97

What are Business Documents?

Back 97

-Crucial link between economic transactions entered into by an entity and the accounting record of those events

-Often called source documents

Front 98

What are key features of Business Documents?

Back 98

1. Sequential numbering system

2. Multiple Copies

Front 99

What are the limitations on internal control?

Back 99

-Not totally foolproof

- Does not ensure prevention of collusion

- Maintenance of controls can be costly

-Small business cannot afford

- Human errors can weaken the system

: Misunderstood instructions, carelessness, fatigue, and distraction can lead to errors

Front 100

What should be done under Computerized Business Documents and internal control-

Back 100

All cash receipts should be deposited intact in the bank on a daily basis

- Intact means that no disbursements should be made from the cash received from customers

Also all cash disbursements should be made by check

Front 101

What does control over cash receipts mean?

Back 101

Most merchandisers receive checks and currency from customers in two ways.

Front 102

When do Cash discrepancies occur?

Back 102

occasionally due to theft by dishonest employees and human error

Front 103

What is the role of computerized Business Documents in controlling Cash Disbursements

Back 103

Purchase Requisition

Purchase Order

Front 104

What is a purchase requisition?

Back 104

A form a department uses to initiate a request to order merchandise.

Front 105

What is a purchase order?

Back 105

A form sent by the purchasing department to the supplier

Front 106

What is a blind receiving report?

Back 106

A form used by the receiving department to account for the quantity and condition of merchandise received from a supplier