37 terms

ACC 207 Block 2

primary source of revenue is selling merchandise (markup of goods)
Expenses of Merchandising
Cost of Goods Sold and Operating Expenses
Cost of Goods Sold
total cost of merchandise
Operating Expenses
selling and administrative expenses
Perpetual System
records of cost of each inventory purchase and sale are maintained continuously, as well as records continuously show inventory (physical inventory to determine what is left/how much sold); determines COGS after every sale
Periodic System
records of goods on hand are not kept on hand throughout the period; determines COGS at end of accounting period
Recording Purchases of Merchandise
every purchase should be supported by business documents; every credit purchase will have purchase invoice; cash purchase is recorded by increasing inventory and decreasing cash
Freight Costs
FOB Shipping Point and FOB Destination
FOB Shipping Point
buyer pays for freight costs; part of purchasing inventory - increase inventory and decrease cash; in determining ownership of goods, ownership passes to buyer
FOB Destination
seller pays for freight costs; freight-out or delivery expense; increase freight-out and decrease cash; in determining ownership of goods, ownership passes when the product reaches the buyer
Return Inventory
purchase return; increase accounts payable and decrease inventory when returning; when receiving a return, increase inventory and decrease accounts payable
Purchase Allowance
keep defected product and will receive discount from seller
Purchase Discount
credit terms of a purchase on account may allow the buyer to claim a discount if prompt payment is made
ex.) 3/15, n/30 (3% off returned price if returned within 15 days, payment due in 30 days no matter what)
Recording Sales of Merchandise
sales revenues recorded when earned (sales may be credit or cash)
Cash Register Tapes vs. Sales Invoice
provides evidence of cash sales vs. provides written evidence of credit sales
Sales Discount
seller may offer a cash discount for the prompt payment of the balance due; based on invoice
Cash (amount to be collected - discount)
Sales Discount (amount) ex.) 2% x $3500) - contra-revenue
Accounts Receivable (whole amount of bill)
Profit Margin
Net Income / Net Sales = %
Gross Profit Rate
Gross Profit / Net Sales = %
Merchandise Inventory
many different items make up inventory
Work in Progress
product that is in production and not yet complete
Manufacturing (3 parts)
Raw Materials; Work in Progress; Finished Goods
Perpetual System Determining Inventory
at year end, 1.) check accuracy and 2.) determine amount lost
Periodic System Determining Inventory
physical inventory to 1.) find inventory on hand at balance sheet date and 2.) determine Cost of Goods Sold for the period
COGS Example
Beginning Inventory $10000
+ Purchases 100000 =
COG Available for Sale $110000
- Ending Inventory (20000) =
COGS $90000
Inventory Costing
after determining quantity of ending inventory, apply unit cost to the unit quantities to determine total cost of ending inventory and COGS
first in, first out; earliest goods purchases are first ones sold; highest net income (work from bottom to top)
last in, first out; last goods purchased are first ones sold; highest COGS and lowest net income (work from top to bottom)
Average Cost
Goods Available for Sale / Units Available for Sale = $x/unit
$x/unit * units in ending inventory = $x ending inventory
Lower of Cost or Market; value of inventory less than cost, mark down to market value (concept of conservatism)
Inventory Turnover Ratio
COGS / Average Inventory = x times
Avg Inventory = (beg inventory + end inventory) / 2
Days in Inventory Ratio
365 / Inventory Ratio = x days
dishonest act by employee for personal benefit at cost of employer
3 Factors to Fraud
1. Opportunity: lack of sufficient controls provides opportunity for employee
2. Financial Pressure: personal debt, want of a better lifestyle, etc. pressures employee
3. Rationalization: employee justifies fraud in their mind
Sarbanes-Oxley Act (2002) and Fraud
requires adequate system of internal control to be put in place in order to stop fraud
Components Internal Control (5)
1. Control environment
2. Risk Assessment
3. Control activities
4. Information ad Communication
5. Monitoring
Principals of Internal Control to Cash Receipts (6)
1. Establishment of responsibility
2. Segregation of duties
3. Documentation procedures (provides evidence)
4. Physical controls (safe/vault, security system, alarms)
5. Independent Internal Verification (review of data prepared by employees)
6. Human Resource Controls (background checks, employee/manager rotation, required vacations)
Basic Principles of Cash Management (5)
1. Increase speed of receivable collection (more quickly received, more quickly $ can be spent)
2. keep inventory levels low (large inventory ties up cash)
3. Monitor payment of liabilities (restrict late payments)
4. Plan timing of major expenditures (help obtain outside financing)
5. Invest idle cash (invest to earn)