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Accounting Exam #2
Terms in this set (75)
Net Income Equation
Revenues - Expenses = Net Sales - COGS = Gross Profit - Expenses = Net Income
Merchandise Available for Sale
Beginning Inventory + Net Purchases OR Ending Inventory + Cost of Goods Sold
Discount percent/Number of days discount is available
Otherwise, Net/Credit Period
FOB Shipping Point Ownership
FOB Shipping Point Transportation Cost
FOB Destination Ownership
FOB Destination Transportation Cost
Entry For Merchandise Purchase
Merchandise Inventory (DR), Cash (CR)
Entry For Discounts
Accounts Payable (DR), Cash (CR) Merchandise Inventory (CR)
Entry For Returns
Accounts Payable (DR), Merchandise Inventory (CR)
Entry For Transportation Costs
Merchandise Inventory (DR), Cash (CR)
T/F Sales Discounts is a contra asset account.
False; Sales Discounts is a contra Revenue account to Sales Revenue.
Sales of Merchandise
Accounts Receivable (DR), Sales (CR)
COGS (DR), Merchandise Inventory (CR)
Cash (DR) Sales Discounts (DR), Accounts Receivable (CR)
Entry to Close Credit Balances in Temporary Accounts to Income Summary
Sales (DR), Income Summary (CR)
Entry to Close Debit Balances in Temporary Accounts to Income Summary
Income Summary (DR), Sales (CR)
Close Income Summary to Retained Earnings
Income Summary (DR), Retained Earnings (CR)
Close Dividends to Retained Earnings
Retained Earnings (DR), Dividends (CR)
Acid Test Ratio
Quick Assets/ Current Liabilities
Acid Test Ratio Normal Ratio
1:1 (For every Dollar of Current Inventory, there is a dollar paid)
Gross Margin Ratio
(Net Sales - Cost of Goods Sold) / Net Sales
Gross Margin Ratio Benchmark
The Higher the Better (% of dollar sales available)
Specific Identification, FIFO, LIFO, or Weighted Average
Perpetual or Periodic
First-In, First-Out (FIFO)
- Method to assign cost to inventory that assumes items and costs flow in the order incurred;
- Earliest items purchased are the first sold.
- Ending Inventory approximates current replacement costs
Last-In, First-Out (LIFO)
- Method for assigning cost to inventory that assumes costs for the most recent items purchased are sold first and charged to cost of goods sold.
- Better matches current costs in cost of goods sold with revenue
- Assumes costs flow at an average of the costs available
- Smooths out price changes
Method to assign cost to inventory when the purchase cost of each item in inventory is identified and used to compute cost of inventory.
Weighted Average Method
Average cost of each unit in inventory is assigned to cost of goods sold
Inventory System Used by the IRS
Inventory must be reported at ________ value
Market - Where marked is the current replacement cost
Inventory Turnover Ratio
Average Inventory Ratio
(Beginning Inventory + Ending Inventory) / 2
Inventory Turnover Ratio Benchmark
The Higher the Better
Days' Sales in Inventory Ratio
(Ending Inventory / COGS) x 365
Days' Sales in Inventory Benchmark
Lower the Better
A law passed by Congress that requires the CEO and CFO to certify that their firm's financial statements are accurate.
What is the most serious limitation of internal controls?
Limitation of Internal Control
The costs of internal controls must not exceed their benefits
Petty Cash System
Small payments required in most companies for items such as postage, courier fees, repairs, and supplies.
T/.F Petty Cash can be used for all types of expenses
False - Only for business expenses and not with reimbursement
Steps to Figure out Petty Cash
1. Add up all expenses
2. Add Remaining Cash
3. Compare to what you're supposed to have
4. Add short to expenses, subtract and debit if over
Bank Reconciliation Statement
A statement that accounts for all differences between the balance on the bank statement and the book balance of cash.
Deposits in Transit
Collections Made by the Bank
Interest Earned on Checking Account
Non-Sufficient Funds Check
Bank Service Charge
Days' Sales Uncollected Ratio
(Accounts Receivable/Net Sales) x 365
Days' Sales Uncollected Ratio Benchmark
Lower the Better
Direct Write-Off Method
- Violates Matching Principle
- Only sole proprietorship and partnerships
- No JE during the month of sale with Bad Debt
Direct Write Off Method - When you determine someone is unable to pay
Bad Debt Expense (DR), Accounts Receivable (CR)
- Follows Matching Principle
- Publicly held corporations
Allowance Method - During the month of sale
Bad Debt Expense (DR), Allowance for Doubtful Accounts (CR)
Allowance Method - When you determine someone is unable to pay
Allowance for Doubtful Accounts (DR), Accounts Receivable (CR)
T/F Allowance for Doubtful Accounts is a contra asset and has a debit balance
False, it has a credit balance
Does the allowance method affect Net Income?
Does the Allowance Method affect Accounts Receivable?
Income Statement Method
Percent of Sales Method
Balance Sheet Method
Percent of Receivables or Aging or Receivables
Does the Income Statement Method pay attention to the balance in the Allowance Account?
No, it Ignores it
When taking the percent times sales, that amount is the...
Bad Debt Expense Amount (JE)
When taking the percent times receivables, that amount is the...
Desired Ending Balance
Does the Balance Sheet Method consider the balance in the allowance account?
Yes, it must Consider it
What does a credit balance in Allowance for Doubtful Accounts mean?
Less bad debt than estimated
What does a debit balance in Allowance for Doubtful Accounts mean?
More bad debt than estimated
3 Ways a Company can receive a Note Receivable
1. Loan someone money
2. Customer buys a big ticket item with a note
3. Customer originally buys on Account, realizes towards the end of the 30 days they cannot afford to pay, and offers you a notes receivable in place of their accounts receivable
How many days are in a year in this chapter?
Principal x Rate x Time (In a fraction)
Journal Entry for Interest
Cash (DR), Interest Receivable (CR) Interest Revenue (CR) Notes Receivable (CR)
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