FOB destinationTitle passes from the seller to the buyer when the goods are delivered to the buyer.FOB shipping pointtitle passes when the seller ships the inventory, not when the buyer receives it.adjustments for retail operationsinventory shrinkage, Estimated customer refunds and allowances, Estimated customer merchandise returnscustomer refunds payableestimate is used in the adjusting process to record a liabilityestimated returns inventoryinventory expected to be returned in the future -Estimated at the end of the period as part of the adjusting processcash saleSeller collects the sales taxSale made on accountSeller charges the buyer by increasing Accounts ReceivableInventory ShrinkageDifference between the balance of Merchandise Inventory and the physical inventory on hand at the end of the accounting periodMultiple-Step Income Statement Format-Cost of goods sold -Gross profit -Income from operations -Selling expenses -Administrative expenses -Other revenue -Other expenseSingle-Step Income Statement for Retail Company-Revenue -expenses -net incomeObjectives of Internal Controlsafeguard assets, accurate information, compliance with laws and regulationselements of internal controlcontrol environment, risk assessment, control activities, information and communication, monitoringcontrol enviroment-Overall attitude of the management and the employees about the importance of controls -factors that influence a company's control environment -Management's philosophy and operating style -Company's organizational structure -Company's personnel policiesrisk assessment-Management should: -Identify risks and analyze their significance -Assess the probability of the occurrence of risks -Take necessary actions to minimize risksControl Procedures-Provide reasonable assurance that business goals will be achieved -Include: -Competent personnel, rotating duties, and mandatory vacations -Separating responsibilities for related operations -Separating operations, custody of assets, and accounting -Proofs and security measureshuman element of controlsfatigue, carelessness, confusion, or misjudgment can cause human errorsCost-benefit considerationsCosts of internal controls should not exceed their benefitsvoucherAny document that serves as a proof of authority to pay cash or issue an electronic funds transfer (EFT)Bank account advantages-Reduce the amount of cash on hand -Provide an independent recording of cash transactions -Help facilitate the transfer of funds using EFT systemsbank reconciliation-Analysis of the items and amounts that result in the cash balance reported in the bank statement differing from the balance of the cash account in the ledger -Actual (true) cash balance determined in the bank reconciliation is reported on the balance sheet -Should be prepared by an employee who does not take part in or record cash transactions to avoid mistakesCredit memo entryIndicates an increase in the depositor's accountpetty cash fundestablished by cashing a check. Funds are controlled by the custodian of the fund and kept secure.cashnormally listed as the first asset in the Current Assets section of a balance sheetAccounts ReceivableCredit terms extended to customers. Usually 30 to 60 days.Notes Payable-More formal agreement. Interest is calculated. -includes a maker and payeeother receivablesCan include interest receivable, taxes receivable, and receivables from employees or officersinterestFace Amount × Interest Rate × (Term/360 days)maturity valueFace Amount + InterestDirect MethodThe Accounts Receivable account is adjusted "directly" for bad debts as they occurallowance method•Bad debts are estimated each period and a contra receivables account called "Allowance for Bad Debts" is used. -bad debt expense happens before the account is written off!percent of accounts receivable methodAccounts receivable are analyzed based on an aging schedule. The bad debt estimate represents the required ending balance that needs to be in the Allowance for Bad Debts account.percent of sales methodBad debt estimate is a function of total credit sales. The estimate calculated here represents the amount of Bad Debt EXPENSE that should be recorded.bad debt expenseCredit sales × Bad debts as a percent of credit salesprecent of credit salesAn income statement approach. Focus is on the estimate of expense as it is matched to the related revenue.Percentage of receivables (aging)A balance sheet approach. Focus is on the estimate of the allowance (a contra asset) to get the net realizable value of accounts receivable.merchandisers•One classification - "Merchandise inventory" •Cost of inventory includes all costs of ownership -purchase price -transportation costs -insurance costs, etc.manufacturers•Every manufacturer has 3 classifications of Inventory -Materials -Work in Progress -Finished GoodsMerchandise Inventory•Merchandise on hand (not sold) at the end of the period •Current asset •Inventory sold becomes the cost of goods soldCost of InventoryPurchase price − purchase discounts + freight - purchase returns and allowancesFIFO (first in, first out)costs flow in the order in which the costs were incurred -Lower cost of goods sold (COGS) Higher gross profit -Higher inventory values. Ending inventory amount is similar to current replacement cost -Gross profit reduces if future costs are higherLIFO (last in, first out)cost flow in the reverse order in which the cost were incurred -Higher COGS Lower gross profit -Lower inventory values -Matches current costs with current revenuesWeighted average costcash flow is an average of cost -Averaged gross profit -Averaged inventory value -Compromise between LIFO and FIFOspecific identification method-If the merchandise can be easily tied to a specific purchase, the specific identification method can be used. -Cost of each unit of merchandise is determined by looking at the purchase price of that particular unit. -Only works if there is a unique characteristic of each item that makes it identifiable •Example: VIN for an automobileLIFO conformity ruleIf a company elects to use LIFO inventory valuation for tax purposes, then the company must also use LIFO for external financial reportingLIFO reserveEstimated difference between the LIFO inventory and the inventory if FIFO had been used •Noted in financial statementsLower-of-Cost-or-Market Method-An example of conservatism -Applied by determining the cost, market price, and any declines for one of the following: -Each item in the inventory -Each major class or category of inventory -Total inventory as a wholeRecievables-Classified as a current asset if collection is expected within one yearInventory ValuationCost is the primary basis for valuing and reporting inventories in the financial statementsmarketNet realizable value of the inventoryNet realizable valueEstimated selling price − direct costs of disposalDirect costs of disposalinclude selling expenses such as special advertising or sales commissions on the saleAccounts Receivable and Inventory-Large current assets for many companies -Objective in managing receivables and inventory is to convert them to cash by collecting receivables and selling inventory -Useful measures of liquidity -Accounts receivable turnover -Inventory turnoverAccounts Receivable TurnoverNet Sales / Average Accounts ReceivableDays' Sales in Receivables365 days/accounts receivables turnoverInventory Turnovercost of goods sold/average inventoryDays' Sales in Inventory365 days / inventory turnover

ACCT 2810 MILLER EXAM 2

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