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ACCT Chapters 4-6

Terms in this set (68)

What are the steps companies take to Control cash disbursements?
Disbursements should be made by check, debit card, or credit card (PROVIDES A RECORD OF IT)
Authorize all expenditures; authorizing employee should not also prepare the check
Checks should be serially numbered and should require two signatures for large amounts
Periodically compare AND agree debit and credit card statements to purchase receipts
Set maximum purchase limits
Separate cash disbursement and cash receipt duties
Cash
Currency, coins, balances in savings and checking accounts, items acceptable for deposit in these accounts (such as checks received from customers), credit card and debit card sales, and cash equivalents. p. 185
Cash equivalents
Short-term investments that have a maturity date no longer than three months from the date of purchase.
What are the components of the total cash balance
Cash and Cash equivalents
What are the steps companies take to Control over cash and check receipts?
Each day: an employee should open mail and list checks and cash received
Each day: a different employee should deposit cash and checks into the company's bank account
As soon as possible: a separate employee should record cash receipts in the accounting records
Accept credit cards or debit cards to limit the amount of cash handled
bank reconciliation
matches the balance of cash in the bank account with the balance of cash in the company's own records
Timing differences
occur when the company records transactions either before or after the bank records the same transactions
What are the three steps of Reconciling the bank account?
STEP 1: Reconcile the Bank's Cash Balance
STEP 2: Reconcile the Company's Cash Balance
STEP 3: Update the Company's Cash Account
STEP 1: Reconcile the Bank's Cash Balance
determine cash transactions recorded by the company, but not yet recorded by its bank: Deposits outstanding & Checks outstanding
Deposits outstanding
cash receipts of the company that have not been added to the bank's record of the company's balance
Checks outstanding
checks the company has written that have not been subtracted from the bank's record of the company's balance
STEP 2: Reconcile the Company's Cash Balance
Cash transactions (items) recorded by bank but not company
Common items that will increase the company's cash balance include
Collections made by the bank on the company's behalf
Interest earned on average daily balance
Common items that will decrease the company's cash balance include:
NSF checks (customers' checks written on "nonsufficient funds," otherwise known as "bad" checks)
Debit card purchases
Electronic funds transfers (EFTs)
Bank service fees
STEP 3: Update the Company's Cash Account
• Look at items used to reconcile the company's
cash balance
• Debit Cash for items that add to the balance
• Credit Cash for items that subtract from the
balance
Account for Employee Purchases
Petty cash fund & company-issued debit/credit cards
Petty cash fund
a small amount of cash kept on hand to pay for minor purchases
• Accounting for the petty cash fund involves:
Establishing the fund
Recognizing expenditures from the fund
Replenishing the fund
Company-issued debit and credit cards
-debit cards (and checks) captured in the bank reconciliation
-credit card purchases need to be recorded
2 Forms of Reporting Cash
• Balance sheet: Reports cash balance at the end of the period
• Statement of cash flows: Reports cash receipts and cash payments during the period
Credit Sales
• Transfer products and services to a customer today and expect to collect cash in the future
• Also known as sales on account or services on account
• Common for many business transactions
Accounts Receivable
• Cash owed to the company by its customers from sales or services on account
• Recorded at the time of the sale or service
• Also called trade receivables
Nontrade receivables
receivables that originate from sources other than customers (Tax refund claims, interest receivable, and loans by the company to other entities, including stockholders and employees)
Notes receivable
formal credit arrangements evidenced by written debt instruments (or "notes")
Trade Discounts
Reduction in list price of a product or service
- Used to provide incentives to larger customers or certain consumer groups (senior citizens, military)
Sales Returns and Allowances
Customers are sometimes dissatisfied with a product or service. IS A Contra revenue accounts
Sales Return
Customer returns a
product
(a) Seller issues a cash
refund if original sale
was for cash
(b) Seller reduces balance
of accounts receivable
if original sale was on
account
Sales Allowances
Customer does NOT
return a product
(a) Seller issues a cash
refund if original sale
was for cash
(b) Seller reduces balance
of accounts receivable
if original sale was on
account
Contra revenue accounts
Reported with total revenues in the income statement, but with negative balances
Sales Discount
Offer a customer a reduction if payment is made within a specified period of time (Contra revenue account)
2/10, n/30
2/10 means a 2% discount if paid in 10 days
n/30 means if you don't take the discount full payment is due in 30
Contra revenue account
Reported with total revenues in the income statement, but with a negative balance
Compute Net Revenue
Total Revenue - Sales Discounts - Sales Allowances = Net rev
Allowance Method
The GAAP Method of reporting accounts receivable for the net amount expected to be collected.
• Companies are required to:
Estimate future uncollectible accounts
Record estimates in the current year
• Estimated uncollectible accounts
Reduce assets (accounts receivable)
Increase expenses (bad debt expense)
contra asset
Percentage-of-receivables method
Method of estimating uncollectible accounts based on the percentage of accounts receivable expected not to be collected.
Estimating Uncollectible Accounts:2 Methods what are they?
Percentage-of-receivables method & Aging method
Aging method
Basing the estimate of future bad debts on the various ages of individual accounts receivable, using a higher percentage for "old" accounts than for "new" accounts. basically, older accounts are probably not gonna get collected
Writing Off Accounts Receivable
When it becomes clear the customer will not pay, the company writes off the customer's account balance as uncollectible
write-off do what
Reduces the balance of Accounts Receivable
Reduces the balance of the Allowance for
Uncollectible Accounts
The write-off has no effect on total assets
(balance sheet) or total expenses (income
statement)
When writing off an uncollectible account:
total assets are unchanged. There is no decrease in total assets and no decrease in net income.
Direct Write-Off Method
Write off bad debts only at the time they actually become uncollectible. Write off bad debts only at the time they actually become uncollectible
Comparing the Allowance Method and the Direct Write-off Method for Recording Uncollectible Accounts
• Allowance account is credited for the estimate and
debited for the actual write-off (balance cancels)
• Over both years, debit Bad Debt Expense and credit
Accounts Receivable
Difference between the methods is timing
Inventory
includes items a company intends for sale to customers
Also includes items that are not yet finished
products
Generally reported as a current asset in the
balance sheet

represents the cost of
inventory not yet sold at the end of the period
Cost of goods sold
is the cost of the inventory that is sold during the period
Reported as an expense in the income statement

represents the cost of
inventory sold.
Service companies record revenues when....
providing services to customers.
Merchandising and manufacturing companies record revenues when...
selling inventory to customers.
Raw Materials Inventory
is the cost of components that will become finished products
Work-In-Process Inventory
consists of products that are not yet complete
Merchandise company inventory
Wholesaler / retailer
Manufacturing company Inventory
raw materials, work in process, finished goods
multiple-step income statement
An income statement that reports multiple levels of income (or profitability).
Gross Profit = ________ - ___________
net sales - cost of goods sold
Operating income = ________ - ___________
gross profit - operating expenses (normal profit operations)
Income before income taxes =
operating income + nonoperating revenues - nonoperating expenses
Net income
ALL Revenues - ALL Expenses
specific identification method
Inventory costing method that matches or identifies each unit of inventory with its actual cost. (think logical)
First-in, first-out (FIFO) method
Inventory costing method that assumes the first units purchased (the first in) are the first ones sold (the first out)
Last-in, first-out (LIFO) method
Inventory costing method that assumes the last units purchased (the last in) are the first ones sold (the first out).
Weighted-average cost Method
Inventory costing method that assumes both cost of goods sold and ending inventory consist of a random mixture of all the goods available for sale
Generally, FIFO more closely resembles the actual physical flow of inventory. When inventory costs are rising, FIFO results in___________
higher reported inventory in the balance sheet and higher reported income in the income statement.
Conversely, LIFO results in _______
a lower reported inventory and net income, reducing the company's income tax obligation.
The three major inventory cost flow assumptions are
FIFO (first-in, first-out), LIFO (last-in, last-out), and weighted-average cost.
Perpetual Inventory System
•Maintains a continual
record of inventory
•Helps a company better
manage inventory levels
Periodic Inventory System
•Does not maintain a
continual record of
inventory
•Periodically adjusts for
purchase and sale of
inventory
Inventory Turnover Ratio
cost of goods sold/average inventory
Average Days in Inventory
365/inventory turnover ratio
gross profit ratio
gross profit/net sales
The inventory turnover ratio indicates...
the number of times the firm sells, or turns over, its average inventory balance during a reporting period.
The gross profit ratio measures...
the amount by which the sale of inventory exceeds its cost per dollar of sales.
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