Chapter 3 Flashcards
merchandising business
generate revenue by selling goods
the goods purchased for resale
net income is
revenue minus expenses
accounts payable
money a company owes
inventory transactions
purchase and sell
transportation/ shipping cost, discounts
cost of sales
indicates how much a retail or wholesale business spends on the products it purchases from suppliers for resale.
new vehicle, used vehicle
gross profit
total cost of sales
selling and administrative costs
costs not included in inventory sometimes called period costs
SG&A often includes rent, utilities, legal fees and insurance.
balance sheet holds the
inventory which is sold, becoming cost of sales (selling price) on the income statement
perpetual inventory system
inventory is perpetually (continuously) throughout the accounting period
inventory increased for
merchandise/ purchased
inventory decreased for
merch sold
purchasing inventory often involves (4)
1) return inventory or receiving purchase allowances
2) taking purchase discounts
3) incurring transportation costs
4) recognizing inventory shrinkage
- a deduction from the invoice price granted
FOB
Free on Board
shipping point or destination
- transport-in: FOB shipping point, pay transportation
- transportation-out: FOB destination means seller is responsible for the freight cost
- Freight cost: the amount paid to a carrier company for the transportation of goods from the point of origin to an agreed location.
merchandising business include
retail companies and wholesale companies to sell merchandise inventory
merchandise inventory is an
asset
manufactures may not have high margins that is the
dealer
inventory costs are
product costs
- price of goods purchased
- handling and shipping costs
- transit insurance
costs not included in inventory are
selling and administrative costs
asset account:
expense account:
merchandise inventory
costs of goods sold
difference between sales revenue and cost of goods sold is
gross margin or gross profit
modern companies record their inventory through the
perpetual inventory system
gross margin percentage is found by
total revenue - cost of goods sold = gross margain
gross margin - all other expenses = operating income (net income)
(total revenue - COGS)/ net sales x 100
find return on sales %
operating profit/ net sales
signature card
signatures of the people authorized to sign checks
bank statement
checking accounts- report the beginning balance, additions for customer deposits, subtractions for the payment of checks
bank statement debit memos; describe transactions that reduce the customer account balance (bank liability)
bank statement credit memos; describe activities that increase customers account balance (banks liability)
bank reconciliation
explain the differences between the cash balance from the bank statement and the cash balance recorded in the depositors accounting records
begins with unadjusted bank balance:
the cash balance recorded by the recorded by the bank
final total is the true cash balance
the true cash balance
add current non-cash assets together and subtract from the total current assets
TCB= non-cash assets - total current assets
The American Institute of Certified Public Accountants (AICPA)
requires members to comply with the code of professional conduct
not including control domain
audits conducted by Certified Public Accountants (CPA)
In an audit, a CPA is required to obtain an understanding of a business’s internal control and assess fraud risk.
financial statement audit, types of audit opinions
unqualified opinion : An unqualified report concludes that the financial statements of a company are fair and transparent based on thorough research
adverse opinion : An adverse opinion states that the financial statements do not present fairly the financial position, results of operations, or cash flows of the entity in conformity with generally accepted accounting principles.
qualified opinion : an auditor’s declaration that there is an area of uncertainty in a company’s financial statements.
outstanding check
a written check that hasn’t been cleared by the bank
deposit in transit
money that has been received by the company and recorded in the company’s system
true cash balance =
unadjusted bank balance + the deposit in transit - outstanding checks
NSF
non-sufficient funds
banks refuse payment because the customer doesn’t have enough in that account
COSO’s framework
Control Environment; the integrity and ethical values the company has
Risk Assessment; monuments process of identifying potential risks in misted financial statements
Control Activities; “internal controls, segregation of duties”
Information and Communication; the internal and external reporting process
monitoring; assessing companies quality and watching overtime
The fraud Triangle is the concept that explains why workers commit fraud at a workplace this consists of;
opportunity, pressure, rationality
the “book”=
cash account
separation of duties include
authorization, recording, and custody of assets
cash is important because
its difficult to prove to rightful owner, has a universal appeal, and small quantities can hold a lot
human error is a common cause of
internal failure
in a checking account it reports
customer deposits made during the period
checks paid during the period
bank accounts beginning balance
cash is; checks,
money orders, bank drafts, and certain saving accounts
materiality
The materiality concept of accounting guides the recognition of a transaction. It means that transactions of little importance should not be recorded. A transaction may be recorded, but its relevance and significance should be kept in mind. For example, a newly purchased pencil is an asset of the business.
account receivable
notes receivable
are both…
buy now, pay later, usually short periods of time, not a lot of money
longer period, bigger amount of money, involves interest
are both assets
net realizable value of accounts receivable
represents the amount of receivables a company will actually collect
the face value less an allowance for doubtful accounts is equal to the net realizable value of the receivables.
allowance for doubtful accounts
what are the two accounts?
% of
estimate of what they don’t collect (uncollectables)
percentage of sales/ revenue (income statement approach)
percentage of accounts receivable (balance sheet approach)
net realizable value =
accounts receivable - allowance for doubtful accounts
when uncollectible accounts are estimated
there is a better change of matching revenues and expenses
the balance sheet reports the amount of cash the company expects to collect
bad debts expense
estimated uncollectible accounts expense
writing off uncollectible accounts is an
asset source transaction
FIFO
first-in, first-out
highest gross margain
LIFO
last-in, first out
Weighted average
average
beginning inventory + purchase = goods available to sell - cost of goods sold
= ending inventory
tangible resources include
property, equipment, natural resources
historical cost concept
an asset must be recorded at the amount paid for it
this amount includes the purchase plus any costs necessary to get the asset in the location and condition for its intended use
once the asset is recorded at its original cost on the balance sheet, it cannot be adjusted for any changes in its market value.
straight line depreciation expense=
use up asset as your making revenue
(asset cost - salvage value) / useful life
salvage value
expected market value of a fully depreciated asset
straight line method
same amount of depreciation expense each period
(cost - salvage value) / useful life = depreciation expense
double-declining balance
an accelerated method, produces more depreciation expense in the early years of an assets life and declining expense later
1/useful life x 2 = DDB rate
BV of asset BOY x DDB rate = depreciation expense
units of production
varying amounts of depreciation expense in different accounting periods
cost - salvage value / useful life in units = units of production
UoP rate x actual usage each year = depreciation expense
to calculate depreciation you need;
cost of the asset
useful life
any salvage
double-declining balance depreciation;
straight line rate percentage (1 / useful life) x 2 = DDB rate
promissionary note
legally documented credit agreements to settle potential disputes about payment terms like credit on a recently passed due account
maker, payee, principle, interest, maturity date, collateral
aging of accounts receivable
the longer an account is pasted due the less likely it will be paid
promissionary note; collateral
assets belonging to the maker that are assigned as security to ensure that the principle and interest will be paid when due
2/10 n/30
what is the discount? what are the days?
2% discount
A buyer will receive a 2% discount on the net amount if they pay the invoice in full within the first ten days of the invoice date. Otherwise, the full invoice amount is due in 30 days without a discount.
the inventory cost flow methods are;
LIFO, FIFO, Weighted Average
To determine the depreciation expense you
depreciation cost - salvage value
The recognition of depreciation expense acts to:
Decrease assets and stockholders’ equity, and does not affect cash flow
What term is used to describe the situation where there is a permanent decline in the value of an intangible asset
impairment`
