Chapter 5 Flashcards
A company received $110 from a customer. Out of $110, $10 is sales tax and $100 is a sales price for the product sold to the customer. In this case, how much revenues should a company recognize?
$100
Journal entry for sales tax case
(Dr) Cash goes up 110 (Cr) Sales tax payabe goes up 10 and revenues goes up 100
What are the two formats for thr Income Statement?
(1) Single-step income statement
(2) Multiple-step income statement
Top line item in multiple step income statement?
main line of revenue for the company
Equation for net sales?
gross sales - sales return and allowances - sales discount
Equation for gross profit?
Net sales - Cost of goods sold
What kind of account is sales returns, allowances and sales discounts?
A contra-revenue account (so we minus it)
Equation for operating income?
gross profit - operating expense
Equation for net income?
Operating incomes + other revenue / gain - other expenses / loss
Exampels of other revenues and other expenses?
Other revenue: winning a lottery
other expenses: (1) after lending CEO some money, CEO ran away with the money and disappeared, (2) Aliens attacked the warehouse and destroyed the company’s inventories
Gross profit margin ratio?
Gross profit/net sales
Net profit margin ratio?
Net income/net sales
Conditions to recognize revenue?
(1) Company has completed the earnings process - revenue has been earned (risk and reward of ownership transfderred)
(2) the amount earned can be measured
(3) Revenue will be collected from the buyer (collectibility)
(4) All future costs necessary to earn the revenue can be reliably estimated (e.g., warranty expenses)
If cash collection is in serious doubt can you recognize revenues at the point of delivery?
No
Inventory
(1) Items held for sale in the ordinary course of business or goods that will be used in the production of goods to be sold
(2) Inventory costs includes all costs reasonably necessary to prepare goods for sale (e.g., Freight-in, insurance premium, warehousing or storage costs, handling costs etc.)
What is FOB shipping point?
Buyer paying for the shipping. Tittle passes when the goods leave the warehouse of the seller. Freight costs by a buyer
What is FOB destination point?
Seller pays for shipping. Title passes when the goods are received at the buyer’s location. Freight costs by a seller.
For goods in transit, who assumes risk and reward of ownership under FOB shipping?
Buyers
For goods in transit,who assumes risk and reward of ownership under FOB destination?
Sellers
Matching principle
Expenses have to be matched with revenues during the same time period.
Why does freights cost become part of inventory on B/S under FOB shipping? What is the acocunting principle used here?
Because of mathcing principle
Costs of goods available for sale
Beggining inventory + purchase = cost of goods available for sales (NOT an account) = cost of goods sold + ending inventory
Cost of goods sold
Beginning inventory + purchase - End Inventory
What is a perpetual system?
COGS and (the reduction in inventory) is determined each time a sale occurs. When purchasing merchandise, inventory (permanent B/S account) is affected
What is the periodic system?
COGS is determined only at the end of the accounting period. When purchasing merchandise, temporary accounts (e.g., purchases) are affected and then calculate the cost of goods purchased at the end of the year
When does ownership of goods pass from seller to buyer in FOB shipping?
As soon as the goods are shipped (Buyer owns goods as soon as shipped and pays freight costs)
When does ownership of the goods pass from seller to buyer in FOB destination?
Until the goods are received by the buyer (Seller pays freight costs and owns goods until received by buyer)
On Dec 31, 2018, there are goods in transit. What allows sellers to recognize revenues in 2018?
FOB shipping point. Risk and rewards of ownership have to be transferred before recognizing revenues.
Journal entry for freight costs in FOB shipping?
(Dr) Inventory (increase)
(Cr) Cash (Decrease)
(freight cost become part of inventory on B/S)
Journal entry for freight costs in FOB destination?
(Dr) Freight-out (delivery exp) (increase)
(Cr) Cash (decrease)
(freight costs become delivery expense on I/S)
Why do freights costs become part of inventory on B/S under FOB shipping? What is the accounting principle applied?
Matching principle. When you recognize revenues, you must recognize the associated costs at the same time even if they occur at different times
Cash to cash cycle
A/R –> Collect cash –> operating cycle –> pay cash to buy inventory –> A/R
What is the cost of goods sold?
The total cost of merchandise sold during the period
Journal entry for freight costs (FOB shipping) under perpetual system
(Dr) Inventory (increase)
Cr) Cash (decrease
Journal entry for cash purchases under perpetual system?
(Dr) Inventory (increase)
Cr) Cash (decrease
Journal entry for on account purchases under perpetual system?
(Dr) Inventory
(Cr) A/P
Journal entry for purchase returns and allowance (deduction in purchase price) under perpetual system?
(Dr) A/P
(Cr) Inventory
What does a credit term of 2/10, n/30 mean?
2% cash discount on net purchase (total purchase - return and allowances) within 10 days, otherwise due 30 days from the invoice date
Journal entry for point of payment with discount (2/10, n/30) under perpetual system?
(Dr) A/P (decreases) 100
(Cr) Cash (decreases) 98 Inventory (decreases) 2
When purchasing inventories we took advantage of buy one get one free. Originally inventory costs 10 per item. With 10 we got two inventory items. In this case wht is the value of inventory?
10
T account for inventory?
(Dr) Beggining balance, freight costs paid, new purchases, ending balance
(Cr) Purchase return, purchase discount
(Ending balance on Dr)
A/P T account?
(Dr) Purchase return, purchase discount
(Cr) Beginning balance, new purchases
(ending balance on Cr. Assum freight costs paid in cash)
How to calculate new purchase amount?
End A/P = Beg A/P - Purchase reutrn - purchase discount + new purchase amount
When does inventory account increase?
New purchase
freight costs paid
When does inventory accoutn decrease?
Purchase return
Purchase discount
Equation for cost of goods purchased?
= net purchases + freight (FOB shipping)
Equation for net purchases
purchases - purchases return and allowant - purchase discount
Journal entry for purchase on account for periodic system?
(Dr) purchases
(Cr) Accounts payable
Journal entry for freight-in (FOB shipping) costs incurred under periodic system?
(Dr) Freight-in
(Cr) A/P
Journal entry for purchase return and allowances under periodic system
(Dr) Accounts payable
(Cr) Purchase returns and allowances
Journal entry for purchase discount occured under periodic system?
(Dr) A/P
(Cr) Cash, purchase discounts
Journal entry for cash sales of merchandise under perpetual system
(Dr) Cash
(Cr) Sales revenue
(Dr) COGS
(Cr) Inventory
Journal entry for credit salrs of merchandise under perpetual system?
(Dr) A/R
(Cr) Sales revenue
(Dr) COGS
(Cr) Inventory
Journal entry for returns and allowances under perpetual system?
(Dr) Sales returns and allowances (increases)
(Cr) A/R
(Dr) Inventory
(Cr) COGS
Journal entry for sales discounts under perpetual system (2/10, n/30 credit terms) under perpetual system?
(Dr) Cash 147
Sales discount 3
(Cr) A/R 150
Credit sale of 152 is made on Sept 1, term 2/10, net/30. Sales return of 3 ocurred on Sept 2. How much foes a company receive from a customer on Sept 10?
147
A/R T account?
(Dr) Beginning balance, sales
(Cr) Sales return, sales discount
(Ending balance on Dr)
Sales revenue T account?
(Dr) Sales return, Sales discount
(Cr) Beginning balance, Sales
(Enfing balance on Cr)
Journal entry for error correction under perpetual system when recorded inventories > actual inventories
(Dr) COGS
(Cr) Inventoru
Journal entry for error correction under perpetual system when recorded inventories < actual inventories?
(Dr) Inventory
(Cr) COGS
Number 1 cause for difference between actual inventory and recorded inventory?
Employee theft
What can we predict under perpetual system?
What ending inventory should be
What can we predict under periodic system?
What COGS should be during the year
Journal entry for cash sales under periodic system?
(Dr) Cash
(Cr) Sales revenue
Journal entry for credit sales under periodic system?
(Dr) A/R
(Cr) Sales revenue
Journal entry for returns and allowances under periodic system?
(Dr) Sales returns and allowances
(Cr) A/R
Journal entry for discounts under periodic system?
(Dr) Cash, Sales discounts
(Cr) A/R
How to determine COGS under perpetual system?
After summing up all COGS during the period. In principle it is not necessary to do adjusting entries except when actual is not equal to recorded
