Chapter 5/6/7/9 Flashcards
Merchandising Companies
Retailers, Wholesalers, Manufacturers
Inventory is classified into 3 categories by manufacturing companies
- Raw materials
- Work in process
- Finished goods
Operating Cycle
Period from cash is spent to buy inventory/provide service to cash is collected
Net Income
Sales - (CoGS & Expenses) - Income Tax
淨利
Gross profit
Sales - Cost of Goods Sold
毛利
=Gross Margin
=Merchandising Profit
Profit Margin
Net Income / Sales (%)
淨利率
(=Sales-Expenses/Sales)
Gross Profit Margin
Gross Profit / Sales (%)
毛利率
=[Sales-CoGS]/Sales
Profitability Measures
Gross Profit Margin & Profit Margin
Generally low-turnover businesses have higher profitability
Steps to determine Cost of Goods Sold in Periodic Inventory System
- Determine Beginning Inventory
- Determine Cost of Goods Available for Sale
(= Beginning Inventory + CoG Purchased) - Determine Cost of Ending Inventory
(Physical count) - Determine Cost of Goods Sold
(= CoGAfS - Ending Inventory)
CoGS is a residual number
Cost of Goods Available for Sale
Cost of Goods Purchased
+ Beginning Inventory
= Cost of Goods Sold
+ Ending Inventory
Record entries of Sales in perpetual inventory
Return Rate = 5%
Sales
Dr Cash or A/R (100%)
Cr Sales (95%)
Cr Refund Liability (5%)
CoGS
Dr CoGS (95%)
Dr Est. Inv. Returns (5%)
Cr Inventory (100%)
Record entries of Returns in perpetual inventory
Sales
Dr Refund Liability
Cr Cash or A/R
CoGS
Dr Inventory
or CoGS (if not resalable)
Cr Est. Inv. Returns
Accounts of Refund Liability / Estimated Inventory Returns
Liability / Asset
(both current)
Explain Purchase Discount
2/10 n/30
2% Discount (Cr Inv.) =
if payment made in 10 days
Due in 30 days anyway
FOB Shipping Point
Title transferred when leaving the seller. (Inventory +/-)
Buyer pays freight costs, record as Inventory.
Buyer is responsible for loss/damage in shipping.
FOB Destination
Title transferred when reaching the Buyer. (Inventory +/-)
Seller pays freight costs, record as Operating Expense (Freight Out).
Seller is responsible for loss/damage in shipping.
Perpetual / Periodic Inventory
Entries for every sale / Entries for every period
(IFRS) Expenses are classified by
-
Nature
E.g. Salaries, Depreciation, Advertising, etc. -
Function
E.g. CoGS, Admin Expenses, Selling Expenses, etc.
Entries of outflow payment of
$1500 in 10 days under 2/10 net 30
Dr Accounts Payable 1500
Cr Inventory 30
Cr Cash 1470
Categories of Inventory Expenses
- Cost of Goods Sold
- Operating Expenses
When costs rising,
compare FIFO & WAC
in CoGS / Inventory & N.I.
CoGS
FIFO < WAC
Inventory & N.I.
FIFO > WAC
If Inventory is Understated
(Inventory Errors)
Effects of
CoGS / Gross Profit / Net Income / Retained Earnings
CoGS Overstated /
G. Profit Understated /
Net Inc. Understated /
R/E Understated
4 Steps of Multiple-Step Statement of Income
-
Gross Profit 毛利
= Sales - CoGS -
Income from Operations 營業利益
= Gross Profit - Operating Exp -
Income before Income Tax 稅前淨利
= Income from Operations + Non-Operating (Rev - Exp) -
Net Income (稅後)淨利
= Income before I/T - I/T Exp
Non-Operating Activities
Rev / Exp not related to company’s main operations
Non-recurring, not sustainable, less predictive value
E.g. Interest income & expense / Rent income / Investment income / Foreign exchange gain or loss
The Income including Net Income & unrealized gain/loss on investments or foreign currency translation
Comprehensive Income
The Income including
unrealized gain/loss on investments or foreign currency translation
Other Comprehensive Income
(OCI)
Net Realizable Value (NRV)
Future economic benefit that company will receive when selling inventory goods.
NRV = Price - Cost to sell
(可變現淨值)
Inventory Cost > NRZ
(Net Realizable Value)
Debit / Credit ?
(A.J.E.)
Dr CoGS
Cr Inventory
Consigned Goods
寄售商品
Inventory held by Consignee to sell
on behalf of Consignor (owner)
Consignor pays commission to Consignee.
Record in Consignor’s inventory
How to choose between FIFO & WAC cost formula?
- Closest to physical flow of goods
- Close to inventory’s recent cost
- Same cost formula for all inventories of a similar nature & use
Cost Formulas of Inventory
-
SI: Specific Identification
(closest to actual cost) - FIFO: First-in, First-out
- WAC: Weighted Average Cost
Inventory Turnover Ratio
CoGS / Average Inventory
([Beginning Inv + Ending Inv] / 2)
存貨周轉率
=庫存在一個會計週期內可賣完次數
Liquidity Ratio
Days in Inventory Ratio
365 / Inventory Turnover Ratio
= 365 / (CoGS / Average Total Inventory)
存貨周轉天數
=庫存可在幾天賣完
Liquidity Ratio
Impairment Loss
Calculation & J.E.
= Carrying Amount - Fair Value
= [Purchase - Accum. Depreciation] - Fair Value
Dr. Impairment Loss
Cr. Accumulated Depreciation - ___
Operating Expense
Criteria to determine Capitalized / Operating expensed
-
Frequency of the Cost :
1-time / recurring - Benefit Period : Asset’s lifetime / 1-year
Land’s Capitalized Expenses
- Purchase Price
- Closing costs: Survey / Title Search / Legal fee
- Preparing: Clearing / Draining / Excavating / Grading
- Demolish/Remove unwanted bldg/structure - $ from salvaged materials
Land Improvements’ Capitalized Expenses
Driveways / Sidewalks / Fences / Lighting / Sprinklers / Parking Lots
Buildings’ Capitalized Expenses
- Purchase Price
- Closing costs: Legal fee
- Construct: Architect fee / Bldg Permit / Excavation / Interest costs until ready for use
- Ready for use: Remodelling / Replacing or Repairing Roof, Floor, Wiring, Plumbing..
Account of
Installation of Power Charging Station for Vehicle
Equipment
Account of
Replacing batteries of E-Powered Vehicles
Vehicles
Equipment’s Capitalized Expenses
- Purchase Price
- Taxes & Tariffs
- Freight & Transit Insurance
- Install, Test & Assemble
- Estimate cost of Dismantling / Removing / Restoring at end of useful life (retire)
Capitalize Expenditures
- Get equipment ready for its intended use
- Benefit equipment > 1 yr
- Increase Life / Productivity / Efficiency
- Normally significant & infrequently
Operating Expenditures
- Benefit current period only
- Maintain normal operating condition and often recur
- E.g. Repainting bldg / Replacing tires / Repairs & Maintenance Expense
5 components of good Internal Control Systems
-
Control Environment
Integrity is valued; “Setting the tone at the top” -
Risk Assessment
Mitigate risks/Reduce impact. Influenced by size & nature of the company -
Control Activities
Policies/Procedures in 5 activities -
Information & Communication
Info for internal/external users -
Monitoring Activities
Adequacy is monitored periodically
CRCIM
Which Control Activity
indicates that the most effective when only 1 employee (level) is authorized to perform a specific task?
Assignment of Responsibility
Ex.1 Need record employee name/number when same level employees performing the same task
Ex.2 Each cashier has respective cash drawer
Which Control Activity
indicates that tasks should be assigned to different individuals?
Segregation of Duties
Small businesses should perform more control activities to prevent fraud from less employees
Ex. Segregate responsibilities of authorization, receiving and recording $ to individuals
Which Control Activity
provides evidence of occurred transactions?
Documentation
Ex. Shipping documents, sales invoices, prenumbered cheques
Ex. Signed document involves Documentation & Assignment of Responsibility
Which Control Activity
is used to safeguard assets and enhance accuracy and reliability of accounting records?
Physical Controls
Including paying ALL payments with cheques and EFT
Which Control Activity
involves (internal/external) review of data prepared by employees, and comparisons between documents?
Review & Reconciliation
Internal Reviews are useful to keep assets from being stolen.
Large companies employs internal auditors for internal reviews.
External auditors are pro accountants hired to report if the company’s financial statements are fairly presented.
Limitations of Internal Control
-
Cost/Benefit Considerations
Benefit should > Cost - Human Error
- Collusion
- Management Override
3 Factors in Fraud Triangle
Opportunity / Financial Pressure / Rationalization
Postdated / Stale-dated / Returned Check = Cash?
False
EFT (Electronic Funds Transfer) for internal control and fraud
Better internal control but NOT eliminating fraud
Just-in-Time Approach
Avoid large quantities of inventory by ordering small quantities frequently, can improve Inventory Turnover Ratio
Entries recording of
NRV Writedown / Shrinkage
Dr. CoGS
Cr. Inventory
Return on Assets ratio
= Net Income /
Average Total Assets
([Beginning+Ending Assets]/2)
(%)
Efficiency of Net Income is generated from each dollar of Assets
Profit Margin x Asset T/O
= Return on Assets
Asset Turnover ratio
= Sales / Average Total Assets
([Beginning+Ending Assets]/2)
(Times)
Efficiency of Sales generated by each dollar of Assets
Profit Margin x Asset T/O
= Return on Assets
Expenditure account of
New truck’s license fee
Repairs & Maintenance Exp
CRA requires ___ to determine depreciation for income tax purpose
(Canada Revenue Agency)
Capital Cost Allowance (CCA)
