Exam 2 Study Topics Flashcards
Merchandise Company vs. Service Company
-Difference is inventory (one has tangible goods, one does not)
-Merchandise company recognizes revenue when they deliver the product to the customer, while a Service company recognizes revenue as the service is performed
Periodic Inventory System
inventory entries are only recorded once a week, month, or year
Perpetual Inventory System
anytime a transaction occurs that affects inventory, inventory is directly affected most used today
Difference between Periodic and Perpetual Inventory Systems
Periodic: inventory is tracked at specific intervals
Perpetual: inventory is tracked continuously
Inventory Shrinkage
Difference between the inventory the company expects to have and the inventory they actually have (Expected ending inventory - Actual inventory)
Causes could be theft, damage, spoilage, fraud, or error
Single-Step vs Multi-Step Income Statement
Single-Step: Simple, less detailed, focuses on total revenues and expenses (SERVICE COMPANIES)
Multi-Step: More detailed, provides insights into gross and operating profits, preferred for larger or more complex businesses (MERCH COMPANIES)
Characteristics of the Specific Identification Inventory Cost System
-Companies use Specific ID when they want to record each cost separately
-Tracking each individual item in inventory, allowing for precise cost attribution to each unit sold
Lower-of-cost-or-market Principle
requires that merchandise inventory be reported in the financial statements at whichever is lower: the historical cost of the inventory or the market value of the inventory
Internal Controls Procedures
Assignment of Procedures, Segregate Duties, Restrict Access, Documents, Audit/Independently Verify
Internal Controls Components
CRIME
Control procedures, Risk assessment, Information system, Monitoring of controls, control Environment
Internal Controls Limitations
Human error, fraud, collusion, cost v benefit most important
Bank Reconciliation Purpose
to ensure that a company’s accounting records match the cash balances in its bank account (bank and book)
What journal entries are prepared after bank reconciliation is complete?
Bank Fees, Interest Earned, NSF Checks, and Errors
Goods Available for Sale
all the goods that could have been sold during this period (beginning inventory or purchases)
In periods of rising prices, FIFO presents…
higher gross profit, inventory, and taxes
