Exam #2 - Outline of Topics Covered
1. Purchasing Inventory from a supplier using credit or cash:
DR Inventory (asset) $XX
CR Cash $XX
2. Return items to supplier:
DR Cash $XX
CR Inventory $XX
3. Sale of Inventory:
You sell goods to a customer for $25 cash that you paid $10 for.
a. Record Revenue, Cash vs. credit
DR Cash $25
CR Revenue $25
b. Record COGS
DR COGS (expense) $10
CR Inventory $10
*profit is $15
4. Customer Returns
a. Record Sales Return and
b. Sales Returns is a contra revenue account
c. Record return of Inventory (flip original, DR cogs CR inventory)
Calculate a Sales Discount or a Purchase Discount
oWhat does 3/15, n30 mean?
3% discount if we pay within 15 days, otherwise entire bill is due in 30 days.
oIf invoice is $100, discount is $3 – ((100)(0.03))
*n30 (you have 30 days to pay full invoice, no discount)*
When does title transfer?
oFreight Charges
FOB Shipping Point: title transfers when it leaves the sellers warehouse
FOB Destination: title transfers when it reaches/arrives the buyers
Multi Step vs Single Step Income Statement
oMost companies are multi-step income statements
Subtotals: gross profit, (GP – Operating expenses = operating income), (interest
– non operating expense), net income.
Current Asset/Liability vs Non-current (Long-Term) Asset/Liability
oCurrent assets: assets turned to cash within a year (supplies, repaid rent/expenses, etc.)
Chapter 4 Accounting for a Merchandiser’s purchase of Inventory and Sales
About 7 questions on Ch. 6, the rest between 4 & 5
Record journal entries for the following transactions:
oLong-term assets: what we have longer than a year (machinery, buildings, etc.)
How do companies determine in what order to list assets on the balance sheet?
oIn order of liquidity; how quickly it turns into cash
How do you calculate Net Sales/Net Revenue?
oRevenue – Sales Returns – Sales Discounts
How do you calculate Gross Profit?
oRevenue – COGS
How do you calculate Gross Profit Margin or Gross Profit %?
oGross Profit/Revenue
How do you calculate Operating Income?
oGross Profit – Operating Expenses
How do you calculate Net Income?
oOperating Income – Nonoperating Expenses
How do you calculate Earnings Per Share or EPS?
oNet Income/Average Shares Outstanding
Chapter 5 Inventory
Inventory Costing Methods. Be able to calculate Cost of Goods Sold and Ending Inventory under
Perpetual: Beg. Inv. 5@$3 and purchase 6@$4, sell 7@$10 each.
oLIFO: COGS = (6)($4) + (1)($3) = $27, ending inventory (4)($3) = $12
oFIFO: COGS = (5)($3) + (2)($4) = $23, ending inventory (4)($4) = $16
oAverage Cost: Total Cost/Total Units = $39/11 = $3.55
COGS = (7)($3.55) = $24.82, ending inventory = (4)($3.55) = $14.20
When would you use the Specific Identification costing method?
oUnique high dollar items/something of higher value; high end jeweler
When would you use the Gross Profit costing method?
oEstimate ending inventory (insurance claim) and also used by retail companies.
Calculate Cost of Goods Available for Sale
oBeginning Inventory + Purchases = cost of goods available for sale
oEnding Inventory + COGS = cost of goods available for sale
Lower of Cost or Market-determine whether inventory needs to be written down, and by how
much. Buy inventory for $500 and now you have it listed for sale for $450
Inventory Shrinkage-what is inventory shrinkage (vs Lower of Cost or Market)
oWhat is the journal entry to record Inventory Shrinkage
oDR COGS $XX
CR Inventory $XX
When prices are increasing what does this mean for LIFO vs FIFO: COGS, Net Income, and
Inventory (which is higher/lower)
oFIFO
$3 COGS
$4 Ending Inventory
Low expenses, high net income
oLIFO
$3 Inventory
$4 COGS
Higher expenses, lower net income
When prices are decreasing what does this mean for LIFO vs FIFO: COGS, Net Income, and
Inventory (which is higher/lower)
oFIFO
$5 COGS
$3 Inventory
High expenses, low net income
oLIFO
$5 Inventory
$3 COGS
Low expense, high net income
Chapter 6 Internal Control, Audit, Fraud, and Ethics
SEC (Securities and Exchange Commission)
oApproves accounting standards and also governs US stock exchanges.
oThey require all public companies to follow US GAAP and that all public companies get
audited by a CPA.
oTheir main goal is to protect the investor.
oRequires an audit
FASB – writes accounting standards - US GAAP (generally accepted accounting principles)
Internal Control
oA plan to safeguard assets (minimize theft)
Separation of duties (one handling cash, one recording transactions)
oImproves the accuracy and reliability of accounting information
Training employees
Fraud-Deception for personal gain.
oTypes of embezzlement
What is collusion?
When 2 or more people work together to commit fraud
What is an expense scheme?
Try to get reimbursed for more than your expenses
What is a cash register scheme?
Taking money from cash registers; recording false transactions
(pocketing cash)
What is a check tampering scheme?
Change who the check is written to (yourself) and cash the check
Fraud Triangle: all 3 have to be in play for fraud to occur
oPerceived Pressure
Need money for whatever reason (pay medical bills)
oRationalization
Justification for stealing (I don’t get paid enough)
oPerceived Opportunity
You think you can get away with it
What is an Audit?
oThe process CPAs use to verify financial statements
Audit Opinion
oUnqualified or clean
Financial statements are fairly presented
oQualified
The statement has to be qualified (something they weren’t able to audit)
Sarbanes-Oxley Act (SOX) – 2002 Act passed by Congress as a result of Accounting Scandals:
oRestricts non audit services that an auditor can provide
oCEO and CFO must sign and attest to financial statements
oInternal Controls (Section 404)
Auditor now also assesses internal controls
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