Acct 229 Exam 2

keeps a running total of inventory.

used in companies with low-volume, high-priced inventory.

make two entries: record sale and update inventory.

recognizes a loss.

update at the end of the period.

purchased items are debited to Purchases acct.

Uses COGS formula.

used in companies with high volume, wide variety of goods.

Beg invt

+ net purch

= GAS

- END invt

= COGS

purchases

- purch R&A

- purch disc

+ freight-in

= net purch

dr purchases (quantity x price)

cr AP/cash

dr inventory (quantity x price)

cr AP/cash

dr cash (quantity x price)

cr sales revenue

dr cash (quantity x price sold for)

cr sales revenue

dr COGS (quantity x price bought for)

cr inventory

COGS formula (loss included in cogs)

dr end invt

dr cogs

cr beg invt

cr purch

sales rev - cogs = net income

dr loss

cr invt

sales rev

- cogs

= gross profit

- loss

= net invt

title transfers to buyer when goods are accepted by the carrier

buyer pays freight-in

title transfers to buyer when goods are delivered to destination

seller pays freight-out, an operating expense on income statement

owners transfers physical goods to agent for purposes of selling without gibing up legal title

small quantity of inventory, high-priced items.

tracks the actual physical flow of goods.

each item is coded with specific unit cost.

uses weighted average of all costs for GAS.

assigns average cost to end invt and cogs.

total cost of gas/total # units avb for sale

end invt = units left x avg price

cogs = units sold x avg price

first in, first out.

advantages: assigns current cost to inventory, when inventory turnover is rapid.

disadvantages: fails to match recent costs with revenues, if prises are rising net inc is overstated

last in, first out

advantages: matches current costs with current revenues, in periods of rising prices net income is lower so it reduces income tax (if lifo is used for tax returns, it must be used in financial statements)

disadvantages: gives non-current value to inventory on balance sheet

used to estimate invt for interim stmts or that has been destroyed

1: determine GP% = gross profit/net sales (net sales - cogs = GP)

2: net sales x (1-GP%) = est COGS

3: GAS - COGS = end invt est

# times inventory is sold during the period

(beg invt + end invt) / 2 = avg invt

cogs/avg invt = ITR

investments with an original maturity of three months or less:

treasury bill, Certificate of Deposit, commercial paper, money market fund

1. record when received

2. deposit receipts intact

3. separation of duties

1. all majoy disbursements via check

2. pay only small misc expenditures from Petty Cash

3. prepare bank reconciliation

add deposits in transit, bank errors

less outstanding checks, bank errors

add notes collected by bank, interest collected, book errors

less NSF checks, service charges, overdraft charges, book errors

bank reduces your cash account, deduction on bank statement

bank increases your cash account, addition on bank statement

Cost of doing business on credit - uncollectible receivables. operating expense on the income statement. must report expense in the same accounting period you recognize the credit sale

wait until you can specifically identify the bad debt customer and then record bad debt expense. this method can only be used if AR are immaterial. problem: puts sales revenue in one period, and expense in another.

estimates uncollectible accounts at the end of the year through an adjusting entry, placing rev and exp in same period.

dr bad debt expense

cr allowance for doubtful accounts

estimate is a percent of sales for year. estimates bad debt expense.

dr BDE && cr ADA

estimate is a percent of ending AR. estimates ending allowance for doubtful accounts

dr BDE && cr ADA

Net realizable value

AR - ADA = NRV

no effect on either because asset and contra asset are both reduced by the same amount at the same time

total assets decreased because contra asset ADA is increased

net income decreased because BD expense increased

amount borrowed

expense for the borrower (the cost of borrowing) (interest revenue for the lender)

principal + interest (amount due on the due date)

interest rate expressed as an annual rate.

Land

plant and equipment with limited useful lives

purchase price + sales commission + back taxes + title fees + title insurance + legal fees + any land preparation costs - proceeds from salvage

improvements the company must maintain with limited useful lives such as fence, parking lot, driveway

purchase price + closing costs + brokers fees + commissions + remodeling costs

invoice price - discounts + freight in + installation cost + trial runs + sales tax

purchase group of assets for one lump sum price. allocate purchase price to each asset acquired to determine its historical price by either fair market value or weighted average of appraisal values when the purchase price of assets is less than FMV

allocates cost of asset to expense evenly over its useful life.

(cost of asset - salvage value) / useful life

accelerated depreciation method that records larger amounts of depreciation in early years of asset life

(2/useful life) x (cost - AD)

be careful not to depreciate past salvage value

assets useful life is based on the number of units it will produce over its entire life

(cost - salvage) / units in life = cost/unit

expected to benefit future periods by either increasing productivity, enhancing quality, or extending useful life

add new cost to book value and depreciate over remaining useful life

((BV + new cost) - salvage value) / life

normal recurring expenditures designed to maintain the asset

expense the cost in the period incurred

dr cash (amount received)

dr AD (total amount in account)

cr Asset (original cost)

cr gain/dr loss

patents, copyrights, trademark/tradename, franchises, goodwill

basically depreciation but no contra asset, amortize asset directly

research & development costs are expenses, not added to asset account