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Typically have a debit balance (as opposed to the credit balance in the typical revenue account). 3 Accounts are: Sales returns Sales allowances Sales discounts

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Contra Revenue Account (3 Accounts)

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Short-term, highly liquid investments that are: 1. Readily convertible to a known cash amount 2. Close to maturity date and not sensitive to interest rate changes

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Cash Equivalents

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How easily an asset can turn into cash to be used to pay for services or obligations

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Liquidity

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1.Verifying, approving and recording obligations for eventual cash disbursements 2.Issuing checks for payments

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Voucher System of Control

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Prepared periodically to explain the difference between cash reported on the bank statement and the cash balance on company's books.

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Bank Reconciliation

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Bank Statement Balance Add: Deposits in transit Deduct: Outstanding Checks Add or Deduct: Bank errors Book Balance Add: Collections made by the bank Add: Interest earned on checking account Deduct: Nonsufficient funds check (NSF) Deduct: Bank service charge Add or Deduct: Book errors

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Reconciling Items

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Set Time period: Monthly, Weekly

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Periodic

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Consistent

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Perpetual

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A document given to an account holder which states that the account balance has been decreased as a result of factors other than a cash withdrawal or a written check being cashed in. Debit memorandums can arise as a result of bank service charges or bounced check fees.

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Debit memorandum

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A document issued to a buyer by a seller in cases where purchased products are not delivered, or are returned by the buyer, which indicates a debt owed to the buyer for the value of the returned or undelivered goods.

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Credit memorandum

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The replacement cost of an item arrived at by deducting estimated carrying, delivery, and selling costs from its estimated selling price. (If item is damaged or obsolete)

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Market Value

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1. Handling cash is separate from record keeping of cash 2. Cash disbursements are made by check 3. Cash receipts are promptly deposited in a bank

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Control of Cash (3 Basic Guidelines)

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Damaged: Are not counted in inventory if they cannot be sold. Obsolete Goods: If these goods can be sold at a reduced price, they are included in inventory at a conservative estimate of their net realizable value

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Damaged or obsolete goods

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Goods shipped by the owner (the consignor), to another party (the consignee) who sells the goods for the owner. The consignor must report these items in inventory until sold

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Goods on Consignment

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Document generated by a user department or storeroom-personnel to notify the purchasing department of items it needs to order, their quantity, and the time frame.

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Purchase Requisition

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Requires management and auditors of publicly held companies to adhere to or perform specific requirements

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SOX

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Expenses related to day-by-day operation of a company (rent, utilities, insurance and managerial salaries)

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General and Administrative expenses

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Expenses within a business that are not directly associated with the productive of goods or services (salaries, advertising)

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Operating Expense

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2% Discount on Invoice if paid within 10 days; if not, then whole invoice is paid within 30 days

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Credit terms- 2/10, n/30

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Ownership transfers to buyer when good are passed to the carrier; Buyer pays transportation cost

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FOB Shipping Point

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Ownership transfers to buyer when good are passed to the buyers place of business; Seller pays transportation cost

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FOB Destination

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Protect assets. Ensure reliable accounting. Promote efficient operations. Urge adherence to company policies.

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Reasons for internal control procedures

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The costs of internal controls must not exceed their benefits. Human Error and Human Fraud

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Limitations for internal control

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The amount of sales generated by a company after the deduction of returns, allowances for damaged or missing goods and any discounts allowed

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Net Sales

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Inventory must be reported at market value when market is lower than cost. Defined as current replacement cost (not sales price).

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Lower of Cost or Market

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Can be applied three ways: (1) separately to each individual item. (2) to major categories of assets. (3) to the whole inventory.

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3 Way to Apply Lower of Cost or Market

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Reveals how much inventory is available in terms of the number of days' sales (Ending Inventory / COGS) x 365

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Equation: Days Sale in Inventory

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(Accounts Receivable / Net Sales) x 365

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Equation: Days Sale Uncollected

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Shows how many times a company turns over its inventory during a period. Indicator of how well management is controlling the amount of inventory available. COGS / Average Inventory Avg. Inv. = (Beginning Inventory + Ending Inventory) / 2

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Equation: Inventory Turn Over Ratio

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Total Assets / Total Liabilities

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Equation: Quick Ratio

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Quick Assets (Cash + S/T Investments + Receivables) / Current Liabilities Should be higher than a 1.0 to not face liquidity problems in the near future

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Equation: Acid-Test Ratio

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1. Debit - Credit Balances, Credit - Income Summary 2. Debit - Income Summary, Credit - Debit Balances 3. Debit - Income Summary, Credit - Retained Earnings 4. Debit - Retained Earnings, Credit - Dividends

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J/E: Closing Entries

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(2 Entries) Debit - Accounts Receivable, Credit - Sales Debit - COGS, Credit - Merchandise Inventory

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J/E: Record a sale for a merchandising company

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As Buyer: Debit - Accounts Payable, Credit - Merchandise Inventory As Seller (2 Entries): Debit - Sales Return and Allowances, Credit - Accounts Receivable Debit - Merchandise Inventory, Credit - COGS

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J/E: Record a return from sale of merchandise

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Debit - Accounts Payable, Credit - Merchandise Inventory, Cash

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J/E: Payment of merchandise within a discount period

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Debit - Cash, Sales Discount; Credit - Accounts Receivable

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J/E: Receipt of cash for merchandise within discount period

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Debit - COGS, Credit - Merchandise Inventory

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J/E: Entry to record shrinkage

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Seller's description of a cash discount granted to buyers in return for early payment

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Sales Discount

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Time period that can pass before a customer's payment is due

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Credit Period

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Time period in which a cash discount is available.

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Discount Period

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Net Sales - COGS

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Gross Profit

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Merchandise inventory includes all goods that a company owns and holds for sale, regardless of where the goods are located when inventory is counted.

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Merchandise Inventory

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Reduction in a receivable or payable if it is paid within the discount period

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Cash Discount

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Reduction below list or catalog price that is negotiated in setting the price of goods

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Trade Discount

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Net Sales - Cost of Goods Sold / Net Sales

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Equation: Gross Margin Ratio

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Percentage of dollar sales available to cover expenses and provide a profit

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Gross Margin

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FIFO - Ending inventory approximates current replacement cost LIFO - Better matches current costs in cost of goods sold with revenues W.A. - Smooths out price changes

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Advantages of each Cost Method

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FIFO, LIFO, Weighted Average, Other

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Frequency in Use of Inventory Methods (In Order)

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Establishing - Debit: Petty Cash, Credit: Cash Reimbursing - Debit: Expenses, Credit: Cash

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J/E: Establishing and Reimbursing Petty Cash

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Single Step has Net Sales - COGS - Operating Expenses = Net Income Multi-Step expands and has Sales - Discounts/Returns, COGS, and all the specific expenses

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What is the Difference Between a Single Step and Multi-Step Income Statement

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Refers to merchandise a buyer acquires but then returns to the seller

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Purchase Return

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A reduction in the cost of defective or unacceptable merchandise that a buyer acquires

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Purchase Allowance

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Requires a company to use the same accounting methods period after period so that financial statements are comparable across periods

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Consistency Concept

Harper College Exam #2 Accounting 101

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