What is a liability account for estimated refunds and allowances that will be paid or granted for customers in the future.
customer refunds payable
estimated returns are
a current asset that is part of the adjusting process. Represents an estimate of the appoint of merchandise that will be returned by customers.
what type of income statement does not have gross profit and income from operations
single step income statements
what do purchase orders do
authorizes the purchase of the inventory from an approved vendor
what establishes an initial record of the receipt of the inventory when it is received
receiving report
receiving report and purchase order are compared to
make sure the inventory received is what was ordered
The amount of inventory is always available in the
subsidiary inventory ledger
Inventory is defined as
tangible resource that is held for resale in the normal course of operations
internal control is...
the system of policies and procedures that a company puts in place to provide reasonable assurance that the companies
1. operations are effective and efficient
2. financial reporting is reliable
3. complying with laws and regulations
internal control report
an annual report in which management states its responsibility for internal control and provides an assessment of internal control
internal control report contains the following:
1.
2.
1. a statement that it is management's responsibility to establish and maintain adequate internal control structure and procedures for financial reporting
2. an assessment of the effectiveness of internal control structure and procedures for financial rep
control environment
the foundation for all other components of internal control. the atmosphere in which the members conduce activities. the "tone at the top
risk assessment
the identification and analysis of risks, with the goal of effectively managing then. ongoing organizational activity
risk assessment
1. e
2. a
3. c
1. estimates the significance of risk
2. assess the likelihood of the risk occurring
3. consider what actions should be taken to manage the risk
control activities are
the policies and procedures established to address the risks that threaten the achievement of organizational goals
sarbanes oxley act
passed by congress to maintain public confidence and trust in the financial reporting of companies
sarbanes oxley act only applies to
publicly held companies who's stock is traded on public exchanges
safeguarding assets, accurately processing information and ensuring compliance with laws and regulations are part of _______ _______
internal control
the five elements of internal control are
1. control environment
2. risk assessment
3. control procedures
4. monitoring
5. information and communication
the _______ ___________ is the overall attitude of management and employees about the importance of controls.
control environment
three factors influencing a company's control environment are
1
2
3
1. management philosophy and operating style
2. the company's organizational structure
3. the company's personnel policies
what is segregation of duties
a technique that limits one person's control over a particular task or area of a company
what is independent verification
the prices of reviewing and reconciling information within an organization
internal control is limited due to
1.
2.
1. human error
2. cost-benefit analysis
cash includes
coins, currency, checks, money orders, and money on deposit with a bank
explain the purpose of a cash short and over account
salespeople sometime make errors in making change for customers. the amount of cash on hand may not equal the amount of cash sales.
if there has been a cash shortage, cash short and over will be ________
debited
Cash xxx
Cash short and over xxx
sales xxx
if there has been a cash over cash short and over will be ________ for the overage.
credited
at the end of the accounting period, a debit balance in cash short and over is included in ____________ _______ on the income statement
miscellaneous expense
at the end of the accounting period, a credit balance in cash short and over is included in the _____ ______ _______ on the income statement
other income section
separating the duties of the cashier's department (which handles cash) and the accounting department (which records cash) is a _______
control
what is cash received by EFT? why do companies encourage customers to use this?
electronic funds transfer. ETF's cost less than receiving cash payments from mail, enhance internal controls over cash and reduce late payments from customers
control of cash payments should provide reasonable assurance that
1.
2.
1. payments are made for only authorized transactions
2. cash is used effectively and efficiently
a _______ ______ is a set of procedures for authorizing and recording liabilities and cash payments
voucher system
a ______ is any document that serves as proof of authority to pay cash or issue an electronic funds transfer
voucher
a major reason why companies use bank accounts is for _______ _______
internal control
what are some control advantages of using bank accounts
bank accounts...
-reduce the amount of cash on hand
-provide an undefended recording of cash transactions. Reconciling the balance of the cash account in the company's records with the cash balance according to the bank is an important control
bank statements
a summary of all transactions. mailed or sent electronically to the company each month
the company's checking account balance in the bank record is a _______. Thus, in the bank records, the company's account has a ______ balance
liability, credit
a credit memo entry on the bank statement indicates an ________ (credit) to the companies account
increase
a debit memo entry on the bank statement indicated a ________ (debit) to the company's account
decrease
bank reconciliation
the process of reconciling the differences between the cash balance on the bank statement and the cash balance in a company's records
the first step of a bank reconciliation is to
reconcile the bank balance to the actual cash balance.
1. start with the bank's unadjusted balance as of the end of the month
2. add any deposit in transit
3. subtract any outstanding checks
deposit in transit
any deposits that have been made by the company but do not appear on the bank's statement because it has not cleared the bank as of the statement date
outstanding checks
checks tha have been distributed by the company but do not appear on the bank statement because they have not been processed as of the statement date
the second step of a bank reconciliation is
to reconcile the company balance to the actual cash balance
1. start with the company's unadjusted balance as of the end of the month
2. add and credit memorandums
3. subtract and debit memorandums
credit memorandums
a notification of an addition to the cash balance on the bank statement. they arise when the bank collets cash on behalf of the company, often through the collection of a receivable or interest on a note
debit memorandum
a notification of a subtraction from the cash balance on the bank statement. common examples include service charges and customer checks that were returned for insufficient funds (NSF checks)
the final step of a bank reconciliation is to
account for any error that could have been made either on the bank's side or the company's side.
any debit memorandum is a _______ charge
service charge
any credit memorandum is a ________ of an account receivable
collection
petty cash funds
an amount of cash kept on hand to pay for minor expenditures.
how do you establish a petty cash fund?
by writing a check for the amount of the fund, cashing the check, and placing the cash under the care of an employee designated as a custodian
How to record the establishment of a petty cash fund:
Date ________ xxx
____ xxx
Date: Petty cash xxx
cash xxx
When are entrys made for the fund?
Only when it needs to be replenished. No entries are made for when payments are made from the fund
how do you replenish the petty cash fund?
as the cash fund decreases, remaining cash in the fund is counted and the company cashes a check for the amount that brings the total cash in the fund back to the original balance
Example: at the end of june the petty cash receipts indicate expenditures for the following items:
office supplies: 380
postage (debit office supplies):22
store supplies:35
miscellaneous administrative expense:30
Total:467
The entry to replenish the petty
Aug 31. Office Supplies 402
Store supplies: 35
misc adminexpense:30
cash: 467
if receipts are less than money paid out, there is extra cash in there (cash over); record:
Aug 31. Office Supplies: 402
Store supplies: 35
misc admin. expense:30
xxxxx 2
cash: 469
xxx= cash short and over
: if receipts are more than money paid out, there is missing cash (cash short); record:
Aug 31. Office Supplies: 402
Store supplies: 35
misc admin. expense:30
xxxxx 2
cash: 469
cash short and over
cash equivalents:
any investment that is readily converted into a known amount of cash, and has an original maturity date of three months or less.
what are examples of cash equivalents:
treasury bills, money market accounts, commercial paper, etc
restricted cash:
cash that is restricted for special purposes and is usually reported separately from cash since the restricted cash is not readily available to pay off debt and other obligations
free cash flow:
the excess cash a company enervates beyond what it needs to invest in productive capacity and pay dividends to its stockholders
free cash flow=
cash flows from operating activities- capital expenditures- dividends
receivables:
all money claims against other entities including people, companies and other organizations
the most common transaction creating a receivable is
selling merchandise or services on account
accounts receivable is
an amount owed by a customer who has purchased the company's product or service. sometimes referred to as trade receivables because they arise from the trade of the company
receivables are recorded at the time of the sale.
Date ________ _______ xxx
________ xxx
Accounts receivable xxx
sales xxx
Sometimes customers return a produce instead of paying for it which affects the accounts receivable. To record the return of an item:
Date ________ ______ ___ _______ xxx
_______ ________ xxx
sales returns and allowances: debited
accounts receivable: credited
purchases discounts
to encourage buyers to pay before the end of a credit period sellers offer discounts
what does 2/10, n/30 mean
the buyer will have a 2% discount if they pay within 10 days of the invoice date. the net about is due in 30 days
an example of a sales discount is:
Date _______ xxx
_____ ________ xxx
_______ ________ xxx
Date: cash xxx
sales discount xxx
Accounts receivable xxx
some companies don't pay off their receivables, which means companies must
write off and estimate bad debt
what is bad debt
account receivable that won't be collected
the operating expense recorded from the losses from the inability to collect accounts receivables
bad debt expense
net realizable value
amount of cash that a company expects to collet from its accounts receivable
two methods of accounting for uncollectible receivables are
1. the direct write off method
2. allowance method
why is bad debt considered an operating expense
since uncollectible accounts are a normal part of any business
under the ______ _____-___ method, bad debt expense is recorded when a company determines that a receivable is uncollectible.
direct write-off method
Once it is determined that a company will be unable to collect from someone they write off the A/R with the following entry:
Date ______ _____ _______ xxx
_______ ________ xxx
Date:Bad debt expense xxx
accounts receivable xxx
under the ______ ____-___ method, bad debt expense is recorded and the accounts receivable is directly written off
direct write-off
which method of accounting for uncollectible receivables is not accepted under GAAP
Direct write-off
the ________ method, splits the accounting into two entries. one to record an estimate of bad debt expense and another to write off receivables when they become uncollectable
allowance method
When recording the sale of a good under the allowance method:
Date: _______ _________ xxx
_______ xxx
Date:Accounts Receivable xxx
Sales xxx
when a bad debt expense is estimated under the allowance method:
Date:___ ____ _______ xxx
________ ___ ___ __________ xxx
Bad debt expense xxx
allowance for bad debt xxx
When bad debt is recognized under the allowance method, the _______ _______ is not directly written off-instead an account called the allowance for bad debt is credited
accounts receiveable
when the account is written off under the allowance method:
Date: _______ ___ __ ____ xxx
_______ _______ xxx
Allowance for bad debt xxx
accounts receivable xxx
when the account is recovered under the allowance method:
Date: _______ _________ xxx
_____ __ ___ ____ xxx
Accounts receivable xxx
allowance for bad debts xxx
when the account is collected under the allowance method:
Date: ____ xxx
_____ _______ xxx
cash xxx
accounts receivable xxx
notes receivable
amounts that customers owe for which a formal, written instrument of credit has been issued. if a notes receivable are expected to be collected within a year they are classified on the balance sheet as a current asset
what are the three methods to determine bad debt expense
1
2
3
1. percentage of sales approach
2. percentage of receivable approach
3. the aging of accounts receivable approach
estimating bad debt expense using the percentage of sales approach:
Sales for the year were $750,000, and gross profit was $450,000. The company estimates that 5% of sales will be uncollectible.
What is the company's estimated bad debt expense for the yea
$750,000 * .05 = $37,500 = Bad Debt Expense
Bad Debt Expense xxxx$37,500
Allowance for Bad Debt xxxxxxxxxxx$37,500
Bad debt expense= ______ x _____
bad debt expense= credit sales x bad debt as a percent of credit sales
estimating bad debt expense using the percentage-of-receivables approach:
Rachel's Clothing Company has a receivables balance of $15,000 at the end of the year. Based on past history, Rachel estimates that it will not collect 2% of its receivables balance
It's important to note that the percentage of receivables gives you the desired balance of the allowance account. UNLIKE % of sales (which gives you bad debt expense),
you need to use the existing balance and the desired balance that you just calculated t
When estimating bad debt expense: percentage of receivables gives you the ______ _______ while the percentage of sales gives you ___ ____ _______
percentage of receivables- desired balance
percentage of sales- bad debt expense
issuance of a note would be recorded as:
Date: _____ _________ xxx
_____ xxx
notes receivable xxx
sales xxx
how do you compute interest on a note:
interest=
interest= face amount (value of note) x annual interest rate x term (n months/12)
the _______ _____ is the amount that must be paid at the due date of a note, which is the sum of the face amount and the interest
maturity value
when its time to collect a note
____ xxx
________ _________ xxx
_________ _________xxx
_________ __________xxx
cash xxx
interest receivable xxx
interest revenue xxx
notes receivable xxx
if the maker of a note fails to pay the note on the due date, the note is a _________ ____ _______
dishonored note receivable
inventory is 1
a tangible resource that is held for resale in the normal course of operations
two primary objectives of control of inventory are
1
2
1. safeguarding inventory from damage and theft
2. reporting inventory in the financial statements
the purchase order
authorizes the purchase
when inventory is received, a ________ _____ establishes an initial record of the receipt of the inventory
receiving report
inventory is recorded at the _________ ____ which includes all of the costs incurred to get the inventory delivered, and if necessary, prepared for resale.
acquisition cost
_______ ________ should be taken at the year end to make sure that the quantity o inventory reported in the financial statements is accurate
physical inventory
under the _________ _______ ____ inventory and cost of goods sold are adjusted with each individual sale
perpetual inventory system
under the _______ _______ ______ the inventory account is updated only at the end of an accounting period.
periodic inventory system
under the periodic inventory system, instead of recording purchases into inventory, they would be recorded in a temporary account called ________ with is closed into inventory at the end of the period
purchases
what are the 4 methods used to estimate was cost of goods sold (and ending inventory) is at the end of the period
1
2
3
4
1. specific identification
2. lifo
3. fifo
3. moving average
what is specific identification method of estimating what cost of goods sold and ending inventory is at the end of a period
this method determined cost of good sold based on the actual cost of each inventory item sold. To use this method a retailed must know which inventory item is sold and the exact cost of that particular its,. This method is used by companies whose inventor
LIFO (last in first out)
this calculates cost of goods based on the assumption that the last unit of inventory available for sale is the first unit sold
FIFO (first in first out)
calculates cost of goods sole based on the assumption that the first unit of inventory available for sale is the first unit sold
Moving average inventory cost method
calculates the cost of goods sold based on the average cost of inventory available for sale
in order to calculate moving average, sum _____ ____ and then divide that by the sum of the units. this will give you an average for the unit cost
total cost
a ________ ________ system foes not update the inventory and cost of goods sold accounts during the period.
periodic inventory system
during the periodic inventory system, when purchases are made they are recorded in a temporary account called
purchases
why do companies have to estimate ending inventory using the periodic inventory system?
when sales are made, the resulting revenue is recorded, but not the cost of goods sold
Under the________ ______, all of the necessary information to fill out the Beginning Inventory, Purchases, and COGAS units and total costs should be available within the problem.
periodic system,
for ending inventory under FIFO you want to use the prices listed for the ____ ending inventory that you have on hand
last
for ending inventory under LIFO, you want to use the ____ values of your beginning inventory to calculate ending inventory
first
when comparing inventory costing methods, FIFO will give the _______ ending inventory and the ______ cost of goods sold
highest ending inventory
lowest cost of goods sold
when comparing inventory methods, moving average will give the _____ ending inventory and the _____ cost of goods sold
middle ending inventory and middle cost of goods sold
when comparing inventory methods, LIFO will give you the ______ ending inventory and the _______ cost of goods sold
lowest ending inventory
highest cost of good sold
who would a company choose FIFO?
because it yields the lowest cost of goods sold, which in turn will allow for a higher net income at the end of the period
who would a company chose LIFO?
because it allows for a tax deferral or a temporary delay in the payment of income taxes.
if the market is lower than the purchase cost, the ______ method is used to value the inventory
lower-of-cost-or-market-method (LCM)
Market, as used in the lower of cost or market, is the ___ _________ _____ of the inventory
net realizable value
how is net realizable value (market value) determined?
Net realizable value=
net realizable value= estimated selling price- direct cost of disposal
direct costs of disposal include
selling expenses such as special advertising or sales commisions
the amount of any price decline is included in the ____ __ ____ ____
cost of goods sold
A primary advantage of using the lower of cost or market method is
Amount of any price decline is included in cost of goods sold. this reduces gross profit and net income in the period in which price decline occurs. this matching of pride decline to the period in which they occur is an advantage of LCM method
inventory is usually reported in the _______ ______ section of the balance sheet
current assets
any errors in inventory will affect
the balance sheet and the income statement
when goods are purchased or sold ___ ________ _____ title passes to the buyer when the goods are shipped
FOB shipping point
when the terms are ___ ___________ title passes to the buyer when the goods are received
FOB destination
inventory errors often arise from _________ ________
consigned inventory
inventory errors are
errors in counting inventory that will affect both the balance sheet (through inventory) and the income statement (through cost of goods sold)
how is the balance sheet affected by inventory errors
through inventory
how is the income statement affected by inventory errors
through cost of goods sold. whenever there is a sale, there is also an entry that debits cost of good sold and devalues inventory in the form of credit
cost of goods sold=
beginning inventory + purchases= cost of goods available for sale-ending inventory= cost of goods sold
inventory errors will misstate the ______ _______ amounts for costs of goods sold, gross profit and net income
income statement
on the income statement: if beginning inventory is understated...
cost of goods sold:
gross profit:
net income:
are (overstated/understated)
cost of goods sold: understated
gross profit: overstated
net income: understated
on the income statement if beginning inventory is overstated:
cost of goods sold:
gross profit:
net income:
are (overstated/understated)
cost of goods sold: overstated
gross profit: understated
net income: understated
are (overstated/understated)
on the income statement if ending inventory is understated:
cost of goods sold:
gross profit:
net income:
are (overstated/understated)
cost of goods sold: overstated
gross profit: understated
net income: understated
on the income statement if ending inventory is overstated:
cost of goods sold:
gross profit:
net income:
are (overstated/understated)
cost of goods sold: understated
gross profit: overstated
net income: overstated
inventory errors misstate the inventory, current assets, total assets, and stockholders' equity on the _______ _____
balance sheet
on the balance sheet if ending inventory is understated:
inventory:
current assets:
total assets:
stockholders' equity:
are (overstated/understated)
inventory: understated
current assets: understated
total assets:understated
stockholders' equity:understated
on the balance sheet if ending inventory is overstated:
inventory:
current assets:
total assets:
stockholders' equity:
are (overstated/understated)
inventory: overstated
current assets: overstated
total assets:overstated
stockholders' equity:overstated
an example of when inventory balance must be estimated is
when inventory is destroyed by a natural disaster or when a company prepares interim financial statements
the _____ _____ ______ of estimating inventory uses a company's gross profit percentage to estimate the cost of goods sole and then ending inventory
gross profit method
The lower of cost or market rule is applied at the end of each accounting period by
comparing inventory costs to market values
Companies can compare costs and market values of
1
2
3
1) inventories in total,
2) major groups of inventories, or
3) individual inventory items.
when the cost is lower than the market value
nothing further is done
when the market value is lower than the cost
a company must adjust its inventory down to the lower market value
When a company adjusts its inventory down to the lower market cost what is the entry?
date: ____ __ ____ ____ xxx
_________ xxx
cost of goods sold: xxx
inventory xxx
_________ ________ measures the relationship between the cost of goods sold and the amount of inventory carried during the period. measures the number of times inventory is turned into sold goods during the year
inventory turnover
inventory turnover= (_____) / (____)
inventory turnover= (cost of goods sold) / (average inventory)
the number of days' sales in inventory
measures the length of time it takes to acquire, sell and replace the inventory
number of days' sales in inventory= (____)/(____)
number of days' sales in inventory = (average inventory) / (average daily cost of goods sold)
generally, the ______ the number of days in inventory, the more effective and efficient the company is in managing inventory
lower
generally, the ______ the inventory turnover, the more effective and efficient the company is in managing inventory
larger
a business may need to estimate the amount of inventory for the following reasons:
1. perpetual inventory records are not maintained
2. a disaster such as a fire or flood has destroyed the inventory records and the inventory
3. monthly or quarterly financial statements are needed, but a physical inventory is only taken once a year
the retail method of estimating inventory costs requires
costs and retail prices to be maintained for the merchandise available for sale. a ratio of cost to retail price is then used to convert ending inventory at retail to estimate the inventory cost
an advantage of the retail method is that
it provides inventory figures for preparing monthly statements
the gross profit method of inventory costing
uses the estimated profit for the period to estimate the inventory at the end of the period
the process of spending cash, generating revenues and receiving cash are part of
the operating cycle
gross profit
excess of net sales over the cost of goods sold