Financial accounting chapters 5-8

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Perpetual inventory system
keeps a running computerized record of merchandise inventory
Purchase of merchandise inventory
Merchandise inventory DB
cash or accounts payable CD
purchase return
cash or accounts payable DB
merchandise inventory CD
payment of freight in
merchandise inventory DB
cash CD
payment with in discount period
accounts payable DB
cash CD
merchandise inventory CD
payment after discount period
accounts payable DB
cash CD
credit term 2/10?
a 2% discount if you pay with in 10 days
credit term N/60?
no discount payment due within 60 days
FOB Destination
situation in which the buy takes ownership to the goods at the delivery point and the seller typically pays the freight
FOB shipping point
situation in which the buyer takes ownership to the goods after goods leave the sellers place of business and the buyer typically pays for freight
sale of merchandise inventory
cash or accounts receivable DB
sales revenue CD

cost of goods sold DB
merchandise inventory CD

sales return
sales returns and allowances DB
cash or accounts receivable CD

merchandise inventory DB
cost of goods sold CD

sales allowance
sales returns and allowances DB
cash or accounts receivable CD
payment of freight out
delivery expense DB
cash CD
collection of cash during discount period
cash DB
sales discounts DB
accounts receivable CD
collection of cash after discount period
cash DB
accounts receivable CD
Multiple-step income statement:
list several important subtotals including gross profit, operating income, and net income
net sales
the amount a company has made on sales of merchandise inventory after returns, allowances, and discounts have been taken out.
gross profit
excess of net sales revenue over cost of goods sold
gross profit percentage
= Gross profit/Net sale revenue
Adjusting entry for inventory shrinkage
if loss of inventory occurs because of theft, damage, and errors.
first-in,first-out (FIFO), perpetual inventory system
first cost into inventory are the first cost out to cost of goods sold; ending inventory is based on the costs of the oldest inventory
last-in,first-out (LIFO), perpetual inventory system
last cost into inventory are the first costs out to cost of goods sold;ending inventory is based on the cost of the oldest inventory
weighted-average method, perpetual inventory system
based on the weight average cost per unit of inventory after purchase. weighted average cost per unit is determined by dividing the cost of goods available for sale by the number of units available for sale.
the FIFO method results in?
in lower cost of goods sold and the highest gross profit when cost are rising
the LIFO method results in?
in the highest cost for goods sold and the lowest gross profit when cost are rising.
FFIO periodic inventory system
will produce the same amount for ending merchandise inventory as perpetual inventory system
LIFO and Weighted – average periodic inventory system
result in different amounts from perpetual inventory system
internal controls
is the organizational plan and all the related measures designed to safeguard assets, encourage employees to follow company policies, promote operational efficiency,and ensures accurate and reliable accounting records
internal control includes five components:
control procedures, risk assessments, information system, monitoring of controls, and environment.
the Sarbanes- oxley act
requires companies to review internal control and take responsibility for accuracy and completeness of their financial reports
petty cash fund
allows a business to keep cash on hand to pay small miscellaneous items such as postage, office supplies, and taxi fare
entry to establish the petty cash fund
petty cash DB
cash CD
to open the petty cash fund
entry to replenish the fund
office supplies DB
delivery expense DB
travel expense DB
cash short and over DB
cash CD
to replenish the petty cash fund
Bank reconciliation
compares and explains the differences between cash on the company books and cash according to the bank records on a specific date.
Bank reconciliation- bank balance- always
add deposits in transit
subtract outstanding checks
add or subtract corrections of bank errors
Bank reconciliation- book balance- always
add book collections, interest revenue, and EFT receipts
subtract service charges,NSF checks ,and EFT payments
add or subtract corrections of book errors
cash ratio
=(cash + Cash equivalents)/total current liabilities
parties of a note
Maker & Payee
Maturity Date
date when a note is due
Maturity Value
= Principal + Interest
Interest
= P x R x Term/360 days or 12 months
allowance for bad debts
bad debts expense based on estimates developed from past experience and uses the allowance for bad debts to hold the pool of unknown noncollectable accounts.
direct write-off method
a method of accounting for noncollectable receivables in which the company records bad debts expense when a customers account receivable is noncollectable
allowance method
a method of accounting for noncollectable receivables in which the company estimates bad debts expense instead of waiting to see which customers the company will not collect from
allowance method- write off of noncollectable accounts
allowance of bad debts DB
accounts receivable-customers name CD
wrote off an uncollectible account
allowance method- recovery of accounts written off
accounts receivable- customers name DB
allowance for bad debts CD
reinstated previously written off account

cash DB
accounts receivable- customers name CD
collected cash on account

allowance method- adjusting entry to recognize bad debts
bad debts expense DB
allowance for bad debts CD
recorded bad debts expense for the period
Categories: Financial Accounting