Exam 2 Review PDF

**Exam 2 Review** **Multiple choice** (40 questions for 2.5 points each). Total of Exam 2 is 100 points. Exam 2 will cover Chapter 4, 5, and 7 - - - - - **Chapter 4** **Read Chapter 4** (merchandise purchases, merchandise sales, shrinkage, multiple-step income statements, balance shee...

**Exam 2 Review** **Multiple choice** (40 questions for 2.5 points each). Total of Exam 2 is 100 points. Exam 2 will cover Chapter 4, 5, and 7 - - - - - **Chapter 4** **Read Chapter 4** (merchandise purchases, merchandise sales, shrinkage, multiple-step income statements, balance sheet for a merchandising company, acid-test ratio and gross margin ratio) Exercises: 4-3, 4-5, 4-6, 4-12, 4-14, 4-15, 4-16, 4-18, 4-19, and 4-21 Problems: 4-1A, 4-2A, and 4-3A **Exercise 4-12: Recording purchases, sales, returns, and shipping** Following are the merchandising transactions of Dollar Store. **1-Nov** Dollar Store purchases merchandise for \$1,500 on terms of 2/5, n/30, FOB shipping point, invoice dated November 1. ------------ ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ **5-Nov** Dollar Store pays cash for the November 1 purchase. **7-Nov** Dollar Store discovers and returns \$200 of defective merchandise purchased on November 1, and paid for on November 5, for a cash refund. **10-Nov** Dollar Store pays \$90 cash for transportation costs for the November 1 purchase. **13-Nov** Dollar Store sells merchandise for \$1,600 with terms n/30. The cost of the merchandise is \$800. **16-Nov** Merchandise is returned to the Dollar Store from the November 13 transaction. The returned items are priced at \$160 and cost \$80; the items were not damaged and were returned to inventory. Journalize the above merchandising transactions for the Dollar Store assuming it uses a perpetual inventory system and the gross method. **Exercise 4-18: Preparing a multiple-step income statement (see Chapter 4 Connect Quiz)** **Chapter 5** **Read Chapter 5** (Costs of merchandise inventory, methods: FIFO, LIFO, weighted average, Lower of cost or market (LCM), effects of inventory methods for financial and tax reporting, effects of inventory error on financial statements, Inventory turnover and days' sales in inventory ratios). No math except for LCM calculation. Exercises: 5-1, 5-2, 5-16, and 5-19 Problems: 5-5A **Chapter 7** **Read Chapter 7** (Accounts receivables (Direct write-off method, Allowance methods: Percentage of sales, Percentage of accounts receivables, Aging of account receivables), Note receivables, honoring and dishonoring of a note and adjustments for interest, Disposal of receivables, Accounts receivable turnover) Exercises: 7-2, 7-4, 7-5, 7-10, 7-13, 7-14, 7-17 (Connect quiz), 7-18, and 7-23      Problems: 7-1A, 7-2A, 7-3A, and 7-4A **In-Class Exercise: Accounts receivable transactions and bad debts adjustments** Lee Company began Year 2 with an Accounts Receivable balance of \$650,000 and a [debit] balance of \$2,000 in its Allowance for Doubtful Accounts. The company uses the perpetual inventory system, and it applies the allowance method for its accounts receivable. The Year 2 transactions are summarized as follows. a. b. c. d. Prepare journal entries to record Lee's Year 2 transactions and its year-end adjustments to record bad debts expense. **Exercises 7-18** Prepare journal entries to record the following transactions of Danica Company. **December 13** Accepted a \$9,500, 45-day, 8% note in granting Miranda Lee a time extension on her past-due account receivable. ----------------- ------------------------------------------------------------------------------------------------------------------ **December 31** Prepared an adjusting entry to record the accrued interest on the Lee note. **Ch 4: Accounting for Merchandising Operations** **Reporting Income for a Service Company** - - - **Reporting Income for a Merchandiser** ======================================= Merchandising companies sell [products] to earn revenue Examples: Clothing, Shoes, Sporting goods Net sales - Cost of goods sold = Gross profit - expenses = net income Example: Nordstrom sells \$1000 worth of shoes - \$200 cost to buy the shoes from Nike = \$800 (gross profit) - \$100 in wage expenses = \$700 net income **Operating Cycle for a Merchandiser** ====================================== Begins with the purchase of merchandise and ends with the collection of cash from the sale of merchandise **Inventory Systems**  Example: May 1 - We started with 10 bikes in inventory May 1 - We buy 15 more bikes 25 total bikes available to sell in May May 31 - 13 bikes sold (the value of this is COGS (cost of goods sold) on Income statement) so if they are worth \$5 each so the total cogs is \$65 May 31 - 12 bikes are unsold (ending inventory) which goes on balance sheet since its a current asset **Perpetual Inventory Systems** =============================== - - - **Transactions For Merchandise Purchases** ========================================== **Purchases without Cash Discounts** ==================================== Buying inventory (debit asset, credit cash) We now have more product but less cash **Credit Terms** - - - **Purchase Discounts** Nike gives Macy\'s the discount if Macy\'s pays within 10 days otherwise the whole amount is due within 30 days ### **Purchases with Cash Discounts: Gross Method** - - -  **Payment within Discount Period: Journal Entry** ================================================= On November 12, Credit inventory 10, Credit cash 490 **Payment after Discount Period** If we don\'t pay soon enough for discount we have to pay full amount **Allowances** ============== - - - -  - - - - - - - - - - **Shipping Terms** - - - - -  **Itemized Costs of Purchases** Everything that adds to the cost of the thing you debit inventory (e.g. shipping charges) Everything that reduces the cost of the thing you credit inventory (e.g. returns) **Acid Test Ratio** Quick Assets (Cash + Short-Term Investments + Receivables) / Current Liabilities Acid Test Ratio should have a value of at least 1.0 otherwise a company is likely to face liquidity problems in the near future **Gross Margin Ratio** ====================== Net Sales - Cost of Goods Sold / Net Sales \% of dollar sales available to cover expenses and provide a profit **Chapter 5: Inventories and Cost of Sales** **Determining Inventory Items** =============================== - - - - - - - **Goods in Transit** ==================== - - - - - - - - - - - **Goods on Consignment** ======================== - - - - - - - - **Goods Damaged or Obsolete** ============================= - - - - **Determining Inventory Costs** ===============================  - - - - - - - - **Taking a Physical Count** =========================== - - - **Inventory in a perpetual system using the methods of specific identification, FIFO, LIFO, and weighted average** ================================================================================================================== - - - - - - - - **Inventory Costing Methods** ============================= 4 methods are used to assign costs to inventory and to cost of goods sold 1. 2. 3. 4. **Inventory Cost Flow Methods** =============================== - - - - - - - - - - - - - - - - **Inventory Costing under a Perpetual System** ==============================================  - - **First - In, First - Out (FIFO)** ================================== - - - **Last - In, First - Out (LIFO)** ================================= - - - - **Weighted Average: Perpetual** =============================== Slide 16 of 30 - - - - **Financial Statement Effects of Costing Methods** ==================================================  - - - **Inventory Costing Methods** ============================= Slide 19 of 30 - **Tax Effects of Costing Methods** ================================== - - - **Lower of cost or market amount of inventory** =============================================== - - - **Lower of Cost or Market** ===========================  **Market is defined as replacement cost** - - - - - - - **Lower of Cost or Market** =========================== Slide 23 of 30 - - - - - - - **Effects of inventory errors on financial statements** ======================================================= - - - - - - **Inventory Errors Balance Sheet Effects** ==========================================  **Inventory Turnover** ====================== Slide 27 of 30 - - - - - - **Analysis of Inventory Management** ==================================== - - **Days' Sales in Inventory** ============================ - - - - - **Chapter 7: Accounting for Receivables** ========================================= **Accounting for Receivables** ============================== - - - - - - - - - - - - **Chapter 7 Learning Objectives** =================================  AR: When we sell on credit and our customers owe us money NR **Valuing Accounts Receivable** =============================== - - - **Sales on Credit: Journal Entries** ==================================== Slide 5 of 44 - - - - - - - - **Sales on Credit: Accounts Receivable Ledger** ===============================================  - - - **Sales on Bank Credit Cards** ============================== Slide 7 of 44 - - - - - - - **Bad Debts** ============= - - - - - - - - **Direct write - off method** ============================= - - - - - - **Direct Write-Off Method - Recording and Writing Off Bad Debts** =================================================================  - - - - **Direct Write-Off Method - Recovering a Bad Debt** =================================================== - - - - - - - **Using the Direct Write-Off Method** ===================================== - - - **Allowance method** ==================== - - - - - - Example: - - - Estimates might have a small balance (allowance accounts) We estimate \$50,000 isn\'t going to be paid to us On the balance sheet - - - **Allowance Method - Recording Bad Debts Expense** ================================================== Slide 15 of 44 - - - - - - - - - - **Balance Sheet Presentation** ============================== -  **Allowance Method - Writing Off a Bad Debt** ============================================= Slide 17 of 44 - - - - - - **Writing Off a Bad Debt** ==========================  Write-off does not affect the realizable value of AR **Allowance Method - Recovering a Bad Debt** ============================================ Slide 19 of 44 If Mr. Kent came back, and paid. We **reverse the journal entry** - - Then **once payment is received** - - **Estimating Bad Debts Expense** ================================  2 methods (when not given the numbers) 1. - - - 2. - - - **Percent of Sales Method (income, easier)** ============================================ Slide 21 of 44 - - - - - **Percent of Sales Method: Example** ====================================  - - **Percent of Receivables Method (balance sheet)** ================================================= Slide 23 of 44 **Bad Debts Expense = AR \* bad debt %** - - - - - - **Percent of Receivables Method: Example** ==========================================  - - - - - - - **Aging of Receivables Method** =============================== Slide 25 of 44 - - - - **Aging of Accounts Receivable: Musicland** ===========================================  - - - - - **Aging of Accounts Receivable: Adjusting Entry with Credit Balance** ===================================================================== Slide 27 of 44 - - - **Aging of Accounts Receivable: Adjusting Entry with Debit Balance** ====================================================================  - - - - - - **Notes Receivables** ===================== - - - - **Notes Receivable** ==================== - **Computing Maturity Date** =========================== - - - - - - **Interest Computation** ======================== - - - - - - **Recording Notes Receivable** ============================== - - - **Notes Receivable in Acceptance of Past - Due Accounts Receivable** ==================================================================== - - - - - **Honoring and dishonoring of a note and adjustments for interest** =================================================================== - - **Recording an Honored Note** ============================= - **Recording a Dishonored Note** =============================== - - - - - **Recording End-of Period Interest Adjustment: 12/31** ====================================================== - - - - - - - - - - - - - - - - **Disposal of Receivables** =========================== - - - - - - - - - - - - **Accounts Receivable Turnover** ================================ - - - - - - - - -