Exam 3 Study Guide PDF

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CHAPTER 6 1. Be able to identify what type of inventory account is used by a retailer or wholesaler and what types of inventory accounts are used by a manufacturer. Retailer: Merchandisers that sell directly to consumers Wholesaler: Merchandisers that sell to other retailers Manufacturers: Companies that buy and transform raw materials into a finished product which is then sold Retailer or wholesaler: selling finished product. One inventory account. Its called merchandise inventory Manufacturer: has 3. Raw materials, work-in-process, finished goods

2. How is cost of goods sold calculated Beginning inventory + Purchases = Cost of goods available for sale – Ending inventory= Cost of goods sold

3. When merchandise is returned to the seller and the seller uses a perpetual inventory system, what account decreases 2 journal entries: Record return. Acct receivable decreases. Debit sales returns and allowance. Put it back in inventory. Costs of goods sold will decrease

4. Be able to interpret shipping terms (2/10,n /30; n/15; 1/15, n/45, etc.) If payment is within 10 days get 2% off. Must be paid in 30 days FOBO shipping: title to merchandise transfers when seller puts stuff in truck FOBO destination: sellers responsibility until it gets to buyer 5. Be able to identify what type of merchandise would be costed using the specific identification method EX: custom-made boat. Know exactly what you’re selling. 6. Be able to calculate ending inventory and cost of goods sold using FIFO, LIFO and moving average methods (perpetual inventory system only)

Look at practice packet

7. What are the acceptable methods of inventory costing LIFO, FIFO, AVG cost, specific identification

8. Be able to identify which inventory costing methods result in highest inventory balance, highest cost of goods sold and/or highest net income in periods of rising or lowering prices.

RISING 7 8

E.I.

COGS

FIFO

8

7

LIFO

7

8

E.I.

COGS

8

10

DECREASING 10 8

FIFO LIFO

10

8

9. Know what lower of cost or market is Under LCM, if the market value of a company’s inventory is lower than its cost, the company reduces the amount recorded inventory to its market value

JOURNAL:

Cost of goods sold Inventory

$2500 $2500

10. Know that under a perpetual inventory system the inventory account is updated after each merchandise purchase and/or sale Grocery store: every time it scans an item the account is updated. 11. Know the formula for the inventory turnover ratio Inverntory Turnover Ratio= Cost of goods sold Average inventory

Chapter 7 1. What is the definition of accumulated depreciation Accumulated Depreciation- represents the total amount of depreciation expense that has been recorded for an asset since the asset was acquired. It is reported on the balance sheet as a contra-asset. 2. What is the definition of an intangible asset Intangible operating asset- represent future economic benefit to the company. They lack physical substance. EX: patents, trademarks, copyrights, 3. What is the definition of depreciation Depreciation- is the process of allocating, in a systematic and rational manner, the cost of a tangible fixed asset (other than land) to expense over the asset’s useful life. 4.   

What information do you need to know in order to calculate depreciation Cost of the fixed asset Useful life (or expected life) of the fixed asset Residual value (salvage value) of the fixed asset

5. How are assets that are classified as property plant and equipment reported on the balance sheet Recorded at property, plant, equipment. Historical cost less accumulated depreciation

6. Be able to tell the difference between items classified as property, plant and equipment; intangible assets; and natural resources Property, plant, and equipment: often called fixed assets or plant assets. They include land, buildings, machines, and automobiles. Intangible assets: do not have physical substance. They include patents, copyrights, trademarks, licenses, and good will Natural Resources: are naturally occurring materials. They include timberlands and deposits such as coal, oil, and gravel. 7. Be able to identify what costs get included in the total cost of an asset

8. What is the definition of the book value of an asset Book Value (carrying value) - cost of the asset minus accumulated depreciation 9. What is salvage value (also called residual value) Salvage value (residual value)- is the amount of cash or trade-in consideration that the company expects to receive when an asset is retired from service. 10. Be able to calculate straight line depreciation, double declining balance depreciation and units of activity (units of production) depreciation Straight-Line Depreciation = (Cost – Residual Value) / Expected Useful Life Declining Balance Rate = (m) x Straight-Line Rate Declining Balance Depreciation Expense = Declining Balance Rate x Book Value Depreciation Cost per Unit = (Cost – Residual Value) / Expected Usage of the Asset Units-of-Production Depreciation Expense = Depreciation Cost per Unit x Actual Usage of the Asset

11. Be able to calculate the percentage to be applied to an asset when using double declining balance depreciation 1/useful *2 = 1/5+2= 2/5 or 40%

12. What is the most common method used for calculation of depletion and amortization Cost – Residual Value Expected usage

=

$40,000 - $0 10 coals

=

$4000

Amortization- straight line. Because it uses time Depletion- units of production.

13. Know the difference between depreciation, amortization, and depletion Depreciation- for property, plant, and equipment assets Amortization- for intangible assets (trademarks and patents) Depletion- for natural resources (timberland and coal)

CHAPTER 8 1. What is the definition of a current liability Current liabilities- are obligations that require the firm to pay cash or another current asset, create a new current liability, or provide goods or services within the longer of one year or one operating cycle 2. What affect does the recording the incurrence of payment of a liability have on assets, liabilities and stockholders equity? Liabilities decrease and assets decrease. Nothing for stock holders equity 3. Be able to calculate and make journal entries for wages payable, interest payable and warranty payable. SEE HOMEWORK Wages expense $$$ Wages payable

$$$$

4. When do contingent liabilities get recorded If the event on which it is contingent is probable and a reasonable estimate of the loss can be made. See chart in notbeook 5. What type of account is affected when a landlord receives a security deposit from a tenant Liability for landlord...