ACIS Test 3

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  1. Perpetual System
    • 1. Maintain detailed records of the cost of each inventory purchase and sale
    • 2. Records continuously show inventory that should be on hand for every item
    • 3. Company determines cost of goods sold each time sale occurs
  2. Periodic System
    • 1. Do not keep detailed records of goods on hand 
    • 2. Cost of goods sold determined by count at the end of the accounting period
  3. Advantages of Perpetual System
    • 1. Traditionally used for merchandise with higher unit values
    • 2. Shows the quantity and cost of the inventory that should be on hand at any time
    • 3. Provides better control over inventories
  4. FOB Shipping point
    • Ownership of the goods passes to the buyer when the public carrier accepts the good from the seller
    • Once the item leaves loading dock they belong to costumer
  5. FOB Destination
    • Ownership of good remains with the seller until the good reach the buyer
    • The supplier owns it until it gets to the destination
  6. In a perpetual inventory system
    • A return of defective merchandise by a purchaser is recorded by crediting
    • The cost of goods sold is determined and recorded each time a sale occurs
  7. Sales returns and allowances
    • Contra-revenue account to sales revenue
    • Sales not reduces because it would obscure the importance of sales returns and allowances as a percentage of sales
    • Could distort comparison
  8. Sales Discount
    • Offered to promot prompt payment of the balance due
    • Contra-revenue account (debit) to sales revenue
  9. Single step Income statement
    • Subtract total expenses from total revenue
    • Reasons for use
    • 1. Company does not realize any type of profit or income until total revenues exceed total expenses
    • 2. Form is simple and easy to read
  10. Multi step income statement
    • Highlights the components of net income
    • 3 Important line items:
    • 1.Gross profit
    • 2. Income from operations
    • 3. Net income
  11. Gross profit rate =
    • Gross profit / Net sales
    • Measures the margin by which selling prices exceeds cost of goods sold
  12. Profit margin ratio
    • Net Income / Net sales
    • Measures the percentage of each dollar of sales that results in net income
    • Measures the extent by which selling prices covers all expenses (including cost of goods sold)
  13. Income measurement process for a merchandising company
    • Sales Rev. - Cost of Goods sold = Gross Profit
    • -Operating Exp. = Net Income
  14. Determining the Cost of Goods sold
    • Beginning Inventory + Cost of Goods Purchased = Cost of Goods Available for Sale 
    • Less : Ending Inventory 
    • = Cost of goods sold
  15. Quality of earnings ratio
    • Net cash from operating activities / net income
    • A measure used to indicate the extent to which a company's earnings provide a full and transparent depiction of its performance
  16. Recording Periodic Inventory
    • No entries to the inventory account
    • Sales are recorded
    • Cost of goods sold is calculated at the end of the month
    • Physical inventory taken at the end of the month to determine ending inventory value
  17. Recording Perpetual inventory
    • Purchases recorded in inventory account
    • Freight costs are considered part of the inventory
    • Returns reduce the cost of inventory
    • Discounts reduce the cost of inventory
    • REcord the sale and cost of goods sold
  18. Consigned goods
    Supplier of those items retains ownership until it's sold
  19. FIFO
    • First in First out
    • Oldest items bought are sold first
    • Oldest thing we acquire will be the cost of goods sold
    • Prices increasing - FIFO will report highest net income
  20. LIFO
    • Last in First out
    • Most recently acquired items are the cost of goods sold
    • Lower tax bill but also lower income
    • During period of inflation
  21. Average cost
    the weighted-average unit cost to allocate the cost of goods available for sale to ending inventory and cost of goods sold
  22. Lower-of-cost-or-market
    • When the value of inventory is lower than its cost
    • -Companies can write down the inventory to its market value in the period in which price decline occurs
    • -Market value = replacement costs
    • - Ex. of conservatism
  23. Inventory turnover ratio
    Cost of Goods Sold / Average Inventory
  24. Days in inventory
    365 / Inventory Turnover Ratio
  25. LIFO Reserve
    Companies using LIFO are required to report the difference between inventory reported using LIFO and using LIFO
  26. Cash
    • The most at risk asset a business holds
    • Ceceptible to being stolen
  27. Fraud triangle
    • Opportunity
    • Financial Pressure
    • Rationalization
  28. Components of internal control of assets
    • Control environment - tone of the person at the top
    • Risk assessment - where are your assets vulnerable
    • Control activities - don't leave opportunities for fraud to occur
    • Communication - capture info and share it
    • Monitoring - are the control procedures being circumvented
  29. Internal control principles
    • Establish responsibility
    • Segregation of duties
    • Document procedures
    • Physical controls
    • Independent internal verification (swap things around and have other people look at whats going on)
    • Human resource scontrols
  30. Bank reconciliation
    • key to controlling and safegaurding the companies cash
    • Compare monthly bacnk statements of your cash account to the cash account in general ledger
    • Bank statement and your cash balance will never be the same 
    • Purpose of reconciliation is to identify the items tat cause the banks balance to differ
  31. Cash budget
    • Three components
    • 1. Cash receipts
    • 2. Cash disbursements
    • 3. Financing (borrowing requirements)
    • Shows anticipated cash flows, over one to two year period
    • More effective cash management
  32. Petty Cash Fund
    • Purpose is to have cash on hand for incidental items
    • Is debited when fund is created
    • Not touched as money is spent and fund is replensihed
    • When it is replenished you debit the expense account and credit cash
  33. Credit memorandum
    • Collects notes recievable
    • Interest earned
  34. Debit memorandum
    • Bank service charge
    • NSF (Not Sufficient funds)
  35. Voucher System
    A network of approvals by authorized individuals, acting independently, to ensure all disbursements by check are proper
  36. Establishment of Responsibility
    • Control is most effective when only one person is responsible for a given task
    • Establishing responsibility often requires limiting access only to authorized personnel, and then identifying those personnel
  37. Segregation of Duties
    • Different individuals should be responsible for related activities
    • The responsibility for record keeping for an asset should be separate from the physically custody asset
  38. Documentation Procedures
    • Companies should use prenumbered documents, and all document should be accounted for
    • Employees should promptly forward source documents for accounting entries to an accounting department
  39. Independent Internal Verification
    • Records periodically verified by an employee who is independent 
    • Discrepancies reported to management
  40. Human Resource Controls
    • Bond employees who handle cash
    • Rotate employees duties and require vacations
    • Conduct background checks
  41. Cash Equivilents
    • Short-term, highly liquid investments that can be readily converted to a specific amount of cash and which are relatively insensitive to interest rate changes.
    • ex. Treasury bills, commercial paper (short-term corporate notes), and money market funds
  42. Bad Debts Expense
    Seller records losses that result from extending credit
  43. Direct write off
    • Method of Accounting for uncollectable accounts, undesirable, when costumer disappears
    • -No matching
    • -Receivable not state at net realizable value
    • -Not acceptable for financial reporting
    • Income takes a big hit, destroys month income statement
  44. Allowance Method
    • Method of accounting for uncollectable accounts, the losses are estimated:
    • -Better matching
    • -Receivable state at net realized value
    • -Required by GAAP
  45. Percentage of Receivables Basis
    under this basis, management establishes a percentage of relationship between the amount of receivable expected losses from uncollectable accounts
  46. Promissory Note
    Written promise to pay a specific amount of money on demand or at a definite time
  47. Receivables
    • Significant liquid assets; amounts owed to company by customers and others
    • Valuable asset as long as you can collect your money
  48. What if we recover (collect) an account after it was written off
    • Make two journal entries 
    • -Re-establish the account
    • -Record the cash receipt
    • Debit accounts rec. Credit ADA
    • Debit Cash Credit accounts rec.
  49. Notes receivable
    • Written agreement to pay
    • Current asset, if it will be settled in 1 year or less
    • Note can be a long term asset
    • Valued just like receivables, still use an ADA account
  50. Interest
    = Face Value X Interest Rate X Time Period
  51. Accounts Receivable Turnover
    Net credit sales / Average Net Accounts Receivable
  52. Average Collection Period
    365 / Accounts Receivable Turnover
  53. Factoring
    • A company cal sell receivable to a factor to get cash quickly
    • The factor will buy Accounts Receivable and take responsibility for collecting money
    • Ex. Credit Cards
Card Set:
ACIS Test 3
2014-10-16 21:35:46
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