Accounting 1110- Midterm 2 review

What the COGS?

100

At its April 30 year end, the inventory records of Pajewski Company showed merchandise inventory of $98,000. Through a physical count, the company determined that its actual inventory on hand was $96,500. Record the necessary adjusting entry.

What is Apr. 30 DR Cost of Goods Sold 1,500 CR. Merchandise Inventory ($98,000 − $96,500) 1,500

200

Old Fashioned Candy Company has decided to expand its sales to include Canada Mints. It purchases 600 packages from its supplier at a cost of $12.50 per package, terms 2/10, n/30, FOB shipping point. The freight charges are $120. Old Fashioned Candy Company pays for the merchandise within the discount period. What are the total cost and cost per package of this inventory item?

What is Total Merchandise Inventory cost: Invoice cost $7,500 Plus: Freight in 120 Less: Purchase discount 150 Total cost $7,470 Cost per unit = Total cost ÷ 600 packages = $7,470 ÷ 600 = $12.45 per package

300

Yip Company uses a perpetual inventory system. The following data are available for its first month of operations: May 2 Purchased 250 units for $6 each. May 3 Purchased 400 units for $7 each. May 10 Sold 275 units for $10 each. May 15 Purchased 350 units for $8 each. May 25 Sold 325 units for $12 each. Calculate the cost of goods sold and ending inventory under FIFO

What is Cost of goods sold $3,950 Ending inventory $3,150 Goods available for sale $7,100

400

Yip Company uses a perpetual inventory system. The following data are available for its first month of operations: May 2 Purchased 250 units for $6 each. May 3 Purchased 400 units for $7 each. May 10 Sold 275 units for $10 each. May 15 Purchased 350 units for $8 each. May 25 Sold 325 units for $12 each. Calculate the cost of goods sold and ending inventory under Average

What is Cost of goods sold $4,186 Ending inventory 2,914 Goods available for sale $7,100

500

Treble Company uses a periodic inventory system and reports the following information: net sales $625,000; purchases $400,000; purchase returns and allowances $11,000; purchase discounts $8,000; freight in $16,000; beginning inventory $60,000; ending inventory $80,000; and freight out $12,500. Calculate: (a) net purchases (b) cost of goods purchased (c) cost of goods available for sale (d) cost of goods sold

What is (a)Purchases $400,000 Less: Purchase returns and allowances $11,000 Purchase discounts 8,000 Net purchases $381,000 (b) Net purchases $381,000 Add: Freight in 16,000 Cost of goods purchased $397,000 (c) Beginning inventory $ 60,000 Add: Cost of goods purchased 397,000 Cost of goods available for sale $457,000 (d)Cost of goods available for sale $457,000 Less: Ending inventory 80,000 Cost of goods sold $377,000

Ratio

100

Jansen Company had beginning inventory of $60,000; net sales of $350,000; and cost of goods purchased of $250,000. In the previous year, the company had a gross profit margin of 40%. Calculate the estimated cost of the ending inventory using the gross profit method.

What is Net sales $350,000 Less: Estimated gross profit (40% x $350,000) 140,000 Estimated cost of goods sold $210,000 Cost of goods available for sale ($60,000 + $250,000) $310,000 Less: Estimated cost of goods sold 210,000 Estimated cost of ending inventory $100,000

200

On June 30, Fabric Villa has the following data related to the retail inventory method: Goods available for sale at cost $35,000; at retail $50,000; and net sales of $40,000. Calculate the estimated cost of the ending inventory using the retail inventory method.

What is Goods available for sale At Cost $35,000 At Retail $50,000 Net sales $40,000 Ending inventory at retail $10,000 Cost-to-retail ratio = $35,000 ÷ $50,000 = 70% Estimated cost of ending inventory = $10,000 x 70% = $7,000

300

Best Buy Co., Inc. reported the following information for two recent fiscal years Sales 2009- $27,433 2008- $40,023 Cost of goods sold 2009- 20,938 2008- 30,477 Profit from operations 2009- 1,442 2008- 2,161 Profit 2009- 984 2008- 1,407 Calculate the gross profit margin and profit margin for Best Buy for 2009

What is Gross profit margin 2009 = 23.7% [($27,433 − $20,938) ÷ $27,433] Profit margin 2009 = 3.6% [$984 ÷ $27,433]

400

In 2011, Red River Company reported net sales of $550,000, cost of goods sold of $300,000, and operating expenses of $200,000. In 2010, Red River Company reported net sales of $600,000, cost of goods sold of $350,000, and operating expenses of $225,000. Calculate the gross profit margin and profit margin for both 2010 and 2011.

What is 2010 Gross profit margin = 41.67% [($600,000 − $350,000) ÷ $600,000] Profit margin = 4.17% [($600,000 − $350,000 − $225,000) ÷ $600,000] 2011 Gross profit margin = 45.45% [($550,000 − $300,000) ÷ $550,000] Profit margin = 9.09% [($550,000 − $300,000 − $200,000) ÷ $550,000]

500

Ry Company reported net sales of $550,000; cost of goods purchased of $300,000; beginning inventory of $22,250; and ending inventory of $27,750. Calculate the inventory turnover and days sales in inventory ratios.

What is Cost of goods sold = $22,250 + $300,000 - $27,750 = $294,500 Inventory turnover = 11.8 times {$294,500 ÷ [($22,250 + $27,750) ÷ 2]} Days sales in inventory = 30.9 days (365 ÷ 11.8)

Rec the bank account

100

In the month of September, Westshore Hotel Company wrote and recorded cheques in the amount of $8,440. In October, it wrote and recorded cheques in the amount of $11,716. Of these cheques, $7,505 of them were paid by the bank in September, and $10,712 in October. What is the amount for outstanding cheques at the end of September?

What is September: Cheques written and recorded in books in Sept.$8,440 Less: Cheques paid by bank in Sept. 7,505 Outstanding cheques at Sept. 30 $ 935

200

Cash balance per bank statement $8,285 Add: Deposits in transit 1,554 Less: Outstanding cheques 3,175 Adjusted cash balance per bank $6,664 Cash balance per books $6,781 Add: Correction of error (supplies) $ 63 EFT deposits 74 Less: Bank service charge $ 24 NSF cheque 230 Adjusted cash balance per books $6,664 Journalize the adjusting entries at September 30, 2011, on Tindall Company's books.

What is DR. Cash 137 CR. Office Supplies 63 CR. Accounts Receivable 74 DR. Bank Charges Expense 24 DR. Account Receivable 230 CR. Cash 254

300

On June 30, Jon Glinz replenishes his company's petty cash fund, which was originally established with a $100 balance. The fund contains receipts of $25 for office supplies, $26 for delivery charges, and $14 for a cab fare. Make the journal entry to replenish the fund.

What is June 30 Dr. Office Supplies 25 Dr. Delivery Expense 26 Dr. Taxi Expense 14 Cr. Cash 65

400

On August 31, Howel Company had an unadjusted cash balance of $8,850. An examination of the August bank statement shows a balance of $7,770 on August 31; bank service charges $30; deposits in transit $2,405; interest earned $12; outstanding cheques $1,523; and an NSF cheque of $180. Prepare a bank reconciliation at August 31.

What is Cash balance per bank $7,770 Add: Deposits in transit 2,405 Less: Outstanding cheques 1,523 Adjusted cash balance per bank $8,652 Cash balance per books $8,850 Add: Interest earned 12 Less: NSF cheque 180 Service charge 30 Adjusted cash balance per books $8,652

500

The following information is for Tindall Company in September: 1. Cash balance per bank, September 30, $8,285 2. Cash balance per books, September 30, $6,781 3. Outstanding cheques, $3,175 4. Bank service charge, $24 5. NSF cheque from customer, $230 6. Deposits in transit, $1,554 7. EFT receipts from customers in payment of their accounts, $74 8. Cheque #212 was correctly written and posted by the bank as $518. Tindall Company had recorded the cheque as $581 in error. The cheque was written for the purchase of office supplies. Prepare a bank reconciliation at September 30, 2011.

What is Cash balance per bank statement $8,285 Add: Deposits in transit 1,554 Less: Outstanding cheques 3,175 Adjusted cash balance per bank $6,664 Cash balance per books $6,781 Add: Correction of error $ 63 EFT deposits 74 Less: Bank service charge $ 24 NSF cheque 230 Adjusted cash balance per books $6,664

Control This

100

The following situations suggest either a strength or a weakness in internal control: 1. At Frederico's, Amanda and Long work alternate lunch hours. Normally Amanda works the cash register at the checkout counter, but during her lunch hour Long takes her place. They both use the same cash drawer and count cash together at the end of the day. 2. Sandeep is a very hard-working employee at Stan's Hardware. Sandeep does such a good job that he is responsible for most of the company's office and accounting tasks. The only thing the owner has to do is sign cheques. 3. At Half Pipe Skate, they are very concerned about running an efficient, low-cost business. Consequently, the manager has eliminated the need to prepare purchase orders and receiving reports. State whether each situation above is a strength or a weakness in internal control.

What is 1.No establishment of responsibility over the cash—weakness Cash counts not performed independently—weakness 2. Improper segregation of duties could result in the misappropriation of cash—weakness 3.The lack of documentation procedures—weakness.

200

Frank Hensal, the Chief Risk Officer at Tri-City Rentals, has been asked by the company owner to develop internal controls for the company. Identify each of the components of an effective control framework for Frank.

What is An effective control framework is likely to have the following components: 1. Control environment 2. Risk assessment 3. Control activities 4. Information and communication, and 5. Monitoring

300

True North Company has the following internal controls over cash receipts. Identify the control activity that is applicable to each of the following: 1. All over-the-counter receipts are recorded on cash registers. 2. All cashiers are bonded. 3. Daily cash counts are made by cashier department supervisors.

What is 1. Physical and IT controls 2. Human resource controls 3. Independent checks of performance

400

Discount Toys advertises a customer-friendly return policy. The store allows returns within 30 days for any reason. The store uses a periodic inventory system. When merchandise is returned, store policy instructs employees to: • Complete a prenumbered return form and refund cash from the cash register. • Provide a copy of the return form to the supervisor for approval. • Immediately return goods to the shelf. How is it possible for a dishonest store employee to steal from Discount Toys and avoid getting caught?

What is A dishonest store employee can steal from Discount Toys without getting caught by filling out a pre-numbered return form with all of the necessary information to pretend that a return of goods has occurred and pockets the cash. The employee need not have any merchandise, nor does he have to collude with any other employee for the theft to occur without detection.

500

The following are four independent situations: (a) Cycle Sports developed and printed employee handbooks that detail company expectations of all employees. However, to save costs, only supervisors receive a copy of the handbook. (b) Company management at Technology Car Supply believe that company success depends only on successfully managing inventory levels, and that worrying about what's happening outside the company will only distract them from that goal. (c) Francesca Foods' Chief Financial Officer agreed with the sales manager to stop checking customer credit limits before shipping products, because it sometimes results in late shipments. Identify the weakness in each scenario.

What is (a) Handbooks documenting the company policies and procedures are not available to all employees, which results in failing to communicate the expectations of management. (b) Management is ignoring the external environment that may affect the business’ vulnerabilities. (c) Suspension of customer credit limit verification which exposes the business to the risk of non-collection of accounts receivable.

Record It!

100

Kopper Kettle Restaurant accepts the Visa card. On April 9, a customer paid for a $125 dinner using his Visa card. The bank charges a 3.5% fee for each transaction. Prepare the entry the Kopper Kettle must make to record this transaction.

What is April 9 Dr. Cash 120.62 Dr. Credit Card Expense ($125 x 3.5%) 4.38 Cr. Sales 125.00

200

Prepare journal entries to record the following sales transactions in Dalibor Company's books. Dalibor uses a perpetual inventory system. March 12 Dalibor sold $15,000 of merchandise to Jarek Company, terms 2/10, n/30, FOB shipping point. The cost of the merchandise sold was $8,500. March 13 The correct company paid freight costs of $155.

March 12 Dr. Accounts Receivable 15,000 Cr. Sales 15,000 Dr. Cost of Goods Sold 8,500 Cr. Merchandise Inventory 8,500 March 13 No entry required.

300

Dec. 3 Pippen Company sold merchandise to Thomas Co. for $48,000, terms 2/10, n/30, FOB shipping point. This merchandise cost Pippen Company $32,000. 4. The correct company paid freight charges of $750. 8 Thomas Co. returned unwanted merchandise to Pippen. The returned merchandise had a sales price of $2,400 and a cost of $1,600. It was restored to inventory. 13 Pippen Company received the balance due from Thomas Co. Prepare the journal entries to record these transactions on the books of Pippen Company.Both companies use a perpetual inventory system.

What is Dec. 3 Dr. Accounts Receivable 48,000 Cr. Sales 48,000 Dr. Cost of Goods Sold 32,000 Cr. Merchandise Inventory. 32,000 4 No entry required. 8 Dr. Sales Returns and Allowances 2,400 Cr. Accounts Receivable 2,400 Dr. Merchandise Inventory 1,600 Cr. Cost of Goods Sold 1,600 13 Dr. Cash ($45,600 × 98%) 44,688 Dr. Sales Discount ($45,600 × 2%) 912 Cr. Accounts Receivable 45,600

400

Crisp Crunchy Company has the following account balances: Sales $510,000; Interest Revenue $8,000; Sales Returns and Allowances $15,000; Sales Discounts $5,000; Cost of Goods Sold $350,000; Depreciation Expense $12,000; Insurance Expense $3,000; Interest Expense $10,000; Rent Expense $40,000; and Salaries Expense $50,000. Assuming Crisp Crunchy Company uses a multiple-step income statement, calculate the following: (a) net sales, (b) gross profit, (c) profit from operations, and (d) profit.

What is (a) Net sales = $490,000 ($510,000 − $15,000 − $5,000) (b) Gross profit = $140,000 ($490,000 − $350,000) (c) Profit from operations = $35,000 ($140,000 − $12,000 − $3,000 − $40,000 − $50,000) (d) Profit = $33,000 ($35,000 + $8,000 − $10,000)

500

The Furano Company had the following merchandise transactions in May: May 2 - Purchased $1,200 of merchandise from Digital Suppliers, terms 2/10, n/30, FOB shipping point. May 2 - The correct company paid $100 freight costs. May 3 - Returned $200 of the merchandise to Digital as it did not meet specifications. May 9 - Paid Digital the balance owing. May 12 - Sold three-quarters of the remaining merchandise to SunDial Company for $1,500, terms 2/10, n/30.

What is 2 Dr. Merchandise Inventory 1,200 Cr. Accounts Payable 1,200 2 Dr. Merchandise Inventory 100 Cr. Cash 100 3 Dr. Accounts Payable 200 Cr. Merchandise Inventory (returns) 200 9 Dr. Accounts Payable ($1,200 − $200) 1,000 Cr. Merchandise Inventory ($1,000 × 2%) 20 Cr. Cash ($1,000 × 98%) 980 12 Dr. Accounts Receivable 1,500 Cr. Sales Revenue 1,500 Dr. Cost of Goods Sold [($1,200 + $100 − $200 − $20) × ¾] 810 Cr. Merchandise Inventory 810