Chapter 5
What is a merchandiser?
a business that sells merch./goods to customers
What are the four accounting principles?
- Consistency
- Disclosure
- Materiality
- Accounting Conservatism
What is petty cash?
How would you record the opening of a petty cash account?
- a fund containing a small amount of cash that is used to pay for minor expenditures
Petty Cash 100
Cash 100
cash ratio
Define + Formula
The cash ratio helps determine a company’s ability to meet
its short-term obligations.
cash + cash equivalents / total current liabilities
What are the four basic inventory costing methods?
1) Specific Identification
2)FIFO
3)LIFO
4)Weighted-Average
What do the credit terms 2/10 mean?
What do the credit terms 3/15 mean?
2% discount if paid within 10 days
3% discount if paid within 15 days
What inventory costing method reports higher COGS?
LIFO or FIFO
LIFO
Because you are using the cost value/price of the most recent goods in ending inventory.
Name 2 of the situations that occurred for ENRON.
• Hiding losses using Special Purpose Entities (SPEs)
• Moved “Losses” from “core operations” to SPEs to show core operations
profitable
• Manipulation of Energy “future” prices by Blackouts
• Misused information for own trading purposes & generate profits
• Abused “Mark to Market” Accounting
• Booking future profits to current statements
• Arthur Anderson (“auditors”) was involved in covering up
Enron’s “mess”/ fraudulent activities
• Arthur Anderson went bankrupt reducing “Big 5” to “Big 4” Accounting firms
• Big 4 = D&T, E&Y, PWC, KPMG
Gross Profit Percentage
Define + Formula
The gross profit percentage measures the profitability of
each net sales dollar above the cost of goods sold.
Gross Profit / Net Sales Revenue
What is horizontal analysis?
Horizontal analysis is the study of percentage changes in
line items from comparative financial statements
FOB Shipping vs. FOB Destination
Define both:
FOB Shipping is when the buyer takes ownership of the goods after the goods leave the seller's place/business (ONCE IT LEAVE AMAZON'S WAREHOUSE, AMAZON IS NO LONGER LIABLE FOR LOST GOODS)
FOB Destination is when the buyer takes ownership of the goods at the delivery destination point (ONCE THE GOODS HAVE REACHED YOUR HOUSE IF PACKAGE IS LOST THROUGHOUT DELIVERY YOU AREN'T LIABLE, THE SELLER IS)
How do you calculate operating income ?
Gross - Operating Expenses
Replenishing Petty Cash Fund.
On August 1, Smart Touch Learning creates a petty cash
fund of $200. The custodian cashes the $200 check and
places the currency in the fund box.
On August 31, the petty cash fund holds $118 in cash and
$80 in petty cash tickets (this is the $$$ they used for a specific type of expense this case being office supplies ($60) and delivery expense ($20)). You can see that $2 is missing:
What is the appropriate journal entry for replenishing this transaction?
Office Supplies 60
Delivery Expense 20
Cash Short and Over 2
Cash 82
Current Ratio
Define + Formula
The current ratio, which is calculated as the total current assets
divided by total current liabilities, measures a company’s ability to
pay its current liabilities with its current assets.
Total current assets / Total current liabilities
What is vertical analysis?
Vertical analysis of a financial statement shows the
relationship of each item to its base amount, the 100%
figure.
ABC company purchased goods from a wholesaler and paid cash of $45,000.
Purchase of goods transaction = more inventory for ABC's company. What would you debit and what would you credit?
Merchandise Inventory 45,000
Cash 45,000
What is the formula for Inventory Turnover?
*hint its a two-step process because you need the average of something
COGS/AVERAGE MERCHANDISE INVENTORY
AVERAGE MERCHANDISE INVENTORY= (BEG. MERCH INV. + END MERCH INV.)/2
The beginning balance taken from the bank statement is 13,768.
1) They recorded a deposit in transit that was made on April 30 for $7,000 that has not yet been recorded by the bank.
2) They recorded an outstanding check. Check number 303 for $3,450 is outstanding.
What would be the bank reconciliation?
$17,318 is the adjusted bank balance.
Beginning 13,768
add: Deposit in Transit 7,000
less: Outstanding Check (3,450)
---------------------------------------
$ 17,318
Profit Margin Ratio
Define + Formula
The profit margin ratio shows how much net income a
the business earns on every $1 of sales.
Net Income / Net Sales Revenue
What are ratios used for ?
Different ratios explain different aspects of a company.
• Ratios are used for the following purposes:
– Evaluating the ability to pay current liabilities and long-
term debt
– Evaluating the ability to sell merchandise inventory and
collect receivables
– Evaluating profitability
– Evaluating stock as an investment
What does a multi-step income statement include?
*hint they are subtotals of what?*
- Gross Profit
- Operating Income
- Other income and expenses
- Income before income tax expense
- Net Income
How are financial statements affected by using LIFO and FIFO?
How is the income statement affected?
How is the balance sheet affected?
Income statement:
-COGS is higher under LIFO than FIFO when costs are rising
-Net Income is lower under LIFO than FIFO when costs are rising
Balance Sheet:
-when costs are increasing, FIFO inventory will be the highest, and LIFO will be lower
What are the four SOX Provisions?
1. Public companies must issue an internal control report,
which is a report by management describing its
responsibility for and the adequacy of internal controls
over financial reporting.
– An auditor must evaluate internal controls.
2. The Public Company Accounting Oversight Board
(PCAOB), oversees the work of auditors of public
companies.
3. Accounting firms are not allowed to audit a public
company and also provide certain consulting services for
the same client.
4. Stiff penalties await violators—25 years in prison for
securities fraud and 20 years for an executive making
false sworn statements.
Asset Turnover Ratio
Define + Formula
The asset turnover ratio measures the amount of net sales
generated for each average dollar of total assets invested.
Net Sales Revenue / Average total assets
What ratio would you use to evaluate the ability to pay current liabilities?
• Working capital
• Cash ratio
• Acid-test (or quick) ratio
• Current ratio