Study Guides (247,997)
Canada (121,215)
Accounting (87)
ACCT 1220 (14)

ACCT 1220 Midterm: ACCT 1220 Midterm 2 Exam Notes

17 Pages
Unlock Document

ACCT 1220
Adeel Mahmood

Accounting Midterm #1 Study Review Chapter 5: Merchandising Operations  Merchandising Operations  Merchandise Inventory: is needed to describe the many different items that make up the total inventory.  Retailers: merchandising companies that purchase and sell directly to consumers.  Wholesalers: merchandising companies that sell to retailers.  Manufacturers: companies that produce goods for sale to wholesalers (or others).  Raw Materials: the basic goods and materials that are on hand and will be used in production but have not yet been sent into production.  Work in Process: that portion of inventory on which production has started but is not yet complete.  Finished goods: inventory is manufactured items that we are completed and ready for sale.  Income Measurement Process  Sales Revenue/Sales: the main source of revenue from the sale of merchandise.  Cost of goods sold: the total cost of the merchandise that was sold during the period. This expense is directly related to the revenue that is recognized from the sale of goods.  Gross profit: sales revenue less the cost of goods sold.  Operating expenses: expenses that are incurred in the process of earning sales revenue. The operating expenses of the merchandising company include many of the same expenses found in a service company, such as salaries, insurance, utilities, and depreciation.  Inventory Systems  Flow of costs for a merchandising company: Beginning inventory + purchases = cost of goods available for sale o Once sold, these costs are assigned to cost of goods sold o Goods left over are ending inventory  Perpetual System: detailed records are maintained for the cost of each product that is purchased and sold. o These records continuously- perpetually- show the quantity and cost of the inventory purchased, sold, and on hand. o A physical count is done at least once a year to adjust perpetual records to actual records. o This system enables the effective control of inventory which is an important asset to all businesses  Periodic System: Detailed records of merchandise are not kept throughout the period o Cost of goods sold is only determined at the end of the accounting period: once inventory is counted o Cost of goods sold = Beginning inventory + cost of purchases less ending inventory  Sales Taxes and Freight  GST and HST paid does not form part of cost of goods (refunded)  FOB (Free on Board) – refers to where title or ownership of goods transfers:  FOB destination: seller pays freight costs  FOB shipping point: buyer pays freight costs  Freight paid by buyer (FOB shipping point) is part of the cost of merchandise purchased  Purchase Returns and Allowances  A purchaser returns the goods to the seller and receives a cash refund or credit  The buyer may choose to keep the merchandise if the seller is willing to give an allowance (deduction) from the purchase price  In both cases, the result is a decrease to the cost of goods purchased  Discounts  A quantity discount gives a price reduction according to the volume of the purchase:  Not recorded separately – discounted price is recorded as cost of purchase  A purchase discount is offered to encourage early payment of a balance due. Example: 2/10, n/30:  Recorded separately when payment made. Results in a decrease to Merchandise Inventory account  Summary of Purchase Transactions  Recording Inventory Sales  Perpetual Vs. Periodic Chapter 6: Reporting and Analyzing Inventory  Taking a Physical Inventory  Involves counting, weighing, or measuring kind of inventory on hand.  An inventory count is generally more accurate when a limited number of, or no, goods are being sold or received during the counting. So, businesses count inventory when the business is slow or closed.  Internal Control: process designed to help an organization achieve reliable financial reporting, effective and efficient operations, and compliance with relevant laws and regulations.  Goods in Transit  Goods in transit should be included in the inventory of the company that has legal title to the goods.  FOB destination: the seller has legal title to the goods while they are in transit.  FOB shipping point: the buyer has legal title to goods while they are in transit.  Consigned Goods  In some lines of business, it is customary to hold goods belonging to other parties and sell them, for a fee, without ever taking ownership of the goods.  Example: Artists often display their paintings in galleries on consignment, the art gallery does not take ownership of the art- it is still the artists. Therefore, if an inventory count is taken, any art on consignment should not be included in the art gallery’s inventory. When the art sells, the gallery makes a commission and pays the artist the remainder.  Specific Identification Method  Tracks the actual physical flow of the goods in a perpetual inventory system. Each inventory is marked, tagged or coded with its specific unit cost so that, at any point in time, the cost of the ending inventory and the cost of the goods sold can be determined.  Appropriate and required for goods that are not ordinarily inter-changeable, and for goods that are produced and segregated for specific products.  First In, First Out (FIFO)  Assumes that the earliest (oldest) goods purchased are the first ones to be sold.  As a result, FIFO assumes that the last goods purchased are still in ending inventory.  Whether periodic or perpetual, FIFO will always result in the same cost of goods sold and ending inventory amounts.  Average Cost  Recognizes that it is not possible to measure a specific physical flow of inventory when the goods available for sale are homogenous or non-distinguishable.  Example: a fuel storage tank at a gas station, more gas keeps getting added in so you can’t tell what gas was bought at what price.  EQUATION: Cost of Goods Available for Sale / Units Available for Sale = Weighted Average Unit Cost  Inventory Turnover  Measures the number of times, on average, that inventory is sold during the period.  EQUATION: Cost of Goods Sold / Average Inventory  DAYS IN INVENTORY EQUATION: 365 / Inventory Turnover  Just in Time Approach: rather than ordering large amounts of quantities of an inventory item, particularly one that is not in high demand, a company places a purchase order when the item is needed to fulfil a specific order. Chapter 7: Internal Control and Cash  Internal Control  Consists of all the related methods and measures adopted within a company to help it achieve reliable financial reporting, effective and efficient operations, and compliance with relevant laws and regulations.  Control Environment: is the responsibility of management to make it clear that the organization values integrity, and that unethical activity will not be tolerated (often referred to as “setting the tone at the top”.  Risk Assessment: companies must identify and analyze the various factors that create risk for the business and determine how to best manage these risks.  Control activities: to reduce the occurrence of unintentional and intentional errors, management must assign policies and procedures to address the specific risks faced by the company.  Information and communication: the internal control system must capture and communicate all pertinent information to the appropriate internal and external users.  Monitoring: internal control systems must be monitored periodically for their adequacy. To be effective, significant deficiencies must be communicated to those in authority, such as management and the Board of Directors.  Control Activities  Authorization of transactions and activities  Segregation of duties  Documentation  Physical controls  Independent checks of performance  Human resource controls  Authorization of Transactions and Activities  The assignment of responsibility to specific employees.  This control activity is the most effective when only one person is authorized to perform a specific task.  Segregation of Duties  Responsibility for related activities should be assigned to different individuals.  When the same individual is responsible for related activities, the potential for errors increases.  Documentation  Documents provide evidence that transactions and events have occurred at specified times and specified amounts.  Requirement that original documents (source documents) required for accounting entries be promptly forwarded to the accounting department to help ensure timely and accurate recording of the transaction.  Physical Controls  Can be used to safeguard assets and enhance the reliability of accounting records. 1. Safe vaults and safety deposit boxes, alarms, television monitors, etc.  Independent Checks of Performance  Internal Reviews: independent internal reviews are especially useful in comparing accounting records with existing assets to ensure that nothing has been stolen.  Internal Auditors: are company employees who evaluate the effectiveness of the company’s system of internal control. They periodically review the activities of departments and individuals to determine whether prescribed internal controls are followed.  External Reviews: it is useful to contrast independent internal reviews with independent external reviews.  External Auditors: perform an important type of external review. They, in contrast with internal auditors, are independent of the company.  Human Resource Controls 1. Conducting through background checks. 2. Bonding of employees who handle cash. 3. Rotating employee’s duties and requiring employees to take vacations.  Limitations of Internal Control  Reasonable assurance: that assets are properly safeguarded and that the accounting records are accurate and reliable. Th
More Less

Related notes for ACCT 1220

Log In


Join OneClass

Access over 10 million pages of study
documents for 1.3 million courses.

Sign up

Join to view


By registering, I agree to the Terms and Privacy Policies
Already have an account?
Just a few more details

So we can recommend you notes for your school.

Reset Password

Please enter below the email address you registered with and we will send you a link to reset your password.

Add your courses

Get notes from the top students in your class.