AFM101 Chapter Notes - Chapter 8: Financial Statement, Over–Under, Internal Control

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lilacmouse857

7 Jun 2018

School

University of Waterloo

Department

Accounting & Financial Management

Course

AFM101

Professor

Donna Psutka

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AFSA Education

(b) PERIODIC

 EI and COS are determined at the end of the accounting period based on physical count.

 Companies do not maintain ongoing record of inventory during the year.

 [# of units of each type of merchandise on hand] * [unit cost] = total cost of EI.

 COS is calculated by using the equation.

o Cannot be determined reliably until the inventory count is completed.

 Inventory purchases  debited to a temporary account called PURCHASES.

 Until there is not inventory count, companies using a period system estimate the value of

inventory on hand.

Periodic vs. Perpetual

PERIODIC PERPETUAL

Low cost. Timely information about inventory quantities

and costs.

Lack of timely inventory information.

 Managers do not receive information

quick about low stock or overstocked

situations.

 Most companies could not survive

without this information.

Timeliness of accounting information

enhances its relevance for decision-making

purposes.

 For this reasons, Perpetual method is

favourable over Period method for

inventory management decisions.

Cost and quality pressures from increasing

competition.

Internal control procedures have gained more

importance  CEOs and CFOs of all

companies must certify the quality of internal

control systems.

Works better for the smallest companies.

(3) METHODS FOR ESTIMATING INVENTORY – GROSS PROFIT METHOD

 For Periodic Inventory System.

 Used when preparing monthly or quarterly financial statements for internal use often

estimate the COS and cost of EI by using the gross profit method.

 Uses the historical gross profit % (chapter 7) to estimate COS.

 COST OF SALES = [$ worth of model/product sold in accounting period] * [100 % MINS

historical gross profit % on an item] .

(4) ERRORS IN MEASURING INVENTORY

 Error in the measurement of EI affects the COS on the current period’s Statement of

Earnings (COS, gross profit and net earnings) and EI on the Statement of Financial Position

(assets).

 Also affects the COS in the following period by the same amount BUT in the opposite

direction.

o Two-period effect  the EI for one accounting period is the BI for the next.

PERIOD 1

PERIOD 2

Inventory Error

COGS

Gross Profit &

Net Income

COGS

Gross Profit &

Net Income

Period 1

EI overstated

UNDER

OVER

UNDER

Period 2

EI understated

OVER

UNDER

OVER

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AFM101 Full Course Notes

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Document Summary

Ei and cos are determined at the end of the accounting period based on physical count. Companies do not maintain ongoing record of inventory during the year. Cos is calculated by using the equation. [# of units of each type of merchandise on hand] * [unit cost] = total cost of ei: cannot be determined reliably until the inventory count is completed. Inventory purchases debited to a temporary account called purchases. Until there is not inventory count, companies using a period system estimate the value of inventory on hand. Managers do not receive information quick about low stock or overstocked situations. Most companies could not survive without this information. Timely information about inventory quantities and costs. information. Timeliness enhances its relevance for decision-making purposes. accounting of. For this reasons, perpetual method is favourable over period method for inventory management decisions.

Related Questions

ABC uses a periodic inventory system, and the ending inventory for each year is determined by taking a complete physical inventory at year-end. A physical count was taken on December 31, 2014, and the inventory on-hand at that time totaled $75,000, which reflects historical cost.âPurchases are $350,000.

Record the 2014 Cost of Goods Sold and the 12/31/14 Inventory adjustment.

Additionally, ABC adheres to GAAP by recording ending inventory at the lower of cost and net realizable value at a total inventory level. A review of inventory data further indicated that the current retail sales value of the ending inventory is $110,000 and estimated costs of completion and shipping is 15% of retail. Be sure to make an additional adjustment, if necessary, to properly value ending inventory using the Loss and Allowance methodology. For Income Statement presentation purposes, be sure to use the Loss Method for accounting for adjustments of inventory to market value.â

Please Help! Iâm not sure about the Loss method for accounting for adjustments of inventory to market value.

I have the following:

BOOK VALUE (HISTORICAL COST) = 75,000

NRV = MV+ESTIMATED COSTâ

110,000 + 15% of 110,000 = NRV 93,500

There is no adjustment required since historical cost is less than NRV.

You can only make allowance for losses not profit. Is that correct or do I need to make an entry for $16,500?

chocolateferret211

17 accounting 1 questions! HELP

9. The following amounts and costs of platters were availablefor sale by Corpus Christy Ceramics during 2016:

Beginning inventory	10 units at $41
First purchase	15 units at $55
Second purchase	30 units at $70
Third purchase	25 units at $65

Corpus Christy Ceramics has 35 platters on hand at the end ofthe year.

What is the dollar amount of inventory at the end of the yearaccording to the weighted-average cost method?

Select one:

A. $4,340

B. $9,920

C. $3,465

D. $6,200

32. Santa Fe Corporation uses the perpetual inventory method. OnMarch 1, it purchased $60,000 of merchandise inventory, terms 2/10,n/30. On March 3, Santa Fe returned goods (not damaged) that cost$6,000. On March 9, Santa Fe paid the supplier.

On March 9, Santa Fe should credit:

Select one:

A. Purchase discounts for $1,200

B. Purchase discounts for $1,080

C. Inventory for $1,080

D. Inventory for $1,200

33. Rocky Company has beginning equity of $600,000, net incomeof $100,000, dividends of $60,000 and investments by owners inexchange for stock of $20,000. Its ending equity is:

Select one:

A. $660,000

B. $480,000

C. $536,000

D. $446,000

35. On September 1, 2016, Chopper, Inc. reported RetainedEarnings of $272,000. During the month of September, Choppergenerated revenues of $40,000, incurred expenses of $24,000,purchased equipment for $10,000 and paid dividends of $12,000.

What is the balance in Retained Earnings on September 30,2016?

Select one:

A. $272,000 debit

B. $276,000 credit

C. $ 16,000 credit

D. $274,000 credit

36. Savannah Company purchases $120,000 of inventory during theperiod and sells $36,000 of it for $60,000. Beginning of the periodinventory was $6,000.

What is the companyâs inventory balance to be reported on itsbalance sheet at year end?

Select one:

A. $36,000

B. $90,000

C. $ 4,000

D. $ 6,000

37. Assuming rising prices, which method will give the highestdollar value for cost of goods sold on the income statement?

Select one:

A. FIFO

B. Average Cost

C. LIFO

D. All of these give equal values for cost of goods sold

38. Kali Company began the period with $20,000 in inventory. Thecompany also purchased an additional $20,000 of inventory andreturned $2,000 for a full credit. A physical count of theinventory at yearâend revealed an inventory on hand of $16,000.What was Kaliâs cost of goods sold for the period?

Select one:

a. $50,000

b. $22,000

c. $48,000

d. $16,000

39. The periodic inventory system differs from the perpetualinventory system:

Select one:

because the periodic system is not compatible with moderntechnology.

because the periodic system continually updates inventory, whilethe perpetual inventory system only updates inventory at the end ofthe period.

because the perpetual system continually updates inventory,while the periodic inventory system only updates inventory at theend of the period.

because the periodic system is more complex and costly.

40. Which one of the following is included in currentassets?

Select one:

A. Common stock

B. Accounts receivable

C. Taxes payable

D. Automobiles

41. For the balance sheet to be in balance, the following mustexist:

Select one:

Total assets must be less than total liabilities

Total assets must be greater than total liabilities

Total assets must equal total liabilities plus stockholders'equity

Total liabilities must equal total stockholders' equity

43. Using a perpetual inventory system, the buyerâs journalentry to record the freight costs includes a:

Select one:

A. Debit to Purchases

B. Debit to Inventory

C. Debit to Freight In

D. Debit to Cost of Goods Sold

44. Joshua records purchases at invoice price and uses theperpetual inventory system. On July 5, Joshua returned $6,000 ofgoods purchased on account to the seller.

How would Joshua record this transaction?

Select one:

Accounts Payable		6,000
	Purchases		6,000

Accounts Receivable		6,000
	Inventory		6,000

Accounts Payable		6,000
	Inventory		6,000

Cash		6,000
	Purchases		6,000

45. Smith & Sons purchased $5,000 of merchandise from theClaremont Company with terms of 3/10, n/30. How much discount isSmith & Sons entitled to take if it pays within the alloweddiscount period of 10 days?

Select one:

$100

$50

$300

$150

46. The accounting record for Max III Company reported thefollowing selected information:

Operating Expenses	$180,000
Sales Returns and Allowances	52,000
Sales Discounts	24,000
Sales Revenue	700,000
Cost of Goods Sold	268,000

Determine Max III Company's gross profit.

Select one:

A. $332,000

B. $280,000

C. $308,000

D. $356,000

48. Using a a perpetual inventory system, the sellerâs journalentry to record the payment for merchandise, received from thebuyer, within the discount period includes a:

Select one:

A. Debit to Accounts Receivable

B. Debit to Cost of Goods Sold

C. Credit to Sales Discounts

D. Debit to Sales Discounts

49.Geraldoâs Groceries purchased milk cartons at an invoiceprice of $6,000 and terms of 2/10, n/30. On arrival of the goods,Geraldoâs realized that half of the milk was past the expirationdate, and returned them immediately to the supplier.

If Geraldoâs pays the remaining amount of the invoice within thediscount period, the amount paid should be:

Select one:

A. $2,880

B. $5,880

C. $2,940

D. $6,000

50. Which one of the following is not a current liability?

Select one:

A. Wages payable

B. Accounts payable

C. Wage expense

D. Taxes payable

rubymacaw554

1. Inventory is classified on the balance sheet as a

a.current liability

b.long-term asset

c.current asset

d.long-term liability

2. What is the term applied to the excess of sales over the cost of goods sold?

a.net income

b.gross profit

c.operations

d.gross sales

3. The inventory system employing accounting records that continuously disclose the amount of inventory is called

a.periodic

b.retail

c.perpetual

d.physical

4. Calculate the gross profit for Jefferson Company based on the following:

Sales $764,000

Selling Expenses $42,500

Cost of Goods Sold $538,000

a.$183,500

b.$721,500

c.$495,500

d.$226,000

5. Calculate income from operations for Jonas Company based on the following data:

Sales $764,000

Selling Expenses $52,500

Cost of Goods Sold $538,000

a.$226,000

b.$711,500

c.$485,500

d.$173,500

6. The primary difference between the periodic and perpetual inventory systems is that a

a.periodic system keeps a record showing the inventory on hand at all times

b.periodic system determines the inventory on hand only at the end of the accounting period

c.periodic system records the cost of the sale on the date the sale is made

d.periodic system provides an easy means to determine inventory shrinkage

7. In credit terms of 3/15, n/45, the "3" represents the

a.percent of the cash discount

b.full amount of the invoice

c.number of days when the entire amount is due

d.number of days in the discount period

8. Which of the following accounts has a normal credit balance?

a.Inventory

b.Accounts Receivable

c.Sales

d.Delivery Expense

9. Using a perpetual inventory system, the entry to record the purchase of $30,000 of merchandise on account would include a

a.debit to Inventory

b.debit to Accounts Payable

c.credit to Sales

d.credit to Inventory

10. Which of the following accounts usually has a debit balance?

a.Sales

b.Inventory

c.Accounts Payable

d.Sales Tax Payable

11. If title to merchandise purchases passes to the buyer when the goods are shipped from the seller, the terms are

a.n/30

b.consigned

c.FOB shipping point

d.FOB destination

12. When goods are shipped FOB destination and the seller pays the freight charges, the buyer

a.does not take a discount

b.journalizes a reduction for the cost of the merchandise

c.makes no journal entry for the freight

d.journalizes a reimbursement to the seller

13. When the perpetual inventory system is used, the inventory sold is debited to

a.Supplies Expense

b.Cost of Goods Sold

c.Sales

d.Inventory

14. Generally, the revenue account for a merchandising business is entitled

a.Gross Sales

b.Sales

c.Gross Profit

d.Fees Earned

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AFM101 Chapter Notes - Chapter 8: Financial Statement, Over–Under, Internal Control

AFM101 Full Course Notes

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