IU A200 Accounting Exam 2
Terms
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- Allowances
- Dissatisfied buyers keep goods for a reduced prices instead of returning them — work the same way as purchase returns
- 2/10, n/30 Cash Discount
- 2/10, n/30 = 2 percent cash discount if paid within 10 days. Purchase discount is a fee incurred if not paid within 10 days.
- Cost of Goods Available for Sale
- Beginning inventory balance + Inventory purchased during the period. Allocated between the asset account 'merchandise inventory' and an expense account called 'cost of goods sold' Inventory costs = product costs
- Merchandising businesses
- generate revenue by selling goods purchased from suppliers. This can include retail companies that sell products to end users as well as wholesale companies that sell to other businesses
- FOB Shipping Point
- Buyer is responsible for shipping costs transportation-in = freight cost for buyer
- FOB Destination
- Seller is responsible for shipping costs transportation-out = freight cost for seller
- Gross Margin/Gross Profit
- sales revenue - COGS
- Net Income
- gross margin - period costs = net income
- Merchandise Inventory
- Goods purchased from suppliers for retail sale
- multi step income statement vs single step income statement
- Single: lump all revenues together, lump all expenses together, subtract for net income multi: Calculate gross margin from revenue and COGS, then subtract all other expenses
- net price
- list price - discount = net price
- periodic inventory system
- requires physical checking of inventory to determine sales
- perpetual inventory system
- tracks sales automatically to minimize shrink rate and requires less physical checking
- Merchandise inventory costs
- Goods not yet sold, recorded on balance sheet
- COGS
- Sold goods recorded on income statement
- FIFO (inflation)
- Better looking FIS - higher gross margin and net income, but higher taxes
- LIFO (inflation)
- Lower net income, lower taxes
- Internal Controls
- Separation of Duties, quality employees, bonded employees, required absences, procedures manual, authority chain
- contribution margin
- contribution margin per unit x the number we sell a unit
- Figure out these things first
- ⬢what was selling price per unit ⬢what was the cost per unit ⬢then calc the contribution margin
- break even point
- Fixed costs / contribution margin = how many items you have to sell to outweigh your overhead costs
- Cost Behaviors
- * for expenses (materials and labor) = variable cost * for overhead = fixed cost
- FOB =
- free on board = title to inventory (ownership) passes at point X
- A cost that has future economic potential are recorded as
- assets (i.e. inventory, company vehicles, etc)
- Financial vs Managerial Accounting
- Financial = Limited in scope for use by those outside the business. Must follow GAAP. Managerial = For internal use by managers etc. No regulation.
- General, Selling, and Administrative Costs (period costs)
- Are expensed in the period during which they are incurred
- Total product costs include:
- raw materials used, wages of production workers, depreciation on manufacturing equipment.
- General, sales, and administrative expenses are usually
- classified as expenses, except when purchasing future benefit goods for the company.
- Any cost incurred at the manufacturing stage is classified as:
- Product costs. This includes salary of VP of manufacturing, middle management in manufacturing plant, wages of production workers, and engineers/maintenance wages
- A cost that is used in the process of generating revenue is recorded as a:
- expense (e.g. administrative salaries, product cost associated with products sold)
- Product Expenses are always
- Classified as assets. The amount of total assets and net income will be higher if product costs are classified as assets.
- Cash paid to production workers has been used to produce
- Inventory. Because of this it is recorded as an asset. The revenue is earned when inventory is sold, at which time all product costs should be expensed.
- JIT - Just In Time inventory principle
- Inventory is made available for customer consumption at the time of demand. Eliminates the expense of storage of large amounts of inventory.