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EXAM REVIEW
ACCOUNTING 101 - UNIT II - CHAPTERS 4, 5 & 6
STUDY SUGGESTIONS
Review your class notes, homework exercises and problems. Be sure to review any chapter appendicies assigned on the General Course Outline. Review Demonstration Problem, Summary and Key Terms at the end of each chapter. Answer the Multiple Choice Quiz at the end of each chapter. Answer Multiple Choice Quiz A and B on the textbook website www.mhhe.com/wild. Know accounting terms and concepts by answering the Discussion Questions at the end of each chapter. Know the account classification (i.e. asset, liability, or owner's equity) and normal balance of all accounts. Know the what the financial ratios mean and how to calculate them. Other online help is available ay a variety of sites such as: http://www.cliffsnotes.com/WileyCDA/Section/id-305261.html http://www.simplestudies.com/
Chapter 4 - Accounting for Merchandising Operations Know that the revenue account is Sales (not Fees Earned). Multiple-Step Income Statement Sales - Sales Returns and Allowances - Sales Discounts = Net Sales Net Sales - Cost of Merchandise Sold = Gross Profit Gross Profit - Operating Expenses = Net Income Know the new accounting terms in this chapter: Merchandise Inventory Perpetual inventory system Periodic inventory system Physical inventory Merchandise Inventory Shrinkage Understand Credit Terms, such as 2/10, n/30 and the credit period. Know how transportation costs (FOB Shipping Point or FOB Destination) are determined and recorded by buyer and seller. Understand the new accounts for a merchandising business. Know how to journalize merchandise transactions for both buyer and seller.
Chapter 5 – Accounting for Inventories Know the effect of inventory errors on the financial statements. Understand the three inventory cost flow assumptions: FIFO, LIFO and Average Cost. Know how to compute the cost of inventory under the perpetual inventory system using FIFO and LIFO and Average Cost.
Know how to compute the cost of inventory under the periodic inventory system using FIFO and LIFO and Average Cost. Compute the proper valuation of inventory using the Lower of Cost or Market rules. Estimate the cost of inventory using the retail method. Estimate the cost of inventory using the gross profit method.
Chapter 6 – Accounting for Cash and Internal Controls Know how to prepare the bank reconciliation and the related journal entries. Know how to prepare the journal entries to open, replenish and adjust the balance for a petty cash fund. Know what the cash short and over account is and how it is used.
SAMPLE PROBLEMS
Problem 1 - Purchase related transaction Merchandise is purchased on account from a supplier, List price $15,000, trade discount 40%, terms 2/10, n/30 FOB shipping point with transportation costs of $150 paid by the seller, and added to the invoice. The purchaser returned $1,000 of the merchandise prior to payment. The invoice was paid within the discount period; what is the amount of cash paid by the buyer?
Problem 2 - Sales related and purchase related transactions Merchandise is sold on account to a customer for $15,000, terms 1/10, n/30, FOB destination. The merchandise cost $10,000. The seller paid transportation costs of $750. The buyer returned some of the merchandise and the seller prior to receiving payment issued a credit memorandum for $1,500 for returned merchandise. The returned merchandise cost $1,000.
a. What is the journal entry recorded by the seller for the sale of the merchandise? b. What is the journal entry recorded by the seller for the return of the merchandise? c. What is the journal entry recorded by the seller for the receipt of payment if the invoice is paid within the discount period? d. What is the journal entry recorded by the buyer for the purchase of the merchandise? e. What is the journal entry recorded by the buyer for the return of the merchandise? f. What is the journal entry recorded by the buyer for the payment, if the invoice is paid within the discount period?
Problem 8 - Periodic inventory by three methods There are 50 units of the item in the physical inventory at December 3 1. The periodic inventory system is used. The units of an item available for sale during the year were as follows:
January 1 Inventory 50 units at $ 9. March 10 Purchase 45 units at $10. July 31 Purchase 35 units at $11. November 5 Purchase 40 units at $12.
a. Determine the cost of ending inventory by the first-in, first-out (FIFO) method. b. Determine the cost of ending inventory by the last-in, first-out (LEFO) method. c. Determine the cost of ending inventory by the average cost method.
Problem 9 - Lower of cost or market inventory On the basis of the following data, determine the value of the inventory at the lower of cost or market.
Inventory Unit Unit Commodity Quantity Cost Price Market Price Corn 15,000 2.75 3. Wheat 10,000 4.25 4. Soybeans 20,000 6.50 6. Oats 5,000 4.45 4.
Problem 10 - Retail inventory method On the basis of the following data, estimate the cost of merchandise inventory at January 31 using the retail method:
Cost Retail January 1 Merchandise inventory $365,000 $550, Jan 1 - 31 Purchases (net) for January $355,000 $650, Sales (net) for January $625,
Problem 11 - Gross profit inventory method A fire destroyed hank’s Hardware’s inventory on February 15. The following data was obtained from the accounting records, which he kept at home. Estimated gross profit rate was 30%. Estimate the cost of merchandise destroyed on February 15.
January 1 Merchandise inventory $125, Jan 1 - Feb 15 Purchases (net) $150, Sales (net) $200,
Problem 12 - Compute inventory turnover and the number of days' sales in inventory The cost of merchandise sold for the Nicholas Company was $4,380,000 in 1998. The beginning and ending inventories were $525,000 and 615,000 respectively. a. Compute inventory turnover for 1998
b. Compute the number of days' sales in year-end inventory.
Problem 13 - Cash Short and Over Account a. What is the journal entry to record cash sales if the actual cash received was $13,180.30 and the amount indicated by the cash register total was $13,189.70?
b. What is the normal balance of the Cash short and over account?
c. If the Cash short and over account has a debit balance at the end of the month, how is it reported on the financial statements?
Problem 14 - Petty Cash Fund a. What is the journal entry to establish a petty cash fund in the amount of $250?
b. What account(s) is or are debited in the journal entry to reimburse the petty cash fund?
c. What account(s) is or are credited in the journal entry to reimburse the petty cash fund?
SOLUTIONS TO SAMPLE PROBLEMS
Problem 1 - Purchase related transaction List price for merchandise $15, Less Trade discount of 40% (6,000) Invoice amount 9, Less return (1,000) 8, Less 2% cash discount 160 7, Plus transportation 150 Amount paid by the buyer $7,
Problem 2 - Sales related and purchase related transactions a. Journal entry recorded by the seller for the sale of the merchandise: Accounts Receivable 15, Sales 15, Cost of Merchandise Sold 10, Merchandise Inventory 10, Transportation Out 750 Cash 750
b. Journal entry recorded by the seller for the return of the merchandise: Sales Returns and Allowances 1, Accounts Receivable 1, Merchandise Inventory 1, Cost of Merchandise Sold 1,
c. Journal entry recorded by the seller for the receipt of payment: Cash 13, Sales Discounts 135 Accounts Receivable 13,
d. Journal entry recorded by the buyer for the purchase of the merchandise: Merchandise Inventory 15, Accounts Payable 15,
e. Journal entry recorded by the buyer for the return of the merchandise: Accounts Payable 1, Merchandise Inventory 1,
f. Journal entry recorded by the buyer for the payment: Accounts Payable 13, Merchandise Inventory 135 Cash 13,
Problem 3 - Sales related transactions a. Sale of $1,000 of merchandise for cash or bank credit card, the cost of the merchandise is $600. Cash 1, Sales 1, Cost of Merchandise Sold 600 Merchandise Inventory 600
b. Sale of $500 of merchandise on account or a non-bank credit card, when the sale is subject to a sales tax of 8% and the merchandise cost $300. Accounts Receivable 540 Sales 500 Sales Tax Payable 40 Cost of Merchandise Sold 300 Merchandise Inventory 300
Problem 4 - Merchandise inventory shrinkage Cost of Merchandise Sold 5, Merchandise Inventory 5,
Problem 5 Subsidiary ledgers and general ledger accounts A subsidiary ledger is a ledger containing individual accounts with a common characteristic. The accounts receivable subsidiary ledger contains an account for each credit customer that shows the amounts of sales and cash received. The accounts payable subsidiary ledger contains an account for each creditor that shows the amounts of purchases and cash payments. General ledger controlling accounts are Accounts Receivable and Accounts Payable. A control account in the general ledger summarizes the balances of the accounts in a subsidiary ledger.
c. The inventory cost by the average cost method is $$520; (50 at $10.40) January 1 Inventory 50 units at $ 9.06 453. March 10 Purchase 45 units at $10.00 450. July 31 Purchase 35 units at $11.00 385. November 5 Purchase 40 units at $12.00 480. Total Units 170 Total Cost 1,768.
(Average cost $1,768 / 170 units = $10.40)
Problem 9 - Lower of cost or market inventory On the basis of the following data, determine the value of the inventory at the lower of cost or market. Unit Unit Inventory Cost Market Lower CommodityQuantity Price Price Cost Market of C or M Corn 15,000 2.75 3.00 41,250 45,000 41, Wheat 10,000 4.25 4.00 42,500 40,000 40, Soybeans 20,000 6.50 6.75 130,000 135,000 130, Oats 5,000 4.45 4.35 22,250 21,750 21, Total $236,000 $241,750 $233,
Problem 10 - Retail inventory method On the basis of the following data, estimate the cost of merchandise inventory at January 31 using the retail method:
Cost Retail Merchandise inventory, January 1$365,000 $ 550, Purchases in January (net) 355,000 650, Merchandise available for sale 720,000 1,200,
Ratio of cost to retail 720,000 / 1,200,000 = 60%
Sales for January (net) $ 625, Merchandise inventory, January 31 at retail 575, Merchandise inventory, January 31 at Estimated cost (575,000 X 60%) $ 345,
Problem 11 - Gross profit inventory method Merchandise inventory, January 1$125, Purchases (net) Jan 1- Feb 15 150, Merchandise available for sale 275, Sales (net) $200, Less Estimated gross profit at 30% 60, Estimated cost of merchandise sold140. Estimated merchandise inventory, February 15 $135,
Problem 12 - Compute inventory turnover and the number of days' sales in inventory a. The inventory turnover for 1998 was 7. 4,380,000 / (525,000 + 615,000) / 2 = 7.
b. The number of days' sales in year end inventory was 51.3 days 615,000 / (4,380,000 / 365) = 51.
Problem 13 - Cash Short and Over Account The journal entry to record cash sales if the actual cash received was $13,180.30 and the amount indicated by the cash register total was $13,189.70: a. Cash 13,180. Cash Short and Over 9. Sales 13,189.
b. The Cash Short and Over account does not have a normal balance.
c. If the Cash Short and Over account has a debit balance at the end of the month, it is included in Miscellaneous Administrative Expense in the income statement. A credit balance is included in the Other Income section.
Problem 14 - Petty Cash Fund The journal entry to establish a petty cash fund in the amount of $250 is: Petty Cash 250 Cash 250
The accounts debited in the journal entry to reimburse the petty cash fund are the various expense or asset accounts for which the petty cash was disbursed.
The cash account is credited in the journal entry to reimburse the petty cash fund.
