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# Exam Ii Review

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• invoice (actual cost of items) plus shipping (freight-in), plus storage, insurance, and other costs related to obtaining inventory and making it ready to be sold.
• FIFO:14 units sold: 10 from beginning = 10 x \$10 = 100 4 from 2nd purchase = 4 x \$15 = 60 TOTAL = \$160LIFO10 units from 2nd purchase = 10 x \$15 = \$1504 from beginning balance = 4 x \$10 = \$ 40 TOTAL = \$190Weighted Average20 units total: 10 x \$10 = 100 10 x \$15 = 150 20 units @ \$250 total = \$12.5 per unit14 units sold x \$12.5 = \$175
• Understating ending inventory overstates COGS, and therefore understates net incomeOverstating ending inventory understates COGS and therefore overstates net incomeThe effect is opposite in year 2SEE PAGE 211 in textbook
• Whole:Product Total Cost Total MarketA \$50 \$60B \$100 \$90C \$100 \$110TOTAL \$250 \$260Inventory = \$250Individually:Product A -- \$50 (lower of 50 or 60)Product B -- \$90 (lower of 100 or 90)Product C -- \$100 (lower of 100 or 110)TOTAL \$240
• Three MethodsA. The percent of sales method, -- Bad Debt Expense directly computedB. The percent of accounts receivable method – Bad Debt Expense is a plugC. The aging of accounts receivable method – Bad Debt Expense is plugged
• % of sales: Bad Debt Expense = %sales.Sales = 1,000,0000 x 2% = 20,0000Bad Debt Expense 20,000 Allowance Doubtful Accounts 20,000
• % of A/R = Total Allowance AccountBad Debt Expense = plugged.5% x A/R = .05 x 500,000 = 25,000  what should be Allowance Account10,000 is already in the Allowance, need \$15,000 more.Bad Debt Expense 15,000 Allowance for Doubtful Accounts 15,000
• Depreciation – for tangible/plant assets - assets that are used in business operation and have useful life more than 1 year.-- Know for the test: Straight-Line Double-Declining Balance Units of Production Depletion – for raw material type assets (such as oil, minerals, etc)Amortization – for intangible assets (such as patents, trademarks, etc)
• Examples of Capital Expenditures: Extraordinary Repair UpgradesExample of Revenue Expenditures Ordinary repairs and maintanance
• Cost of Building -- \$250,000Accumulated Depreciation \$120,000 Book Value \$130,000Proceeds from Insurance \$180,000Gain \$50,000
• ### Exam Ii Review

1. 1. EXAM II -- REVIEW<br />ACC 201 – Spring 2010<br />
2. 2. Inventory and Cost of Sales<br />Chapter 5<br />
3. 3. Inventory Cost<br />Costs included in inventory can include<br />
4. 4. Valuation<br />FIFO<br />Balance sheet is reflection of current costs<br />if prices are rising, net income is overstated<br />Income Statement reflection of older costs<br />LIFO<br />Lower net income if rising prices<br />COGS more accurate with current costs<br />Weighted Average<br />Tends to smooth out erratic changes in costs<br />
5. 5. FIFO / LIFO/Weighted Average<br />Beginning Balance (day 1) is 10 units at \$10 each. Purchased 10 more unites at \$15 each on day 5. On day 10, sold 14 units.<br />COGS under FIFO? <br /> Under LIFO? <br /> Weighted Average?<br />
6. 6. Financial Statement Effects<br />Understated Ending Inventory…<br />Overstated ending inventory<br />
7. 7. Lower of Cost or Market<br />Calculate the inventory value using the LCM for inventory as a whole<br />Calculate the inventory value using LCM for each individual item<br />
8. 8. Receivables<br />Chapter 7<br />
9. 9. Bad Debt Expense<br />bad debt expense can be estimated by: <br />
10. 10. % sales method<br />A company using the %sales method has 1,000,000 sales in 2009. The allowance account had credit balance of 10,000. A/R has balance of 500,000 About 2% of sales are estimated to be uncollectible.<br />What is the journal entry to record bad debt expense?<br />
11. 11. % A/R method<br />A company using the %sales method has 1,000,000 sales in 2009. The allowance account had credit balance of 10,000. A/R has balance of 500,000 About 5% of A/R are estimated to be uncollectible.<br />What is the journal entry to record bad debt expense?<br />
12. 12. Interest<br />= Principle x InterestRate x time<br />Time = days/360<br />*assume 30 days per month.<br />
13. 13. Long-Term Assets<br />Chapter 8<br />
14. 14. Cost Recovery<br />Different methods of allocating cost of an asset over its useful life<br />
15. 15. Capital vs Revenue Expenditures<br />Capital Expenditures are written to the balance sheet asset account - these expenditures increase the usefulness of the asset significantly<br />Revenue expenditures are written to the income statement – they do not significantly affect the usefulness of the asset<br />
16. 16. Asset Disposal Gains/Losses<br />Company has building destroyed by an earthquake. Building cost \$250,000, had accumulated depreciation of \$120,000. Insurance company proceeds were \$180,000.<br />Calculate the gain/loss<br />