1) The document discusses accounting for merchandising operations under a perpetual inventory system. It describes how purchases, sales, returns and allowances are recorded.
2) Purchases are recorded by debiting inventory and crediting accounts payable. Sales are recorded by crediting sales revenue and debiting cost of goods sold and inventory.
3) Returns and allowances are contra accounts that are credited to offset original debit entries for purchases or sales. This summary highlights the key accounting entries for a merchandising business.
This document discusses inventory classification and costing methods. It begins by explaining how companies classify inventory into raw materials, work in process, and finished goods. The document then discusses how companies determine inventory quantities by taking physical counts and considering goods in transit. It also explains different inventory cost flow methods like FIFO, LIFO, and average costing and their effects on financial statements. Finally, it discusses how inventory errors can affect income statements and balance sheets in both the current and subsequent periods.
The document discusses the steps in preparing a worksheet. It begins by explaining how to prepare a trial balance on the worksheet by transferring account balances from the ledger. The second step is to enter adjusting entries in the adjustments columns. The third step is to complete the adjusted trial balance columns by totaling debits and credits. The fourth step extends adjusted account balances to the appropriate financial statement columns. The final step is to compute net income or loss by totaling the columns and determining the difference between revenues and expenses.
The document provides an overview of accounting information systems. It discusses the basic concepts of an AIS, including that an AIS collects and processes transaction data and communicates financial information. It also describes the nature and purpose of subsidiary ledgers, which are used to track individual account balances like accounts receivable. Additionally, the document explains how to record transactions in special journals, including sales, purchases, cash receipts and payments journals, in order to organize similar transactions and reduce general journal entries. It compares AIS under GAAP and IFRS.
The document provides information about adjusting entries for Micro Computer Services for August 2017. It states that accrued revenues of $500 were earned but not recorded for services performed. It also states that accrued expenses of $300 were incurred for unpaid utilities. The adjusting entries would debit Accounts Receivable and credit Service Revenue for $500 to record accrued revenues. For accrued expenses, the adjusting entries would debit Utilities Expense and credit Accounts Payable for $300 to record accrued expenses.
The document describes the accounting recording process, including how accounts, debits, credits, journals, ledgers, and trial balances are used. It explains that journals are used to record transactions chronologically, while ledgers contain accounts for assets, liabilities, equity, revenues, and expenses. Transactions are posted from journals to ledgers to update account balances. A trial balance is prepared to check that total debits equal total credits. While useful, a trial balance does not guarantee accurate records as errors can still exist.
Here are the key steps to solving this problem:
1. Calculate 10% of accounts receivable to estimate uncollectible accounts:
- 10% of $30,000 is 0.1 * $30,000 = $3,000
2. Add the existing balance in the allowance account:
- $2,000 existing balance
3. The total estimated uncollectible accounts is $3,000 + $2,000 = $5,000
Therefore, the adjusting entry is:
Bad Debt Expense 5,000
Allowance for Doubtful Accounts 5,000
This document discusses key concepts related to analyzing financial statements including horizontal and vertical analysis, ratio analysis, and sustainable income. It defines horizontal analysis as evaluating financial statement data over time to determine increases and decreases. Vertical analysis expresses each financial statement item as a percentage of a base amount. Ratio analysis is used to analyze a company's performance using ratios that measure liquidity, profitability, and solvency. Sustainable income differs from actual net income by excluding unusual revenues, expenses, gains, and losses to determine a company's most likely future income level.
This document discusses inventory classification and costing methods. It begins by explaining how companies classify inventory into raw materials, work in process, and finished goods. The document then discusses how companies determine inventory quantities by taking physical counts and considering goods in transit. It also explains different inventory cost flow methods like FIFO, LIFO, and average costing and their effects on financial statements. Finally, it discusses how inventory errors can affect income statements and balance sheets in both the current and subsequent periods.
The document discusses the steps in preparing a worksheet. It begins by explaining how to prepare a trial balance on the worksheet by transferring account balances from the ledger. The second step is to enter adjusting entries in the adjustments columns. The third step is to complete the adjusted trial balance columns by totaling debits and credits. The fourth step extends adjusted account balances to the appropriate financial statement columns. The final step is to compute net income or loss by totaling the columns and determining the difference between revenues and expenses.
The document provides an overview of accounting information systems. It discusses the basic concepts of an AIS, including that an AIS collects and processes transaction data and communicates financial information. It also describes the nature and purpose of subsidiary ledgers, which are used to track individual account balances like accounts receivable. Additionally, the document explains how to record transactions in special journals, including sales, purchases, cash receipts and payments journals, in order to organize similar transactions and reduce general journal entries. It compares AIS under GAAP and IFRS.
The document provides information about adjusting entries for Micro Computer Services for August 2017. It states that accrued revenues of $500 were earned but not recorded for services performed. It also states that accrued expenses of $300 were incurred for unpaid utilities. The adjusting entries would debit Accounts Receivable and credit Service Revenue for $500 to record accrued revenues. For accrued expenses, the adjusting entries would debit Utilities Expense and credit Accounts Payable for $300 to record accrued expenses.
The document describes the accounting recording process, including how accounts, debits, credits, journals, ledgers, and trial balances are used. It explains that journals are used to record transactions chronologically, while ledgers contain accounts for assets, liabilities, equity, revenues, and expenses. Transactions are posted from journals to ledgers to update account balances. A trial balance is prepared to check that total debits equal total credits. While useful, a trial balance does not guarantee accurate records as errors can still exist.
Here are the key steps to solving this problem:
1. Calculate 10% of accounts receivable to estimate uncollectible accounts:
- 10% of $30,000 is 0.1 * $30,000 = $3,000
2. Add the existing balance in the allowance account:
- $2,000 existing balance
3. The total estimated uncollectible accounts is $3,000 + $2,000 = $5,000
Therefore, the adjusting entry is:
Bad Debt Expense 5,000
Allowance for Doubtful Accounts 5,000
This document discusses key concepts related to analyzing financial statements including horizontal and vertical analysis, ratio analysis, and sustainable income. It defines horizontal analysis as evaluating financial statement data over time to determine increases and decreases. Vertical analysis expresses each financial statement item as a percentage of a base amount. Ratio analysis is used to analyze a company's performance using ratios that measure liquidity, profitability, and solvency. Sustainable income differs from actual net income by excluding unusual revenues, expenses, gains, and losses to determine a company's most likely future income level.
This document discusses accounting for partnerships, including forming, operating, and liquidating a partnership. It covers three main learning objectives:
1) Discussing and accounting for the formation of a partnership by explaining the characteristics of partnerships such as co-ownership, mutual agency, and limited life.
2) Explaining how to account for net income or net loss of a partnership by dividing income according to the partnership agreement using methods like fixed ratios or interest/salaries.
3) Explaining how to account for the liquidation of a partnership through closing entries and distributing remaining assets to partners.
This document provides an overview of accounting for receivables. It defines different types of receivables like accounts receivable and notes receivable. It explains how companies recognize, value, and dispose of both accounts receivable and notes receivable. Specific topics covered include recognizing revenue on credit sales, estimating and recording allowance for doubtful accounts, accounting for uncollectible accounts, determining maturity dates and interest on notes, and presenting receivables on financial statements. The document aims to help students understand the key accounting concepts and entries related to receivables.
The document discusses the statement of cash flows, including its usefulness, format, and how to prepare it using the indirect method. It explains that the statement of cash flows provides information about a company's cash receipts and payments during a period and is separated into operating, investing, and financing activities. It also discusses how to classify transactions and adjust net income to reconcile it to net cash provided by operating activities. Key steps include adding back non-cash expenses, and analyzing changes in current assets and liabilities.
This document summarizes key accounting concepts related to cash, receivables, and related valuation issues. It defines cash and receivables, discusses how to recognize, measure, and present them in financial statements. Specific topics covered include cash controls, restricted cash, cash equivalents, accounts and notes receivable, allowance for doubtful accounts, present value concepts for long-term notes receivable.
This document provides an overview of adjusting entries in 3 parts:
1. It introduces adjusting entries and explains they are needed to follow accrual accounting principles by ensuring revenues and expenses are recorded in the correct periods.
2. It identifies the major types of adjusting entries as deferrals (prepaid expenses and unearned revenues) and accruals (accrued revenues and accrued expenses).
3. It explains how to prepare adjusting entries for specific types of deferrals, including prepaid expenses like supplies, insurance, and depreciation, as well as unearned revenues. Examples are provided for each.
1. The document provides an overview of chapter 1 of the textbook "Financial Accounting" which covers topics such as what accounting is, who uses accounting data, ethics in accounting, accounting standards, and the basic accounting equation.
2. It defines accounting as identifying, recording, and communicating the economic events of an organization to interested users. Accounting data is used by internal and external users such as managers, investors, creditors, and more.
3. Ethics, accounting standards set by bodies like FASB and IASB, and measurement principles like historical cost are also introduced as important foundations of accounting.
Managerial accounting provides economic and financial information for internal use by managers. It differs from financial accounting which produces reports for external users. Managerial accounting helps with planning, directing, and controlling a business. It involves tracking costs including direct materials, direct labor, and manufacturing overhead. These costs are either product costs, which are included in inventory, or period costs which are expenses. Managerial accounting also computes cost of goods manufactured using total manufacturing costs for the period plus beginning work in process, less ending work in process.
Corporations invest in debt and stock securities for various reasons such as having excess cash or generating investment income. For debt investments, entries are made to record acquisition, interest revenue, and sale. Interest receivable and revenue are reported in financial statements. For stock investments where influence is less than 20%, the cost method is used where investments are recorded at cost and revenue is recognized on cash dividends. For influence between 20-50%, the equity method is used where the investment is adjusted for the investor's share of earnings and dividends. For over 50% influence, consolidated financial statements are prepared. Investments are classified as trading, available-for-sale, or held-to-maturity and reported differently in financial statements.
Current Liabilities, Provisions, and Contingenciesreskino1
Current Liabilities,
Provisions, and Contingencies
After studying this chapter, you should be able to:
1. Describe the nature, valuation, and reporting of current liabilities.
2. Explain the accounting for different types of provisions.
3. Explain the accounting for loss and gain contingencies.
4. Indicate how to present and analyze liability-related information
1) The document provides an overview of chapter 1 of the textbook "Financial Accounting" which covers accounting basics. It defines accounting, identifies its users and uses, and explains key concepts like ethics, standards, assumptions and the accounting equation.
2) The accounting equation states that assets must equal liabilities plus equity. It defines the components of the equation as assets being resources owned, liabilities being debts or obligations, and equity being the ownership claim.
3) Business transactions impact the accounting equation by increasing or decreasing at least two elements as a transaction has a dual effect.
Stanley Company produces specialized safety devices. It expects manufacturing overhead costs of $160,000 for the year and machine usage of 40,000 hours. To determine the predetermined overhead rate, Stanley will calculate overhead costs divided by the activity base of machine hours. This rate will then be used to assign a portion of manufacturing overhead to Work in Process based on actual machine hours used for each job. The predetermined overhead rate provides an estimated allocation of overhead costs, which are later compared to actual overhead costs at year end.
This document discusses fraud and principles of internal control. It begins by introducing the learning objectives which are to discuss fraud and internal control principles, apply them to cash, identify bank account control features, and explain cash reporting. It then defines fraud and lists the three factors that contribute to fraudulent activity. Several principles of internal control are outlined, including establishing responsibility, segregating duties, documentation procedures, physical controls, and independent internal verification. Examples are provided to illustrate how missing specific controls enabled several fraud scenarios.
1. The document describes accounting concepts and procedures for merchandising companies, including recording purchases and sales under a perpetual inventory system.
2. Key concepts covered include recording purchases on account, purchase returns and allowances, purchase discounts, recording sales on account, sales returns and allowances, and sales discounts.
3. Examples are provided to illustrate journal entries for typical purchase and sales transactions such as recording purchases and payment with a discount taken, and recording sales and subsequent returns.
Here are the steps to analyze and post a journal entry:
1. Analyze the journal entry to determine the accounts involved and whether each account increased or decreased.
2. Determine if each account is an asset, liability, equity, revenue or expense account based on the general ledger chart of accounts.
3. Translate increases in asset and expense accounts and decreases in liability, equity and revenue accounts into debits, and increases in liability, equity and revenue accounts and decreases in asset and expense accounts into credits.
4. Record the debits and credits in the appropriate general ledger accounts.
Posting
Question
LO 6
The document discusses budgeting principles and the components of the master budget. It states that the master budget is a set of interrelated budgets that constitutes a plan of action for a specified time period and contains operating budgets and financial budgets. The operating budgets are used as the basis for preparing the budgeted income statement, while the financial budgets focus on cash needs to fund operations and capital expenditures. It also discusses preparing budgets for sales, production, direct materials, direct labor, manufacturing overhead, selling and administrative expenses, and a budgeted income statement.
Here are the steps to solve this payroll problem:
(a) Gross earnings: $40,000
FICA taxes (7.65% of $40,000): 0.0765 * $40,000 = $3,060
Federal income tax withheld: $9,000
State income tax withheld: $1,000
Net pay = Gross earnings - FICA taxes - Federal taxes - State taxes
= $40,000 - $3,060 - $9,000 - $1,000 = $26,940
(b) Salaries and Wages Expense 40,000
FICA Taxes Payable 3,060
Federal Income Taxes Payable 9,000
Ch03-financial reporting and accounting standardsVivi Tazkia
The document provides an overview of the key concepts and steps covered in Chapter 3 of Intermediate Accounting (IFRS 2nd Edition) by Kieso, Weygandt, and Warfield. It outlines 8 learning objectives for the chapter, which include understanding basic accounting terminology, the double-entry system, the accounting cycle, journalizing and posting transactions, adjusting entries, and preparing financial statements. The chapter also discusses the accounting equation, T-accounts, the different types of accounts, and the accounting process from recording transactions to the adjusted trial balance.
The document discusses accounting for long-term liabilities such as bonds payable and notes payable. It covers topics such as issuing long-term debt, types of bonds, valuation of bonds at issuance, accounting for bond discounts and premiums including amortization methods, extinguishment of debt, accounting for notes payable including zero-interest notes, and off-balance sheet financing arrangements. Examples and illustrations are provided for various bond and note transactions to demonstrate the accounting entries.
This document discusses accounting for dividends and retained earnings for corporations. It covers how to record cash and stock dividends, as well as stock splits. It also discusses preparing and analyzing the stockholders' equity section of the balance sheet, including the retained earnings statement. The learning objectives are to explain how to account for dividends and retained earnings, prepare the stockholders' equity section, and describe corporate income statements.
The document provides information on cost-volume-profit (CVP) analysis and preparing a CVP income statement. It defines contribution margin as the amount of revenue remaining after deducting variable costs. The document uses an example company, Vargo Video, to illustrate how to prepare a CVP income statement that classifies costs as fixed or variable and reports contribution margin. It shows the contribution margin per unit and contribution margin ratio calculations for Vargo Video based on assumed selling and cost data.
The multiple-step income statement for a merchandiser shows each of the following features except:
b. cost of goods sold.
The multiple-step income statement shows:
- Net sales
- Gross profit
- Operating expenses
- Nonoperating activities
- Net income
It does not specifically show cost of goods sold, as that amount is used to calculate gross profit.
This document discusses accounting for merchandising operations under a perpetual inventory system. It covers recording purchases and sales, including returns and discounts. It explains adjusting entries needed to update inventory balances and the multiple-step income statement format that distinguishes gross profit and operating expenses. The accounting cycle for a merchandising company is similar to a service company except for an additional inventory adjustment entry.
This document discusses accounting for partnerships, including forming, operating, and liquidating a partnership. It covers three main learning objectives:
1) Discussing and accounting for the formation of a partnership by explaining the characteristics of partnerships such as co-ownership, mutual agency, and limited life.
2) Explaining how to account for net income or net loss of a partnership by dividing income according to the partnership agreement using methods like fixed ratios or interest/salaries.
3) Explaining how to account for the liquidation of a partnership through closing entries and distributing remaining assets to partners.
This document provides an overview of accounting for receivables. It defines different types of receivables like accounts receivable and notes receivable. It explains how companies recognize, value, and dispose of both accounts receivable and notes receivable. Specific topics covered include recognizing revenue on credit sales, estimating and recording allowance for doubtful accounts, accounting for uncollectible accounts, determining maturity dates and interest on notes, and presenting receivables on financial statements. The document aims to help students understand the key accounting concepts and entries related to receivables.
The document discusses the statement of cash flows, including its usefulness, format, and how to prepare it using the indirect method. It explains that the statement of cash flows provides information about a company's cash receipts and payments during a period and is separated into operating, investing, and financing activities. It also discusses how to classify transactions and adjust net income to reconcile it to net cash provided by operating activities. Key steps include adding back non-cash expenses, and analyzing changes in current assets and liabilities.
This document summarizes key accounting concepts related to cash, receivables, and related valuation issues. It defines cash and receivables, discusses how to recognize, measure, and present them in financial statements. Specific topics covered include cash controls, restricted cash, cash equivalents, accounts and notes receivable, allowance for doubtful accounts, present value concepts for long-term notes receivable.
This document provides an overview of adjusting entries in 3 parts:
1. It introduces adjusting entries and explains they are needed to follow accrual accounting principles by ensuring revenues and expenses are recorded in the correct periods.
2. It identifies the major types of adjusting entries as deferrals (prepaid expenses and unearned revenues) and accruals (accrued revenues and accrued expenses).
3. It explains how to prepare adjusting entries for specific types of deferrals, including prepaid expenses like supplies, insurance, and depreciation, as well as unearned revenues. Examples are provided for each.
1. The document provides an overview of chapter 1 of the textbook "Financial Accounting" which covers topics such as what accounting is, who uses accounting data, ethics in accounting, accounting standards, and the basic accounting equation.
2. It defines accounting as identifying, recording, and communicating the economic events of an organization to interested users. Accounting data is used by internal and external users such as managers, investors, creditors, and more.
3. Ethics, accounting standards set by bodies like FASB and IASB, and measurement principles like historical cost are also introduced as important foundations of accounting.
Managerial accounting provides economic and financial information for internal use by managers. It differs from financial accounting which produces reports for external users. Managerial accounting helps with planning, directing, and controlling a business. It involves tracking costs including direct materials, direct labor, and manufacturing overhead. These costs are either product costs, which are included in inventory, or period costs which are expenses. Managerial accounting also computes cost of goods manufactured using total manufacturing costs for the period plus beginning work in process, less ending work in process.
Corporations invest in debt and stock securities for various reasons such as having excess cash or generating investment income. For debt investments, entries are made to record acquisition, interest revenue, and sale. Interest receivable and revenue are reported in financial statements. For stock investments where influence is less than 20%, the cost method is used where investments are recorded at cost and revenue is recognized on cash dividends. For influence between 20-50%, the equity method is used where the investment is adjusted for the investor's share of earnings and dividends. For over 50% influence, consolidated financial statements are prepared. Investments are classified as trading, available-for-sale, or held-to-maturity and reported differently in financial statements.
Current Liabilities, Provisions, and Contingenciesreskino1
Current Liabilities,
Provisions, and Contingencies
After studying this chapter, you should be able to:
1. Describe the nature, valuation, and reporting of current liabilities.
2. Explain the accounting for different types of provisions.
3. Explain the accounting for loss and gain contingencies.
4. Indicate how to present and analyze liability-related information
1) The document provides an overview of chapter 1 of the textbook "Financial Accounting" which covers accounting basics. It defines accounting, identifies its users and uses, and explains key concepts like ethics, standards, assumptions and the accounting equation.
2) The accounting equation states that assets must equal liabilities plus equity. It defines the components of the equation as assets being resources owned, liabilities being debts or obligations, and equity being the ownership claim.
3) Business transactions impact the accounting equation by increasing or decreasing at least two elements as a transaction has a dual effect.
Stanley Company produces specialized safety devices. It expects manufacturing overhead costs of $160,000 for the year and machine usage of 40,000 hours. To determine the predetermined overhead rate, Stanley will calculate overhead costs divided by the activity base of machine hours. This rate will then be used to assign a portion of manufacturing overhead to Work in Process based on actual machine hours used for each job. The predetermined overhead rate provides an estimated allocation of overhead costs, which are later compared to actual overhead costs at year end.
This document discusses fraud and principles of internal control. It begins by introducing the learning objectives which are to discuss fraud and internal control principles, apply them to cash, identify bank account control features, and explain cash reporting. It then defines fraud and lists the three factors that contribute to fraudulent activity. Several principles of internal control are outlined, including establishing responsibility, segregating duties, documentation procedures, physical controls, and independent internal verification. Examples are provided to illustrate how missing specific controls enabled several fraud scenarios.
1. The document describes accounting concepts and procedures for merchandising companies, including recording purchases and sales under a perpetual inventory system.
2. Key concepts covered include recording purchases on account, purchase returns and allowances, purchase discounts, recording sales on account, sales returns and allowances, and sales discounts.
3. Examples are provided to illustrate journal entries for typical purchase and sales transactions such as recording purchases and payment with a discount taken, and recording sales and subsequent returns.
Here are the steps to analyze and post a journal entry:
1. Analyze the journal entry to determine the accounts involved and whether each account increased or decreased.
2. Determine if each account is an asset, liability, equity, revenue or expense account based on the general ledger chart of accounts.
3. Translate increases in asset and expense accounts and decreases in liability, equity and revenue accounts into debits, and increases in liability, equity and revenue accounts and decreases in asset and expense accounts into credits.
4. Record the debits and credits in the appropriate general ledger accounts.
Posting
Question
LO 6
The document discusses budgeting principles and the components of the master budget. It states that the master budget is a set of interrelated budgets that constitutes a plan of action for a specified time period and contains operating budgets and financial budgets. The operating budgets are used as the basis for preparing the budgeted income statement, while the financial budgets focus on cash needs to fund operations and capital expenditures. It also discusses preparing budgets for sales, production, direct materials, direct labor, manufacturing overhead, selling and administrative expenses, and a budgeted income statement.
Here are the steps to solve this payroll problem:
(a) Gross earnings: $40,000
FICA taxes (7.65% of $40,000): 0.0765 * $40,000 = $3,060
Federal income tax withheld: $9,000
State income tax withheld: $1,000
Net pay = Gross earnings - FICA taxes - Federal taxes - State taxes
= $40,000 - $3,060 - $9,000 - $1,000 = $26,940
(b) Salaries and Wages Expense 40,000
FICA Taxes Payable 3,060
Federal Income Taxes Payable 9,000
Ch03-financial reporting and accounting standardsVivi Tazkia
The document provides an overview of the key concepts and steps covered in Chapter 3 of Intermediate Accounting (IFRS 2nd Edition) by Kieso, Weygandt, and Warfield. It outlines 8 learning objectives for the chapter, which include understanding basic accounting terminology, the double-entry system, the accounting cycle, journalizing and posting transactions, adjusting entries, and preparing financial statements. The chapter also discusses the accounting equation, T-accounts, the different types of accounts, and the accounting process from recording transactions to the adjusted trial balance.
The document discusses accounting for long-term liabilities such as bonds payable and notes payable. It covers topics such as issuing long-term debt, types of bonds, valuation of bonds at issuance, accounting for bond discounts and premiums including amortization methods, extinguishment of debt, accounting for notes payable including zero-interest notes, and off-balance sheet financing arrangements. Examples and illustrations are provided for various bond and note transactions to demonstrate the accounting entries.
This document discusses accounting for dividends and retained earnings for corporations. It covers how to record cash and stock dividends, as well as stock splits. It also discusses preparing and analyzing the stockholders' equity section of the balance sheet, including the retained earnings statement. The learning objectives are to explain how to account for dividends and retained earnings, prepare the stockholders' equity section, and describe corporate income statements.
The document provides information on cost-volume-profit (CVP) analysis and preparing a CVP income statement. It defines contribution margin as the amount of revenue remaining after deducting variable costs. The document uses an example company, Vargo Video, to illustrate how to prepare a CVP income statement that classifies costs as fixed or variable and reports contribution margin. It shows the contribution margin per unit and contribution margin ratio calculations for Vargo Video based on assumed selling and cost data.
The multiple-step income statement for a merchandiser shows each of the following features except:
b. cost of goods sold.
The multiple-step income statement shows:
- Net sales
- Gross profit
- Operating expenses
- Nonoperating activities
- Net income
It does not specifically show cost of goods sold, as that amount is used to calculate gross profit.
This document discusses accounting for merchandising operations under a perpetual inventory system. It covers recording purchases and sales, including returns and discounts. It explains adjusting entries needed to update inventory balances and the multiple-step income statement format that distinguishes gross profit and operating expenses. The accounting cycle for a merchandising company is similar to a service company except for an additional inventory adjustment entry.
This document discusses accounting concepts related to merchandising operations and the multiple-step income statement. It defines key terms like cost of goods sold, gross profit, and profit margin ratio. It explains the differences between perpetual and periodic inventory systems, and how to record purchases, sales, returns, and discounts under each. The document also distinguishes between single-step and multiple-step income statements and discusses factors that affect profitability.
1. The passage describes fraud committed by a store cashier named Holly Harmon over a short period of time using three methods: switching UPC labels to charge more for items, voiding sales but leaving items in carts, and scanning empty containers but not items inside.
2. Holly was later identified through a review of past surveillance tapes after she did not show up for a shift. This allowed the store to observe her thefts on video.
3. The passage notes that better human resource and physical controls could have prevented the fraud, such as background checks, software to flag voided transactions, and random checks of video and register records.
This document provides an overview and learning objectives for a chapter on accounting for merchandising operations. It discusses key differences between service and merchandising companies, including that merchandising companies buy and sell goods while service companies do not include cost of goods sold in their financial statements. It also covers recording purchases and sales under a perpetual inventory system, including entries for purchases, freight costs, returns, discounts, and sales.
This chapter discusses accounting for merchandising operations. It covers topics such as merchandising operations and inventory systems, recording purchases and sales under a perpetual inventory system, adjusting entries for a merchandising company, and preparing income statements. The key points are:
- Merchandising companies sell goods and use a perpetual or periodic inventory system to track purchases and sales.
- Under a perpetual system, the cost of goods sold is recorded with each sale and purchase transactions are recorded when they occur.
- Adjusting entries include adjusting inventory to the physical count at period end.
- Income statements for merchandising companies include a gross profit figure and report revenues from sales.
This document discusses accounting for merchandising operations under a perpetual inventory system. It provides examples of recording purchases, sales, returns and allowances, discounts, and the flow of costs. Purchases are recorded by debiting merchandise inventory and crediting accounts payable. Sales are recorded by debiting cost of goods sold and crediting merchandise inventory, and by crediting sales revenue and debiting accounts receivable. Returns are handled through contra accounts like sales returns and allowances that are debited. Discounts are also treated as contra revenue accounts. The document explains the key steps in the accounting cycle for a merchandising business.
1) The document discusses accounting for merchandising businesses. It explains that for merchandising businesses, revenue comes from sales and expenses are divided into cost of goods sold and operating expenses.
2) It describes the periodic and perpetual inventory systems and how they are used to track inventory levels and calculate cost of goods sold. The periodic system involves periodic physical counts while the perpetual system continuously tracks inventory.
3) The document provides examples of journal entries for purchases, sales, returns, and allowances for merchandising businesses. It explains how to record transactions like purchases, sales, returns, discounts and freight costs under both accounting systems.
A merchandising business buys and sells goods to make a profit. The goods purchased for resale are called merchandise. There are two main systems for tracking inventory - perpetual and periodic. The perpetual system tracks inventory in real time with each purchase or sale, while the periodic system only calculates cost of goods sold at the end of each period based on a physical inventory count. Calculating cost of goods sold is important for measuring income for merchandising businesses.
This document provides an overview of accounting for merchandising operations. It defines merchandising companies as those that buy and sell goods, with sales revenue as the primary source of income. It discusses the differences between merchandising and service companies, including that merchandising companies use an inventory account and calculate cost of goods sold. The document also covers perpetual and periodic inventory systems, recording purchases and sales, and purchase/sales returns, discounts, and allowances.
SBI Company consigned products costing $250,000 to Furad Company. SBI paid $10,000 in freight costs. Furad spent $2,000 on advertising that SBI will reimburse. Furad sold 2/3 of the products for $230,000 cash, retaining a 20% commission and remitting the proceeds to SBI. To record the transaction, SBI debits Consignment Out and credits Inventory. Furad debits Cash, Credits Payable to SBI and debits Commission Expense and Advertising Expense. SBI's gross profit on the consignment sale will be calculated separately from regular sales by subtracting the cost of consigned goods from consign
The document discusses accounting transactions for purchases and sales of stock. It explains that purchases increase the stock asset and may increase liabilities, while sales decrease stock and increase a receivable asset. Purchases on credit differ from those paid in cash in their impact on liabilities. Similarly, sales on credit differ from cash sales in their impact on receivables. The document also covers returns inwards, which increase stock when goods are returned by customers, and returns outwards, which decrease stock and liabilities when goods are returned to suppliers.
1) The document discusses accounting for merchandising activities, including the operating cycle of merchandising companies, income statements, and two approaches to inventory accounting - perpetual and periodic systems.
2) Key aspects covered include the general ledger and use of subsidiary ledgers to provide more detailed accounting information for inventory, receivables, payables and other accounts.
3) The perpetual inventory system allows for continuous updating of inventory balances as transactions occur, using journal entries to record purchases, sales, payments and physical inventory counts.
Valuation of Inventories: A Cost-Basis Approachreskino1
Describe inventory classifications and different inventory systems.
Identify the goods and costs included in inventory.
Compare the cost flow assumptions used to account for inventories.
Determine the effects of inventory errors on the financial statements.
Ac 107 Enhance teaching / snaptutorial.comBaileya17
For more classes visit
www.snaptutorial.com
AC 107 Week 1 Unit 1 Assignment (Score 49.5/50)
AC 107 Week 1 Discussion
AC 107 Week 2 Unit 2 Assignment (Score 47/50)
AC 107 Week 2 Discussion
AC 107 Week 3 Unit 3 Assignment (Score 40/50)
Ac 107 Education Organization-snaptutorial.comrobertlesew
For more classes visit
www.snaptutorial.com
AC 107 Week 1 Unit 1 Assignment (Score 49.5/50)
AC 107 Week 1 Discussion
AC 107 Week 2 Unit 2 Assignment (Score 47/50)
AC 107 Week 2 Discussion
The document provides an overview of accounting for merchandising operations. It discusses:
1) The differences between service companies and merchandising companies. Merchandising companies purchase inventory to sell directly or to retailers/wholesalers.
2) The operating cycle and flow of costs for merchandising companies, which involves perpetual and periodic inventory systems for recording purchases and sales.
3) Key steps in the accounting cycle for merchandising companies, including adjusting and closing entries to determine net income.
This document summarizes key concepts related to merchandising activities for companies that buy and sell goods. It discusses how merchandisers derive revenue from sales rather than services. It also outlines the basic accounting entries for purchases, sales, returns and allowances. Inventory systems and calculations for cost of goods sold are summarized. Key financial statements for merchandising companies are identified.
AC 107 Effective Communication/tutorialrank.comjonhson168
For more course tutorials visit
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AC 107 Week 1 Unit 1 Assignment (Score 49.5/50)
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1. 5-1
Accounting for
Merchandising Operations5
Learning Objectives
Describe merchandising operations and inventory systems.
Record purchases under a perpetual inventory system.
Record sales under a perpetual inventory system.3
Apply the steps in the accounting cycle to a merchandising
company.
2
1
4
Compare a multiple-step with a single-step income statement.5
2. 5-2
Merchandising Companies
Buy and Sell Goods
Wholesaler Consumer
The primary source of revenues is referred to as
sales revenue or sales.
Retailer
LEARNING
OBJECTIVE
Describe merchandising operations and
inventory systems.
1
LO 1
3. 5-3
Income Measurement
Cost of goods sold is the total
cost of merchandise sold during
the period.
Not used in a
Service business.
Net
Income
(Loss)
Less
LessEquals
Equals
Sales
Revenue
Cost of
Goods Sold
Gross
Profit
Operating
Expenses
Illustration 5-1
Income measurement process for a
merchandising company
Merchandising Operations
LO 1
4. 5-4
The operating
cycle of a
merchandising
company
ordinarily is longer
than that of a
service company.
Illustration 5-2
Operating Cycles
Illustration 5-3
LO 1
5. 5-5
Companies use either a perpetual inventory system or a periodic
inventory system to account for inventory.
Illustration 5-4
Flow of Costs
LO 1
6. 5-6
PERPETUAL SYSTEM
Maintain detailed records of the cost of each inventory
purchase and sale.
Records continuously show inventory that should be on
hand for every item.
Company determines cost of goods sold each time a
sale occurs.
Flow of Costs
LO 1
7. 5-7
Do not keep detailed records of the goods on hand.
Cost of goods sold determined by count at the end of
the accounting period.
Calculation of Cost of Goods Sold:
Beginning inventory $ 100,000
Add: Purchases, net 800,000
Goods available for sale 900,000
Less: Ending inventory 125,000
Cost of goods sold $ 775,000
PERIODIC SYSTEM
Flow of Costs
LO 1
8. 5-8
Traditionally used for merchandise with high unit
values.
Shows the quantity and cost of the inventory that
should be on hand at any time.
Provides better control over inventories than a periodic
system.
ADVANTAGES OF THE PERPETUAL SYSTEM
Flow of Costs
LO 1
10. 5-10
Indicate whether the following statements are true or false.
1. The primary source of revenue for a merchandising
company results from performing services for
customers.
2. The operating cycle of a service company is usually
shorter than that of a merchandising company.
3. Sales revenue less cost of goods sold equals gross
profit.
4. Ending inventory plus the cost of goods purchased
equals cost of goods available for sale.
1 Merchandising Operations and Inventory Systems
DO IT!
LO 1
False
True
True
False
11. 5-11
Made using cash or credit (on account).
Normally record when
goods are received from
the seller.
Purchase invoice should
support each credit
purchase.
LEARNING
OBJECTIVE
Record purchases under a perpetual
inventory system.
2
Illustration 5-6
Sales invoice used as purchase
invoice by Sauk Stereo
LO 2
12. 5-12
Illustration: Sauk Stereo (the
buyer) uses as a purchase
invoice the sales invoice
prepared by PW Audio Supply,
Inc. (the seller). Prepare the
journal entry for Sauk Stereo for
the invoice from PW Audio
Supply.
Inventory 3,800May 4
Accounts Payable 3,800
Illustration 5-6
Recording Purchases of Merchandise
LO 2
13. 5-13
Illustration 5-7
Shipping terms
Ownership of the goods
passes to the buyer when the
public carrier accepts the
goods from the seller.
Ownership of the goods
remains with the seller until
the goods reach the buyer.
Freight costs incurred by the seller are an
operating expense.
Freight Costs
LO 2
14. 5-14
Illustration: Assume upon delivery of the goods on May 6, Sauk
Stereo pays Public Freight Company $150 for freight charges, the
entry on Sauk Stereo’s books is:
Inventory 150May 6
Cash 150
Assume the freight terms on the invoice in Illustration 5-6 had
required PW Audio Supply to pay the freight charges, the entry by
PW Audio Supply would have been:
Freight-Out 150May 4
Cash 150
Freight Costs
LO 2
15. 5-15
Purchaser may be dissatisfied because goods are damaged or
defective, of inferior quality, or do not meet specifications.
Return goods for credit if the
sale was made on credit, or
for a cash refund if the
purchase was for cash.
May choose to keep the
merchandise if the seller will
grant a reduction of the
purchase price.
Purchase Return Purchase Allowance
Purchase Returns and Allowances
LO 2
16. 5-16
Illustration: Assume Sauk Stereo returned goods costing
$300 to PW Audio Supply on May 8.
Accounts Payable 300May 8
Inventory 300
Purchase Returns and Allowances
LO 2
17. 5-17
In a perpetual inventory system, a return of defective
merchandise by a purchaser is recorded by crediting:
a. Purchases
b. Purchase Returns
c. Purchase Allowance
d. Inventory
Question
Purchase Returns and Allowances
LO 2
18. 5-18
Credit terms may permit buyer to claim a cash discount for
prompt payment.
Advantages:
Purchaser saves money.
Seller shortens the operating cycle by converting the
accounts receivable into cash earlier.
Example: Credit terms
may read 2/10, n/30.
Purchase Discounts
LO 2
19. 5-19
2% discount if
paid within 10
days, otherwise
net amount due
within 30 days.
1% discount if
paid within first 10
days of next
month.
2/10, n/30 1/10 EOM
Net amount due
within the first 10
days of the next
month.
n/10 EOM
Purchase Discounts
LO 2
20. 5-20
Accounts Payable 3,500May 14
Cash 3,430
Inventory 70
(Discount = $3,500 x 2% = $70)
Illustration: Assume Sauk Stereo pays the balance due of
$3,500 (gross invoice price of $3,800 less purchase returns
and allowances of $300) on May 14, the last day of the
discount period. Prepare the journal entry Sauk Stereo
makes on May 14 to record the payment.
Purchase Discounts
LO 2
21. 5-21
Accounts Payable 3,500June 3
Cash 3,500
Illustration: If Sauk Stereo failed to take the discount, and
instead made full payment of $3,500 on June 3, the journal
entry would be:
Purchase Discounts
LO 2
22. 5-22
Should discounts be taken when offered?
Discount of 2% on $3,500 70.00$
$3,500 invested at 10% for 20 days 19.18
Savings by taking the discount 50.82$
Example: 2% for 20 days = Annual rate of 36.5%
$3,500 x 36.5% x 20 ÷ 365 = $70
Purchase Discounts
LO 2
24. 5-24
On September 5, De La Hoya Company buys merchandise on
account from Junot Diaz Company. The selling price of the
goods is $1,500, and the cost to Diaz Company was $800. On
September 8, De La Hoya returns defective goods with a selling
price of $200. Record the transactions on the books of De La
Hoya Company.
2 Purchase TransactionsDO IT!
Inventory 1,500
Accounts Payable 1,500
Accounts Payable 200
Inventory 200
Sept. 5
Sept. 8
LO 2
25. 5-25
Made using cash or credit (on account).
Sales revenue, like service
revenue, is recorded when
the performance obligation
is satisfied.
Performance obligation is
satisfied when the goods
are transferred from the
seller to the buyer.
Sales invoice should
support each credit sale.
Illustration 5-6
LEARNING
OBJECTIVE
Record sales under a perpetual inventory
system.
3
LO 3
26. 5-26
Journal Entries to Record a Sale
Cash or Accounts receivable XXX
Sales revenue XXX
#1
Cost of goods sold XXX
Inventory XXX
#2
Selling
Price
Cost
Recording Sales of Merchandise
LO 3
27. 5-27
Accounts Receivable 3,800May 4
Sales Revenue 3,800
Illustration: PW Audio Supply records the sale of $3,800 on
May 4 to Sauk Stereo on account (Illustration 5-6) as follows
(assume the merchandise cost PW Audio Supply $2,400).
Cost of Goods Sold 2,4004
Inventory 2,400
Recording Sales of Merchandise
LO 3
29. 5-29
“Flip side” of purchase returns and allowances.
Contra-revenue account to Sales Revenue (debit).
Sales not reduced (debited) because:
► Would obscure importance of sales returns and
allowances as a percentage of sales.
► Could distort comparisons.
Sales Returns and Allowances
LO 3
30. 5-30
Illustration: Prepare the entry PW Audio Supply would make
to record the credit for returned goods that had a $300 selling
price (assume a $140 cost). Assume the goods were not
defective.
Sales Returns and Allowances 300May 8
Accounts Receivable 300
Inventory 1408
Cost of Goods Sold 140
Sales Returns and Allowances
LO 3
31. 5-31
Sales Returns and Allowances 300
Accounts Receivable 300
Inventory 50
Cost of Goods Sold 50
Illustration: Assume the returned goods were defective and
had a scrap value of $50, PW Audio would make the following
entries:
May 8
8
Sales Returns and Allowances
LO 3
32. 5-32
The cost of goods sold is determined and recorded each
time a sale occurs in:
a. periodic inventory system only.
b. a perpetual inventory system only.
c. both a periodic and perpetual inventory system.
d. neither a periodic nor perpetual inventory system.
Question
Sales Returns and Allowances
LO 3
34. 5-34
Offered to customers to promote prompt payment of the
balance due.
Contra-revenue account (debit) to Sales Revenue.
Sales Discount
LO 3
35. 5-35
Cash 3,430May 14
Accounts Receivable 3,500
Sales Discounts 70
* [($3,800 – $300) X 2%]
*
Illustration: Assume Sauk Stereo pays the balance due of
$3,500 (gross invoice price of $3,800 less purchase returns
and allowances of $300) on May 14, the last day of the
discount period. Prepare the journal entry PW Audio Supply
makes to record the receipt on May 14.
Sales Discount
LO 3
36. 5-36
On September 5, De La Hoya Company buys merchandise on
account from Junot Diaz Company. The selling price of the
goods is $1,500, and the cost to Diaz Company was $800. On
September 8, De La Hoya returns defective goods with a selling
price of $200 and a fair value of $30. Record the transactions
on the books of Junot Diaz Company.
3 Sales TransactionsDO IT!
Accounts Receivable 1,500
Sales Revenue 1,500
Cost of Goods Sold 800
Inventory 800
Sept. 5
Sept. 5
LO 3
37. 5-37
On September 5, De La Hoya Company buys merchandise on
account from Junot Diaz Company. The selling price of the
goods is $1,500, and the cost to Diaz Company was $800. On
September 8, De La Hoya returns defective goods with a selling
price of $200 and a fair value of $30. Record the transactions
on the books of Junot Diaz Company.
3DO IT!
Sales Returns and Allowances 200
Accounts Receivable 200
Inventory 30
Cost of Goods Sold 30
Sept. 8
Sept. 8
LO 3
Sales Transactions
38. 5-38
Generally the same as a service company.
One additional adjustment to make the records agree with
the actual inventory on hand.
Involves adjusting Inventory and Cost of Goods Sold.
Adjusting Entries
LEARNING
OBJECTIVE
Apply the steps in the accounting cycle to a
merchandising company.
4
LO 4
39. 5-39
Illustration: Suppose that PW Audio Supply has an unadjusted
balance of $40,500 in Merchandise Inventory. Through a physical
count, PW Audio determines that its actual merchandise inventory
at year-end is $40,000. The company would make an adjusting
entry as follows.
Cost of Goods Sold 500
Inventory 500
Adjusting Entries
LO 4
42. 5-42
The trial balance of Celine’s Sports Wear Shop at December 31
shows Inventory $25,000, Sales Revenue $162,400, Sales
Returns and Allowances $4,800, Sales Discounts $3,600, Cost
of Goods Sold $110,000, Rent Revenue $6,000, Freight-Out
$1,800, Rent Expense $8,800, and Salaries and Wages
Expense $22,000. Prepare the closing entries for the above
accounts.
4DO IT!
Sales Revenue 162,400
Rent Revenue 6,000
Income Summary 168,400
Dec. 31
LO 4
Closing Entries
43. 5-43
The trial balance of Celine’s Sports Wear Shop at December 31
shows Inventory $25,000, Sales Revenue $162,400, Sales
Returns and Allowances $4,800, Sales Discounts $3,600, Cost
of Goods Sold $110,000, Rent Revenue $6,000, Freight-Out
$1,800, Rent Expense $8,800, and Salaries and Wages
Expense $22,000. Prepare the closing entries for the above
accounts.
Income Summary 151,000
Cost of Goods Sold 110,000
Sales Returns and Allowances 4,800
Sales Discounts 3,600
Freight-Out 1,800
Rent Expense 8,800
Salaries and Wages Expense 22,000
Dec. 31
LO 4
44. 5-44
Multiple-Step Income Statement
Shows several steps in determining net income.
Two steps relate to principal operating activities.
Distinguishes between operating and non-operating
activities.
LEARNING
OBJECTIVE
Compare a multiple-step with a single-step
income statement.
5
LO 5
51. 5-51
The multiple-step income statement for a merchandiser
shows each of the following features except:
a. gross profit.
b. cost of goods sold.
c. a sales revenue section.
d. investing activities section.
Question
Multiple-Step Income Statement
LO 5
53. 5-53
Subtract total expenses from total revenues
Two reasons for using the single-step format:
1. Company does not realize any profit until total
revenues exceed total expenses.
2. Format is simpler and easier to read.
Single-Step Income Statement
LO 5
56. 5-56
Indicate in which financial statement and under what
classification each of the following accounts would be reported.
5 Financial Statement ClassificationsDO IT!
LO 5
59. 5-59
LEARNING
OBJECTIVE
APPENDIX 5A: Prepare a worksheet for
a merchandising company.
6
Using a Worksheet
As indicated in Chapter 4, a worksheet enables companies to
prepare financial statements before they journalize and post
adjusting entries. The steps in preparing a worksheet for a
merchandising company are the same as for a service
company. Illustration 5A-1 shows the worksheet for PW Audio
Supply, Inc. (excluding nonoperating items). The unique
accounts for a merchandiser using a perpetual inventory system
are in red.
LO 6
61. 5-61
No running account of changes in inventory.
Ending inventory determined by physical count.
Cost of goods sold not determined until the end of the
period.
Determining Cost of Goods Sold Under a Periodic
System
LEARNING
OBJECTIVE
APPENDIX 5B: Record purchases and sales
under a periodic inventory system.
7
LO 7
62. 5-62
Illustration 5B-2
Determining Cost of Goods Sold
Under a Periodic System Illustration 5B-2
Cost of goods sold for a
merchandiser using a periodic
inventory system
LO 7
63. 5-63
Record revenues when sales are made.
Do not record cost of merchandise sold on the date of
sale.
Physical inventory count determines:
► Cost of merchandise on hand and
► Cost of merchandise sold during the period.
Record purchases in Purchases account.
Purchase returns and allowances, Purchase discounts,
and Freight costs are recorded in separate accounts.
Recording Merchandise Transactions
LO 7
64. 5-64
Illustration: On the basis of the sales invoice (Illustration 5-6)
and receipt of the merchandise ordered from PW Audio Supply,
Sauk Stereo records the $3,800 purchase as follows.
Purchases 3,800May 4
Accounts Payable 3,800
Recording Purchases of Merchandise
LO 7
65. 5-65
Illustration: If Sauk pays Public Freight Company $150
for freight charges on its purchase from PW Audio Supply on
May 6, the entry on Sauk’s books is:
Freight-In (Transportation-In) 150May 6
Cash 150
FREIGHT COSTS
Recording Purchases of Merchandise
LO 7
66. 5-66
Accounts payable 300May 8
Purchase Returns and Allowances 300
PURCHASE RETURNS AND ALLOWANCES
Illustration: Sauk Stereo returns $300 of goods to PW Audio
Supply and prepares the following entry to recognize the
return.
Recording Purchases of Merchandise
LO 7
67. 5-67
Accounts Payable 3,500May 14
Purchase Discounts 70
PURCHASE DISCOUNTS
Cash 3,430
Illustration: On May 14 Sauk Stereo pays the balance due on
account to PW Audio Supply, taking the 2% cash discount
allowed by PW Audio for payment within 10 days. Sauk
Stereo records the payment and discount as follows.
Recording Purchases of Merchandise
LO 7
68. 5-68
No entry is recorded for cost of goods sold at the time of the sale
under a periodic system.
Illustration: PW Audio Supply, records the sale of $3,800 of
merchandise to Sauk Stereo on May 4 (sales invoice No. 731,
Illustration 5-6) as follows.
Accounts Receivable 3,800May 4
Sales Revenue 3,800
Recording Sales of Merchandise
LO 7
69. 5-69
Illustration: To record the returned goods received from Sauk
Stereo on May 8, PW Audio Supply records the $300 sales
return as follows.
Sales Returns and Allowances 300May 8
Accounts Receivable 300
SALES RETURNS AND ALLOWANCES
Recording Sales of Merchandise
LO 7
70. 5-70
Cash 3,430May 14
Accounts Receivable 3,500
Sales Discounts 70
SALES DISCOUNTS
Illustration: On May 14, PW Audio Supply receives payment of
$3,430 on account from Sauk Stereo. PW Audio honors the 2%
cash discount and records the payment of Sauk’s account
receivable in full as follows.
Recording Sales of Merchandise
LO 7
74. 5-74
Similarities
Under both GAAP and IFRS, a company can choose to use either a
perpetual or a periodic inventory system.
The definition of inventories is basically the same under GAAP and
IFRS.
As indicated above, the basic accounting entries for merchandising
are the same under both GAAP and IFRS.
Key Points
LEARNING
OBJECTIVE
Compare the accounting for merchandising under
GAAP and IFRS.
8
LO 8
A Look at IFRS
75. 5-75
Similarities
IFRS requires that 2 years of income statement information be
presented, whereas GAAP requires 3 years.
Differences
Under GAAP, companies generally classify income statement items
by function. Classification by function leads to descriptions like
administration, distribution, and manufacturing. Under IFRS,
companies must classify expenses either by nature or by function.
Classification by nature leads to descriptions such as the following:
salaries, depreciation expense, and utilities expense. If a company
uses the functional-expense method on the income statement,
disclosure by nature is required in the notes.
Key Points
LO 8
A Look at IFRS
76. 5-76
Differences
Presentation of the income statement under GAAP follows either
a single-step or multiple-step format. IFRS does not mention a
single-step or multiple-step approach.
Under IFRS, revaluation of land, buildings, and intangible assets
is permitted. The initial gains and losses resulting from this
revaluation are reported as adjustments to equity, often referred
to as other comprehensive income . The effect of this difference is
that the use of IFRS result in more transactions affecting equity
(other comprehensive income) but not net income.
Key Points
LO 8
A Look at IFRS
77. 5-77
Looking to the Future
The IASB and FASB are working on a project that would rework the structure
of financial statements. Specifically, this project will address the issue of how
to classify various items in the income statement. A main goal of this new
approach is to provide information that better represents how businesses are
run. In addition, this approach draws attention away from just one number—net
income. It will adopt major groupings similar to those currently used by the
statement of cash flows (operating, investing, and financing), so that numbers
can be more readily traced across statements. For example, the amount of
income that is generated by operations would be traceable to the assets and
liabilities used to generate the income. Finally, this approach would also
provide detail, beyond that currently seen in most statements (either GAAP or
IFRS), by requiring that line items be presented both by function and by
nature. The new financial statement format was heavily influenced by
suggestions from financial statement analysts.
LO 8
A Look at IFRS
78. 5-78
IFRS Self-Test Questions
Which of the following would not be included in the definition of
inventory under IFRS?
a) Photocopy paper held for sale by an office-supply store.
b) Stereo equipment held for sale by an electronics store.
c) Used office equipment held for sale by the human relations
department of a plastics company.
d) All of the above would meet the definition.
LO 8
A Look at IFRS
79. 5-79
IFRS Self-Test Questions
Which of the following would not be a line item of a company
reporting costs by nature?
a) Depreciation expense.
b) Salaries expense.
c) Interest expense.
d) Manufacturing expense.
LO 8
A Look at IFRS
80. 5-80
IFRS Self-Test Questions
Which of the following would not be a line item of a company
reporting costs by function?
a) Administration.
b) Manufacturing.
c) Utilities expense.
d) Distribution.
LO 8
A Look at IFRS