Agenda: Exam I Answers

Same procedure as exam (everything zipped and in the front of the room), except no pencils/pens.

Your grade is important to me, but errors do occur. Any individual questions/errors, please remember the question/problem number or error (if adding/subtracting) and email me the details. I will pull you exam and re-grade.

Begin Unit 2 with Chapter 4

Chapter 4: Closing & Classified Balance Sheet

ACTG 2110

Sid C. Bundy

GOAL: Re-set Balances for Next Period

The goal of “Closing” is to re-set balances for the next accounting period.

Update Capital to reflect the statement of owner’s equity.

If we do monthly statements, then revenues and expenses should start over at $0 for the new month.

Statement of Cash Flows

Balance Sheet

Statement of Owner’s Equity

Income Statement

FINANCIAL STATEMENT

S

4 Closing Entries Close Revenue Accounts to Income

Summary Close Expense Accounts to Income

Summary Close Income Summary to Capital Close Withdrawals to Capital

Closing the Books

Temporary Permanent

Revenues Expenses Income Summary Withdrawals

Assets Liabilities Capital

Account Title A/L/OE/R/Ex

B.S. / I.S. / O.E. DR/CR T/P

Cash Asset Balance Sheet DR P

Harry, Capital

Depreciation Expense

Rent Revenue

Accounts Receivable

Unearned Service Fees

Accum. Depreciation - Equip

Withdrawals

Utilities Expense

Accounts Payable

Supplies

Account Title A/L/OE/R/Ex

B.S. / I.S. / O.E.

DR/CR T/P

Cash Asset Balance Sheet DR P

Harry, Capital OE OE & BS CR P

Depreciation Expense Ex IS DR T

Rent Revenue R IS CR T

Accounts Receivable A BS DR P

Unearned Service Fees L BS CR P

Accum. Depreciation - Equip

A* BS CR* P

Withdrawals OE* OE DR* T

Utilities Expense Ex IS DR T

Accounts Payable L BS CR P

Supplies A BS DR P

ACCOUNTING CYCLE

Examples: pg. 146Problem 4-4B Journalize Closing

Entries

Post Closing Entries

Post-Closing Trial Balance

Page 146

P4-4B

Introduce yourself to your neighbor / partner.

Solo Cup Review

Review Account Classifications

ROUND 1:

Financial StatementsROUND 2: Closing

RED = BALANCE SHEET

BLUE = INCOME STATEMENT

NONE = OTHER

RED = PermanentBLUE = Temporary

GOAL: Create a GAAP Balance Sheet (Classified)

Classified Balance Sheet further orders accounts.

4 asset classifications:1. Current assets2. Long-term investments3. Plant assets4. Intangible assets

2 liability classifications:5. Current liabilities6. Long-term liabilities

Equity Section (stays the same for now)

Study for Formatting: Page 150

Investors use ratio analysis to make many decisions. We will learn two liquidity ratios today.

1. Current Ratio2. Quick Ratio

Liquidity ratios

*HINT: Today’s ratios alone will not tell you which stocks to invest in or sell

2 Measures of Liquidity

Current RatioQuick Ratio (Acid Test*)

Current assets / Current liabilities

Measures whether or not a firm has enough resources to pay its debts over the next 12 months.

Generally this ratio will fall between 1.5 and 3 for a healthy business (what is “good” varies by industry). But less than 1 is definitely bad.

(Cash + Accounts Receivable) / Current Liabilities

*Cash includes cash equivalents like money market and savings accounts. The Acid Test excludes inventory.

Measures the ability for a company to use its NEAR cash assets to pay off its current liabilities immediately.

The higher the ratio, the more “liquid” a company is. Any ratio less than 1:1 would indicate that current liabilities can’t currently be paid back.

Ratio ExamplesCurrent Ratio:165,600 / 52,000 = 3.1846

Quick Ratio:95,600 / 52,000 = 1.8385

*This company will most likely be able to pay its current outstanding debts.

End Day 1: What next? Quiz #5: CLASSIFIED Balance Sheet Homework Set #4 should be “live”

GOAL:

1. Two Ratios: Current Ratio & Quick Ratio

2. Begin Chapter 5

3. Classified Balance Sheet Example

ANNOUNCEMENTS:

Quiz #5 on Tuesday

Blue Raiders Packet due IN CLASS on Thursday

Homework 4 Due Sunday Night

Day 2

BELL RINGER:

BULL or BUBBLE? What do you think is going on with the stock market right now and should you invest or sell or hold right now? Discuss with your neighbor.

CLASSIFIED Balance Sheet ExampleP4-5A

Chapter 5: Merchandising Firms

Journal entries required when a company sells stuff.

What is the difference between a wholesaler and a retailer?

What is the difference between a wholesaler and a retailer?

Merchandiser – any company that sells products or goods

Wholesaler – intermediary, does not sell to the final consumer. The “customer” is another firm

Retailer – sells goods to the final consumer

2 Inventory Systems:Important Formula:

Beginning Inventory 25Add: Purchases 5

Goods Available 30Less: COGS 20Ending Inventory 10

1. Periodic – calc COGS at end of period only

2. Perpetual – calc COGS for every sale, keep a constant total for inventory, most entries impact inventory

*Chapter 5 focuses on

Perpetual.

Perpetual means we are

perpetually updating

inventory.

Inventory Systems

Who owns the inventory?F.O.B. Destination- The seller owns the inventory until the buyer receives it.

F.O.B. Shipping Point- The buyer owns the inventory as soon as it is shipped.

EOM = end of month

If your company OWNS the inventory at the end of the period, then you should record it.

Credit Terms

“3/15, n/30” “2/10, n/10 EOM”

3% discount if paid in the first 15 days, the net (balance) is due in 30 days

2% discount if paid in ten days, the net is due 10 days from the end of the month.

Inventory Flow Assumptions:

1. LIFO2. FIFO3. Average Cost4. Specific

Identification

LIFO: Last – In – First – Out

FIFO: First – In – First – Out

Weighted Average Specific Identification

The next few slide are posted on D2L under “Syllabus…”

New AccountsCategory DR/CR Financial

StatementCost of sales Expense – COGS DR IS

Distribution expenses

Expense DR IS

Administrative expenses

Expense DR IS

Delivery Expense Expense DR IS

Purchases Expense – COGS DR IS

Purchase returns & allowances*

Expense – COGS* CR* IS

Purchase discounts* Expense – COGS* CR* IS

Sales Revenue CR IS

Sales returns & allowances*

Revenue* DR* IS

Sales discounts* Revenue* DR* IS

Merchandising inventory

Asset DR BS (and sometimes IS-COGS)

Transportation-In Expense - COGS DR IS

15 New Journal Entries: Perpetual System11-2 Merchandise Inventory 1,200

Cash 1,200

<BUYER: purchased merchandise>

2 Merchandise Inventory 1,200

Accounts payable 1,200

<BUYER: purchased merchandise on account, credit terms = 2/10, n/30>

12 Accounts payable 1,200

Merchandise Inventory (1,200 x 2% discount) 24

Cash 1,176

<BUYER: paid for goods previously bought on account>

15 Accounts Payable 300

Merchandise Inventory 300

<BUYER: received “credit” for defective items>

*or* Accounts Payable 30

Merchandise Inventory 30

<BUYER: received “credit for returning defective items>

15 New Journal Entries: Perpetual System

24 Merchandise Inventory 75

Cash 75

<BUYER: paid for shipping of goods TO company>

SELLER ENTRIES

3 Cash 2,400

Sales 2,400

Cost of Goods Sold 1,600

Merchandising Inventory 1,600

<SELLER: sold goods that cost $1,600 for $2,400 cash>

3 Accounts Receivable 2,400

Sales 2,400

Cost of Goods Sold 1,600

Merchandising Inventory 1,600

<SELLER: sold goods that cost $1,600 for $2,400 on account>

15 New Journal Entries: Perpetual System12 Accounts Receivable 1,000

Sales 1,000

<SELLER: Sold on account, 2/10, n/60> (*1/2 Required Entry*)

22 Cash 980

Sales Discounts 20

Accounts Receivable 1,000

<SELLER: Received money from sales, with discount>

30 Cash 1,000

Accounts Receivable 1,000

<SELLER: Received money from sales, without discount>

6* Sales Returns & Allowances 800

Accounts Receivable 800

Merchandise Inventory 600

Cost of Goods Sold 600

<SELLER: customer returns items>

15 New Journal Entries: Perpetual System12 Sales Returns & Allowances 100

Accounts Receivable 100

<SELLER: Customer doesn’t return items, but takes a allowance>

Adjusting Journal Entries

31 Cost of good sold 15

Merchandise inventory 15

<SELLER: to adjust inventory account to the amount of inventory physically counted, the COGS is recorded as “shrinkage” due to theft, breakage, evaporation, etc.>

Closing Entries

31 Income Summary 3,120

Sales Discounts* 100

Sales Returns and Allowances* 200

COGS 800

Supplies Expense 20

Rent Expense 2,000

<SELLER: Note that contra expense and revenue accounts are temporary, so they are closed!>

Board Practice: Journal Entries P5-1A (pg. 217)

AGENDA

1. Classified Balance Sheet Quiz

2. Blue Raider Packet

3. Finish P5-1A

4. Multi-Step Income Statement

5. Begin P5-2A

MULTI-STEP INCOME STATEMENT

Revenue is not Profit is not Income!

Multi-Step Income Statement:

1. Sales – Sales Returns & Allowances = Net Sales

2. Net Sales – COGS = Gross Profit

3. Gross Profit – Operating Expenses = Income from Operations

4. Income from Operations + Non-operating

revenue & expenses = Net Income

It’s more than just Revenues – Expenses

This is more than just sub-categories.

Study Page 205!!!

Sample problem with answer Pages 211-212

Format Multi-Step Income Statement

P5-3A (pg 228)

…format the Income Statement.

**note: we will complete the journal entries next class.

Formatted AnswerP5-3A

Operating Expense

Total operating expenses

GOAL:

1) Shrinkage Adjusting Entry

2) Closing Entries for a Merchandising Company

3) Ratios

3rd Look at Merchandising Entries (P5-2A)

Adjusting & Closing

P5-3A (pg 218)

This is not what the problem asks us to do exactly. We are going to record adjusting entries and closing entries. We are coming back to this problem after looking at the format of the Income Statement.

Formatted AnswerP5-3A

Ratios: (P5-3A continued from last class)

Current Ratio:Current Assets / Current Liabilities

Acid-Test Ratio:Cash + Equivalents + Accts Rec / Current Liabilities

Gross Profit Margin Ratio:Gross Profit / Net Sales

(Net Sales – COGS) / Net Sales

Gross Margin RatioI know that I can sell a product for $250. I want to earn a 30% gross margin. What is the MOST I should pay for my merchandise?

***Given the gross margin and total revenue (net sales), can you solve for COGS?***

Gross Profit Margin = Gross Profit / Net Sales

Gross Profit Margin = (Net Sales – COGS) / Net Sales

0.30 = ( $250 – x) / 250

0.30 x 250 = 250 – x

75 = 250 – x

175 = x

CHECK: (250-175) / 250 = ?

0.30

CAT:1. A company’s quick

assets are $37,500, its current assets are $80,000, and its current liabilities are $50,000. Its acid-test ratio equals:

2. A company’s net sales are $675,000, its cost of goods sold are $459,000, and its net income is $74,250. Its gross margin ratio equals:

Gross Profit Margin Ratiohttp://www.bloomberg.com/news/articles/2015-03-02/lumber-liquidators-sold-illegal-flooring-60-minutes-reports

PRINT HANDOUTS FOR NEXT CLASS!!!

Chapter 6: Inventory

LIFO, FIFO, Weighted Average, Specific Identification

Perpetual AND Periodic

GOAL:

Chapter 6: Calculating the Cost of Inventory:

Periodic Method:

• LIFO

• FIFO

• Weighted Average

ANNOUNCEMENTS:

SOURCE: Wray Herbert. Ink on Paper: Some Notes On Note Taking*. Association for Psychological Science. 2014.

The students who took their notes by hand scored significantly higher on conceptual questions and scored equally well on factual questions when compared to their typing peers.

on the overhead

Exercise 6-7 (pg 262)

# Units available = 1,100 units

Cost of Available = $18,750# Units Sold = 880 units

# Units Remaining = 220 units

Exercise 6-7

Weighted AverageSales Revenue $35,200 LESS: Weighted Average Cost of Goods Sold 15,000Gross Profit $20, 200

c. Weighted Average ($18,750/1,100 = $17.05) (220 x $17.045) (880 x $17.045) $3,750 $15,000

Which One?Which ever one you want!1. Income tax effects

LIFO creates tax savings

2. Income statement effects

FIFO reports higher net income, bnut

3. Balance sheet effects FIFO costs reflect

current costs LIFO costs understated

*assumes inflating prices

Compare Methods…

Specific Identification Specific identification method requires

that companies keep records of the original cost of each individual inventory item.

A major disadvantage of this method is that management may be able to manipulate net income.

Accounting Concept: Conservatism The best choice among accounting

alternatives is the method that is least likely to overstate assets and net income.

LCMlower-of-cost-or-market

1. COST: historical cost (according to Specific ID, LIFO, FIFO, or average-cost)

2. MARKET: current replacement cost

Watch Out! Don’t use sales price in LCM. Sales prices are often driven by market costs.

LCM Example: E6-10

Helmets 24 x $50 = $1,200 Bats 17 x $72 = 1,224Shoes 38 x $91 = 3,458 Uniforms 42 x $36 = 1,512 $7,394

Inventory Ratios1. Inventory turnover ratio: cost of goods sold / average

inventory

indicates how many times the inventory “turns over” (is sold) during the period

2. Days in inventory: 365 days / inventory turnover ratio

indicates the average number of days inventory is held.

 

High inventory turnover (low days in inventory) indicates the company is tying up little of its funds in inventory (has minimal inventory on hand at any one time). Although minimizing the funds tied up in inventory is efficient, it may lead to lost sales due to inventory shortages.

  Management should closely

monitor the inventory turnover ratio to achieve the best balance between too much and too little inventory.

Ratio Example: E6-10

a. Inventory Turnover: COGS / {(Beg Invt + Beg Invt+1) / 2}b. Days in Inventory: 365 / Inventory Turnoverc. Gross Profit: (Net Sales – COGS) / Net Sales

Pepsi

Inventory Turnover 2007 = 18,038 / [(1926+2290)/2] =

8.56 times 2008 = 20,351 / [(2290+2522)/2] =

8.46 times 2009 = 20,099 / [(2522+2618)/2] =

7.82 times

Days in Inventory 2007 = 365 / 8.56 = 42.64 days 2008 = 365 / 8.46 = 43.14 days 2009 = 365 / 7.82 = 46.68 days

Gross Profit 2007 = (39,474 – 18,038) / 39,474

= 0.543 2008 = (43,251 – 20,351) / 43,251

= 0.530 2009 = (43,232 – 20,099) / 43,232

= 0.536

2 Ways to Estimate Inventory:

1. Retail Method – use sales at retail and a ratio of retail to cost to estimate the cost of items sold

2. Gross Profit Method – estimate the cost of ending inventory by applying the gross profit ratio to net sales (p.g. 255)

THIS METHOD IS ON THE EXAM

Exit Ticket: Answer the following

Appendix 6B: Inventory Estimation Methods

P4

Inventory sometimes requires estimation for interim statements or if some casualty such as fire or flood makes taking a physical

count impossible.

Retail Inventory Method Gross Profit Method

Announcements

EXAM 2 is TOMORROW

Review Problems are Posted

Study by RE-WORKING problems

Try P6-5A Try P6-1B

Chapter 7

Special Journals and Subsidiary Ledgers

Special Journals

Where would you record…. Closing entries? The depreciation entry? Other adjusting entries?

Subsidiary Ledgers Two of the most important are:

1. Accounts receivable ledger—stores transaction data of individual customers.

2. Accounts payable ledger—stores transaction data of individual suppliers.