Accounting Priciples Part 2x

Compiled By Nut Khorn, -Page 1-
COURSE SYLLABUS FOR

Accounting Principles (Part II)

By Nut Khorn
(Course Facilitator)
For BBA students

This course aims to introduce to the students the financial accounting and it real
practices in making decisions in the normal operations in the business. The
financial accounting provides the external user such as investors, creditors, and so
on; that is, the investors need to know the financial statements of the company
information, especially, financial reporting (annual reports) to making decisions
whether or not they will invest for their resources such as cash and other assets or
financial assets.

II. COURSE OBJECTIVES

The objectives of the course are to enable the student to:
1. Apply the financial technique in preparing the financial statement of
the Service Company and Merchandising Company.
2. Apply for the preparing the CLOSING ENTRIES process of the
Merchandising Company.
3. Apply for the Accounts Receivable and the Method the writeoff of
about it.
4. Apply for the method using the Merchandise inventories.

III. COURSE CONTENT
The following chapters will be discussed in this course:

Chapter 1: accounting for merchandising businesses

LEARNING OBJECTIVES:
Upon completion of this chapter, students will be able to:

1. Identify the differences between service and merchandising companies.
2. Explain the recording of purchases under a perpetual inventory system.
3. Explain the recording of sales revenues under a perpetual inventory
system.
4. Explain the steps in the accounting cycle for a merchandising company.
5. Distinguish between a multiple-step and a single-step income statement.
6. Explain the computation and importance of gross profit.
7. Determine cost of goods sold under a periodic system.

I: COURSE DESCRIPTION


TIME FRAME: Week 1

Chapter 2: Receivables


1. Identify the different types of receivable.
2. Explain how accounts receivable are recognized in the accounts.
3. Distinguish between the methods and bases used to value accounts
receivable
4. Describe the entries to record the disposition of accounts receivable.
5. Compute the maturity date of, and interest on, note receivable.
6. Explain how notes receivable are recognized in the accounts.
7. Describe the entries to record the disposition of the notes receivable.
8. Explain the statement presentation of receivable.

TIME FRAME: Week 2

Chapter 3: Payables

1. Explain a current liability and identify the major types of current
liabilities
2. Describe the accounting for notes payable.
3. Explain the accounting for other current liabilities.
4. Describe the accounting and disclosure requirement for contingent
liabilities.

TIME FRAME: Week 3

Chapter 4: Inventories


1. Describe the steps in determining inventories quantities.
2. Explain the basis of accounting for inventories and describe the
inventory cost flow methods.
3. Explain the financial statement and tax affects of each of the inventory
cost flow methods.
4. List the essential accounting features of a perpetual inventory system.

TIME FRAME: Week 4

IV. LEARNING RESOURCES:
Required textbook


Jan R Williams, Susan F. Haka, and Mark S. Bettner Financial &
Managerial Accounting , (2005), The 13
rd
Edition, Mc GRAW-HILL. (USA).

Reference:
1. WEYGRANT. KIESO. KELL.1996.
Accounting Principles. Fourth Edition, Wiley (USA)
2. Kermit D. Larson. Contributed Author
Barbara Chiappetta . 1996
Fundamental Accounting Principles.
3. NEEDLES. ANDERSON. CALDWELL
Financial & Managerial Accounting
A Corporate Approach
Fourth Edition 1996
4. Jam R. Williams, Susan F. Haka, and Mark S. Bettner. ( 2005).
Financial & and Managerial Accounting 13 Edition, McGra-Hill
(USA).
5. Ministry of Economy and Finance. 2003. The Cambodian Accounting
Standards (CAS). Cambodia.
6. Ministry of Economy and Finance, National Accounting Council
.2006. Financial Reporting Template for Small and Medium Sized
Enterprises.

Internet Web for these Courses:

www.wiley.com/college/weygandt (Accounting Principles, Financial
Accounting, Hospital Accounting, and Managerial Accounting)
www.mhhe.com/williams_basis14e
www.mhhe.com/wild

Note: When you research the entire web above you
should enter the STUDENT CENTER OR STUDENT
COMPONION.

V. Course requirement
Student must have basic knowledge of Business mathematics, business,
and Accounting Principles.

VI. Evaluation of the student performance
Course assessment:
Attendance and participation. 10 %
Home work. 30%
Assignment................... 20%
Mid-term Exam 20%
Final Examination .. 20%

Total: .. 100%


VII. COURSE DURATION
The duration of this course will take approximately one month and one week or
forty-eight (48) hours to complete. Formal class room lectures/ discussion lasting
15 hours will be conducted once a week.

VIII: EVALUATION OF STUDENT PERFORMANCE
Beside formal classroom lectures and theoretical discussions, the students will
also be introduced to class Self-study questions, questions, exercises, problems,
and case-study and discussion that will provide them with a more comprehensive
learning package in this course.
It is expected that formal class discussions will provide the conceptual and
knowledge-oriented learning, while the class exercises and case study will
provide students the experiential, development and sharpening of their
managerial skills. Through this process, students can become more involved in
the learning process. It is therefore essential that students participate
actively in class discussions and during the Q & A group case study
presentations. The class exercises and case study are generally action oriented in
that individuals or groups of students investigate a situation, develop conclusions,
and/or recommendations, and present their ideas/views to their class colleagues.

Work Requirement for a Accounting Principles Major under Mr. Nut Khorn
I will apply the international standard when I teach all accounting courses
I will require that you do all the assigned work before class:

Read your textbook (slide presentation is not complete)
Read the power point materials
Do the assignments
Prepare for all examinations.
Internet research work.
To perform well in my courses, you need to spend about a minimum of 15
hours per week for this class. If you do not want to make this
commitment, then do not take my courses.

You should be present in all my classes. If you do not show up for my
lectures, I will consider you as absent (no need to give excuses).

If you fail any of my courses (I hope you wont), you must retake a new
written examination plus an oral examination to prove that you know the
subjects.

HOME WORK AND ASSIGNMENT

Students MUST COMPLY STRICTLY with the following instructions in
writing their Home Work, Individual Assignments, Group Case-study and Group
Case-Study Presentation.
1. The student(s) is expected to do his/her own research in order to write up
individual assignments and home work.

2. All Individual Assignments/Home work and Group Case-Study MUST be
type written on A-4 sized paper with adequate margins. You should include a
TITLE PAGE and a LIST OF CONTENTS.
3. Use headings and sub-headings to organize your report, including supporting
material(s) as attachments.
4. All reference books/published materials you refer to should be properly
referenced (arrange in this order: name of author(s), year, and title of the book,
publisher, and the country the book was published) and this must be included in
a bibliography at the end of the assignment.
5. Use text referencing when you cite somebody elses work from your
references. Citation may mean direct quoting, or paraphrasing, or
summarizing, or simply to make a statement of that author's view of finding.
An example of text referencing: Beamer and Varner (2001),
suggested that culture is not something we are born with, but rather it is learned.
6. Number all pages sequentially and securely staple and/or bind all sheets
together.
Chapter 1: accounting for merchandising businesses
Assignment:
1) ..j.+....+i..+...+...
.+...+
+++..++-..+..-++..+
+-
2) ....+.++...j.. ++...i
...+ .. ...... .... u.. -
Home Work
P1-2; P1-3; P1-14; P1-15
Chapter 2: Receivables
Assignment:
....+.++.....++..++.+ ...+
.. ...... .... u..
Home Work
P2-7; P2-10
Chapter 3: Payables
Home Work
P3-5; P3-6
Chapter 4 Inventories
Home Work
P4-4; P4-5

CHAPTER. 1 ACCOUNTING FOR MERCHANDISING
BUSINESSES

STUDY OBJECTIVE

After studying this chapter, you should
be able to:

8. Identify the differences between service and merchandising companies.
9. Explain the recording of purchases under a perpetual inventory system.
10. Explain the recording of sales revenues under a perpetual inventory
system.
11. Explain the steps in the accounting cycle for a merchandising company.
12. Distinguish between a multiple-step and a single-step income statement.
13. Explain the computation and importance of gross profit.
14. Determine cost of goods sold under a periodic system.


...[...[................[ .
. . . . ..[..:.. .
..........
..........
. ........ ..... ..,..[.......
....

1
Cambodian Accounting Standards : CAS 2: Inventories


I. MANAGEMENT ISSUES IN MERCHANDISING
BUSINESSES

Up to this point you have studied business and accounting issue related to the
simplest type of business- the service business. Service business, such as
advertising agencies and law firms, perform services for fees or commissions.
Merchandising business, on the other hand, earn income by buying and selling
products or merchandise. These companies, whether wholesale or retail, use the
same basic accounting methods as do service companies, but the buying and
selling of merchandise adds to the complexity of the process.

Cash Flow Management

The Operating Cycle of Merchandising Concerns

Purchases

Cash
Merchandise
inventory
Sales for Cash
Sales on Credit
Accounts Receivable
Collection of
Cash


Profitability Management
Profitability management is a complex activity that includes setting
appropriate prices on merchandise, purchasing merchandise at favorable
price and terms, and maintaining acceptable levels of expenses.

Choice of Inventory System
Under the periodic inventory system, the inventory on hand is counted
periodically, usually at the end of the accounting period. No detailed
records of the actual inventory on hand are maintained during the
accounting period. Under the perpetual inventory system, continuous
records are kept of the quantity and, usually, the cost of individual items
as they are bought and sold.
Control of Merchandising Operations
The principal transactions of merchandising businesses, which involve
buying and selling, are covered by asset accounts-Cash, Accounts
Receivable, and Merchandise Inventory-that are vulnerable to theft and
embezzlement.

II. MANAGEMENT ISSUES IN MERCHANDISING
BUSINESSES

Service companies, as illustrated thus far in this book, requires only a
simple income statement. For those companies, as shown in Figure 2, net
income represents the difference between revenues and expenses. But
merchandising companies, because they buy and sell merchandise
inventory require a more complex income statement. The income

statement for a merchandiser has four major parts: (1) net sales, (2) cost
of goods sold, (3) operating expenses, and (4) income taxes.

The Components of Income Statements for Service and
Merchandising Companies

Service Business
Fees earned $XXX
Operating expenses XXX
Net income $XXX

Merchandising Business
Sales $XXX
Cost of Goods Sold XXX
Gross Profit $ XXX
Operating Expenses XXX
Net Income $XXX

Net Sales
The first major part of the merchandising income statement is net sales, or
often simply sales. Net sales consist of the gross proceeds from sales of
merchandise, or gross sales, less sales returns and allowances. Gross sales
consist of total cash sales and total credit sales occurring during an
accounting period.
Cost of Goods Sold
The Second part of the merchandising income statement is cost of goods sold,
or often simply cost of sales, which is the amount a merchant paid for the
merchandise sold during an accounting period.
Gross Margin
The percentage of gross margin is computed by dividing the dollar amount of
gross margin by net sales.
Operating Expenses
The third major area of the merchandising income statement consists of
operating expenses, which are the expenses other than cost of goods sold that
are incurred in running a business. The latter cost is often called freight out
expense or delivery expense. Careful planning and control of operating
expenses can improve a companys profitability.
Income Before Income Taxes
Income before income taxes is also referred to as operating income or income
from operations because it represents the income from a companys normal,
or main, business.
Income Taxes
Current federal income tax rates for corporations can vary from 15 percent to
38 percent depending on the amount of income before income taxes and other
factors.

Net Income
Net income, the final figure or bottom line of the income statement, is what
remains after operating expenses and income taxes are deducted from gross
margin. Both management and investors often use net income to measure
whether a business has been operating successfully during the past accounting
period.
III. Inventory Systems

As we have seen, merchandising inventory is a key factor in determining the
cost of goods sold. Consequently, every merchandiser needs a useful and reliable
system for determining both the quality and the cost of the goods on hand. The
two basic systems of accounting for the number of items in the merchandise
inventory are the periodic inventory system and the perpetual inventory system.

Periodic Method
A method of determining the cost of merchandise sold and the
amount of merchandise on hand.
Under this method, the inventory records do not show the amount
available for sale or the amount sold during the period.
Perpetual Method
Under this method, each purchase and sale of merchandise is
recorded in the inventory and the cost of merchandise sold accounts.
The amount of merchandise available for sale and the amount sold
are continuously disclosed in the inventory records.
Features:
1. Purchases increase Merchandise Inventory.
2. Freight costs, Purchase Returns and Allowances and Purchase
Discounts are included in Merchandise Inventory.
3. Cost of Goods Sold is increased and Merchandise Inventory is decreased
for each sale.
4. Physical count done to verify Merchandise Inventory balance.

The perpetual inventory system provides a continuous record of
Merchandise Inventory and Cost of Goods Sold.

IV. MERCHANDISING TRANSACTIOS

Merchandising transactions can be divided into the two broad categories
of sale transactions and the purchases transactions. The ways in which
these transactions are recorded differ somewhat under the periodic and the
perpetual inventory systems.
SALES TERMS

2/10, n/30 2% discount if paid within 10 days, otherwise net
amount due within 30 days.
Freight Costs

Terms
FOB shipping point - seller places goods Free On Board the carrier, and
buyer pays freight costs.
FOB destination - seller places the goods Free On Board to the buyers
place of business, and seller pays freight costs.

Freight costs incurred by the seller on outgoing merchandise are an
operating expense to the seller (Freight-out or Delivery Expense).

Who Pays the Cost
Shipping Term Where Title Passes of Transportation

FOB shipping point at origin Buyer
FOB destination at destination Seller

Periodic Method
Features:
1. Purchases of merchandise increase Purchases.
2. Ending Inventory determined by physical count.
3. 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

Separate accounts used to record purchases, freight costs, returns, and
discounts.
Company does not maintain a running account of changes in inventory.
Ending inventory determined by physical count.
Calculation of Cost of Goods Sold


Information related to Chevalier Co. is presented below. Prepare the
journal entry to record the transaction under a periodic inventory system.

1. On April 5, purchased merchandise from Paris Company for $22,000
terms 2/10, net/30, FOB shipping point.

Dr Cr
April 5. Purchases $22,000
A/P.. $22,000
(Terms, 2/10, n/30, from Paris Company)

2. On April 6, paid freight costs of $600 on merchandise purchased from
Paris.
April 6. Freight-in . $600
Cash $600

3. On April 8, returned damaged merchandise to Paris Company and was
granted a $4,000 allowance.

April 8. A/P $4,000
Purchases Returns and Allowance. $4,000

4. On April 15, paid the amount due to Paris Company in full. Remember
the return of $4,000 of merchandise.
April 15. A/P .. $18,000
Purchases Discounts ... $360
Cash . $17,640
($22,000 - $4,000 = $18,000x 0.02 = $360)

5. On April 16, Chevalier Co. sold $500,000 of merchandise to Hashmi Co.,
terms 2/10, n/30, FOB shipping point. Cost of merchandise sold was
$350,000.
April 16. A/R.. $500,000
Sales .. $500,000
(Terms, 2/10, n/30, to Hashmi Co.,)

6. On April 20, Chevalier Co. accepted for full credit the return of $1,000 of
merchandise sold to Hashmi Co., on April 16, the cost of which was $500.
April 20. A/R. $1,000
Sales Returns and Allowance.. $1,000

7. On April 22, Chevalier Co. received payment in full of the account from
Hashmi Co.,, less the return of April 20.

April 22. Cash $489,020
Sales Discounts ..$9,980
A/R. $ 499,000

Perpetual Method
Summarizing the Transactions above:
Dr Cr
5-Apr Merchandise Inv 22,000.00 $
A/P 22,000.00 $
(Terms, 2/10,n/30,From Paris Company)
6-Apr Merchandise Inv 600.00 $
Cash 600.00 $
8-Apr A/P 4,000.00 $
Merchandise Inv 4,000.00 $
15-Apr A/P 18,000.00 $
Merchandise Inv 360.00 $
Cash 17,640.00 $
16-Apr A/R 500,000.00 $
Sales 500,000.00 $
Cost of Goods Sold 350,000.00 $
Merchandise Inv 350,000.00 $
(Terms, 2/10,n/30,To Hashmi Co.,)
20-Apr A/R 1,000.00 $
Sales Returns and Allowance 1,000.00 $
Merchandise Inv 500.00 $
Cost of Goods Sold 500.00 $
22-Apr Cash 489,020.00 $
Sales Discounts 9,980.00 $
A/R 499,000.00 $

V. Forms of Financial Statements
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.

Your formula:

= + Loss Income Net Losses Gains E R
GAAP
/
) (

Find Cost of Goods Sold

Single-Step Income Statement

Subtract total expenses from total revenues
Two reasons for using the single-step format:
1) Company does not realize any type of profit until total revenues
exceed total expenses.
2) Format is simpler and easier to read.

Your Formulas
enses ng nonoperati enses operating ofit Gross income Net or
enses operating ofit Gross operations from Income income Net
COGS Sales Net ofit Gross
Inv Ending In Freight Purchases Net Inv Beginning COGS Or
brain your in them remember please statement income in shown is above formulas
Inv Ending sales for available goods of Cost COGS sold goods of Cost
Purchased Goods of Cost Inv Beginning sales for available goods of Cost
In Freight Purchases Net Purchased Goods of Cost
Allowance and returns Purchases Discounts Purchases Purchases Purchases Net
Allowaance And turns Sales Discounts Sales Sales Sales Net
exp exp Pr
exp Pr ) ( ) 7
Pr ) 6
) , 5 (
) ( ) 5
) 4
) 3
) ( ) 2
) Re ( ) 1
=
=
=
+ + =
=
+ =
+ =
+ =
+ =

Classified Balance Sheet


Problems
Chapter 1. Accounting for Merchandising
Businesses

P1-1. Calculate net sales and gross profit in each of the following situations:
a b c d
Sales
$125,00
0 $505,000 $33,700 $256,700
Sales discounts $3,200 $13,500 $300 $4,000
Sales returns and allowances $19,000 $3,000 $6,000 $600
Cost of goods sold $67,600 $352,700 $22,300 $123,900

P1-2. A company purchased merchandise that cost $165,000 during the year that
just ended. Determine the companys cost of good sold in each of the following
four situations:
a) There was no beginning or ending inventories.
b) There was a beginning inventory of $35,000 and no ending inventory.
c) There was a $30,000 beginning inventory and a 42,000 ending
inventory.
d) There was no beginning inventory but there was a $ 21,000 ending
inventory.

P1-3.The following information appeared in a companys income statement:

Sales $300,000
Sale returns $15,000
Sales discounts $4,500
Beginning inventory $25,000
Purchases $180,000
Purchases returns and allowances $6,000
Purchases discounts $3,600
Freight- In $11,000
Gross profit from sales $105,000
Net income $55,000

Required:
Calculate the (a) total operating expenses, (b) cost of goods sold, and (c)
ending inventory.

P1-4. The following accounts and balance are taken from the year end adjusted
trial balance of the Vintage Shop, a single proprietorship. Use the information in
these columns to complete the requirements.


Debit Credit
Merchandise inventory $28,000
Sales $425,000
Sales returns and allowances $16,500
Sales discounts $4,000
Purchases
$240,00
0
Purchases returns and allowances $18,000
Purchases discounts $2,000
Transportation -in $6,000
Selling expenses $35,000
General and administrative expenses $95,000

The count of the ending inventory shows that its cost is $37,000.
Required:
a. Calculate the companys net sales for the year.
b. Calculate the companys cost of purchased for the year.
c. Calculate the companys cost of goods sold for the year.
d. Prepare a multiple- step income statement for the year that lists net sales,
cost of goods sold, gross profit, the operating expenses, and net income.

P1-5.Record each of the following transactions, assuming the periodic inventory
system is used.
Aug.2 Purchased merchandise on credit from Gear Company,
invoice dated August 1, terms n/10, FOB shipping point,
$2,300.
3 Received bill from State Shipping Company for
transportation costs on August 2 shipment, invoice
dated August 1, terms n/30, $210.
7 Returned damaged merchandise received from Gear
Company on August2 for credit, $360.
10 Paid in full the amount due to Gear Company for the
purchase of August 2, part of which was returned on
August 7.

P1-6. Record the transaction in P1-5. above, assuming the perpetual inventory
system is used.

P1-7. Record each of the following transactions, assuming the periodic inventory
system is used:
August 4. Sold merchandise on credit to Kwai Corporation, terms n/30, FOB
destination, $1,200.
August 5. Paid transportation costs for sale of August 4, $110.

August 9. Merchandise sold on August 4 was accepted back from Kwai
Corporation for full credit and returned to the merchandise inventory, $350.
September 4. Received payment in full from Kwai Corporation for merchandise
sold on August 4, less the return on August 9.

P1-8. Record the transactions in P1-7. using the perpetual inventory system,
assuming that the merchandise sold on August 4 cost $720 and the merchandise
returned on August 9 cost $210.

P1-9. On April 15, the Sural company sold merchandise to Astor Corporation for
$1,500 on terms 2/10, n/30. Record the entries in both Surals and Astors records
for (1) the sales, (2) a return of merchandise on April 20 of $300, and (3)
payment in full on April 25. Assuming both companies use the periodic inventory
system.

P1-10. a. If beginning inventory is $10,000, purchases total $85,000, and ending
inventory is $12,700, how much is cost of goods sold?
b. If beginning inventory is $23,000, purchases total $119,000, and cost of
goods sold is $127,000, how much is ending inventory?

P1-11. Auto Max Used Cars purchased inventory costing $100,000 and sold
70% of the automobiles for $120,000. All purchases were on account. Sales were
for note receivable, with Auto Max collecting 20% up front.
1) Journalize theses two transactions for Auto Max, which uses the
perpetual inventory system.
2) For these transactions, show what Auto Max will report inventory,
revenues, and expenses on its financial statements. Report gross profit on the
appropriate statement.

P1-12.
Information related to Pagnucci Co. is presented below.
1. On April 5, purchased merchandise from Steff Company for $20,000,terms
2/10, net/30,FOB shipping point.
2. On April 6 paid freight costs of $700 on merchandise purchased from Bryant.
3. On April 7, purchased equipment on account for $29,000.
4. On April 8, returned damaged merchandise to Steff Company and was granted
a $3,000 credit for returned merchandise.
5. On April 15 paid the amount due to Steff Company in full.
Instructions
(a) Prepare the journal entries to record these transactions on the books of
Pagnucci Co. under a perpetual inventory system.
(b) Assume that Pagnucci Co. paid the balance due to Steff Company on May 4
instead of April 15. Prepare the journal entry to record this payment.

P1-13.
On September 1, Jiggs Office Supply had an inventory of 40 calculators at a cost
of $18 each.The company uses a perpetual inventory system. During September,
the following transactions occurred.
Sept. 6 Purchased 70 calculators at $20 each from Billy Jack Co. for cash.
9. Paid freight of $68 on calculators purchased from Billy Jack Co.

10. Returned 2 calculators to Billy Jack Co. for $40 credit because
they did not meetspecifications.
12. Sold 40 calculators costing $18 for $34 each to Kerry Book Store,
terms n/30.
14. Granted credit of $34 to Kerry Book Store for the return of one calculator
that was not ordered.
20. Sold 30 calculators costing $21 (including freight) for $35 each to
Sayers Card Shop, terms n/30.

Instructions
Journalize the September transactions.

P1-14.
In its income statement for the year ended December 31, 2008, Duthie Company
reported the following condensed data.
Administrative expenses..$304,000 Selling expenses $ 343,000
Cost of goods sold 902,000 Loss on sale of equipment... 7,000
Interest expense. 49,000 Net sales. 1,620,000
Interest revenue 20,000

Instructions
(a) Prepare a multiple-step income statement.
(b) Prepare a single-step income statement.

P1-15.
Presented below is financial information for two different companies.
Viet Naise
Company Company

Sales . $210,000. (d)
Sales returns.. (a) .. $ 5,000
Net sales 200,000 95,000
Cost of goods sold 120,000 . (e)
Gross profit (b). 42,000
Operating expenses . 50,000. (f)
Net income (c) . 20,000
Instructions
Determine the missing amounts.
P1-16: Prepare journal entries to record the following merchandising
transactions of Garcia Company, which applies the perpetual inventory
system. (Hint: It will help to identify each receivable and payable; for
example, record the purchase on August 1 in Accounts PayableWeir
Co.)
Aug. 1 Purchased merchandise from Weir Company for $25,000 under
credit terms of 1/10, n/45, FOB shipping point.
2 Paid $300 for freight charges on the purchase of August 1.
4 Sold merchandise to Cassidy Corp. for $3,800 under credit terms
of 2/10, n/60, FOB shipping point. The merchandise had cost
$1,700.

6 Purchased merchandise from Lesh Corporation for $6,000 under
credit terms of 2/15,n/30. FOB destination.
7 Received a $1,200 credit memorandum for the return of
defective merchandise purchased on August 6.
8 Sold merchandise that cost $500 for $900 cash.
9 Paid the balance due to Weir Co. within the discount period.
11 Sold merchandise that cost $1,000 to Terrapin Co. for $3,100
under credit terms 2/10,n/30. FOB shipping point.
14 Received the balance due from Cassidy Co. for the August 4 sale
within the discount period.
15 Paid $250 shipping charges on the August 11 sale to Terrapin
Co. and added the amount to their bill.
16 Issued a $200 credit memorandum to Terrapin Co. for defective
merchandise.
21 Received Terrapin Cos cash payment for the amount due from
the August 11 purchase.
30 Paid Lesh Co. the amount due from the August 6 purchase.
P1-17:
Newman Hardware Store completed the following merchandising transactions in
the month of May. At the beginning of May, the ledger of Newman showed Cash
of $5,000 and Common Stock of $5,000.
May 1 Purchased merchandise on account from Jerrys Wholesale Supply
$4,200, terms 2/10, n/30.
2 Sold merchandise on account $2,100, terms 1/10, n/30.The cost of
the merchandise sold was $1,300.
5 Received credit from Jerrys Wholesale Supply for merchandise
returned $300.
9 Received collections in full, less discounts, from customers billed
on sales of $2,100 on May 2.
10 Paid Jerrys Wholesale Supply in full, less discount.
11 Purchased supplies for cash $400.
12 Purchased merchandise for cash $1,400.
15 Received refund for poor quality merchandise from supplier on
cash purchase $150.
17 Purchased merchandise from Cosmo Distributors $1,300, FOB
shipping point, terms 2/10, n/30.
19 Paid freight on May 17 purchase $130.
24 Sold merchandise for cash $3,200.The merchandise sold had a
cost of $2,000.
25 Purchased merchandise from Costanza, Inc. $550, FOB
destination, terms 2/10, n/30.
27 Paid Cosmo Distributors in full, less discount.
29 Made refunds to cash customers for defective merchandise $60.
The returned merchandise had a scrap value of $10.
31 Sold merchandise on account $900, terms n/30.The cost of the
merchandise sold was $560.
Newman Hardwares chart of accounts includes the following: No. 101 Cash, No.
112 Accounts Receivable, No. 120 Merchandise Inventory, No. 126 Supplies,
No. 201 Accounts Payable,No. 311, Common Stock No. 401 Sales, No. 412 Sales
Returns and Allowances, No. 414 Sales Discounts, No. 505 Cost of Goods Sold.

Instructions
(a) Journalize the transactions using a perpetual inventory system.
(b) Enter the beginning cash and common stock balances and post the
transactions. (Use J1 for the journal reference.)
(c) Prepare an income statement through gross profit for the month of
May 2008.
[Answer: (c) Gross profit $2,269]

P1-18: Pauls Book Warehouse distributes hardcover books to retail stores and
extends credit terms of 2/10, n/30 to all of its customers.At the end of May,
Pauls inventory consisted of 300 books purchased at $1,800. During the month
of June the following merchandising transactions occurred.
June 1 Purchased 200 books on account for $6 each from Logan
Publishers, FOB destination, terms 2/10, n/30.The appropriate
party also made cash payment of $50 for the freight on this date.
3 Sold 240 books on account to Reading Rainbow for $10 each
(cost, $6 each)
6 Received $120 credit for 20 books returned to Atkinson
Publishers.
9 Paid Logan Publishers in full, less discount.
15 Received payment in full from Reading Rainbow.
17 Sold 180 books on account to Cheap Books for $10 each
(cost, $6 each).
20 Purchased 250 books on account for $6 each from Phantom
Publishers, FOB destination, terms 2/15, n/30. The appropriate
party also made cash payment of $50 for the freight on this date.
24 Received payment in full from Cheap Books.
26 Paid Phantom Publishers in full, less discount.
28 Sold 130 books on account to Willow Bookstore for $10 each
(cost, $6 each).
30 Granted Willow Bookstore $120 credit for 12 books returned
costing $72.

Pauls Book Warehouses chart of accounts includes the following: No. 101
Cash, No. 112 Accounts Receivable, No. 120 Merchandise Inventory, No. 201
Accounts Payable, No. 401 Sales, No. 412 Sales Returns and Allowances, No.
414 Sales Discounts, No. 505 Cost of Goods Sold.
Instructions
Journalize the transactions for the month of June for Pauls Book Warehouse
using a perpetual inventory system.
P1-19: Below is a series of cost of goods sold sections for companies A, B, C,
and D.
A B C D
Beginning Inventory $200 $100 $500 (J)
Purchases 2,000 1,100 (g) $11,200
Purchases returns and Allowances 50 (d) 150 (k)
Net Purchases (a) 1,060 3,100 10,500
Freight-in 70 (E) (H) 610
Cost of goods purchased (b) 1,120 3,250 (l)

Cost of goods available for sales 2,220 1,120 (i) 12,200
Ending Inventory 300 (f) 700 1,200
Cost of goods sold (c) 1,090 3,050 11,000

Instructions
Fill in the lettered blanks to complete the cost of goods sold sections.
P1-20: On January 1, 2008, Rachael Runde Corporation had merchandise
inventory of $35,000. At December 31, 2008, Rachael Runde had the following
account balances.

Freight-in .$ 6,000
Purchases.. 360,000
Purchase discounts 8,000
Purchase returns and allowances... 3,000
Sales 600,000
Sales discounts 7,000
Sales returns and allowances. 12,000

At December 31, 2008, Rachael Runde determines that its ending inventory is
$41,000.
Instructions
(a) Compute Rachael Rundes 2008 gross profit.
(b) Compute Rachael Rundes 2008 operating expenses if net income is $120,000
and there are no nonoperating activities.
P1-21:

The end of the Chapter 1.


CHAPTER. 2 ACCOUNTING FOR RECEIVABLES

STUDY OBJECTIVE

After studying this chapter, you should
be able to:
1 Classification of Receivables
2. Internal Control of Receivables
3. Uncollectible Receivables
4. Uncollectibles Allowance Method
5. Uncollectibles Direct Write-Off Method
6. Characteristics of Notes Receivable
7. Accounting for Notes Receivable
8. Balance Sheet Presentation
9. Financial Analysis and Interpretation


In the normal course of events, accounts receivable are collected in cash and
removed from the books. However, as credit, sales and receivables have grown in
size and significance, the normal course of events has changed. There are
several reasons for the sale of receivables. First, for competitive reasons,
sellers (retailers, wholesalers, and manufacturers) often must provide financing
to purchases of their goods
2
.
Goods and services are normally bought and sold on credit where payment is
made or received at a letter date then the delivery of the goods or provision of the
service. The important event for the business is the date of the purchase or the
sale and not the receipt or payment of the cash
3
.

I. Classification of Receivables
Accounts Receivable used for selling merchandise or services on credit,
and normally expected to be collected in a relatively short period.
Notes Receivable used to grant credit on the basis of a formal instrument
of credit, called a promissory note.
Other Receivables interest receivable, taxes receivable, and receivables
from officers or employees.

Note: Accounting for Sales Revenues

Assume on March 15, $1,000 of merchandise is sold on account. The terms of
the agreement are 2/10, n/30. The firm uses the gross method for record sales on
account.

Entry on date of sale:

Dr Accounts Receivable 1,000
Cr Sales.1,000

If paid within the discount period:

Dr Cash 980
Dr Sales Discounts 20
Cr Accounts Receivable 1,000

If not paid within the discount period:

Dr Cash 1,000
Cr Accounts Receivable 1,000

II. Accounting for Bad Debts

Occur when customers do not pay for items or services purchased on
credit.
Bad debts are uncollectible accounts receivable.

2
Weygandt, Kieso, and Kell, (1996), Accounting Principles , pp. 336.
3
BPP Professional Education, (2006), CAT , pp.152.

Bad Debt Expense is reported as a selling or general and administrative
expense.
Accounts receivable are reported on the balance sheet at their net
realizable value.

III. Accounting for Uncollectible Accounts Receivable
Two methods are used in accounting for uncollectible accounts: (1) the
the direct write-off method and (2) allowance method. Each of these methods
is explained in the following sections.

1) Direct Write off Method

This method is not consistent with the matching principle.
Accounts that prove to be uncollectible are written off in the year they
become worthless.
Uncollectible Accounts Expense is debited and Accounts Receivable is
credited for each such transaction.
Under the direct write-off method, bad debt losses are not estimated and no
allowance account is used.

Journal Entries Direct Write off Method
May.10
Dr Uncollectible Accts. Expense 420
Cr Accts. Receivable - D. L. Ross 420

Write off uncollectible Account of $ 420.
Nov.21

Dr Accts. Receivable - D. L. Ross 420
Cr Uncollectible Accts. Expense 420

Dr Cash 420
Cr Accts. Receivable - D. L. Ross 420
Reinstate and collect prior account written off.

2) The Allowance Method (Required by GAAP)

1. This method is consistent with the matching principle.
2. Management makes an estimate each year of the portion of
accounts receivable that may not be collectible. (Adjusting Entry
at the end of each period)
Uncollectible Accounts Expense is debited and Allowance for
Doubtful Accounts is credited.
3. Actual accounts that prove to be uncollectible are debited to
Allowance for Doubtful Accounts and credited to Accounts
Receivable. (Write-off)
When all means of collecting a past-due account have been
exhausted and collection appears impossible, the account should
be written off. To prevent premature write offs, each write off

should be formally approved in writing by authorized
management personnel.

Dec. 31
Dr Uncollectible Accts. Expense 4,000
Cr Allowance for Doubtful Acct. 4,000

Estimated a total of $4,000 will be uncollectible.
Jan 21.
Dr Allowance for Doubtful Accts. 610
Cr Accts. Receivable - J. Parker 610
Write off uncollectible account of $160.
June 10.
Dr Accts. Receivable - J. Parker 610
Cr Allowance for Doubtful Accts. 610
Dr Cash 610
Cr Accts. Receivable - J. Parker 610
Reinstate and collect prior account write off.

In the Partial Balance sheet.

Current Assets:
Cash..$14,800
Accounts Receivable.$200,000
Less: Allowance for Doubtful accounts. 12,000..188,000
Merchandise Inventory310,000
Prepaid Expense.25,000
Total Current Assets$537,800
Note: Net A/R..$188,000

Note: There are three methods of the Allowance Method
Percentage of credit sales
Percentage of accounts receivable
Aging receivables

Percentage of Credit Sales
Management establishes a percentage relationship between the
amount of credit sale and expected loss for uncollectible accounts.
The ABC Company had credit sales of $100,000. The current accounts
receivable balance is $30,500. The allowance for doubtful accounts balance is
$350. Historically, 2 percent of the credit sales are not collected.

Dr Bad Debt Expense 2,000
Cr Allowance for Doubtful Accounts 2,000
To record estimated uncollectible
accounts for the year.

Percentage of Accounts Receivable

Management establishes a percentage relationship between the
amount of receivable and the expected loss for uncollectible accounts.

The XYZ Company had credit sales of $693,000. The current accounts
receivable balance is $50,000. The allowance account balance is a credit of
$600. Historically, 3 percent of accounts receivable are not collectible.
Bal: 600.00 $
Adjusting: 900.00 $
Bal: 1,500.00 $
We compute: $50,000x0.03
Allowance for Doutfual Accounts

Dr Bad Debt Expense $900
Cr Allowance for Doubtful Accounts $900
To record estimated uncollectible accounts for the year.
($50,000*0.03) - $600= $900)

Aging Receivable

The analysis of customer balance by the length of time they have been
unpaid.

The ABC Company had credit sales of $100,000. The current accounts
receivable balance is $47,550. The allowance for doubtful accounts balance is
credit of $620.The firm ages the accounts to determine the expected
uncollectibles.
Remember, because receivables are involved, the amount derived from aging
provides the desired balance of the allowance account.

Compiled By Nut Khorn,


Dr Dab Debt Expense

Cr Allowance for Doubtful Accounts
To record estimated uncollectible accounts for the year

Credit Card Sales
Retailer considers credit card sales the same as
Retailer must pay card issuer a fee of 2
transactions.
Retailer records the sale in a similar manner as checks deposited
from cash sale.
Approximately 1 billion credit cards were established to be in use
recentlymore than three credit cards for every man, woman ,and chi
in this country. A common type of credit card is a national credit card
such as VISA, MasterCard, and American Express
involved when nation credit cards are used in making retail sales:
credit card issuer, who is independent of the retailer,
(3) the customer.
Note: Visa is the largest retail electronic payment network in the world,
connecting 16,600 financial institutions and more than 1.6 billion cards to more

-Page 30-
Bal: 620.00 $
Adjusting: 2,250.00 $
Bal: 2,870.00 $
Dab Debt Expense $2,250
Allowance for Doubtful Accounts $2,250
To record estimated uncollectible accounts for the year
Credit Card Sales
Retailer considers credit card sales the same as cash sales.
Retailer must pay card issuer a fee of 2 to 4% for processing the
transactions.
from cash sale.
more than three credit cards for every man, woman ,and chi
VISA, MasterCard, and American Express. Three parties are
involved when nation credit cards are used in making retail sales:
credit card issuer, who is independent of the retailer, (2) the retailer, and
the customer.
Visa is the largest retail electronic payment network in the world,

$2,250
to 4% for processing the
more than three credit cards for every man, woman ,and child
. Three parties are
involved when nation credit cards are used in making retail sales: (1) the
the retailer, and
Visa is the largest retail electronic payment network in the world,

than 29 million merchants and 1 million ATMs worldwide, according to a
company statement.
4

VISA and MasterCard Sales: Sales resulting from the use of VISA and
MasterCard are considered cash sales by the retailers. The cards are issued by
banks.
Examples: On May 10, Dale Company sold merchandise for $3,500 and accepted
the customers America Bank MasterCard. America Bank charges a 4% service
charge for credit card sales. Prepare the entry on Dale Companys books to
record the sale of merchandise.

Cash $3,360
Service Charge Expense.. 140
Sales ..$3,500
($3,500x 0.04 = $140)

IV. Characteristics of Notes Receivable
A promissory note is a written document containing a promise to pay:
a specific amount of money (principal)
to a specific person or company (payee)
at a specific place
on a specific date or upon demand
plus interest at a specific percentage of the principal (face) amount per
year

4
THE CAMBODIA DAILY, BUSINESS, Friday, August 29, 2008.page 29.


Calculating Interest and
We received a $2,500, 10%, 90

-Page 32-
Calculating Interest and Maturity Value
We received a $2,500, 10%, 90-day note dated March 16, 2003. day note dated March 16, 2003.


ILLUSTRATIVE ACCOUNTING ENTRIES OF NOTE
RECEIVABEL
The accounting entries for promissory notes receivable fall into four
groups: (1) recording receipt of a note, (2) recording collection of a
note, (3) recording dishonored note, and (4) recording adjusting
entries.

(1) Recording receipt of a note,
Assume that on June 1 a 12 percent, 30-day note is received from a
customer, J.Halsted, in settlement of an existing accounts receivable of $4,000.
The entry for this transaction is as follows:

June 1. Note Receivable .$4,000
A/R.$4,000
(Received 12 percent, 30-day note in payment of account of J.
Halsted)
(2) Recording collection of a note

Jul1. Cash...$4,040
Note Receivable .$4,000
Interest Revenue 40
(Collected 12 percent, 30-day note form J. Halsted)

(3) Recording dishonored note
A dishonored note is a note that is not paid in full at maturity.

Jul1. A/R...$4,040
Note Receivable .$4,000
Interest Revenue 40
(Collected 12 percent, 30-day note dishonored by J. Halsted)

(4) Recording adjusting entries.

Examples Mikes Stores had the following select transactions.
Apr. 1, 2008 Accepted Otis Companys 1-year, 12% note in settlement
of a $30,000 accounts receivable.
July 1, 2008 Loaned $50,000 cash to Dan Hampton on a 9-month, 10%
note.
Dec. 31, 2008 Accrued interest on all notes receivable.
Apr. 1, 2009 Received principal plus interest on the Otis note.
Apr. 1, 2009 Dan Hampton dishonored its note; Mikes expects it will
eventually collect.
Instructions
Prepare journal entries to record the transactions. Mikes Stores prepares
adjusting entries once a year on December 31.

Solution


Apr 1,08 Note Receivable 30,000.00 $
A/R 30,000.00 $
( Accepted 1-year,12%, note from Otis Com)
1-Jul-08 Note Receivable 50,000.00 $
Cash 50,000.00 $
( Loaned to Dan Hampton, 9-month, 10%, note)
Dec31,08 Interest Receivable 2,700.00 $
Interest Revenue 2,700.00 $
( 9-month for Otis Com)
Interest Receivable 2,500.00 $
( 6-month for Dan Hampton)
April 1,09 Cash 33,600.00 $
Note Receivable 30,000.00 $
Interest Revenue 900.00 $
( Collected in cash from Otis Com, 3-month)
1-Apr-09 A/R 53,750.00 $
Note Receivable 50,000.00 $
( Dishonored note by Dan Hampton, 3 month)

End of Chapter 2


Problems on Chapter2
Accounts and Note Receivable

P2-1) At the end of October, Mafa Company management estimates the
uncollectible accounts expense (=Bad debts expense) to be 1 percent of net sales
of $2,770,000. Give the entry to record the uncollectible accounts expense,
assuming that the Allowance for Uncollectible Accounts (= Allowance for
Doubtful Accounts) has a debit balance of $14,000.

P2-2) An aging analysis on June 30 of the accounts receivable of Texbar
Corporation indicates uncollectible accounts of $43,000. Give the entry to record
uncollectible accounts expense under each of the following independent
assumptions: (a) Allowance for Uncollectible Accounts has a credit balance of
$9,000 before adjustment, and (b) Allowance of Uncollectible Accounts had a
debit balance of $7,000 before adjustment.

P2-3) At the end of the year, Marin Enterprises estimates the uncollectible
accounts expense to be 0.7 percent of net sale of $10,100,000. The current credit
balance of Allowance for Uncollectible Accounts is $17,200. Give the general
journal entry to record the uncollectible accounts expense. What is the balance of
Allowance for Uncollectible Accounts after this adjustment?

P2-4) Accounts Receivable of Herera Company shows a debit balance of
$104,000 at the end of the year. An aging analysis of the individual accounts
indicates estimated uncollectible accounts to be $6,700. Give the general journal
entry to record the collectible accounts expense under each of the following
independent assumptions: (a) Allowance for Uncollectible Accounts has a credit
balance of $800 before adjustment and (b) Allowance for Uncollectible Accounts
has a debit balance of $800 before adjustment.

P2-5) During its first year of operations, Wendy Company had credit sales of
$3,000,000, of which $600,000 remained uncollected at year-end. The credit
manager estimates that $40,000 of these receivable will become uncollectible. (a)
Prepare the journal entry to record the estimated uncollectibles. (b) Prepare
current assets section of the balance for Wendy Company, assuming that in
additional to receivables it has cash of $90,000, merchandise inventory of
$130,000, and prepaid expenses of $13,000.

P2-6) Alex Co. elects to use the percentage of sales basis in 2009 to record the
bad debts expense and concludes that 2% of net credit sales will become
uncollectible. Sales are $700,000 for 2009, sales returns and allowances are
$50,000, and the allowance for doubtful accounts has a credit balance of $12,000.
Prepare the adjusting entry to record the bad debts expense in 2009.

P2-7) Massey Co. uses the percentage of accounts receivable basis to record bad
debts expense, and concludes that 1% of accounts receivable will become

uncollectible. Accounts Receivable are $500,000 at the end of the year, and the
allowance for doubtful accounts has a credit balance of $3,000. (a) Prepare the
adjusting journal entry to record bad debt expense for the year. (b) If the
allowances for doubtful accounts a debit balance of $800 instead of credit balance
of $3,000, determine the amount to report for bad debt expense.

P2-8) On December 31, 2008, Lisa Ceja Co. estimates that 2% of its net sales of
$300,000 will become uncollectible and records this amount as an addition to
Allowance for Doubtful Accounts. On May 11, 2009, Lisa Ceja Co. determined
that Robert Worthys account was uncollectible and wrote off $900. On June 12,
2009, Worthy paid the amount previously written off. Prepare the journal entries
on December 31, 2008, May 11, 2009, and June 12, 2009.

P2-9) Presented below is an aging schedule for Boitano Company.
Number of Days Past Due
Customer Total
Not Yet
Due 1-31 31-60 61-90
Over
90
Aber
$20,00
0
$9,00
0
$11,00
0
Bohr 30,000 $30,000
Case 50,000 15,000 5,000
$30,00
0
Datz 38,000
$38,00
0
Others
120,00
0 92,000
15,00
0 13,000

258,00
0 137,000
29,00
0 24,000 30,000 38,000
Estimated
Percentage 3% 6% 12% 24% 50%
Uncollectible

$34,93
0 $4,110
$1,74
0 $2,880 $7,200
$19,00
0
Total Estimated
Bad Debts

At December 31, 2008, the adjusted balance in Allowance for Doubtful Accounts
is a credit of $9,000.
Instructions:
a) Journalize and post the adjusting entry for bad debts at December 31,
2008.
(b) Journalize and post to the allowance account the following events and
transactions in the year 2009.
(1) March 1, a $1,900 customer balance originating in 2008 is
judged uncollectible.
(2) May 1, a check for $1,900 is received from the customer whose
account was written off as uncollectible on March 1.

(c) Journalize the adjusting entry for bad debts on December 31, 2009.
Assume that the unadjusted balance in Allowance for Doubtful
Accounts is a debit of $2,000, and the aging schedule indicates that
total estimated bad debts will be $42,300.

P2-10) At December 31, 2008. Trisha Underwood Imports reported the following
information on its balance sheet:
Accounts receivable ........................... $1,000,000
Less: Allowance for Doubtful accounts 60,000
During the first quarter of 2009, the company had the following transactions
related to receivable.
1. Sales on account .......................................................... $2,600,000
2. Sales returns and allowances........................................ 40,000
3. Collections of accounts receivables............................. 2,300,000
4. Write off of accounts receivable deemed uncollectible ..... 80,000
5. Recovery bad debts previously written of as uncollectible....... 25,000
Instructions:
(a) Prepare the journal entries to record each of five transactions. Assume that
no cash discounts were taken on the collections of accounts receivable.
(b) Enter the January 1, 2009, balance in Accounts Receivable and Allowance
for Doubtful Accounts, post the entries to the two accounts (use T
accounts), and determine the balances.
(c) Prepare the journal entry to record bad debts expense for the first quarter
of 2009, assuming that an aging of accounts receivable indicates that
estimated bad debts are $70,000.

P2-11) On January 1, 2009, Comeneci Company had Accounts Receivable
$54,200 and Allowance for Doubtful Accounts $4,700. Comeneci Company
prepares financial statements annually. During the year the following selected
transactions occurred.
Jan. 5 Sold $6,000 of merchandise to Garth Brooks Company, terms n/30.
Feb. 2 Accepted a $6,000, 4-month, 12% promissory note from Garth Brooks
Company for balance due.
Feb.12 Sold $7,200 of merchandise to Gage Company and accepted Gags
$7,200 a two-month, 10% note for the balance due.
Feb. 26 Sold $5,000 of merchandise to Mathias Co. terms n/10.
Apr. 5 Accepted a $5,000, 3-month, 8% note from Mathias Co. for balance
due.
Apr. 12 Collected Gage Company note in full.
June. 2 Collected Garth Brooks Company note in full.
July. 5 Mathias Co. dishonored its note of April 5. It is expected that
Mathias will eventually pay the amount owed.
July 15 Sold $3,000 of merchandise to Tritt Inc. and accepted Tritts $3,000,
3-month,12% note for the amount due.
Oct. 15 The Tritt Inc. note was dishonored. Tritt Inc. is bankrupt, and there is
no hope of future settlement.
Instructions: Journalize the transactions.

P2-12) Determine the interest on the following notes.
a. $22,800 at 10 percent for 90days

b. $16,000 at 12 percent for 10 months
c. $18,000 at 9 percent for 3 years
d. $30,000 at 15 percent for 120 months
e. $10,800 at 6 percent for 60 days

P2-13) Prepare general journal entries to record the following transactions.
Jan. 16- Sold merchandise to Brighton Corporation on account for $36,000,
terms n/30.
Feb.15- Accepted a $36,000, 10 percent, 90-days note from Brighton
Corporation in lieu of payment of account.
May 16- Brighton Corporation dishonored the note.
June 15- Received payment in full from Brighton Corporation, including
interest at 10 percent from the date the note was dishonored.

Chapter 3: Current Liabilities

Current liabilities
Are obligations due within one year or within the companys
normal operating cycle if it is longer than one year
Fall into one of two categories:
Liabilities of known amount
Liabilities whose amount must be estimated
Accounts payable are amounts owed for products or services purchased
on account.
Accounts Payable are the counterpart of accounts receivable. Accounts
payable arise when a company purchases goods, supplies, or services on
credit. They are recorded at the amount expected to be paid to eliminate
the obligation
5
.
May1. Bowden Co. purchased merchandise on account from Coker Co.,
$10,000, terms 2/10, n/30.
Dr Mdse. Inventory $10,000
Cr Accts. Payable 10,000

Convert from Accounts Payable to Note Payable
May 31. Bowden Co. issued a 60-day, 12% note for $10,000 to Coker Co. on
account.

May 31.
Dr Account Payable $10,000
Cr Note Payable 10,000

Notes Payable
Obligations in the form of written promissory notes are recorded as notes
payable.
Notes payable are often used instead of accounts payable. Doing so gives
the lender written documentation of the obligation in case legal remedies
are needed to collect the debt. Notes payable usually require the borrow to
pay interest and frequently are issued to meet short-term financing needs
6
.

June 30. Bowden Co. paid the amount due. Interest:
$10,000x12%x60/360= $200

Dr Note Payable $10,000
Cr Interest Expense 200
Cr Cash 10,200

Sales Tax Payable
As consumers, we are well aware that many of the products we purchase
at retail store are subject to sales taxes. The tax is expressed as a stated
percentage of the sales price. The retailer (selling company) collects the

5
Chasteen, Flaherty, and O connor, (1998), Intermediate Accounting ,pp.214
6
Weygandt, Kieso, and Kell,(1996), Accounting Principles ,pp. 453.

tax from the customer when the sale occurs, and periodically (usually
monthly) remits the collections to the states department of revenue.
Under most of state sales tax laws, the amount of the sale and the amount
of the sales tax collected must be rung up separately on the cash register.
The cash registers readings are then used to credit Sales and Sales Taxes
Payable. For example, assuming that the March 25 cash register readings
for Cooley Grocery show sales of $10,000 and sales taxes of $600 (sales
tax rate of 6%), the entry is
7
:
Mar. 25
Dr Cash .$10,6000
Cr Sales10,000
Cr Sales Taxes Payable 600
(To record daily sales and sales taxes)

Current Liabilities must be estimated
Estimated warranty payable
Arises when a company warranties its product
Is recorded in the same period that the business recognizes sales revenue
Is estimated because the exact amount of warranty expense cannot be
known with certainty.
Assume that Black & Decker made sales of $200,000,000 subject to product
warranties. If Black & Decker estimates that 3% of the products it sells this
year will require repair or replacement, the company would estimate warranty
expense of $6,000,000 ($200,000,000 x .03) for the period and make the
following entry:

Dr Warranty Expense 6,000,000
Cr Estimated Warranty Payable 6,000,000
To accrue warranty expense

End of Chapter 3

7
Weygandt, Kieso, and Kell,(1996), Accounting Principles ,pp.453-454.

Problems on Chapter 3: Current Liabilities

P3-1: Indiana Jones Company had the following selected transactions:
Feb. 1 Sings a $50,000 6-month 9% -interest-bearing note payable to
CityBank receiving $50,000 in cash.
Feb 10 Cash register sales total $43,200 which includes an 8% sales tax.
Feb 28 The following adjustment data are developed:
1. Interest expense of $375 has been occurred on the note.
2. Some sales were made under warranty. Of the units sold under
warranty, 350 are expected to become defective. Repair costs
are estimated to be $40 per unit.
Instructions:
Journalize the February transactions.
P3-2: Grandy Auto Supply does not segregate sales and sales taxes at the time of
sale.
The register total for March 16 is $9,975. All sales are subject to a 5% sales
tax. Compute sales taxes payable and make the entry sales taxes payable and
sales.
P3-3: On December 1, Irma Company introduces a new product that includes a
one-year warranty on parts. In December 1,000 units are sold. Management
believes that 4% of the units will be defective and the average warranty costs will
be $60 per unit. Prepare adjusting entry at December 31 to accrue the estimated
warranty cost.
P3-4: Cairo Company borrows $50,000 from First Bank on a 6-month, $50,000,
12% notes.
Instructions:
a) Prepare the entry on June 1.
b) Prepare the adjusting entry on June 30.
P3-5: In providing accounting services to small business, you encounter the
following situations pertaining to cash sales:
1. Nash Company rings up sales and sales tax separately on its cash
register. On April 10, the register totals are sales $25,000 and sales
taxes $1,500.
2. Pontiac Company does not segregate sales and sales taxes. Its register
total for April 15 is $13,780, which includes a 6% sales tax.
P3-6: On January 1, 2009, the ledger of Calcutta Company contains the
following liability accounts.
Accounts Payable $42,500
Sales Taxes Payable .. 5,600
During January the following selected transactions occurred:
Jan.1 Borrowed $15,000 in cash from Milland Bank on a 4-month, 12%,
$15,000 note.
Jan. 5 sold merchandise for cash totaling $7,800 which includes 4% sales
taxes.
Jan. 20 Sold 500 units of a new product on credit at $52 per unit, plus 4%
sales tax. This new product is subject to a 1-year warranty.
Jan.25 Sold merchandise for cash totaling $11,440, which includes 4% sales
taxes.
Instructions:

a) Journalize the January transactions.
b) Journalize the adjusting entries at January 31 for (1) the outstanding
note payable (2) estimated warranty liabilities, assuming warranty costs
are expected to equal 8% of sales of the new product.
P3-7: The following are selected transactions of Zimmer Company. Zimmer
prepares financial statements quarterly.
Jan. 2 Purchased merchandise on account from Alicea company, $18,000,
terms 2/10, n/30.
Feb 1 Issued a 10%, 2-month, $18,000 note to Alicea in payment of account.
Mar.31 Accrued interest for 2 months on Alicea note.
Apr. 1 Paid face value and interest on Alicea note.
July.1 Purchased equipment from Vincent Equipment paying $11,000 in
cash and singing a 10%, 3-month, $24,000 note.
Setp.30 Accrued interest for 3 months on Vincent note.
Oct.1 Paid face value and interest on Vincent note.
Dec 1 Borrowed $10,000 from the Otago Bank by issuing a 3-month, 12%
interest bearing note with a face value of $10,000.
Dec.31 Recognized interest expense for 1 month on Otago Bank note.
Instructions:
(a) Prepare journal entries for the above transactions and events.
(b) Post to the accounts, Notes Payable, Interest Payable, and Interest
Expense.
(c) Show the balance sheet presentation on note payable at December
31.
(d) What is total interest expense for the year?

Chapter 4: Inventories

Study Objectives
After studying this chapter, you should be able to:

1. Describe the steps in determining inventory quantities.
2. Explain the basis of accounting for inventories and describe
the inventory cost flow methods.
3. Explain the financial statements and tax affects of each of the
inventory cost flow methods.
4. List the essential accounting features of a perpetual inventory
system.

Why is Inventory Control Important?

Inventory is a significant asset and for many companies the largest
asset.
Inventory is central to the main activity of merchandising and
manufacturing companies.
Mistakes in determining inventory cost can cause critical errors in
financial statements.
Inventory must be protected from external risks (such as fire and
theft) and internal fraud by employees.
Assigning Costs to Inventory

Merchandising and Inventory
Merchandising involves selling inventory.
Inventory is usually an important asset.
Inventory must be accounted for periodically or perpetually.
Traditional periodic method is often being replaced by perpetual
inventory accounting.

Advantages of Using Perpetual Inventory
Continuous determination of inventory value
Continuous determination of gross profit
Affordable with computers, scanners, and bar codes on most products
Perpetual inventory accounting provides management controls.
Managers know which items are selling fastest and the profit margin on
those items.
Perpetual systems maintain a running record to show the inventory on
hand at all times.

Periodic Inventory
Periodic systems do not keep a continuous record of inventory on hand.

Inventory Costing
There are three methods of the Cost Flow Methods
1. First-in, First -out (FIFO).
Inventory affects . . .
Balance
Sheet
Income
Statement
The matching principle requires the matching
of the cost of the merchandise sold
with the sales revenue.

2. Last-in, First- out (LIFO).
3. Average Cost.

Example:

To illustrate the three methods under the periodic and perpetual inventory system,
the following data for the month of June will be used.
Inventory data, June 30

Data 5-1: (for periodic Inventory System only)

XYZ COMPANY
Explanation Units Unit Cost Total Cost
June 1 Inventory 50 $1.00 $50
6 Purchase 50 $1.10 55
13 Purchase 150 $1.20 180
20 Purchase 100 $1.30 130
25 Purchase 150 $1.40 210
Goods Available for Sales 500 $625
Sales 280
On hand June 30 220
Date

Data 5-2: ( for Perpetual Inventory System only)

XYZ COMPANY
Explanation Units Unit Cost Total Cost
June 1 Inventory 50 $1.00 $50
6 Purchase 50 $1.10 55
10 Sale 70
13 Purchase 150 $1.20 180
20 Purchase 100 $1.30 130
25 Purchase 150 $1.40 210
30 Sale 210
30 Inventory 220
Date

Periodic Inventory System

We can use the formula as follow:

COGS = Goods Available for Sales Ending Inventory
1) FIFO:

The FIFO method assumes that the earliest goods purchased are the first to be
sold. FIFO often parallels the actual physical flow of merchandise because it
generally is good business practice to sell the oldest units first. Under the FIFO
method, therefore, the cost of the earliest goods purchased are the first to be
recognized as cost of goods sold.

Use the Date 5-1:

Step 1. Step 2.
Ending Inventory Cost of Goods Sold
Date Units Unit Cost Total Cost
25-Jun 150 1.40 $ 210.00 $ Cost of Goods Available for Sales 625.00 $
20-Jun 70 1.30 $ 91.00 $ Less: Ending Inventory 301.00 $
Total 220 301.00 $ Cost of Goods Sold 324.00 $

2) LIFO:
The LIFO method assumes that the latest goods purchased are the first to be
sold. LIFO seldom coincides with the actual physical flow of inventory. Under
the LIFO method, therefore, the costs of the latest goods purchased are the first
to be recognized as cost of goods sold.

Step 1. Step 2.
Ending Inventory Cost of Goods Sold
Date Units Unit Cost Total Cost
1-Jun 50 1.00 $ 50.00 $ Cost of Goods Available for Sales 625.00 $
6-Jun 50 1.10 $ 55.00 $ Less: Ending Inventory 249.00 $
13-Jun 120 1.20 $ 144.00 $ Cost of Goods Sold 376.00 $
Total 220 249.00 $

3) Average Cost:
The average cost method assumes that the goods of available for sales are
homogeneous. Under this method, the allocation of the cost of goods available
for sale is made on the basis of the weighted average unit cost incurred.

Formula:

25 . 1 $
500
625 $
cos
= =
= unit t average
sale for available units
sale for availabe goods of Cost

Ending Inventory :220 units@ $1.25 = 275.00 $
Cost of Goods Available for Sales 625.00 $
Less: Ending Inventory 275.00 $
Cost of Goods Sold 350.00 $

Perpetual Inventory System

Use the D5-2:

FIFO

Units
Unit
Cost Total Cost
Units
Unit
Cost Total Cost
Units
Unit
Cost Total Cost
1-Jun 50 1.00 $ 50.00 $
6-Jun 50 1.10 $ 55.00 $ 50 1.00 $ 50.00 $
50 1.10 $ 55.00 $
10-Jun 50 1.00 $ 50.00 $
20 1.10 $ 22.00 $ 30 1.10 $ 33.00 $
13-Jun 150 1.20 $ 180.00 $ 30 1.10 $ 33.00 $
150 1.20 $ 180.00 $
20-Jun 100 1.30 $ 130.00 $ 30 1.10 $ 33.00 $
150 1.20 $ 180.00 $
100 1.30 $ 130.00 $
25-Jun 150 1.40 $ 210.00 $ 30 1.10 $ 33.00 $
150 1.20 $ 180.00 $
100 1.30 $ 130.00 $
150 1.40 $ 210.00 $
30-Jun 30 1.10 $ 33.00 $
150 1.20 $ 180.00 $ 70 1.30 $ 91.00 $
30 1.30 $ 39.00 $ 150 1.40 $ 210.00 $
324.00 $ 301.00 $
Date
Purchased Sold Balance

Cost of Goods sold Ending Inv

LIFO:

Units
Unit
Cost Total Cost
Units
Unit
Cost Total Cost
Units
Unit
Cost Total Cost
1-Jun 50 1.00 $ 50.00 $
6-Jun 50 1.10 $ 55.00 $ 50 1.00 $ 50.00 $
50 1.10 $ 55.00 $
10-Jun 50 1.10 $ 55.00 $
20 1.00 $ 20.00 $ 30 1.00 $ 30.00 $
13-Jun 150 1.20 $ 180.00 $ 30 1.00 $ 30.00 $
150 1.20 $ 180.00 $
20-Jun 100 1.30 $ 130.00 $ 30 1.00 $ 30.00 $
150 1.20 $ 180.00 $
100 1.30 $ 130.00 $
25-Jun 150 1.40 $ 210.00 $ 30 1.00 $ 30.00 $
150 1.20 $ 180.00 $
100 1.30 $ 130.00 $
150 1.40 $ 210.00 $
30-Jun 150 1.40 $ 210.00 $
60 1.30 $ 78.00 $ 30 1.00 $ 30.00 $
150 1.20 $ 180.00 $
363.00 $ 40 1.30 $ 52.00 $
COGS 262.00 $
ENDING INV
Date

AVERAGE COST :

Units
Unit
Cost Total Cost
Units
Unit
Cost Total Cost
Units
Unit
Cost Total Cost
1-Jun 50 1.00 $ 50.00 $
6-Jun 50 1.10 $ 55.00 $ 100 1.05 $ 105.00 $
10-Jun 70 1.05 $ 73.50 $ 30 1.05 $ 31.50 $
13-Jun 150 1.20 $ 180.00 $ 180 1.18 $ 211.50 $
20-Jun 100 1.30 $ 130.00 $ 280 1.22 $ 341.50 $
25-Jun 150 1.40 $ 210.00 $ 430 1.28 $ 551.50 $
30-Jun 210 1.28 $ 269.34 $ 220 1.28 $ 282.16 $
342.84 $
COGS 282.16 $
ENDING INV
Date

EFFECTS ON THE FINANCIAL STATEMENTS

Each of the three methods of inventory pricing is acceptable for use in published
financial statements. The factors that should be consider in choosing an inventory
method are the affects of each method on financial statements, income taxes, and
management decisions.

FIFO LIFO
Average Cost
FIFO LIFO
Average Cost
Sales 11,500.00 $ 11,500.00 $ 11,500.00 $ 11,500.00 $ 11,500.00 $ 11,500.00 $
COGS 324.00 $ 376.00 $ 350.00 $ 324.00 $ 363.00 $ 342.00 $
Gross Profit 11,176.00 $ 11,124.00 $ 11,150.00 $ 11,176.00 $ 11,137.00 $ 11,158.00 $
Operating
Expense 2,000.00 $ 2,000.00 $ 2,000.00 $ 2,000.00 $ 2,000.00 $ 2,000.00 $
Income before
income taxes 9,176.00 $ 9,124.00 $ 9,150.00 $ 9,176.00 $ 9,137.00 $ 9,158.00 $
Income tax
expense (30%) 30% 2,752.80 $ 2,737.20 $ 2,745.00 $ 2,752.80 $ 2,741.10 $ 2,747.40 $
Net Income 6,423.20 $ 6,386.80 $ 6,405.00 $ 6,423.20 $ 6,395.90 $ 6,410.60 $
Periodic Inventory System Perpetual Inventory System


The 600 largest Companies
in the U.S.

The Internal Revenue Service has developed several rules for valuing
inventories for federal income tax purpose.
Many accountants believe that the use of the FIFO and average-cost methods in
periods of rising prices causes the businesses to report more than their true
profit, resulting in the payment of excess income taxes.

When prices are rising LIFO produces the lowest income and lowest income
tax.

The Income Tax and Advantage of LIFO
During periods of inflation, LIFOs income is the lowest.
The most attractive feature of LIFO is reduced income tax payments.

ACCOUNTING PRINCIPLES: CONSISTENCY
The business should use the same accounting methods and procedures from one
period to the next.
A company may change inventory methods, but it must disclose the effects of the
change on net income.

ACCOUNTING PRINCIPLES: DISCLOSURE
The financial statements should report enough information to enable an outsider
to make knowledgeable decisions about the company.

APPLY THE LOWER-OF-COST-OR-MARKET RULE TO INVENTORY.

An asset is reported at the lower of its historical cost or market
(replacement) value.
If the replacement cost falls below its historical cost, the business must
write down the value of its inventory.
Example
Cost of inventory: $3,000

Market value at balance sheet date: $2,200
What is the journal entry?

December 31
Cost of Goods Sold. $ 800
Inventory. $ 800
($3,000 - $2,200= $800)
Write down inventory to LCM

End of Chapter 5

Problems Chapter 4: Inventories

P4-1 Save-Mart Center began operations on July 1. It uses a perpetual inventory
system. During July the company had the following purchases and sales:
Purchases
Date Units Unit Cost Sale Units
1-Jul 5 $90
6-Jul 3
11-Jul 4 $99
14-Jul 3
21-Jul 3 $106
27-Jul 4

Instructions

(a) Determine the ending inventory under a perpetual inventory system using
(1) FIFO, (2)
Average Cost, and (3) LIFO.
(b) Which costing method produces the highest ending inventory valuation?
P4-2 The Family Home Appliance Mart begins operations on May 1. It uses a
perpetual inventory system. During May the company had the following
purchases and sales for its Model 25 Sureshot camera.
Purchases
Date Units Unit Cost
Sale
Units
1-May 7 $150
4-May 5
8-May 8 $170
12-May 5
15-May 5 $180
20-May 4
25-May 3
Instructions


(a) Determine the ending inventory under a perpetual inventory system using
(1) FIFO, (2)
Average Cost, and (3) LIFO.
(b) Which costing method produces (1) the highest ending inventory valuation
and (2) the lowest ending inventory valuations?

P4-3 In its first month of operations, Filandia Company made three purchases
of merchandise in the following sequence: (1) 300 units at $6, (2) 400 units at $7,
and (3) 300 units at $8. Assuming there are 400 units on hand, compute the cost
the ending inventory under the (1) FIFO, (2) LIFO, and (3) Average Cost.
Filandia uses a perpetual and periodic inventory system.

P4-4 The table summarizes the beginning inventory, purchases, and sales of Psi
Companys single product during January.
Beginning Inventory and Purchases
Date Units Cost Total
Sales
Units
Jan. 1 Inventory 1,400 $19 $26,600
4 Sale 300
8 Purchase 600 $20 $12,000
10 Sale
1,30
0
12 Purchase 900 $21 $18,900
15 Sale 150
18 Purchase 500 $22 $11,000
24 Purchase 800 $23 $18,400
31 Sale
1,35
0
Tota
l 4,200 $86,900
3,10
0

REQUIRED 1. Assuming that the company uses the periodic inventory system,
compute the cost that should be assigned to ending inventory and
to cost of goods sold using (a) the average-cost method, (b) the
FIFO method, and (c) LIFO method.
2. Assuming that the company uses the perpetual inventory
system, compute the cost that should be assigned to ending
inventory and to cost of goods sold using (a) the average-cost
method, (b) the FIFO method, and (c) LIFO method.
P4-5 Palaggi Company merchandises a single product called Compak. The
following data represent beginning inventory and purchases of Compak during
the past year: January 1 inventory, 68,000 units at $11.00; February purchases,
80,000 units at $12.00; March purchases, 160,000 units at $12.40; May
purchases, 120,000 units at $12.60; July purchases, 200,000 units at $12.80;

September purchases, 160,000 units at $12.60; and November purchases, 60,000
unit s at $13.00. Sale of Compak totaled 786,000 units at $20 per unit. Selling
and administrative expenses totaled $5,102,000 for the year, and Palaggi
Company uses a periodic inventory system.
REQUIRED. 1. Prepare a schedule to compute the cost of goods available
for sale.
2. Prepare an income statement under each of the following
assumptions: (a) costs are assigned to inventory using the
average-cost method; (b) costs are assigned to inventory
using the FIFO method; and (c) costs are assigned to
inventory using the LIFO method.
P4-6) Use the Intel Corporation data, which is listed below, to answer the
following questions.

October 1 Beginning inventory ........................ 5 units @ $160
8 Purchase ........................................... 4 units @ 160
15 Purchase ........................................... 11 units @ 170
26 Purchase ........................................... 5 units @ 180

The physical count of inventory at October 31 indicates that 8 units are on hand,
and there are no consignment goods.

Required:

1.Compute ending inventory and cost of goods sold, using each of the
following methods ( periodic Inventory system):

a. Weighted-average cost

b. First-in, first-out

c. Last-in, first-out

2. Which method produces the highest cost of goods sold? Which method
produces the lowest cost of goods sold? What causes the difference in cost of
goods sold?

P4-7) Now lets assume that Gerald D. Engelhard Company and has the same
inventory, purchases, and sales data for the month of March as shown earlier:
Inventory, March1 200 Units@$4.00 = $800
Purchases:
March 10500 units@$4.50 = $2,250
March 20 400 units@$4.75 = $1,900
March 30 300 units@$5.00 = $1,500
Sales:
March 15.500 Units
March 25 400 Units
The physical count on March31 shows 500 units on hand.
Instructions:

1) Under the perpetual inventory system, determine the cost of inventory on
hand at March 31, and the cost of goods sold for March under the (a)
First-In, First- Out (FIFO), (b) Last-In, First-Out( LIFO), and weighted
average cost.
2) Under the periodic inventory system, determine the cost of inventory on
hand at March 31, and the cost of goods sold for March under the (a)
First-In, First- Out (FIFO), (b) Last-In, First-Out( LIFO), and weighted
average cost.
3) Prepare an income statement in March31, 2008 if:
Sale revenues $10,000
Operating expenses. 3,000
Taxes Rate.35%
4) Please give your recommendation about your calculation for each method.

End of Chapter 4

Chapter Glossary

Acid-test ratio Ratio used to assess a company's ability to settle its current
debts with its most liquid assets; defined as quick assets (cash,
short
current liabilities.

Cash discount Reduction in the price of merchandise granted by a seller to a
buyer when payment is made within the discount period.

Cost of goods
available for sale
Beginning inventory plus net purchases.

Cost of goods
sold
Cost of inventory sold to customers during a period; also called
cost of sales

Credit
memorandum
Notification that the sender has credited the recipient's account
in the

Credit period Time period that can pass before a customer's payment is due.

Credit terms Description of the amounts and timing of payments that a buyer
agrees to make in the future.

Debit
memorandum
Notification that the sender has debited the recipient's account in
the sender's records.

Discount period Time period in which a cash discount is available and the buyer
can make a reduced payment.

EOM Abbreviation for
credit transactions.

FOB Abbreviation for
goods passes to the buyer;
means the buyer pays shipping costs and accepts ownership of
goods when the seller transfers goods to carrier;
means the seller pays shipping costs and buyer accepts

-Page 55-
Chapter Glossary (Chapter 01)
Ratio used to assess a company's ability to settle its current
short-term investments, and current receivables) divided by
Reduction in the price of merchandise granted by a seller to a
Beginning inventory plus net purchases.
cost of sales.
in the sender's records.
Time period that can pass before a customer's payment is due.
Description of the amounts and timing of payments that a buyer
agrees to make in the future.
the sender's records.
Time period in which a cash discount is available and the buyer
can make a reduced payment.
Abbreviation for end of month; used to describe credit terms for
credit transactions.
Abbreviation for free on board; the point when ownership of
goods passes to the buyer; FOB shipping point (or factory)
goods when the seller transfers goods to carrier;
Ratio used to assess a company's ability to settle its current
investments, and current receivables) divided by
Reduction in the price of merchandise granted by a seller to a
Time period that can pass before a customer's payment is due.
Description of the amounts and timing of payments that a buyer
Time period in which a cash discount is available and the buyer
used to describe credit terms for
; the point when ownership of
(or factory)
goods when the seller transfers goods to carrier; FOB destination

ownership of goods at the buyer's place of business.

General and
administrative
expenses
Expenses that support the operating activities of a business.

Gross margin (See

Gross margin
ratio
Gross margin (net sales minus cost of goods sold) divided by net
sales; also called

Gross method Method of recording purchases at the full invoice price without
deducting any cash discounts.

Gross profit Net sales minus cost of goods sold; also called

Inventory Goods a company owns and expects to sell in its normal
operations.

List price Catalog (full) price of an item before any trade discount is
deducted.

Merchandise (See

Merchandise
inventory
Goods that a company owns and expects to sell to customers;
also called

Merchandiser Entity that earns net income by buying and selling merchandise.

Multiple-step
income
statement
Income statement format that shows subtotals between sales
and net income, categorizes expenses, and also often reports the
details of net sales and expenses.

Periodic inventory
system
Method that records
continuously track the quantity available or sold to customers;
records are updated at the end of each period to reflect the
physical count and costs of goods available.

-Page 56-
(See gross profit.)
sales; also called gross profit ratio.
Method of recording purchases at the full invoice price without
deducting any cash discounts.
Net sales minus cost of goods sold; also called gross margin
Goods a company owns and expects to sell in its normal
operations.
Catalog (full) price of an item before any trade discount is
deducted.
(See merchandise inventory.)
also called merchandise.
Entity that earns net income by buying and selling merchandise.
details of net sales and expenses.
Method that records the cost of inventory purchased but does not
physical count and costs of goods available.
Method of recording purchases at the full invoice price without
gross margin.
Goods a company owns and expects to sell in its normal
Catalog (full) price of an item before any trade discount is
Entity that earns net income by buying and selling merchandise.
the cost of inventory purchased but does not


Perpetual
inventory system
Me
inventory available and the cost of goods sold.

Purchase
discount
Term used by a purchaser to describe a cash discount granted to
the purchaser for paying within the discount period.

Retailer Intermediary that buys products from manufacturers or
wholesalers and sells them to consumers.

Sales discount Term used by a seller to describe a cash discount granted to
buyers who pay within the discount period.

Selling expenses Expenses of promoting sales, such as displaying and advertising
merchandise, making sales, and delivering goods to customers.

Service company Organization that provides services instead of tangible products.

Shrinkage Inventory losses that occur as a result of theft or deterioration.

Single-step
income
statement
Income statement format that includes cost of goods sold as an
expense and shows only one subtotal for total expenses.

Supplementary
records
Information outside the usual accounting records; also called
supplemental records

Trade discount Reduction from a list or catalog price that can vary for
wholesalers, retailers, and consumers.

Wholesaler Intermediary that buys products from manufacturers or other
wholesalers and sells them to retailers or other wholesalers.

Chapter Glossary

Accounts
receivable
Amounts due from customers for credit sales; backed by the
customer's

-Page 57-
Method that maintains continuous records of the cost of
inventory available and the cost of goods sold.
Intermediary that buys products from manufacturers or
wholesalers and sells them to consumers.
Term used by a seller to describe a cash discount granted to
buyers who pay within the discount period.
Expenses of promoting sales, such as displaying and advertising
Organization that provides services instead of tangible products.
Inventory losses that occur as a result of theft or deterioration.
supplemental records.
Reduction from a list or catalog price that can vary for
wholesalers, retailers, and consumers.
Intermediary that buys products from manufacturers or other
Chapter Glossary (Ch02)
customer's general credit standing.
thod that maintains continuous records of the cost of
Intermediary that buys products from manufacturers or
Term used by a seller to describe a cash discount granted to
Expenses of promoting sales, such as displaying and advertising
Organization that provides services instead of tangible products.
Inventory losses that occur as a result of theft or deterioration.
Reduction from a list or catalog price that can vary for
Intermediary that buys products from manufacturers or other


Accounts
receivable
turnover
Measure of both the quality and liquidity of accounts receivable;
indicates how often receivables are received and collected during
the period; computed by dividing net sales by average
receivable.

Aging of accounts
receivable
Process of classifying accounts receivable by how long they are
past due for purposes of estimating uncollectible accounts.

Allowance for
Doubtful
Accounts
Contra asset account with a balance approximating uncollectible
accounts receivable; also called
Accounts

Allowance
method
Procedure that (a) estimates and matches bad debts expense with
its sales for the period
estimated realizable value.

Bad debts Accounts of customers who do not pay what they have promised
to pay; an expense of selling on credit; also called
accounts

Contingent
liability
Obligation to make a future payment if, and only if, an uncertain
future event occurs.

Direct write-off
method
Method that records the loss from an uncollectible account
receivable at the time it is determined to be uncollectible;
attempt is made to estimate bad debts.

Full-disclosure
principle
Principle that prescribes financial statements (including notes) to
report all relevant information about an entity's operations and
financial condition.

Interest Charge for using money (or other assets) loaned from one entity
to another.

Maker of the
note
Entity who signs a note and promises to pay it at maturity.

Materiality Prescribes that accounting for items that significantly impact
financial statement and inferences from them adhere strictly to
GAAP.

-Page 58-
the period; computed by dividing net sales by average
receivable.
accounts receivable; also called Allowance for Uncollectible
Accounts.
its sales for the period and/or (b) reports accounts receivable at
estimated realizable value.
Accounts of customers who do not pay what they have promised
to pay; an expense of selling on credit; also called
accounts.
future event occurs.
receivable at the time it is determined to be uncollectible;
attempt is made to estimate bad debts.
Charge for using money (or other assets) loaned from one entity
to another.
Prescribes that accounting for items that significantly impact
GAAP.
the period; computed by dividing net sales by average accounts
Allowance for Uncollectible
and/or (b) reports accounts receivable at
Accounts of customers who do not pay what they have promised
to pay; an expense of selling on credit; also called uncollectible
receivable at the time it is determined to be uncollectible; no
Charge for using money (or other assets) loaned from one entity
Prescribes that accounting for items that significantly impact


Maturity date of a
note
Date when a note's principal and interest are due.

Note (See promissory note.)

Note receivable Asset consisting of a written
money on demand or on a specific future date(s).

Payee of the
note
Entity to whom a note is made payable.

Principal of a
note
Amount that the signer of a note agrees to pay back when it
matures,

Promissory note (or note) Written promise to pay a specified amount either on
demand or at a definite future date; is a
lender but a

Realizable value Expected proceeds from converting an asset into cash.

Chapter Glossary

Account payable

Current portion of long
term debt

Deferred income tax
liability

Discount on note
payable

-Page 59-
Date when a note's principal and interest are due.
(See promissory note.)
Asset consisting of a written promise to receive a definite sum of
money on demand or on a specific future date(s).
Entity to whom a note is made payable.
matures, not including interest.
(or note) Written promise to pay a specified amount either on
demand or at a definite future date; is a note receivable
lender but a not payable for the lendee.
Expected proceeds from converting an asset into cash.
Liability created by buying goods or services on credit;
backed by the buyer's general credit standing.
Current portion of long- Portion of long-term debt due within one year or the
operating cycle, whichever is longer; reported under
Deferred income tax Corporation income taxes that are deferred until future
years because of temporary differences between GAAP
and tax rules.
Difference between the face value of a note payable and
the amount borrowed; reflects the interest to be paid on
the note over its life.

promise to receive a definite sum of

(or note) Written promise to pay a specified amount either on
note receivable for the
Expected proceeds from converting an asset into cash.
Liability created by buying goods or services on credit;
backed by the buyer's general credit standing.
term debt due within one year or the
operating cycle, whichever is longer; reported under
Corporation income taxes that are deferred until future
temporary differences between GAAP
Difference between the face value of a note payable and
the amount borrowed; reflects the interest to be paid on

Employee benefits

Employee earnings
report

Estimated liability

Federal depository
bank

Federal Insurance
Contributions Act (FICA)
Taxes

Federal Unemployment
Taxes (FUTA)

Form 940

Form 941

Form W-4

Form W-2

Gross pay

Known liabilities

-Page 60-
Additional compensation paid to or on behalf of
employees, such as premiums for medical, dental, life,
and disability insurance, and contributions to pension
plans.
Record of an employee's net pay, gross pay,
and year-to-date payroll information.
Obligation of an uncertain amount that can be reasonably
estimated.
Bank authorized to accept deposits of amounts payable to
the federal government.
Contributions Act (FICA)
Taxes assessed on both employers and employees; for
Social Security and Medicare programs.
Federal Unemployment Payroll taxes on employers assessed by the
government to support its unemployment insurance
program.
IRS form used to report an employer's federal
unemployment taxes (FUTA) on an annual filing basis.
IRS form filed to report FICA taxes owed and
Withholding allowance certificate, filed with the employer,
identifying the number of withholding allowances claimed.
Annual report by an employer to each employee showing
the employee's wages subject to FICA and federal income
taxes along with amounts withheld.
Total compensation earned by an employee.
Obligations of a company with little uncertainty; set by
agreements, contracts, or laws; also called
determinable liabilities.
Additional compensation paid to or on behalf of
employees, such as premiums for medical, dental, life,
and disability insurance, and contributions to pension
Record of an employee's net pay, gross pay, deductions,
Obligation of an uncertain amount that can be reasonably
Bank authorized to accept deposits of amounts payable to
Taxes assessed on both employers and employees; for
Payroll taxes on employers assessed by the federal
government to support its unemployment insurance
IRS form used to report an employer's federal
unemployment taxes (FUTA) on an annual filing basis.
IRS form filed to report FICA taxes owed and remitted.
Withholding allowance certificate, filed with the employer,
identifying the number of withholding allowances claimed.
Annual report by an employer to each employee showing
FICA and federal income
Total compensation earned by an employee.
Obligations of a company with little uncertainty; set by
agreements, contracts, or laws; also called definitely


Merit rating

Net pay

Noninterest-bearing
note

Note payable

Payroll bank account

Payroll deductions

Payroll register

Short-term note
payable

State Unemployment
Taxes (SUTA)

Times interest earned

Unearned revenue

Wage bracket
withholding table

-Page 61-
Rating assigned to an employer by a state based on the
employer's record of employment.
Gross pay less all deductions; also called take
bearing Note with no stated (contract) rate of interest; interest is
included in the face value of the note.
Liability expressed by a written promise to pay a definite
sum of money on demand or on a specific
Payroll bank account Bank account used solely for paying employees; each pay
period an amount equal to the total employees' net pay is
deposited in it and the payroll checks are drawn on it.
Amounts withheld from an employee's gross pay; also
called withholdings.
Record for a pay period that shows the pay period dates,
regular and overtime hours worked, gross pay, net pay,
and deductions.
Current obligation in the form of a written promissory
note.
State Unemployment State payroll taxes on employers to support its
unemployment programs.
Times interest earned Ratio of income before interest expense (and any income
taxes) divided by interest expense; reflects risk of
covering interest commitments when income varies.
Liability created when customers pay in advance for
products or services; earned when the products
services are later delivered.
Table of the amounts of income tax withheld from
employees' wages.
Rating assigned to an employer by a state based on the
take-home pay.
Note with no stated (contract) rate of interest; interest is
Liability expressed by a written promise to pay a definite
sum of money on demand or on a specific future date(s).
Bank account used solely for paying employees; each pay
period an amount equal to the total employees' net pay is
deposited in it and the payroll checks are drawn on it.
Amounts withheld from an employee's gross pay; also
Record for a pay period that shows the pay period dates,
regular and overtime hours worked, gross pay, net pay,
Current obligation in the form of a written promissory
State payroll taxes on employers to support its
expense (and any income
taxes) divided by interest expense; reflects risk of
covering interest commitments when income varies.
Liability created when customers pay in advance for
products or services; earned when the products or
Table of the amounts of income tax withheld from


Warranty

Chapter Glossary

Average cost See

Conservatism
principle
Principle that prescribes the less optimistic estimate when two
estimates are about equally

Consignee Receiver of goods owned by another who holds them for
purposes of selling them for the owner.

Consignor Owner of goods who ships them to another party who will sell
them for the owner.

Consistency
principle
Principle encouraging use of the same accounting method(s) over
time so that financial statements are comparable across periods.

Days' sales in
inventory
Estimate of number of days needed to convert inventory into
receivables or cash; equals ending inventory divided by cost of
goods sold and then multiplied by 365; also called
hand

First-in, first-out
(FIFO)
Method to assign cost
in the order acquired; earliest items purchased are the first sold.

Full-disclosure
principle
report all relevant information about an

Gross profit
method

Procedure to estimate inventory when the past gross profit rate
is used to estimate cost of goods sold, which is then subtracted
from the cost of goods available for sale.

Inventory Number of times a company's average inventory is sold during a

-Page 62-
Agreement that obligates the seller to correct or replace a
product or service when it fails to perform properly within
a specified period.
See weighted average.
estimates are about equally likely.
Receiver of goods owned by another who holds them for
purposes of selling them for the owner.
Owner of goods who ships them to another party who will sell
them for the owner.
goods sold and then multiplied by 365; also called
hand.
Method to assign cost to inventory that assumes items are sold
from the cost of goods available for sale.
Number of times a company's average inventory is sold during a
Agreement that obligates the seller to correct or replace a
to perform properly within
Receiver of goods owned by another who holds them for
Owner of goods who ships them to another party who will sell
goods sold and then multiplied by 365; also called days' stock on
to inventory that assumes items are sold
entity's operations and
Number of times a company's average inventory is sold during a

turnover period; computed by dividing cost of goods sold by average
inventory; also called

Last-in, first-out
(LIFO)
Method to assign cost to
most recent items purchased are sold first and charged to cost of
goods sold.

Lower of cost or
market (LCM)
Required method to report inventory at market replacement cost
when that market cost is lower than

Net realizable
value
Expected selling price (value) of an item minus the cost of
making the sale.

Retail inventory
method
Method to estimate ending inventory based on the ratio of the
amount of goods for sale at cost
at retail.

Specific
identification
Method to assign cost to inventory when the purchase cost of
each item in inventory is identified and used to compute cost of
inventory.

Weighted
average
Method to
units is divided by the number of units available to determine per
unit cost prior to each sale that is then multiplied by the units
sold to yield the cost of that sale.

-Page 63-
period; computed by dividing cost of goods sold by average
inventory; also called merchandise turnover.
Method to assign cost to inventory that assumes costs for the
goods sold.
when that market cost is lower than recorded cost.
making the sale.
amount of goods for sale at cost to the amount of goods for sale
at retail.
inventory.
Method to assign cost to sales; the cost of available
sold to yield the cost of that sale.
period; computed by dividing cost of goods sold by average
inventory that assumes costs for the
recorded cost.
to the amount of goods for sale
assign cost to sales; the cost of available-for-sale

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