SPECIAL JOURNALS Transaction Sale of Merchandise on Credit Purchase on Credit Receipt of Cash Disbursement of Cash Anything Else Special-Purpose

Journal Sales Journal Purchases Journal Cash Receipts Journal Cash Payments Journal General Journal Posting Abbreviation S P CR CP J

Sales Journal: -Consists of debit to a customer in accounts receivable (shown in the journal) and a credit to sales(not shown in journal) -Post daily each of the transactions to the subsidiary accounts and post the total to the general ledger account at the end of the month

Purchases Journal: -Consists of a debit to purchases and a credit to accounts payable - Post daily each of the transactions to the subsidiary accounts and post the total to the general ledger account at the end of the month

Cash Receipts Journal: - Consists of a debit to cash and sales discounts and a credit to accounts receivable, sales, and sales tax payable -Post individual amounts in the Accounts Receivable Subsidiary Ledger column daily and post the totals at the end of the month

Cash Payments Journal: - Consists of a debit to accounts payable and a credit to purchases discounts and cash. There can be a general debit if the payment was for an expense. - Post daily each of the transactions to the subsidiary accounts and post the total to the general ledger account at the end of the month

BANK RECONCILIATIONS Bank Balance Add: Outstanding Deposits Bank Mistakes Subtotal Less: Outstanding Checks Adjusted Balance Checkbook Balance Add: Note Receivable Interest on Note Receivable Interest on Account Subtotal Less: Mistake on check Service Charge Non sufficient funds Adjusted Balance - Record the changes in the checkbook balance as transactions PETTY CASH -Establishing the fund Debit Petty cash Credit Cash -Reimbursing the petty cash fund Debit the thing you used it on Credit Cash INVENTORY ANALYSIS Inventory Turnover: Indicates the number of times a companys average inventory is sold during an accounting period.

Average Days Inventory on Hand: Indicates the average number of day s required to sell the inventory on hand.

Supply-Chain Management: a company manages its inventory and purchasing through business to business transactions that it conducts over the internet Just-in-Time Operating Environment: The company works closely with suppliers to coordinate and schedule shipments so that the shipments arrive just at the time they are needed. Goods Flow: Actual physical movement of goods in the operations of a company

Cost Flow: The association of costs with their assumed flow in the operations of a company. Specific Identification Method *This method prices the inventory by identifying the cost of each item in ending inventory. *Cost of goods available for sale Ending inventory = Cost of goods sold Calculate the ending inventory by taking the remainder stock and multiplying each piece of inventory by the price of it. *Two disadvantages 1. It is difficult and impractical to keep track of the purchases and the sale of individual items 2. When a company deals in items that are identical but that are bought at different costs, deciding which items were sold becomes arbitrary; thus the company can raise or lower income by choosing the lower or higher cost items Average-Cost Method *Inventory is priced at the average cost of the goods available for sale during the period

*Tends to level out the effects of cost increases and decreases because the cost for the ending inventory calculated under this method is influenced by all the prices paid during the year and the beginning inventory price

First-In, First-Out (FIFO) Method *Based on the assumption that the costs of the first items acquired should be assigned to the first items sold *The costs of the goods on hand at the end of a period are assumed to be from the most recent purchases, and the costs assigned to the goods that have been sold are assumed to be from the beginning inventory and the earliest purchases *Effect is to value the ending inventory at the most recent costs and include earlier costs in cost of goods sold *Magnifies the effects of the business cycle on income *Good for the balance sheet because the ending inventory is closest to current values and therefore gives a better view of the current financial assets of a business Last-In, First-Out (LIFO) Method

*Based on the assumption that the costs of the last items purchased should be assigned to the first items sold and that the costs of ending inventory reflects the cost of the goods purchased earliest. *effect is to value inventory at the earliest prices and to include in cost of goods sold the cost of the most recently purchased goods *Are closest to the current price level *God for the income statement because it matches revenues and cost of goods sold Over and Understatements *Profit is overstated if cost of goods is understated *LIFO Liquidation: sales have reduced inventories below the levels set in prior years *A misstatement in the inventory figure at the end of the period will cause an equal misstatement in gross margin and income before income taxes on the income statement. The amount of assets and owners equity on the balance sheet will also be misstated by the same amount.

Year 1 Ending Inventory overstated Cost of goods sold understated Income before income taxes overstated Ending Inventory Understated Cost of goods sold overstated Income before income taxes understated

Year 2 Beginning inventory overstated Cost of goods sold overstated Income before income taxes understated Beginning Inventory Understated Cost of goods sold understated Income before income taxes overstated

Lower of Cost or Market *Lower-of-cost-or-market rule requires when the replacement cost of the inventory falls below the cost you paid, the inventory is written down to the lower value and a loss is recorded *Method 1: Item by Item Cost and market values are compared for each item in inventory. Each item is then valued at its lower price. *Method 2: Major category The total cost and total market values for each category of items are compared. Each category is then valued at its lower amount. Retail Method of Inventory Estimation *Estimates the cost of ending inventory by using the ratio of cost to retail price

* Gross Profit Method of Inventory Estimation *Assumes that the ratio of gross margin for a business remains relatively stable from year to year Beginning Inv-cogs WHICH FINANCIAL STATEMENT? Income Statement Revenues Expenses Statement of Owners Equity Beginning Capital Investments Withdrawals Balance Sheet Assets Liabilities Owners Equity WHICH COLUMNS FOR THE WORKSHEET Income Statement Withdrawals Expenses Revenues Balance Sheet Assets Liabilities Owners Equity

ACCRUAL VS. DEFFERAL Accrual -used to apply the matching rule -attempts to record the financial effects on an enterprise of transactions and other transactions and other events and circumstances in the periods in which those transactions occur rather than only in the periods in which cash is received or paid by the enterprise -requires: Recording revenues when earned Recording expenses when incurred Adjusting the accounts -follows the matching principles

Deferral -events that may happen over two or more periods -major events including prepaid expenses and the depreciation of plant and equipment

NOTES -maturity date - date in which the note must be paid - duration of note - time in between the day the note is issued and the maturity date -interest and interest rate -principal X rate of interest = interest - maturity value - principal + interest = maturity value

-recording a dishonored note - debit notes receivable past due -credit notes receivable - credit interest income Adjustments Prepaid insurance: - debit insurance expense -credit prepaid insurance *only use the number that is the percentage of the time that you have used up

Depreciation: -Debit depreciation expense -credit accumulated depreciation

SHORT TERM INVESTMENTS Held-to-Maturity Securities: -buying the item -debit short term investments -credit cash

-recording interest -debit short term investments -credit interest income

-recording collection -debit cash -credit short term investments -credit interest income

TRADING SECURITY - buying the item - debit short term investments - credit cash

-recording unrealized loss -debit unrealized loss on investment -credit allowance account

recording realized gain - debit cash -credit short term investments -credit realized gian

-recording unrealized gain - debit allowance -credit unrealized gain

PERIODIC OR PERPETUAL INVENTORY -perpetual -continuous records are kept of the quantity and prices of individual items at purchase and selling price -pros:able to respond to customer's inquiries about product availability order inventory more effectively avoid running out of stock to control the financial costs associated with investments in inventory -the cost of each item is recorded in Merchandise Inventory account when it is purchased -as merchandise is sold, cost is transferred from Merchandise inventory to COGS -balance of Merchandise Inventory=Cost of Goods on hand - balance in COGS=Cost of merchandise sold to customers -periodic -inventory not yet sold or still on hand is counted periodically, usually at the end of the accounting period -the figure for inventory on hand is accurate only on the balance sheet date -when a purchase or sale is made, the inventory figure becomes a historical amount, and it remains so until the new ending inventory amount is entered at the end of the next accounting period -pros:reduces amount of clerical work -more likely to be found in a small business or in companies that sell items of low value in high quantity BAD DEBTS - Dishonored notes -debit notes receivable -credit sales -debit AR -credit sales -debit NR -credit AR/S -notes receivable -credit cash

RATIOS AND FORMULAS

Liquidity Working Capital CA-CL=WC Current Ratio CA/CL= Current Ratio Quick Ratio QA/CL=Quick Ratio

Profitability

Profit Margin Net Income/Net Sales On each dollar of net sales, a percentage (money) is made Asset Turnover Net Sales/Avg Total Assets = TIMES The number is how much money in sales is made for each dollar invested Return on Assets Net Income/Avg Total Assets For every dollar invested, this is how much the assets generate in income Debt to Equity Ratio Total Lia/OE = Ratio Over 1 means more is from lended Under 1 means more is invested by owner Return on Equity Net Income/Avg OE Company earned (percentage) money on each dollar invested by owner Receivable Turnover Net Sales/Avg Net Account Receivable Avg Days Sales Uncollected 365 days/Receivable Turnover

Current Assets Cash Become Cash Prepaid Quick Assets Cash Marketable Securities Receivables