Review of Chapters This power point review is only an OVERVIEW of the MAIN concepts we learned in these chapters. These power points are pulled from each chapter and are NOT a COMPREHENSIVE review of the material for the exam.

Chapter 4 – 7 Review McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc.

Part A Internal Controls 4-3

Internal Control Purpose of internal Controls: 1.) Safeguard the company’s assets. 2.) Improve the accuracy and reliability of accounting information 4-4

Framework for Internal Control 4-5

Part B Cash 4-6

Focus of Bank Statement Reconciliation The main focus of reconciling the bank statement is to adjust the company’s general ledger cash balance based on any new information contained in the bank statement. Steps: 1. Bank Statements – review the items recorded on the books (Cash GL) that are not yet showing up on the bank statements: 1. Add: deposits in transit, and certain errors 2. Deduct: outstanding checks, and certain bank errors 2. Company’s GL cash balance – review the items shown on the bank statements that are not yet recorded of the books (Cash GL) that are not yet showing up on the bank statements 1. Add: interest revenue, bank collections, EFT receipts, and certain bank errors 2. Deduct: services charges, NSF, EFT payments, and certain bank errors 3. Record journal entries to the company GL cash balance. 4. The general ledger cash account and bank statement ending cash number should match at the end of the reconciliation.

Bank Reconciliation Items Bank Statement Book Side (GL) – Journal Entries Step 1 - Start with Ending Balance on Bank Statement ADD Deposits in transit Certain bank errors SUBTRACT Outstanding checks Certain bank errors Step 2 - Start with Ending Balance on the book (GL Cash Account) ADD Bank collections Interest revenue EFT receipts Certain book errors SUBTRACT Service charges NSF checks EFT payments Certain book errors 8

Chapter 05 Receivables and Sales McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc.

Allowances, Returns, and Discounts  Sales – use contra revenue account for allowances, returns, and discounts.  Inventory purchases - use the inventory account for allowances, returns, and discounts.

Issue – How do you record A/R that is determined to be uncollectible? Select the METHOD for recording uncollectible A/R (ONLY TWO METHODS!) Direct write-off method (Method #1)  Non GAAP  The amount of the write-off is known and occurs many months after revenue is earned, which is in opposition to the matching principle. The Allowance method (Method #2)  GAAP  The amount of the write-off is estimated and occurs in the same period as the as the revenue is earned, which is in accordance to the matching principle.

12 Accounting for Uncollectible Accounts Percentage of Accounts Receivable (aging) Percentage of Sales OR 2.) Allowance Method Step 1 - Select method for recording Uncollectible Receivables 1.) Direct Write Off Method Step 2 – how to calculate amount

What are we Doing????  ESTIMATE UNCOLLECTIBLE AMOUNTS Estimating how many of our customers will not pay us for the goods or services we provided to them. We want to estimate this amount and match it to the time frame of the revenue we earned.  WRITE OFF UNCOLLECTIBLE AMOUNTS When our customers do not pay their invoices and we have extinguished our options available to us for collection, we must admit that the monies will not be collected and write off the balance owed to us.

METHOD 1 - Direct Write-Off Method  Records expense when a specific account determined to be uncollectible Required for tax purposes  Inferior to Allowance method – not GAAP Receivables reported at full amount  Assets overstated on Balance Sheet Poor matching of uncollectible-account expense against revenue JOURNAL DateAccounts and explanationDebitCredit Bad Debt Expense Accounts Receivable Write off customer account 14

Allowance Estimate Calculation #2 - Aging-of- Receivables  Allowance is based on estimated collectability (Quality) of amounts contained in Accounts Receivable based on the age of each receivable. Aging schedule  TARGET BALANCE – the total amount calculated as uncollectible based on the A/R aging quality. The Target Balance becomes the Ending Balance in the Allowance for Uncollectible Accounts. The entry to the Allowance account needs to consider the beginning balance to ensure the target balance is achieved.  Steps: 1. Calculate the target balance for the allowance account 2. Subtract the beginning balance in the allowance account from the target balance to estimate the debit to bad debt expense 3. Credit the same amount to the Allowance account.

16 Age of Account Customer 1-30 days days days Over 90 days Total Balance Customer A$100$500$600 Customer B400 All others5,0001, ,500 Totals$5,100$1,900$1,100$400$8,500 Est. percent uncollectible1%3%8%20% Allowance balance should be:$51$57$88$80$276 Allowance for Uncollectible Accounts $31 Balance before adjustment $276 $245 Adjustment needed Ending balance equals aging schedule

Aging-of-Receivables 17 JOURNAL DateAccounts and explanationDebitCredit Bad Debt Expense245 Allowance for uncollectible accounts245 Recorded uncollectible accounts expense Copyright ©2010 Pearson Education Inc. Publishing as Prentice Hall.

Writing Off Uncollectible Accounts  WRITE OFF UNCOLLECTIBLE AMOUNTS When our customers do not pay their invoices and we have extinguished our options available to us for collection, we must admit that the monies will not be collected and write off the balance owed to us.  Does not include and increase to Bad Debt Expense because that was already debited in the original transaction to set up the allowance account

Writing Off Uncollectible Accounts Copyright ©2010 Pearson Education Inc. Publishing as Prentice Hall. JOURNAL DateAccounts and explanationDebitCredit Allowance for Uncollectible Accounts900 Accounts Receivable900 Write off customer account Allowance for Uncollectible Accounts Accounts Receivable $50,000 $3,000 Bal. $900 $49,100 $2,100 No impact on Income Statement 19

Notes Receivable  More formal than accounts receivable  Written promise to pay a sum at the maturity date Plus interest at stated rate  Also called promissory notes 20 Copyright ©2010 Pearson Education Inc. Publishing as Prentice Hall.

Interest  Interest rates are usually expressed as an annual percentage rate (APR)  For time periods less than a year, a fraction is applied to the APR # months until loan due date/12  Often interest is computed based on days Denominator would be days/365  Banks often use 360 days Copyright ©2010 Pearson Education Inc. Publishing as Prentice Hall. 21

6/1/14 $3,000 note issued at 6% annual interest. Note (principal) and interest are all due 3/1/15. Prepare original and adjusting entry at year-end. Steps: 1. Record the original transaction. 2. Record the adjusting entry to recognize the interest due our organization 1. Debit Interest Receivable and Credit Interest Revenue.

Chapter 06 Inventory and Cost of Goods Sold McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc.

Copyright ©2010 Pearson Education Inc. Publishing as Prentice Hall. 24 Number One Concern!! Accounting for the COST* of Inventory 1.) Purchased 2.) Sold * NOT concerned with flow of actual inventory items – only their costs

Calculating the “Cost” of Net Purchases 25 +Purchase price of inventory items +Freight-in, taxes, insurance, etc. -Purchase returns -Purchase allowances -Purchase discounts =Net inventory purchases (debit account balance)

26

Four Inventory Costing Methods 27 Specific unit Weighted Average cost First-in, first-out Last-in, first-out Each Method will result in a different Ending inventory Cost of Good Sold

Weighted Average Cost: Average cost of inventory units 28 Average cost per unit Cost of goods available * Number of units available* * Goods available = Beginning inventory + Purchases Cost of goods sold Number of units sold Average cost per unit Ending inventory Number of units on hand (Ending Inventory) Average cost per unit

First-in, First-out (FIFO)  Represents the flow of COSTS not ITEMS First goods purchased are sold first (costs only) Focus on Balance Sheet (most recent costs) 29 Balance Sheet Ending Inventory Most recent (last) costs Income Statement COGS Oldest (first) costs

Last-in, First-out (LIFO)  Represents the flow of COSTS not ITEMS Last goods purchased are sold first (cost only) Focus on Income Statement (most recent costs) 30 Balance Sheet Ending Inventory Oldest (first) costs Income Statement COGS Most recent (last) costs

Cost of Goods Sold Formulas

FIFO

34

Exam #2 – Topics and Sample Questions Overall Study Tips  Definitions from book – Mostly in BLUE, but make sure that you have the definitions from all of the material covered  Connect LearnSmart Learning Presentations for items that you need more help understanding Exam Practice Questions  Self-study questions at the end of each chapter related to the topics listed below.  Re-do practice problems from in class (original Excel document and solutions are posted on webcourses)  Keep in mind how each transaction (bank rec., AR allowances, inventory costing, and depreciation) affect the Inc. Stmt. and Balance Sheet accounts.  How matching principle and revenue recognition principle relate to how we record transactions in these chapters.

Remember Accounting Equation and understand transactions through it. Watch the dates… Write the Accounting Equation down on the scrap paper provided in Testing Lab as soon as you sit down. Use T Accounts during the exam starting from the original transaction! Tips for Taking Exam

 Learn Smart (Extra Credit)  Study Groups  Flash Cards for def., normal balance, financial statement.(Materia)  Tutor – if needed Review Session for Exam #2 with Louis  October 30 th – 12:00 PM – 2:00 PM in BA1 #107 (Normal auditorium) Tools that are critical to success

For Exam, you must be able to place our typical accounts (see Block 1 Definitions) in the right location on the Accounting Equation, know the normal balance of the account, and which financial statement it appears on. Permanent Accounts Temporary Accounts

Exam #2 – Topics and Sample Questions  Chapter 4  Objective of internal controls  Framework for internal controls (Pyramid) - definitions and examples of each Control environment Risk assessment Control activities  Preventative  Detective Monitoring Information and communication  Bank statement reconciliation Adds and subtracts from bank/book Journal Entries for each type of activity that occurs during the bank statement reconciliation Error correction

Exam #2 – Topics and Sample Questions Chapter 5  Definitions & journal entries - Sales discounts, allowances, & Returns (contra revenue accounts)  Recording an amount for uncollectible accounts receivable Two methods 1. Direct write off (not GAAP) 2. Allowance - GAAP estimated bad debts (contra asset account) Techniques for calculating the allowance for uncollectible accounts  % of aging (only % of aging on the exam)  How to write off the actual A/R amount that becomes uncollectible months after the sale.  Net realizable value of accounts receivable amount - how to calculate – also just called Net A/R  Notes receivable – original transaction and accrue interest at year end only

Exam #2 – Topics and Sample Questions Chapter 6  Components of the cost of inventory (Cost of net purchases) on the balance sheet  Cost of goods sold formula  Gross profit formula  Inventory costing methods LIFO, FIFO, Weighted Average  Effects of each inventory valuation method on COGS, GP, & ending inventory  Order of current assets on balance sheet

Exam #2 – Topics and Sample Questions Chapter 7  Measuring cost of plant assets Land & Land Improvements  Lump-sum purchases of assets (Basket)  Definitions and calculation - Accumulated depreciation (contra asset account), Depreciable Cost, Book value Straight line Activity based Double declining balance - (how to calculate for first two years only)  accelerated – reduces net income in the early years, company pays less in taxes, increases cash flow  Journal entry for recording depreciation expense  Intangible Assets Amortization expense – definition and to record JE  Patents, Copyrights, Franchises, & Goodwill.  Research and Development – expense

Exam #2 – Topics and Sample Questions 1 - For the year of 2013, using the % of A/R Aging techniques used for calculating estimated uncollectible accounts, ABC Company has estimated that $10,000 of their accounts receivable will not be collectible. The Allowance for Uncollectible Accounts has a credit balance of $3,000. Bad debt expense for 2013 equals? A - $5,000 B - $13,000 C - $10,000 D - $7, Using the following data, what is the ending inventory using FIFO inventory costing method?  Sales revenue 200 units at $30 per unit  Beginning inventory 150 units at $9 per unit  Purchases 100 units at $10 per unit A - $500 B - $450 C - $1,850 D - $1,900

Exam #2 – Topics and Sample Questions 3 - If a bank statement included an service charge for $50, the journal entry to record this reconciling item would include a: A - debit to Cash for $50. B - credit to Service charge $50. C - credit to Cash for $50. D - credit to Accounts Payable for $ ABC Company purchased a copyright for $90,000. The copyright has a legal life of 70 years. The copyright is expected to generate revenue for only 5 years. The annual amortization expense for the patent is: A - $18,000 B - $0. The copyright cost should be expenses when the copyright is purchased C - $0. The copyright is not amortized. D - $1,286.

Exam #2 – Topics and Sample Questions 5 - On January 1, 2012, ABC company acquired equipment for $100,000. The estimated life of the equipment is 4 years or 50,000 hours. The estimated residual value is $20,000. What is the amount of depreciation expense for 2012, if ABC Company uses the asset for 4,000 hours and uses the straight-line method? A - $6,400; B - $20,000; C - $8,000; or D - $25, The account balances in each of the following accounts at the end of the year: sales - $60,000; accounts payable - $10,000; accounts receivable - $7,000; and allowance for uncollectible accounts – debit of $400. Lightning uses the percent-of-aging method and estimates $800 of the accounts receivable is uncollectible. Make the adjusting entry for the uncollectible accounts. What is the amount of the adjustment to the allowance for uncollectible accounts? A - $1,000; B - $600; C - $800; or D - $1,200

Exam #2 – Topics and Sample Questions 7 - Under the allowance method, the entry to actually write off an $870 uncollectible account includes: A - a credit to Allowance for Uncollectible Accounts for $870. B - a debit to Accounts Receivable for $870. C - a credit to Bad Debt Expense for $870. D - a debit to Allowance for Uncollectible Accounts for $ Requiring one employee to receive cash and another employee to record the receipt of cash is an example of which preventive control? A - Physical controls B - Employee management C - Proper authorization D - Separation of duties

Exam #2 – Topics and Sample Questions  Answers 1. d 2. a 3. c 4. a 5. b 6. d 7. d 8. d