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Chapter 5: The operating cycle and merchandising operations

Tuesday, February 28, 2012

12:04 PM

Working capital = current assets - current liabilities

PM Working capital = current assets - current liabilities Liquidity: pay debt & invest Financing period

Liquidity: pay debt & invest

Financing period: the amount of item from the purchase of inventory until it is sold and payment is collected, less the amount of time creditors give the company to pay for the inventory. During financing

give the company to pay for the inventory. During financing period, company will be without cash.

period, company will be without cash.

Financing period = Days' inventory on hand + Days receivable -Days payable

Perpetual inventory Merchandise inventory ----------------------> Cost of goods sold || || Cost of goods on
Perpetual inventory
Merchandise inventory ----------------------> Cost of goods sold
||
||
Cost of goods on hand
Cost of merchandise sold to customers

Periodic Inventory

Beginning inventory + Net cost of purchase = Cost of goods sold + Ending inventory
Beginning inventory + Net cost of purchase = Cost of goods sold + Ending inventory

Beginning inventory + Net cost of purchase = Cost of goods sold + Ending inventory

Beginning inventory + Net cost of purchase = Cost of goods sold + Ending inventory
Beginning inventory + Net cost of purchase = Cost of goods sold + Ending inventory

FOB shipping point: buyers pay the shipping fee ----------> Freight-in accounts

pay the shipping fee ----------> Freight-in accounts ↑ cost of ↑ cost of inventory goods sold

cost of

cost of

inventory

goods sold

FOB destination: sellers pay the shipping fee --------------> Delivery expense

Debit (Assets, Credit Dividends, Expense) Merchandise inventory Purchase Purchase Returns and Allowances Sales
Debit (Assets,
Credit
Dividends,
Expense)
Merchandise inventory
Purchase
Purchase Returns and
Allowances
Sales Returns and
Allowances
Sales
Delivery expenses
Freight in
Sales discounts
Purchase discounts

Notes for midterm (p247) operation cycle (p250) internal controls , be able to recognize it!!! (p252) wat amount go to the journal entries, wat part of invetories (p254) in multiple choice questions Understand how freight works

Internal controls

- Safeguard

- Accurate financial statement

- Employee taking laws

Freight-in -----> cost of goods sold Delivery expense ----> operating expense

Perpetual Inventory Income Statement

operating expense Perpetual Inventory Income Statement Periodic inventory income statement Perpetual (count

Periodic inventory income statement

Income Statement Periodic inventory income statement Perpetual (count continuously) Periodic (count after a
Perpetual (count continuously) Periodic (count after a period) Purchases Debit Merchandise Debit Purchases of
Perpetual
(count continuously)
Periodic
(count after a
period)
Purchases
Debit Merchandise
Debit Purchases
of merchandise
inventory
Credit Acct Payable
Purchases Returns
Credit Merchandise
Credit Purchase
inventory
Return and
Allowance
Debit Account Payable
Sales on credit
Credit Sales; debit
account receivable
Credit Sales; debit
accounts receivable
Credit Merchandise
inventory; debit cost
of goods sold
Sales Returns and
Allowances
Debit Merchandise
inventory; credit cost
of goods sold
Debit Sales; credit
accounts receivable
Debit Sales; Credit
accounts receivable

Periodic inventory system more commonly used for low priced, high volume

Perpetual inventory system …………………………………

high priced, low volume

Accounting Page 1

accounts receivable Periodic inventory system more commonly used for low priced, high volume high priced,
accounts receivable
accounts receivable

Periodic inventory system more commonly used for low priced, high volume

high priced, low volume

Perpetual inventory system …………………………………

Component s of internal control

- Control environment ----> created by management's attitude, awareness and actions. ----> Employees should be trained

- Risk assessment ---> identify risks of losses or inaccuracies in accounting records

- Information and communication ----> accounting system established by management

- Control activities -----> policies and procedures management

Authorization ---> approval of certain transactions and activities

Recording transactions

Documents and records----> help ensure transactions are properly recorded

Physical controls ----> control the limits to access

Periodic independent verification ----> some others periodically check the records or physical inventory

Separation of duties

Sound personnel practices ---->adequate supervision, rotation of key people, employees taking vacations, bonding of personnel

- Monitoring ------> assessment of internal control

Management goals

- Enough inventory to sell to customers - Enough cash on hand to pay for
-
Enough inventory to sell to customers
-
Enough cash on hand to pay for purchases
-
Keep losses as low as possible
Cash budget

- Separation duties

- Limit ppl access to cash

- Bond employees

- Keep amount of cash minimum

- Keep cash safe

- Record all cash receipts & pay by checks

- Independent person audits cash

- Independent person reconcile cash

cash receipts & pay by checks - Independent person audits cash - Independent person reconcile cash

Accounting Page 2