bu-127-midterm-cheatsheet

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Wilfrid Laurier University *

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BU127

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Finance

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Jan 9, 2024

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Studocu is not sponsored or endorsed by any college or university BU-127 Midterm Cheatsheet Intro to Financial Accounting (Wilfrid Laurier University) Studocu is not sponsored or endorsed by any college or university BU-127 Midterm Cheatsheet Intro to Financial Accounting (Wilfrid Laurier University) Downloaded by Jerry Lin (jerrylin123@hotmail.com) lOMoARcPSD|20166339

Periodic Inventory System Updates inventory at the end of a period Purchasing Inventory Debit Purchases account Credit Cash/Accounts payable/other purchasing method Selling Inventory Debit Cash/AR Credit Sales 540i Ending Inventory Debit COGS Debit Inventory Credit Purchases Perpetual Inventory system Continually updates inventory Purchasing Inventory Debit Inventory Credit Cash/AP/etc Selling Inventory Debit Cash/AR Credit Sales AND Debit COGS Credit Inventory Statement of Financial Earnings Records Assets, Liabilities and Shareholders Equity Assets = Liabilities + Shareholders Equity Income Statement shows Revenues, Expenses and Net Income FIFO Method The First units purchased are sold first, you would account for the cost of the remaining first units before moving on to the cost of newer inventory Average Cost Method The average cost method assigns a cost to inventory items based on the total cost of goods purchased or produced in a period divided by the total number of items purchased or produced, you would use average cost method when the unit price for inventory changes 1.) Principle of Regularity - The accountant has adhered to GAAP rules and regulations as a standard. 2.) Principle of Consistency - Accountants commit to applying the same standards throughout the reporting process, from one period to the next, to ensure financial comparability between periods. Accountants are expected to fully disclose and explain the reasons behind any changed or updated standards in the footnotes to the financial statements. 5.) Principle of Non-Compensation - Both negatives and positives should be reported with full transparency and without the expectation of debt compensation. 6.) Principle of Prudence - Emphasizing fact-based financial data representation that is not clouded by speculation. 7.) Principle of Continuity - While valuing assets, it should be assumed the business will continue to operate. Downloaded by Jerry Lin (jerrylin123@hotmail.com) lOMoARcPSD|20166339

Purple Beverages Inc. sells only one product, the very popular and strong Purple Rain drink. The drinks are sold to local fraternity and sorority clubs. Purple Beverages Inc. had the following balances at January 1, 2018: 1. Cash 8,000 debit 2. Inventory (1000 units of purple rain drink x $4 per unit) 4,000 debit 3. Accounts receivable 10,000 debit 4. Allowance for doubtful accounts 1,000 credit 5. Contributed capital 15,000 credit 6. Retained earnings 6,000 credit 7. Other information: 8. 1. Purple Beverages Inc. uses the perpetual method to account for its inventory and values its inventory using First-in First-Out basis. 9. 2. Purple Beverages Inc. uses the aging method to determine its allowance for doubtful accounts using the following rates: i. Accounts not yet due 1% ii. Accounts 1-60 days overdue 10% iii. Accounts over 60 days overdue 20% 10. 3. Trade terms are 2/10, net 30 on sales. No discount is available for early payment to suppliers. 11. The following were the only transactions that occurred during the first quarter of 2018: 12. Jan 15 Received $9,500 cash from the collection of accounts receivable. 13. Jan 30 Wrote off the remaining accounts receivable as uncollectible. 14. Feb 1 Purchased 1000 units of purple rain drink at $5 per unit. Paid in cash. 15. Feb 10 Sold 1,000 units of purple rain drink at $7 per unit to the Gamma My Drinka Sorority on credit. 16. Feb 19 Received full payment from the Gamma My Drinka Sorority for the Feb. 10 sale. 17. Feb 23 Purchased 2000 units of purple rain drink at $6 per unit. Paid in cash. 18. Feb. 25 Sold 2000 units of purple rain drink at $8 per unit to the Sigma Big Ralph Fraternity on credit. 19. Mar 25 Received 1000 units of purple rain drink back from the Sigma Big Ralph Fraternity. The goods were returned due to low sales. The low sales were as a result of some fool in the accounting area scheduling a midterm the day after St. Patrick’s Day. Sigma Big Ralph Fraternity was given full credit for the goods returned. 20. Required 21. 1. Prepare the necessary journal entries to record all transactions during the quarter and any necessary adjusting journal entries at the end of the quarter. Ignore income taxes. 22. 2. Prepare a multi-step statement of earnings for the quarter ended March 31, 2018. Ignore income taxes. 23. 3. Would income be higher or lower if the average cost method was used to value inventory (Please just indicate “higher”, “lower”, or “same”. No calculation is required). 24. Solution 25. 26. Jan 15 Cash dr 9,500 ½ mark 27. Accounts receivable cr 9,500 ½ mark 28. 29. Jan 30 Allowance for doubtful accounts 500 ½ mark 30. Accounts receivable 500 ½ mark 31. 32. Feb 1 Inventory 5,000 ½ mark 33. Cash 5,000 ½ mark 34. 35. Feb 10 Accounts receivables (1,000 x 7) 7,000 ½ mark 36. Sales 7,000 ½ mark 37. 38. Feb 10 Cost of sales (1,000 x 4) 4,000 1 mark* 39. Inventory 4,000 1 mark* 40. * 2 marks in total. ½ mark for each of the four elements. 41. 42. Feb 19 Sales discount (7000x2%) 140 1 mark 43. Cash (7000 x 98%) 6,860 ½ mark 44. Accounts receivables 7,000 ½ mark 45. 3.) Principle of Sincerity - The accountant strives to provide an accurate and impartial depiction of a company’s financial situation. 4.) Principle of Permanence of Methods - The procedures used in financial reporting should be consistent, allowing comparison of the company's financial information. 8.) Principle of Periodicity- Entries should be distributed across the appropriate periods of time. For example, revenue should be reported in its relevant accounting period. 9.) Principle of Materiality / Good Faith- Accountants must strive to fully disclose all financial data and accounting information in financial reports 10.) Principle of Utmost Good Faith - Derived from the Latin phrase “uberrimae fidei” used within the insurance industry. It presupposes that parties remain honest in all transactions. Downloaded by Jerry Lin (jerrylin123@hotmail.com) lOMoARcPSD|20166339

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46. Feb 23 Inventory (2000 x 6) 12,000 ½ mark 47. Cash 12,000 ½ mark 48. 49. Feb 25 Accounts receivable 16,000 ½ mark 50. Sales (2000 x 8) 16,000 ½ mark 51. 52. Feb 25 Cost of sales (1000 x 5+ 1000x6) 11,000 1 mark* 53. Inventory 11,000 1 mark* 54. * 2 marks in total. ½ mark for each of the four elements. 55. 56. Mar 25 Sales returns (1000 x 8) 8,000 ½ mark 57. Accounts receivable 8,000 ½ mark 58. 59. Mar 25 Inventory (1000x6) 6,000 ½ mark Cost of sales 6,000 ½ mark 60. 61. Mar 31 Bad Debt expense 300 1 mark* 62. Allowance for doubtful accounts 300 1 mark* 63. * 2 marks in total. ½ mark for each of the four elements. 64. 65. Note: Allowance balance is 1,000 cr – 500dr = 500 cr; balance needs to be 8,000 balance of receivables x 10% = 800; required adjustment = 800-500=300 Purple Beverages Inc. 66. Statement of Earnings 1 mark* 67. For the three months ended March 31, 2018 68. 69. Sales $ 23,000 ½ mark 70. Less: Returns 8,000 ½ mark 71. Discounts 140 8,140 ½ mark 72. Net sales 14,860 ½ mark 73. Cost of sales (4000+11000-6000) 9,000 ½ mark 74. Gross Profit $ 5,860 ½ mark 75. Bad debt expense 300 76. Net earnings $5560 77. Income would be lower under the average cost method. 1 m Downloaded by Jerry Lin (jerrylin123@hotmail.com) lOMoARcPSD|20166339