Needing ANSWERS ASAP!

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06155200: Graded Project Instructions & Worksheets 1 Lesson 1: Business, Accounting, and You PROJECT GOAL The goal of this graded project is to create the following financial statements for J & L Accounting, Inc.: ???? Balance sheet ???? Income statement ???? Statement of retained earnings ???? Post-closing trial balance The financial statements must be created in one Microsoft Word document (.doc or .docx file). Alternatively, an Excel workbook may be used (.xls or .xlsx file). The Word or Excel file will be uploaded for grading. INSTRUCTIONS At the end of the project, youll be given instructions for creating and uploading the financial statements in a Word or Excel file for grading. Graded Project Instructions Note: The formatting of financial statements is important. They follow Generally Accepted Accounting Principles (GAAP), which creates a uniformity of financial statements for analyzing. This allows for an easier comparison, as all businesses follow GAAP. Therefore, the financial statements should be created exactly the same way shown or referenced in the textbook. Failure to do so will result in a loss of points. The project references debits equaling credits. This is a fundamental principle of accounting that cant be violated and if so is not acceptable under any circumstance. Debits not equaling credits allows for cooking of the books, which is presenting false information. It also allows for embezzlement, which is theft by management or employees. If debits dont equal credits, the cause may be a lack of understanding of accounting principles, such as those presented in the textbook and assigned homework problems, or a lack of focus and concentration when making journal entries, posting to ledger accounts, or completing math. Rememberinstructors are available to help you with material you may be struggling with. Mistakes of the lack-of-focus variety are best corrected by going back over the work until the error is found. The accounting equation must balance on the balance sheet. This is another fundamental principle of accounting that cant be violated and if so is completely unacceptable. When the equation doesnt balance and the numbers are fudged, this is easily detectable by someone who knows accounting. If your debits equal your credits and you understand which general ledger accounts belong on which financial statements, then the accounting equation should balance. Its really all about understanding the concepts and applying that understanding. The following financial statements are provided from the prior accounting period for J & L Accounting, Inc.: a) Post-closing trial balance b) Balance sheet c) Income statement d) Statement of retained earnings 2 Graded Project 3 J & L Accounting, Inc. Post-Closing Trial Balance December 31, 2012 BALANCE ACCOUNT TITLE DEBIT CREDIT Cash, Business Checking 20,500.00 Accounts Receivable Prepaid Rent Vehicles 48,000.00 Accumulated Depreciation, Vehicles 12,000.00 Equipment 3,600.00 Accumulated Depreciation, Equipment 600.00 Accounts Payable Common Stock 38,000.00 Retained Earnings 21,500.00 Dividends Service Revenue Advertising Expense Rent Expense Office Supplies Expense Telephone Expense Utilities Expense Depreciation Expense TOTALS 72,100.00 72,100.00 J & L Accounting, Inc. Balance Sheet As of December 31, 2012 ASSETS Cash, Business Checking 20,500.00 Accounts Receivable 0.00 Prepaid Rent 0.00 Vehicles 48,000.00 Less: Accumulated Depreciation, Vehicles 12,000.00 36,000.00 Equipment 3,600.00 Less: Accumulated Depreciation, Equipment 600.00 3,000.00 TOTAL ASSETS 59,500.00 LIABILITIES Accounts Payable 0.00 TOTAL LIABILITIES 0.00 STOCKHOLDERS EQUITY Common Stock 38,000.00 Retained Earnings 21,500.00 TOTAL STOCKHOLDERS EQUITY 59,500.00 TOTAL LIABILITIES AND STOCKHOLDERS EQUITY 59,500.00 Business, 4 Accounting, and You Graded Project 5 J & L Accounting, Inc. Income Statement For the Month Ending December 31, 2012 REVENUES Service Revenue 10,275.00 EXPENSES Advertising Expense 2,300.00 Rent Expense 1,000.00 Office Supplies Expense 300.00 Telephone Expense 750.00 Utilities Expense 3,200.00 Depreciation Expense 1,100.00 TOTAL EXPENSES 8,650.00 NET INCOME 1,625.00 J & L Accounting, Inc. Statement of Retained Earnings For the Month Ending December 31, 2012 Retained Earnings, December 1, 2012 19,875.00 Add: Net Income 1,625.00 Subtotal 21,500.00 Less: Dividends 0.00 Retained Earnings, December 31, 2012 21,500.00

Study Guide Financial Accounting by Jim Burcicki About the Author Jim Burcicki holds a B.S. in Accounting from King's College, graduating magna cum laude as an adult learner. He began as a bookkeeper for a hospitality group that included three 2,000- person banquet facilities, a Best Western, and historical landmark hotels. After obtaining his degree, Jim worked as an accounting software consultant for a large, regional public accounting firm. He installed customized accounting software in businesses with revenues ranging from $5 million to $150 million. Jim currently teaches business programs as a Senior Instructor at Penn Foster College. Jim is a proud veteran of the United States Army, having served from 1977 to 1981. All terms mentioned in this text that are known to be trademarks or service marks have been appropriately capitalized. Use of a term in this text should not be regarded as affecting the validity of any trademark or service mark. Copyright 2015 by Penn Foster, Inc. All rights reserved. No part of the material protected by this copyright may be reproduced or utilized in any form or by any means, electronic or mechanical, including photocopying, recording, or by any information storage and retrieval system, without permission in writing from the copyright owner. Requests for permission to make copies of any part of the work should be mailed to Copyright Permissions, Penn Foster, 925 Oak Street, Scranton, Pennsylvania 18515. Printed in the United States of America 1 LESSON ASSIGNMENTS 7 LESSON 1: BUSINESS, ACCOUNTING, AND YOU 9 GRADED PROJECT 27 LESSON 2: ACCOUNTING FOR MERCHANDISING 49 LESSON 3: THE VALUE OF MONEY 71 LESSON 4: CORPORATIONS 95 SELF-CHECK ANSWERS 117 Contents INSTRUCTIONS TO STUDENTS iii Welcome to accounting, doorway to a world of possibilities! You've chosen to study a vibrant, thought-provoking subject that's full of challenges and opportunities. Best of all, you'll find that the key ideas discussed in this course are useful in many careers and in your personal life as well. Let's consider an example. One important lesson you can learn from your study of accounting is to keep the big picture in mind. Here's a question demonstrating this concept: Toni Tiller bought a pony for $50 and sold it for $60. Later she bought the pony back for $70 and sold it to someone else for $80. How much did Toni make on the pony? We'll return to this discussion in a minute. Before we do, let's turn our attention to this study guide. It's designed to help you develop an understanding of financial accounting in conjunction with your textbook, Financial Accounting. There are four lessons in the study guide, each containing three assignments. Each assignment concludes with suggested exercises and problems selected from the textbook, as well as a self-check. The answers to these textbook problems are found in the Financial Accounting Solutions Supplement, located on your student portal. You're responsible for your success in this course. Here are three tips that may help you achieve that success: 1. Know your learning style. Are you a visual learner, an audio learner, or a kinesthetic learner? Do you learn best by seeing examples, hearing explanations, or experiencing hands-on activity? If you don't know, you might want to check out various websites or library books that offer free evaluations. Once you're determined your learning style, tailor your study habits to your best advantage. If you're a visual learner, pay special attention to the charts, graphs, exhibits, and financial statements in the text. Audio learners might consider recording key points and listening to them while commuting or during other quiet times. If hands-on is your style, work through the examples in the text using pencil and paper. Instructions YOUR COURSE 1 2. Assume you'll receive an A in the course. Give yourself permission to succeed at the outset. Sit down before you start the course and write a letter to your instructor dated several months in the future that describes in detail what you did to achieve your A. Any time you feel your motivation faltering during the course, remind yourself that you're an A student. Remember, whether you think you can or think you can't, you're right. 3. Keep the big picture in mind. Let's finish our discussion of Toni Tiller. Was your answer $10? Or did you do the big-picture accounting and determine that the correct answer is $20? If you answered $10, let's work through the solution: Add the amounts Toni paid for the pony ($50 + $70 = $120). Add what she received when she sold the pony ($60 + $80 = $140). Now calculate the difference between what she earned and what she spent ($140 - $120 = $20). Whatever your motivation for choosing to study accounting, you have an exciting future ahead of you. May your achievements be matched by your pleasure in realizing them. OBJECTIVES When you complete this course, you'll be able to n n n n 2 Understand important accounting principles and concepts in order to prepare basic financial statements Understand the fundamentals of bookkeeping while using the general journal, general ledger, and trial balance to prepare financial statements Understand adjustments and closing entries to prepare financial statements and a post-closing trial balance Understand periodic and perpetual inventory systems; accounting for the purchases and sales of inventory; and how to account for shipping, freight, and other selling expenses in preparation of a multi-step income statement and classified balance sheet Instructions to Students n n n n n n n n Account for inventory, the use of different inventory costing methods, and their effects on financial statements Understand the role of ethics in accounting, the use of internal controls, and the major provisions of the International Financial Reporting Standards (IFRS) Understand cash and accounts receivable and the methods and internal controls for reporting on the balance sheet Understand, account for, and report various long-term assets on the balance sheet Distinguish between different liabilities and account for and report current liabilities and long-term debt on the balance sheet Understand the treatment of stock as paid-in capital, dividends, and retained earnings in the stockholders' equity section of the balance sheet Prepare a statement of cash flows using the direct and indirect methods and evaluate the company's performance as it relates to cash Perform a horizontal and vertical analysis of financial statements and compute various financial ratios COURSE MATERIALS Your Financial Accounting course provides you with the materials listed below. 1. This study guide, which includes n n A lesson assignments page that lists the schedule of assigned readings in your textbook Self-checks and answers that allow you to measure your understanding of the course material Instructions to Students 3 2. Your course textbook, Financial Accounting, Third Edition, by Robert Kemp and Jeffrey Waybright, which contains your assigned readings, exercises, and problems 3. Financial Accounting Solution Manual, located as a supplement on your student portal. MYACCOUNTINGLAB Throughout the Financial Accounting textbook, you'll notice references to MyAccountingLab. MyAccountingLab is a textbook supplement that allows instructors to assign questions that can be completed in an Excel-simulated environment. MyAccountingLab isn't part of the Financial Accounting course. Ignore any textbook references to MyAccountingLab. If you wish to supplement your learning by acquiring MyAccountingLab, you'll need to contact the publisher directly to purchase the supplemental material. Since the questions aren't being assigned, Penn Foster won't be able to provide support for MyAccountingLab. A STUDY PLAN This study guide is intended to help you achieve the maximum benefit from the time you spend on this course. It doesn't replace the textbook in any way. It serves as an introduction to material that you'll read in the book and as an aid to assist you in understanding this material. This study guide provides your assignments in four lessons. Each lesson contains three assignments, a set of textbook problems and exercises for each assignment, a self-check for each assignment, and a comprehensive examination on the material covered in the lesson. Be sure to complete all work related to a lesson before moving on to the next lesson. 4 Instructions to Students For each lesson, do the following: 1. Read the introduction to the lesson in this study guide. 2. Read the assigned pages in your textbook. 3. Complete the self-check in this study guide for each assignment in the lesson. Remember: Do not send your answers to the self-checks to the school. 4. Determine your own progress by comparing your answers for the self-checks to the answers given in the answer section of this study guide. 5. Complete the suggested exercises and problems selected from your textbook. 6. Determine your own progress by comparing your answers for the exercises and problems to the answers given in the Financial Accounting Solution Manual. 7. Review the material covered in the lesson to prepare for the lesson examination. Now you're ready to begin Lesson 1. When you've finished the assigned readings and self-checks and are confident that you have a good grasp of the material covered, complete the graded project for Lesson 1. This graded project serves as the exam for Lesson 1. Lessons 2-4 have multiple-choice examinations that you'll access via your student portal. At any point in your studies, you can email your instructor for further information or clarification of your study materials. Your instructor's guidance and suggestions should be very helpful to you as you progress with your course. Take some time now to review the lesson assignments. Then, begin your study of financial accounting with Lesson 1, Assignment 1. Good luck and have fun! Instructions to Students 5 NOTES 6 Instructions to Students For: Read in the study guide: Read in the textbook: Pages 15-18 Chapter 2 Assignment 1 Pages 9-12 Assignment 3 Pages 21-24 Assignment 2 Chapter 1 Chapter 3 Graded Project 061579 Material in Lesson 1 Lesson 2: Accounting for Merchandising For: Read in the study guide: Read in the textbook: Pages 57-61 Chapter 5 Assignment 4 Pages 50-53 Assignment 6 Pages 65-68 Assignment 5 Examination 061580 Chapter 4 Chapter 6 Material in Lesson 2 Lesson 3: The Value of Money For: Read in the study guide: Read in the textbook: Pages 80-86 Chapter 8 Assignment 7 Pages 72-77 Assignment 9 Pages 89-92 Assignment 8 Examination 061581 Chapter 7 and Appendix B Chapter 9 Material in Lesson 3 Assignments Lesson 1: Business, Accounting, and You 7 Lesson 4: Corporations For: Read in the study guide: Read in the textbook: Pages 104-106 Chapter 11 Assignment 10 Pages 96-99 Assignment 12 Pages 109-112 Assignment 11 Examination 061582 Chapter 10 Chapter 12 Material in Lesson 4 Note: To access and complete any of the examinations for this study guide, click on the appropriate Take Exam icon on your student portal. You should not have to enter the examination numbers. These numbers are for reference only if you have reason to contact Student CARE. 8 Lesson Assignments Lesson 1 Business, Accounting, and You Assignment 1 introduces three types of business and the entities used in creating these businesses. Generally Accepted Accounting Principles (GAAP) and International Financial Reporting Standards (IFRS) are shown to govern the standards, practices, and reporting of accounting information. The accounting equation, transactions, and financial statements (and their relationship to each other) are discussed. Assignment 2 introduces the concept of double-entry bookkeeping and fundamentals for analyzing, journalizing, and posting transactions as they occur in business. Assignment 3 shows the adjusting and closing process in preparation of an adjusted trial balance to be used to prepare financial statements. When you complete this lesson, you'll be able to n n n Understand important accounting principles and concepts in order to prepare basic financial statements Understand the fundamentals of bookkeeping while using the general journal, general ledger, and trial balance to prepare financial statements Understand adjustments and closing entries to prepare financial statements and a post-closing trial balance ASSIGNMENT 1: INTRODUCTION TO ACCOUNTING Read Assignment 1 in this study guide. Then read Chapter 1 in your textbook, Financial Accounting. Why Study Accounting? An often-asked question is \"Why do I need to take accounting? I'm not going to be an accountant.\" Accounting teaches the language of business. Students receive report cards at school. 9 Financial statements are the report cards for businesses. Everything that happens in a business is quantified on a financial statement. If business professionals don't know how the numbers are put together and used, how can they run their business effectively? The numbers should provide an objective look at the health of a company at a specific point in time. What Is Accounting? Accounting is keeping score of what's happening in the business. This is known as financial accounting, and the results are reported on the financial statements. The financial statements allow investors and creditors to make investment decisions, suppliers and customers to determine the financial condition of the company, and managers to make corrections and better decisions concerning the operations of the business. How Are Businesses Organized? There are three common types of businessesservice, merchandising, and manufacturing. The organization of the business can be set up as a sole proprietorship, partnership, corporation, or limited liability company. Each has advantages and disadvantages. Exhibit 1-1 in the textbook summarizes the different types of business organizations. What Accounting Principles and Concepts Govern the Field of Accounting? The Financial Accounting Standards Board (FASB) set the principles that govern how we report financial information, called the Generally Accepted Accounting Principles (GAAP). The International Financial Reporting Standards (IFRS) were created for businesses located in countries that didn't have their own accounting standards. 10 Financial Accounting How Is the Accounting Equation Used to Record Business Transactions? The basic accounting equation states that the assets must equal the liabilities plus the owner's equity. This sets the basic framework for accounting. For example, assets can be broken down into current assets and long-term assets. Liabilities can be broken down into current liabilities and long-term liabilities. Equity can be broken down into common stock and retained earnings. Each of these can be broken down even further. It's important to build a framework (a structure) in your mind as to where everything goes and how they're interrelated. As transactions occur in a business, they're recorded in these categories of accounts. For example, if you invest capital in the form of cash, then the assets and equity increase, keeping the accounting equation in balance. What Do Financial Statements Report, and How Are They Prepared? The four most common financial statements are 1. Balance sheetA statement that shows what a company owns (assets), what it owes (liabilities), and what the owners can claim (owner's equity) as of a particular date 2. Income statementA statement that shows how much a company has earned (revenue) and spent (expenses) for a period of time 3. Statement of retained earningsA statement that shows how owner's equity has changed over a period of time. (Don't be confused by the introduction of the term stockholders' equity. In a corporation, owner's equity is called stockholders' equity because the owners hold stock certificates. But the definition is the same; a stockholder is an owner.) 4. Statement of cash flowsA statement that accounts for the cash position of a company as of a particular date Lesson 1 11 Every business has a balance sheet and income statement. The statement of retained earnings and statement of cash flows are optional. Also, additional statements can be created as needed. For example, a manufacturing concern will have statements of manufactured goods. There isn't a set number of statements that a particular business may have, but all businesses will have the first two. Exhibit 1-2 in the textbook illustrates the relationship between the first three financial statements. The net income from the income statement is shown as a line item on the statement of retained earnings. The retained earnings is shown as a line item on the balance sheet. Before moving on to your next assignment, work through the following accounting exercises and practice problems. When you've completed the work, check your answers against the answers provided on your student portal. Then, take some time to complete Self-Check 1. TexTbook exercises and Problems for assignmenT 1 At the end of each assignment, you'll be asked to complete selected exercises and practice problems from the text as a review of what you've learned. We urge you to complete the exercises and problems, as accounting is best learned by doing. The more you practice, the more proficient you'll become. 1. Short Exercises S1-2 through S1-14 (pages 30-33) 2. Exercises (Group B): E1-23B through E1-30B (pages 37-39) 3. Problems (Group B): P1-36B through P1-40B (pages 44-47) Check your answers in the financial accounting solutions supplement that is found on your student portal. 12 Financial Accounting Self-Check 1 At the end of each section of financial accounting, you'll be asked to pause and check your understanding of what you've just read by completing a \"Self-Check\" exercise. Answering these questions will help you review what you've studied so far. Please complete self-check 1 now. 1. Which statement is false? a. The proprietorship form of business organization protects the personal assets of the owners from creditors of the business. b. A proprietorship has a single owner. c. Accounting is the information system that measures business activities, processes that information into reports, and communicates the results to decision makers. d. The FASB determines how accounting is practiced in the United States. 2. The primary objective of financial reporting is to a. b. c. d. present provide provide provide information information information information in an ethical manner. useful to managers in making daily decisions. to the federal government. useful for investment and lending decisions. 3. Wilbur Corp. operates a fishing tackle shop. The company needs to borrow money to expand; therefore, it prepared financial statements to present to the banker. Wilbur Corp. obtained appraisals of all the assets of the business to ensure that the balance sheet would reflect the most current value of the assets. Wilbur Corp. has violated which principles or concepts? a. Reliability principle b. Cost principle c. Going-concern principle d. Stable-monetary-unit concept 4. Which statement is false? a. Assets are economic resources that are expected to benefit future periods. b. Expenses are decreases in stockholders' equity that result from delivering goods and services to customers. c. Revenues are assets that represent economic benefits. d. Liabilities are economic obligations to outsiders. 5. A payment on account a. decreases assets. b. increases liabilities. c. increases stockholders' equity. d. increases assets. (Continued) Lesson 1 13 Self-Check 1 6. Which transaction increases stockholders' equity? a. Collection of an account receivable b. Issuance of common stock for cash c. Payment of salaries d. Cash purchase of land 7. A balance sheet reports the a. b. c. d. assets, liabilities, and stockholders' equity on a particular date. difference between revenues and expenses during the period. change in the retained earnings during the period. cash receipts and cash payments during the period. 8. If assets increase $40,000 during the period and liabilities decrease $8,000 during the period, stockholders' equity must have a. increased $32,000. b. decreased $48,000. c. decreased $32,000. d. increased $48,000. 9. The following is information about the assets and liabilities at the end of 2013 and 2014: Assets Liabilities 2013 2014 $75,000 $90,000 36,000 45,000 If net income was $1,500 and there were no dividends, how much did equity increase from new stock issuances? a. $40,500 b. $45,000 c. $6,000 d. $4,500 10. The amount of net income shown on the income statement also appears on the a. statement of financial position. b. balance sheet. c. statement of retained earnings d. statement of cash flows. Check your answers with those on page 117. 14 Financial Accounting ASSIGNMENT 2: ANALYZING AND RECORDING BUSINESS TRANSACTIONS Read Assignment 2 in this study guide. Then read Chapter 2 in your textbook, Financial Accounting. How Are Accounts Used to Keep Business Transactions Organized? The books of accounting for a business are very similar to the chapters of a textbook. And, just as textbook has a table of contents that lists the chapters of the textbook, the accounting books for a business have a chart of accounts. On the chart of accounts are the following categories: 1. Assets 2. Liabilities 3. Stockholders' Equity 4. Revenues 5. Expenses Each category is further broken down into general ledger accounts, like subsections. The accounting \"book\" titled Assets would have accounts like Cash and Accounts Receivable. In the general ledger account \"Cash,\" information about cash is entered, just as information is written in a chapter of a textbook. Lesson 1 15 What Are Debits, Credits, and T-Accounts? The definition of a debit isn't plus or minus. It isn't increase or decrease. A debit is simply what's on the left. This is the same with a credit. A credit is what's on the right. A debit or credit must be considered in context. The context is what's considered the normal balance, which simply is what increases that category of accountsa debit or credit. The normal balance of an asset is a debit. The normal balance of a liability is a credit. The normal balance of equity is a credit. The normal balance of a revenue account is a credit. The normal balance of an expense account is a debit. Double-entry accounting requires that every transaction affects at least two general ledger accounts. The transaction must affect at least one debit and at least one credit. The sum of the debits must always equal the sum of the credits. Therefore, if you're going to increase an asset account (the normal balance of an asset is a debit), then you must debit that account. Using a double-entry accounting means you must make a credit somewhere else because debits must equal credits. That means whichever account you choose, you'll credit that account. If choosing a liability account, know that you'll be increasing the liability account because the normal balance of a liability account is a credit (which increases that account). Notice that the asset is a debit. Also, notice that the liability is a credit. If increasing the liability using a credit, then to decrease it, use a debit. This is why debits and credits don't have the definition of increase or decrease, plus or minus. If increasing the asset using a debit, and you'd decrease a liability using a debit. The debit depends on its context or the normal balance of the category of account. To see this more clearly, T-accounts are used. The middle of page 56 of the textbook shows a T-account. The debit is on the left, and the credit is on the right. If the account was an asset, the debit would go on the left. If the account was a liability, the debit would still go on the left. However, the meaning of each account changes based on the normal balance. If it's an asset, the asset will increase on the debit 16 Financial Accounting side. If it's a liability, the liability will increase on the credit side, which means it will decrease on the debit side. Exhibit 2-1 illustrates the categories of accounts and T-accounts, showing whether the account increases or decrease by using a debit or credit for that type of account. How Are the General Journal and General Ledger Used to Keep Track of Business Transactions? All transactions that occur in a business are journalized, or recorded in a journal. Remember, there are two parts to every transactiona debit and a credit. There can be more than one debit or more than one credit for each transaction. However, the debits must equal the credits. After a transaction has been journalized, it must be posted into the general ledger accounts. This can be thought of as rearranging the information. For example, if you have 1,000 transactions spread out over 200 pages in a journal and you want to know what the balance of your cash account is, it would be time-consuming to go through each page and transaction to come up with the effects on the cash account. By posting the 1,000 transactions into the general ledger, all of the transactions that affect the cash account are posted in one place. The information is easier to assimilate because you're looking only at the cash transactions. Exhibit 2-2 of the text shows an example of a transaction that was entered into a journal and posted to its corresponding general ledger accounts. Looking at the general ledger accounts reveals the transactions that affected that account and the balance in the account. Lesson 1 17 How Is a Trial Balance Prepared, and What Is It Used For? The information in the general ledger can be further simplified into a general ledger trial balance. A trial balance is nothing more than a listing of the accounts and the balances in those accounts. Exhibit 2-3 in the textbook provides an example of a trial balance. From the trial balance, steps can be taken to correct any information that's in error or needs adjustment, and the financial statements can be prepared. Page 72 of the text provides an illustration with eight steps that shows the process from analyzing a transaction through creating a post-closing trial balance. Follow and understand where you are in each step of the process. Beginning students often get lost as to what they should be doing next. Refer to this illustration often. Remember, you must build a framework in your mind as to what you must be doing with the accounting information. TexTbook exercises and Problems for assignmenT 2 1. Short Exercises S2-2 through S1-14 (pages 78-82) 2. Exercises (Group B): E2-23B through E2-30B (pages 86-89) 3. Problems (Group B): P2-37B through P2-42B (pages 93-96) Check your answers in the financial accounting solutions supplement that is found on your student portal. 18 Financial Accounting Self-Check 2 1. Which of the following is/are an example of a liability account? a. Service revenue b. Rent expense c. Accounts payable d. All of the above 2. Oliver Company collected $2,250 on account. The effect of this transaction on the accounting equation is a. b. c. d. to increase assets and decrease liabilities. nothing. It has no effect on total assets. to increase assets and increase stockholders' equity. to decrease assets and decrease liabilities. 3. Which statement is true? a. b. c. d. Decreases in assets and increases in revenues are recorded with a debit. Increases in liabilities and decreases in stockholders' equity are recorded with a credit. Increases in both assets and dividends are recorded with a credit. Decreases in liabilities and increases in expenses are recorded with a debit. 4. Note Payable has a normal beginning balance of $30,000. During the period, new borrowings total $63,000, and the ending balance in Note Payable is $41,000. Determine the payments on loans during the period. a. $8,000 b. $52,000 c. $134,000 d. $22,000 5. Which statement is not correct? a. b. c. d. The account is a basic summary device used in accounting. A business transaction is recorded first in the journal and then posted to the ledger. The ledger is a chronological listing of all transactions. The debit entry is recorded first in a journal entry; the credit entry follows. 6. Which account has a normal credit balance? a. Rent Expense b. Common Stock c. Service Revenue d. Both b and c (Continued) Lesson 1 19 Self-Check 2 7. The journal entry to record the payment to a supplier of $890 on account is a. b. c. d. Accounts Payable, $890; Cash $890. Cash, $890; Accounts Receivable, $890. Cash, $890; Accounts Payable, $890. Supplies, $890; Cash, $890. 8. The ending Cash account balance is $57,600. During the period, debit postings equal $124,300. If credit postings during the period total $135,100, then the beginning Cash amount must have been a. $68,400. b. $46,800. c. $181,900. d. $10,800. 9. Use the following selected information for the Callie Company to calculate the correct credit column total for a trial balance: Accounts receivable Accounts payable Building Cash Common stock Salary expense Salary payable Service revenue Dividends $7,200 6,900 179,400 15,800 64,000 56,100 3,600 190,500 6,500 a. $201,000 b. $265,000 c. $321,400 d. $271,500 10. The incorrect trial-balance debit column total is $58,700. During the period, a $1,000 debit to Accounts Receivable was posted as $100. What is the trial-balance debit column total after this error is corrected? a. $57,600 b. $59,800 c. $57,800 d. $59,600 Check your answers with those on page 117. 20 Financial Accounting ASSIGNMENT 3: ADJUSTING AND CLOSING ENTRIES Read Assignment 3 in this study guide. Then read Chapter 3 in your textbook, Financial Accounting. How Does a Company Accurately Report Its Income? GAAP requires that revenue is recognized when it's earned, regardless of when the cash is received. This is known as the revenue recognition principle, and the journal entries used to record these transactions are known as accrual entries. A corollary to this is the matching principle, which states that expenses should be matched with the revenues they earned. However, if cash is received prior to the recognition of revenue or cash is paid prior to the recognition of an expense, this is known as a deferral. Accounting for revenue when it's earned but not paid for follows the use of accrual accounting, which GAAP requires. However, some businesses use cash-basis accounting and record the transactions when the cash is received, regardless of when the sale occurred. What Is the Role of Adjusting Entries, and When Are They Prepared? Adjusting entries are journal entries used to ensure that the revenue recognition and matching principles are followed. There are two types of adjusting entries made for accruals: 1. Unrecorded revenues 2. Unrecorded expenses There are two types of adjusting entries made for deferrals: 1. Unearned revenues 2. Prepaid expenses Lesson 1 21 Adjusting entries are usually prepared at the end of an accounting period. A business starts the accounting period with a beginning trial balance that shows the balances in the general ledger accounts at the start of the period. Transactions occur throughout the accounting period and are journalized and posted to the general ledger accounts. At the end of the accounting period, an unadjusted trial balance is created. The accounts are examined, and adjustments are made for any errors that may have occurred, for accruals, and for deferrals. These adjustments are journalized and posted to the respective general ledger accounts. From these new balances, an adjusted trial balance is generated. How Are Financial Statements Prepared from an Adjusted Trial Balance? Review Exhibit 3-3 in your textbook. It presents an example of an adjusted trial balance. This is a list of the general ledger accounts and their balances. Each account falls into one of the five categories of accountsassets, liabilities, equity, revenues, or expenses. The accounts and balances are placed on the appropriate financial statement. The balance sheet (Exhibit 3-6 in the textbook) reflects the assets, liabilities, and equity accounts. The income statement (Exhibit 3-4) reflects the revenues and expenses. The statement of retained earnings (Exhibit 3-5) shows the changes in retained earnings based on the net income/loss from the income statement. How Does a Company Prepare for a New Accounting Period? The general ledger accounts on the balance sheet are referred to as permanent accounts. This means that the accounts reflect the balance in the accounts from the beginning of the business up until the balance sheet is dated. 22 Financial Accounting The accounts on the income statement are known as temporary accounts. They reflect the balances in the accounts for a period of time (the accounting period ). After the adjusted trial balance has been created, if you add together all of the asset accounts, the total of the liability accounts, and the total of the equity accounts, you'll find that the accounting equation is out of balance. It's out of balance by the difference between the revenues and expenses (net income/loss) from the income statement and any effect from dividends. To bring the accounting equation back into balance and to start the new accounting period with zero balances in the temporary accounts, closing entries must be made. Pages 118120 in your textbook illustrate the process for making closing entries for the temporary accounts. Once the closing entries are journalized and posted to the general ledger accounts, the only accounts with balances in them are the assets, liabilities, and equity accounts. A post-closing trial balance is then generated, and the balances from these accounts are the beginning balances for the next accounting period. TexTbook exercises and Problems for assignmenT 3 1. Short Exercises S3-2 through S3-13 (pages 127-130) 2. Exercises (Group B): E3-28B through E3-41B (pages 135-141) 3. Problems (Group B): P3-48B through P3-P53B (pages 146-151) Check your answers in the financial accounting solutions supplement that is found on your student portal. Lesson 1 23 Before moving on to Lesson 2, go to the student portal to access the instructions for the graded project for Lesson 1. When you've completed the project and uploaded your work to be graded, return to this study guide to begin Lesson 2. Self-Check 3 1. During 2014, Bustamante Co. incurred a salary expense of $240,000. Beginning and ending Salary Payable was $4,000 and $8,000, respectively. In 2013, Bustamante paid salaries of a. $248,000. b. $240,000. c. $236,000. d. $244,000. 2. On October 1, 2014, the Jernigan Company paid $4,800 for a one-year insurance policy. On December 31, 2014, the adjusting entry would include a a. b. c. d. debit to Insurance Expense, $3,600. credit to Insurance Payable, $1,200. credit to Prepaid Insurance, $1,200. debit to Insurance Expense, $4,000. 3. Failure to record an adjusting entry for an accrued expense will result in the following: a. b. c. d. Liabilities understated overstated understated no effect Net Income overstated understated no effect understated 4. An adjusting entry could contain all of the following except a a. debit to Unearned Revenue. b. credit to Cash. c. debit to Interest Receivable. d. credit to Salary Payable. 5. The 2014 income statement showed Rent Expense of $6,100. The related balance sheet account, Prepaid Rent, had a beginning balance of $1,400 and an ending balance of $1,200. The amount of cash paid for rent during 2014 is a. $6,100. b. $1,200. c. $6,300. d. $5,900. (Continued) 24 Financial Accounting Self-Check 3 Table 3-1 Lemon Car Rental, Inc. Unadjusted Trial Balance December 31, 2014 Cash $7,450 Prepaid insurance Equipment 1,600 19,000 Accumulated Depreciation $4,200 Accounts Payable 5,000 Common Stock 10,000 Retained Earnings 5,600 Dividends 6,000 Rental Revenue 23,400 Insurance Expense 7,000 Salary Expense 4,000 Repair Expense 3,150 _____ $48,200 $48,200 Adjusting entries include: (1) Prepaid insurance used $1,600 (2) Depreciation 1,300 $2,900 6. Refer to Table 3-1 above. The credit column of the adjusted trial balance should total a. $45,300. b. $49,300. c. $49,500. d. $51,100. 7. Refer to Table 3-1. After posting adjusting entries, net income a. b. c. d. will be $6,350. will be $9,250. will be $7,950. can't be determined from the given information. (Continued) Lesson 1 25 Self-Check 3 8. Which of the following is a permanent account? a. Dividends b. Prepaid Insurance c. Insurance Expense d. Service Revenue 9. The entry required to close dividends at the end of the period should include a a. debit to Retained Earnings. b. credit to Retained Earnings. c. credit to Cash. d. debit to Dividends. 10. Which groups of accounts correctly appear on the post-closing trial balance? a. b. c. d. Rent Expense, Prepaid Rent, Retained Earnings Dividends, Equipment, Accumulated Depreciation Service Revenue, Interest Receivable, Note Payable Retained Earnings, Cash, Unearned Revenue Check your answers with those on page 118. 26 Financial Accounting The goal of this graded project is to create the following financial statements for J & L Accounting, Inc.: Balance sheet Income statement Statement of retained earnings Post-closing trial balance The financial statements must be created in one Microsoft Word document (.doc or .docx file). Alternatively, an Excel workbook may be used (.xls or .xlsx file). The Word or Excel file will be uploaded for grading. INSTRUCTIONS Read the following instructions thoroughly before beginning your work. This will help you to become familiar with what is involved in the project. Some students start on the project right away, thinking they'll save time. Those students tend to get stuck and spend more time working through the project than is necessary. The material you need to know in order to complete the project has been covered in the textbook and the assigned exercises and problems. If you understand the chapters and completed the assigned homework problems, you should have no problem with the project. The project is to be done by hand with a pencil and paper. Use the blank forms provided. At the end of the project, you'll be given instructions for creating and uploading the financial statements in a Word or Excel file for grading. Graded Project PROJECT GOAL 27 Note: The formatting of financial statements is important. They follow Generally Accepted Accounting Principles (GAAP), which creates a uniformity of financial statements for analyzing. This allows for an easier comparison, as all businesses follow GAAP. Therefore, the financial statements should be created exactly the same way shown or referenced in the textbook. Failure to do so will result in a loss of points. The project references \"debits equaling credits.\" This is a fundamental principle of accounting that mustn't be violated. Doing so is not acceptable under any circumstance. Debits not equaling credits allows for \"cooking of the books,\" which is presenting false information. It also allows for embezzlement, which is theft by management or employees. If debits don't equal credits, the cause may be a lack of understanding of accounting principles, such as those presented in the textbook and assigned homework problems, or a lack of focus and concentration when making journal entries, posting to ledger accounts, or completing math. Rememberinstructors are available to help you with material you may be struggling with. Mistakes of the lack-of-focus variety are best corrected by going back over the work until the error is found. The accounting equation must balance on the balance sheet. This is another fundamental principle of accounting that can't be violated and if so is completely unacceptable. When the equation doesn't balance and the numbers are \"fudged,\" this is easily detectable by someone who knows accounting. If your debits equal your credits and you understand which general ledger accounts belong on which financial statements, then the accounting equation should balance. It's really all about understanding the concepts and applying that understanding. The following financial statements are provided from the prior accounting period for J & L Accounting, Inc.: a) Post-closing trial balance b) Balance sheet c) Income statement d) Statement of retained earnings 28 Financial Accounting J & L Accounting, Inc. Post-Closing Trial Balance December 31, 2014 BALANCE ACCOUNT TITLE Cash, Business Checking DEBIT CREDIT 20,500.00 Accounts Receivable Prepaid Rent Vehicles 48,000.00 Accumulated Depreciation, Vehicles Equipment 12,000.00 3,600.00 Accumulated Depreciation, Equipment 600.00 Accounts Payable Common Stock 38,000.00 Retained Earnings 21,500.00 Dividends Service Revenue Advertising Expense Rent Expense Office Supplies Expense Telephone Expense Utilities Expense Depreciation Expense TOTALS Lesson 2 72,100.00 72,100.00 29 J & L Accounting, Inc. Balance Sheet As of December 31, 2014 ASSETS Cash, Business Checking 20,500.00 Accounts Receivable 0.00 Prepaid Rent 0.00 Vehicles 48,000.00 Less: Accumulated Depreciation, Vehicles 12,000.00 Equipment Less: Accumulated Depreciation, Equipment TOTAL ASSETS 36,000.00 3,600.00 600.00 3,000.00 59,500.00 LIABILITIES Accounts Payable 0.00 TOTAL LIABILITIES 0.00 STOCKHOLDERS' EQUITY Common Stock 38,000.00 Retained Earnings 21,500.00 TOTAL STOCKHOLDERS' EQUITY TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY 30 59,500.00 59,500.00 Financial Accounting J & L Accounting, Inc. Income Statement For the Month Ending December 31, 2014 REVENUES Service Revenue 10,275.00 EXPENSES Advertising Expense 2,300.00 Rent Expense 1,000.00 Office Supplies Expense 300.00 Telephone Expense 750.00 Utilities Expense 3,200.00 Depreciation Expense 1,100.00 TOTAL EXPENSES NET INCOME Lesson 2 8,650.00 1,625.00 31 J & L Accounting, Inc. Statement of Retained Earnings For the Month Ending December 31, 2014 Retained Earnings, December 1, 2014 Add: Net Income Subtotal Less: Dividends Retained Earnings, December 31, 2014 32 19,875.00 1,625.00 21,500.00 0.00 21,500.00 Financial Accounting 1)Using the following blank forms (make as many copies as necessary), set up the general ledger accounts for the general ledger and insert the beginning balances for the accounts from the post-closing trial balance. The balances from the post-closing trial balance become the beginning balances of the accounts for the next account period. DATE Lesson 2 ITEM POST REF. BALANCE DEBIT CREDIT DEBIT CREDIT 33 DATE 34 ITEM POST REF. BALANCE DEBIT CREDIT DEBIT CREDIT Financial Accounting 2) Journalize the following transactions in the general journal using the following blank form (make as many copies as needed). When making journal entries, each individual journal entry's debits should equal its credits. (The amount for a journal entry can be incorrect or the entry can be incorrect. However, the debits still have to equal the credits even though the entry is incorrect. If the journal entry is incorrect, it can be corrected later when making adjusting/correcting journal entries. For example, if the amount is supposed to be $1,100, and for some reason the amount of $1,010 is recorded, this is acceptablealthough incorrect, it can be corrected later.) The total of the debits must always equal the total of the credits for each journal entryalways. This is a fundamental GAAP that cannot be violated. a. On January 1, 2015, a payment in cash for $12,000 is made for prepaying rent for the entire year 2015. b. On January 4, 2015, accounting services are performed and payment is received in cash for the amount of $1,900. c. On January 9, 2015, a payment in cash for advertising is made in the amount of $850. d. On January 10, 2015, office supplies are purchased in the amount of $75 with cash. e. On January 14, 2015, accounting services are performed and payment is received in cash for the amount of $2,725. f. On January 20, 2015, the telephone bill for the amount of $660 is received and paid with cash. g. On January 20, 2015, the utilities bill for $2,925 is received. The bill won't be paid until it is due on February 15, 2015. h. On January 27, 2015, accounting services are performed on account in the amount of $3,750. i. On January 28, 2015, a payment in cash for $1,500 is made for a bill from an advertising agency. Lesson 2 35 DATE 36 ACCOUNTS POST REF. Dr. Cr. Financial Accounting 3) Post the general journal entries from the journal to the corresponding general ledger accounts, paying particular attention to the posting being made (debit or credit). Use the Post Ref. column to ensure that each line item of the journal entries is posted correctly to each general ledger account. Posting from the journal to the general ledger is nothing more than rearranging the information. If the debits equal the credits for a particular journal entry and the information is posted correctly, the total of the debits should equal the total of the credits in the general ledger. 4) Calculate the balances in the general ledger accounts. (Use an Excel spreadsheet or a printing calculator, and run the numbers several times for accuracy. Often, debits won't equal credits on the trial balance because a hand-held calculator is used and the math is done only once. Using a hand-held calculator can introduce errors. This is why an Excel spreadsheet is recommended. However, if a hand-held calculator is all that's available to you, be sure to do the math enough times that you know the calculations are accurate.) To calculate the balances in the ledger accounts, you'll need to do the following: 1) Add the debits. 2) Add the credits. 3) Subtract the larger amount from the other, or, alternatively, keep the running balance of the amount in the account and whether it's a debit or credit on the ledger. 5) Create an unadjusted trial balance from the balances in the general ledger accounts. (Once again, be very careful when doing the math. When calculating the totals of the debit and credit columns, they should be equal. If not, do not continue until the debits equal the credits. An error has been made and must be found and corrected from the previous steps.) See page 129 of the text for an example of an unadjusted trial balance. Use the following blank form. Lesson 2 37 ACCOUNT 38 DEBIT CREDIT Financial Accounting 6) Journalize the following adjusting journal entries in the general journal, being sure that the debits equal the credits: a. Calculate and make the adjustment for the amount of pre-paid rent that has been used. b. Make an adjusting journal entry in the amount of $1,000 for depreciation of the vehicles. c. Make an adjusting journal entry in the amount of $100 for depreciation of the equipment. 7) Post the adjusting journal entries to the respective general ledger accounts, again being sure that the postings are to the correct debit or credit side and that the Post Ref. column is used. 8) Calculate the new balances in the general ledger accounts. Create an adjusted trial balance from the balances in the general ledger accounts using the same blank form provided in step 5 when you created the unadjusted trial balance. See Exhibit 3-3 on page 114 in your textbook for an example of an adjusted trial balance. Make sure the math is correct and that the debit column is equal to the credit column. If not, don't continue until the error has been found. 9) Create the income statement for J & L Accounting, Inc. using the information from the adjusted trial balance. Use the following blank form to create the income statement. Its format should be the same as the format used for the statement provided at the beginning of the project for the prior accounting period. Lesson 2 39 40 Financial Accounting 10) Create the closing journal entries in the general journal to close the revenue, expense, and dividend accounts to the retained earnings account, paying attention to debits equaling credits. 11) Post the closing journal entries to the respective general ledger accounts. 12) Calculate the balances in the general ledger accounts. 13) Create a post-closing trial balance from the balances in the general ledger accounts using the same blank form that was provided in step 5 when you created the unadjusted trial balance. The post-closing trial balance should be in the same format as the post-closing trial balance provided at the beginning of the project for the prior accounting period. Make sure the math is correct and that the debit column is equal to the credit column. If not, don't continue until the error has been found. 14) Create the balance sheet for J & L Accounting, Inc. using the information from the post-closing trial balance. If the debits equal the credits from the previous work and the closing entries were made properly, then the accounting equation should balance on the balance sheet. If the assets don't equal the liabilities plus stockholders' equity, an error has been made that needs to be corrected. The balance of the accounting equation is another fundamental GAAP principle that can't be violated. Use the following form to create the balance sheet. Its format should be the same as the format of the statement provided at the beginning of the project for the prior accounting period. Lesson 2 41 42 Financial Accounting 15) Create the statement of retained earnings for J & L Accounting, Inc. using the ending balance from the statement of retained earnings from the prior period and the net income from the income statement for the January accounting period. (No dividends were paid out during the month of January.) Follow the same format from the statement of retained earnings at the beginning of the graded project for the prior accounting period using the blank form on the following page. Lesson 2 43 44 Financial Accounting Having created the balance sheet, the income statement, the statement of retained earnings, and the post-closing trial balance on the blank forms that were provided, the financial statements must now to be typed up in a Microsoft Word document and saved as a .doc or .docx file. Microsoft Excel can also be used (saving the file with the extension .xls or .xlsx). Each financial statement should be on its own page (or worksheet). The name of the file should include your student ID number and the graded project exam number, such as \"21512345_061579.docx\" as an example. Insert tables in the Word document if you feel you need them to format the financial statements. Alternatively, space and tab in Word to get the formatting of the statements set up correctly. Formatting is important. Also, keep in mind that points will be deducted for incorrect capitalization, spelling, underlining and double underlining, as well as for improper headings, dates, indentations, and columns. Create all of the financial statements in one file. Submission of more than one file will result in the project being returned as ungraded. Submission of only one file is important for tracking and grading purposes. Images or scanned images of the financial statements pasted into a Word document will also result in the project being returned as ungraded. This prevents the ability to \"mark up\" the file, and financial statements that are handwritten are generally considered unprofessional. Only the financial statements are required. Submitted journals, ledgers, or unadjusted/adjusted trial balances will not be evaluated. PLAGIARISM Plagiarism is taking any part of a published piece of work and using it as your own. Plagiarism is unacceptable at Penn Foster College. This is a reminder of the expectation to which all Penn Foster College students are held. Per your Student Handbook, students are expected to conduct themselves with the highest academic and ethical standards. Failure to do so results in disciplinary action. Lesson 2 45 GRADING CRITERIA The grading criteria for the project are as follows: The formatting of the four financial statements is worth 10 points each for a total of 40 points (4 10 40). An out-of-balance accounting equation on the balance sheet will result in a loss of 10 points for the formatting of the balance sheet even though other formatting issues may be correct. Debits not equaling credits on the post-closing trial balance will result in a loss of 10 points for formatting of the post-closing trial balance even though other formatting issues may be correct. Also, not having made closing journal entries as reflected on the post-closing trial balance will result in a loss of 10 points for formatting of the post-closing trial balance even though other formatting issues may be correct. Calculations on the financial statements are based on 18 balances from the general ledger accounts. One is for the beginning retained earnings balance on the statement of retained earnings, and one is for the correct ending retained earnings balance on the statement of retained earnings. This amounts to a total of 20 figures (18 1 1 20). Each is worth 3 points for a total of 60 points (20 3 60). Thus, the formatting of the financial statements (worth 40 points total) plus the figures used for the financial statements (worth 60 points total) provide 100 points for the project. Formatting Figures Total Points 40 points 60 points 100 points If a project receives a failing grade (less than 70 points), the project will have to be reworked and resubmitted for final grading. The highest grade that can be obtained on a retake is a 70, which is passing. 46 Financial Accounting SUBMITTING YOUR PROJECT Once you've completed the project and your one file is ready to be submitted, follow the instructions below. Be sure to check your work, and be sure to upload the correct file. Once the file is uploaded, it will be graded \"as is\" and can't be resubmitted. You can submit your graded project online. Save a final version of your project. Be sure to include your name, student number, and exam number in the header or the footer of your saved document. The graded project number is 061579. 1. Go to www.pennfoster.edu and log in. 2. Go to Student Portal. 3. Click on Take Exam next to the lesson you're working on. 4. Enter your email address in the box provided. (Note: This information is required for online submission.) 5. Attach your file as follows: a. Click on the Browse box. b. Locate the file you wish to attach. c. Double-click on the file. d. Click on Upload File. 6. Click on Submit Files. Be sure to keep a backup copy of your completed assignment. Good luck with the project! Lesson 2 47 NOTES 48 Financial Accounting Lesson 2 Accounting for Merchandising Assignment 4 describes the supply chain of a merchandising business and the use of periodic and perpetual inventory systems. Accounting for shipping, purchase discounts, and purchase returns and allowances are covered. Preparations of single-step and multi-step financial statements are illustrated. Assignment 5 examines the accounting for inventory using the specific-identification, FIFO, LIFO, and average cost methods. Accounting principles and concepts that affect inventory, such as the consistency principle, accounting conservatism, the materiality concept, the full-disclosure principle, and the lower-of-cost-or-market rule, will be explained. Assignment 6 discusses the importance of ethics in business and accounting and the use of internal controls to prevent fraud and embezzlement. The major requirements of the Sarbanes-Oxley Act (SOX) are presented, and distinctions between internal and external audits are made. When you complete this lesson, you'll be able to n n n Understand periodic and perpetual inventory systems, accounting for the purchases and sales of inventory and how to account for shipping, freight, and other selling expenses in preparation of a multi-step income statement and classified balance sheet Account for inventory, the use of different inventory costing methods, and their effects on financial statements Understand the role of ethics in accounting, the use of internal controls, and the major provisions of the International Financial Reporting Standards (IFRS) 49 ASSIGNMENT 4: ACCOUNTING FOR A MERCHANDISING BUSINESS Read Assignment 4 in this study guide. Then read Chapter 4 in your textbook, Financial Accounting. What Are the Relationships among Manufacturers, Wholesalers, Retailers, and Customers? Exhibit 4-1 of the textbook illustrates the relationships among wholesalers, retailers, and customers. While customers can at times purchase products directly from the manufacturer, this generally happens only when the customers are located close to the manufacturer. Otherwise, a distribution channel is created so that the manufacturer can sell its products beyond the local vicinity. How Do Periodic and Perpetual Inventory Systems Differ? Keeping track of the value of inventory on an ongoing basis is known as using a perpetual inventory system. At any given time, you know the value of the inventory. This method is used for easy-to-track inventories, such as automobiles and large-ticket items. Periodic inventory systems value the inventory periodically, most often at the end of an accounting period. A physical count of the inventory is taken, and the value is determined. This method is best used when there are numerous products to be accounted for, such as in department stores or grocery stores. The inventory on the books is adjusted to reflect this valuation. Page 161 in your textbook shows the basic formula for determining the cost of goods sold. 50 Financial Accounting How Do You Account for the Purchase of Inventory? When inventory is purchasedwhether using cash, credit, or on accountthe purchase is recorded using an inventory account. However, two additional accounts can be used: purchase returns and allowances and purchase discounts. The purpose of these accounts is to record returns, allowances, and discounts separate from the actual sales amount. For example, you buy 100 sweaters for $100 each, for a total of $10,000. However, $1,500 of the sweaters are the incorrect color and must be returned. You would make the entry to your books against the Purchase Returns and Allowance account. Your books would show a purchase for the $10,000 and a return for $1,500, for a net effect of $8,500. Why would you record your entries like this? Control. If you use only the inventory account, the balance in the account after the return would show $8,500. For this one transaction, you're familiar with the return. But what if you're a large retailer with multiple locations? It may be very difficult to know what's being returned. By having different accounts, you can see that the returns may be unusually high and that there may be a problem that must be addressed. How Do You Account for the Sale of Inventory? Accounting for the sale of inventory is similar to purchasing inventory. It's just the opposite side of the same coin. If you understand one, you can easily understand the other. When you make a sale, you're making an entry against a sales revenue account. If what you sold is returned or an allowance is made, you would make an entry against the Sales Returns and Allowances account. If there's a discount, you make an entry to Sales Discounts. Once again, you're recording these entries this way for control. For example, you own a car dealership, and your salespeople qualify for a bonus if they sell 10 cars in a Lesson 3 51 month. John has sold nine cars, and it's the last day of the month. He needs one more car to qualify for the bonus. He telephones a friend and convinces her to buy a car so that he can get the bonus. John reassures his friend that she can return the car the next month, and for her troubles, they'll split the bonus. If you used only the Sales Revenue account, at the end of the following month you wouldn't know that the car was returned and that John shouldn't have received the bonus. However, a flag would go up when recording the return in the Sales Return and Allowance account, and the reason for the return would lead you to know that John didn't really qualify for the bonus. How Do You Account for Freight Charges and Other Selling Expenses? Exhibit 4-4 of the textbook illustrates the concepts of FOB shipping point and FOB destination. These concepts show who pays for shipping and when title of the merchandise passes from seller to buyer. Often, product is shipped using a shipping company, such as a trucking company. Who pays for the freight? When does the title pass? The answers to these questions are negotiated between the buyer and seller or are assumed as a standard practice in the industry. The seller sells ice cream machines. The terms of the sale is using FOB destination. The ice cream machine is loaded onto a truck, and the truck drives