Review of Chapters 4 - 7
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
Step 1 - Start with Ending
Balance on Bank Statement
ADD
Deposits in transit

Certain bank errors
SUBTRACT
 Outstanding checks
 Certain bank errors

8
Book Side (GL) –
Journal Entries
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

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.
Accounting for Uncollectible Accounts
Step 1 - Select method for recording Uncollectible
Receivables
1.) Direct Write
Off Method
OR
Step 2 – how to
calculate amount
2.) Allowance
Method
Percentage of
Sales
12
Percentage of
Accounts Receivable
(aging)
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
Date
Accounts and explanation
Bad Debt Expense
Accounts Receivable
14
Write off customer account
Debit
Credit
Allowance Estimate Calculation #2 - Aging-ofReceivables



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.
Age of Account
Customer
Customer A
1-30
days
31-60
days
$100
Over 90
days
Total
Balance
$500
Customer B
All others
61-90
days
$600
400
400
5,000
1,500
600
400
7,500
$5,100
$1,900
$1,100
$400
$8,500
Est. percent uncollectible
1%
3%
8%
20%
Allowance balance should be:
$51
$57
$88
$80
Totals
Allowance for Uncollectible Accounts
$31
Balance before adjustment
$245 Adjustment needed
$276
Ending balance equals aging schedule
16
$276
Aging-of-Receivables
JOURNAL
Date
Accounts and explanation
Debit
Bad Debt Expense
245
Allowance for uncollectible accounts
245
Recorded uncollectible accounts expense
Copyright ©2010 Pearson
Education Inc. Publishing as
Credit
17
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
JOURNAL
Date
Accounts and explanation
Debit
Allowance for Uncollectible Accounts
Credit
900
Accounts Receivable
900
Write off customer account
Allowance for Uncollectible
Accounts
$900
$3,000 Bal.
Accounts Receivable
Bal. $50,000
$49,100
Copyright ©2010 Pearson
Education Inc. Publishing as
$900
No impact on
Income
Statement
19
$2,100
Notes Receivable


More formal than accounts receivable
Written promise to pay a sum at the
maturity date


20
Plus interest at stated rate
Also called promissory notes
Copyright ©2010 Pearson Education Inc.
Publishing as Prentice Hall.
Interest



21
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.
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.
Number One Concern!!
Accounting for the COST* of
Inventory
1.) Purchased
2.) Sold
* NOT concerned with flow of actual inventory items –
only their costs
Copyright ©2010 Pearson Education Inc. Publishing as Prentice Hall.
24
Calculating the “Cost” of Net Purchases
+
+
=
Purchase price of inventory items
Freight-in, taxes, insurance, etc.
Purchase returns
Purchase allowances
Purchase discounts
Net inventory purchases (debit account balance)
25
a
b/c
Bal.
Bought 1,000 units of inventory for $50 per unit for cash
Sold 100 inventory for $100 per unit on account.
CASH
500,000
ACCOUNTS RECEIVABLE
Ending
REVENUE
COGS
26
INVENTORY
Four Inventory Costing Methods
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
27
Weighted Average Cost:
Average cost of inventory units
Average cost
per unit
Cost of goods available *
Number of units available*
*Goods available = Beginning inventory +
PurchasesNumber of
Cost of
goods sold
units sold
Ending
inventory
Number of units
on hand (Ending
Inventory)
28
Average cost
per unit
Average cost
per unit
First-in, First-out (FIFO)

29
Represents the flow of COSTS not ITEMS
 First goods purchased are sold first (costs
only)
 Focus on Balance Sheet (most recent costs)
Balance Sheet
Income Statement
Ending Inventory
COGS
Most recent (last) costs
Oldest (first) costs
Last-in, First-out (LIFO)

30
Represents the flow of COSTS not ITEMS
 Last goods purchased are sold first (cost
only)
 Focus on Income Statement (most recent
costs)
Balance Sheet
Income Statement
Ending Inventory
COGS
Oldest (first) costs
Most recent (last) costs
Cost of Goods Sold Formulas
Beginning inventory
+ Purchases
Cost of goods available for sale
- Ending inventory
Cost of goods sold
Beginning inventory
+ Purchases
Cost of goods available for sale
- Cost of goods sold
Ending inventory
FIFO
Beginning
Unit Count
Ending
Unit
Count
Cumulative
Transfer to
COGS
Ending
Unit
Count
Ending Inventory Cost
Calculation
COGS Cost Calculation
Income Statement
Revenue
Cost of Goods Sold (COGS)
Gross Profit (GP)
Balance Sheet
Ending Inventory
Weighted Avg.
9,720
(6,415)
3,305
1,030
LIFO
9,720
(6,561)
3,159
884
FIFO
9,720
(6,310)
3,410
1,135
Cost of Goods Sold Formula
Calculate ending inventory
Beginning Inventory
Purchases
Goods Available for Sale
Ending Inventory
Cost of Goods Sold
1,224
6,221
7,445
(1,030)
6,415
1,224
6,221
7,445
(884)
6,561
1,224
6,221
7,445
(1,135)
6,310
Calculate cost of goods sold
Beginning Inventory
Purchases
Goods Available for Sale
Cost of Goods Sold
Ending Inventory
1,224
6,221
7,445
(6,415)
1,030
1,224
6,221
7,445
(6,561)
884
1,224
6,221
7,445
(6,310)
1,135
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.
Tips for Taking Exam
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!
Tools that are critical to success




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 30th – 12:00 PM – 2:00 PM in BA1 #107 (Normal
auditorium)
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.
Assets
Debit
Credit
=
Liabilities
Debit
Permanent
Accounts
+
Stockholders' Equity
Credit
Debit
Common Stock
Debit
Debit
+ Retained Earnings
Credit
Revenues
Temporary
Accounts
Credit
Credit
Debit
-
Credit
Expenses
Debit
Net Income
Credit
-
Dividends
Debit
Credit
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 - $7,000
2 - 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 $50.
4 - 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 - $25,000
6 - 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 $870.
8 - 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

1.
2.
3.
4.
5.
6.
7.
8.
Answers
d
a
c
a
b
d
d
d