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Control Features and Bank Reconciliation Study Guide

Learn how to calculate and interpret the Gross Profit Rate and Profit Margin. Understand the formulas, their significance in measuring business performance, and how they are derived from a multiple-step income statement. This guide covers analysis, trends, and practical examples to help you assess a company's financial health.

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Inventory Reporting, Valuation, and Analysis

Reporting and Analyzing Inventory

Discuss how to classify and determine inventory through classification based on the degree of completeness and determination of inventory amounts.

  • Merchandise Inventory
  • Raw Materials Inventory
  • Work in Process Inventory
  • Finished Goods Inventory
  • Current Assets
  • Physical Count
  • Perpetual System
  • Periodic System
  • Cost of Goods Sold

Determining Ownership of Goods

  • Ownership of goods in transit
  • Legal title
  • FOB shipping point
  • FOB destination
  • Consigned goods
  • Inventory ownership

Financial Effects of Inventory Cost Flow

Inventory is accounted for at cost using specific identification, FIFO, LIFO, or average-cost methods to determine cost of goods sold and ending inventory.

  • Specific identification
  • First-In First-Out (FIFO)
  • Average-cost
  • Weighted-average unit cost
  • Cost of goods sold
  • Ending inventory
  • Periodic inventory system
  • Income statement effects
  • Balance sheet effects

Inventory Cost Flow Methods and Valuation

This topic covers inventory cost flow methods including FIFO, LIFO, and average-cost, along with the lower-of-cost-or-net-realizable-value method and financial statement disclosure requirements.

  • Average-cost method
  • Consistency concept
  • Lower-of-cost-or-net-realizable-value (LCNRV)
  • Lower-of-cost-or-market
  • Inventory disclosure
  • Cost of goods sold
  • Net realizable value
  • Conservatism

Accounting for Inventory and Turnover Ratios

This content covers accounting for inventory under lower-of-cost-or-net realizable value, inventory turnover, days in inventory, and the LIFO reserve.

  • Lower-of-cost-or-net realizable value
  • Inventory turnover
  • Average inventory
  • Days in inventory
  • LIFO reserve
  • Cost flow methods

Cash Controls, Reporting, and Income Statements

Fraud, Internal Control, and Cash

A study of fraud factors, internal control principles, and specific controls for cash receipts and disbursements.

  • fraud triangle
  • opportunity
  • financial pressure
  • rationalization
  • internal control
  • establishment of responsibility
  • segregation of duties
  • documentation procedures
  • physical controls
  • independent internal verification
  • human resource controls
  • cash receipts controls
  • cash disbursement controls

Control Features and Bank Reconciliation

Identify the control features of a bank account and the process of comparing the bank’s balance with the company’s balance to determine the true cash balance.

  • Control features of a bank account
  • Bank reconciliation
  • Bank statement contents
  • NSF check
  • Deposits in transit
  • Outstanding checks
  • Bank errors
  • Other deposits
  • Other payments
  • Book errors
  • Adjusted cash balance
  • Independent internal verification

Reporting Cash and Restricted Cash

Explain the reporting of cash, including cash equivalents, the statement of cash flows, and the classification of restricted cash as current or noncurrent assets.

  • Reporting of cash
  • Cash equivalents
  • Statement of cash flows
  • Restricted cash
  • Current assets
  • Noncurrent assets
  • Balance sheet presentation

Preparing Multiple-Step Income Statements

This content explains how to prepare a multiple-step income statement by highlighting components of net income including gross profit, operating expenses, nonoperating activities, and income tax expense.

  • Net sales
  • Cost of goods sold
  • Gross profit
  • Operating expenses
  • Income from operations
  • Other revenues and gains
  • Other expenses and losses
  • Income before income taxes
  • Income tax expense
  • Net income
  • Contra revenue accounts
  • Sales returns and allowances
  • Sales discounts
  • Nonoperating activities

Merchandising Operations and Perpetual Inventory Systems

Merchandising Operations and Inventory Systems

This content describes merchandising operations, inventory systems, and the income measurement process for a merchandising company.

  • Merchandising operations
  • Sales revenue
  • Cost of goods sold
  • Operating expenses
  • Periodic inventory system
  • Perpetual inventory system
  • Gross profit
  • Physical inventory count

Recording Purchases Under Perpetual Systems

Recording purchases of merchandise for resale in the Inventory account including freight costs and purchase returns and allowances.

  • Perpetual system
  • Inventory account
  • Freight costs
  • FOB shipping point
  • FOB destination
  • Freight-Out
  • Delivery Expense
  • Purchase returns
  • Purchase allowances

Recording Purchase Returns and Discounts

This content covers recording purchase returns and allowances, purchase discounts, and the impact of credit terms on inventory costs in a perpetual inventory system.

  • perpetual inventory system
  • purchase returns and allowances
  • purchase discounts
  • credit terms
  • cash discount
  • inventory cost
  • accounts payable
  • accounts receivable
  • T-accounts

Recording Sales Under Perpetual Inventory Systems

Recording sales revenue and cost of goods sold under a perpetual inventory system requires complying with the revenue recognition principle when performance obligations are satisfied.

  • Perpetual inventory system
  • Revenue recognition principle
  • Performance obligation
  • Sales revenue
  • Cost of goods sold
  • Cash sales
  • Sales on account
  • Sales invoice
  • Accounts receivable

Reporting Sales Revenue and Related Transactions

This topic covers reporting sales revenue, accounting for sales returns and allowances, and recording sales discounts to determine net sales.

  • Sales revenue
  • Sales returns and allowances
  • Contra-revenue account
  • Sales discounts
  • Net sales
  • Inventory cost of goods sold
  • Fair value of goods returned

Computing Gross Profit Rate and Profit Margin

Compute and analyze gross profit rate and profit margin to measure how revenue covers expenses.

  • Gross Profit Rate
  • Profit Margin
  • Net Sales
  • Gross Profit
  • Net Income
  • Cost of Goods Sold
  • Operating Expenses
  • Multiple-step Income Statement

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