prelim two review - 6 When there is a decrease in accounts...

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6 When there is a decrease in accounts receivable for the year, cash collections from customers are more than sales revenue. Using the indirect method of preparing the cash flow from operating activities portion of the statement of cash flows, we add the decrease in accounts receivable to reported net income. When there is an increase in accounts receivable for the year, cash collections from customers are less than sales revenue. Using the indirect method of preparing the cash flow from operating activities portion of the statement of cash flows, we subtract an increase in accounts receivable from reported net income. When we prepare a bank reconciliation, there are two sections. In one section, we reconcile the bank statement balance to the correct balance. In the other section, we reconcile the book balance to the correct balance. The correct balances in both sections should be equal. On the bank’s side, we will start with the balance on the bank statement and adjust it for outstanding checks, deposits in transit, and errors made by the bank. +deposits in trans – outstanding checks and +- bank errors On the book’s side, we will start with the cash balance in the ledger and adjust it for collections made by the bank on our behalf, interest earned, bank service charges, customer checks that were drawn on accounts that were nonsufficient, and errors we made. +deposits by bank –service charges – nsf +-book errors (journal entries) Examples of collections made by the bank on our behalf are when the bank acts as a collection box for customer payments or when the bank collects a note receivable for us from a customer. 7 The choice of an inventory costing method is not based on physical flow of goods on and off the shelves. That is why they are called cost flow assumptions. When using weighted average (also known as the average cost method), we assign the average cost of the goods available for sale to cost of goods sold. The average cost is determined by dividing the cost of goods available for sale by the units on hand. The
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prelim two review - 6 When there is a decrease in accounts...

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