Accounting Test Chapters 5 and 6
Purchase Return
A situation in which sellers allow purchasers to return merchandise.
Wholesaler
A type of merchandiser that buys goods from manufacturers and then sells them to retailers
Conservatism
A business should report the least favorable figures in the financial statements even two or more possible options are presented
Consistency principle
A business should use the same accounting methods and procedures from period to period
Purchase Discount
A discount that businesses offer to purchasers as an incentive for early payment.
Inventory Costing Method
A method of approximating the flow of inventory costs in a business that is used to determine the amount of cost of goods sold and ending merchandise inventory
Invoice
A seller's request for payment from the purchaser.
The periodic inventory system requires and additional calculation called
Cost of Goods Sold because it is a subtotal and not an account
What is true about freight in within the discount period?
Discounts are not computed on the transportation costs because there is no discount on freight.
A high rate of turnover indicates
Ease in selling inventory; a low rate indicates difficulty.
In a perpetual inventory system, how are ending merchandise inventory and cost of goods sold determined?
Ending merchandise inventory= number of units on hand X unit cost Cost of good sold= number of units sold X unit cost
Gross Profit
Excess of net Sales Revenue over Cost of Goods Sold. From this we subtract all other expenses
Income Tax Expense
Expense incurred by a corporation related to federal and state income taxes
Administrative Expenses
Expenses incurred that are not related to marketing the company's goods and services
Selling Expenses
Expenses related to marketing and selling the company's goods and services
Operating Expenses
Expenses, other than Cost of Goods Sold, that are incurred in the entity's major ongoing operations.
The weighted average method generates amounts for cost of goods sold and gross profit that
Fall between FIFO and LIFO if costs are consistently increasing or decreasing
What is the journal entry for a sales return and allowance under the perpetual inventory system?
First entry is to Debit Sales Returns and Allowances and Credit Accounts Receivable Second entry is to Debit Merchandise Inventory and Credit Cost of Goods Sold
Days' Sales in Inventory
Measures the average number of days that inventory is held in a company. 365/ inventory turnover
Inventory Turnover
Measures the number of times a company sells its average level of merchandise inventory during a period. Cost of Goods Sold/ average merchandise inventory
Gross Profit Percentage
Measures the profitability of each sales dollar above the cost of goods sold. Gross profit/net sales revenue
How is gross profit calculated?
Net sales revenue minus cost of goods sold
Even in a perpetual inventory system, the business must count inventory at least
Once a year
Delivery expense is an
Operating expense and is debited to delivery expense account
Net Purchases
Purchases less purchase returns and allowances less purchase discounts.
How do you calculate net purchases?
Purchases minus purchase returns and and allowances minus purchase discounts
Under the periodic inventory system, the ending merchandise inventory is determined without
Regard to when the sales dates of inventory occurred
The materiality concept frees accountants from having to
Report every last item in strict accordance with GAAP
Lower of Cost or Market (LCM) Rule
Rule that merchandise inventory should be reported in the financial statements at whichever is lower- it's historical cost or it's market value
The sales discount account is a contra account to
Sales revenue; sales discounts is a contra revenue account and has a normal debit balancr
FOB shipping point
Situation in which the buyer takes ownership or title to the goods after the goods leave the seller's place of business (shipping point) and the buyer typically pays the freight.
How are Merchandise Inventory costs determined under a period Inventory system?
Specific identification, FIFO, LIFO and weighted average can be used in a periodic in inventory system. Specific identification and FIFO will produce the same amount for ending merchandise inventory and costs of goods sold under both the perpetual and periodic inventory systems. LIFO and weighted average generally result in different amounts for ending merchandise inventory and cost of goods sold under the perpetual and periodic inventory systems.
Cost of Goods Sold is not an account in the periodic inventory system but just a
Subtotal
When sales are made, the inventory sold should be properly recorded and removed from the inventory count, this will prevent
The company from running out of inventory often called a stock out
Cost of Goods Sold is always based on
The company's cost and not the retail price
Cost of Goods Sold (COGS)
The cost of the merchandise inventory that the business has sold to customers
Most credit terms express
The discount, the discount time period, and the final due date.
At the time of sale, two entries must be made in the perpetual inventory system which are:
The entry to record the sales revenue: Debit cash and Credit Sales Revenue The entry to record the expense and the reduction of merchandise inventory: Debit Cost of Goods Sold and Credit Merchandise Inventory
All major accounting methods and procedure are described in
The footnotes to the financial statements
How do we use gross profit percentage to evaluate business performance?
The gross profit percentage measures the profitability of each sales dollar above the cost of goods sold. Gross profit percentage = Gross Profit/ Net Sales Revenue
The LIFO method results in the highest and lowest blank when costs are rising
The highest cost of goods sold and the lowest gross profit. The opposite is true for when costs are declining
What are the new accounts for a merchandisers worksheet?
The main one is Merchandise Inventory which must be adjusted based on a physical count due to inventory shrinkage. Also the merchandiser's worksheet carries the other new merchandising accounts (sales revenue, sales returns and allowances, sales discounts, delivery expense and cost of goods sold).
How are merchandise inventory transactions recorded in a periodic inventory system?
The merchandise inventory account is not used when recording purchase transactions. Instead purchases, purchase discounts, purchase returns and allowances, and freight in are used. Sales transactions only involve recording the sales revenue. The merchandise inventory account is not used. An adjustment for inventory shrinkage is not needed. Closing entries are similar to the perpetual inventory system with the addition of closing the new accounts discussed. Ending merchandise inventory must be recorded, and beginning merchandise inventory must be removed.
Merchandise Inventory
The merchandise that a business sells to customers
Credit Terms
The payment terms of purchase or sale as stated on the invoice.
The net cost of merchandise inventory purchased includes?
The purchase cost of inventory, less purchase returns and allowances, less purchase discounts, plus freight in
Specific identification method is calculated
The same under perpetual and periodic inventory systems
Cost of Goods Availble for Sale
The total cost spent on inventory that was available to be sold during a period
Freight In
The transportation cost to ship goods into the purchaser's warehouse.; therefore it is freight on purchases goods
Freight Out
The transportation cost to ship goods out of the seller's warehouse; therefore it is freight on goods sold to customers
How are merchandiser's financial statements prepared?
There are two formats for the income statement: single step and multi step. The single step groups all revenues together and all expenses together without calculating other sub totals. The multi step lists several important subtotals including gross profit, operating income, and income before income tax expense. A merchandiser's statement of Retained Earnings look exactly like that of a service business. The balance sheet will also look the same, except merchandisers have an additional current asset, Merchandise Inventory.
When using periodic inventory system, there is no need to record and adjusting entry for inventory shrinkage because
There is no perpetual running balance of the merchandise inventory account. Instead the business determines the ending merchandise inventory amount by taking a physical count of inventory.
True or False: the amounts for cost of goods sold and ending merchandise inventory are always the same for FIFO perpetual and FIFO periodic.
True
True or False: using the FIFO method of inventory valuation will always produce the same results whether a company used a perpetual or periodic inventory costing methods
True
Inventory Shrinkage
The loss of inventory that occurs because of theft, damage and errors
The FIFO method results in the lowest and highest blank when costs are rising?
The lowest cost of goods sold and highest gross profit. The opposite is true when costs are declining
Merchandiser
A business that sells merchandise, or goods, to customers.
Disclosure principle
A business's financial statements must report enough information for outsiders to make knowledgeable decisions about the company
Gross profit along with net income is a measure of
A businesses success
Materiality concept
A company must perform strictly proper accounting only for items that are significant to the business's financial situation
Retailer
A type of merchandiser that buys merchandise either from a manufacturer or a wholesaler and then sells those goods to consumers
When making a payment with a discount period, what should you always do to the account, Accounts Payable?
Always debit accounts Payable for the full amount of the invoice other wise there will be a balance remaining in the payable account even though the invoice has been paid in full
What must be recorded to write down merchandise inventory if the market is lower than the historical cost?
Am adjusting entry
What are the adjusting and closing entries for a merchandiser?
An adjusting entry must be made for inventory shrinkage, the loss of inventory that occurs because of theft, damage and errors. The closing entries are similar to those already learned, except for including the new accounts (sales revenue, sales returns and allowances, sales discounts, delivery expense and cost of goods sold).
Purchase Allowance
An amount granted to the purchaser as an incentive to keep goods that are not "as ordered."
What are the effects of merchandise inventory errors on the financial statements?
An error in ending merchandise inventory creates a whole string of errors in other related accounts. One period's ending merchandise inventory becomes the next period'a beginning merchandise inventory
Specific Identification Method
An inventory costing method based on the specific cost of particular units of inventory
Weighted-Average Method
An inventory costing method based on the weighted average cost per unit of inventory that is calculated after each purchase. Weighted average cost per unit is determined by dividing the cost of goods available for sale by the number of units available
First In, First Out (FIFO) method
An inventory costing method in which the first costs into inventory are the first costs out of goods sold. Ending inventory is based on the costs of the most recent purchases
Last In, First Out (LIFO) method
An inventory costing method in which the last costs into inventory are the first costs out to cost of good sold. The method leaves the oldest costs- those of beginning inventory and the earliest purchases of the period- in ending inventory
Perpetual inventory system
An inventory system that keeps a running computerized record of merchandise inventory. It is continuous.
Periodic inventory system
An inventory system that requires businesses to obtain a physical count of inventory to determine quantities on hand. Usually once a year.
How do you calculate gross profit percentage?
Gross profit/net sales revenue
Multi step Income statement
Income statement format that contains sub totals to highlight significant relationships. In addition to net income, it reports gross profit and operating income.
Single step Income Statement
Income statement format that groups all revenues together and then lists and deducts all expenses together without calculating any sub totals.
In a multi step Income statement, which of the following items is excluded from the calculation of operating income?
Interest expense
Controls over merchandise inventory ensure that
Inventory purchase and sales are properly authorized and accounted for by the accounting system
How do we evaluate inventory turnover and data's sales in inventory to evaluate business performance?
Inventory turnover measures how rapidly merchandise inventory is sold and is calculated as: cost of goods sold/ average merchandise inventory Days sales in inventory measures the average number of days Merchandise Inventory is held by the company and is calculated as: 365 days/ inventory turnover
What is the main benefit of the LIFO method?
It allows companies to pay the lowest income taxes when inventory costs are rising. Lower tax payments conserves cash.
How is the multi step income statement set up?
It begins with net sales revenue, cost of goods sold, and gross profit. Next, the operating expenses, those expenses other than cost of goods sold are listed. Operating expenses are selling and administrative expenses.
A lower days sales in inventory is preferable because
It indicates that the company is able to sell its inventory quickly, thereby reducing its inventory storage and insurance costs, as well as reducing the risk of holding obsolete inventory.
Operating Income
Measures the results of the entity's major ongoing activities. Gross profit minus operating expense
The goal of conservatism is to
Report realistic figures and never overstated assets or net income
Other Revenues and Expenses
Revenues or expenses that are outside the normal, day to day operations of a business, such as a gain or loss on the sale of plant assets or interest expense
FOB Destination
Situation in which the buyer takes the ownership or title to the goods at the delivery destination point and the seller typically pays the freight.
Steps of closing the accounts of a merchandiser
Step 1: make the revenue accounts equal zero via the Income Summary account Step 2: make expense accounts and other temporary accounts with a debit balance (sales return and allowances and sales discounts) equal zero via the Income Summary account Step 3: make the Income Summary account equal zero via the Retained Earnings account. This closing entry transfers net income or net loss to Retained Earnings. Step 4: make the dividends account equal zero via the Retained Earnings account
For all four inventory costing methods, cost of good sold available for sale is always the
Sum of beginning inventory plus net purchases are
Net Sales Revenue
The amount a company has earned on sales of merchandise inventory after returns, allowances, and discounts have been taken out. Sales revenue less sales returns and allowances and sales discounts.
Vendor
The individual or business from whom a company purchases goods
When using the periodic inventory system, the merchandise inventory account is not
Updated during the period. Only during closing. Therefore it will never be used when recording purchase, discounts, returns or sales of inventory.
