Chapter 4 - Accounting 201

Credit Memorandum

Notification that the sender has credited the recipients account in the senders records.

Debit Memorandum

Notification that the sender has debited the recipients account in the sender's records.

Which of the following accounts are temporary accounts under a periodic system? (a) Merchandise Inventory; (b) Purchases; c) Transportations-In

(b) Purchases and c) Transportation-In

Expenses

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EOM

Abbreviation for end of month; used to describe credit terms for credit transactions.

FOB

Abbreviation for free on board; the point when ownership of goods passes to the buyer; FOB shipping point (or factory) means the buyer pays shipping costs and accepts ownership of goods when the seller transfers goods to carrier: FOB destination means the seller pays shipping costs and buyer accepts ownership of goods as the buyers' place of business

Gross Profit

Net sales minus cost of goods sold; also called margin

Do reported amounts of ending inventory and net income differ if the adjusting entry method of recording the change in inventory is used instead of the closing entry method

Both methods report the same ending inventory and income

List Price

Catalog (full) price of an items before any trade discount is deducted.

What account is used (for journalizing entries) in a perpetual inventory system but not in a periodic inventory

Cost of Goods Sold.

Describe a merchandiser's cost of goods sold

Cost of goods sold is the cost of merchandise purchased from a supplier that is sold to customers during a specific period.

Cost of goods sold

Cost of inventory sold to customers during a period; also called cost of sales

When merchandise is sold on credit and the seller notifies the buyer of a price allowance, does the seller create and send a credit memorandum or a debit memorandum?

Credit memorandum--seller credit accounts receivable form buyer

Credit Terms

Description of the amounts and timing of payments that a buyer (debtor) agrees to make in the future

Merchandiser

Entity that earns net income by buying and selling merchandise

Selling expense

Expenses of promoting sales, such as displaying and advertising merchandise, making sales, and delivering goods to customers

General and Administrative

Expenses that support the operating activities of a business

What does FOB mean? What does FOB destination mean?

FOB means "free on board." It is used in identifying the point when ownership transfer from seller to buyer. FOB destination means that the seller transfers ownership of goods to the buyer when they arrive at the buyers places of business. It also means that the seller is responsible for paying shipping charges and bears the risk of damage or loss during shipment

Describe the closing entries normally made by a merchandising company.

Four closing entries; (1) close credit balances in temporary accounts to income summary, (2) close debit balances in temporary accounts to Income summery, (3) close dividends account to retained earnings.

Inventory

Goods a company owns and expects to sell in its normal operations

Merchandise Inventory

Goods that a company owns and expects to sell to customers; also called merchandise or inventory

Gross Margin Ratio

Gross margin (net sales minus cost of goods sold) divided by net sales; also called gross profit ratio.

How do we compute gross profit for a merchandising company

Gross profit (gross margin) is the difference between net sales and cost of goods sold

Single-Step income statement

Income statement format that includes cost of goods sold as an expense and show only one subtotal for total expenses

Multiple-Step income statement

Income statement format that shows subtotals between sales and net income, categorizes expenses, and often reports the details of net sales and expenses.

Supplementary records

Information outside the usual accounting records; also called supplemental records

Wholesaler

Intermediary that buys products from manufacturers or other wholesalers and sells them to retailers or other wholesalers.

Retailer

Intermediary that buys products from manufacturers or wholesalers and sells them to consumers

Shrinkage

Inventory losses that occur as a result of theft of deterioration

When a merchandiser uses a perpetual inventory system, why is it sometimes necessary to adjust the Merchandise Inventory balance with an adjusting entry?

Merchandise Inventory may need adjusting to reflect shrinkage

Perpetual Inventory System

Method that maintains continuous records of the cost of inventory available and the cost of goods sold

Periodic Inventory System

Method that records the cost of inventory purchased but does not continuously track the quantity available or sold to customers; records are updated at the end of each period to reflect the physical count and cost of goods available.

Gross Margin

Net sales minus cost of goods sold; also called gross profit

Acid-Test Ratio

Ratio used to asses a company's ability to settle its current debts with its most liquid assets: defined as a quick assets (cash, short-term investments, and current receivables) divided by current liabilities

Why are sales discounts and sales returns and allowances recorded in contra revenue accounts instead of directly in the Sales account?

Recording sales discounts and sales returns and allowances separately from sales gives useful information to managers for internal monitoring and decision-making

Trade discount

Reduction from a list or catalog priced that can vary for wholesalers, retailer, and consumers.

Cash Discount

Reduction in the price of merchandise granted by a seller to a buyer when payment is made within the discount period

What temporary accounts do you expect to find in a merchandising business but not in a service business

Sales (of goods), Sales Discounts, Sales Returns and Allowances, and Cost of Goods Sold (and maybe Delivery Expenses).

Merchandise

See merchandise inventory

Purchase discount

Term used by a purchasers to describe a cash discount granted to the purchaser for paying within the discount period.

Sales discount

Term used by a seller to describe a cash discount granted to buyers who pay within the discount period.

Discount Period

Time period in which a cash discount is available and the buyer can make a reduced payment.

Credit Period

Time period that can pass before a customer's payment is due

Identify which items are subtracted from the list amount and not recorded when computing

Trade discounts

How is cost of goods sold computed under a periodic inventory system?

Under a periodic inventory system, the cost of goods sold is determined at the end of an account period by adding the net costs purchased to the beginning inventory and subtracting the ending inventory.

How long are the credit and discount periods when credit terms are 2/10, n/60?

Under credit terms of 2/10, n/60, the credit period is 70 days and the discount period is 10 days.

Under what conditions are two entries necessary to recor4d a sales return?

When a customer returns merchandise and the seller restores the merchandise to inventory, tow entries are necessary. One entry records the decrease in revenue and credits the customer's account. The second entry debits inventory and reduces cost of goods sold.

Explain why use of the perpetual inventory system has dramatically increased

Widespread use of computing and related technology has dramatically increased the use of the perpetual inventory system