Accounting Chapter 9

What is the difference between a discount taken and a discount lost?

A discount taken is the difference between the gross price of the merchandise and the cash that must be paid since the merchandise is paid for within the discount period. A discount lost is the difference between the net price of the merchandise and the cash that must be paid since the merchandise is paid for after the discount period has expired.

What is the difference between a loss and an expense?

A loss is a decrease in net assets that does not result from the attempt to generate revenue. An expense is a decrease in net assets resulting from the attempt to generate revenue.

Who pays FICA taxes, the employee or the employer? Why?

Both, the employer pays FICA taxes and also withholds FICA taxes from the employee. Thus, FICA is often referred to as a matching expense.

What is the difference between Direct Materials Inventory and Merchandise Inventory?

Direct Materials Inventory is inventory purchased to be used in production. Merchandise Inventory is inventory purchased to be sold

Does a company's Salary and Wage Expense reflect employees' gross pay or net pay? Why?

Salary and Wage Expense reflects the employees' gross pay because that is the amount earned by employee. From the business's point of view then, gross pay represents the cost incurred in an attempt to generate revenue.

Why would a company compare its actual financial?

The company should compare its plans against its actual results to determine if goals have been achieved.

What is the difference between utilities expense and utilities payable?

Utilities expense represents the cost of utilities used in an attempt to generate revenue. Utilities payable represents the obligation to pay for the cost of utilities that are owed.

net price method

a method used to record inventory purchases at the discounted price

discount lost

an account used under the net price method to record discounts lost

inventory (merchandise inventory)

an inventory account used by a merchandising company

direct materials inventory

an inventory account used in a manufacturing company to record the direct materials on hand

What is the difference between a perpetual and a periodic inventory system?

Companies use a perpetual inventory system to keep a running balance of the cost of inventory available for sale and cost of goods sold. Companies use a periodic inventory system to determine the cost of goods sold and ending inventory only at specific points in time.

What is the difference between the gross price method and the net price method of recording inventory purchases?

Companies use the gross price method to record inventory at its gross amount and to record discounts only when taken. Companies use the net price method to record inventory at its net amount and to record discounts lost.

What is the purpose of a special journal? Does it replace the general journal?

A special journal is a journal used for frequent, recurring transactions. A special journal is used in conjunction with the general journal, that is, a given accounting event is recorded in either a special journal or the general journal.

What is the purpose of a subsidiary ledger? Does it replace the general ledger?

A subsidiary ledger is a place to record details concerning a specific general ledger account. A subsidiary ledger is used to supplement a general ledger account. That is, amounts are recorded twice-details in the subsidiary ledger and totals in the general ledger.

What is the purpose of the account Accumulated Depreciation?

Accumulated Depreciation is a contra account that represents the total amount of the cost of an asset that has been expensed in an attempt to generate revenue.

A company's Accounts Payable-Merchandise Inventory account decreased during the period. Were the net purchases on account greater than or less than the cash paid for purchases? Why?

If Accounts Payable-Inventory decreases it implies that more was paid than was charged during the period. Therefore net purchases were less than cash payments.

A company's Inventory account increased during the period. Is cost of goods sold greater than or less than the amount of net purchases during the period? Why?

If Inventory increases it implies that more inventory was purchased than was sold during the period. Therefore cost of goods sold is less than net purchases.

Assume a company began the period with $5,000 of prepaid insurance. During the period, the company paid an additional $8,000 for insurance. At the end of the period, the company determined that insurance expense for the period was $12,000. On which financial statement would each of these numbers be reported?

Insurance expense of $12,000 is shown on the income statement. The ending balance in the Prepaid Insurance account of $1,000($5,000+$8,000-$12,000) is shown on the Balance Sheet. The cash paid for insurance ($8,000) is shown on the Statement of Cash Flows.

How does a company decide whether to use the gross or net price method to record inventory?

It depends on the information needed and the philosophy adopted by management. If management believes that all discounts should be taken, the net price method should be used because it indicates discounts lost.

How does a company decide whether to use a perpetual or a periodic inventory system?

It depends on the information needed. If the company needs a running balance of inventory, the perpetual system should be adopted.

What is the difference between prepaid rent and rent expense?

Prepaid rent is an asset while rent expense is the amount of rent used up in an attempt to generate revenue.

Explain the purchase of each of the following accounts: (a) Purchases, (b) Purchase Discounts, and (c) Purchase Returns and Allowances.

Purchases is used to record the cost of all inventory purchased. Purchase Discounts is used to record the cost of all purchase discounts taken. Purchase Returns and Allowances is used to record the cost of all inventory returned or allowances given by suppliers of inventory.

What is the difference between supplies and supplies expense?

Supplies is an asset while supplies expense is the amount of supplies used up in an attempt to generate revenue.

special journal

a journal used for transactions that occur frequently and in the same manner

subsidiary ledger

a ledger used to record details for specific general ledger accounts

gross price method

a method used to record inventory purchases at the full price

periodic inventory system

a system used by companies that need to determine the balance in inventory and the cost of goods sold only at specific points in time

perpetual inventory system

a system used by companies that want to keep a running balance of the cost of inventory available for sale and the cost of goods sold during the period

purchase discounts

a temporary account used to record purchase discounts taken

purchase returns and allowances

a temporary account used to record purchase returns and purchase allowances

purchases

a temporary account used to record purchases of inventory

loss on inventory

a temporary account used to report losses of inventory