Inventories T/F, Accounting for Retail Businesses T/F
"Market," as used in the phrase "lower of cost or market" for valuing inventory, refers to the price at which the inventory is being offered for sale by its owner.
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1. The use of the lower-of-cost-or-market method of inventory valuation increases net income for the period in which the inventory replacement price declined.
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A business using the perpetual inventory system, with its detailed subsidiary records, does not need to take a physical inventory.
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A buyer who acquires merchandise under credit terms of 1/10, n/30 has 30days after the invoice date to take advantage of the cash discount.
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A deduction allowed to wholesalers and retailers from the price of merchandise listed in catalogs is called cash discounts.
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A physical inventory should be taken at the end of every month.
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A purchase order establishes an initial record of the receipt of the
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A sale of $750 on account, subject to a sales tax of 6%, would be recorded as an account receivable of $750.
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As we compare a merchandise business to a service business, the financial statement that changes the most is the Balance Sheet.
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Because many companies use computerized accounting systems, periodic inventory is widely used.
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Closing entries for a merchandising business are not similar to those for a service business.
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Cost of merchandise sold is the amount that the merchandising company pays for the merchandise it intends to sell.
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Direct disposal costs do not include special advertising or sales commissions.
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Discounts taken by the buyer for early payment of an invoice are credited to Sales Discounts by the buyer.
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During periods of decreasing costs the use of the LIFO method of costing inventory will result in a lower amount of net income than would result from the use of the FIFO method.
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During periods of rapidly rising costs, the use of the LIFO method results in illusory or inventory profits
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Freight in is the amount paid by the company to deliver merchandise sold to a customer.
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Gross profit minus selling expenses equals net income.
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If ending inventory for the year is overstated, owner's equity reported on the balance sheet at the end of the year is understated.
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If ending inventory for the year is understated, net income for the year is overstated.
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If payment is due by the end of the month in which the sale is made, the invoice terms are expressed as n/30.
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If the buyer bears the freight costs related to a purchase, the terms are said to be FOB destination.
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If the ownership of merchandise passes to the buyer when the seller delivers the merchandise for shipment, the terms are stated as FOB destination.
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In a merchandise business, sales minus operating expenses equals net income.
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In a multiple-step income statement the dollar amount for income from operations is always the same as net income.
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In a perpetual inventory system, the Merchandise Inventory account is only used to reflect the beginning inventory.
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In a perpetual inventory system, when merchandise is returned to the seller, Cost of Merchandise Sold is debited as part of the transaction.
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In the retail inventory method, the cost to retail ratio is equal to the cost of goods sold divided by the retail price of the good sold.
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Inventory controls start when the merchandise is shelved in the store area.
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Inventory turnover measures the length of time is takes to acquire, sell and replace the inventory.
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Merchandise is sold for $3,600, terms FOB destination, 2/10, n/30, with prepaid freight costs of $150. If $500 of the merchandise is returned prior to payment and the invoice is paid within the discount period, the amount of the sales discount is $65.
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Most companies will not take a purchases discount, because 1% or 2% discounts are insignificant.
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Most large companies will use only one inventory costing methods for all of its different segments.
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Net sales is equal to sales minus cost of merchandise sold.
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Purchases of merchandise are typically credited to the merchandise inventory account under the perpetual inventory system.
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Retailers record all credit card sales as credit sales.
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Sales Discounts is a revenue account with a credit balance.
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Sales to customers who use bank credit cards, such as MasterCard and VISA, are generally treated as credit sales.
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Sellers and buyers are required to record trade discounts.
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The accounts Purchases, Purchases Returns and Allowances, Purchases Discounts, and Freight In are found on the balance sheet.
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The cost of merchandise inventory is limited to the purchase price less any purchase discounts.
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The selection of an inventory costing method has no significant impact on the financial statements.
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The seller records the sales tax as part of the sales amount.
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The specific identification inventory method should be used when the inventory consists of identical, low cost units that are purchased and sold frequently
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Title to merchandise shipped FOB shipping point passes to the buyer upon delivery of the merchandise to the buyer's place of business.
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Under the LIFO inventory costing method, the most recent costs are assigned to ending inventory.
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Under the periodic inventory system, the cost of merchandise sold is equal to the beginning merchandise inventory plus the cost of merchandise purchased plus the ending merchandise inventory.
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Under the periodic inventory system, the cost of merchandise sold is recorded when sales are made.
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Under the periodic inventory system, the merchandise inventory account continuously discloses the amount of inventory on hand.
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Under the perpetual inventory system, a company purchases merchandise on terms 2/10, n/30. If payment is made within 10 days of the purchase, the entry to record the payment will include a credit to Cash and a credit to Purchase Discounts.
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Unsold consigned merchandise should be included in the consignee's inventory.
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Use of the retail inventory method requires taking a physical count of inventory.
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When companies use a perpetual inventory system, the recording of the purchase of inventory will include a debit to purchases.
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When merchandise is sold for $600 plus 6% sales tax, the Sales account should be credited for $636.
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When merchandise that was sold is returned, a credit to sales returns and allowances is made.
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When using the FIFO inventory costing method, the most recent costs are assigned to the cost of goods sold.
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A consignor who has goods out on consignment with an agent should include the goods in ending inventory even though they are not in the possession of the consignor.
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A perpetual inventory system is an effective means of control over inventory.
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A seller may grant a buyer a reduction in selling price and this is called a sales allowance.
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A subsidiary inventory ledger can be an aid in maintaining inventory levels at their proper levels.
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Average inventory is computed by adding the inventory at the beginning of the period to the inventory at the end of the period and dividing by two
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Computerized systems can be used to capture accounting information such as accounts receivable, inventory items, accounts payable, and sales.
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Cost of Merchandise Sold is often the largest expense on a merchandising company income statement.
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During periods of increasing costs, an advantage of the LIFO inventory cost method is that it matches more recent costs against current revenues
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During periods of increasing costs, the use of the FIFO method of costing inventory will result in a greater amount of net income than would result from the use of the LIFO cost method.
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During periods of increasing costs, the use of the FIFO method of costing inventory will yield an inventory amount for the balance sheet that is higher than LIFO would produce.
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FIFO is the inventory costing method that follows the physical flow of the goods.
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Freight-in is considered a cost of purchasing inventory.
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Generally, the lower the number of days' sales in inventory, the better.
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If a company uses the periodic inventory system to cost its inventory, the gross profit method is a method that can be used to check on theft when the actual inventory is taken by the company.
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If a fire destroys the merchandise inventory, the gross profit method can be used to estimate the cost of merchandise destroyed.
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If merchandise costing $3,500, terms FOB destination, 2/10, n/30, with prepaid freight costs of $125, is paid within 10 days, the amount of the purchases discount is $70.
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If the perpetual inventory system is used, an account entitled Cost of Merchandise Sold is included in the general ledger.
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If the perpetual inventory system is used, the account entitled Merchandise Inventory is debited for purchases of merchandise.
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In a periodic inventory system, the cost of merchandise purchased includes the cost of freight-in.
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In a perpetual inventory system, merchandise returned to vendors reduces the merchandise inventory account.
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In many retail businesses, inventory is the largest current asset.
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In the merchandising income statement, sales will be reduced by sales discounts and sales returns and allowances to arrive at net sales.
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In the periodic inventory system, purchases of merchandise for resale are debited to the Purchases account.
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In valuing damaged merchandise for inventory purposes, net realizable value is the estimated selling price less any direct costs of disposal.
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Income that cannot be associated definitely with operations, such as a gain from the sale of a fixed asset, is listed as Other Income on the multiple-step income statement.
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Inventory errors, if not discovered, will self-correct in two years.
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Merchandise Inventory normally has a debit balance
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Of the three widely used inventory costing methods (FIFO, LIFO, and average cost), the LIFO method of costing inventory assumes costs are charged based on the most recent purchases first.
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On the income statement in the single-step form, the total of all expenses is deducted from the total of all revenues.
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One negative effect of carrying too much inventory is risk that customers will change their buying habits.
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One of the most important differences between a service business and a retail business is in what is sold.
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One of the two internal control procedures over inventory is to properly report inventory on the financial statements.
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Other income and expenses are items that are not related to the primary operating activity.
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Purchased goods in transit should be included in the ending inventory of the buyer if the goods were shipped FOB shipping point.
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Purchased goods in transit, shipped FOB destination, should be excluded from ending inventory of the buyer.
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Safeguarding inventory and proper reporting of the inventory in the books are the reasons for controlling the inventory.
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Sales Returns and Allowances is a contra-revenue account.
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Sales to customers who use nonbank credit cards, such as American Express, are generally treated as credit sales.
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Service businesses provide services for income, while a merchandising business sells merchandise.
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The abbreviation FOB stands for Free On Board
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The adjusting entry to record inventory shrinkage would generally include a debit to Cost of Merchandise Sold.
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The average cost inventory method is the rarely used with a perpetual inventory system.
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The average cost method will always yield results between FIFO and LIFO.
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The buyer will include the sales tax as part of the cost of items purchased for use
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The chart of accounts for a merchandise business would include an account called Delivery Expense.
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The effect of a sales return and allowance is a reduction in sales revenue and a decrease in cash or accounts receivable.
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The ending merchandise inventory for 2010 is the same as the beginning merchandise inventory for 2011.
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The form of the balance sheet in which assets, liabilities, and owner's equity are presented in a downward sequence is called the report form.
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The lower of cost or market is a method of inventory valuation.
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The lower-of-cost-or-market method of determining the value of ending inventory can be applied on an item by item, by major classification of inventory, or by the total inventory.
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The ratio of net sales to assets measures how effectively a business is using its assets to generate sales.
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The seller may prepay the freight costs even though the terms are FOB shipping point.
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The service fee that credit card companies charge retailers varies and is the primary reason why some businesses do not accept all credit cards.
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The single-step income statement is easier to prepare, but a criticism of this format is that gross profit and income from operations are not readily available.
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The three inventory costing methods will normally each yield different amounts of net income.
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There is no difference between the recording of cash sales and the recording of MasterCard or VISA sales.
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Under a periodic inventory system, the merchandise on hand at the end of the year is determined by a physical count of the inventory.
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Under the periodic inventory system, a physical inventory is taken to determine the cost of the inventory on hand and the cost of the merchandise sold.
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Under the perpetual inventory system, when a sale is made, both the sale and cost of merchandise sold are recorded.
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When a large quantity of merchandise is purchased, a reduction allowed on the sale price is called a trade discount.
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When a merchandising business is compared to a service business, the financial statement that is not affected by that change is the Statement of Owner's Equity.
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When merchandise inventory is shown on the balance sheet, both the method of determining the cost of the inventory and the method of valuing the inventory should be shown.
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When the seller offers a sales discount, even if borrowing has to be done, it is generally advantageous for the buyer to pay within the discount period.
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When the terms of sale are FOB shipping point, the buyer should pay the freight charges.
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