Accounting Chapter 4 and 5
X-Mart purchased $300 of merchandise on account. Demonstrate the journal entry to record this transaction, assuming the perpetual inventory system is used.
- Debit Merchandise Inventory $300; credit Accounts Payable $300.
The net method
- records the invoice initially at the gross amount less any cash discount offered.
LIFO
- results in the lowest taxable income
net realizable value
- sales price minus the cost of making the sale
Two classifications of operating expenses
- selling expenses: expenses of promoting sales - general and administrative expenses: expenses that support the operating activities of a business
FOB Destination
- the seller pays shipping costs and the buyer accepts ownership of goods at the buyer's place of business.
Cost of Goods
- used to figure gross profit. - an expense reported on the income statement. - includes the expenses of buying and preparing an item for sale. - also called cost of sales.
Operating Cycle for a Merchandiser
1. purchases 2. merchandise inventory 3. credit sales 4. accounts receivable 5. cash collection
Merchandise
Goods that a company owns and expects to sell to customers
Periodic Inventory System
- records cost of goods sold at the end of the period
perpetual inventory system
- records cost of goods sold at the time of each sale
Average Inventory
(Beginning Inventory + Ending Inventory) / 2
VERY IMPORTANT: sales discount
- Debit
X-Mart uses the perpetual inventory system to account for its merchandise. On May 1, it purchased $400 of merchandise on account with terms of 2/15, n/40. On May 3, X-Mart returned $50 of merchandise due to defect. Assuming that the purchase was paid for within the discount period, demonstrate the required journal entry for X-Mart to record the payment by selecting all of the correct actions below. (Check all that apply.)
- Debit Accounts Payable $350 - Credit Cash $343 - Credit Inventory $7
Entry to record credit sales
- Debit Accounts Receivable - Credit sales - Debit Cost of Goods - Credit Inventory
Company makes payment within discount period
- Debit Accounts payable - Credit Cash - Credit Merchandise Inventory Example LOL Music Store uses the perpetual inventory system to account for its merchandise. On November 17, it purchased $1,000 of merchandise with terms of 2/5,n/60. If payment is made on November 21, demonstrate the required journal entry to record the payment by selecting all of the correct actions below. (Check all that apply.) - Debit Accounts Payable $1,000. - Credit Cash $980. - Credit Merchandise Inventory $20.
Acid-test Ratio
- quick assets (cash, short-term investments, current receivables) / current liabilities
Days' sales in Inventory
- Ending inventory/cost of goods sold x 365
Shrinkage
- Inventory losses that occur as a result of theft or deterioration.
A single-step income statement
- It shows one total for all expenses.
LIFO is used for financial reporting and.tax reporting
- LIFO conformity rule
Closing Entries
- The Dividends account is closed to Retained Earnings - Sales Returns and Allowances is closed with the expense accounts. - Cost of goods sold is closed with the expense accounts. - Sales is closed as a revenue account. - Sales Discounts is closed with the expense accounts.
FOB Shipping
- The buyer pays shipping costs and accepts ownership of goods when the seller transfers goods to the carrier
Cost of Goods Avaliable For Sale / Units Available at time of sale
- Weighted Average Cost Per Unit
sales allowance
- a reduction in the selling price of defective or unacceptable merchandise sold to customers
Four closing entries at the end of an accounting cycle
- close expense account - close revenue account - close income summary account - close the dividends account
sales discount
- contra revenue account - normal balance is debit
beginning inventory + purchases - ending inventory
- cost of goods sold
LIFO
- cost of goods sold approximates current replacement cost
Inventory Turnover
- cost of goods sold/average inventory
sales
- credit
adjusting for shrinkage
- debit COGS - credit Inventory
Purchases Allowance
- debit account payable - credit merchandise inventory
Purchases Allowances
- debit accounts payable, credit merchandise inventory Example On Dec. 20, X-Mart received a $100 allowance because the merchandise it purchased on account, earlier in the month, was of poor quality. Demonstrate the required journal entry on X-Mart's books for the allowance assuming the perpetual inventory method. - debit accounts payable $100 - credit inventory $100 On November 5, Z-Mart (buyer) issues a $30 allowance from Trex for defective merchandise. - debit accounts payable $30 - credit inventory $30
selling merchandise on credit
- debit accounts receivable - credit sales - debit COGS - credit inventory
buyer pays within discount period
- debit cash - debit sales discounts - credit accounts receivable Example: Sally Beauty Warehouse uses the perpetual inventory system to account for its merchandise. On Nov 2, it sold $700 of merchandise on credit with terms of 2/15,n/30. Demonstrate the required journal entry to record the receipt of payment from the customer on Nov 13, by selecting all of the correct actions below. (Check all that apply.) Debit Cash $686 Debit Sales discount: $14 Credit Accounts Receivable: $700
Adjusting Entry for shrinkage
- debit cost of goods sold - credit merchandise inventory
When a return occurs, the seller debits or credits Sales Returns and Allowances?
- debits
FIFO
- ending inventory approximates current replacement cost
Beginning Inventory + purchases
- goods available for sale
sales - sales discount
- net sales
FIFO perpetual
- oldest (Cost of Goods Sold) - recent (Ending Inventory)
Good Internal controls over the inventory count include
- prenumbered inventory tickets - counters have no inventory responsibility - counters confirm existence, amount, and condition of inventory - second count is taken by a different counter - manager confirms all items counted only once
Gross Proft
Net Sales - COGS
Net Income
Net sales - Cost of Goods Sold - Expenses
Understating Ending Inventory
Year 1 - overstate Cost of Goods Sold - understate Net Income Year 2 - understate Cost of Goods Sold - overstate Net Income
Overstating Ending Inventory
Year 1 - understate Cost of Goods Sold - overstate Net Income Year 2 - overstate Cost of Goods Sold - understate Net Income