Accounting Chapter 4 and 5

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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


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