ACCT 206 Video Lecture & Assessment LO 4-1, 2, 3

Amarillo Company experienced the following events during its first accounting period. (1) Purchased $5,000 of inventory on account. (2) Returned $1,000 of the inventory purchased in Event 1. (3) Paid the remaining balance in accounts payable for the inventory purchased in Event 1. (4) Sold inventory purchased in Event 1 for $5,000 to customers on account. At the end of the first accounting period what would be reported on for Net Operating Cash Flow on the Statement of Cash Flows?

$(4,000) (Only Event 3 affects cash flow. The accounts payable is $4,000 ($5,000 original cost − $1,000 purchase return) and is paid in cash. Therefore, Net Operating Cash Flow is ($4,000). Event 4 does not affect cash because the inventory was sold on account to customers.)

Amarillo Company experienced the following events during its first accounting period. (1) Purchased $5,000 of inventory on account. (2) Returned $1,000 of the inventory purchased in Event 1. (3) Paid the remaining balance in accounts payable for the inventory purchased in Event 1. (4) Sold inventory purchased in Event 1 for $5,000 to customers on account. At the end of the first accounting period what would be reported on the Income Statement for net income?

$1,000 (The cost of the inventory is $4,000 ($5,000 original cost − $1,000 purchase return). The inventory was sold to customers for $5,000. Net income would be $1,000 (Sales 5,000 − Cost of Goods Sold 4,000).)

Amarillo Company experienced the following events during its first accounting period. (1) Purchased $5,000 of inventory on account under terms 1/10/n30. (2) Returned $1,000 of the inventory purchased in Event 1. (3) Paid the remaining balance in accounts payable within the discount period for the inventory purchased in Event 1. Immediately after the three events have been recognized, the balance in the inventory account is

$3,960 (The cost of the inventory is $3,960 ($5,000 original cost − $1,000 purchase return − $40 cash discount). The amount of the cost of the inventory will remain in the inventory account until the inventory is sold.)

Amarillo Company experienced the following events during its first accounting period. (1) Purchased $5,000 of inventory on account under terms 1/10/n30. (2) Returned $1,000 of the inventory purchased in Event 1. (3) Paid the remaining balance in accounts payable for the inventory purchased in Event 1. If the Company pays the accounts payable after the discount period has expired, how much cash will be required to settle the liability?

$4,000 (If the Company pays after the discount period has expired, there will be no discount granted. The amount due will be $4,000 ($5,000 original accounts payable − $1,000 reduction in the accounts payable due to the purchase return).)

Amarillo Company experienced the following events during its first accounting period. (1) Purchased $5,000 of inventory on account under terms 1/10/n30 (2) Returned 1,000 of the inventory purchased in Event 1. (3) Paid the remaining balance in account payable within the discount period for the inventory purchased in Event 1. Immediately after the three events have been recognized, the balance in the inventory account is

$4,000 (The cost of the inventory is $4,000 ($5,000 original cost - $1,000 purchase return). The amount of the cost of the inventory will remain in the inventory account until the inventory is sold.)

Keisha Dress Shops experienced the following events during its third accounting period. (1) Sold merchandise that cost $92,000 for $140,000 cash. (2) Paid $30,000 of operating expenses. (3) Paid a $4,000 cash dividend. Based on this information, the amount of the gross margin is

$48,000 (Gross margin is determined by subtracting cost of goods sold from the sales revenue. In this case, the gross margin is $48,000 ($140,000 sales revenue - $92,000 cost of goods sold). Operating expenses are subtracted from the gross margin to determine the net income. Dividends are not shown on the income statement.)

Mahan Company purchased inventory on account under terms 2/10/n30. Mahan would like to pay the accounts payable within the discount period in order to receive the discount. Unfortunately, Mahan does not have the cash. What is the maximum annual interest rate that Mahan would be willing to pay in order to borrow the money necessary to settle the accounts payable?

36.5% (A 2% discount for 20 days is equivalent to a 36.5 % annual interest (365 days ÷ 20 day discount period = 18.25 discount periods in one year; 18.25 discount periods x .02 discount rate per period = 36.5% equivalent annual interest rate). If Mahan pays more than 36.5% annual interest, the Company would be paying more interest than the Company would be saving by taking the cash discount. Therefore, 36.5% is the maximum Mahan should pay in order to settle the accounts payable within the discount period. Of course, Mahan should not pay off the accounts payable before the last day the discount is available, because paying early would mean the Company has to borrow money for a longer period of time than necessary. The longer the length of the loan, the more that interest accumulates.)

Amarillo Company experienced the following events during its first accounting period. (1) Purchased $5,000 of inventory on account. (2) Returned $1,000 of the inventory purchased in Event 1. (3) Paid the remaining balance in accounts payable for the inventory purchased in Event 1. Based on this information the journal entry necessary to record the return is

Accounts Payable- Debit $1,000 Inventory- Credit $1,000 (Amarillo returned $1,000 of inventory which reduces the cost of the inventory and the accounts payable account. In this case, accounts payable (liability) is debited and Inventory (asset) is credited.)

Amarillo Company experienced the following events during its first accounting period. (1) Purchased $5,000 of inventory on account under terms 1/10/n30. (2) Returned $1,000 of the inventory purchased in Event 1. (3) Paid the remaining balance in accounts payable within the discount period for the inventory purchased in Event 1. Based on this information the journal entry necessary to record the purchase discount is

Accounts Payable- Debit 40 Inventory- Credit 40 (Since Amarillo returned $1,000 the discount is calculated on the $4,000 remaining balance in the accounts payable account ($5,000 original cost − $1,000 purchase return. The amount of the discount is $40 ($4,000 × .01). The discount reduces the cost of the inventory. It, therefore, also reduces the amount of the obligation (liability) arising from the inventory purchase. Debit entries decrease liability accounts and credit entries decrease asset accounts. In this case, accounts payable (liability) is debited and Inventory (asset) is credited.)

Amarillo Company experienced the following events during its first accounting period. (1) Purchased $5,000 of inventory on account under terms 1/10/n30. (2) Returned $1,000 of the inventory purchased in Event 1. (3) Paid the remaining balance in accounts payable within the discount period for the inventory purchased in Event 1. Based on this information, which of the following shows how the recognition of the cash discount will affect the Company's financial statements?

Asset- (40) Liab.- (40) Equity- NA Rev.- NA Expense- NA Net Inc.- NA Cash Flows- NA (The amount of the discount is $40 [($5,000 original cost − $1,000 purchase return) × .01]. The discount reduces the cost of the inventory thereby reducing assets. It also reduces the balance due on the accounts payable thereby reducing liabilities. The income statement will not be affected until the inventory is sold. While the discount reduces the amount of the accounts payable, it does not immediately affect cash flow. The cash flow occurs when the accounts payable is paid. Accordingly, the discount has no effect on the statement of cash flows.)

Which of the following shows the effects of purchasing inventory on account?

Assets + Liabilities + (Purchasing inventory on account is an asset source transaction. It causes assets (inventory) and liabilities (accounts payable) to increase. Buying inventory does not affect expense. Expense is affected when the inventory is sold. As a result, there is no effect on the income statement. Since the inventory was purchased on account, the company did not spend cash; therefore there is no effect on the statement of cash flows.)

Edwards Shoe Store sold shoes that cost the company $5,700 for $8,200. Which of the following journal entries would be required to recognize the cost of goods sold? (Ignore the effects of the associated revenue recognition.)

Cost of goods sold- Debit 5,700 Inventory- Credit 5,700 (When a merchandising company sells inventory an asset account (inventory) decreases and an expense account (cost of goods sold) increases. Debit entries increase expenses which in turn decrease stockholders' equity. Credit entries decrease asset accounts. In this case, cost of goods sold (expense) is debited and the inventory (asset) is credited.)

Which of the following journal entries would be required to recognize the cash purchase of $500 of merchandise inventory?

Inventory- Debit 500 Cash- Credit 500 (When a merchandising company pays cash to purchase inventory, one asset account (cash) decreases and another asset account (inventory) increases. The purchase is an asset exchange transaction. The increase in the asset (inventory) is recorded with a debit and the decrease in the asset (cash) is recorded with a credit.)

Paying cash to purchase inventory is

an asset exchange transaction (When a merchandising company pays cash to purchase inventory one asset account (cash) decreases and another asset account (inventory) increases. The amount of total assets is not affected. The purchase is an asset exchange transaction.)

inventory is

an assets account that appears on the balance sheet. (Inventory is a balance sheet asset account. It represents an economic resource that will be used (sold) in the future to produce revenue. In other words, it is the portion of the goods that were not sold during the accounting period. The cost of the inventory that has been sold is accumulated in an expense account titled cost of goods sold and is shown on the income statement. The amount of cash paid for inventory or the amount of cash collected from the sale of inventory is shown on the statement of cost of goods sold. Inventory and cash are separate asset accounts.)

Amarillo Company experienced the following events during its first accounting period. (1) Purchased $5,000 of inventory on account under terms 1/10/n30. (2) Returned 1,000 of the inventory purchased in Event 1. (3) Paid the remaining balance in account payable within the discount period for the inventory purchased in Event 1. Based on this information, which of the following shows how the recognition of the cash discount will affect the Company's financial statements.

assets: (50) lib: (50) eq: NA rev:NA exp: NA net: NA cF: NA (The amount of the return is $50. The discount reduces the cost of the inventory thereby reducing assets. It also reduces the balance due on the accounts payable thereby reducing liabilities. The income statement will not be affected until the inventory is sold (event 3). While the return reduces the amount of the accounts payable, it does not immediately affect cash flow. The cash flow occurs when the accounts payable is paid. Accordingly, the return has no effect on the statement of cash flows.)

Edwards Shoe Store sold shoes that cost the company $5,700 for $8,200. Which of the following shows how the recognition of the cost of goods sold will affect the Company's financial statement? (Ignore the effects of the associated revenue recognition.)

assets: - lib: NA eq: - rev:NA exp: + net: - cF: NA (When inventory is sold, the cost of the inventory must be removed from the inventory account thereby reducing assets. The cost of goods sold is recognized as an expense on the income statement thereby reducing net income and ultimately stockholders' equity (retained earnings). The statement of cash flows is not affected because cash flow is recognized when the company pays for the inventory; not when the inventory is sold.)

Product costs are expensed when they are incurred. This statement is

false (At the time they are incurred, product costs are accumulated in an asset account (inventory). They are expensed later when the inventory is sold to customers.)

The gross margin appears on a

multistep income statement (Gross margin is the difference between sales revenue and the cost of goods sold expense. It is normally shown as the first step in a multi-step income statement. The operating expenses are then subtracted from gross margin to determine the amount of net income. In contrast, on a single step income statement cost of goods sold is shown as one of a number of operating expenses that are subtracted from sales revenue to determine net income. This single-step format does not show the determination of gross margin. Multistep and single-step formats are used only for income statements; they do not apply to the statement of cash flows.)

When a merchandising company sells inventory it will

recognize revenue and expenses (When a merchandising company sells inventory, it will recognize sales revenue for the amount of the sales price. The company will also recognized a cost of goods sold expense for the amount of the cost of the goods that were sold.)