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.
TRUE
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.
TRUE
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.
TRUE
In the merchandising income statement, sales will be reduced by sales discounts and sales returns and allowances to arrive at net sales.
TRUE
In the periodic inventory system, purchases of merchandise for resale are debited to the Purchases account.
TRUE
In valuing damaged merchandise for inventory purposes, net realizable value is the estimated selling price less any direct costs of disposal.
TRUE
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.
TRUE
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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