4. accting for inventory 1

Question 1

what is merchandising business?

Answer 1

buy and resell inventory

Question 2

What is service business?

Answer 2

• performs services to receive cash

Question 3

what are revenues referred to as?

Answer 3

sales revenue

Question 4

Expenses are divided into two categories:

Answer 4

1. COST OF SALES / COST OF GOODS SOLD 2. OPERATING EXPENSES.

Question 5

how do you find the profit (loss)?

Answer 5

sales revenue - cost of sales = gross profit - operating expenses = profit (loss)

Question 6

cycle of service business?

Answer 6

perform service > AR > send invoice > receive cash

Question 7

cycle of merchandising business?

Answer 7

buy inventory > sell inventroy > AR > send invoice > receive cash

Question 8

what is perpetual system

Answer 8

• Detailed inventory system in which the cost of sales is maintained.
• Records continuously show the inventory that should be on hand:
e.g. car dealerships, furniture stores.
• Use of bar codes and optical scanners has led to wide use:
e.g. supermarkets, department stores.

Question 9

Periodic system?

Answer 9

• Cost of sales is determined only at end of accounting period by a physical inventory count.
• Detailed records of inventory are not maintained.
• Used widely by small businesses: e.g. convenience stores, cafes.

Question 10

key difference between periodic and perpetual inventory system?

Answer 10

the point at which the cost of sales is calculated

Question 11

what is freight in?

Answer 11

cost of freight that is added to the cost of inventory where cost is charged to buyer - part of cost of sales

Question 12

what is freight out?

Answer 12

Freight costs incurred by seller as operating expense to seller.

Question 13

sales return?

Answer 13

is the return of goods by the customer.

The customer will receive a refund in the form of either credit or cash.

Question 14

sale allowance?

Answer 14

occurs where the customer keeps the goods and a reduction in price is granted.

Question 15

purchase return?

Answer 15

the return of goods to the supplier.

Question 16

purchase allowance?

Answer 16

occurs where a reduction in price is granted by the supplier.

Question 17

what are the two purchase discounts?

Answer 17

• trade discounts

- settlement discounts

Question 18

trade discounts?

Answer 18

are a % reduction in the list price of inventory sold.

Question 19

settlement discount?

Answer 19

are discounts given for prompt payment of account.

Question 20

credit purchase difference for perpetual and periodic system?

Answer 20

Perpetual: DR inventory
CR AP
Periodic: DR purchases
CR AP

Question 21

purchase returns & allowances Periodic vs perpetual?

Answer 21

Perpetual: DR AP
CR Inventory
Periodic: DR AP
CR Purchase returns and allowances

Question 22

in perpetual system, cost of sales are?

Answer 22

maintained and available

Question 23

periodic system, cost of sales are:

Answer 23

not maintained so have to physically count ending stock and calculate it.

Question 24

cost of goods purchased calculation:

Answer 24

purchases - purchase returns and allowance + fright in

Question 25

what is selling expense?

Answer 25

cost of making the sale

e.g. advertising, delivery expenses.

Question 26

what is admin expense?

Answer 26

cost of operating activities of the general, accounting and personnel offices
e.g. salaries, rent.

Question 27

what is financial expense?

Answer 27

costs of financing the business
e.g. interest expense, discounts allowed.
o

Question 28

operating expense include:

Answer 28

admin expense, financial expense, selling expense

Question 29

summary of perpetual inventory system?

Answer 29

• Involves keeping a running record of each purchase and sale
• The inventory account and Cost of Sales account is updated after every purchase or sale
• As a result, the balance in the inventory account is the ENDING inventory amount.
• A stocktake is only performed to verify the accuracy of this recorded ending inventory
• If the recorded inventory and the stocktake differ, then an entry to record the correct amount needs to be processed.

Question 30

summary of periodic inventory system

Answer 30

• No running record of each purchase and sale
• Additional inventory purchased is recorded in the “Purchases” account, instead of the Inventory account
• The balance in the inventory account therefore does not change until the end of the accounting period
• A stocktake is required to determine the closing inventory balance
• This closing balance is then used to calculate/determine the Cost of Sales