Accounting 5 Flashcards
Explain the recording of purchases under a perpetual inventory system
The inventory account is debited for all purchases of merchandise and for freight costs, and it is credited for purchase discounts and purchase returns and allowances
Explain the recording of sales revenues under a perpetual inventory system.
When inventory is sold, Accounts Receivable (or Cash) is debited and Sales Revenue is credited for the selling price of the merchandise. At the same time Cost of Goods Sold is debited and Inventory is credited for the cost of inventory items sold. Separate contra revenue accounts are maintained for Sales Returns and Allowances and Sales Discounts. These accounts area debited as needed to record returns, allowances, or discounts related to the sale.
Distinguish between a single-step and a multiple step income statement.
In a single step income statement- companies classify all data under 2 categories, revenue or expenses, and net income is determined in one step
A multiple step income statement- shows numerous steps in determining net income, including results of non-operating activities
Determine cost of goods sold under a periodic system
The periodic system uses multiple accounts to keep track off transactions that affect inventory. To determine cost of goods sold, first calculate cost of foods purchased by adjusting purchases for returns, allowances, discounts, and freight in. Then calculate cost of goods sold by adding cost of goods purchased to beginning inventory and subtracting ending inventory.
Explain the factors affecting profitability
affected by gross profit, as measured by the gross profit rate, and by management’s ability to control cost, as measured by the profit margin
Identify a quality of earnings indicator
Earnings have high quality if they provide a full and transparent depiction of how a company performed. An indicator of the quality of earnings is the quality of earnings ration, which is net cash provided by operating activities divided by net income. Measures about 1 suggest the company is employing conservative accounting practices. Measures significantly below 1 might suggest the company is using aggressive accounting to accelerate the recognition of income
What formula would you use to answer the question, “Is the price of goods sold keeping pace with changes in the cost of inventory?
Gross profit Rate= (Gross profit/ Net Sales)
- higher ratio=average margin between the selling price and inventory cost is increasing
- lower ratio= too high margin between the selling price and inventory cost is decreasing
What formula would you use to answer the question, “Is the company maintaining an adequate margin between sales and expenses?”
Profit margin= (net income/ net sales)
-higher values=favorable returns on each dollar of sales
What is the Quality of Earnings Ratio formula and what does it provide?
Quality of earnings ratio=
(net cash provided by operating activities/ net income)
-provides a depiction of how a company performed
contra revenue account
an account that is offset against a revenue account on the income statement
cost of goods sold
the total cost of merchandise sold during the period
Gross profit
the excess of net sales over the cost of goods sold
Gross profit rate
gross profit expressed as a percentage by dividing the amount of gross profit by net sales
net sales
Sales less sales returns and allowances and sales discounts
Periodic inventory system
an inventory system in which a company does not maintain detailed records of goods on hand throughout the period and determine the cost of goods sold only at the end of an accounting period
Perpetual inventory system
a detailed inventory system in which a company maintains the cost of each inventory item, and the records continuously show the inventory that should be on hand
Profit margin
measures the percentage of each dollar of sales that results in net income, computed by dividing net income by net sales
purchase allowance
a deduction made to the selling price of merchandise, granted by the seller, so that the buyer will keep the merchandise
purchase discount
a cash discount claimed by a buyer for prompt payment of a balance due
purchase invoice
a document that provides support for each purchase
purchase return
a return of goods from the buyer to the seller for cash or credit
Quality of earnings ratio
a measure used to indicate the extent to which a company’s earnings provide a full and transparent depiction of its performance; computed as net cash provided by operating activities divided by net income
Sales discount
a reduction given by a seller for prompt payment of a credit sale
sales invoice
a document that provides support for each sale
sales returns and allowances
transactions in which the seller either accepts good back from the purchaser (a return) or grants a reduction in the purchase price (an allowance) so that the buyer will keep the goods
sales revenue
primary source of revenue for the merchandising company
What are the key components of a multiple step income statement?
- Sales, and sales discounts
1) net sales
2) cost of goods sold
3) gross profit
4) total operating expenses - income from operations
5) other revenues and gains
- interest revenue
6) other expenses and losses- interest expense
- income before income taxes
7) income tax expenses
8) net income (loss)
What is an example of periodic inventory systems
when companies determine cost of goods sold only at the end of the accounting period
What does not result in an adjustment in the inventory account under a perpetual system?
Payment of freight costs for goods shipped to a customer
What sales account normally has a debit balance
- sales discounts
- sales returns and allowances
A company makes a credit sale of $750 on June 13th, terms 2/10 , n/30, on which it grants a return of $50 on June 16. What amount is received as payment in full on June 23rd?
$686
(($750-$50)*.98)= $686
To record the sale of goods for cash in a perpetual inventory system…
two journal entries are necessary: one to record the receipt of cash and sales revenue, and one to record the cost of goods sold and reduction of inventory
Gross profit will result if
sales revenues are greater than cost of goods sold
If sales revenues are $400,000 cost of goods sold is $310,000, and operating expenses are $60,000. What is the gross profit?
$90,000
($400,000- $310,000)= $90,000
Multiple- step income statements for a merchandising company show what features?
gross profit
cost of goods sold
a sales section
If the beginning inventory is $60,000 cost of goods purchased is $380,000 and ending inventory is $50,000, what is cost of goods sold under a periodic system?
$390,000
($60,000+$380,000-$50,000)= $390,000
Bufford Corporation had reported the following amounts at December 31, 2014; Calculate the cost of goods available for sale. Sales revenue $184,000 ending inventory $11,600 beginning inventory $17,200 purchased $60,400 purchased discounts $3,000 purchased returns and allowances $1,100 freight in $600 freight out $900
$74,100
($17,200+ ($60,400-$3,000-$1,100+$600))=$74,100
What would affect the gross profit rate?
an increase in cost of goods sold
The gross profit rate is equal to
net sales minus cost of goods sold, divided by net sales
During the year ended Dec 31, 2014, Bjornstad Corporation had the following results; What was the profit margin?
sales revenue $267,000
Cost of Goods sold $107,000
Net income $92,400
Operating Expenses $55,400
net cash provided by operating activities $108,950
34.6%
($92,400/ $267,000)*100= 34.6%
a quality of earnings ratio that is less than 1…
indicates that a company might be using aggressive accounting tactics of
When goods are purchased for resale by a company using a periodic inventory system:
purchases on accounts are debited to Purchases
What are the 2 systems used by companies to account for inventory
Perpetual inventory
periodic inventory
What is the flow of costs for a perpetual system
- maintain detailed records of the cost of each inventory purchase and sale
- records continuously show inventory that should be on hand for every item
- company determines cost of goods sold each time a sale occurs
What is the flow cost of a periodic system
- dont keep detailed records of the goods on hand
- cost of goods sold determined by count at the end of the accounting period
- calculation of cost of goods sold=
- beginning inventory
- add:Purchases
- net Goods available for sale
- Less: Ending inventory
- Costs of Goods sold
When recording Purchases of Merchandise purchases are made using _____; normally recorded when _________, and the _______ should support each credit purchase
- cash or credit (on account)
- goods are received from the seller
- purchase invoice
Freight costs incurred by the seller are an
operating expense
what does the term n/10 EOM
the net amount is due within the first 10 days of the next month
When recording sales of merchandise sales are made using ______; sales revenue is recorded when_________, performace obligation is satisfied when the goods are _______, sales invoice should support each _______
- cash or credit (on account)
- the performance obligation is satisfied
- transferred from the seller to the buyer
- credit sale
What does the multiple step income statement provide and what are the 3 important line items
- highlights the components of net income
1) gross profit
2) income from operations
3) net income
Identify the difference between a service company and a merchandising company.
Because of the presence of inventory, a merchandising company has sales revenue, costs of goods sold, and gross profit. To account for inventory, a merchandising company must choose between a perpetual inventory system and a periodic inventory system.
