Chapter 4- Inventory/Merchandise Flashcards
What is inventory/merchandise?
-Products/goods that a company buys or manufactures (produces) to sell
-Asset
-NB= Debit
What are wholesalers?
buys the product from the manufacturer and sells to retailer
Who are retailers?
buys product from the wholesaler and sells to the customer
What is the Sales account?
-Revenue account for inventory
-NB=Credit
What is the Cost of Goods Sold account? (COGS)
-Expense related to the sale of inventory
-NB= Debit
What is the equation for gross profit?
Net Sales-Cost of Goods Sold= Gross Profit
What is the equation for Net Sales?
Sales
- Sales discounts
- Sales returns and allowances
=Net sales
What is the equation for cost of goods sold?
Initial cost
+ shipping/transportation
+storage
+repairs/maintenance/cleaning
+installation
+sales tax
= cost of goods sold
(initial cost + any use to get the inventory ready for sale)
What is the equation for ending inventory?
Beginning inventory
+Purchases
= Goods Available for Sale
Goods Available for Sale
-Cost of Goods Sold
=Ending inventory
What are the two ways to account for inventory?
- Perpetual System
- Periodic System
What is the Perpetual System?
-“Live” update of inventory
-The “system” updates after every single purchase and/or sale
Pros:
-always know quantity
-knows when to purchase more
*most used due to technology (most efficient)
Cons:
-technology breakdown
-expansive
What is the Period System?
-Inventory is only counted “periodically”- usually at month end
-Usually a manual system
Cons:
-Don’t know at any specific point in time how much inventory is on hand
-Human error
-Time consuming
-Potential lost sales
What are purchases with cash discounts?
Offering a percent off when a company buys on credit as an incentive to pay sooner/quicker
What are credit terms?
The amount of discount (% off) and timing of payments (credit periods)
What do credit terms: 3/15, n/45 mean?
3% discount if paid in 15 days
If not, net balance (full amount) is due in 45 days
What is the gross method?
-Records the purchase at the full (gross) amount and then later adjusts if the discount is taken
(Acc 211)
What is the net method?
-Records the purchase as if the discount was already taken and then adjust later if it was not
What 3 accounts are used for the buyer side of inventory?
ONLY
1. Inventory > *all adjustments impact inventory
2. Accounts payable
3. Cash
What is the the equation for inventory?
-purchases
-discounts
-returns on allowances
+transportation/ (freight in)
**inventory is valued on our books at cost
What are purchases with returns?
Returns- when a buyer gives back the inventory and in return receives back the cash or is credited for the unpaid amount (AP is lowered)
What are purchases with allowances?
Allowance- when a buyer receives a damaged good but is allowed to keep the inventory and is offered a price reduction or money back for the damage
What are transportation costs?
-Buyer and seller must agree who pays the shipping costs
-whoever pays shipping is also liable for the goods
What is FOB?
“Freight on Board” Point
-Point of transfer from seller to buyer
What is FOB shipping?
“Freight in”
-Buyer pays shipping
-Buyer is liable for the goods
FOB Point: at the warehouse of the seller (Before the goods are transferred) when the goods depart the sellers location
**increases inventory
What is FOB destination?
“Freight out”
-Seller pays shipping
-Seller is liable for the goods
FOB Point: ownership changes hand when the goods are received at the buyers location
**transportation expense
What two journal entries are required when you are the seller?
When inventory is sold 2 journal entries are required:
1. Revenue side-
DR cash/ AR
CR inventory
2. Cost side
DR Cost of goods sold
CR inventory
What are sales discounts accounts?
-contra revenue account
-NB= debit
What are sales returns and allowances?
-contra revenue account
-NB= debit
What are gain or loss accounts?
-Not any type of account, they are standalone
-G/L account for any transaction- just make it specific
-Gain= credits
-Losses= debits
What is inventory shrinkage?
Loss of inventory
-reasons: theft, expires, damaged
-Discovered through a physical inventory count
-Adjusted at year end (AJE)
What is the FS for inventory?
- Income statement **different
- Statement of Retained Earnings
- Balance sheet- only difference is now inventory is added as an asset under accounts receivable
- Statement of Cash Flow
What are the 2 types of income statements?
- “Single step” Income Statement
RevenuesExpenses
Net income/ (loss)
- “Multi Step” Income Statement
-used for manufacturing companies and retail companies ->inventory
What is the equation for income from operations?
Gross profit
- operation expense
=income from operation
What is the equation for net income?
Income for operation
+/- non operating (G/L)
=Net income
What are the two closing entries?
- Temporary
-close to 0
-Start with a 0 beginning balance
-ex: revenues, expenses, dividends - Permanent
-Don’t close
-Balance carries forward
-ex: assets, liabilities, and common stock
What is the income summary account?
-Revenues and expenses are closed to the income summary
(represents net income for the current year)
-Income statement then closes to retained earnings
What are the closing steps?
1.close credit balances
(close revenues to the income summary)
2. close debit balances (except dividends) to the income summary
3. Close the income summary to Retained Earnings
4. Close dividends to Retained Earnings
What is the Acid Test Ratio?
-AKA Quick Ratio
-Measure of merchandiser’s ability to pay its current liabilities (liquidity)
-Differs from current ratio by excluding less liquid current assets (such as inventory and prepaid expenses that take longer to be converted to cash)
Current Liabilities
What is the Gross Margin Ratio?
-AKA Gross Profit Ratio
-Assesses amount of gross profit to forecast if a company will survive
Net Sales
