Chapter 5.2 Recording purchases of merchandise Flashcards

1
Q

in perpetual inventory system, inventory account is ALWAYS effected when —-

A

inventory is eitehr bought or sold

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2
Q

where is purchases of inventory recorded in perpetual inventory system

A

inventory account

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3
Q

What affects the purchase cost of inventory

A

-> increased by freight costs

-> decreased by any purchase returns/allowances/discounts

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4
Q

what is the net results of inventory costs (taking into account freight costs and returns/allowances/discounts)

A

COST OF GOODS PURCHASED

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5
Q

What are two ways the company can purchase inventory

A

using cash or using credit (on account)

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6
Q

when do companies record purchases

A

when the goods are receivied from the seller

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7
Q

what are examples of documentation that would be used to support inventory purchases

A

invoices, receiving reprots, and purchase orders

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8
Q

what is a purchase order

A

documentation of the types, quantities, and agreed prices of goods taht are purchased (used for larger companies w larger orders)

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9
Q

What are receiving reports

A

reports that r completed when goods which were ordered are received (document the types and quantities)

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10
Q

Invoices are used for what?

A

compared w the purchase order and receiving reports to CHECK the goods on the inovice were ordered and recevied

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11
Q

JE for purchase

A

DR Inventory
CR Cash or accounts payable

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12
Q

Do we care about sales tax?

A

NO! this could create increased costs for purchasers, but manufacturing companies can offset this by including tax in the price of goods

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13
Q

GST VS PST VS HST

A

GST= FEDERAL
PST= PROVINCIAL
HST= HARMONIZED SALES TAX (P+F)

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14
Q

What is a freight cost

A

shipping cost

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15
Q

who agrees on the “Freight terms” (Who will pay for the shipping/who is responsibile for the risk/loss/damage of goods during shipping)

A

buyer and seller

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16
Q

why do we care about freight terms

A

helps us determine when the asset of seller becomes asset of buyer

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17
Q

2 types of freight terms

A

FOB destination
FOB shippig point

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18
Q

FOB meaning

A

free on board, until ownership is transferred

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19
Q

FOB destination- defintion

A

FREE ON BOARD, until arrived at DESTINATION

goods are owned by the seller until it reaches the buyer; seller responsbile for safe delivery of goods; seller pays freight costs

**remain in inventory until they are delivered

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20
Q

FOB shipping point- defiintion

A

FREE ON BOARD until BUYER MAKES THE PURCHASE

buyer responsible for freight costs; buyer responsible for an y loss or damage; goods become part of buyers inventory at the the SHIPPING POINT not when it arrives at the buyers location

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21
Q

Who pays freight when FOB Shipping point

22
Q

Who pays freight when FOB Destination

23
Q

FOB DESTINATION VISUAL

A

Seller pays freight costs

seller owns good until received by buyer

when buyer receives goods, ownership passes

24
Q

FOB SHIPPING POINT VISUAL

A

Seller loads onto truck

BUYER Owns goods as soon as they are shipped,

BUYER pays freight costs when they recieve the goods

25
How are freight costs recorded- FOB SHIPPING POINT
Inventory freight cost Cash freight cost increases inventory because the cost of invenoty includes the purchase cost AND also any other costs incurred to transport the inventory for sale
26
when to record in JE about deliver from fob shipping point?
ON THE DAY GOODS ARE DELIVERED
27
what is a purchase return
when the purchaser returns the goods for cash refund or credit (if bought on account)
28
what is purchase allownaces
buyer may choose to keep merchandise if seller is willing to give an allowance (Reduce the purchase price)
29
how to record purchase return and allowances
DR CR Inventory (reflects the decrease in cogpurchased)
30
purchase discount
when goods are bought on account, buyer may claim discount for early payment "Early bird discounts"
31
is purchase discount good for both buyer and seller
yes! buyer saves money, seller is able to shorten its operating cycle (A/R becomes cash faster)
32
Example of common purchase discount
2/10, n/30 2% discount if you pay within 10 days of invoice date (Discount period) otherwise the total price is due in 30 days from the invoice date
33
what is an invoice
a request to pay from seller to buyer
34
what does just n/30 mean
the total amount payed in less than 30 days
35
When an invoice is paid within the discount period, the amount of the discount decreases the cost recorded in the Inventory account. To illustrate, assume that the credit terms were 2/10, n/30, rather than n/30. If Sauk Communications wanted to settle its payable on May 12, the last day of the discount period, it would have to pay $3,528. This is calculated as $3,600 less a $72 purchase discount [gross invoice price of $3,900 − purchase returns and allowances of $300 = $3,600 × 98% (100% less 2% discount), or $72]. Note that returns reduce the amount eligible for a discount. In addition, discounts are not taken on freight costs. The entry to record the May 12 assumed payment by Sauk Communications would be:
A/P 3600 CASH 3528 INVENTORY 72
36
When do you adjust entries for inventory
at year end
37
how to adjust entry for period end inventory
COGS ### inventory #### bc even though inventory not sold we consider it as cogs to easier understand
38
if fob destination... pays frieght
seller pays freight
39
if fob shipping point... pays frieght
buyer
40
if buyer is paying freight (fob shipping point), then how is it recorded in buyers book?
Dr Inventory (freight cost) Cr Cash (Cash) You DR inventory because inventory INCLUDES the cost of both purchase+frieght
41
if buyer is paying freight (fob shipping point), then how is it recorded in buyers book?
Dr Inventory (freight cost) Cr Cash (Cash) You DR inventory because inventory INCLUDES the cost of both purchase+frieght
42
if buyer is paying freight (fob destination), then how is it recorded in buyers book?
no entry
43
How would a buyer returning inventory in exchange frsstore credit record it in buyers books?
DR A/P (decreases the amount of A/P in the future) CR inventory (decreased)
44
How would you record an entry for purchase discount paid within discount period, 2/10 n/30?
Dr A/P (total amount on invoice) Cr Cash (Cost-purchase discount) Cr Inventory (amount that was discounted off the cost of the merch, so 2% of the invoice)
45
can you get discounts on frieght costs
ofc not dumbass
46
why do companies usually pay wthin the discount period of 2/10 n/30?
because the 2% that is not used is viewed as wasted excess money, or "interest" on using the money
47
how would you record a payment within the n/30 in a buyers books
Dr AP (Total cost) Cr Cash (Total cost)
48
How is accounting books adjusted for shrinkage at the end of the period?
Dr COGS (shrinkage) Cr Inventory (shrinkage)
49
when you read, company pays the total amount owing do what?
check if you are w/n dicount period IF YES: dr a/p cr cash (total-discount) cr inventory (discount) IF NO: Dr. a/p cr. cash
50