Chapter 5.2 Recording purchases of merchandise

Question 1

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

Answer 1

inventory is eitehr bought or sold

Question 2

where is purchases of inventory recorded in perpetual inventory system

Answer 2

inventory account

Question 3

What affects the purchase cost of inventory

Answer 3

-> increased by freight costs

-> decreased by any purchase returns/allowances/discounts

Question 4

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

Answer 4

COST OF GOODS PURCHASED

Question 5

What are two ways the company can purchase inventory

Answer 5

using cash or using credit (on account)

Question 6

when do companies record purchases

Answer 6

when the goods are receivied from the seller

Question 7

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

Answer 7

invoices, receiving reprots, and purchase orders

Question 8

what is a purchase order

Answer 8

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

Question 9

What are receiving reports

Answer 9

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

Question 10

Invoices are used for what?

Answer 10

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

Question 11

JE for purchase

Answer 11

DR Inventory
CR Cash or accounts payable

Question 12

Do we care about sales tax?

Answer 12

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

Question 13

GST VS PST VS HST

Answer 13

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

Question 14

What is a freight cost

Answer 14

shipping cost

Question 15

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

Answer 15

buyer and seller

Question 16

why do we care about freight terms

Answer 16

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

Question 17

2 types of freight terms

Answer 17

FOB destination
FOB shippig point

Question 18

FOB meaning

Answer 18

free on board, until ownership is transferred

Question 19

FOB destination- defintion

Answer 19

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

Question 20

FOB shipping point- defiintion

Answer 20

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

Question 21

Who pays freight when FOB Shipping point

Answer 21

buyer

Question 22

Who pays freight when FOB Destination

Answer 22

Seller

Question 23

FOB DESTINATION VISUAL

Answer 23

Seller pays freight costs

seller owns good until received by buyer

when buyer receives goods, ownership passes

Question 24

FOB SHIPPING POINT VISUAL

Answer 24

Seller loads onto truck

BUYER Owns goods as soon as they are shipped,

BUYER pays freight costs when they recieve the goods

Question 25

How are freight costs recorded- FOB SHIPPING POINT

Answer 25

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

Question 26

when to record in JE about deliver from fob shipping point?

Answer 26

ON THE DAY GOODS ARE DELIVERED

Question 27

what is a purchase return

Answer 27

when the purchaser returns the goods for cash refund or credit (if bought on account)

Question 28

what is purchase allownaces

Answer 28

buyer may choose to keep merchandise if seller is willing to give an allowance (Reduce the purchase price)

Question 29

how to record purchase return and allowances

Answer 29

DR
CR Inventory (reflects the decrease in cogpurchased)

Question 30

purchase discount

Answer 30

when goods are bought on account, buyer may claim discount for early payment

“Early bird discounts”

Question 31

is purchase discount good for both buyer and seller

Answer 31

yes! buyer saves money, seller is able to shorten its operating cycle (A/R becomes cash faster)

Question 32

Example of common purchase discount

Answer 32

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

Question 33

what is an invoice

Answer 33

a request to pay from seller to buyer

Question 34

what does just n/30 mean

Answer 34

the total amount payed in less than 30 days

Question 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:

Answer 35

A/P 3600
CASH 3528
INVENTORY 72

Question 36

When do you adjust entries for inventory

Answer 36

at year end

Question 37

how to adjust entry for period end inventory

Answer 37

COGS ###
inventory ####

bc even though inventory not sold we consider it as cogs to easier understand

Question 38

if fob destination… pays frieght

Answer 38

seller pays freight

Question 39

if fob shipping point… pays frieght

Answer 39

buyer

Question 40

if buyer is paying freight (fob shipping point), then how is it recorded in buyers book?

Answer 40

Dr Inventory (freight cost)
Cr Cash (Cash)

You DR inventory because inventory INCLUDES the cost of both purchase+frieght

Question 41

if buyer is paying freight (fob shipping point), then how is it recorded in buyers book?

Answer 41

Dr Inventory (freight cost)
Cr Cash (Cash)

You DR inventory because inventory INCLUDES the cost of both purchase+frieght

Question 42

if buyer is paying freight (fob destination), then how is it recorded in buyers book?

Answer 42

no entry

Question 43

How would a buyer returning inventory in exchange frsstore credit record it in buyers books?

Answer 43

DR A/P (decreases the amount of A/P in the future)

CR inventory (decreased)

Question 44

How would you record an entry for purchase discount paid within discount period, 2/10 n/30?

Answer 44

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)

Question 45

can you get discounts on frieght costs

Answer 45

ofc not dumbass

Question 46

why do companies usually pay wthin the discount period of 2/10 n/30?

Answer 46

because the 2% that is not used is viewed as wasted excess money, or “interest” on using the money

Question 47

how would you record a payment within the n/30 in a buyers books

Answer 47

Dr AP (Total cost)
Cr Cash (Total cost)

Question 48

How is accounting books adjusted for shrinkage at the end of the period?

Answer 48

Dr COGS (shrinkage)
Cr Inventory (shrinkage)

Question 49

when you read, company pays the total amount owing do what?

Answer 49

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