Exam 3 Flashcards
What is the cost of the merchandise inventory that the business has sold to customers?
Cost of goods sold
And amount granted to the purchaser as an incentive to keep goods that are not as ordered.
Purchase allowance
A type of merchandiser that buys merchandise either from a manufacturer or a wholesaler and then sells those goods to customers.
Retailer
A situation in which the buyer takes ownership at delivery destination point.
FOB destination
A type of merchandiser that buys goods from manufactures and sells them to retailers.
Wholesaler
A discount the businesses offer to purchasers as an incentive for early payment.
Purchase discount
A situation in which the buyer takes title to the goods after the goods leave the sellers place of business.
FOB shipping point
The terms of purchase or sale as stated on the invoice.
Credit terms
A sellers request for cash from the purchaser.
Invoice
When receiving an allowance from the wholesaler how are accounts affected?
You debit your accounts payable, and credit merchandise inventory
How do you prepare a single step income statement?
By adding up your net sales revenue and interest revenue, then subtracting total expenses with cost of goods sold, giving you your net income or loss.
What is gross profit?
sales revenue minus cost of goods sold.
Gross profit minus operating expenses equals?
Operating income
Gross profit percentage equals?
Gross profit divided by net sales revenue
What is the cost of ending inventory?
The dollar amount of your inventory left
Name some commonly used accounts regarding purchase and sales transactions.
Accounts receivable merchandise inventory accounts payable sales revenue sales discounts forfeited cost of good sold
What does
2/10, n/30 mean?
2% discount if payment is within 10 days of sales invoice, otherwise net amount due within 30 days of sales invoice
FOB
Free on board
What does FOB shipping point mean?
Purchaser pays the shipping cost (Freight in)
What does FOB destination point mean?
Seller pays transportation cost (freight out)
Service revenue minus operating expenses equals
Net income
Gross profit minus operating expenses equals
Net income
Sales revenue minus cost of goods sold equals
Gross profit
What is inventory shrinkage?
The loss of inventory that occurs because of theft damage and errors.
Businesses take a physical count of inventory at least once a year to account for
Inventory shrinkage
How do you adjust for inventory shrinkage?
By finding the actual difference and debiting cost of good sold in crediting merchandise inventory
Single step and multi step is in reference to
Income statements
Which format of income statement is the most common?
Single step
What’s the difference in a single step and multi step format?
The multi step form at separates operating revenue and expenses from non-operating revenue and expenses
Describe the single step income statement breakdown
list revenues i.e. sales and interest revenue and get the total for total revenue. Then you less expense including your cost of good sold all expenses and get the total expense amount. Then subtract total expense from total revenue to get net income.
Describe the process for a multi step income statement.
Start off with net sales revenue and subtract cost of goods sold to acquire gross profit. Then you less operating expense i.e. administrative, salaries, depreciation, utilities, rent for a total administrative expense. Then you less all selling expenses and add total selling expenses to total admin expenses.Then you subtract total operating expenses from gross profit to acquire income before other revenue and expenses. Then you list other revenue expenses such as interest revenue and interest expense, that would be the total net other revenue expense. You then subtract the net other revenue expense from the income before other revenue and expense to acquire net income.
Explain FIFO
The first unit cost into the inventory account is the first unit cost out of the inventory account
Describe LIFO
The last unit cost into the inventory account is the last unit cost out of the inventory account
How do you calculate average cost
By finding the total cost divided by the total number of units
assuming inflation, describe the characteristics of the following if using LIFO instead of FIFO Ending inventory account Cost of good sold Net income Income tax expense Cash flow
Less More Less Less Improved
Assuming deflation, describe the characteristics of the following when using LIFO instead of FIFO
Ending inventory account Cost of goods sold Net income Income tax expense Cash flow
More Less More More Disfavorable
When using FIFO/LIF04 tax, what must be used for financial?
Whatever one you were using for tax
_______ Is most used in accounting practices.
FIFO
Why do some businesses use LIFO?
Because the cost of goods sold is higher so they were can report less taxes.
_______ Has higher cost of goods sold during inflation
LIFO
_____ Has higher costs of goods sold during deflation
FIFO
The average method always comes out
In between LIF0 and FIFO
Which method is least likely to apply lower of cost or market rule?
LIFO
What is the lower of cost or market rule?
Rule that merchandise inventory should be reported in the financial statements at whichever is lower – – – – – it’s historical cost or its market value.
Would the lower of cost or market rule apply if cost is $390 and market value is $435?
No
What are the two inventory systems?
Physical (periodic) inventory and perpetual inventory
Which inventory system accounts for shrinkage?
Perpetual
Which inventory system allows for more level of management control?
Perpetual
As far as journal entries are concerned, what is different between the two inventory systems?
Since the perpetual inventory system is continuous, upon a sale you have to debit cost of good sold in credit merchandise inventory. As far as purchases are concerned both systems journalize the same by debiting merchandise inventory and crediting Accounts Payable.
