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BA 99 series > Inventories > Flashcards

Inventories Flashcards

1
Q

What are retailers?

A

Retailers purchase and sell directly to consumers.

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2
Q

What are wholesalers?

A

Wholesalers sell to retailers.

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3
Q

What is sales revenue?

A

It is the primary source of revenue for merchandising companies.

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4
Q

What are the two categories of expenses for merchandising companies?

A

COGS and operating expenses

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5
Q

What is COGS?

A

It means cost of goods sold or the total cost of merchandise sold during the period

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6
Q

What is the income measurement process of merchandising companies?

A

Sales revenue less COGS equals gross profit. Gross profit less operating expenses equals net income.

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7
Q

What is the operating cycle of merchandising companies?

A

Cash are used to buy inventories. Inventories are sold and cash is received.

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8
Q

Compare the operating cycle of merchandising and service companies.

A

The operating cycle of merchandising companies are typically longer than that of service companies. The purchase of merchandise inventory and its eventual sale lengthen the cycle.

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9
Q

How does the costs flow for a merchandising company?

A

Beginning inventory plus the cost of goods purchased is the cost of goods available for sale. As goods are sold, they are assigned to cost of goods sold. Those goods that are not sold by the end of the period represent the ending inventory.

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10
Q

What are the two systems to account for an inventory?

A

Perpetual inventory system and periodic inventory system

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11
Q

What is the perpetual inventory system?

A

It keeps detailed records of the cost of each inventory purchase and sale.

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12
Q

What is the control procedure for inventories of merchandising companies?

A

Physical count at the end of the period

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13
Q

When are COGS determined under a perpetual inventory system?

A

Each time a sale occurs

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14
Q

When are COGS determined under a periodic inventory system?

A

Only at the end of the accounting period

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15
Q

What is a periodic inventory system?

A

It does not keep detailed inventory records of the goods on hand throughout the period.

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16
Q

What are the steps to determine COGS under a periodic inventory system?

A
  1. ) Determine the cost of goods on hand at the beginning of the accounting period (i.e. beginning inventory).
  2. ) Add it to the cost of goods purchased (which totals the cost of goods available for sale).
  3. ) Subtract the goods on hand as determined by the physical inventory count at the end of the accounting period (i.e. ending inventory).
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17
Q

What are the advantages of the perpetual system?

A
  • for companies that sell merchandise with high unit values
  • provides better control over inventories
  • can be applied using basic accounting software (no need to invest in a computerized one)
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18
Q

What are needed to record cash purchase?

A
  • received goods

- canceled checks or a cash register receipts

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19
Q

What are needed to record credit purchases?

A
  • received goods

- purchase invoice

20
Q

How to record cash purchase in a perpetual inventory system?

A

Dr. Inventory

Cr. Cash

21
Q

How to record cash purchase in a periodic inventory system?

A

Dr. Purchases

Cr. Cash

22
Q

How to record credit purchase in a periodic inventory system?

A

Dr. Purchases

Cr. Accounts payable

23
Q

How to record credit purchase in a perpetual inventory system?

A

Dr. Inventory

Cr. Accounts Payable

24
Q

What are the contents of an invoice?

A
  • seller
  • salesperson
  • invoice date
  • buyer
  • credit terms
  • freight terms
  • goods sold: catalog number, description, quantity, price per unit
  • total invoice amount
25
Q

What are the purchases not recorded in an inventory?

A

Purchases that are for use and not for resale

26
Q

What is the need for sales agreement?

A

To indicate who is to pay for transporting the goods

27
Q

What does a common courier prepare?

A

Freight bill

28
Q

What are the freight terms?

A

FOB shipping point and FOB destination

29
Q

What does FOB mean?

A

Free on board

30
Q

What is FOB shipping point?

A

It means the seller places the goods free on board the carrier, and the buyer pays the freight costs.

31
Q

What is FOB destination?

A

It means that the seller places the goods free on board to the buyer’s place of business, and the seller pays the freight.

32
Q

How does freight affect the buyer’s books?

A

Increases the amount of inventory

33
Q

How does freight affect the seller’s books?

A

Increase in operating expenses

34
Q

What are purchase returns?

A

Returned goods to the seller for credit or cash refund

35
Q

What are purchase allowances?

A

Granted allowance (or deduction) from the purchase price

36
Q

How does purchase returns and allowances affect the buyer’s books?

A

Decreases the amount of inventory (and accounts payable)

37
Q

What are purchase discounts?

A

A cash discount for prompt payment

38
Q

What is the advantage of purchase discounts for the buyer and seller?

A
  • buyer saves money

- seller shorten the operating cycle (A/R are converted to cash)

39
Q

What are credit terms?

A

It specify the amount of the cash discount and time period in which it is offered.

40
Q

What does “2/10, n/30” mean?

A

This means the buyer may take 2% cash discount on the invoice price net of any returns and allowances, if payment is made within 10 days of the invoice date (discount period). Otherwise, the net invoice price is dues 30 days from the invoice date.

41
Q

What does “n/10 EOM” mean?

A

Buyer must pay the net amount within the first 10 days of the next month.

42
Q

How does purchase discount affect buyer’s books if paid within discount period?

A

Reduced the amount of Inventory

Dr. Accounts payable
Cr. Cash
Cr. Inventory

43
Q

What happens if buyer pass up the discount?

A

May be viewed as paying interest

44
Q

Summarize the effect of purchasing transactions to the Inventory account in a perpetual inventory system.

A

Purchase and freight-in increases the account while PR&A and PD decreases it.

45
Q

According to the revenue recognition principle, when are sales revenue recorded?

A

When performance obligation are satisfied, i.e. the goods are transferred from the seller to the buyer

46
Q

What are needed to record cash sales?

A

Cash register documents

47
Q

What are needed to record credit sales?

A

Sales invoice

BA 99 series (1 decks)

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