Unit 8 Flashcards

1
Q

What does a merchandise business do?

A

Sell inventory

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2
Q

What is a retail company?

A

A type of merchandising business that buys inventory from a wholesaler and resells it at a higher price

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3
Q

What are the 2 types of inventory systems? Describe each + their pros and cons

A

Perpetual inventory system: Inventory is updated whenever a transaction occurs
- Pros: more efficient and reliable, get instant info about quantities/costs of inventory

Periodic inventory system: Inventory is updated at certain times during accounting period (e.g. when decisions are to be made)
- Pros: less expensive to set up in the past because technology was costly

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4
Q

Name 3 examples of technology that might be used in a perpetual inventory system

A

POS terminals
Computerized cash registers
Scanners

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5
Q

Which inventory system is most often used by companies?

A

Perpetual

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6
Q

What type of business sells inventory to merchandising companies?

A

Wholesalers

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7
Q

4 reasons for returning inventory

A

Unsatisfied with inventory (e.g. poor quality, didn’t meet specifications, etc)
Inventory was defective (e.g. broken)
Difficult to resell (low demand)
Competitors offering lower price

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8
Q

Define discount

A

Amount deducted from the price of inventory sold

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9
Q

Define purchase discount

A

Offered to a buyer who makes a purchase on account and pays within the discount period

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10
Q

Define quantity discount

A

Discount on bulk purchases

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11
Q

Define purchase allowance

A

Reduction in the price of unsatisfactory inventory that was purchased (provided as an incentive for the buyer to keep the inventory)

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12
Q

What are 5 accounts used to record transactions for a merchandising business? Describe each.

A

Merchandise inventory (short-term asset)
Cost of goods sold (expense)
Sales (revenue)
Sales discount (contra-revenue)
Sales returns and allowance (contra revenue)

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13
Q

What source documents are used to record the sale of inventory?

A

Cash sales slip
Sales invoice

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14
Q

How is profit calculated for a merchandising business?

A

Net sales - cost of goods sold = gross profit
Gross profit - operating expenses = profit (or loss)

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15
Q

How are net sales calculated?

A

Net sales = sales - sales returns and allowances - sales discounts

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16
Q

How is gross profit calculated?

A

Net sales - cost of goods sold

17
Q

What is the difference between a single-step income statement and a multiple-step income statement?

A

Single-step income statement: Shows 1 step (revenue - expenses) in determining profit/loss
Multiple-step income statement: Shows several steps in determining profit/loss (used for merchandising business)

18
Q

What is ONE benefit of the single-step income statement and multiple-step income statement?

A

Single-step: easy to read
Multiple-step: gives more info about the company’s profitability and distinguishes between its operating and non-operating activities

19
Q

How is the Statement of Owner’s Equity prepared for a merchandising business?

A

In the same way as a service business

20
Q

Where is merchandise inventory recorded on a balance sheet?

A

Below accounts receivable and above supplies & prepaid expenses

21
Q

What is the one adjusting entry specific to a merchandising business? Why is this adjusting entry required?

A

Inventory on hand at the end of the fiscal year
WHY: to ensure that inventory records are accurate (no errors / theft)

22
Q

How do you journalize this entry?

A

DR: Cost of Goods Sold
CR: Merchandise Inventory

23
Q

What are 4 reasons why merchandise inventory might be > than inventory on hand

A

Inventory was…
Stolen, destroyed, damaged, thrown out

24
Q

What are the 6 accounts specific to merchandising businesses? (these will be listed on the adjusted trial balance)

A

Merchandise inventory
Sales
Sales discounts
Sales returns and allowances
Freight Out
Cost of Goods Sold

25
Q

Closing entries are made at the end of the accounting period to close the balances of the Temporary Accounts. What are 3 revenue accounts and 2 expense accounts specific to merchandising businesses?

A

Revenues: Sales, Sales Returns and Allowances, Sales Discounts
Expenses: Cost of Goods Sold, Freight Out

26
Q

What is the ONLY new account listed in the post-closing trial balance for a merchandising business?

A

Merchandise Inventory