3 Flashcards
(23 cards)
- Define merchandise inventory. What types
of costs are included in the Merchandise
Inventory account?
Merchandise inventory is finished goods that are held for sale to customers. Costs that are included in “merchandise inventory” include the cost of the product, transportation-in costs, packaging costs, transit insurance, etc.
- What is the difference between a product
cost and a selling and administrative cost?
Product costs are costs associated with goods for resale, usually inventory costs. Selling and administrative expenses, called period costs, are costs that are not directly traceable to products, for example, operating expenses.
- How is the cost of goods available for sale
determined?
Cost of goods available for sale is the total of inventory on hand at the beginning of the period plus inventory purchased during the period.
- What portion of cost of goods available for
sale is shown on the balance sheet? What
portion is shown on the income statement?
The cost of the items that have not been sold are allocated to merchandise inventory (asset) and are shown on the balance sheet. The cost of the items that have been sold are allocated to cost of goods sold (expense) and are shown on the income statement.
- When are period costs expensed? When are
product costs expensed?
Period costs are expensed in the period they are incurred or used. Product costs are expensed in the period in which the inventory is sold.
- If PetCo had net sales of $600,000, goods
available for sale of $450,000, and cost of
goods sold of $375,000, what is its gross
margin? What amount of inventory will be
shown on its balance sheet?
Net Sales $600,000
Cost of Goods Sold (375,000)
Gross Margin $225,000
Cost of Goods Available for Sale $450,000
Cost of Goods Sold (375,000)
Ending Merchandise Inventory $ 75,000 (shown in balance sheet)
- Describe how the perpetual inventory system
works. What are some advantages of
using the perpetual inventory system? Is it
necessary to take a physical inventory when
using the perpetual inventory system?
Under a perpetual inventory system, the balance in the inventory account is increased each time goods are purchased and decreased each time goods are sold. The major advantage of the perpetual system is the inventory account will reflect changes to inventory on a continual basis. Another advantage of the perpetual method is that it allows for better internal control of inventory.
A physical inventory should be taken even when the perpetual method is used. A physical count is necessary under the perpetual method in order to adjust the balance of the inventory account for items that have been lost, stolen, or damaged.
8. What are the effects of the following types of transactions on the accounting equation? Also identify the financial statements that are affected. (Assume that the perpetual inventory system is used.) a. Acquisition of cash from the issue of common stock. b. Contribution of inventory by an owner of a company. c. Purchase of inventory with cash by a company. d. Sale of inventory for cash.
a. Assets increase, stockholders’ equity increases - The balance sheet, statement of cash flows, and statement of changes in stockholders’ equity are affected.
b. Assets increase, stockholders’ equity increases - This is similar to an acquisition of cash capital from the owner except that inventory and not cash is increased. The balance sheet and statement of changes in stockholders’ equity are affected. The statement of cash flows is not affected.
c. This is an asset exchange and total assets would not change. The balance sheet and statement of cash flows are affected.
d. Assets both increase and decrease (cash increases, inventory decreases) and stockholders’ equity both increases and decreases (revenue is increased and cost of goods sold is increased). The balance sheet, income statement, statement of changes in stockholders’ equity, and statement of cash flows are affected.
- Northern Merchandising Company sold inventory
that cost $12,000 for $20,000 cash.
How does this event affect the accounting
equation? What financial statements and
accounts are affected? (Assume that the
perpetual inventory system is used.)
Assets would both increase and decrease (cash increases by $20,000 and inventory decreases by $12,000) and stockholders’ equity both increases and decreases (revenue is increased by $20,000 and cost of goods sold is increased by $12,000). All four financial statements are affected.
10. If goods are shipped FOB shipping point, which party (buyer or seller) is responsible for the shipping costs?
If goods are shipped FOB shipping point, the buyer is responsible for the shipping costs.
- Define transportation-in. Is it a product or a
period cost?
Transportation-in is the cost of freight and shipping charges on goods purchased. It is a product cost because it is a part of the cost of the goods purchased.
- Quality Cellular Co. paid $80 for freight
on merchandise that it had purchased for
resale to customers (transportation-in) and
paid $135 for freight on merchandise delivered
to customers (transportation-out).
The $80 payment is added to what account?
The $135 payment is added to what
account?
The $80 transportation-in is a product cost and is added to the Merchandise Inventory account. The $135 transportation-out is a period cost and is added to the expense account Transportation-out.
- Why would a seller grant an allowance to a
buyer of the his merchandise?
When allowances are granted it is usually because the customer received inferior or damaged merchandise. When granting an allowance, the seller does not take back the goods and saves the cost of shipping and replacing the product. In addition, it saves time in handling the problem.
- Dyer Department Store purchased goods
with the terms 2/10, n/30. What do these
terms mean?
2/10 n/30 means that a 2% discount may be taken off of the selling price if payment is made within ten days of the invoice date. If the discount is not taken, the amount of the invoice is due in 30 days.
- Eastern Discount Stores incurred a $5,000
cash cost. How does the accounting for this
cost differ if the cash were paid for inventory
versus commissions to sales personnel?
If the $5,000 is for the purchase of inventory, this is an asset exchange in that inventory is increased and cash is decreased. A $5,000 payment for commissions is an asset use transaction; assets are decreased and stockholders’ equity is decreased (commissions expense is increased).
- What is the purpose of giving a cash discount
to charge customers?
Cash discounts are offered to customers to encourage prompt payment.
- Define transportation-out. Is it a product
cost or a period cost for the seller?
Transportation-out is the freight or shipping cost on goods sold. It is a period cost.
- Ball Co. purchased inventory with a list
price of $4,000 with the terms 2/10, n/30.
What amount will be added to the
Merchandise Inventory account?
The net amount of $4,000 will be added to the inventory account. If the invoice is paid within the discount period, the discount taken will reduce the inventory account when the invoice is paid.
- Explain the difference between purchase
returns and sales returns. How do purchase
returns affect the financial statements
of both buyer and seller? How do
sales returns affect the financial statements
of both buyer and seller?
Purchase returns refer to the situation where the buyer of the goods returns them. Sales returns refer to the situation where goods sold by the seller are returned to the seller. A sales return on the seller’s books is a purchase return on the buyer’s books. Sales returns cause an increase in assets (inventory) to the seller as previously sold merchandise is returned. Stockholders’ equity is increased as cost of goods sold is reduced by the original cost of the goods. A sales return will also cause a reduction of cash or accounts receivable as money must be refunded or credit given on accounts receivable. Stockholders’ equity will decrease by a corresponding reduction in revenue. The net effect of a sales return is a decrease in assets and a decrease in stockholders’ equity. Purchase returns are either an asset exchange or asset use. Either cash is increased or accounts payable is decreased and merchandise inventory is decreased.
- Explain the difference between gross margin
and a gain.
Gross margin is net sales less cost of goods sold and relates the sales of primary products. Gain from the sale of an asset is computed by subtracting the cost of the asset from its sales price, but a gain refers to profit from an incidental transaction not likely to regularly recur.
- What is the difference between a multistep
income statement and a single-step income
statement?
The multistep income statement provides more information on the results of various business activities. For example, net income from operations is computed separately from other gains and losses. Also, any unusual items are reported separately from normal operating activities. The single-step income statement shows a single comparison of total revenues with total expenses.
- Explain how the periodic inventory system
works. What are some advantages of using
the periodic inventory system? What are
some disadvantages of using the periodic
inventory system? Is it necessary to take a
physical inventory when using the periodic
inventory system?
When using the periodic inventory system, a temporary account, Purchases, is used to accumulate the purchases transactions for the year. Inventory is not adjusted until the end of the accounting period. At the end of the accounting period, inventory is physically counted and cost of goods sold is determined by adding beginning inventory and purchases and then subtracting ending inventory. The inventory is then adjusted, cost of goods sold is recorded and the purchases account is closed.
The periodic inventory system is easy to use in that when goods are sold, the cost of goods sold does not have to be determined. Cost of goods sold is calculated by determining goods available for sale and then subtracting the actual ending inventory.
One of the primary disadvantages of the periodic system is that the business owner has no account of the amount of lost, stolen or damaged goods. Also, it is difficult to determine the amount of inventory on hand throughout the accounting period, since there is no running balance in the inventory account.
It is necessary to take a physical inventory at the end of the accounting period. That is the only way to determine the amount of ending inventory except for some estimation techniques.
- Why does the periodic inventory system
impose a major disadvantage for management
in accounting for lost, stolen, or
damaged goods?
The periodic inventory system does not separate the cost of lost, damaged, or stolen merchandise from the cost of goods sold. This system fails to provide management with information necessary to make decisions on controlling such inventory losses.
