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accounting > chapter 5 > Flashcards

chapter 5 Flashcards

1
Q

items with the following characteristics will be classified as inventory

A

The company owns them and,
They are ready for sale to customers

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2
Q

what is a retailer?

A

A merchandising company that sells directly to consumers

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3
Q

what is a wholesaler?

A

one that sells to retailers

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4
Q

what is a manufacturer?

A

A company that produces goods for sale to wholesalers

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5
Q

A manufacturing company will classify their inventory into three main categories

A

Raw materials: goods/materials on hand that have not yet been used in production
Work in process: inventory in the production process
Finished goods: inventory that is ready for sale

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6
Q

what is the operating cycle?

A

The operating cycle is the time from when cash is spent on inventory/ providing services until the time cash received from customers.
is usually longer for a merchandising company.

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7
Q

what is sales revenue?

A

is a company’s main source of income. For a merchandising company this would include revenues from the sale of goods.

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8
Q

what is cost of goods sold?

A

is the total cost of inventory sold during the period and relates directly to the above revenue from the sale of goods.

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9
Q

what are operating expenses?

A

include the rest of a company’s expenses that are incurred in the process of earning sales revenue. This would include salaries, insurance, utilities, etc.

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10
Q

how do you calculate cost of goods available for sale?

A

beginning inventory+ cost of goods purchased

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11
Q

how do you calculate the other way of cost of goods available for sale based on the income statement and fincnaicla statement?

A

cosy of goods sold+ ending inventory

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12
Q

what are the two types of inventory systems?

A
  1. Perpetual inventory system
  2. Periodic inventory system
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13
Q

what is the perpetuall inventory system?

A

one that continuously keeps track of inventory purchases, sales and inventory on hand.

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14
Q

how are inventory purchases recorded in the perpetual inventory system?

A

are recorded by increasing inventory at the time of the purchase and credit to a/p or cash

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15
Q

every time a sale happens, how is It recorded In the perpetual inventory system (two entries)

A

debit cash/ ar, credit revenue
debit cogs, credit inventory

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16
Q

what is the periodic inventory system?

A

updates are made on a periodic basis

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17
Q

what are advantages of the perpetual inventory system?

A
  • info is always up to date
  • always management to effectively manage inventory or use systems that have automatic reorder points
  • easier to quantify goods lost to theft
  • Reduces the need for frequent inventory counts
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18
Q

what are advantages of a periodic inventory system?

A
  • simpler to use
  • Less expensive system is required which may be preferable for smaller companies
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19
Q

which system is more common to see?

A

much more common to see perpetual systems due to availability of computer software and other technologies. Therefore, the focus in this course will be companies that use perpetual systems.

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20
Q

when you purchase inventory what do you debit and credit?

A

debit inventory and credit cash/ ap

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21
Q

cost of Inventory includes what?

A

Accounting standards state that the cost of inventory includes not only the purchase cost but also the costs incurred to transport the inventory and get it ready for sale.

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22
Q

if a company has sales tax (freight costs)

A

they should be included in the cost of inventory, debit inventory, credit cash

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23
Q

there are two possible arrangements the buyer & seller will come to, what are they?

A

FOB destination and FOB shipping point

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24
Q

what is fob destination?

A

The ownership only transfers from buyer to seller once goods arrive at the buyer. The seller will pay transportation and will be responsible for any damage in transit.

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25
Q

what is fob shipping point?

A

The ownership transfers at the time the goods are accepted (picked up) by the buyer. The buyer will pay transportation and will be responsible for any damage in transit.

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26
Q

what is fob?

A

free on board and refers to when the legal title will transfer.

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27
Q

If the purchaser wants to return the goods (due to damage, quality, etc.), the supplier may offer:

A
  • A cash refund (if cash was already paid)
  • A credit (if purchase made on account)
  • The buyer may be able to keep the goods in exchange for a reduction of purchase price, referred to as sales allowance.
28
Q

It is common for suppliers to offer discounts because of what?

A

to encourage purchasers to pay their accounts sooner than later.

29
Q

When the invoice is paid within the discount period, the amount of the discount will be recorded as what?

A

a reduction to the cost of inventory.

30
Q

when would you adjust?

A

if something was stolen or damaged, dr. cost of goods sold cr. inventory

31
Q

when is a sales transaction recorded?

A

at the time the ownership transfers to the buyer

32
Q

how to record recording sales

A

Entry #1: debit cash or a/r, credit revenue
Entry #2: debit cogs, credit inventory

33
Q

In the case where we expect customers to return some of the goods, what happens?

A

IFRS says that we should reduce the amount of revenues recognized and instead record a refund liability–> current liability

34
Q

what is an estimated inventory return?

A

In order to properly match the cost of goods sold with revenues recognized, we also need to reflect the fact that we expect to receive some goods back

35
Q

how do you record freight paid?

A

dr. freight out/ shipping expense
cr. cash

36
Q

what are the two formats for preparing a statement of income?

A

single step and multi step

37
Q

what is single step?

A

all line items are simply separated in two categories, revenues and expenses. The only subtotal is net income before tax.

38
Q

what is multi step?

A

uses several steps to determine net income

39
Q

how do you calculate gross profit on multi step?

A

sales- cost of goods sold

40
Q

how do you calculate income from operations (multi step)?

A

gross profit – operating expenses

41
Q

how do you calculate income before tax? (multi step)

A

income from operations + other income and minus expenses

42
Q

how do you calculate net income? (multi step)

A

income before tax- income tax expense

43
Q

Companies have the option of presenting their operating expenses based on?

A

nature and function

44
Q

what is nature?

A

This means that expenses are classified based on the type of expense, such as salary expense, depreciation expense, advertising expense, etc.

45
Q

what is function?

A

This means that expenses are classified based on the activity for which they were incurred, such as cost of goods sold, administrative expenses, selling expenses, etc.

46
Q

When preparing a multi step Income Statement, non-operating items should be presented how?

A

separately

46
Q

what are some common examples of non operating income/ gains and expenses/ losses

A
  • Interest income from notes receivable and investments
  • investment income from investments in equity
  • Rental income that is not a company’s primary business activity
  • Gains/losses on foreign exchange
  • Gains/losses on sale of investments
47
Q

for companies that follow IRSF, we will see the statement of income called what?

A

Statement of Comprehensive Income

48
Q

what are some addiotnal things included in the statement of comprehensive income that would not be included in the statement of income?

A
  • Certain gains or losses on foreign currency translation
  • Unrealized gains or losses on certain types of investments
    The concept of other comprehensive income does not exist for ASPE.
49
Q

what is the gross profit margin ratio?

A

Gross profit margin = Gross profit ➗ Sales

50
Q

what is the profit margin ratio?

A

Net income ➗ Sales

51
Q

for gross profit margin ratio and profit margin ratio, is it better to have a higher ratio

A

yes

52
Q

how is cogs presented on an income statement

A

expense

53
Q

what is shrinkage?

A

Loss of inventory due to theft or spoilage

54
Q

what are some sale taxes in Canada?

A

Goods and Services Tax (GST),
Provincial Sales Tax (PST)
together= harmonized tax HST

55
Q

When merchandising companies purchase inventory, they pay which taxes?

A

HST or GST

56
Q

what is a purchase discount and how does it benefit sellers and buyers?

A

A price reduction, based on the invoice price less any returns and allowances, to encourage customers to make an early payment of a credit purchase→ offered as an incentive for customers to pay their accounts prior to the due date, offers avdnatges to both parties, the purchaser saves money and the seller is able to shorten its operating cycle

57
Q

how do you adjust the inventory system?

A

The cost of goods sold account would be debited and the inventory account credited

58
Q

what are sale returns and allowances?

A

Cash refunds or credits provided by the seller to the buyer when they return goods or agree to keep goods that they are dissatisfied with

59
Q

what is a contra revenue account?

A

An account that is offset against (reduces) a revenue account on the statement of income. Examples include Sales Returns and Allowances and Sales Discounts

60
Q

when does the seller only pay freight?

A

The seller pays freight only when the shipping terms are FOB destination.

61
Q

how do you record a sale return (two journal entire)

A

debit refund liability, credit ar
debit inventory, credit estimated returns account

62
Q

what are the reasons wyhy companies use single step income?

A

A company does not realize any income until total revenues exceed total expenses, so it makes sense to divide the statement into these categories.
The single-step form is simple and easy to read.

63
Q

how can a company improve its profit margin?

A

by increasing its gross profit margin and/or by controlling its operating and other expenses, by earning other income, or by a reduction in income tax expense.

64
Q

how do profit margin and gross profit margin differ?

A

Gross profit margin indicates the margin by which selling price exceeds cost of goods sold.
Profit margin indicates the extent by which selling price covers all expenses (including the cost of goods sold)

accounting (13 decks)

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