Chapter 5 Flashcards
Define Cost of Goods Sold
total cost of merchandise that was sold during the period.
Define Operating Expenses
expenses that are incurred in the process of earning revenue.
What is the formula for Cost of Goods Available for Sale?
Beginning Inventory + Purchases
What happens to items sold and not sold from the cost of goods available?
Sold: Goes to COGS
Not Sold: Goes to ending inventory
What are the two types of accounting systems for inventory and cost of goods sold?
Perpetual and Periodic
What are the characteristics of a Perpetual System?
Inventories updated continuously so COGS and inventory are always accurate
Physical counts are done to match inventory
What are the characteristics of a Periodic System?
Inventory and COGS not kept during accounting period
Only updated at the end of the year
What 2 accounts increase Inventory?
Purchases, Freight-In
What 2 accounts decrease Inventory?
purchase returns, purchase discounts
What is FOB Destination?
When the seller pays shipping costs but owns the product and is liable for the product until it reaches the customer.
What is FOB Shipping?
Buyer pays shipping costs and owns the product but is liable for product instantly.
What does 2/10 n/30 mean?
It refers to discount purchases. If the invoice is paid within 10 days the buyer gets 2% off. Otherwise they are required to pay the full amount at the end of 30 days.
What are the temporary accounts of periodic systems?
Purchases, Freight-In, purchase returns, purchase discounts
What is the first step of recording the purchase of merchandise?
Calculate the cost of goods purchased.
Purchases - purchase returns - purchase discounts + freight-in
What is the second step of recording the purchase of merchandise?
Determine the ending inventory which is found during the year end count.
