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Accounting 2401
Chapter 6
98
Accounting
11/03/2008

Additional Accounting Flashcards

 


 

Cards

Term
Merchandising Businesses
Definition
Earn Income by selling products or merchandise; can be wholesalers or retailers, use same basic accounting methods as service co.
Term
Merchandise inventory
Definition
the goods on hand for sale to customers of merchandising businesses.
Term
The Operating Cycle
Definition
Series of transactions that include: purchases of merchandise inventory for cash or on credit, payment for purchases made on credit, sales of merchandise inventory for cash or on credit, and collection of cash from credit sales.
Term
Operating Cycle of Merchandising Businesses
Definition

1. merchandising inventory is purchased for cash or on credit

2. payments are made for purchases on credit

3. merchandise is sold for cash or on credit

4. cash is collected from credit sales.

Term
The financing period
Definition
The time period from the purchase of inventory until it is ultimately sold and collected less the amount of time creditors give the company to pay for the inventory; also called cash gap. This is the period of time the company will be without cash from a particular series of transactions. The company will need to have fund available or borrow from the bank. This is why cash flow management is important.
Term
The Financing Period steps
Definition

1. Inventory is purchased on credit (Accounts payable)

2. Terms for payment are 30 days (cash is paid)

3. Average days to sell inventory is 60 days - sol on credit (Accounts recievable)

4. Average days to collect on recievables is 60 days (cash is recieved.

Term
The Financing Period steps
Definition
1. Inventory is purchased on credit (Accounts payable) 2. Terms for payment are 30 days (cash is paid) 3. Average days to sell inventory is 60 days - sol on credit (Accounts recievable) 4. Average days to collect on recievables is 60 days (cash is recieved.
Term
TRUE
Definition
The financing period can vary for different companies, it can be 120 days or even longer for merchandising companies.
Term
Cash, Bank credit card
Definition
Fund from these sales are available to the merchandiser immediately.
Term
Store Credit
Definition
merchandiser must wait a period of time before receiving cash.
Term
TRUE
Definition
Retailers reduce their financing period (improve theur cash flow) by selling as much as possible for cash - encourage sales by cash or bank credit card.
Term
Choice of Inventory System
Definition
Two basic systems
Perpetual inventory system
Periodic inventory system

Management must choose the system or combination of systems that is best for achieving the company’s goals
Term
Perpetual Inventory System
Definition

Keeps continuous records of quantity and, usually, the cost of individual items as they are bought and sold

Enables management to determine product availability, to avoid running out of stock, and to control financial costs associated with investments in inventory

Often used by larger companies or companies that sell high value items

Ex: Automobiles, Appliances

Term
Accounting for Inventory Under the Perpetual System
Definition
Purchases
The cost of each item is recorded in the Merchandise Inventory account
Sales
The cost of each item is transferred from the Merchandise Inventory account to the Cost of Goods Sold account
Therefore
Merchandise Inventory account balance = Cost of goods on hand
Cost of Goods Sold account balance = Cost of merchandise sold to customers
Term
Periodic Inventory System
Definition
Determines inventory by a physical count taken at the end of the accounting period
Reduces the amount of clerical work
Lack of records could lead to lost sales or high operating costs
More likely to be used by
Smaller companies
Companies that sell high volumes of low value items
Drugstores
Automobile parts stores
Department stores
Discount stores

No detailed records of the actual inventory on hand are maintained during the accounting period
Amount of inventory on hand is accurate only on the balance sheet date
Term
Foreign Business Transactions
Definition

Involve different currencies.

Require the use of exchange rates

Term
Exchange Rate
Definition

Value of one currency stated in terms of another.

A transaction may take place in Japanese yen, British pounds, or some other currency.

The values of these currencies in relation to the dollar rise and fall daily.

Term
Exchange Gain or Loss
Definition
If there is a time lapse between the date of sale and the date of receipt and two different currencies are involved, an exchange gain or loss may be experienced
Term
Exchange Gain Illustrated
Definition
  • A U.S. company purchases shipping services from a British company for $160,000.
  • The British company bills the U.S. company £100,000 and expects to be paid in pounds.
  • The exchange value of the pound decreased from $1.60 to $1.50 between the date of purchase and payment.
  • Because the U.S. company only has to spend $150,000 to get the necessary £100,000 for payment, it will experience an exchange gain of $10,000.
Term
The perpetual inventory system keeps continuous records of quantity and, usually, the cost of individual items as they are bought and sold. The periodic inventory system determines inventory on hand only by a physical count taken at the end of the period. No detail records of the actual inventory on hand are maintained during the accounting period.
Definition
What is the difference between the perpetual inventory system and the periodic system?
Term
Trade Discount
Definition

A reduction from list or catalogue prices given by wholesalers and manufacturers

Usually 30 percent or more

Example: An article is listed at $1,000 with a trade discount of 40 percent Sale price = $1,000(1.00 – 0.40) = $600

Term
Sales Discounts.
Definition

Discounts given by seller to a buyer for early payment of the buyer’s account

Sales discounts taken are debited to the Sales Discounts account

Term
Purchases Discounts.
Definition

Discounts taken by the buyer for the early payment on merchandise

Purchases discounts taken are credited to the Purchases Discounts account

Term
Sales Discount Terms
Definition

2/10, n/30

Amount may be paid within 10 days of the invoice date with a 2 percent discount

Or wait up to 30 days and pay the full amount

Term
FOB Shipping Point
Definition

Buyer pays shipping costs, called freight-in

Title of merchandise passes from seller to buyer at the point merchandise is shipped

FOB means “free on board”

Term
FOB Destination
Definition

Seller pays shipping costs, called freight-out

Title of merchandise passes from seller to buyer when the merchandise reaches its destination

FOB means “free on board”

Term
Credit Card Sales
Definition

If seller accepts a credit card payment, the customer signs a sales invoice

The sale is communicated to the seller’s bank and a cash deposit is made in the seller’s account

Seller does not have to establish customer's credit, collect from the customer, or tie up money in accounts receivable

The seller pays the lender (credit card company) from 2 to 6 percent of the sale amount for the service

Term
Accounting for Credit Card Sales
Definition
Example: A customer charges a $1,000 purchase on a Visa credit card Visa charges a 4 percent discount on sales The seller will pay Visa $40 ($1,000 x .40) Entry: Cash 960 Credit Card Expense 40 Sales 1000
Term
Trade discount
A deduction off a list or catalogue price
Sales discount
A discount given to a buyer for early payment for sales made on credit

Definition
What is the difference between a trade discount and a sales discount?
Term
Income Statement When Using the Perpetual Inventory System
Definition
The Cost of Goods Sold account is continually updated during the accounting period
The Merchandise Inventory account on the balance sheet is updated at the same time
Term
Purchases of Merchandise on Credit
Oct. 3: Received merchandise purchased on credit, invoice dated October 1, terms n/10, $9,780
Definition
Under the perpetual inventory system, the cost of merchandise purchased is placed in the Merchandise Inventory account at the time of purchase.
Term
Payments on Account
Oct. 10: Paid amount in full for the purchase of Oct. 3, part of which was returned on Oct. 6, $8,820
Definition
Term
Sales of Merchandise on Credit
Oct. 7: Sold merchandise on credit, terms n/30, FOB destination, $2,400; the cost of merchandise was $1,400
Definition
Under the perpetual inventory system, two entries are necessary. The sale is recorded and Cost of Goods Sold is updated by a transfer from Merchandise Inventory.
Term
Sales Returns and Allowances
Oct. 9: Return of part of merchandise sold on Oct. 7 accepted for full credit and returned to merchandise inventory, $600; the cost of the merchandise was $360
Definition
If merchandise
is not returned
or will not be
resold, this
transaction
is not recorded
The Sales Returns and Allowances account gives management a readily available measure of unsatisfactory products or customer dissatisfaction, which can be indicated by returns and allowances
Term
A Cost of Goods account is used under the perpetual inventory system. The cost of merchandise sold is transferred from the Merchandise Inventory account to the Cost of Goods Sold account.
Definition
Under which inventory system is a Cost of Goods Sold account maintained? Why?
Term
Income Statement Under the Periodic Inventory System
Definition
Under the periodic inventory system, cost of goods sold must be computed
Cost of goods available for sales is computed as beginning inventory plus net cost of purchases
Term
Cost of Goods Available for Sale
Definition

Beginning Inventory + Net Cost of Purchases for purchases during the period = Cost of Goods Available for Sale

 

Laboda Sportswear Company Beginning inventory $ 105,600 Net cost of purchases + 253,720 Cost of goods available for sale $ 359,320

Term
Purchases of Merchandise on Credit
Definition
The Purchases account is a temporary account. It does not indicate whether merchandise has been sold or is still on hand.
Term
Purchases Returns and Allowances
Definition
The Purchases Returns and Allowances account
Is a contra-purchases account
Carries a normal credit balance
Is deducted from purchases on the income statement
Term
Sales of Merchandise on Credit
Definition
Under the periodic inventory system, only one entry is necessary. The Cost of Goods Sold account is not used because the Merchandise Inventory account is not updated until the end of the accounting period.
Term
Sales Returns and Allowances
Definition
The Sales Returns and Allowances account
Is a contra-revenue account
Carries a normal debit balance
Is deducted from sales on the income statement
Term
A physical inventory is taken. The Merchandise Inventory account remains at its beginning balance throughout the period.
Definition
Under the periodic inventory system, how must the amount of inventory at the end of the year be determined? Why?
Term
Cost of goods available for sale
Definition
the sum of begining inventory and the net cost of purchases during an accounting period
Term
delivery expense
Definition
the transportation cost of delivering merchandise. Also called freight-out.
Term
exchange gain or loss
Definition
a gain or loss due to exchange rate fluctuation, which is reported on the income statement
Term
Financing Period
Definition
The amount of time from the purchase of inventory until it is sold and payment is collected, less the amount of time creditors give the company to pay for the inventory
Term
FOB destination
Definition
a term indicating that the seller retains the title to the merchandise until it reaches its destination and that the seller bears the shipping cost.
Term
FOB shipping point
Definition
a term indicating that the buyer assumes title to the merchandise at the shipping point and bears the shipping costs
Term
Freight-In
Definition
the transportation cost of recieving merchandise
Term
Merchandising Inventory
Definition
The goods on hand at any one time that are available for sale to customers
Term
Net cost of purchases
Definition
net purchases plus any freight charges on the purchases
Term
Net purchases
Definition
total purchases less any deductions, such as purchases returns and allowances and discounts on purchases.
Term
Operating cycle
Definition
a series of transactions that includes ourchases of merchandise inventory for cash or on creditm payment for purchases made on credit, sales of merchandise inventory for cash or on credit, and collection of cash from credit sales.
Term
periodic inventory system
Definition
a system for determining inventory on hand by periodically taking a physical count
Term
perpetual inventory system
Definition
a system for determining inventory on hand by keeping continuous records of the quantity and, usually , the cost of individual items as they are bought and sold.
Term
purchases account
Definition
a temporary account used under the periodic inventory system to accumulate the cost of merchandise purchased for resale during an accounting period.
Term
purchases discounts
Definition
discounts that buyers take for early payment of merchandise;; the Purchases Discounts account is a contra-purchases account used under the periodic inventory system
Term
Purchases Returns and Allowances account
Definition
a contra-purchases account used under the periodic inventory systen to accumulatecash refunds, credits on account, and other allowances made by suppliers
Term
sales discount
Definition
a discount is given to a buyer for early payment of a sale made on redit; the Sales Discounts account is a contra-revenue account
Term
sales returns and allowances account
Definition
a contra-revenue account used to accumulate cash refunds, credits on account, and other allowances made to customers who have recieved defective or otherwise unsatisfactory products.
Term
trade discount
Definition
a deduction (usually 30 percent or more) off a list or catalogue price, which is not recorded in the accounting records.
Term
merchandising business
Definition
earns income by buying and selling goods, also known as merchandise inventory. This type of firm, whether wholesale or retail, uses the same basic accounting methods as a service company. However, accounting for a merchandising concern is more complicated because, unlike a service firm, a merchandiser must account for the inventory of goods it holds for resale
Term
A merchandiser engages in a series of transactions known as the operating cycle.
Definition
The transactions involved in the operating cycle are (a) the purchase of merchandise inventory for cash or on credit, (b) payment for purchases made on credit, (c) sale of the merchandise inventory for cash or on credit, and (d) collection of cash from credit sales.
Term
financing period
Definition
Cash flow can be improved by reducing the financing period (also called the cash gap), which is the length of time a business will be without cash from merchandise inventory transactions. Technically, it is the amount of time from the purchase of inventory to the collection of cash from its sale minus the time the business takes to pay for the inventory.
Term
A merchandising company must choose a system or a combination of systems to account for its inventory. The two basic systems are
Definition
the perpetual inventory system and the periodic inventory system.
Term
Under the perpetual inventory system,
Definition
continuous records are kept of the quantity and, usually, the cost of individual items as they are bought and sold. The detailed data available from the perpetual inventory system (which is often computerized) enable managers to quickly determine product availability, avoid running out of stock, and control the costs of carrying inventory. A physical count of the inventory should still be taken periodically to make sure that the actual number of goods on hand matches the accounting records.
Term
Merchandisers use the periodic inventory system
Definition
when it is unnecessary or impractical to keep track of the quantity of inventory or the cost of each item (e.g., when a retailer sells a high volume of low-value items). With this system, no detailed records of inventory are kept during the accounting period; the merchandiser waits until the end of the period to take a physical count of the inventory. The periodic inventory system is simpler and less costly to maintain than the perpetual inventory system. However, its lack of detailed records may lead to inefficiencies, lost sales, and higher operating costs.
Term
exchange rate
Definition
Most merchandising and manufacturing firms conduct some of their business overseas. Transactions with foreign businesses are often denominated in the foreign currency, which must be translated to the domestic currency (the U.S. dollar for an American company) by means of an exchange rate, or the value of one currency in terms of another.
Term
exchange gain or loss.
Definition
No accounting problem arises when the domestic company bills and receives payment from the foreign company in the domestic currency. However, when a transaction involves foreign currency, the domestic company will probably realize and record an exchange gain or loss. This exchange gain or loss, which is reported in the income statement, reflects the change in the exchange rate between the transaction date and the date of payment.
Term
catalogue price (called a trade discount).
Definition

As a matter of convenience, manufacturers and wholesalers frequently quote prices of merchandise based on a discount from the list or catalogue price (called a trade discount). Neither the list price nor the trade discount is entered into the accounting records.

Term
2/10, n/30
Definition
mean that a 2 percent discount will be given if payment is made within 10 days of the invoice date. Otherwise, the full amount is due within 30 days.
Term
sales discount
Definition
Sales discounts for early payment are customary in some industries. When a merchandising firm gives a customer a discount for early payment, it records a sales discount. Cash and Sales Discounts are debited, and Accounts Receivable is credited. Sales Discounts is a contra account to sales in the income statement.
Term
Purchases discounts
Definition
Purchases discounts are discounts taken for early payment of merchandise purchased for resale. They are to the buyer what sales discounts are to the seller. A purchase is initially recorded at the gross purchase price. If the company makes payment within the discount period, it debits Accounts Payable, credits Purchases Discounts, and credits Cash. Purchases Discounts will reduce cost of goods sold or purchases, depending on the inventory method used.
Term
FOB shipping point & FOB Destination
Definition
The terms of sale designate whether the buyer or seller of the goods bears the freight charges. A buyer in Chicago, for instance, must pay the freight-in from Boston if the terms specify FOB (free on board) Boston or FOB shipping point. However, the seller in Boston pays if the terms are FOB Chicago or FOB destination. FOB terms also pertain to when the title of the merchandise passes from the seller to the buyer.
Term
freight-in
Definition
Transportation costs for goods received are recorded as freight-in (also called transportation-in), and—depending on the relative dollar amount—either added to the cost of merchandise purchased or included in the cost of goods sold.
Term
delivery expense
Definition
Delivery costs for goods sold are recorded as delivery expense (also called freight-out), and treated as a selling expense in the income statement.
Term
Companies that allow customers to make purchases with credit cards (such as Visa) or debit cards (whereby a person’s bank account is reduced directly) must follow special accounting procedures.
Definition
In reimbursing a merchant for a sale, credit card companies take a 2 to 6 percent discount as payment for having established the customer’s credit and for collecting money from the customer. When the merchant communicates its credit card sales to its bank (resulting in a cash deposit to its account), it debits Cash and Credit Card Discount Expense (a selling expense) and credits Sales.
Term

The net income of a merchandising firm is computed as follows:

Definition

 

Net sales

Cost of goods sold

=

Gross margin

Operating expenses

=

Net income

Term
Under the perpetual inventory system
Definition
the Cost of Goods Sold and Merchandise Inventory accounts are updated whenever a purchase, sale, or other inventory transaction takes place.
Term
Transactions are recorded under the perpetual inventory system as follows:
Definition

a.For the purchase of merchandise on credit, Merchandise Inventory is debited, and Accounts Payable is credited.

b.A return of goods to the supplier for credit is recorded with a debit to Accounts Payable and a credit to Merchandise Inventory.

c. Payment on account is recorded with a debit to Accounts Payable and a credit to Cash.

d.When goods are sold on credit, Accounts Receivable is debited, and Sales is credited. However, an additional entry must be made, debiting Cost of Goods Sold and crediting Merchandise Inventory. A cash sale is recorded with a debit to Cash and a credit to Sales (along with the additional entry shown above). 

e.When a credit customer returns goods for a refund, the Sales Returns and Allowances account is debited and Accounts Receivable is credited. (The purpose in accumulating returns and allowances in a Sales Returns and Allowances account rather than in the Sales account is to make data on customer dissatisfaction readily available to managers.) A second entry is needed to reinstate Merchandise Inventory (a debit) and to reduce Cost of Goods Sold (a credit).

f. The receipt of payment on account is recorded with a debit to Cash and a credit to Accounts Receivable.

Term
Under the periodic inventory system
Definition
the Merchandise Inventory and Cost of Goods Sold accounts are not updated as purchases, sales, and other inventory transactions occur.
Term
Cost of goods sold is therefore computed on the income statement as follows:
Definition

 

Beginning inventory

+

Net cost of purchases (see paragraph 17)

=

Cost of goods available for sale

Ending inventory

=

Cost of goods sold

Term
Net cost of purchases is calculated as follows:
Definition

 

Purchases

Purchases returns and allowances

Purchases discounts

=

Net purchases

+

Freight-in

=

Net cost of purchases

Term

Transactions are recorded under the periodic inventory system as follows:

Definition

a.     All purchases of merchandise are debited to the Purchases account and credited to Accounts Payable or Cash. The purpose of the Purchases account is to accumulate the cost of merchandise purchased for resale during the period.

b.     The return of goods to the supplier for credit is recorded with a debit to Accounts Payable and a credit to the Purchases Returns and Allowances account. The latter appears as a contra account to purchases on the income statement.

c.     Payment on account is recorded with a debit to Accounts Payable and credit to Cash.

d.     When a cash sale is made, Cash is debited and Sales is credited for the amount of the sale. When a credit sale is made, Accounts Receivable is debited and Sales is credited.

e.     Delivery costs for goods sold are recorded with a debit to Delivery Expense and a credit to Accounts Payable or Cash.

f.      When a credit customer returns goods for a refund, Sales Returns and Allowances is debited and Accounts Receivable is credited. The former functions as a contra account to sales on the income statement.

g.     The receipt of payment on account is recorded with a simple debit to Cash and credit to Accounts Receivable.

Term

Summary of Journal Entries Introduced in Chapter 6

(Note: In most instances, the text described the entry or presented it in T account form.)

Definition

Cash

XX  (amount net of fee)

Credit Card Discount Expense

XX  (fee charged)

 

Sales

 

XX  (gross amount sold)

 

 

Made sales on credit cards

 

 

 

 

 

 

 

Term

Summary of Journal Entries Introduced in Chapter 6

(Note: In most instances, the text described the entry or presented it in T account form.)

Definition

Perpetual Inventory System

 

(LO3)

Merchandise Inventory

XX  (purchase price)

 

 

Accounts Payable

 

XX  (amount due)

 

 

 

Purchased merchandise on credit

 

 

 

Term

Summary of Journal Entries Introduced in Chapter 6

(Note: In most instances, the text described the entry or presented it in T account form.)

Perpetual Inventory System

Definition

Perpetual Inventory System

 

(LO3)

Freight-In

XX  (price charged)

 

 

Accounts Payable

 

XX  (amount due)

 

 

 

Received bill for transportation charges

 

 

 

Term

Summary of Journal Entries Introduced in Chapter 6

(Note: In most instances, the text described the entry or presented it in T account form.)

Definition

Perpetual Inventory System

 

Accounts Payable

XX  (amount returned)

 

Merchandise Inventory

 

XX  (amount returned)

 

 

Returned merchandise to supplier for credit

 

 

 

Term
Which of the following activities is not a component of the operating cycle?   
Definition
Payment of employees' wages   
Term
Which of the following does not represent a sale
Definition
Merchandise placed aside for a customer who plans to come in next week and pay with cash   
Term
If it takes Gledhill Company 45 days to sell inventory, 65 days to collect from the sale, and creditors' payment terms are 30 days, the financing period is   
Definition
80 days
Term
Which of the following companies would be most likely to use a computerized perpetual inventory system?   
Definition
Auto parts store   
Term
Which of the following should not be included in the count of ending merchandise inventory?   
Definition
Goods sold but not yet delivered
Term
An American company makes a credit sale of goods to a company in London for 10,000 British pounds. On the date of sale, the exchange rate was $1.60 per pound. However, on the date payment was received, the exchange rate had risen to $1.70 per pound. As a result, the American company would record   
Definition
an exchange gain of $1,000.   
Term
Which of the following goods would not be included in merchandise inventory for a purchasing company?   
Definition
Goods in transit shipped FOB destination   
Term
A discount that buyers take for early payment of merchandise is called a   
Definition
purchases discount.   
Term
The entry to record a $750 sale with terms of 2/10, n/30 would include a(n
Definition
increase to Sales for $750.   
Term
A purchase on account with an invoice price of $750 has been made. The entry to record the payment after the 2 percent discount period would include a(n)   
Definition
decrease to Accounts Payable for $750.