Inventory is a relatively liquid asset and usually appears above Accounts Receivable on the balance sheet.
The operating cycle of a merchandising company consists of (1) purchases of merchandise; (2) sales of the merchandise; and (3) collection of accounts receivable.
Inventory shrinkage refers to unrecorded decreases in inventory resulting from breakage, theft and sales of inventory.
In a perpetual inventory system when merchandise is purchased it is debited to an account called Purchases.
In a periodic inventory system the Cost of Goods Sold account may be created during the closing process by debiting Cost of Goods Sold and crediting the Beginning Inventory and the Purchases account.
Purchase Discounts Lost is shown as a reduction of cost of goods sold in the income statement.
Net Sales total sales revenue less sales returns and allowances less sales discounts.
The contra-revenue accounts, Sales Returns and Allowances and Sales Discounts, should be closed by crediting these accounts and debiting Income Summary for each account.
Gross profit margin is the dollar amount of gross profit expressed as a percentage of gross sales.
The accounting cycle of a merchandising business is the length of time covered by the company's income statement.
Today, most large merchandising companies use a perpetual inventory system.
Inventories are assets that a company holds for sale in the ordinary course of business.
In preparing monthly bills to be sent to individual credit customers, the billing department will use the accounts payable subsidiary ledger, rather than the general ledger.
In a periodic inventory system, the Inventory and Cost of Goods Sold accounts are kept up-to-date throughout the accounting period.
A perpetual inventory system requires the capability of recording the cost of the goods sold in individual sales transactions.
Wholesalers buy from retailers and sell to the general public.
Under the periodic inventory system, no effort is made to keep up-to-date records of either Inventory or Cost of Goods Sold as transactions occur.
The manager of National Software wants to know how many Microsoft Excel programs the store sold in June. This information is contained in the Inventory controlling account.
In a retail department store with an efficient perpetual inventory system, the quantities of goods actually on hand are probably somewhat more than the quantities indicated in the accounting records.
When using a perpetual inventory system, the Purchases account is debited when merchandise is acquired.
In a perpetual inventory system, the Inventory and Cost of Goods Sold accounts are kept up-to-date throughout the accounting period.
In a periodic inventory system, the ending inventory can be determined from the accounting records and a physical count of the merchandise on hand will confirm the amount.
In a periodic inventory system, the cost of goods sold is determined by the following end-of-period computation: Beginning Inventory + Purchases - Ending inventory = Cost of Goods Sold.
Under the perpetual inventory system, two entries are required when goods are sold.
If ending inventory and cost of goods sold are added together, they should equal gross profit.
Instead of paying for merchandise purchased on account, Olympic Corp. returned this merchandise to the supplier. Olympic should record this transaction by debiting Accounts Payable and crediting Sales Returns and Allowances.
When using a periodic inventory system, the Purchases account is debited when merchandise is acquired.
A large company with many different kinds of low-cost items would tend to use a perpetual inventory system.
International accounting rules and generally accepted accounting principles (GAAP) are alike in every respect.
The average gross profit margin is a measure of relative profitability.
A measure of profitability after deducting cost of sales and all expenses incurred in operating the
business from net sales.
Operating income is:
When properly recorded will reduce net profit.
Sales discounts and allowances:
May be afforded some protection by the Sarbanes Oxley Act.
A lower level employee who is asked to participate in an accounting fraud:
Debiting Income Summary and crediting Cost of Goods Sold
The Cost of Goods Sold account is closed by
A periodic inventory system
Merchandising companies that are small and do not use a perpetual inventory system may elect to use:
A high volume of sales transactions and a manual accounting system
Which of the following would not tend to make a manufacturer choose a perpetual inventory system?
"Company cars" provided to specific company executives for their personal use.
Which of the following should not be classified as inventory in the balance sheet of a large automobile dealership?
A high volume of many different, low-cost items.
Which of the following factors would suggest the use of a perpetual inventory system?
A food store
Which of the following businesses is likely to have the shortest operating cycle?
A newspaper stand
Which of the following companies would be more likely to use a periodic inventory system?
Merchandise is delivered to the customer.
Sales revenue is recognized in the period in which:
Which of the following companies would be more likely to use a perpetual inventory system?
Which of the following appears in the income statement of a merchandising business, but not in the income statement of a business that renders only services?
Both a and b
Which of the following factors would suggest the use of a periodic inventory system?
Net sales and the cost of goods sold.
Gross profit is the difference between:
That there is a 2% discount if payment is received within 10 days and no discount if payment is not received within 30 days.
The credit term 2/10, n/30 means:
Provide details about the individual items comprising the balance of a general ledger account.
The basic purpose of a subsidiary ledger is to:
Debit, Inventory and credit, Cash.
Under the perpetual inventory system which journal entry would indicate a purchase of merchandise?
Accounts payable subsidiary ledger.
The purchasing agent of Superb Service Co. wants to know the dollar amount of inventory purchased on account during the year from a particular supplier. This information can be found most easily in Superb Service's:
Which of the following credit terms is the most advantageous to the purchaser of merchandise?
The Accounts Receivable controlling account.
Cumberland, Inc., has applied to its bank for a loan. The bank asks Cumberland's controller the total amount of the company's accounts receivable. Assuming that all accounting records are up-to-date, the controller can best answer this question by referring to:
Merchandising transactions are recorded as they occur.
In a perpetual inventory system:
Subtracting sales returns and sales discounts from sales.
Net sales is calculated by:
One entry recognizes the sales revenue, and the other recognizes the cost of goods sold.
In a perpetual inventory system, two entries usually are made to record each sales transaction. The purposes of these entries are best described as follows:
Which account listed below is classified as a contra-revenue account?
Inventory (beginning) and Purchases.
In a periodic inventory system, which of the following accounts may be closed by debiting Cost of Goods Sold?
The perpetual method is easier to apply in a manual accounting system.
In comparing a perpetual inventory system with a periodic inventory system, which of the following statements is not correct?
Probably will indicate less than $1,200,000 in merchandise on hand.
Hicksville's Department Store uses a perpetual inventory system. At year-end, the balance in the Inventory controlling account is $1,200,000. Assuming that the inventory records have been maintained properly, a year-end physical inventory:
Reduce the balance in its Inventory controlling account and inventory subsidiary ledger by $7,000.
Jayson Products uses a perpetual inventory system. At year-end the Inventory account had a balance of $280,000, but a complete year-end physical inventory indicated goods on hand costing only $273,000. Jayson should:
An operating expense
The cost of delivering merchandise to the customer is:
Determined by a computation which is performed at year-end, after the taking of a complete physical inventory.
In a periodic inventory system, the cost of goods sold is:
Beginning inventory + purchases -ending inventory.
In a periodic inventory system, the formula used in computing the cost of goods sold may be summarized as follows:
Small businesses with manual accounting systems.
Periodic inventory systems are used primarily by:
All of the above
Inventory shrinkage is caused by:
The Cost of Goods Sold account is updated as sales transactions occur.
Which of the following statements about a periodic inventory system is not correct?
Becomes part of the cost of inventory.
The cost of the transportation of inventory purchased:
None of the above
A company's gross profit rate is computed by dividing:
Debit to Purchase Discounts Lost.
Regal Artworks Co. records purchases net of all available purchase discounts. If the company makes payment after the discount has expired, the entry to record the payment should include a:
Subtract sales returns and sales discounts from sales.
To arrive at net sales:
All three are the same.
As a retailer, which of the following percentages is the most attractive to you?
Keep the merchandise, but pay a reduced purchase price.
Bernice Beverages is not satisfied with the quality of merchandise purchased from Reade Supplies. If American Supplies agrees to settle this matter by granting Bernice Beverages a sales allowance, Bernice Beverages will:
Merchandise is returned by a customer.
The Sales Returns and Allowances account is debited when:
Deduction from gross sales revenue.
If sales discounts are shown as a separate item in financial statements, they should be shown as a(n):
All of the above accounts normally have debit balances.
All of the following accounts normally have debit balances except:
All of the above
The gross profit margin:
Speed up the collection of accounts receivable.
The basic purpose of offering customers cash discounts such as 2/10, n/30 is to:
When making sales, the sales taxes received are:
Periodic inventory system
An approach to accounting for inventories and the cost of goods sold used primarily in small businesses with manual accounting systems.
A reason why perpetual inventory records may not be entirely accurate.
The difference between the revenue earned by selling merchandise and the cost of goods sold.
Gross profit divided by average total stockholders' equity.
An accounting procedure used in both perpetual and periodic inventory systems. In a perpetual system, this procedure brings to light the amount of inventory shrinkage. In a periodic system, it is the basis for computing the cost of goods sold.
An accounting record showing the individual items comprising the balance of a general ledger account.
The accounting record in which transactions initially are recorded.