Accounting Chapter 4 – Flashcards

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.

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.

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.

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.

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.

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)

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.

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.

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.

Cash discounts are offered to customers to encourage prompt payment

Transportation-out is the freight or shipping cost on goods sold. It is a period cost.

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.

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.

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.

he 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.