Chapter 5 Financial Accounting

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What are Merchandising Companies?
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Companies that buy and sell goods (rather than sell services)
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What are the 2 types of Merchandising Companies?
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Retailers Wholesalers
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Define: Retailer
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company sells its merchandise to customers who are the final consumers of the product ex) Walmart
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What are Wholesalers?
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Companies who sell products to retailers who later sell it to the final customers (much less well known)
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What is the difference in how revenue is recorded for wholesalers vs. retailers?
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There is no difference- revenue is recorded the same.
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The primary source of revenues is referred to as
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sales revenue, sales or revenue (These are synonyms)
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What tends to be the largest expense on the income statement?
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Cost of goods sold For this reason, it’s the first expense listed
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How do we find Gross Profit?
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Revenues – Cost of Goods Sold
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What 2 things are ignored in the income statement of a service company?
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Cost Goods Sold and Gross Profit
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What is the Operating Cycle of a Service Company?
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Cash–>Perform Services–>Accounts Receivable–>Mail–>Receive Cash
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What is the Operating Cycle of a Merchandising Company?
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Cash–>Buy Inventory–>Deliver–>Inventory–>Sell Inventory–>Accounts Receivable–>Mail–>Receive Cash
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The operating cycle of a __________________ company is ordinarily longer than that of a __________________ company.
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merchandising service
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How do you find the Cost of Goods Available for Sale?
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Beginning Inventory + Cost of Goods purshased
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How do you find Cost of Goods sold or Ending Inventory?
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You take the amount given for Costs of Goods Avaiable for sale and you subtract Cost of Goods Sold to find Ending Inventory and Vice Versa
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What are the characteristics of the Periodic Inventory System?
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– Doesn’t keep detailed records of the goods on hand – Cost of goods sold is determined by count at the END of the accounting period
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How is the Calculation of Goods Sold done in the Periodic System?
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Beginning Inventory + Purchases, net (This totals to the Goods available for sale) – Ending Inventory
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What are the characteristics of the Perpetual System?
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– Maintain detailed records of the cost of each inventory purchase and sale – Records continuously show inventory that should be on hand for every item – Company determines cost of goods sold each time a sale occurs (We PERPETUALLY update)
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What are the advantages of the Perpetual System?
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– Shows the quantity and cost of the inventory that should be on hand at any time – Provides better control/measurement over inventories than a periodic system – Traditionally used for merchandise with high unit values
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When do we record the cost of inventory?
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When the goods are received from the seller
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What is a Purchase Invoice?
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tells us what we’re buying and how much this is costing us. It should support each credit purchase.
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If a company is given an invoice with inventory, how would they record this in a journal to show perpetual inventory?
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Debit to inventory for amount Credit to accounts payable for same amount
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What does FOB Shipping Point mean?
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The buyer pays for freight costs and they gain ownership once the public carrier accepts the goods from the seller.
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What does FOB Destination mean?
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Ownership of the goods remains with the seller until the goods reach the buyer. Here, the seller pays for transportation of goods/shipment costs.
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Freight costs incurred by the seller are an
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operating expense
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What is a Purchase Allowance?
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They buyer may choose to keep the merchandise if the seller will grand a price reduction
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How do we record returns or allowances in the perpetual inventory system for buyers?
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decreases in the inventory account. We do this with a credit to the inventory T account.
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In a perpetual inventory system, a return of a defective merchandise by a purchaser is recorded by crediting
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Inventory
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What are the advantages of Purchase Discounts?
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– Purchaser saves money – Seller shortens the operating cycle by converting the accounts receivable into cash earlier
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What does this mean: 2/10, n/30
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2% discount if paid within 10 days, otherwise net amount due within 30 days (These numbers can be replaced with others)
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What does this mean: 1/10 EOM
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1% discount if paid within first 10 days of next month
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What does this mean: n/10 EOM
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Net amount due within the first 10 days of the next month
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The cost of goods sold is determined and recorded each time a sale occurs in
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a perpetual inventory system
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Why are Sales Discounts offered?
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to promote prompt payment of the balance due
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What quality of earnings ratio might a company have if it is using more aggressive accounting techniques in order to accelerate income recognition?
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Significantly less than 1
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Cosmos Corporation, which uses a perpetual inventory system, purchased $2,000 of merchandise on July 5 on account. Credit terms were 2/10, n/30. It returned $400 of the merchandise on July 9. Which of the following is one effect when Cosmos pays its bill on July 21?
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Credit to Cash for $1,600
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When recording the sale of goods for cash in a perpetual inventory system, what entries are made in the journal?
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Two journal entries are necessary: one to record the receipt of cash and sales revenue, and one to record the cost of goods sold and to reduce inventory.
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Sales revenue less gross profit results in
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Cost of Goods sold

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