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Most retailers record all credit card sales as credit sales. |
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The adjusting entry to record inventory shrinkage would generally include a debit to Cost of Merchandise Sold. |
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A customer discount encourages customers to pay accounts more quickly than if a discount were not available. |
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The single-step income statement is easier to prepare, but a criticism of this format is that gross profit and income from operations are not readily available. |
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Merchandise is sold for $3,600, terms FOB destination, 2/10, n/30, with prepaid freight costs of $150. The amount of the sales recorded is $3,528. |
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The abbreviation FOB stands for "free on board." |
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In a multiple-step income statement, the dollar amount for income from operations is always the same as net income. |
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Purchased goods in transit, shipped FOB destination, should be excluded from ending inventory of the buyer. |
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Freight in is considered a cost of purchasing inventory. |
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If the perpetual inventory system is used, an account entitled Cost of Merchandise Sold is included in the general ledger. |
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There is no difference between the recording of cash sales and the recording of MasterCard or VISA sales. |
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When the seller offers a sales discount, even if borrowing has to be done, it is generally advantageous for the buyer to pay within the discount period. |
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In a perpetual inventory system, when merchandise is returned to the supplier, Cost of Merchandise Sold is debited as part of the transaction. |
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Sellers and buyers are required to record trade discounts. |
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When merchandise that was sold is returned, a credit to sales returns and allowances is made. |
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When a merchandising business is compared to a service business, the financial statement that is not affected by that change is the statement of owner’s equity. |
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In a perpetual inventory system, the Merchandise Inventory account is only used to reflect the beginning inventory. |
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The fees associated with credit card sales are periodically recorded as expenses. |
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Purchased goods in transit should be included in the ending inventory of the buyer if the goods were shipped FOB shipping point. |
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When the terms of sale are FOB shipping point, the buyer should pay the freight charges. |
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When merchandise is sold for $600 plus 6% sales tax, the Sales account should be credited for $636. |
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Freight in is the amount paid by the company to deliver merchandise sold to a customer. |
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Closing entries for a merchandising business are not similar to those for a service business. |
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Large businesses that make sales to customers who use nonbank credit cards, such as American Express, generally treat these sales as credit sales. |
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In a merchandise business, sales minus operating expenses equals net income. |
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If the ownership of merchandise passes to the buyer when the seller delivers the merchandise for shipment, the terms are stated as FOB destination. |
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A sale of $750 on account, subject to a sales tax of 6%, would be recorded as an account receivable of $750. |
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Sales is equal to the cost of merchandise sold less the gross profit. |
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Purchases of merchandise are typically credited to the merchandise inventory account under the perpetual inventory system. |
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Buyers and sellers do not normally record the list prices of merchandise and the trade discounts in accounts. |
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The cost of merchandise inventory is limited to the purchase price less any purchase discounts. |
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The account form of the balance sheet is presented in a downward sequence in three sections. |
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Merchandise Inventory normally has a debit balance. |
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The chart of accounts for a merchandising business would include an account called Delivery Expense. |
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A seller may grant a buyer a reduction in selling price and this is called a customer discount. |
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Under the perpetual inventory system, a company purchases merchandise on terms 2/10, n/30. The entry to record the purchase will include a debit to Cash and a credit to Sales. |
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Title to merchandise shipped FOB shipping point passes to the buyer upon delivery of the merchandise to the buyer’s place of business. |
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Because many companies use computerized accounting systems, periodic inventory is widely used. |
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The most important differences between a service business and a retail business are reflected in their operating cycles and financial statements. |
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Estimated Returns Inventory is an account used when adjusting for expected merchandise sales in the next period. |
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Sales to customers who use bank credit cards, such as MasterCard and VISA, are generally treated as credit sales. |
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When companies use a perpetual inventory system, the recording of the purchase of inventory will include a debit to Purchases. |
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Gross profit minus selling expenses equals net income. |
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Customer Refunds Payable is an account used to record merchandise returns from customers. |
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A deduction allowed to wholesalers and retailers from the price of merchandise listed in catalogs is called cash discounts. |
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If the buyer bears the freight costs related to a purchase, the terms are said to be FOB destination. |
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A business using the perpetual inventory system, with its detailed subsidiary records, does not need to take a physical inventory. |
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Cost of merchandise sold is often the largest expense on a merchandising company income statement. |
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Income that cannot be associated definitely with operations, such as a gain from the sale of a fixed asset, is listed as Other Income on the multiple-step income statement. |
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The seller records the sales tax as part of the sales amount. |
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On the income statement in the single-step form, the total of all expenses is deducted from the total of all revenues. |
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As we compare a merchandise business to a service business, the financial statement that changes the most is the balance sheet. |
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Most companies will not take a purchase discount, because 1% or 2% discounts are insignificant. |
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Under the perpetual inventory system, when a sale is made, both the sale and cost of merchandise sold are recorded. |
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Service businesses provide services for income, while a merchandising business sells merchandise. |
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In the merchandising income statement, sales will be reduced by administrative expenses to arrive at operating income. |
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The seller may prepay the freight costs even though the terms are FOB shipping point. |
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When a large quantity of merchandise is purchased, a reduction allowed on the sale price is called a trade discount. |
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Other income and expenses are items that are not related to the primary operating activity. |
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In retail businesses, inventory is reported as a current asset. |
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If payment is due by the end of the month in which the sale is made, the invoice terms are expressed as n/30. |
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Cost of merchandise sold is the amount that the merchandising company pays for the merchandise it intends to sell. |
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A buyer who acquires merchandise under credit terms of 1/10, n/30 has 30 days after the invoice date to take advantage of the sales discount. |
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If merchandise costing $3,500, terms FOB destination, 2/10, n/30, with prepaid freight costs of $125, is paid within 10 days, the amount of the purchases discount is $70. |
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In a perpetual inventory system, merchandise returned to vendors reduces the merchandise inventory account. |
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The form of the balance sheet in which assets, liabilities, and owner’s equity are presented in a downward sequence is called the report form. |
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Under the LIFO inventory costing method, the most recent costs are assigned to ending inventory. |
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The specific identification inventory method should be used when the inventory consists of identical, low-cost units that are purchased and sold frequently. |
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One of the two internal control procedures over inventory is to properly report inventory on the financial statements. |
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If the perpetual inventory system is used, the merchandise inventory account is debited for purchases of merchandise. |
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When using the FIFO inventory costing method, the most recent costs are assigned to the cost of merchandise sold. |
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Unsold consigned merchandise should be included in the consignee’s inventory. |
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FIFO is the inventory costing method that follows the physical flow of the goods. |
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It’s not unusual for large companies to use different inventory costing methods for different segments of its inventory. |
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One negative effect of carrying too much inventory is risk that customers will change their buying habits. |
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"Market" as used in the phrase "lower of cost or market" for valuing inventory, refers to the price at which the inventory is being offered for sale by its owner. |
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During periods of increasing costs, the use of the FIFO method of costing inventory will result in a greater amount of net income than would result from the use of the LIFO cost method. |
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In valuing merchandise for inventory purposes, net realizable value is the estimated selling price less any direct costs of disposal. |
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The three inventory costing methods will normally each yield different amounts of net income. |
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A consignor who has goods out on consignment with an agent should include the goods in ending inventory even though they are not in the possession of the consignor. |
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Average inventory is computed by adding the inventory at the beginning of the period to the inventory at the end of the period and dividing by two. |
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Under the periodic inventory system, the merchandise inventory account continuously discloses the amount of inventory on hand. |
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Inventory errors, if not discovered, will self-correct within two years. |
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When merchandise inventory is shown on the balance sheet, both the method of determining the cost of the inventory and the method of valuing the inventory should be shown. |
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The lower-of-cost-or-market method of determining the value of ending inventory can be applied on an item by item, by major classification of inventory, or by the total inventory. |
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Of the three widely used inventory costing methods (FIFO, LIFO, and average cost), the LIFO method of costing inventory assumes costs are charged based on the most recent purchases first. |
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A perpetual inventory system is an effective means of control over inventory. |
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The average cost method will always yield results between FIFO and LIFO. |
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Safeguarding inventory and proper reporting of the inventory in the financial statements are the reasons for controlling the inventory. |
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A purchase order establishes an initial record of the receipt of the inventory. |
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Direct disposal costs do not include special advertising or sales commissions. |
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During periods of rapidly rising costs, the use of the LIFO method results in illusory or inventory profits. |
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If ending inventory for the year is overstated, owner’s equity reported on the balance sheet at the end of the year is understated. |
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A physical inventory should be taken at the end of every month. |
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The choice of an inventory costing method has no significant impact on the financial statements. |
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Under the periodic inventory system, a physical inventory is taken to determine the cost of the inventory on hand and the cost of the merchandise sold. |
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A subsidiary inventory ledger can be an aid in maintaining inventory levels at their proper levels. |
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Inventory controls start when the merchandise is shelved in the store area. |
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The use of the lower-of-cost-or-market method of inventory valuation increases net income for the period in which the inventory replacement price declined. |
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During periods of increasing costs, an advantage of the LIFO inventory cost method is that it matches more recent costs against current revenues. |
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During periods of decreasing costs, the use of the LIFO method of costing inventory will result in a lower amount of net income than would result from the use of the FIFO method. |
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If ending inventory for the year is understated, net income for the year is overstated. |
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The weighted average inventory cost flow method is the least used of the inventory costing methods. |
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During periods of increasing costs, the use of the FIFO method of costing inventory will yield an inventory amount for the balance sheet that is higher than LIFO would produce. |
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The lower of cost or market is a method of inventory valuation. |
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