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Questions and Answers
What is the primary advantage of using computers in inventory management today?
In a perpetual inventory system, what happens to the inventory account when an item is sold?
What is the purpose of the electric scanner in a point-of-sale terminal?
In the perpetual inventory system, what is the second part of the transaction when a sale is made?
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What is the difference between the selling price and the cost of an item called?
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What is the term 2/10, net 30 in the sales invoice referring to?
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What is the result of debiting the COGS and crediting the Merchandise Inventory account?
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What is the main difference between a perpetual inventory system and a periodic inventory system?
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What would happen to the inventory account if a business were to return a purchased item to the supplier?
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What is the purpose of the sales invoice in the perpetual inventory system?
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Study Notes
Accounting Procedures for a Merchandising Business
- Changes in inventory are done at the end of the fiscal period.
- The Freight-in account is used to accumulate transportation charges on incoming goods, which is separate from Delivery Expenses.
- Freight-in is included in the calculation of cost of goods sold and is found in the ledger right after purchases.
The Freight-in Account
- The charges for freight-in and for delivery expense are usually found on invoices from transportation companies.
- Duty refers to the special charges imposed by the government on certain goods imported from a foreign country.
The Merchandising Business and Inventory Cycle
- Merchandise moves in and out of a business in a regular pattern, with inventory at the beginning of the accounting period.
- Merchandise is sold and replaced by the purchase of new stock from time to time, with the inventory at the end of the accounting period being more or less the same as at the beginning.
Physical Inventory
- When the periodic system is used, it is necessary to take a physical inventory at statement time.
- A physical inventory is a procedure by which the unsold goods of a merchandising business are counted and valued (at cost price).
- The ending inventory figure is important for three reasons: it is an important current asset on the balance sheet, it is needed to calculate cost of goods sold on the income statement, and it was previously difficult and costly to keep track of, but is now made easier with computers.
Perpetual Inventory
- In a store, each cash register is a point-of-sale terminal connected to the store's main computer.
- As items are sold, information is passed from the cash register to the main computer, which makes the following entry.
- Every sale under the perpetual inventory system has two parts: recording the receipt of cash (or accounts receivable), the amount of the sale, and the taxes, and recording the cost portion by debiting COGS and crediting the Merchandise Inventory account.
Example of Perpetual Inventory
- Merchandise that is purchased for $100 is sold for $150, generating a $50 gross profit.
- Fifty portable stereos (costing $45 each) are sold to Fidelity Sound for $90 each; terms 2/10, net 30.
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Description
This quiz covers accounting procedures for a merchandising business, including the Freight-in account and its role in calculating cost of goods sold.
