Accounting for Freight and Returns
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Questions and Answers

The credit memo issued by NetSolutions to Blake & Sons reflects a reduction of Blake & Sons' accounts receivable by $900.

True (A)

The terms "FOB shipping point" indicate that the buyer, NetSolutions, is responsible for freight costs from the shipping point to the final destination.

True (A)

The purchase of merchandise from Magna Data on June 10, for $1,200, involved a total cost of $1,250, including freight costs.

True (A)

The credit memo in Exhibit 6 indicates that NetSolutions will record a $900 debit to Sales Returns and Allowances.

<p>False (B)</p> Signup and view all the answers

The purchase of merchandise from Magna Data on June 10 is recorded as a $1,200 credit to Purchases.

<p>True (A)</p> Signup and view all the answers

The journal entry to record the payment of freight on June 10 would involve a debit to Freight-In for $50 and a credit to Cash for $50.

<p>True (A)</p> Signup and view all the answers

When merchandise is shipped FOB shipping point, the seller is responsible for the freight costs until the merchandise reaches the buyer's location.

<p>False (B)</p> Signup and view all the answers

The credit memo to Blake & Sons was issued because NetSolutions received defective merchandise from Blake & Sons.

<p>False (B)</p> Signup and view all the answers

Instant rebates directly reduce the revenue recognized at the time of sale.

<p>True (A)</p> Signup and view all the answers

Mail-in rebates require businesses to estimate the dollar value of rebates that will be redeemed.

<p>True (A)</p> Signup and view all the answers

If a customer returns defective merchandise, the seller must issue a cash refund, regardless of whether the customer has already paid for the merchandise.

<p>False (B)</p> Signup and view all the answers

A price allowance is a reduction in the price of a product that is granted after the customer has already paid for the merchandise.

<p>True (A)</p> Signup and view all the answers

At the end of an accounting period, a seller should estimate the amount of sales returns, refunds, and allowances likely to be granted in the future.

<p>True (A)</p> Signup and view all the answers

The adjusting entry for estimated returns, refunds, and allowances increases the Sales account and decreases the Customer Refunds Payable account.

<p>False (B)</p> Signup and view all the answers

Customer Refunds Payable is an asset account used to record estimated refunds and allowances.

<p>False (B)</p> Signup and view all the answers

Estimating sales returns, refunds, and allowances helps companies avoid potential financial losses on these anticipated events.

<p>False (B)</p> Signup and view all the answers

A trade discount is a special discount offered by wholesalers to government agencies or businesses that order large quantities.

<p>True (A)</p> Signup and view all the answers

The seller normally records the list prices of merchandise in their accounts, along with the trade discounts they offer.

<p>False (B)</p> Signup and view all the answers

Newport Beach Goods can take advantage of a 1% discount if they pay Suntime Umbrellas, Inc. within 15 days of the invoice date.

<p>True (A)</p> Signup and view all the answers

If Newport Beach Goods pays Suntime Umbrellas, Inc. on May 29, they will pay $2,772.

<p>True (A)</p> Signup and view all the answers

Sales taxes are normally recorded by the seller when the customer pays the sale.

<p>True (A)</p> Signup and view all the answers

When paying the state the sales tax collected, the seller will debit the Sales Tax Payable account.

<p>True (A)</p> Signup and view all the answers

The seller records the total amount received from a customer (including sales tax) as a sales revenue

<p>False (B)</p> Signup and view all the answers

A seller who offers trade discounts will typically receive more revenue than if they do not offer trade discounts.

<p>False (B)</p> Signup and view all the answers

The chart of accounts is organized into only two categories: Assets and Liabilities.

<p>False (B)</p> Signup and view all the answers

The account Accumulated Depreciation—Store Equipment is classified as a Liability.

<p>False (B)</p> Signup and view all the answers

The account Retained Earnings is classified as a Liability.

<p>False (B)</p> Signup and view all the answers

The account Notes Payable is an example of a Stockholders' Equity account.

<p>False (B)</p> Signup and view all the answers

The account Accounts Payable is an example of an Asset.

<p>False (B)</p> Signup and view all the answers

If Newport Beach Goods had paid their invoice to Suntime Umbrellas on May 22, they would have been eligible for a $28 discount.

<p>True (A)</p> Signup and view all the answers

A payment term of 1/15, n/30 means that a 1% discount can be applied if payment is made within 30 days.

<p>False (B)</p> Signup and view all the answers

If Newport Beach Goods had paid the Suntime Umbrellas invoice on June 1st, they would have owed $2,800.

<p>True (A)</p> Signup and view all the answers

The term n/30 indicates that the customer is required to pay within 30 days and a 1% discount is available.

<p>False (B)</p> Signup and view all the answers

The inventory amount in the perpetual inventory system consistently reflects the amount of merchandise available for sale at any given time.

<p>False (B)</p> Signup and view all the answers

The physical inventory count at the end of an accounting period is always identical to the balance of the Inventory account under the perpetual inventory system.

<p>False (B)</p> Signup and view all the answers

Employee theft and shoplifting are common causes of inventory shrinkage.

<p>True (A)</p> Signup and view all the answers

The difference between the physical inventory on hand and the inventory account balance under a perpetual inventory system is referred to as inventory redundancy.

<p>False (B)</p> Signup and view all the answers

Under the perpetual inventory system, the ending inventory physical count is compared to the balance of Inventory, and the difference is recorded as a debit to Cost of Goods Sold and a credit to Inventory.

<p>True (A)</p> Signup and view all the answers

Under the periodic inventory system, any inventory shrinkage is directly determined by comparing the ending inventory physical count to the balance of Inventory.

<p>False (B)</p> Signup and view all the answers

Closing entries under the periodic inventory system involve closing the Purchases, Purchases Discounts, Purchases Returns and Allowances, and Freight-In accounts.

<p>True (A)</p> Signup and view all the answers

The Cost of Goods Sold account is closed in the periodic inventory system.

<p>False (B)</p> Signup and view all the answers

The closing entries under the periodic inventory system include an adjustment for estimated returns from the current period’s sales.

<p>True (A)</p> Signup and view all the answers

Inventory shrinkage under the periodic system is directly recorded in the Cost of Goods Sold account.

<p>False (B)</p> Signup and view all the answers

The closing entries under the periodic inventory system involve the closing of the Cost of Goods Sold account.

<p>False (B)</p> Signup and view all the answers

The periodic inventory system maintains an up-to-date balance in the Inventory account throughout the period.

<p>False (B)</p> Signup and view all the answers

Flashcards

Instant Rebates

Rebates redeemed at the time of purchase that reduce revenue immediately.

Mail-in Rebates

Rebates that require customers to submit a form to receive a refund later; estimation of potential redemptions must be recorded.

Sales Returns

Merchandise returned by buyers due to defects or dissatisfaction, often resulting in refunds.

Refunds

Cash returned to buyers when they return purchased merchandise.

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Offset Against Accounts Receivable

A buyer can reduce their outstanding balance instead of requesting a cash refund when returning items.

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Customer Refunds Payable

A current liability that represents the estimated refunds and allowances owed to customers in the future.

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Sales Adjusting Entries

Accounting entries made to estimate future returns and allowances, affecting sales and liabilities.

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Estimating Returns and Allowances

At the end of an accounting period, sellers estimate potential refunds and adjust their accounts accordingly.

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Credit Memo

A document issued to reduce a customer's account receivable balance.

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Accounts Receivable

Money owed to a company by its customers for goods or services provided.

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Sales Returns and Allowances

Reductions in sales revenue due to returned goods or customer allowances.

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FOB Shipping Point

Ownership of goods transfers to buyer when loaded onto the carrier.

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Freight Costs

Expenses related to transporting goods from seller to buyer.

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Customer Allowance

A reduction in the amount owed due to issues with the sold goods.

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Journal Entries

Records of business transactions in accounting.

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NetSolutions Purchase Example

A scenario showing FOB shipping point with merchandise costs.

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Assets

Resources owned by a company that have economic value.

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Liabilities

Obligations or debts that a company owes to outside parties.

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Inventory

Goods available for sale to customers; stock held by a business.

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Stockholders' Equity

The owners' claim on the assets of a company after liabilities are settled.

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Payment Terms

Terms indicating discount and payment due dates, e.g. 1/15, n/30.

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Invoice Payment Calculation

Total amount paid after applying discounts, for a $2,800 invoice.

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Inventory Shrinkage

Loss of inventory due to theft, error, or loss.

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Perpetual Inventory System

An inventory system that updates records continuously for transactions.

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Customer Returns and Allowances

Adjusting entries for returns or discounts given to customers.

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Adjusting Entries

Entries made at the end of an accounting period to update accounts.

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Shoplifting

Theft of goods from a retail store, contributing to inventory loss.

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Physical Inventory

The actual count of inventory on hand at a specific time.

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Cost of Goods Sold (COGS)

The cost attributed to the goods sold during a period, impacted by inventory shrinkage.

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Periodic Inventory System

A system where inventory updates occur periodically instead of continuously.

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Indirect Shrinkage Reporting

In the periodic system, shrinkage is included in COGS but not identified directly.

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Closing Entries

Adjustments made at the end of an accounting period to finalize accounts.

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Estimated Returns Inventory

Account used to record estimated returns from sales at period end.

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Physical Inventory Count

A physical tally of inventory on hand to verify records against actual.

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Sales Tax Calculation

The process of determining the amount of tax on a sale.

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Sales Tax Entry

Recording of the sale amount and sales tax in accounting.

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Tax Payment to Authority

The seller pays collected sales taxes to the tax authority.

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Trade Discounts

Special price reductions offered to buyers, usually for bulk purchases.

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Invoice Payment Terms

Conditions under which a payment must be made, indicated on an invoice.

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Payment Calculation with Discount

Calculating the actual payment after applying cash discount terms.

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Cash Discount

A reduction in the invoice amount if paid within a specified time.

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Total Invoice Amount

The total cost indicated on an invoice before discounts.

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Study Notes

Chapter 5: Accounting for Merchandising Businesses

  • Merchandising businesses do not manufacture products; they resell goods they purchase from other companies.
  • Two types of merchandising businesses are wholesalers (sell to other businesses) and retailers (sell directly to consumers)
  • Business-to-business (B2B) transactions are between companies, while business-to-consumer (B2C) transactions are between retailers and final consumers.
  • The operating cycle for a merchandising business involves purchasing merchandise, selling merchandise, and collecting cash from customers.

Chapter Objectives

  • Distinguish between service and merchandising businesses.
  • Account for merchandise transactions.
  • Describe the adjusting process for a retail business.
  • Describe the financial statements and closing entries for a retail business.
  • Evaluate a company's operating performance using the asset turnover ratio.
  • Account for sales discounts (using the gross and net methods).
  • Describe and illustrate the periodic inventory system.

Nature of Merchandising Businesses

  • Merchandising businesses do not create products
  • They resell goods purchased from other companies.
  • They can be classified as wholesalers or retailers.
  • Wholesalers sell merchandise to other businesses.
  • Retailers sell merchandise directly to consumers.
  • Business transactions between companies are called B2B transactions, and transactions between retailers and customers are called B2C transactions.

Merchandise Transactions

  • Merchandise transactions are recorded using debit and credit rules similar to those for service businesses.
  • A new chart of accounts is needed to accommodate the unique activities of merchandising businesses.

Subsidiary Ledgers

  • Individual accounts with similar characteristics are grouped in subsidiary ledgers.
  • The primary ledger which includes all balance sheet and income statement accounts is the general ledger.
  • Each subsidiary ledger uses a controlling account in the general ledger to summarize transactions.
  • Common subsidiary ledgers: accounts receivable (customer ledger) and accounts payable (creditor ledger).

Purchases Transactions

  • In a perpetual inventory system, each purchase and sale transaction is recorded in the inventory account.
  • In a periodic inventory system, the amount of merchandise is not updated regularly; a physical inventory is taken at the end of a period to determine the amount of goods available.

Purchases Discounts

  • Businesses may offer discounts to encourage early payment.
  • The discount is calculated as a percentage of the invoice amount.
  • Purchases discounts are a contra-account, meaning they offset the purchase account.

Purchases Returns and Allowances

  • A buyer may return merchandise or receive an allowance for damaged or defective goods.
  • Use debit memos to notify sellers of the return or allowance. -The buyer may record the returns or allowances at the time of notification or wait for the seller's approval.

Cash Sales

  • When a retailer sells goods for cash, the transaction is recorded in the cash account.
  • The cost of goods sold is also recorded because it reduces the amount of inventory.
  • Sales are made using bank cards (debit and credit cards) are recorded similarly to cash sales.

Sales on Account

  • A retailer may sell merchandise on account (credit).
  • This transaction is recorded as a debit to Accounts Receivable and a credit to Sales.
  • The cost of the merchandise sold is reported separately.

Sales Incentives, Promotions, and Discounts

  • Businesses offer incentives, promotions, and discounts to encourage purchases and early payments.
  • Coupons offer a discount at the time of purchase.
  • Rebate are a refund after a purchase.
  • The accounting for coupons depends upon their terms and how they are redeemed

Freight

  • Freight costs are associated with the transportation of goods.
  • FOB shipping point: Buyer responsible for freight from the time of shipment; seller has transferred ownership at shipping point.
  • FOB destination: Seller responsible for freight from shipping point to buyer’s destination; Buyer takes ownership at final destination.

Inventory Shrinkage

  • Shrinkage is the difference between the physical count of inventory on hand and the balance in the inventory account.
  • It is considered a normal business expense and is debited to the Cost of Goods Sold expense account.

Customer Returns, Refunds, and Allowances

  • Businesses estimate returns, refunds and allowances at the end of the period.
  • The accounting for refunds is based on the estimated amounts to be refunded or allowed.
  • Customer refunds payable is classified as a current liability for the business.

Financial Statements and Closing Entries

  • Merchandising transactions affect the income statement.
  • Income statements can be prepared using either a multi-step or single step format.

Operating Income

  • Operating income is calculated by subtracting operating expenses from gross profit.
  • Operating expenses are often classified as selling or administrative expenses.

Other Revenue and Expense

  • Other revenue and other expenses are not related to the primary operations of the business.

Sales Taxes

  • Sales taxes are a liability incurred at the time of sale, and it's collected separately at the time of purchase
  • Sales tax may be reported separately for cash sales, and account sales.

Trade Discounts

  • Wholesalers often offer trade discounts to government agencies or other businesses that purchase in large quantities. -These discounts are not recorded.

Appendix 1: Sales Discounts

  • Businesses give discounts for early payments.
  • The gross method records the invoice amount, and the payment is reduced when discounts are applied.
  • The net method records the net amount (amount due after discount).

Appendix 2: The Periodic Inventory System

  • Purchases of inventory are recorded in the Purchases Account.
  • Discounts are credited to Purchases Discounts.
  • Returns are credited to Purchase Returns and Allowances. -Freight costs are debited to Freight In.

Recording Transactions Under the Periodic System

  • Purchases are recorded in a purchases account.
  • Purchase returns and allowances are recorded separately to reflect any returns or allowances granted.
  • Purchases discounts are recorded separately to reflect any discounts taken by vendors.
  • Freight costs are recorded in a freight-in account.
  • An adjusted inventory count, at the end of the period, will reveal shrinkage and the amounts will be recorded to the cost of goods sold account.

Adjusting Process Under the Periodic System

  • The adjusting process for shrinkage and customer returns under a periodic inventory system is similar to a perpetual inventory system.
  • A physical inventory count determines the ending inventory; the difference is recorded.

Closing Entries Under the Periodic Inventory System

  • Purchases, purchases discounts, purchases returns and allowances, and freight-in are closed out at the end of the accounting period.
  • Inventory shrinkage is recorded in a separate account.
  • Estimated returns are adjusted during the closing process.
  • Retained earnings and dividends are closed as well.

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Description

This quiz covers the fundamentals of accounting related to freight costs, credit memos, and merchandise purchases. It specifically addresses concepts like FOB shipping terms and the journal entries required for various transactions. Test your understanding of these essential accounting practices!

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