Agency & Principal: Sales Agencies Overview
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Questions and Answers

What is the total amount of cash forwarded to Branch X in the transactions summarized for year 1?

  • $1,000 (correct)
  • $62,000
  • $80,000
  • $37,500

Credit sales by Branch X amounted to $62,000.

False (B)

What was the cost of merchandise sold by Branch X?

$45,000

The ________ of Branch X totaled $20,000.

<p>operating expenses</p> Signup and view all the answers

Match the amounts to their respective accounts in the transaction summaries:

<p>Cash forwarded to Branch X = $1,000 Merchandise shipped to Branch X = $60,000 Equipment acquired by Branch X = $500 Total cash remitted to home office by Branch X = $37,500</p> Signup and view all the answers

What amount was charged to Branch X for operating expenses by the home office?

<p>$3,000 (C)</p> Signup and view all the answers

Equipment acquired by Branch X is recorded in the home office records.

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

How much cash did Branch X collect from trade accounts receivable?

<p>$62,000</p> Signup and view all the answers

What is the total amount of sales recorded?

<p>$80,000 (C)</p> Signup and view all the answers

A branch carries a reciprocal account with another branch for internal transactions.

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

What is recorded in the Home Office account when assets are transferred between branches?

<p>the transfer of assets</p> Signup and view all the answers

The home office shipped merchandise costing $6,000 to Branch D and paid freight costs of $______.

<p>400</p> Signup and view all the answers

Match the following accounts with their corresponding actions:

<p>Investment in Branch A = Credits when assets are transferred to Branch B Inventories = Debits when merchandise is received by a branch Home Office = Records the transfer of assets between branches Freight Costs = Included in inventory costs for direct shipments</p> Signup and view all the answers

What is the total amount billed for merchandise shipped to branches at a 50% markup?

<p>90,000 (B)</p> Signup and view all the answers

The branch reports a net income of $10,500 after adjustments.

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

What is the total amount in the 'Allowance for Overvaluation of Inventories: Branch X' account to be reported after the adjustment?

<p>7,500</p> Signup and view all the answers

The investment in Branch X by the Home Office is recorded as __________.

<p>90,000</p> Signup and view all the answers

Match the following values with their corresponding accounts:

<p>Investment in Branch X = 90,000 Overvaluation of inv: Br X = 30,000 Net Loss reported by Branch = 10,500 Ending inventories at billed prices = 22,500</p> Signup and view all the answers

What is the amount recorded to reduce the allowance for overvaluation of inventories in Branch X?

<p>22,500 (B)</p> Signup and view all the answers

The net income for Branch X after adjustments was recorded as 87,000.

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

What was the allowance for overvaluation of inventories in Branch X before any adjustments?

<p>30,000</p> Signup and view all the answers

The net loss reported by Branch X was __________.

<p>10,500</p> Signup and view all the answers

Match the following accounts to their respective values as recorded:

<p>Investment in Branch X = 56,000 Cash = 30,000 Inventories = 60,000 Allowance for overvaluation = 30,000</p> Signup and view all the answers

What is the total reported sales of the Home Office and Branch X combined?

<p>480,000 (C)</p> Signup and view all the answers

The trade accounts receivable (net) for Home Office and Branch X combined total 57,000.

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

What was the cost of goods sold for Branch X?

<p>67,500</p> Signup and view all the answers

What is the gross profit for S Corporation for the year ended December 31, Year 1?

<p>200,000 (A)</p> Signup and view all the answers

The total assets of S Corporation are equal to total liabilities and stockholders' equity.

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

What was the retained earnings at the beginning of the year for S Corporation?

<p>70,000</p> Signup and view all the answers

The earnings per share of common stock for S Corporation is $______.

<p>5.80</p> Signup and view all the answers

Match the following financial statement elements with their descriptions:

<p>Net income = Total earnings after expenses Dividends = Payments to shareholders Gross profit = Difference between sales and cost of goods sold Retained earnings = Cumulative net income not paid as dividends</p> Signup and view all the answers

What is the final retained earnings at the end of Year 1 for S Corporation?

<p>117,000 (A)</p> Signup and view all the answers

S Corporation sold merchandise to branches at cost without any markup.

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

What is the total liabilities of S Corporation as per the balance sheet?

<p>20,000</p> Signup and view all the answers

What is the primary function of a sales agency?

<p>To carry samples of products and transmit orders (D)</p> Signup and view all the answers

A branch operates independently and does not report to a home office.

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

What is maintained at a sales agency for payment of operating expenses?

<p>Imprest cash fund</p> Signup and view all the answers

A sales agency does not keep __________ of merchandise.

<p>inventory</p> Signup and view all the answers

Which of the following journal entries records sales made by a sales agency?

<p>Trade Accounts Receivable (C)</p> Signup and view all the answers

Separate revenue and expense accounts may be opened for each sales agency.

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

How does a home office handle accounts receivable for a sales agency?

<p>The home office manages the accounts receivables.</p> Signup and view all the answers

The __________ controls fixed assets and cost of goods sold for sales agencies.

<p>subsidiary ledger accounts</p> Signup and view all the answers

Match the type of business unit with its defining characteristic:

<p>Agency = Carries out services on behalf of principals Branch = Located at a distance from the home office Sales Agency = Performs limited functions compared to a branch Home Office = Centralized management of accounts receivable</p> Signup and view all the answers

What type of accounting system may an enterprise use for its branches?

<p>Complete accounting records at each branch or centralized records at the home office.</p> Signup and view all the answers

Flashcards

Branch X Cash

Cash forwarded to Branch X from the home office.

Branch X Merchandise

The cost of merchandise shipped to Branch X from the home office.

Branch X Equipment

Equipment acquired by Branch X, recorded on the home office's books.

Branch X Credit Sales

Sales made by Branch X on credit, to customers.

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Branch X Collections

Cash collected by Branch X from customers on credit sales.

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Branch X Operating Expenses

Expenses incurred by Branch X for operating.

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Remittance to Home Office

Cash sent from Branch X to the home office.

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Home Office Expenses

Expenses such as advertising and insurance charged from home office.

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Agency Relationship

A contract where a principal(s) hires an agent to perform services, often involving decision-making delegation.

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Branch

A business unit distant from the main office, handling sales, inventory, and collections.

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Sales Agency

A business unit acting primarily as a sales representative, not holding inventory.

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Imprest Cash Fund

A fixed amount of cash at a sales agency for daily operating expenses.

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Inventory Samples

Products sent to the agency for demonstration/sales purposes, not held as inventory.

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Home Office

The primary business location managing accounts and overseeing branches/agencies.

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Account Receivables Management

Home office handles customer accounts and debts for sales agencies.

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Accounting Records in Branch

Accounting methods at each branch vary based on overall company policy (some centralized in home office).

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Perpetual Inventory System

A continuous accounting system tracking changes in inventory levels.

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Cost of Goods Sold

The direct costs of the products sold by sales agencies.

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Branch Transfer

Transfer of assets between branches, recorded through the Home Office account.

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Investment in Branch

Home office account tracking its investment in a branch.

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Direct Shipment

Freight costs associated with the direct shipment of goods from Home Office are recorded as cost of goods.

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Indirect Routing

Freight costs related to indirect routes between branches are not included in inventory costs.

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Home Office Account

Central account used to record transactions between branches.

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Overvaluation of Inventories

The difference between the cost of goods shipped to a branch and the selling price billed by the home office.

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Allowance for Overvaluation of Inventories

An account used by the home office to track the unrealized gross profit on shipments to branches.

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Billed Prices

The price at which the home office bills merchandise to the branch, including a markup.

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Why is the Allowance Account Adjusted?

The Allowance account is adjusted to reflect the actual overvaluation of inventory at the end of the period, ensuring the balance accurately represents the unrealized profit.

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Impact of Billing Method on Branch Income

Changing the billing method affects the branch's reported net income because it influences the amount of unrealized gross profit included in the ending inventory valuation.

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Net Income

The profit remaining after deducting all expenses from revenue.

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Retained Earnings

Portion of a company's profits that are kept and reinvested in the business, rather than distributed to shareholders as dividends.

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Common Stock

Shares of ownership in a corporation.

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Trade Accounts Payable (A/P)

Amounts owed to suppliers for goods or services purchased on credit.

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Balance Sheet

A financial statement that reports a company's assets, liabilities, and shareholders' equity at a specific point in time.

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Income Statement

A financial statement that reports a company's revenues and expenses over a period of time.

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Statement of Retained Earnings

A financial statement that explains the changes in retained earnings over a period of time.

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Assets

Economic resources owned or controlled by a company that provide future economic benefit.

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Billing above Cost

When a home office sells goods to its branch at a price higher than the cost of those goods. This difference is reflected as "profit" on the home office's books, but it is not actual profit until the branch sells the goods to customers.

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Combined Statements

Financial statements prepared to show the overall financial performance and position of both the home office and its branch, as if they were a single entity.

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Elimination Adjustments

Adjustments made to the individual financial records of the home office and branch to remove internal transactions (sales and purchases between them) and present a consolidated picture of the company.

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Adjusted TB

The trial balance of the home office and branch adjusted to reflect the billing above cost. This adjustment ensures the combined statements are accurate and reflect the true financial position of the company.

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Income Summary

A temporary account used to close the income statement accounts (revenues and expenses) at the end of an accounting period. The balance in Income Summary represents the net income or loss for the period.

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Branch Net Income (Adjusted)

The net income of the branch after adjusting for the overvaluation of inventories and the billing above cost.

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Study Notes

Agency & Principal, Head Office & Branch

  • An agency relationship is a contract where one or more principals hire an agent to perform a service, often involving some decision-making authority delegated to the agent.

  • A branch is a business unit located away from the main office, handling sales and collections.

  • A sales agency performs a subset of branch functions, primarily handling sample products without maintaining inventory.

Accounting for Sales Agencies

  • Sales agencies maintain a simplified accounting system compared to full branches.

  • They manage customer orders, transmit them to the home office, receive approval, and arrange for the direct shipment of merchandise to customers.

  • Accounts receivable are managed by the home office.

  • An imprest cash fund handles operating expenses at the sales agency, reducing the need for comprehensive accounting at the agency level.

  • Only the record of sales and cash payments is needed at the sales agency.

  • The home office tracks each sales agency's profitability using separate revenue and expense accounts.

Accounting for Branches

  • Branch accounting is determined by company policy, which may allow branches to have independent records or manage all records centrally at the home office.

  • Branch accounting includes expenses and revenue for which the branch manager is responsible.

  • Branches typically maintain their own journals, ledgers, and chart of accounts, similar to independent businesses.

  • A home office ledger is used to keep track of transfers of assets between the home office and the branch.

  • The home office maintains a ledger account for the branch (e.g., Investment in Branch) reflecting the branch's performance and investment by the home office.

  • Changes in the balance of the branch account are recorded by an increase in the credit balance for net income and a reduction in the credit balance for net losses.

Billing of Merchandise to Branches

  • Branches can be billed at cost, at a percentage above cost, or at the retail selling price.

  • Cost-based billing is a simpler method.

  • Percentage-based billing allocates gross profit to the home office.

  • Retail price-based billing uses the retail price of the merchandise.

Transactions Between Branches

  • Transferring assets between branches does not constitute a sale.

  • Branches should record transfers to the home office account.

  • Intra-company expenses (i.e., freight) are included in the direct shipping cost when transferring goods.

Combined Financial Statements

  • A single entity balance sheet is created from the home office and branch balances.

  • Reciprocal accounts are eliminated from combined reports since they are internally balanced.

  • Elimination of reciprocal and intra-company profit/loss is important to arrive at a combined financial statement for the enterprise.

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Description

This quiz covers the essential concepts of agency relationships and the functions of sales agencies in business. It explains how sales agencies operate with simplified accounting practices while coordinating with the home office. Test your understanding of these crucial aspects of business operations!

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