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Questions and Answers
What does the term 'net sales' represent in the Multi-Step Income Statement?
What does the term 'net sales' represent in the Multi-Step Income Statement?
How is gross profit calculated in the Multi-Step Income Statement?
How is gross profit calculated in the Multi-Step Income Statement?
What type of accounts does the Closing Process consider closing?
What type of accounts does the Closing Process consider closing?
Which of the following describes operating expenses in the context of a merchandising business?
Which of the following describes operating expenses in the context of a merchandising business?
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In a Multi-Step Income Statement, what is calculated after gross profit is determined?
In a Multi-Step Income Statement, what is calculated after gross profit is determined?
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Which inventory method assigns costs based on the actual cost of specific items?
Which inventory method assigns costs based on the actual cost of specific items?
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What is the primary characteristic of the FIFO method?
What is the primary characteristic of the FIFO method?
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In calculating the average cost using the weighted-average method, what is the formula used?
In calculating the average cost using the weighted-average method, what is the formula used?
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Which inventory method would result in the lowest taxes during a period of rising prices?
Which inventory method would result in the lowest taxes during a period of rising prices?
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If a company has 250 units available for sale and 50 units remain unsold, how much of the total cost is assigned to the unsold goods using the weighted-average method?
If a company has 250 units available for sale and 50 units remain unsold, how much of the total cost is assigned to the unsold goods using the weighted-average method?
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What does LIFO stand for in inventory accounting?
What does LIFO stand for in inventory accounting?
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Which inventory method is considered to have the most logical appeal for cost allocation?
Which inventory method is considered to have the most logical appeal for cost allocation?
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How many total units were available for sale in the given example?
How many total units were available for sale in the given example?
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What is a key difference between the accounting cycle for a merchandising business and a service industry?
What is a key difference between the accounting cycle for a merchandising business and a service industry?
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Which of the following accurately describes the Periodic Inventory System?
Which of the following accurately describes the Periodic Inventory System?
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How is the balance in the merchandise inventory account tracked under the Perpetual Inventory System?
How is the balance in the merchandise inventory account tracked under the Perpetual Inventory System?
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What action occurs when customers return merchandise under the Perpetual Inventory System?
What action occurs when customers return merchandise under the Perpetual Inventory System?
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What does the cost of goods sold account reflect in the Perpetual Inventory System?
What does the cost of goods sold account reflect in the Perpetual Inventory System?
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Which of the following accounts would typically not be affected directly during the year under the Periodic Inventory System?
Which of the following accounts would typically not be affected directly during the year under the Periodic Inventory System?
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What must be done at the end of the accounting period in the Periodic Inventory System?
What must be done at the end of the accounting period in the Periodic Inventory System?
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What is a typical component of a multi-step income statement in merchandising?
What is a typical component of a multi-step income statement in merchandising?
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Study Notes
Merchandising Accounting Cycle
- The accounting cycle for merchandising businesses is similar to that of service industries.
- Key differences include the recognition of inventory, the use of a multi-step income statement, and additional accounts needing closure at the end of the accounting period.
Inventory Systems
- Two inventory systems are used: periodic and perpetual.
Periodic Inventory System
- No entries are made to merchandise inventory or cost of goods sold accounts throughout the year.
- The merchandise inventory balance relies on a physical count at the end of the accounting period.
- Cost of goods sold is calculated at the end of the period using a formula.
Perpetual Inventory System
- Entries are made to merchandise inventory and cost of goods sold accounts as transactions occur.
- Accounts are adjusted for purchases, sales, returns, allowances, and discounts.
- Balances reflect the cost of goods on hand and sold at any point in time.
- Year-end adjustments are unnecessary if the physical inventory matches the merchandise inventory account balance.
Inventory Costing Methods
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Four widely accepted inventory costing methods are used:
- Specific identification
- First-in, first-out (FIFO)
- Weighted-average
- Last-in, first-out (LIFO)
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These methods can be applied to both periodic and perpetual inventory systems.
Specific Identification
- This method tracks each item's specific cost.
- The actual cost of goods sold is determined by identifying the costs of the specific items sold.
First-In, First-Out (FIFO)
- Assumes that the first units purchased are the first units sold.
- The cost of goods sold is determined by using the costs of the oldest inventory purchases.
- Ending inventory reflects the cost of the most recent purchases.
Last-In, First-Out (LIFO)
- Assumes that the last units purchased are the first units sold.
- The cost of goods sold is determined by using the costs of the most recent inventory purchases.
- Ending inventory reflects the cost of the oldest purchases.
Weighted Average Method
- The average cost of all units available for sale is used to determine the cost of goods sold and ending inventory.
- It is calculated by dividing the total cost of goods available for sale by the total number of units available for sale.
Multi-Step Income Statement
- Commonly used for merchandising businesses.
- Calculates net income in a step-by-step manner.
- Presents gross sales, net sales, cost of goods sold, gross profit, operating expenses, and income from operations.
- The closing process requires consideration for closing additional revenue and expense accounts (temporary or nominal accounts).
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Description
Test your understanding of the accounting cycle for merchandising businesses. Explore key differences from service industries, inventory systems, and how inventory impacts financial statements. This quiz covers both periodic and perpetual inventory systems in detail.
