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Questions and Answers
Which type of business primarily focuses on selling merchandise or goods to customers?
Which type of business primarily focuses on selling merchandise or goods to customers?
- A manufacturer
- A merchandiser (correct)
- A service provider
- A retailer
In the context of merchandising operations, what is the initial step in the operating cycle?
In the context of merchandising operations, what is the initial step in the operating cycle?
- Selling inventory to customers.
- Calculating gross profit.
- Purchasing inventory from a vendor. (correct)
- Collecting cash from customers.
How does a merchandising company's income statement differ from that of a service company?
How does a merchandising company's income statement differ from that of a service company?
- It reports service revenue instead of sales revenue.
- It reports sales revenue instead of service revenue and includes cost of goods sold. (correct)
- It reports operating expenses instead of cost of goods sold.
- It does not include gross profit calculations.
Which of the following is an accurate representation of the formula for calculating gross profit?
Which of the following is an accurate representation of the formula for calculating gross profit?
How does a merchandising company's balance sheet differ from a service company's balance sheet?
How does a merchandising company's balance sheet differ from a service company's balance sheet?
Which merchandise inventory system requires a physical count of inventory to determine the quantity on hand?
Which merchandise inventory system requires a physical count of inventory to determine the quantity on hand?
What is the primary feature of a perpetual inventory system?
What is the primary feature of a perpetual inventory system?
In accounting for the purchase of merchandise inventory, what is the buyer's document requesting payment from the seller?
In accounting for the purchase of merchandise inventory, what is the buyer's document requesting payment from the seller?
What are invoices also commonly referred to as?
What are invoices also commonly referred to as?
What does the notation '3/15, n/30' on an invoice indicate regarding credit terms?
What does the notation '3/15, n/30' on an invoice indicate regarding credit terms?
If Smart Touch Learning purchases goods with credit terms of 3/15, n/30 and pays within 15 days, how is the purchase discount accounted for in a perpetual inventory system?
If Smart Touch Learning purchases goods with credit terms of 3/15, n/30 and pays within 15 days, how is the purchase discount accounted for in a perpetual inventory system?
What are purchase returns?
What are purchase returns?
What are purchase allowances?
What are purchase allowances?
How does the accounting entry differ between a purchase return and a purchase allowance when the buyer is granted either?
How does the accounting entry differ between a purchase return and a purchase allowance when the buyer is granted either?
Under FOB shipping point terms, who typically bears the freight costs?
Under FOB shipping point terms, who typically bears the freight costs?
Under FOB destination terms, who has ownership of the goods while in transit?
Under FOB destination terms, who has ownership of the goods while in transit?
What is 'freight in'?
What is 'freight in'?
When Smart Touch Learning pays a $60 freight charge for a purchase with FOB shipping point terms, how is this recorded?
When Smart Touch Learning pays a $60 freight charge for a purchase with FOB shipping point terms, how is this recorded?
If a seller prepays transportation costs under FOB shipping point terms and lists this cost on the invoice, and Smart Touch Learning pays within the discount period, on what amount is the discount calculated?
If a seller prepays transportation costs under FOB shipping point terms and lists this cost on the invoice, and Smart Touch Learning pays within the discount period, on what amount is the discount calculated?
What is the formula for calculating the net cost of inventory purchased?
What is the formula for calculating the net cost of inventory purchased?
Howie Jewelers purchased inventory for $5,100 with terms 2/15, n/45, FOB shipping point and paid $400 freight. If they returned $600 of inventory and then paid within 15 days, what is the amount of the discount they would receive?
Howie Jewelers purchased inventory for $5,100 with terms 2/15, n/45, FOB shipping point and paid $400 freight. If they returned $600 of inventory and then paid within 15 days, what is the amount of the discount they would receive?
Howie Jewelers purchased inventory for $3,500 with terms 2/10, n/EOM, FOB destination and received a $300 allowance for damaged goods. If they pay within 10 days, what amount of cash should they pay?
Howie Jewelers purchased inventory for $3,500 with terms 2/10, n/EOM, FOB destination and received a $300 allowance for damaged goods. If they pay within 10 days, what amount of cash should they pay?
Following the purchase of merchandise inventory under a perpetual inventory system, Smart Touch Learning returns some of the goods to the vendor. Which accounts are affected by this transaction?
Following the purchase of merchandise inventory under a perpetual inventory system, Smart Touch Learning returns some of the goods to the vendor. Which accounts are affected by this transaction?
Smart Touch Learning purchases $5,000 of goods with a freight charge of $400 on account with terms of 3/5, n/30. The terms of shipment are FOB shipping point. If Smart Touch Learning pays within the discount period, what is the total cash payment?
Smart Touch Learning purchases $5,000 of goods with a freight charge of $400 on account with terms of 3/5, n/30. The terms of shipment are FOB shipping point. If Smart Touch Learning pays within the discount period, what is the total cash payment?
How does a periodic inventory system differ from a perpetual inventory system in recording purchases?
How does a periodic inventory system differ from a perpetual inventory system in recording purchases?
What is the impact on the accounting equation when a company grants a purchase allowance, and the buyer retains the goods?
What is the impact on the accounting equation when a company grants a purchase allowance, and the buyer retains the goods?
Which action would have no impact on the calculated ‘Net Cost of Inventory Purchased’?
Which action would have no impact on the calculated ‘Net Cost of Inventory Purchased’?
How would the decision to use ‘FOB shipping point’ versus ‘FOB destination’ affect the buyer in terms of inventory management and risk?
How would the decision to use ‘FOB shipping point’ versus ‘FOB destination’ affect the buyer in terms of inventory management and risk?
A company using a perpetual inventory system purchases goods on credit with terms 2/10, n/30. It returns a portion of the goods before paying. How does the purchase return affect the calculation of the discount if the payment is made within the discount period?
A company using a perpetual inventory system purchases goods on credit with terms 2/10, n/30. It returns a portion of the goods before paying. How does the purchase return affect the calculation of the discount if the payment is made within the discount period?
If a company incorrectly records a freight-in cost as freight-out, what is the likely effect on its financial statements?
If a company incorrectly records a freight-in cost as freight-out, what is the likely effect on its financial statements?
How does the consistent use of a perpetual inventory system improve inventory management decisions compared to a periodic system?
How does the consistent use of a perpetual inventory system improve inventory management decisions compared to a periodic system?
What journal entry is prepared when returning inventory to the seller?
What journal entry is prepared when returning inventory to the seller?
Flashcards
What is a merchandiser?
What is a merchandiser?
A business that sells goods to customers.
What is a wholesaler?
What is a wholesaler?
Purchases goods from manufacturers and sells to retailers.
What is a retailer?
What is a retailer?
A business that buys from manufacturers or wholesalers and sells to consumers.
What is the operating cycle?
What is the operating cycle?
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Merchandiser Income Statement
Merchandiser Income Statement
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What is gross profit?
What is gross profit?
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Operating expenses
Operating expenses
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Merchandise Inventory
Merchandise Inventory
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Periodic Inventory System
Periodic Inventory System
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What is Perpetual Inventory system?
What is Perpetual Inventory system?
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What is an invoice?
What is an invoice?
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Purchase Discount
Purchase Discount
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Credit Terms
Credit Terms
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Purchase Allowance
Purchase Allowance
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What are Purchase Returns?
What are Purchase Returns?
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FOB Shipping Point
FOB Shipping Point
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FOB Destination
FOB Destination
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What is Freight In?
What is Freight In?
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What is Freight Out?
What is Freight Out?
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Net Cost of Inventory
Net Cost of Inventory
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Study Notes
Merchandising Operations
- Merchandising operations involve buying and selling merchandise, with the goods sold referred to as merchandise inventory.
- A merchandiser is a business that sells merchandise to customers.
- A wholesaler buys goods from manufacturers and sells them to retailers.
- A retailer buys merchandise from manufacturers or wholesalers and then sells the goods to consumers.
Operating Cycle of a Merchandising Business
- The operating cycle of a merchandising business begins when the company purchases inventory from a vendor or business.
- The company then sells the inventory to a customer.
- The company concludes when cash is collected from customers.
Income Statement of a Merchandiser
- Sales Revenue is reported instead of Service Revenue.
- Cost of Goods Sold (COGS) represents the cost of merchandise sold to customers.
- Gross profit is the net Sales Revenue minus the Cost of Goods Sold.
- Operating expenses include all expenses other than the Cost of Goods Sold.
Merchandise Inventory Systems
- Businesses must determine the value of merchandise inventory on hand and the value sold.
- A periodic inventory system requires a physical count of inventory to determine inventory on hand.
- A perpetual inventory system keeps a running computerized record of merchandise inventory.
Purchases of Merchandise Inventory in a Perpetual Inventory System
- The merchandiser cycle begins with the purchase of merchandise inventory.
- An invoice serves as the seller's request for payment from the purchaser.
- Invoices are also called bills.
- Sellers have sales invoices.
- Purchasers have purchase invoices.
Purchase Discounts
- A purchase discount incentivizes early payment.
- Credit terms are the payment terms of purchase or sale listed on the invoice.
- Most credit terms express the discount, the discount time period, and the final due date.
- The notation 3/15, n/30 represents a 3% discount if paid within 15 days, otherwise, the full amount is due in 30 days.
Purchase Returns and Allowances
- The invoice price may be adjusted for returns or allowances.
- Purchase returns occur when sellers permit purchasers to return unsuitable merchandise.
- Purchase allowances are amounts granted to purchasers to keep goods that are not as ordered.
Transportation Costs
- Title transfer and freight payment responsibilities are specified in purchase agreements.
- FOB shipping point means the buyer takes ownership once the goods leave the seller.
- The buyer typically pays the freight.
- FOB destination means the buyer takes ownership at the delivery destination point.
- The seller usually pays the freight.
- Freight in is the transportation cost for shipping goods into the purchaser's warehouse.
- Freight out is the transportation cost for shipping goods from the seller's warehouse to the customer.
Freight In Within Discount Period
- Sellers sometimes prepay transportation costs under FOB shipping point.
- The seller lists this cost on the invoice as a convenience.
- If the buyer pays within the discount period, the discount applies only to the merchandise cost.
Cost of Inventory Purchased
- Knowing the net cost of inventory allows for determining the actual cost of purchased merchandise.
- The net cost of inventory is calculated as: Purchase cost of inventory – Purchase returns and allowances – Purchase discounts + Freight in
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