Sales Transactions and Accounting

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Questions and Answers

What is recorded at the time of a sales transaction when inventory is sold?

The cost of goods sold

The trade discount granted to the buyer

The selling price as revenue (correct)

The cash received from the buyer

How does the company record the expense of a sale?

By decreasing the inventory account (correct)

By increasing the inventory account

As cash discounts granted

As sales revenue

What do trade discounts aim to achieve?

Reduce operating expenses

Facilitate faster payment of invoices

Encourage bulk purchases (correct)

Increase cash flow

How are cash discounts calculated on sales?

On sales minus sales returns and allowances Signup and view all the answers

In the terms '2/10, n/30', what does 'n' represent?

Net amount to pay Signup and view all the answers

When is revenue recognized for a sale?

At the time the transaction occurs Signup and view all the answers

Which factor determines how freight costs are recorded?

FOB shipping terms Signup and view all the answers

What is the main advantage of offering cash discounts to purchasers?

Encouraging prompt payment of receivables Signup and view all the answers

What does the Sarbanes-Oxley Act require from publicly traded companies?

To maintain a system of internal control Signup and view all the answers

What is one of the main factors that contribute to fraudulent activity?

Opportunity Signup and view all the answers

Which of the following best describes the role of cash in a business?

Cash has the greatest chance of going missing Signup and view all the answers

How does financial pressure contribute to fraud according to the fraud triangle?

It motivates employees to justify their actions Signup and view all the answers

What must corporate executives ensure according to the Sarbanes-Oxley Act?

That the internal controls are reliable and effective Signup and view all the answers

Which of the following is NOT a recommended action to control cash?

Limit cash transactions to once a month Signup and view all the answers

What is the primary goal of the Sarbanes-Oxley Act?

To maintain public confidence in financial statements Signup and view all the answers

What is a significant risk of cash handling in a business?

Cash can be mishandled through theft or carelessness Signup and view all the answers

What is the purpose of establishing responsibility in cash handling?

To authorize specific individuals to handle cash receipts Signup and view all the answers

Which principle of internal control helps to prevent fraudulent cash disbursement?

Segregation of duties Signup and view all the answers

What should be included in the documentation procedures for cash disbursements?

Pre-numbered cheques and accounted for in sequence Signup and view all the answers

What is a key benefit of using a paid cheque in cash disbursement verification?

It serves as proof of payment Signup and view all the answers

Why is the Electronic Funds Transfer (EFT) System advantageous?

It transfers funds without using physical cash or paper Signup and view all the answers

What control is recommended for ensuring the security of blank cheques?

Keep in a safe with limited access Signup and view all the answers

Which action is NOT a recommended practice for cash management?

Allow cash handlers to skip vacations Signup and view all the answers

How can independent internal verification contribute to cash management?

By comparing cash receipts and bank deposits Signup and view all the answers

Which inventory valuation method specifically tracks individual items?

Specific Identification Signup and view all the answers

What factor influences whether net income will increase or decrease under different inventory methods?

Acquisition costs of items sold Signup and view all the answers

Using FIFO, what is the sequence of cost allocation when calculating cost of goods sold?

First purchased items first Signup and view all the answers

In a scenario with rising prices, which inventory method typically results in lower net income?

LIFO Signup and view all the answers

Which of the following is true about the Average Cost method?

It calculates a weighted average for units sold and in ending inventory Signup and view all the answers

What does the aging of accounts receivable help to refine in the calculation of uncollectibility?

The length of time receivables have been outstanding Signup and view all the answers

How is accounts receivable turnover calculated?

Net credit sales divided by average accounts receivable Signup and view all the answers

What is indicated by a higher accounts receivable turnover ratio?

Faster collection of receivables Signup and view all the answers

What formula is used to determine the days in accounts receivable?

Accounts receivable divided by Turnover x 365 days Signup and view all the answers

If a company has $150,000 in accounts receivable and $900,000 in net credit sales, what is its accounts receivable turnover if calculated over a year?

What does a higher number of days in accounts receivable suggest about a company's collection process?

The company is experiencing collection delays Signup and view all the answers

Which of the following is true about service revenue recognition?

It is recorded when the performance obligation is satisfied Signup and view all the answers

What is the average accounts receivable if the beginning balance is $100,000 and the ending balance is $200,000?

$150,000 Signup and view all the answers

Study Notes

Sales

Sales invoices must be supported for each credit sale
Sales transactions require two journal entries:
- The first records the revenue from the sale at the selling price
- The second decreases the inventory account and records the expense of the sale at cost
Revenue (sales) is recorded when the transaction occurs, regardless of payment.
Revenue is always greater than the cost of goods sold
Inventory is decreased for the cost of the inventory sold, including the price paid plus necessary costs to get the inventory ready to sell
FOB rules determine whether freight costs are recorded as transportation out or as part of the cost of inventory
Cash discounts are used to motivate customers to pay earlier
Sales (cash) discounts are offered to customers to promote prompt payment of the balance due
Trade discounts are part of the initial sale transaction and are not a sales discount
Trade discounts increase sales in bulk quantity while cash discounts are granted for prompt payment
Cash discounts are calculated on sales minus returns and allowances
Credit terms may allow the buyer to claim a cash discount for prompt payment
Credit terms can take the form of 2/10, n/30
- 2 is the discount %
- 10 is the discount period in days
- n is the net (total) amount to pay
- 30 is the number of days after the invoice date that the net amount is due
2/10, n/30 means a 2% discount if paid within 10 days, otherwise the net amount is due within 30 days

Fraud

Fraud is a dishonest act by an employee that results in personal benefit at the expense of the employer
The fraud triangle is the main contributor to fraudulent activity, composed of:
- Opportunity
- Financial Pressure
- Rationalization (Justify committing the fraud)
The Sarbanes-Oxley Act (SOX) was passed in 2002 to respond to corporate failures and fraud that resulted in substantial financial losses
The Act contains provisions affecting corporate governance, risk management, auditing, and financial reporting of public companies
The Act is intended to deter and punish corporate accounting fraud and corruption
The purpose of the Act is to maintain public confidence and trust in the financial statements of reporting companies

Cash

Cash is the most liquid asset
Businesses need adequate control over their cash
Cash is the asset that has the greatest chance of going missing
Strong internal controls are built around the cash process
Cash is a vital factor in the operation of a business
A company should:
- account for all cash transactions accurately
- ensure enough cash is available to pay bills
To control and manage its cash, a company should:
- Establish responsibility
- Segregate duties
- Utilize documentation procedures
- Implement physical, mechanical, and electronic controls
- Implement independent internal verification
- Apply other controls

Cash Disbursement

Cash is disbursed to pay expenses, liabilities, or purchase assets
Internal control over cash disbursement is more effective when payments are made by cheque, rather than cash
Cash payments are generally made after specific control procedures are followed
The paid cheque provides proof of payment
The principles of internal control apply to cash disbursements as follows:
- Establish responsibility
- Segregate duties
- Utilize documentation procedures
- Implement physical, mechanical, and electronic controls
- Implement independent internal verification
- Apply other controls
Methods of disbursing and/or safeguarding cash:
- Electronic Funds Transfer (EFT) System: Transfer funds among parties without the use of paper
- Petty Cash Fund: Used to pay relatively small amounts.

Aging of Accounts Receivable

Aging of accounts receivable is a variation of the percent of accounts receivable method
Refines the calculation, considering the length of time receivables have been outstanding
Groups receivables by age (time outstanding)
Estimated uncollectibility increases as receivables get older

Accounts Receivable Turnover

Accounts receivable turnover is the rate of collection of accounts receivable
Accounts Receivable Turnover = net credit sales divided by average accounts receivable
Accounts receivable turnover measures how many times a business can turn its accounts receivable into cash during a period
Average accounts receivable = (Beginning accounts receivable + Ending accounts receivable) / 2

Days in Accounts Receivable / Accounts Receivable Days

Days in accounts receivable is the days an item spends in accounts receivable, on average
It is the number of days that an invoice will remain outstanding before it is collected
Accounts Receivable Days = Accounts receivable / Turnover x 365 days

Accelerating the Inflow of Cash from Sales

Recording sales of merchandise is made using cash or credit (on account).
Service revenue, like sales revenue, is recorded when the performance obligation is satisfied.

Inventory Costing Methods

There are three main inventory costing methods. The outcome of using each method may be different
- Specific Identification (SI)
  - Track the individual inventory items
  - Used for one-of-a-kind, high value, low-volume items, such as art or jewelry
  - The effect on net income depends on items sold and their acquisition costs
- First In, First Out (FIFO)
  - Assumes the first goods purchased are the first goods sold
  - Results in a higher ending inventory than LIFO during periods of inflation
- Last In, First Out (LIFO)
  - Assumes the last goods purchased are the first goods sold
  - Results in a lower ending inventory than FIFO during periods of inflation

Class Exercise

The accounting records of SUCCESS Electronics relate to:
- Beginning inventory on January 1st: 3,000 units at $3
- Purchases on January 15th: 8,000 units at $7
- Sales on January 19th: 9,200 units at $10
The exercise requires calculating the cost of goods sold and the cost of ending inventory under the FIFO, LIFO, and Average Cost methods.

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Description

Test your knowledge on the principles of sales transactions and accounting practices. This quiz covers key concepts such as sales invoices, journal entries, revenue recognition, and inventory management. Understand the role of discounts and FOB rules in sales.