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AU / Accounting / ACCT 2110 / What does gross margin tell you?

What does gross margin tell you?

What does gross margin tell you?

Description

School: Auburn University
Department: Accounting
Course: Principles of Financial Accounting
Professor: Elizabeth miller
Term: Fall 2015
Tags:
Cost: 50
Name: Test 3 Study Guide And Answer Key
Description: Here is a study guide I put together for Test 3. It contains questions regarding information from Chapters 5 and 6. The answer key is provided as well. Good Luck!
Uploaded: 10/18/2015
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Test 3 Study Guide


What does gross margin tell you?



Chapters 5 and 6

The information in this study guide is a collection of class notes and notes from the textbook. Vocabulary 

___Sales Invoice  

___Gross Method

___Sales Discount Account

___ Sales Returns and Allowance Account ___ Return

___ Allowance

___ Allowance of Doubtful Accounts ___ Net Sales Revenue

___ Net Accounts Receivable

___ Net Sales

___ Net Realizable Value

___ % Of Credit Sales

___ Factoring

___ Payee

___ Accounts Receivable Turnover ___ Uncollectable

a. Sales – Sales Discount – Sales Returns and  Allowances

b. Customer will pay reduced price for a defect  in a product.


What kind of account is a sales discount?



If you want to learn more check out Why is machiavelli sometimes called the father of political science?

c. Net Realizable Value – Accounts Receivable – Allowance of Doubtful Accounts

d. Recording sale before discount is applied.

e. A contra revenue account when handling  sales and receivables.

f. Sales Revenue – Sales Returns and Allowances  – Sales Discount

g. A contra asset account when recording  sales/allowances.

h. A contra asset account found on the balance  sheet when handling Allowances.

i. Customer no longer wants the  

product/service.

j. 2/10, n/30  

k. Amount a company expects to collect from  their customers

l. Selling Receivables to a third party who will  collect from the customer.

m. Bad Debt.

n. Estimate of Bad Debt Expense. An Allowance  Method.


What is a good accounts receivable turnover?



We also discuss several other topics like What are the consequences of sex?

o. Net Sales/ Average net accounts receivable

p. Company to receive principal and interest  amounts from a notes receivable.  

q. Analyzing the accounts receivable to estimate  the net realizable value. The amount a company  expects to default

True/ False Don't forget about the age old question of What makes a good research idea?

___ The Following is a Journal Entry recording a sales discount under the Gross Method:

Sept 10 Cash 980

 Sales Discount 20

Account Receivable 100

___ Under the Factoring Cash Management, Cash flow speeds up at no factoring fee. ___ Debit cards reduce transaction costs.

___ There are two types of Sales Discount Accounts; Trade and Quantity

___ In this invoice 3/10, n/20, the period with which the discount will be honored is 10 days. ___ The 2 Types of accounts receivable are Trade and Uncollectable

___ A short term note receivable is any contract made past the 12 month mark.

___ There are two ways to mark off a uncollectable; Directly or before it has been deemed uncollectable  (Allowance Method)

___ Under the % of Credit Sales ( Allowance Method), bad debt expense is calculated first to then  determine the amount that will go into the Allowance of Doubtful Accounts T-account. Don't forget about the age old question of What is the central limit theorem?

___ The Aging Method helps us estimate a target amount for the Allowance of Doubtful Accounts T account

___ The Allowance of Doubtful Accounts T-account has a debit balance.

___If an Allowance of Doubtful Accounts T-account has an underestimated balance, then that balance is  located on the debit side.  

___ The following entry is the records of a debit card transaction between a bank and a customer: We also discuss several other topics like Who is sherri l. jackson?
Don't forget about the age old question of Mass communication theory is based on what?

Cash 990

Service Charge 10

Sales 1000  

___ The three steps that come with a notes receivable are: 1. Accepting note 2. Earning Interest 3.  Collecting the note at its maturity level

___ In order to analyze sales using the profitability ratios, one must refer to the income statement for  the values.

___ The problem with the direct write off method is that a company can manipulate earnings, fail the  matching principle, and it violates GAAP.

Problems 

1a. Create a journal entry of a company billing a customer for 15,000 for services provided in April. The  Terms are 2/10, n/30. The customer paid on May 15th (in the discount period)

 b. How would this sale appear on the Income Statement if it was the only sale made by the end of the  period and was still within the discount period?

2a. A customer fails to pay for $1000 worth of goods sold in October. The company finally deems it as an  uncollectable sale and directly writes it off. Provide a journal entry:

 b. this violates which principle of accounting? 

The Write Off Principle The Matching Principle The Value Principle

3a. A company has $620,000 in net sales, with an estimate of 1.43% bad debt expense estimated.  Calculate that bad debt expense amount in 2013.  

 b. What two accounts are affected if there is a write off of an accounts receivable?

4a. Assuming that 7,200 dollars of a current accounts receivable is deemed uncollectable, by what  amount will the Allowance of Doubtful Accounts need to be adjusted?

Allowance of Doubtful Accounts 

 60,000 6700

 53300

Below are statements that describe both the Aging Method and the % of Credit Sales Method (Both of  which are Allowance Methods). Organize the statements into the correct column.

AGING METHOD % CREDIT SALES

Net realizable value goes on the Balance Sheet

Determine how much expense to put on the Income Statement

Use % of revenue to estimate the amount of bad debt expense

Analysis of receivables to estimate the contra asset

Accounts categorized by age

Bad Debt Expense = Sales X Percent estimated

Net Sales = Sales – Sales Discount – Sales Returns and Allowances

Net Realizable Value= Accounts Receivable – Allowance of Doubtful Accounts

Vocabulary 

___ Gross Margin

___ Merchandisers

___ Wholesalers

___ Retailers

___ Costs of Goods Sold

___Cost of Goods Available for Sale ___ Perpetual Inventory System ___ Periodic Inventory System ___ FOB Shipping Point

___ FOB Destination

___ Consignment

___ Net Purchases

___ Cost of Ending Inventory

___ Goods Available for Sale

___ Inventory Turnover Ratio ___ Average # of days to sell inventory ___ Weighted Average Cost per Unit

a. Cost of Goods Sold are updated after each  Sale.

b. Cost of Goods Available for Sale / # of Units  Available for Sale

c. Net Sales - Cost of Goods Sold

d. Ending units X Cost per unit

e. The buyer pays the freight. Termed as  “freight in.”

f. A company that sells a finished product g. Merchandisers that sell to other retailers h. Beginning Inventory – Net Purchases

i. Cost of Goods Available for Sale – Ending  Inventory. Ending Units X Cost per unit

j. Cost of Goods Sold are updated after the  period ends.

k. Merchandisers that sell directly to customers.

l. The seller is responsible for paying the freight.  Termed as “freight out”

m. Cost of Goods Sold/ Average Inventory n. Units X Cost per unit

o. Purchases – Purchase Discounts – Purchase  Returns and Allowances + Transportation costs

p. Goods owned by one seller but sold by  another.

q. 365/ Inventory Turnover Ratio

True or False 

___ When companies sell their inventory, the cost of the inventory becomes an expense known as Cost  of Goods Sold.

___ There are two types of Inventory Systems; Permanent and Periodic

___ The buyer will credit the inventory account for the amount of a purchase return or allowance in the  Perpetual Inventory System

___ The buyer will credit the inventory account for the amount of a purchase discount in the perpetual  Inventory system.

___ The buyer will debit the inventory account for the transportation costs paid.

___ Returns and Allowances are handled the same way a discount would be under the Perpetual  Inventory System.

___ There are 4 ways of costing inventory; LIFO, PIFO, Specific Identification, and Average Cost ___ Under FIFO, the first goods in are the 1st goods to be sold when prices fluctuate in a market.

___ When prices rise in a market, one can expect FIFO to illustrate a lower ending inventory, the highest  Cost of Goods Sold, and the lowest income recorded.

___ LIFO and FIFO switch in these records when prices fall.

___ LIFO has a higher value in the inventory and cost of goods sold accounts than does FIFO

___ When market/ replacement cost is less than the historical price, a company has the option of  reporting their inventory value with the replacement cost.

___ This is true because of the Conservation Principle

___If ending inventory were understated on the income statement, then cost of goods sold would be  overstated.

___This would affect Stockholder’s Equity, Assets, and Retained Earnings.

___ It will never be able to correct itself in the future.

___In periods of rising prices, a company may choose LIFO because it provides the lowest current  taxable income.

___ During the Periodic Inventory System, the inventory account remains unchanged until the end of  the period.

Problems 

1. From a customer’s standpoint, what would a payment of goods bought on account with a  discount of 2/10, n/30 look like in a journal entry?

What about if the customer didn’t pay on time to receive a discount?

2. A customer purchased $1000 worth of goods. What will the journal entry look like for a return  made worth $100?

What if that amount had been discounted first with a discount 2/10, n/30? What would the  customer’s records show then? Remember, they purchased $1000 worth of goods.

3. A customer sells goods worth $12,000 cash. $10,000 were paid to the supplier. What is the  journal entry to record this transaction?

Test 3 Study Guide

Chapters 5 and 6

The information in this study guide is a collection of class notes and notes from the textbook. Vocabulary 

_J_Sales Invoice  

_D_Gross Method

_E_Sales Discount Account

_G_ Sales Returns and Allowance Account _I_ Return

_B_ Allowance

_H_ Allowance of Doubtful Accounts _F_ Net Sales Revenue

_C_ Net Accounts Receivable

_ A_ Net Sales

_ K_ Net Realizable Value

_N_ % Of Credit Sales

__L__ Factoring

_P_ Payee

_O_ Accounts Receivable Turnover _M_ Uncollectable

a. Sales – Sales Discount – Sales Returns and  Allowances

b. Customer will pay reduced price for a defect  in a product.

c. Net Realizable Value – Accounts Receivable – Allowance of Doubtful Accounts

d. Recording sale before discount is applied.

e. A contra revenue account when handling  sales and receivables.

f. Sales Revenue – Sales Returns and Allowances  – Sales Discount

g. A contra asset account when recording  sales/allowances.

h. A contra asset account found on the balance  sheet when handling Allowances.

i. Customer no longer wants the  

product/service.

j. 2/10, n/30  

k. Amount a company expects to collect from  their customers

l. Selling Receivables to a third party who will  collect from the customer.

m. Bad Debt.

n. Estimate of Bad Debt Expense. An Allowance Method.

o. Net Sales/ Average net accounts receivable

p. Company to receive principal and interest  amounts from a notes receivable.  

q. Analyzing the accounts receivable to estimate  the net realizable value. The amount a company  expects to default

True/ False 

_T_ The Following is a Journal Entry recording a sales discount under the Gross Method:

Sept 10 Cash 980

 Sales Discount 20

Account Receivable 100

__F- there is a factoring fee__ Under the Factoring Cash Management, Cash flow speeds up at no  factoring fee.

_T__ Debit cards reduce transaction costs.

_T_ There are two types of Sales Discount Accounts; Trade and Quantity

_T_ In this invoice 3/10, n/20, the period with which the discount will be honored is 10 days. _F- Trade and Non Trade__ The 2 Types of accounts receivable are Trade and Uncollectable

_F- within a 12 month mark_ A short term note receivable is any contract made past the 12 month  mark.

_T_ There are two ways to mark off a uncollectable; Directly or before it has been deemed uncollectable  (Allowance Method)

_T_ Under the % of Credit Sales ( Allowance Method), bad debt expense is calculated first to then  determine the amount that will go into the Allowance of Doubtful Accounts T-account.

_T_ The Aging Method helps us estimate a target amount for the Allowance of Doubtful Accounts T account

_F- normal credit_ The Allowance of Doubtful Accounts T-account has a debit balance.

_T_If an Allowance of Doubtful Accounts T-account has an underestimated balance, then that balance is  located on the debit side.  

_F-for a credit card_ The following entry is the records of a debit card transaction between a bank and a  customer:

Cash 990

Service Charge 10

Sales 1000  

_T_ The three steps that come with a notes receivable are: 1. Accepting note 2. Earning Interest 3.  Collecting the note at its maturity level

_T_ In order to analyze sales using the profitability ratios, one must refer to the income statement for  the values.

_T_ The problem with the direct write off method is that a company can manipulate earnings, fail the  matching principle, and it violates GAAP.

Problems 

1a. Create a journal entry of a company billing a customer for 15,000 for services provided in April. The  Terms are 2/10, n/30. The customer paid on May 15th (in the discount period)

May 15 Cash 14700  

 Discount 300

Accounts Receivable 15,000

 b. How would this sale appear on the Income Statement if it was the only sale made by the end of the  period and was still within the discount period?

Sales 15,000

Discount (300) 

Net Sales 14700

2a. A customer fails to pay for $1000 worth of goods sold in October. The company finally deems it as an  uncollectable sale and directly writes it off. Provide a journal entry:

Bad Debt Expense 1000

Accounts Receivable 1000

b. this violates which principle of accounting? 

The Write Off Principle The Matching Principle The Value Principle

3a. A company has $620,000 in net sales, with an estimate of 1.43% bad debt expense estimated.  Calculate that bad debt expense amount in 2013.  

$620,000 X 0.0143 = 8866

 b. What two accounts are affected if there is a write off of an accounts receivable? Allowance of Doubtful Accounts (debited) and Accounts Receivable (credited)

4a. Assuming that 7,200 dollars of a current accounts receivable is deemed uncollectable, by what  amount will the Allowance of Doubtful Accounts need to be adjusted?

Allowance of Doubtful Accounts 

 60,000 6700

 53300

7200= -53300 + X =60,500

Below are statements that describe both the Aging Method and the % of Credit Sales Method (Both of  which are Allowance Methods). Organize the statements into the correct column.

AGING METHOD % CREDIT SALES

Net realizable value goes on the Balance Sheet

Determine how much expense to put on the Income Statement

Use % of revenue to estimate the amount of bad debt expense

Analysis of receivables to estimate the contra asset

Accounts categorized by age

Bad Debt Expense = Sales X Percent estimated

Net Sales = Sales – Sales Discount – Sales Returns and Allowances

Net Realizable Value= Accounts Receivable – Allowance of Doubtful Accounts

Vocabulary 

_C_ Gross Margin

_F_ Merchandisers

_G_ Wholesalers

_K_ Retailers

_I_Costs of Goods Sold

_H_Cost of Goods Available for Sale _A_ Perpetual Inventory System _J_ Periodic Inventory System _E_ FOB Shipping Point

_L_ FOB Destination

_P_ Consignment

_O_ Net Purchases

_D_ Cost of Ending Inventory

_N_ Goods Available for Sale

_M_ Inventory Turnover Ratio _Q_ Average # of days to sell inventory _B_ Weighted Average Cost per Unit

a. Cost of Goods Sold are updated after each  Sale.

b. Cost of Goods Available for Sale / # of Units  Available for Sale

c. Net Sales - Cost of Goods Sold

d. Ending units X Cost per unit

e. The buyer pays the freight. Termed as  “freight in.”

f. A company that sells a finished product g. Merchandisers that sell to other retailers h. Beginning Inventory – Net Purchases

i. Cost of Goods Available for Sale – Ending  Inventory. Ending Units X Cost per unit

j. Cost of Goods Sold are updated after the  period ends.

k. Merchandisers that sell directly to customers.

l. The seller is responsible for paying the freight.  Termed as “freight out”

m. Cost of Goods Sold/ Average Inventory n. Units X Cost per unit

o. Purchases – Purchase Discounts – Purchase  Returns and Allowances + Transportation costs

p. Goods owned by one seller but sold by  another.

q. 365/ Inventory Turnover Ratio

True or False 

__T__ When companies sell their inventory, the cost of the inventory becomes an expense known as  Cost of Goods Sold.

_F- Perpetual_ There are two types of Inventory Systems; Permanent and Periodic

_T_ The buyer will credit the inventory account for the amount of a purchase return or allowance in the  Perpetual Inventory System

_T_ The buyer will credit the inventory account for the amount of a purchase discount in the perpetual  Inventory system.

_T_ The buyer will debit the inventory account for the transportation costs paid.

_T_ Returns and Allowances are handled the same way a discount would be under the Perpetual  Inventory System.

_F- FIFO not PIFO_ There are 4 ways of costing inventory; LIFO, PIFO, Specific Identification, and Average  Cost

_T_ Under FIFO, the first goods in are the 1st goods to be sold when prices fluctuate in a market.

_F-LIFO_When Prices Rise in a market, one can expect FIFO to illustrate a lower ending inventory, the  highest Cost of Goods Sold, and the lowest income recorded.

_T_ LIFO and FIFO switch in these records when prices fall.

_T_ LIFO has a higher value in the inventory and cost of goods sold accounts than does FIFO

_T_ When market/ replacement cost is less than the historical price, a company has the option of  reporting their inventory value with the replacement cost.

_T_ This is true because of the Conservation Principle

_T_If ending inventory were understated on the income statement, then cost of goods sold would be  overstated.

_T_This would affect Stockholder’s Equity, Assets, and Retained Earnings.

_F_ It will never be able to correct itself in the future.

_T_In periods of rising prices, a company may choose LIFO because it provides the lowest current  taxable income.

_T_ During the Periodic Inventory System, the inventory account remains unchanged until the end of the  period.

Problems 

1. From a customer’s standpoint, what would a payment of goods bought on account with a  discount of 2/10, n/30 look like in a journal entry?

Accounts Payable 1000

Cash 20

Inventory 980

What about if the customer didn’t pay on time to receive a discount?

Accounts Payable 1000

Cash 1000

2. A customer purchased $1000 worth of goods. What will the journal entry look like for a return  made worth $100?

Accounts Payable 100

Inventory 100

What if that amount had been discounted first with a discount 2/10, n/30? What would the  customer’s records show then? Remember, they purchased $1000 worth of goods.

Accounts Payable 900

Inventory 18  

Cash 882

3. A customer sells goods worth $12,000 cash. $10,000 were paid to the supplier. What is the  journal entry to record this transaction?

Accounts Receivable 12,000

Revenue 12,000

Cost of Goods Sold 10,000

Inventory 10,000

Test 3 Study Guide

Chapters 5 and 6

The information in this study guide is a collection of class notes and notes from the textbook. Vocabulary 

_J_Sales Invoice  

_D_Gross Method

_E_Sales Discount Account

_G_ Sales Returns and Allowance Account _I_ Return

_B_ Allowance

_H_ Allowance of Doubtful Accounts _F_ Net Sales Revenue

_C_ Net Accounts Receivable

_ A_ Net Sales

_ K_ Net Realizable Value

_N_ % Of Credit Sales

__L__ Factoring

_P_ Payee

_O_ Accounts Receivable Turnover _M_ Uncollectable

a. Sales – Sales Discount – Sales Returns and  Allowances

b. Customer will pay reduced price for a defect  in a product.

c. Net Realizable Value – Accounts Receivable – Allowance of Doubtful Accounts

d. Recording sale before discount is applied.

e. A contra revenue account when handling  sales and receivables.

f. Sales Revenue – Sales Returns and Allowances  – Sales Discount

g. A contra asset account when recording  sales/allowances.

h. A contra asset account found on the balance  sheet when handling Allowances.

i. Customer no longer wants the  

product/service.

j. 2/10, n/30  

k. Amount a company expects to collect from  their customers

l. Selling Receivables to a third party who will  collect from the customer.

m. Bad Debt.

n. Estimate of Bad Debt Expense. An Allowance Method.

o. Net Sales/ Average net accounts receivable

p. Company to receive principal and interest  amounts from a notes receivable.  

q. Analyzing the accounts receivable to estimate  the net realizable value. The amount a company  expects to default

True/ False 

_T_ The Following is a Journal Entry recording a sales discount under the Gross Method:

Sept 10 Cash 980

 Sales Discount 20

Account Receivable 100

__F- there is a factoring fee__ Under the Factoring Cash Management, Cash flow speeds up at no  factoring fee.

_T__ Debit cards reduce transaction costs.

_T_ There are two types of Sales Discount Accounts; Trade and Quantity

_T_ In this invoice 3/10, n/20, the period with which the discount will be honored is 10 days. _F- Trade and Non Trade__ The 2 Types of accounts receivable are Trade and Uncollectable

_F- within a 12 month mark_ A short term note receivable is any contract made past the 12 month  mark.

_T_ There are two ways to mark off a uncollectable; Directly or before it has been deemed uncollectable  (Allowance Method)

_T_ Under the % of Credit Sales ( Allowance Method), bad debt expense is calculated first to then  determine the amount that will go into the Allowance of Doubtful Accounts T-account.

_T_ The Aging Method helps us estimate a target amount for the Allowance of Doubtful Accounts T account

_F- normal credit_ The Allowance of Doubtful Accounts T-account has a debit balance.

_T_If an Allowance of Doubtful Accounts T-account has an underestimated balance, then that balance is  located on the debit side.  

_F-for a credit card_ The following entry is the records of a debit card transaction between a bank and a  customer:

Cash 990

Service Charge 10

Sales 1000  

_T_ The three steps that come with a notes receivable are: 1. Accepting note 2. Earning Interest 3.  Collecting the note at its maturity level

_T_ In order to analyze sales using the profitability ratios, one must refer to the income statement for  the values.

_T_ The problem with the direct write off method is that a company can manipulate earnings, fail the  matching principle, and it violates GAAP.

Problems 

1a. Create a journal entry of a company billing a customer for 15,000 for services provided in April. The  Terms are 2/10, n/30. The customer paid on May 15th (in the discount period)

May 15 Cash 14700  

 Discount 300

Accounts Receivable 15,000

 b. How would this sale appear on the Income Statement if it was the only sale made by the end of the  period and was still within the discount period?

Sales 15,000

Discount (300) 

Net Sales 14700

2a. A customer fails to pay for $1000 worth of goods sold in October. The company finally deems it as an  uncollectable sale and directly writes it off. Provide a journal entry:

Bad Debt Expense 1000

Accounts Receivable 1000

b. this violates which principle of accounting? 

The Write Off Principle The Matching Principle The Value Principle

3a. A company has $620,000 in net sales, with an estimate of 1.43% bad debt expense estimated.  Calculate that bad debt expense amount in 2013.  

$620,000 X 0.0143 = 8866

 b. What two accounts are affected if there is a write off of an accounts receivable? Allowance of Doubtful Accounts (debited) and Accounts Receivable (credited)

4a. Assuming that 7,200 dollars of a current accounts receivable is deemed uncollectable, by what  amount will the Allowance of Doubtful Accounts need to be adjusted?

Allowance of Doubtful Accounts 

 60,000 6700

 53300

7200= -53300 + X =60,500

Below are statements that describe both the Aging Method and the % of Credit Sales Method (Both of  which are Allowance Methods). Organize the statements into the correct column.

AGING METHOD % CREDIT SALES

Net realizable value goes on the Balance Sheet

Determine how much expense to put on the Income Statement

Use % of revenue to estimate the amount of bad debt expense

Analysis of receivables to estimate the contra asset

Accounts categorized by age

Bad Debt Expense = Sales X Percent estimated

Net Sales = Sales – Sales Discount – Sales Returns and Allowances

Net Realizable Value= Accounts Receivable – Allowance of Doubtful Accounts

Vocabulary 

_C_ Gross Margin

_F_ Merchandisers

_G_ Wholesalers

_K_ Retailers

_I_Costs of Goods Sold

_H_Cost of Goods Available for Sale _A_ Perpetual Inventory System _J_ Periodic Inventory System _E_ FOB Shipping Point

_L_ FOB Destination

_P_ Consignment

_O_ Net Purchases

_D_ Cost of Ending Inventory

_N_ Goods Available for Sale

_M_ Inventory Turnover Ratio _Q_ Average # of days to sell inventory _B_ Weighted Average Cost per Unit

a. Cost of Goods Sold are updated after each  Sale.

b. Cost of Goods Available for Sale / # of Units  Available for Sale

c. Net Sales - Cost of Goods Sold

d. Ending units X Cost per unit

e. The buyer pays the freight. Termed as  “freight in.”

f. A company that sells a finished product g. Merchandisers that sell to other retailers h. Beginning Inventory – Net Purchases

i. Cost of Goods Available for Sale – Ending  Inventory. Ending Units X Cost per unit

j. Cost of Goods Sold are updated after the  period ends.

k. Merchandisers that sell directly to customers.

l. The seller is responsible for paying the freight.  Termed as “freight out”

m. Cost of Goods Sold/ Average Inventory n. Units X Cost per unit

o. Purchases – Purchase Discounts – Purchase  Returns and Allowances + Transportation costs

p. Goods owned by one seller but sold by  another.

q. 365/ Inventory Turnover Ratio

True or False 

__T__ When companies sell their inventory, the cost of the inventory becomes an expense known as  Cost of Goods Sold.

_F- Perpetual_ There are two types of Inventory Systems; Permanent and Periodic

_T_ The buyer will credit the inventory account for the amount of a purchase return or allowance in the  Perpetual Inventory System

_T_ The buyer will credit the inventory account for the amount of a purchase discount in the perpetual  Inventory system.

_T_ The buyer will debit the inventory account for the transportation costs paid.

_T_ Returns and Allowances are handled the same way a discount would be under the Perpetual  Inventory System.

_F- FIFO not PIFO_ There are 4 ways of costing inventory; LIFO, PIFO, Specific Identification, and Average  Cost

_T_ Under FIFO, the first goods in are the 1st goods to be sold when prices fluctuate in a market.

_F-LIFO_When Prices Rise in a market, one can expect FIFO to illustrate a lower ending inventory, the  highest Cost of Goods Sold, and the lowest income recorded.

_T_ LIFO and FIFO switch in these records when prices fall.

_T_ LIFO has a higher value in the inventory and cost of goods sold accounts than does FIFO

_T_ When market/ replacement cost is less than the historical price, a company has the option of  reporting their inventory value with the replacement cost.

_T_ This is true because of the Conservation Principle

_T_If ending inventory were understated on the income statement, then cost of goods sold would be  overstated.

_T_This would affect Stockholder’s Equity, Assets, and Retained Earnings.

_F_ It will never be able to correct itself in the future.

_T_In periods of rising prices, a company may choose LIFO because it provides the lowest current  taxable income.

_T_ During the Periodic Inventory System, the inventory account remains unchanged until the end of the  period.

Problems 

1. From a customer’s standpoint, what would a payment of goods bought on account with a  discount of 2/10, n/30 look like in a journal entry?

Accounts Payable 1000

Cash 20

Inventory 980

What about if the customer didn’t pay on time to receive a discount?

Accounts Payable 1000

Cash 1000

2. A customer purchased $1000 worth of goods. What will the journal entry look like for a return  made worth $100?

Accounts Payable 100

Inventory 100

What if that amount had been discounted first with a discount 2/10, n/30? What would the  customer’s records show then? Remember, they purchased $1000 worth of goods.

Accounts Payable 900

Inventory 18  

Cash 882

3. A customer sells goods worth $12,000 cash. $10,000 were paid to the supplier. What is the  journal entry to record this transaction?

Accounts Receivable 12,000

Revenue 12,000

Cost of Goods Sold 10,000

Inventory 10,000

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