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ACCT110 Ch 5 & 6 CAP

CAP for Ch 5 & 6

QuestionAnswer
Describe merchandising activities and identify income components for a merchandising company. Merchandisers buy and resell products. Ex: Wal-Mart, Home Depot and Barnes & Noble. A merchandiser's costs on the income statement include an amount for cost of goods sold. Gross profit, or gross margin, equals sales minus cost of goods sold.
Identify and explain the inventory asset and cost flows of a merchandising company. Current assets of a merchandising co's BS includes merchandise inventory. Cost of merchandise purchases flows into Merchandise Inventory and from there to Cost of Goods Sold on the IS. Any remaining inventory is reported as a current asset on the BS.
Compute the acid-test ratio and explain its use to asses liquidity. Computed as quick assets (cash, short-term investments, current receivables) divided by current liabilities. Indicates a company's ability to pay its current liabilities with its existing quick assets. Acid-test ratio >= 1.0 is often adequate.
Compute the gross margin ratio and explain its use to assess profitability. Computed as gross margin (net sales minus cost of goods sold) divided by net sales. Indicates a company's profitability before considering other expenses.
Analyze and record transactions for merchandise purchases using a perpetual system. For a perpetual invt'y system, purchases net of trade disc'ts are added to Merchandise Invt'y account. Purchase discounts & purchase returns & allowances are subtracted from Merchandise Invt'y & transportation-in costs are added to Merchandise Invt'y.
Analyze and record transactions for merchandise sales using a perpetual system. 1 of 2 A merchandiser records sales @ list price less trade discounts. The cost of items sold is xferred from Merchandise Invt'y to Cost of Goods Sold. Refunds/credits given are recorded in Sales Ret'ns & Allowances, a contra acct to Sales.
Analyze and record transactions for merchandise sales using a perpetual system. 2 of 2 If merchandise is returned & restored to invt'y cost is removed from COGS and xferred back to Merchandise Invt'y. When cash discounts are offered and paid w/in disc period seller records Sales Discounts, a contra acct to Sales.
Prepare adjustments and close accounts for a merchandising company. With a perpetual system its often necessary to adjust for inventory shrinkage. This is computed by comparing a physical count of invt'y w/Merchandise Invt'y balance. Shrinkage is normally charged to COGS.
What are the temporary accounts of a merchandiser? Temporary accounts closed to Income Summary for a merchandiser include Sales, Sale Discounts, Sales Returns and Allowances, and Cost of Goods Sold.
Define multiple-step and single-step income statements. Multiple-step income statements include greater detail for sales and expenses than do single-step income statements. They also show details of net sales and report expenses in categories reflecting different activities.
Identify the items making up merchandise inventory. Merchandise inventory refers to goods owned by a company and held for resale. Goods in transit, goods on consignment and goods damaged or obsolete.
Goods in transit. Reported in the inventory of the company that holds ownership rights.
Goods on consignment. Reported in the consignor's inventory.
Goods damaged or obsolete. Reported in inventory at their net realizable value.
Identify the costs of merchandise inventory. Cost of merchandise inventory include expenditures necessary to bring an item to a salable condition and location. This includes its invoice cost minus any discount plus any added or incidental costs necessary to put it in place and condition for sale.
Analyze the effects of inventory errors on current and future financial statements. An error in the amount of ending inventory affects assets (inventory), net income (cost of goods sold) and equity for that period. An error in ending invt'y affects next periods COGS & net income. Errors in one period are offset in the next.
Assess inventory management using both inventory turnover and days' sales in inventory. We prefer a high inventory turnover, provided that goods aren't out of stock and customers aren't turned away. We use days' sales in invt'y to assess likelihood of goods being out of stock.
Compute inventory in a perpetual system using the methods of specific identification. Specific identification assigns a cost to each item sold by referring to its actual cost (ex, its net invoice cost).
Compute inventory in a perpetual system using the methods of FIFO. FIFO assigns cost to items sold assuming that the earliest units purchased are the first units sold.
Compute inventory in a perpetual system using the methods of LIFO. LIFO assigns cost to items sold assuming that the most recent units purchased are the first units sold.
Compute inventory in a perpetual system using the methods of weighted average. Weighted avg assigns cost to items sold by dividing current inventory account balance by total items available for sales to determine cost per unit. We then multiply number of units sold by this cost per unit to get cost of each sale.
Compute the lower of cost or market amount of inventory. Invt'y is reported @ mkt cost when mkt is lower than recorded cost, called LCM (lower of cost or mkt) invt'y. Mkt is typically measured as replacement cost. LCM can be applied separately to each item, to major categories of items, or to the entire invt'y.
Created by: slk