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Why doesn't the perpetual inventory system give a completely accurate count of inventory on hand?
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How does a business assure themselves of having an accurate inventory recording system?
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Ch. 5 - 232 on
Beyond the basic entries in perpetual inventory system
| Question | Answer |
|---|---|
| Why doesn't the perpetual inventory system give a completely accurate count of inventory on hand? | Recording errors, theft or waste create discrepancies. |
| How does a business assure themselves of having an accurate inventory recording system? | Use periodic physical inventories to update figures and discover where there may have been erros, fraud or waste. |
| What does it mean to adjust Inventory and Cost of Goods Sold? | After the physical inventory is completed and matched to that of the perpetual inventory system, adjustments are entered. See chart middle of 232. |
| What does it mean to make closing entries? p. 232 | A merchandising company closes to Income Summary the accounts that affect net income. Identify the temporary accounts by their balances and prepare one entry for credits and one for the debits. After closing entries, temporary accounts- zero balances. |
| What happens to the Retained Earnings after making closing entries for a merchandising company? p. 233 | Retained Earnings has a balance - carry it over to the next period. Previous period is closed, but the earnings are carried over. |
| What do merchandising companies widely use for their balance sheet? | They use a classified balance sheet, see chapter 4, p. 180 |
| What are two forms of financial statements used by merchandising companies? | multiple-step income statement and single-step income statement. |
| Why is multiple-step financial statement ?called that? | There are several steps shown to determine the net income. It also makes a difference between operating and nonoperating activities. It highlights intermediate copmonents of income and shows subgroupings of expenses. p. 234 |
| What is a single-step income statement? | It has on one sept. It subtracts total expenses from total revenues to determine net income. All data is classified as revenues or expenses (expenses include cost of goods sold, operating expenses and other expenses and losses). p. 238; 5-14 |
| What steps are included in a multiple-step income statement? | 1) presents sales revenue; then it deducts contra-reveneue accounts (sales returns and allowances and sales discounts) - to get net sales. 2) GROSS PROFIT; 3) operating expenses 4) nonoperating activities p. 234-237 |
| How do you get net sales? | Sales revenue less sales returns and sllowances and sales discounts - illustration 3-8. |
| How do you get gross profit? | Generally, it is sales revenue minus cost of goods sold.ch. 5 - illustration 5-1. For a multiple-step income statement it is different. |
| How do you get gross profit for a multiple-step income statement? | Use net sales (sales revenue less sales returns, allowances and discounts) for sales revenue. subtract cost of goods sold to find gross profit. ill. 5-9, p. 235 |
| How do you find the gross profit rate? p. 235; ill. 5-10 | Divide the amount of gross profit by net sales to find the gross profit rate (a percentage). Analysts prefer the rate to the amount to be more meaningful. |
| What represents the merchandising profit of a company? | The gross profit. Operating expenses are not deducted yet, but managers and tohers do watch the trend of gross profit and compare it to other periods. |
| How do you the figure for operating expenses in a multiple-step income statement? | Gross profit minus operating expenses equals net income. 5-11, p. 236 |
| What is called the "bottom line" of a company's income statement? | Net income amount is the "bottom line." |
| What are nonoperating activities? | They are revenues and expenses and gains and losses unrelated to the company's main income-generating activities. |
| What are the categories listed in the multiple-step income statement for nonoperating activities? | 1) Other revenues and gains (interest, dividend, rent revenue and gains from sale of property, plant, equipment); Other expenses and losses (interst, casualty losses, loss from sale or abandonment of property, loss from strikes, etc.) |
| Where are the nonoperating activities listed in the income statement of merchandising companies? | It is immediately after the company's operating activities. See 5-13, p. 237. |
| What is the ethics issue in disclosing nonoperating activities? | If the gain and loss of nonoperating activities is not listed as such the company can give a false impression of their control of operating expenses and the source of their profits. For stock holders and auditing purposes this is important. |
| What is liquidity? | It is "closeness to cash;" ability to use cash. Inventory is less close to cash than accounts receivable because good smust first be sold and the customer has to pay. |
| explain the recording of purchases under a perpetual inventory system. | Company debist Inventory account for all purchases of merchandise and freight-in. Credits Inventory for purchase discounts and purchase returns and allowances. |
| How do you record sales revenues under a perpetual inventory system for a merchandising company? | Co. sells inventory and debits Accounts Receivable (or Cash); credits Sales REvenue for selling price of merchandis. Debits Cost of Goods Sold and credits Inventory for cost of the inventory items sold; debit sales returns, allowances and discounts. |
| How is cost of goods sold determined for a company using a periodic inventory system? 5A-1, 5A-2 p. 242 | Cost of goods sold is determined at the end of the period. A count is made to determine the ending balance of inventory. Beinning inventory plus cost of goods purchase minus cost of goods available for sale(ending inventory) = cost of goods sold. |
| How do the perpetual and periodic systems adjust for freight, returns, discounts, etc.? | The perpetual system adjusts Inventory account directly. Periodic system does not. It creates different accounts for purchases, freight costs, returns and discounts. 5A-2, p. 242 |
| How do you record merchandise transactions in a periodic inventory system? | Companies record revenues from sales when the sales are made, as in perpetual system, but they don't record the cost of the goods sold on the same date. They do that at the end of the period. |
| In a periodic system, where are purchases of merchandise recorded each day? Are returns, allowances, purchase discounts and freight costs recorded in the purchases account? | They are recorded in the Purchases account, not the Inventory account. Returns, allowances, discounts, freight are recorded in separate accounts. |
| How does are freight costs recorded for a periodic inventory system? | Freight-in costs are recorded in a temporary Freight-In account - normal balance is a debit. Freight-in is a part of cost of goods purchases. Freight costs are not subject to a purchase discount. Freight-in can also be called transportation-in. |
| Where are returns and allowances listed in a periodic inventory system? | They are listed in a temporary account whose normal balance is a credit. |
| Where are purchase discounts recorded in a periodic system? | Temporary account - Purchase Discounts - balance is normally a credit. |
Created by:
MarkCurtisMorgan