Quiz 3 Flashcards

Chapters 6 & 7

Click each card to reveal the answer. These cards focus on the relationships, terminology, calculations, and common traps you should understand for Quiz 3.

Chapter 6: Merchandising Operations

What is the major difference between a service company and a merchandising company? Tap to reveal
A merchandising company buys inventory and resells it to customers. This creates two important accounts that service companies generally do not have: Inventory and Cost of Goods Sold.
When merchandise is purchased for resale under a perpetual inventory system, which account is debited? Tap to reveal
Inventory. The merchandise is an asset until it is sold.
Under a perpetual inventory system, when is the Inventory account updated? Tap to reveal
Continuously. Purchases, purchase returns, applicable freight, and the cost of merchandise sold update Inventory as those events occur.
Why is merchandise purchased for resale not immediately recorded as an expense? Tap to reveal
The company still owns a resource with future benefit. Its cost remains in Inventory until the merchandise is sold.
What happens to inventory cost when the merchandise is sold? Tap to reveal
The cost moves from the asset Inventory to the expense Cost of Goods Sold.
Why does a merchandise sale require two entries under a perpetual system? Tap to reveal
One entry records the selling price and Sales Revenue. The second records the cost of the merchandise sold and the decrease in Inventory.
Is the selling price of merchandise the same as its cost of goods sold? Tap to reveal
No. The selling price determines Sales Revenue. The retailer's cost of the merchandise determines Cost of Goods Sold.
When the buyer pays freight necessary to bring purchased inventory to its location, where does that cost go? Tap to reveal
It becomes part of Inventory cost under the perpetual system.
What happens when a buyer returns merchandise previously purchased on account? Tap to reveal
Inventory decreases because the buyer no longer owns the merchandise, and Accounts Payable decreases because less is owed to the supplier.
What is net sales? Tap to reveal
Sales Revenue - Sales Returns and Allowances - Sales Discounts
What is gross profit? Tap to reveal
Net Sales - Cost of Goods Sold
What does gross profit tell us? Tap to reveal
It shows how much remains from net sales after covering the cost of the merchandise sold, before operating expenses are considered.
How is operating income calculated on a multistep income statement? Tap to reveal
Gross Profit - Operating Expenses = Operating Income
Why is a multistep income statement useful? Tap to reveal
It separates important layers of performance, including net sales, gross profit, operating income, and net income.
Where is unsold merchandise reported? Tap to reveal
As Inventory on the Balance Sheet.
Where is the cost of merchandise that has been sold reported? Tap to reveal
As Cost of Goods Sold on the Income Statement.
If a retailer has $90,000 of net sales and $54,000 of COGS, what is gross profit? Tap to reveal
$36,000.

$90,000 - $54,000 = $36,000
If gross profit is $48,000 and operating expenses are $31,000, what is operating income? Tap to reveal
$17,000.

$48,000 - $31,000 = $17,000

Chapter 7: Inventory and Cost of Goods Sold

Before assigning inventory costs, what should you determine first? Tap to reveal
Units. Determine units available, units sold, and units remaining before attaching dollar amounts.
What is cost of goods available for sale? Tap to reveal
Beginning Inventory + Purchases
What is the relationship among cost of goods available, COGS, and ending inventory? Tap to reveal
Cost of Goods Available = COGS + Ending Inventory
Under FIFO, which costs are assigned to Cost of Goods Sold first? Tap to reveal
The oldest costs.
Under FIFO, which costs generally remain in ending inventory? Tap to reveal
The newest costs.
Under LIFO, which costs are assigned to Cost of Goods Sold first? Tap to reveal
The newest costs.
Under LIFO, which costs generally remain in ending inventory? Tap to reveal
The oldest costs.
Do FIFO and LIFO necessarily describe the physical movement of inventory? Tap to reveal
No. They are cost-flow assumptions. Physical flow and cost flow do not have to be the same.
How is weighted-average cost per unit calculated? Tap to reveal
Total Cost of Goods Available ÷ Total Units Available
What does specific identification use to assign inventory cost? Tap to reveal
The actual cost of the specific item being sold or remaining in inventory.
Do different inventory costing methods change total cost of goods available for sale? Tap to reveal
No. They allocate the same cost pool differently between COGS and ending inventory.
If ending inventory is understated, what happens to COGS? Tap to reveal
COGS is overstated. Ending inventory is subtracted when calculating COGS.
If COGS is overstated, what happens to net income? Tap to reveal
Net income is understated. Higher expenses produce lower net income.
What chain should you follow when analyzing an ending inventory error? Tap to reveal
Ending Inventory → COGS → Net Income → Retained Earnings
With FOB shipping point, when does ownership generally transfer to the buyer? Tap to reveal
When the goods are shipped.
With FOB destination, who owns goods while they are still in transit? Tap to reveal
The seller. Ownership transfers when the goods reach the destination.
What is the basic idea behind lower of cost or market? Tap to reveal
Inventory may need to be written down when its value falls below its recorded cost.
How is inventory turnover calculated? Tap to reveal
Cost of Goods Sold ÷ Average Inventory
What does a higher inventory turnover generally indicate? Tap to reveal
Inventory is generally being sold and replaced more quickly. However, higher is not automatically better because inventory levels that are too low can cause stockouts.
How are days sales in inventory calculated? Tap to reveal
365 ÷ Inventory Turnover
What does a lower number of days sales in inventory generally mean? Tap to reveal
Inventory is generally moving through the business more quickly.
Why can carrying too much inventory be a problem? Tap to reveal
Excess inventory can tie up cash and increase storage, insurance, damage, and obsolescence risk.
Why can carrying too little inventory be a problem? Tap to reveal
The company may experience stockouts and lost sales.
What should always be true after assigning costs between COGS and ending inventory? Tap to reveal
COGS + Ending Inventory = Cost of Goods Available for Sale. This is an excellent reasonableness check.