ACCO EXAM 3

service company income statement

fees earned - operating expenses

merchandiser's income statement

gross profit - operating expenses

gross profit

net sales - costs of good sold

net purchases

purchases - purchase discounts - purchase returns and allowances + transportation-in

ending inventory

beginning inventory + net purchases - COGS

purchase inventory for cash

DR merchandise inventory
CR cash

purchase inventory on credit

DR merchandise inventory
CR accounts payable

purchase discount

A cash discount claimed by a buyer for prompt payment of a balance due.

purchase discount journal entry

DR accounts payable
CR cash
CR merchandise

purchase return

returns good to seller for full credit/cash

purchase return journal entry

DR accounts receivable
CR merchandise

purchase allowance

purchaser keeps merchandise, seller grants allowance from purchase price

purchase allowance journal entry

DR accounts payable
CR merchandise inventory

two entries for a sale

1. DR Accounts receivable
CR sales revenue
2. DR cost of good sold
CR merchandise inventory

journal entry for sales discount

DR cash
DR sales discount
CR accounts receivable

sales return (seller)

1. DR sales return and allowance
CR accounts receivable
2. DR merchandise inventory
CR cost of goods sold

sales allowance (seller)

DR sales returns and allowances
CR accounts receivable/cash

FOB shipping point

Freight terms indicating that ownership of goods passes to the buyer when the public carrier accepts the goods from the seller.

FOB destination

Freight terms indicating that ownership of goods remains with the seller until the goods reach the buyer.

FOB shipping point journal entry

DR inventory
CR cash

FOB destination journal entry

DR sales revenue
CR inventory

FIFO

First In, First Out. Rotation system that uses the oldest products first

LIFO

Last in, first out

inventory accounting in which the most recently acquired items are assumed to be the first sold

weighted average

cost flow assigns the average cost of the items

weighted average calculation

Total cost divided by total units available.

specific identification

used when each item in inventory can be measured with specific purchase invoice

FIFO in rising costs

reports the lowest cost of goods sold - yielding the highest gross profit and net income

LIFO in rising costs

Reports the highest cost of goods sold - yielding the lowest gross profit and net income

FIFO in falling costs

reports the highest cost of goods sold - yielding lowest gross profit and net income

LIFO in falling costs

reports lowest cost of goods sold - yielding lowest gross profit

FIFO advantage

ending inventory approximates current replacement cost

LIFO advantage

Better matches current costs in cost of goods sold with revenues.

weighted average advantage

smooths out erratic changes in costs

specific identification advantage

matches the costs of items with the revenues they generate

lower of cost or market

A basis whereby inventory is stated at the lower of either its cost or its market value as determined by current replacement cost.

recording lower of cost or market

DR cost of goods sold, CR merchandise inventory

understated inventory year 1 I/S

overstated COGS, understated net income

understated inventory year 2 I/S

understated COGS, overstated net income

overstated inventory year 1 I/S

understated COGS, overstated net income

overstated inventory year 2 I/S

overstated COGS, understated net income

understated inventory B/S

understated assets, understated equity

overstated inventory B/S

overstated assets, overstated equity