Prin of Accounting Exam 3 (McGowan)

Merchandiser

A company that buys and sells finished goods.

Inventory

Goods owned and held for resale.

Wholesaler vs. Retailer

Wholesaler sells to businesses; Retailer sells to final consumers.

Operating Cycle

Buy inventory --> Sell it --> Collect cash --> Repeat.

Vendor

A supplier of inventory or goods.

Merchandising vs. Service Income Statement

Merchandisers include Cost of Goods Sold (COGS).

Gross Profit Formula

Sales - COGS = Gross Profit

Operating Income Formula

{Gross Profit} - {Operating Expenses} = {Operating Income}

Perpetual vs. Periodic Systems

Perpetual updates continuously; Periodic updates only at period-end via count.

Invoice

Document showing purchase details, prices, and terms.

Buying Inventory on Account Entry

Debit Inventory, Credit Accounts Payable.

Credit Terms

Payment deadlines and early-payment discounts (e.g., 2/10, n/30).

FOB Shipping Point vs. Destination

Shipping Point = Buyer pays/owns in transit; Destination = Seller pays/owns.

Sale of Inventory Entries (Perpetual)

1. Debit Cash, Credit Sales. 2. Debit COGS, Credit Inventory.

Discount Rule

Always assume they take the discount.

Inventory Shrinkage

Missing inventory from theft, damage, or spoilage.

FIFO (First-In, First-Out)

Oldest inventory sells first; leaves recent costs in ending inventory.

LIFO (Last-In, Last-Out)

Newest inventory sells first; leaves older costs in ending inventory.

Consistency Principle

Use the same accounting methods period after period.

Disclosure Principle

Report all relevant information needed by financial statement users.

Materiality Concept

Ignore strict rules if an amount is too small to matter.

Conservatism

Anticipate potential losses immediately, but wait on gains.

Specific Identification

Track exact individual item costs (used for cars, jewelry).

Perpetual FIFO/LIFO

Update inventory and COGS chronologically line-by-line after every sale.

Periodic FIFO/LIFO/Average

Calculate inventory and COGS all at once at the end of the period.

Key Test Outputs

Must solve for COGS, Ending Inventory, and Gross Profit.

Inflation Impact on Systems

FIFO = higher inventory/profit; LIFO = lower profit/taxes during inflation.

Lower of Cost or Market (LCM)

Write down inventory value immediately if market price drops below cost.