Inventory Management and Cash Discounts

These flashcards cover key concepts related to inventory management, cash discounts, and accounting practices related to payments and returns.

What is the percentage off if a payment is made within the first ten days?

2% off

What is the opposite of a 2% discount?

98%

What happens to accounts payable when merchandise is returned under a perpetual inventory system?

Accounts payable decreases because inventory is credited.

What does EOM stand for in payment terms?

End of month.

What is inventory shrinkage a result of?

Theft, breakage, or obsolescence.

What is gross profit?

Net sales minus cost of goods sold.

How do you calculate net sales?

Gross sales minus sales discounts, returns, and allowances.

If ending inventory is understated, what happens to cost of goods sold?

Cost of goods sold is overstated.

What is the journal entry for recording inventory shrinkage?

Debit Cost of Goods Sold, credit Merchandise Inventory.

What does FOB shipping point mean?

Ownership of goods transfers to the buyer as soon as the goods leave the seller's location.

What is the relationship between ending inventory and net income?

An understatement of ending inventory results in a lower net income.

What is the perpetual inventory system primarily used for?

To continually update inventory records after each transaction.

What percentage is used to calculate cash discounts?

The discount percentage agreed upon, e.g., 2%.

How is 'net income' calculated?

Gross profit minus operating expenses.

What action is taken when an inventory is returned in a perpetual inventory system?

The inventory account is credited.

How is the cost of goods sold calculated under FIFO?

By using the cost of the oldest inventory first.

What is a key difference between LIFO and FIFO?

LIFO assumes the most recently purchased items are sold first, while FIFO assumes the oldest items are sold first.