ACCT 2301

Flashcard Set: ACCT 2301 Test 1 Review

Chapter 4: Merchandising Operations & Inventory Transactions

Q: What is a Cash Discount?
A: A reduction in price given by a seller to encourage prompt payment by the buyer.

Q: How do you calculate Gross Margin?
A: Gross Margin = Net Sales - Cost of Goods Sold (COGS)

Q: What is FOB Shipping Point?
A: The buyer takes ownership at the shipping point and pays for transportation costs (recorded as Transportation-in).

Q: What is FOB Destination?
A: The seller maintains ownership until the goods arrive at their destination and pays for transportation costs (Transportation-out).

Q: What is the Perpetual Inventory System?
A: An inventory tracking system that updates continuously for each sale or purchase.

Q: What happens when inventory is purchased on account?
A: Inventory increases, Accounts Payable increases. No effect on the Income Statement.

Q: What is the effect of Purchase Discounts?
A: Reduces Inventory and Accounts Payable. Example: 2/10, n/30 (2% discount if paid in 10 days, full payment due in 30 days).

Q: How do you record Sales Revenue for an inventory sale?
A: 1) Record the sale (increase Cash/AR & Revenue)
2) Record COGS (decrease Inventory & increase Expense)

Chapter 5: Inventory Cost Flow Methods

Q: What are the four inventory cost flow methods?
A:

1. FIFO (First-In, First-Out)

2. LIFO (Last-In, First-Out)

3. Weighted-Average

4. Specific Identification

Q: How does FIFO affect COGS in inflation?
A: Lower COGS, Higher Net Income. Older, lower-cost inventory is used first.

Q: How does LIFO affect COGS in inflation?
A: Higher COGS, Lower Net Income. Newer, higher-cost inventory is used first.

Q: What is the Lower-of-Cost-or-Market (LCM) Rule?
A: Inventory is reported at the lower of cost or market value on the balance sheet.

Chapter 7: Accounts Receivable & Notes Receivable

Q: What is the Allowance for Doubtful Accounts?
A: A contra asset account used to estimate uncollectible accounts.

Q: How do you calculate Net Realizable Value (NRV)?
A: Accounts Receivable - Allowance for Doubtful Accounts

Q: How do you calculate Interest Revenue on Notes Receivable?
A: Interest = Principal × Interest Rate × Time

Q: What happens when a company writes off an account receivable?
A: Decrease Accounts Receivable & Allowance for Doubtful Accounts, NRV remains the same.

Chapter 8: Depreciation & Long-Term Assets

Q: How do you calculate Straight-Line Depreciation?
A: (Cost - Salvage Value) ÷ Useful Life

Q: What are Intangible Assets?
A: Non-physical assets like patents, trademarks, and goodwill.

Q: What happens when you sell a long-term asset?
A: Gain = Cash Received > Book Value
Loss = Cash Received < Book Value

Chapter 4: Merchandising Operations & Inventory Transactions

Q: What is a Multistep Income Statement?
A: An income statement that separates operating and non-operating activities, showing Gross Margin, Operating Income, and Net Income.

Q: What is the difference between Retail Companies and Wholesale Companies?
A:

• Retail Companies sell directly to consumers.

• Wholesale Companies buy in bulk and sell to retailers.

Q: What is the effect of Sales Returns & Allowances?
A:

• Decrease Revenue and Accounts Receivable.

• Increase Inventory and reduce COGS.

Q: How are Purchase Returns & Allowances recorded?
A:

• Decrease Inventory and decrease Accounts Payable (if purchased on account).

• If purchased with cash, increase Cash instead.

Q: What happens when a company offers a Sales Discount?
A:

• Revenue and Accounts Receivable decrease.

• Encourages early payment from customers.

Chapter 5: Inventory Cost Flow Methods

Q: How does Weighted-Average Costing work?
A:

• (Total Cost of Goods Available for Sale) ÷ (Total Units Available for Sale) = Weighted Average Cost per Unit

• Both COGS and Ending Inventory use the same cost per unit.

Q: When is the Specific Identification Method used?
A:

• For high-value, unique items like cars, jewelry, or artwork.

• Each item’s cost is tracked individually.

Chapter 7: Accounts Receivable & Notes Receivable

Q: What is the Matching Concept in relation to bad debts?
A:

• Bad debt expense is recorded in the same period as the related sales revenue.

Q: What is the Percent of Revenue Method for estimating uncollectible accounts?
A:

• Uncollectible Accounts Expense = Net Credit Sales × % Uncollectible

• Affects Allowance for Doubtful Accounts (AFDA) and Net Realizable Value (NRV).

Q: How does a Credit Card Sale impact financial statements?
A:

• Increase Revenue (full sale price).

• Record Credit Card Expense (usually a percentage of the sale).

• Increase Accounts Receivable (net of the service fee).

Q: What is the Accounts Receivable Turnover Ratio, and how is it calculated?
A:

• Measures how efficiently a company collects its receivables.

• AR Turnover = Sales ÷ Net Accounts Receivable

Chapter 8: Depreciation & Long-Term Assets

Q: What are Capital Expenditures?
A:

• Costs that improve or extend the life of a long-term asset.

• Recorded as assets (not expenses).

Q: What are Revenue Expenditures?
A:

• Costs for regular maintenance and repairs.

• Recorded as expenses.

Q: What is the formula for Book Value of an Asset?
A:
Book Value = Cost - Accumulated Depreciation

Q: What is the Relative Market Value Method?
A:

• Used to allocate costs in a Basket Purchase (when multiple assets are bought for one price).

• Allocates cost based on each asset’s appraised value percentage.

Q: What is the difference between Amortization and Depreciation?
A:

• Amortization applies to intangible assets.

• Depreciation applies to tangible assets.

Q: How does the Lower-of-Cost-or-Market Rule (LCM) affect inventory valuation?
A:

• Inventory is reported at the lower of:

  1. Historical cost (based on FIFO/LIFO/Wtd Average).

  2. Current market (replacement) cost.