Slide Set 5

Question 1

Diffrence between a perpetual and a periodic inventory system

Answer 1

Perpetual:
- Maintain detailed records of the cost of each inventory purchase and sale.
- Records continuously show inventory that should be on hand.
- Company determines cost of goods sold each time a sale occurs.
Periodic:
- Do not keep detailed records of the goods on hand.
- Cost of goods sold determined by count at the end of
the accounting period.
Calculation:
Beginning inventory + Purchases = Goods Available for sale - Ending Inventory= COGS

Question 2

Advantages and Disadvantages of a perpetual inventory system

Answer 2

Pro: provides better control over inventories
Con: Requires additional clerical work and additional cost to maintain inventory records.

Question 3

Why the need for a Purchase Returns and Allowances account?

Answer 3

Purchaser may be dissatisfied because goods are damaged or defective, of inferior quality, or do not meet specifications.

Question 4

Difference between Purchase Returns and Purchase Allowances

Answer 4

Returns: Return goods for credit or cash
Allowances: May choose to keep the merchandise if the seller will grant an allowance (deduction) from the purchase price.

Question 5

Advantages of Purchase Discounts for Seller and Buyer

Answer 5

Purchaser: saves money
Seller: shortens the operating cycle

Question 6

Explain the following Purchase Discounts

• 2/10, n/30
• 1/10 EOM
• n/10 EOM

Answer 6

• 2% discount if paid within 10 days, otherwise net amount due within 30 days.
• 1% discount if paid within first 10 days of next month.
• Net amount due within the first 10 days of the next month.

Question 7

What are the Journal Entries to Record a Sale?

Answer 7

1. Selling Price
Debit Cash or Accounts receivable 
Credit Sales revenue
2. Cost
Debit Cost of goods sold 
Credit Inventory

Question 8

Name Key items of the income statement and explain the calculation.

Answer 8

• Net sales (Sales revenue - Sales Returns and A. - Sales Discount)
• Gross profit (Net sales - COGS)
• Gros profit rate (Gross profit/net sales)
• Operating expenses
• Income from operations (Gross profit - Operating expenses)
• Other income and expense
• Interest expense
• Net income (Income from Operations - Other income and expenses - Interest expenses)

Question 9

Examples for Other income and expense

Answer 9

Other Income:
- Interest revenue
- Dividend revenue
- Rent revenue
- Gains from the sale of PPE
Other expenses:
- Casualty losses (vandalism)
- Losses from sale of PPE
- Losses from strikes

Question 10

Comprehensive Income

Answer 10

Includes certain adjustments to pension plan assets, gains and losses on foreign currency translation, and unrealized gains and losses on certain types of investments.

Reported in a combined statement of net income and comprehensive income, or in a separate schedule that reports only comprehensive income.

(Net income - OCI Losses + OCI Gains= CI)