Accounting for Merchandising Flashcards

Accounting for Merchandising Flashcards
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Consignee
The business that sells goods for another business or person.
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Consignor
The person or business that has an item to be sold by another.
Got it
Merchandise Inventory
Items acquired with the specific intention of reselling.
Got it

Use weighted average to determine remaining inventory value.

Purchase 500 units for $5000.

Sell 300 units.

5000/500=10 each

Remaining inventory = 200 units

200 * 10 = $2000 remaining inventory value

Got it
Weighted Average
Average cost. Assumes inventory sold simultaneously.
Got it
LIFO

Last in, First out

Newest inventory items are recorded as sold first.

Got it
FIFO

First in, First out

Oldest inventory gets recorded as sold first.

Got it
Specific Identification
Items identified by specifically and tracked individually by the identification process (such as bar codes).
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Examples of Cost Flow Assumption:

Specific identification

First in, First out

Last in, First out

Weighted average

Got it
Perpetual Inventory System
System of record keeping that updates financial records for merchandise transactions continually.
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Periodic Inventory System
Merchandise transactions updated on financial records at the end of financial period.
Got it
Inventory Valuation
Provides companies the ability to give a monetary value for items held in inventory.
Got it

Sold item=$350.00

Carrying costs=$10.00

Purchase (wholesale) price=$225

Total profit:

350 - (10 + 225) = $115.00
Got it
COG

Cost of Goods

Sum of all costs associated with an inventory item.

Got it
Examples of Carrying Costs:

Loss of money for unsold inventory.

Interest fees on loans used to purchase inventory.

Warehouse fees for storing inventory.

Rent and taxes on business location.

Got it
Carrying Costs
Costs associated with maintaining or holding on to products in stock.
Got it

Purchase 10 units of X's at $50.00/unit.

Trade discount=20%

Purchase discount=2%

Transportation costs=%10.00

Total cost is:

50 * 10 = 500

500 * 0.2 = 100 (trade dis)

500 * 0.02 = 10 (purchase dis)

500 - 110 = 390 (purchase price)

390 + 50 = 440 (transport) Total

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Transportation Costs
Any costs incurred to transport goods.
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Purchase Discount
Discount offered to those paying in full within a set time frame.
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Trade Discount
A discount offered by a provider (like the manufacturer) to those intending to resell items; often used when buying in bulk.
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40 cards in set

Flashcard Content Overview

This flashcard set offers students an opportunity to test their knowledge and understanding of terms and processes related to merchandise in business. What are costs related to inventory items? Are there more costs than simply the purchase price of an item? What about when you sell something using consignment, or if something gets damaged while still in your inventory? These concepts and more are covered with sample problems to give you practice calculating the main formulas used in the set. Happy studying!

Front
Back
Trade Discount
A discount offered by a provider (like the manufacturer) to those intending to resell items; often used when buying in bulk.
Purchase Discount
Discount offered to those paying in full within a set time frame.
Transportation Costs
Any costs incurred to transport goods.

Purchase 10 units of X's at $50.00/unit.

Trade discount=20%

Purchase discount=2%

Transportation costs=%10.00

Total cost is:

50 * 10 = 500

500 * 0.2 = 100 (trade dis)

500 * 0.02 = 10 (purchase dis)

500 - 110 = 390 (purchase price)

390 + 50 = 440 (transport) Total

Carrying Costs
Costs associated with maintaining or holding on to products in stock.
Examples of Carrying Costs:

Loss of money for unsold inventory.

Interest fees on loans used to purchase inventory.

Warehouse fees for storing inventory.

Rent and taxes on business location.

COG

Cost of Goods

Sum of all costs associated with an inventory item.

Sold item=$350.00

Carrying costs=$10.00

Purchase (wholesale) price=$225

Total profit:

350 - (10 + 225) = $115.00
Inventory Valuation
Provides companies the ability to give a monetary value for items held in inventory.
Periodic Inventory System
Merchandise transactions updated on financial records at the end of financial period.
Perpetual Inventory System
System of record keeping that updates financial records for merchandise transactions continually.
Examples of Cost Flow Assumption:

Specific identification

First in, First out

Last in, First out

Weighted average

Specific Identification
Items identified by specifically and tracked individually by the identification process (such as bar codes).
FIFO

First in, First out

Oldest inventory gets recorded as sold first.

LIFO

Last in, First out

Newest inventory items are recorded as sold first.

Weighted Average
Average cost. Assumes inventory sold simultaneously.

Use weighted average to determine remaining inventory value.

Purchase 500 units for $5000.

Sell 300 units.

5000/500=10 each

Remaining inventory = 200 units

200 * 10 = $2000 remaining inventory value

Merchandise Inventory
Items acquired with the specific intention of reselling.
Consignor
The person or business that has an item to be sold by another.
Consignee
The business that sells goods for another business or person.
The owner of goods on consignment.
The consignor maintains ownership of all items until sold.
Damaged and Obsolete Goods
Items of inventory that have been damaged or are no longer made; cannot be sold at full price.
Net Realizable Value (NRV)

Return expected from an item after subtracting costs associated with the item from selling price.

Two methods used to account for Damaged or Obsolete Goods

1. Use Net Realizable Value in the inventory valuation.

2. If item cannot be sold, do not value it in inventory.

Compare the perpetual system of reporting to the periodic system.
Perpetual system allows for an accurate (actual) inventory count at any given moment. Periodic system is less expensive but not as timely.
Formula for net income:
Sales - Cost of Goods Sold - Expenses = Net Income

You buy:

5 units @ $5.00ea

6 @ $2.50ea

8 @ $4.25ea

Then sell 14 units. Using FIFO, your inventory value now is:

First in, First out:

All of 1st and 2nd sets out. 3 of last set out.

Leaves 5 @ $4.25= $21.25 inventory valuation

You buy:

5 units @ $5.00ea

6 @ $2.50ea

8 @ $4.25ea

Then sell 14 units. Using LIFO, your inventory value now is:

Last in, First out

All of last and 2nd sets out (=14 units).

Remaining stock is 5 units @ $5.00 = $25.00 inventory valuation

Formula for Cost of Goods Sold
Beginning inventory Value + New Inventory Purchase - Ending Inventory Value = Cost of Goods Sold
Profit
Money made that exceeds the costs associated with an item sold.
Process for finding Net Realizable Value
Subtract any costs of preparing item for sale from the sale price.
An item cost you $15.00. You spent $2.00 upscaling it and plan to sell it for $22.00. This is the items NRV.
22 - 2 = $20 NRV
Lower of Cost or Market (LCM)
Inventory value is the lower value between total actual costs and current replacement cost.
Market (in relation to LCM)
The current market replacement cost.
Cost (in relation to LCM)
The actual amount paid for an inventory item.
Ceiling (in relation to LCM)
The top limit of the Market: Net Realizable Value minus selling costs.
Floor (in relation to LCM)
The Net Realizable Value minus the expected profit of the item.

Purchase price of unit: $300.00

Selling costs: $25.00

Current market value: $450.00

Selling price: $500.00

Calculate Ceiling and Floor values.

Ceiling: 500-25=$475.00

Floor: 475-200 (expected profit) = $275.00

Process to record a cash sale using Perpetual System:

Debit amount of cash in cash account;

Credit sales revenue account;

Debit costs of goods sold account;

Credit inventory account.

List the two categories of inventory errors. Note the most dangerous category.

Overstated Profits (most dangerous)

Understated Profits

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