Exam Revision - 5 & 6
Exam Revision - 5 & 6
Exam Revision - 5 & 6
Chapter 5
Objective 1: Merchandising Operations and Inventory Systems
Inventory
Define:
Type of Account Normal Balance Financial Statement
Asset Debit Balance Sheet
Flow of Costs:
1) Beginnig Inventory + Cost of Goods Purchased = Cost of Goods
Available for Sale
Define
Periodic:
Perpetual:
Objective 2: Recording a Purchase
Freight Costs:
FOB Shipping Point:
Who pays for shipping The Buyer
1|Page
Exam Review (Chapters 5,6)
2|Page
Exam Review (Chapters 5,6)
Example: The company purchases inventory FOB shipping point from the Seller. The shipping
were $400. Record the entry for shipping chargers for the company.
Inventory 400
Cash 400
FOB Destination:
Who pays for shipping The seller
Who owns the inventory in transit The seller
What account does shipping charges go to Operating Expense
Example: The company purchases inventory FOB destination from the Seller. The shipping
were $400. Record the entry for shipping chargers for the seller.
Freight-out 400
Cash 400
The Buyer purchases inventory of $2,000 on account with the terms 2/10, n/30.
Record the Purchase:
Inventory 2,000
Accounts Payable 2,000
3|Page
Exam Review (Chapters 5,6)
Record the Payment within discount period:
Account Payable 2000
Cash 1,960
Inventory 40
4|Page
Exam Review (Chapters 5,6)
Record the Payment after discount period:
Accounts Payable 2000
cash 2000
Sales Discount
Define:a reduction in the price of a product or service that is offered by the seller, in exchange
for early payment by the buyer.
Type of Account Normal Balance Financial Statement
Contra Revenue debit Income statement
The Seller sells inventory of $2,000 on account with the terms 2/10, n/30. The cost of the
inventory was $800.
Record the Sale:
Account receivable 2000
Sales Revenue 2000
Cost of goods sold 800
Inventory 800
Sales discount 40
5|Page
Exam Review (Chapters 5,6)
Sales Return and Allowance:
The Seller receives a return with an initial selling price of $1,250. The cost of the goods is $500.
Record the entry:
Sales Returns and Allowances 1,250
Closing Entries:
Account Normal Balance Closed with a Debit or Credit
Sales Revenue Credit Debit
Sales Returns and Allowance Debit Credit
Sales Discount Debit Credit
Cost of Goods Sold Debit Credit
Freight Out Debit Credit
2: Gross Profit
Net sales - Cost of goods sold = Gross Profit
Section 3: Income from Operation
Gross profit - Operating expenses = Income from Operations
Section 4: Nonoperating Activites
revenues + cost of goods sold - operating expenses = Net Income
6|Page
Exam Review (Chapters 5,6)
Chapter 6
Objective 1: Classify and Determine Inventory
Define
Raw Materials: are the basic goods that will be used in production but have not yet been placed
into production.
Work in Process: is that portion of manufactured inventory that has been placed into the
production process but is not yet complete.
Finished Goods: : is manufactured items that are completed and ready for sale
During the month of March, 110 units were sold for $10 each.
Determine the cost of goods sold and ending inventory under FIFO, LIFO, and average cost
methods:
FIFO Ending Inventory
8|Page
Exam Review (Chapters 5,6)
Date Units Unit Cost Total Cost
March 15 50 $ 3.50 $175
March 28 80 $ 4.00 $ 320
9|Page
Exam Review (Chapters 5,6)
Income Statement Effects
An error in the ending inventory of the current period, will have a reverse effect
on the net income of the next accounting period.
Balance Sheet Effects
Inventory Error Assets are: Stockholder’s Equity is:
Overstated overstated overstated
Understated understated understated
10 | P a g e