Study Guide Exam 4 - Study Guide Exam 4 Chapter 8 Valuation...

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Study Guide Exam 4 Chapter 8 Valuation of Inventories 1. Merchandise Inventory – the term used for products held for resale in the ordinary course of business 2. Merchandising Company – a company whose main source of revenue is from the sale of products at the retail level. A merchandising company purchases its inventory in a finished form ready for resale, and usually uses the term “merchandise inventory.” 3. Manufacturing Company – produces the goods to be sold. Manufacturing firms have three main inventory accounts: Raw Materials, Work – In – Process and Finished Goods. The current asset section of the balance sheet would list all three inventory accounts. 4. Sales Revenue – term used for the revenue received from the sale of inventory by merchandising companies. 5. Cost of Goods Sold – term used for the expense account representing the total cost of merchandise sold during the period. 6. Inventory System – the method that a company uses to keep track of inventory and account for the journal entries. The two main inventory systems are the “perpetual” and “periodic” systems. a. Perpetual – a continuous record is kept for all changes to the inventory account and cost of goods sold as the transaction occurs. 7. The main operating activity of most firms is the sale of its products. Sales can either be made for cash (in which case the company receives cash at the time of sale) or the sale may be on credit (in which case the company records a receivable at the time of sale). Main Entries related to Perpetual Inventory System 1. Journal Entries Under the Perpetual System a. Recording purchases of inventory made for cash: i. Merchandise Inventory XX ii. Cash XX b. Recording purchases of inventory made on account: i. Merchandise Inventory XX ii. Accounts Payable XX c. Recording purchase returns and allowances i. Accounts Payable XX ii. Merchandise Inventory XX d. Recording shipping costs paid on inventory purchases i. Merchandise Inventory XX ii. Cash XX e. Recording shipping costs paid on sales of merchandise to customers: i. Freight-out XX ii. Cash XX f. Recording purchase discounts under the “gross method” i. Example: purchase $7,000 of merchandise with 3/10 n/30 ii. Initial Purchase 1. Merchandise Inventory 7,000 2. Accounts Payable 7,000 iii. If payment within 10 days 1. Accounts Payable 7,000 2. Cash 6,790 3. Merchandise Inventory 210 iv. If payment made after 10 days 1. Accounts Payable 7,000
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2. Cash 7,000 g. Recording Purchase Discounts under the “net method” i. Example: purchase $7,000 of merchandise with terms 3/10 n/30 ii. Initial Purchase 1. Merchandise Inventory 6,790 2. Accounts Payable 6,790 iii. If payment within 10 days 1. Accounts Payable 6,790 2. Cash 6,790 iv. If payment after 10 days 1. Accounts Payable 6,790 2. Merchandise Inventory 210 3. Cash 7,000 h. Recording Sales (Assume a sale of $1,000 with a cost of $740) i. To record sales: 1. Cash(or Accounts Receivable) 1,000 2. Sales Revenue 1,000
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Study Guide Exam 4 - Study Guide Exam 4 Chapter 8 Valuation...

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