Chapter_5_Solutions - CHAPTER 5 - SOLUTIONS LO 1 Q2 The...

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CHAPTER 5 - SOLUTIONS LO 1 Q 2 The operating cycle of a merchandising business consists of (1) purchases of merchandise inventory for cash or on credit, (2) payment for purchases made on credit, (3) sales of merchandise inventory for cash or on credit, and (4) collection of the cash from the sales. In the case of sales of merchandise for cash (cash sales), the cash is collected immediately. In the case of sales of merchandise on credit (credit sales), the company must wait a period of time before receiving the cash. In a merchandising business, the operating cycle is important because it affects the company's cash flow, or liquidity. Q 4 Under the perpetual inventory system, records are kept of the quantity and, usually, the cost of individual items of inventory as they are bought and sold. Under the periodic inventory system, the inventory on hand is counted peri- odically, usually at the end of the accounting period. No detailed records of the actual inventory on hand or cost of goods sold are maintained during the period. Q 5 Under the periodic inventory system, the amount of year-end inventory is de- termined by a physical count of the merchandise on hand at the end of the year. Q 7 The perpetual inventory system does give management up-to-date informa- tion, but it is more time-consuming and costly than the periodic inventory system. This means that management must weigh the benefits against the costs. The perpetual inventory system tends to be used by companies that
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This note was uploaded on 11/17/2009 for the course ACC 311 taught by Professor Hass during the Spring '09 term at American University in Bulgaria.

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Chapter_5_Solutions - CHAPTER 5 - SOLUTIONS LO 1 Q2 The...

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