Accounting 201- Exam 2

Perpetual inventory system

Companies keep detailed records of the costs of each inventory purchase and sale. These records continuously share the inventory that should be on hand for every item

Periodic inventory system

When companies don't keep detailed inventory records of the goods on hand throughout the period. Instead they determined the cost of goods sold only at the end of the accounting period.

FOB destination

It's yours once it hits your front door so the seller pays freight costs.

FOB shipping point

Ownership passes when the product is put on the truck. Therefore buyer pays freight

When buyer incurs transportation costs

The costs are considered part of purchasing inventory

Freight costs incurred by the seller outgoing merchandise

Is an operating expense to the seller

Purchase allowance

Find a good that is damaged and letting them give you a discount and said item

2/10, n/30

This means that the buyer may take 2% cash discount on the invoice price- less any returns or allowances if payment is made within 10 days of the invoice date.

Credit terms

Specifies the amount of cash discount and the time period in which it is offered. The credit terms also indicate the time period which you are expected to pay the full invoice price.

2/10 meaning

Payment is made within 10 days of the date (the discount period) you will get 2% off full price.

The seller makes two entries for each sale

The first entry records the sale. The second entry records the cost of the merchandise sold (decreasing inventory)

Sales returns and allowances & sales discounts

Contra-revenue account

Multiple step income statement

It shows several steps in determining net income. Two of these steps relate companies principal operating activities. A Multiple step statement also distinguishes between operating and nonoperating activities.

Income Statement Presentation

Begins by presenting sales revenue. Then deducts contra revenue accounts: sales returns and allowances, and sales discounts ??to return at net sales

Gross profit rate

gross profit ? net sales = gross profit

Non-operating activities

Various revenues and expenses, gains and losses that are unrelated to the companies main line of operations.

Where to report nonoperating activities:

Income statement