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Final

COMMERCE 1AA3 Final: COMMERCE 1AA3-Exam Review

22 pages88 viewsFall 2018

Department
Commerce
Course Code
COMMERCE 1AA3
Professor
Emad Mohammad
Study Guide
Final

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COMMERCE 1AA3 December 3, 2018
Exam Review
Breakdown
Chapter T/F M/C Total
5 5 13 18 26%
6 4 12 16 23%
8 6 15 21 30%
9 3 6 9 13%
11 2 4 6 9%
20 50 70
Chapter 5- Inventory and Cost of Goods Sold
- Cost of goods sold is the most important expense account
- Merchandise inventory is the heart of the merchandising business
INVENTORY: is an asset held for resale or used to produce services and goods for sale
- Merchandise firms only have merchandise inventory
- Manufacturing firm have…. Raw materials, work in process, and finished goods
COST OF GOODS SOLD: goes in the income statement as an expense
INVENTORY: goes on the balance sheet as a current asset
- Sales revenue is based on the sale of inventory
- Cost of goods sold is based on the cost of inventory
GROSS PROFIT/MARGIN: is the excess of sales and revenue over cost of goods sold. This is
because operating expenses have not been subtracted yet
INVENTORY = # of units on hand x cost per unit
COGS = # of units sold x cost per unit
- FOB Shipping point- it should be included on the books of the buyer, who has legal title,
as soon as it leaves the shipping dock
- FOB destination- the inventory in transit still belongs on the books of the seller until it is
delivered to the buyer
PERIODIC INVENTORY SYSTEM- is mainly used by business that sell inexpensive goods. These
stores count their inventory periodically. Companies use this method because the accounting
costs are low
PERPETUAL INVENTORY SYSTEM- uses computer software to keep a running record of
inventory on hand. Most businesses use the perpetual inventory system. A business will still
count the inventory on hand annually
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COMMERCE 1AA3 December 3, 2018
Perpetual system
Used for all types of goods
Keeps a running record of all good bought, sold and on hand
Inventory counted at least once a year
Periodic system
Used for inexpensive goods
Does not keep a running record of all goods bought, sold and on hand
Inventory counted at least once a year
Perpetual system journal entry for purchase of inventory:
Cash or A/R
Sales Revenue
Cost of Goods sold
Inventory
Periodic system journal entry for purchase of inventory:
Cash or A/R
Sales Revenue
NET PURCHASE INVENTORY= purchase of the inventory from the seller + freight-in - purchase
returns - purchase allowance - purchase discount
FREIGHT-IN: is the transportation cost paid by the buyer to move goods from the seller to the
buyer
FREIGHT-OUT: is a delivery expense
PURCHASE RETURN: is a decrease in the cost of inventory because they buyer returned the
goods to the seller
PURCHASE ALLOWANCE: a deduction from the amount owed-often because of merchandise
defect
PURCHASE DISCOUNT: is common arrangement states payment terms of 2/10 n/30. (this
means the buyer can take 2% discount for payment within 10 days, or pay the full amount
within 30 days
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COMMERCE 1AA3 December 3, 2018
SALES RETURNS AND ALLOWANCE: the right to return unsatisfactory or damaged merchandise
for a refund or exchange
Journal entry under the perpetual system:
Sales return and allowance
Accounts Receivable
Inventory
Cost of Goods Sold
SALES DISCOUNTS: businesses offer customers sales discounts for early payment in order to
speed up the cash flow. Ex. 2/10, n/30
There are 3 inventory costing methods…
1. Specific identification cost
2. Weighted-average cost
3. First in, first out (FIFO) cost
SPECIFIC IDENTIFICATION METHOD: businesses with unique inventory such as antique
furniture, jewels and real estate. This method is too expensive to use for inventory items that
have common characteristics
Both weighted- average cost and FIFO assume different flows of inventory costs
WEIGHTED-AVERAGE METHOD- PERPETUAL: is based on the average cost of inventory during
the period
Step 1:
WAC = Cost of goods available
Number of units available
Step 2:
COGS = Number of units sold x weighted-average cost
Step 3:
Ending Inventory = units left after sale of goods + units from purchase
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