Semester 1 Final Exam Review
Vocabulary
Credit period – amount of time allowed before payment is due
Merchandise – consists of products also called goods that a company acquires to resell
Purchases Allowance – reduction in cost of defective or unacceptable merchandise
FOB destination – ownership of goods when goods arrive at buyer’s location
Cost of Gods Sold – expense of buying and preparing merchandise
Merchandise Available for Sale – beginning inventory plus net purchases of inventory
Merchandise Inventory – refers to products a company owns and intends to sell
Gross Profit – difference between net sales and cost of goods sold
FOB Shipping – buyer accepts ownership when goods depart
Cash discount – sellers use this to encourage buyers to pay bills earlier
Net income for service company = Revenue less expenses
Net income for merchandiser = Net sales less cost of goods sold = gross profit less expenses
5 steps of operating cycle in order
a.
b.
c.
d.
e.
Purchase merchandise
Inventory for sales
Credit sales
Accounts receivable
Cash
Closing process – SEND (Acronym for closing)
Close Sales
Close Expenses
Close Net Income to Retained earnings
Close Dividends to Retained earnings
Merchandise inventory includes costs to buy, ship and make ready for sale
Shrinkage is difference between record of inventory and physical count
Entry to record shrinkage
Debit Cost of Goods Sold
Credit Merchandise Inventory
Entry to pay freight charges
Debit Accounts payable
Credit Cash
Ownership transferred when
goods passed to
Carrier
buyer
FOB Shipping
FOIB Destination
Transportation costs paid by
buyer
Seller
Transaction for purchases (study these hard)
Purchase on account
Debit – Merchandise Inventory 1000
Credit – Accounts payable
1000
When you return items that you purchased
Debit – Accounts payable
100
Credit – Merchandise Inventory 100
When you pay for the items
You apply the discount to the new amount which is the original amount less what you returned
Debit – Accounts Payable
900
Credit – Cash
892
Credit – Merchandise Inventory
18
The discount of 2% is taken from $900 and you debit the entire $900
Transaction for Sales (Study these hard)
When you sell merchandise on account
2 part transaction
Debit – Accounts Receivable
3000
Credit Sales
Debit – Cost of Goods Sold
3000
2000
Credit – Merchandise Inventory 2000
Remember the unit cost for each item
When the buyer then returns some of the goods
Debit – Sales Returns and Allowances
500
Credit – sales
Debit – Merchandise Inventory
500
250
Credit – Cost of Goods Sold
250
When you receive cash from the buyer
Debit – Sales Discounts
50
Debit – Cash
2450
Credit – Accounts Receivable
2500
To practice transactions you should complete Chapter 4 Problem 4.1 – I have made available for you
in Connect and you should check answers and go over thoroughly – the transactions on test are very
similar
Exam will be paper based exam – my suggestion to you would be to study review sheet and work on
Problem 4.1 – you will need to know the transactions well – there are numerous multiple choice
questions that come from the transactions – the transactions I just included above should help with
the multiple choice questions – write out the transactions on the exam if it helps you