ACCOUNTING 203 EXAM 3|Ques ons and answers |
Updated RATED A+ |2026
Merchandising companies may use two different systems to account for inventory
perpetual or
periodic
perpetual or periodic inventory system
For example, the perpetual system may be used to help
manage inventory throughout the year, but the periodic system may be used for formal, end of
the year
accoun ng procedures. In this course, for the most part, we will assume companies are using
perpetual
inventory systems
Accounts Receivable
ASSETT / Amounts to be received in the future due to the sale of goods or services
Accounts Payable
LIABILITY/ Amounts to be paid in the future for goods or services already acquired
perpetual system
when inventory is purchased, the inventory account, an asset - not an expense, is increased.
When goods are sold, the inventory account is reduced and only then is an expense account,
cost of goods sold, increased. The sale is recorded at the same me by increasing revenues and
increasing assets, either cash or accounts receivable
FOB
free on board. the term FOB tells when legal tle to goods is passed from the seller to the buyer,
which has implica ons beyond indica ng who will pay for shipping costs
FOB des na on
means the seller will pay
FOB shipping point
means the buyer will pay
, Cash discount terms
(also referred to as sales discounts or purchase discounts) such as 1/10, n/30 tell when the
buyer is supposed to pay for the goods, and indicates if there is a discount for paying early.
1/10, n/30
Terms of 1/10, n/30 mean there is a 1% discount granted if payment is made by the 10th day
following the date of sale. If payment is not made in the first ten days, the buyer has an
addi onal 20
days, for a total of 30, to pay for the goods at the full price.
purchase or sales return
means that purchased goods were returned to the seller for a full
refund
allowance
implies that the purchaser kept goods that did meet his or her original expecta ons, but that
the seller reduced the price that the buyer had originally agreed to pay.
When a company that
sold goods has a sales return or sales allowance,
the opposite party, the company that had previously
purchased the goods has a purchase return or purchase allowance.
Year-end adjustment required if
if the perpetual records do not agree with a physical count of ending inventory
The perpetual system assumes
that all goods that have been purchased that have not been sold are s ll in inventory. There are
several reasons this may not be true. For example, if a customer in a grocery
store knocks a jar of strawberry jam off a shelf and it breaks, it has not been sold, but neither is
it in
inventory. Addi onally, even the best accoun ng system makes mistakes
If the accoun ng records show that there is $1,000,000 of inventory, but the physical count
shows that only
$990,000 is on hand
the company must decrease the inventory account and increase either an expense
account (cost of goods sold) or an "inventory loss" account.
Updated RATED A+ |2026
Merchandising companies may use two different systems to account for inventory
perpetual or
periodic
perpetual or periodic inventory system
For example, the perpetual system may be used to help
manage inventory throughout the year, but the periodic system may be used for formal, end of
the year
accoun ng procedures. In this course, for the most part, we will assume companies are using
perpetual
inventory systems
Accounts Receivable
ASSETT / Amounts to be received in the future due to the sale of goods or services
Accounts Payable
LIABILITY/ Amounts to be paid in the future for goods or services already acquired
perpetual system
when inventory is purchased, the inventory account, an asset - not an expense, is increased.
When goods are sold, the inventory account is reduced and only then is an expense account,
cost of goods sold, increased. The sale is recorded at the same me by increasing revenues and
increasing assets, either cash or accounts receivable
FOB
free on board. the term FOB tells when legal tle to goods is passed from the seller to the buyer,
which has implica ons beyond indica ng who will pay for shipping costs
FOB des na on
means the seller will pay
FOB shipping point
means the buyer will pay
, Cash discount terms
(also referred to as sales discounts or purchase discounts) such as 1/10, n/30 tell when the
buyer is supposed to pay for the goods, and indicates if there is a discount for paying early.
1/10, n/30
Terms of 1/10, n/30 mean there is a 1% discount granted if payment is made by the 10th day
following the date of sale. If payment is not made in the first ten days, the buyer has an
addi onal 20
days, for a total of 30, to pay for the goods at the full price.
purchase or sales return
means that purchased goods were returned to the seller for a full
refund
allowance
implies that the purchaser kept goods that did meet his or her original expecta ons, but that
the seller reduced the price that the buyer had originally agreed to pay.
When a company that
sold goods has a sales return or sales allowance,
the opposite party, the company that had previously
purchased the goods has a purchase return or purchase allowance.
Year-end adjustment required if
if the perpetual records do not agree with a physical count of ending inventory
The perpetual system assumes
that all goods that have been purchased that have not been sold are s ll in inventory. There are
several reasons this may not be true. For example, if a customer in a grocery
store knocks a jar of strawberry jam off a shelf and it breaks, it has not been sold, but neither is
it in
inventory. Addi onally, even the best accoun ng system makes mistakes
If the accoun ng records show that there is $1,000,000 of inventory, but the physical count
shows that only
$990,000 is on hand
the company must decrease the inventory account and increase either an expense
account (cost of goods sold) or an "inventory loss" account.
