Leaning Online

The correct option of this multiple choice (mcq) is a, as under retail method of inventory, we multiply the ending inventory at retail price by the cost-to-retail ratio in order to calculate the estimated cost of Ending Inventory (EI) without going into inventory details for physical counting. This method is suitable for businesses which have large volume of inventory. The formula used for the calculation of ending inventory at cost under Retail Inventory Method (RIM) is divided into two parts which are shown below: Ending Inventory At Retail = Retail Value of Goods Available For Sale - Net Sales Now, multiply EI at retail price by cost-to-retail ratio as shown below: Ending Inventory At Cost = Ending Inventory At Retail X Cost-To-Retail Ratio Examples: We have the following data to calculate EI at cost Beginning Inventory (BI) = $5,000 Purchases at cost = $15,000 BI at Retail = $10,000 Purchases at retail = $30,000 Net Sales = $35,000 Here Cost price of goods available for sale =...

The correct option of this multiple choice question (mcq) is (a), as this ratio shows how many days or time taken by a company to acquire, sell and replace inventory. The average of merchandise and the number of days of sales in current inventory will decide this ratio. If this ratio is small, then it shows that the company’s management is effective in selling merchandise to customers in less days. On the other hand, if this ratio is large, then it means that the company takes more days in selling its current stock of merchandise to customers due to poor inventory management and overstock problems. The formula to calculate this ratio is shown below: Number Of Days’ Sales In Inventory (DSI) = Average Inventory / Average Daily Cost Of Goods Sold The above formula can also be written as shown below: DSI = Average Inventory / Cost of Goods Sold X 365 Here AI is equal to OI plus CI divided by two (OI + CI / 2) Example: If AI is $4,000 and cost of goods sold is $60,000 during the accoun...

The correct option of this multiple choice question (mcq) is (C), as Inventory Turnover Ratio (ITR) tells us how efficiently the management manages the inventory / stock of the business between opening inventory and ending inventory which are affected by inventory purchases and sales of the business. The formula to show is given below: Inventory Turnover Ratio = Cost of Goods Sold / Average Inventory Here Average Inventory (AI) is calculated as shown below: AI = Beginning Inventory + Ending Inventory / 2 For example, if cost of goods sold is $60,000 and AI is $20,000, then the ratio is 3, which means that the company sells and replaces its stock 3 times during the current accounting cycle. If this ratio will increase in the next accounting cycle, then the company’s management is effectively managing the stock in the upcoming accounting cycle. On the other hand, if this ratio will be below 3, then the management of the company needs to improve its performance in managing inventory ...

The correct answer of this multiple choice (mcq) is (B), as under Monetary Unit Assumption, only those business events are recorded in the books of accounts and then transferred to financial statements which can be expressed in terms of money. All the events which can’t be related with monetary transactions or business transactions are not accounted for in business’ records. For example, “We will sell the goods to customers”, it’s just a statement, which shows the willingness of the seller to sell products or goods to customers in future, but it is not considered as a monetary transaction as no money is involved in it, but when we say that “We sold goods worth $5,000 to customers for cash”, then this statement shows a business transaction in which money ($5,000) is involved between seller and buyers. The unit of money is “Dollar”. So, a transaction of worth $5,000 takes place between seller and buyers and this monetary transaction is recorded in the books of accounts of seller’s busi...

The correct option of this multiple choice question (mcq) is (D), as the basic purpose of physical counting of Inventory (I) is to check the actual inventory on hand and to compare it with inventory on hand recorded in books of accounts in order to check errors or mistakes made in recording inventory, wastage of raw materials and goods and losses occurred due to theft. Which Accounts Are Affected By Inventory Shrinkage (IS)? The company using Perpetual Inventory System (PIS) needs to make adjustment for IS. The shrinkage of inventory is charged to cost of goods sold. The adjusting entry (in which two accounts are affected) to record for such case is shown below: Cost of Goods a/c XXX                         Inventory a/c XXX (IS Recorded To Update Inventory Value By Physical Counting) By taking physical counting of merchandise, the company recorded true and accurate va...

Importance Of Profits For Company’s Business A company (corporation) needs to earn profits in order to run the business, to grow it and to stabilize it. Running a business in loss will surely close it one day. That is why, the company started the business to earn profits during the accounting period. The correct option of this multiple choice question (mcq) is (C) as proved below: We are given the following: Gross Sales = $800,000 Cost of Goods Sold = $490,000 We are required to calculate gross profit rate. Here we need to calculate the value of net sales, so we have the following: Net Sales = Gross Sales - Sales Returns and Allowances - Sales Discounts Both sales returns and allowances and sales discounts are contra revenue account, so these are deducted from gross sales to calculate net sales for the current accounting period. Net Sales = $800,000 - $75,000 - $25,000 = $800,000 - $100,000 = $700,000 Amount of Gross Profit = Net Sales - Cost of Goods Sold = $700,000 - $490,000 = ...

The correct option of this multiple choice question (mcq) is (D), as when the company, whether a manufacturing / producing or a merchandiser / trading, sold goods to customers on credit, the accountant debits accounts receivable account and credit sales revenue account. Why Accounts Receivable Is Debited And Sales Revenue Is Credited? According to Rules of Debits and Credits, when assets accounts increase, we debit these accounts and when these accounts decrease, we credit these accounts. Here accounts receivable is a current asset and it is increasing as the business is entitled to receive the amount of goods sold to customers on account who promises to pay to the company within specified time. So, increase in accounts receivable is debited in this transaction. On the other hand, sales is a revenue account which is credited when increases according to the rules of debits and credits. In this business transaction, sales revenue account is increasing as the company is selling the g...