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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...

1. The correct option of this multiple choice question (mcq) is (a), as under perpetual inventory system, the merchandise or goods purchased or acquired for resale is recorded under inventory account. There is no need to open separate purchases account to record purchase of merchandise on account / credit unlike periodic inventory system. The double entries to record are shown below: (a) Merchandise Acquired On Account Inventory a/c XXX                   Accounts Payable a/c XXX (Merchandise Purchased On Account) (b) Merchandise Acquired For Cash For Resale Purpose Inventory a/c XXX                   Cash a/c XXX (Merchandise Purchased For Cash) All other options are incorrect choices here. 2. The correct option is (c), as under perpetual inventory system, when the selling company sold goods to customers on accou...

The statement is “True”, as under Perpetual Inventory System (PIS), Inventory Account (IA) is constantly updated on every sales made, purchases made or the occurrence of sales returns & allowances, sales discounts, purchases returns & allowances and purchases discounts but the physical count of Inventory (I) is not made. So, errors or mistakes in recording I, theft and wastage of merchandise or goods on hand are not taken into account unlike periodic inventory system, So, the balance of I on hand is different with the actual balance of I on hand. That is why, under PIS, the inventory control management makes physical count of merchandise on hand at the end of period. Due to the difference between merchandise on hand and actual balance of merchandise on hand by taking the physical count, there is a need to make adjustment for such unadjusted balance in IA. The adjustment affects inventory and cost of goods sold. If the unadjusted amount in I is greater than the actual amo...