Test Bank for Accounting Principles, Eighth Edition – Chapter 5: Accounting for Merchandising Operations

Retailers and wholesalers are both considered merchandisers.

The steps in the accounting cycle are different for a merchandising company than for a service company.

Sales minus operating expenses equals gross profit.

Under a perpetual inventory system, the cost of goods sold is determined each time a sale occurs.

A periodic inventory system requires a detailed inventory record of inventory items.

Freight terms of FOB Destination means that the seller pays the freight costs.

Freight costs incurred by the seller on outgoing merchandise are an operating expense to the seller.

Sales revenues are earned during the period cash is collected from the buyer.

The Sales Returns and Allowances account and the Sales Discount account are both classified as expense accounts.

The revenue recognition principle applies to merchandisers by recognizing sales revenues when they are earned.

Sales Allowances and Sales Discounts are both designed to encourage customers to pay their accounts promptly.

To grant a customer a sales return, the seller credits Sales Returns and Allowances.

A company's unadjusted balance in Merchandise Inventory will usually not agree with the actual amount of inventory on hand at year-end.

For a merchandising company, all accounts that affect the determination of income are closed to the Income Summary account.

A merchandising company has different types of adjusting entries than a service company.

Nonoperating activities exclude revenues and expenses that result from secondary or auxiliary operations.

Selling expenses relate to general operating activities such as personnel management.

Net sales appears on both the multiple-step and single-step forms of an income statement.

A multiple-step income statement provides users with more information about a company's income performance.

The multiple-step form of income statement is easier to read than the single-step form.

Merchandise inventory is classified as a current asset in a classified balance sheet.

Gain on sale of equipment and interest expense are reported under other revenues and gains in a multiple-step income statement.

The gross profit section for a merchandising company appears on both the multiple-step and single-step forms of an income statement.

In a multiple-step income statement, income from operations excludes other revenues and gains and other expenses and losses.

A single-step income statement reports all revenues, both operating and other revenues and gains, at the top of the statement.

If net sales are $800,000 and cost of goods sold is $600,000, the gross profit rate is 25%.

Gross profit represents the merchandising profit of a company.

Gross profit is a measure of the overall profitability of a company.

Gross profit rate is computed by dividing cost of goods sold by net sales.

Purchase Returns and Allowances and Purchase Discounts are subtracted from Purchases to produce net purchases.

Freight-in is an account that is subtracted from the Purchases account to arrive at cost of goods purchased.

Under a periodic inventory system, the acquisition of inventory is charged to the Purchases account.

Under a periodic inventory system, freight-in on merchandise purchases should be charged to the Inventory account.

In a worksheet, cost of goods sold will be shown in the trial balance (Dr.), adjusted trial balance (Dr.) and income statement (Dr.) columns.

Merchandise inventory is reported as a long-term asset on the balance sheet.

Under a perpetual inventory system, inventory shrinkage and lost or stolen goods are more readily determined.

The terms 2/10, n/30 state that a 2% discount is available if the invoice is paid within the first 10 days of the next month.

Sales should be recorded in accordance with the matching principle.

Sales returns and allowances and sales discounts are subtracted from sales in reporting net sales in the income statement.

A merchandising company using a perpetual inventory system will usually need to make an adjusting entry to ensure that the recorded inventory agrees with physical inventory count.

If a merchandising company sells land at more than its cost, the gain should be reported in the sales revenue section of the income statement.

The major difference between the balance sheets of a service company and a merchandising company is inventory.

Income from operations is gross profit less

An enterprise which sells goods to customers is known as a

Which of the following would not be considered a merchandising company?

A merchandising company that sells directly to consumers is a

Two categories of expenses for merchandising companies are

The primary source of revenue for a wholesaler is

Sales revenue less cost of goods sold is called

After gross profit is calculated, operating expenses are deducted to determine

Cost of goods sold is determined only at the end of the accounting period in

Which of the following expressions is incorrect?

Detailed records of goods held for resale are not maintained under a

A perpetual inventory system would likely be used by a(n)

Which of the following is a true statement about inventory systems?

In a perpetual inventory system, cost of goods sold is recorded

If a company determines cost of goods sold each time a sale occurs, it

Under a perpetual inventory system, acquisition of merchandise for resale is debited to the

The journal entry to record a return of merchandise purchased on account under a perpetual inventory system would credit

The Merchandise Inventory account is used in each of the following except the entry to record

A buyer would record a payment within the discount period under a perpetual inventory system by crediting

If a purchaser using a perpetual system agrees to freight terms of FOB shipping point, then the

Freight costs paid by a seller on merchandise sold to customers will cause an increase

Bryan Company purchased merchandise from Cates Company with freight terms of FOB shipping point. The freight costs will be paid by the

Flynn Company purchased merchandise inventory with an invoice price of $5,000 and credit terms of 2/10, n/30. What is the net cost of the goods if Flynn Company pays within the discount period?

Stine Company purchased merchandise with an invoice price of $2,000 and credit terms of 2/10, n/30. Assuming a 360 day year, what is the implied annual interest rate inherent in the credit terms?

If a company is given credit terms of 2/10, n/30, it should

In a perpetual inventory system, the amount of the discount allowed for paying for merchandise purchased within the discount period is credited to

Zach's Market recorded the following events involving a recent purchase of merchandise:
Received goods for $50,000, terms 2/10, n/30.
Returned $1,000 of the shipment for credit.
Paid $250 freight on the shipment.
Paid the invoice within the discount period.

As a result of these events, the company's merchandise inventory

Jake's Market recorded the following events involving a recent purchase of merchandise:
Received goods for $20,000, terms 2/10, n/30.
Returned $400 of the shipment for credit.
Paid $100 freight on the shipment.
Paid the invoice within the discount period.
As a result of these events, the company's merchandise inventory

A credit sale of $800 is made on April 25, terms 2/10, n/30, on which a return of $50 is granted on April 28. What amount is received as payment in full on May 4?

The entry to record the receipt of payment within the discount period on a sale of $750 with terms of 2/10, n/30 will include a credit to

The collection of a $600 account within the 2 percent discount period will result in a

Company X sells $400 of merchandise on account to Company Y with credit terms of 2/10, n/30. If Company Y remits a check taking advantage of the discount offered, what is the amount of Company Y's check?

Holt Company sells merchandise on account for $2,000 to Jones Company with credit terms of 2/10, n/30. Jones Company returns $400 of merchandise that was damaged, along with a check to settle the account within the discount period. What is the amount of the check?

The collection of a $900 account after the 2 percent discount period will result in a

The collection of a $600 account after the 2 percent discount period will result in a

In a perpetual inventory system, the Cost of Goods Sold account is used

Sales revenues are usually considered earned when

A sales invoice is a source document that

Sales revenue

The journal entry to record a credit sale is

A credit memorandum is prepared when

The Sales Returns and Allowances account is classified as a(n)

A credit memorandum is used as documentation for a journal entry that requires a debit to

If a customer agrees to retain merchandise that is defective because the seller is willing to reduce the selling price, this transaction is known as a sales

A credit sale of $900 is made on July 15, terms 2/10, n/30, on which a return of $50 is granted on July 18. What amount is received as payment in full on July 24?

When goods are returned that relate to a prior cash sale,

The Sales Returns and Allowances account does not provide information to management about

A Sales Returns and Allowances account is not debited if a customer

As an incentive for customers to pay their accounts promptly, a business may offer its customers

The credit terms offered to a customer by a business firm are 2/10, n/30, which means that

A sales discount does not

Company A sells $500 of merchandise on account to Company B with credit terms of 2/10, n/30. If Company B remits a check taking advantage of the discount offered, what is the amount of Company B's check?

Hale Company sells merchandise on account for $1,500 to Kear Company with credit terms of 2/10, n/30. Kear Company returns $300 of merchandise that was damaged, along with a check to settle the account within the discount period. What is the amount of the check?

Feine Company sells merchandise on account for $2,000 to Tang Company with credit terms of 2/10, n/30. Tang Company returns $300 of merchandise that was damaged, along with a check to settle the account within the discount period. What entry does Feine Company make upon receipt of the check?

Which of the following would not be classified as a contra account?

Which of the following accounts has a normal credit balance?

With respect to the income statement,

When a seller grants credit for returned goods, the account that is credited is

The respective normal account balances of Sales, Sales Returns and Allowances, and Sales Discounts are

All of the following are contra revenue accounts except

A merchandising company using a perpetual system will make

In preparing closing entries for a merchandising company, the Income Summary account will be credited for the balance of

A merchandising company using a perpetual system may record an adjusting entry by

The operating cycle of a merchandiser is

The sales revenue section of an income statement for a retailer would not include

The operating expense section of an income statement for a wholesaler would not include

Income from operations will always result if

Indicate which one of the following would appear on the income statement of both a merchandising company and a service company.

Thelman Company reported the following balances at June 30, 2008:

Sales $10,800
Sales Returns and Allowances 400
Sales Discounts 200
Cost of Goods Sold 5,000

Net sales for the month is

Income from operations appears on

Gross profit does not appear

Which of the following is not a true statement about a multiple-step income statement?

Which one of the following is shown on a multiple-step but not on a single-step income statement?

All of the following items would be reported as other expenses and losses except

If a company has net sales of $500,000 and cost of goods sold of $350,000, the gross profit percentage is

A company shows the following balances:
Sales $1,000,000
Sales Returns and Allowances 180,000
Sales Discounts 20,000
Cost of Goods Sold 560,000

What is the gross profit percentage?

The gross profit rate is computed by dividing gross profit by

In terms of liquidity, merchandise inventory is

On a classified balance sheet, merchandise inventory is classified as

Gross profit for a merchandiser is net sales minus

Salon's gross profit is

Salon's income from operations is

Salon's net income is

Gross profit would be

The gross profit rate would be

Gross profit would be

The gross profit rate would be

The amount of net sales on the income statement would be

Gross profit would be

The gross profit rate would be

If a company has sales of $420,000, net sales of $400,000, and cost of goods sold of $260,000, the gross profit rate is

Ingrid's Fashions sold merchandise for $38,000 cash during the month of July. Returns that month totaled $800. If the company's gross profit rate is 40%, Ingrid's will report monthly net sales revenue and cost of goods sold of

Sal's gross profit for August, 2008 is

Sal's nonoperating income (loss) for the month of August, 2008 is

Sal's operating income for the month of August, 2008 is

Sal's net income for August, 2008 is

At the beginning of September, 2008, RFI Company reported Merchandise Inventory of $4,000. During the month, the company made purchases of $7,800. At September 31, 2008, a physical count of inventory reported $3,200 on hand. Cost of goods sold for the month is

At the beginning of the year, Midtown Athletic had an inventory of $400,000. During the year, the company purchased goods costing $1,600,000. If Midtown Athletic reported ending inventory of $600,000 and sales of $2,000,000, the company's cost of goods sold and gross profit rate must be

During the year, Darla's Pet Shop's merchandise inventory decreased by $20,000. If the company's cost of goods sold for the year was $300,000, purchases must have been

Cost of goods available for sale is computed by adding

The Freight-in account

Net purchases plus freight-in determines

West Company has the following account balances:

The cost of goods purchased for the period is

Baden Shoe Store has a beginning merchandise inventory of $30,000. During the period, purchases were $140,000; purchase returns, $4,000; and freight-in $10,000. A physical count of inventory at the end of the period revealed that $20,000 was still on hand. The cost of goods available for sale was

In a periodic inventory system, a return of defective merchandise by a customer is recorded by crediting

Which one of the following transactions is recorded with the same entry in a perpetual and a periodic inventory system?

The journal entry to record a return of merchandise purchased on account under a periodic inventory system would be

Under a periodic inventory system, acquisition of merchandise is debited to the

Which of the following accounts has a normal credit balance?

The respective normal account balances of Purchases, Purchase Discounts, and Freight-in are

In a worksheet for a merchandising company, Merchandise Inventory would appear in the

The Merchandise Inventory account balance appearing in a worksheet represents the

Cole Company has sales revenue of $39,000, cost of goods sold of $24,000 and operating expenses of $9,000 for the year ended December 31. Cole's gross profit is

Logan Company made a purchase of merchandise on credit from Claude Corporation on August 3, for $6,000, terms 2/10, n/45. On August 10, Logan makes the appropriate payment to Claude. The entry on August 10 for Logan Company is

Cartier Company purchased inventory from Pissaro Company. The shipping costs were $400 and the terms of the shipment were FOB shipping point. Cartier would have the following entry regarding the shipping charges:

In a perpetual inventory system, a return of defective merchandise by a purchaser is recorded by crediting

On October 4, 2008, Terry Corporation had credit sales transactions of $2,800 from merchandise having cost $1,900. The entries to record the day's credit transactions include a

Which of the following accounts is not closed to Income Summary?

In the Clark Company, sales were $480,000, sales returns and allowances were $30,000, and cost of goods sold was $288,000. The gross profit rate was

Net sales is sales less

In the balance sheet, ending merchandise inventory is reported

Cost of goods available for sale is computed by adding

Presented here are the components in Sanders Company's income statement. Determine the missing amounts.

Prepare the necessary journal entries on the books of Tri-State Carpet Company to record the following transactions, assuming a perpetual inventory system (you may omit explanations):

• (a) Tri-State purchased $40,000 of merchandise on account, terms 2/10, n/30.
• (b) Returned $4,000 of damaged merchandise for credit.
• (c) Paid for the merchandise purchased within 10 days.

Erving Company sold goods on account to Farley Enterprises with terms of 2/10, n/30. The goods had a cost of $600 and a selling price of $900. Both Erving and Farley use a perpetual inventory system. Record the sale on the books of Erving and the purchase on the books of Farley.

Manning Company sells merchandise on account for $2,000 to Tiger Company with credit terms of 3/10, n/60. Tiger Company returns $200 of merchandise that was damaged, along with a check to settle the account within the discount period. What entry does Manning Company make upon receipt of the check and the damaged merchandise?

Ord Company uses a perpetual inventory system. During May, the following transactions and events occurred.

• May 13 Sold 6 motors at a cost of $44 each to Waller Brothers Supply Company, terms 1/10, n/30. The motors cost Ord $25 each.
• May 16 One defective motor was returned to Ord.
• May 23 Received payment in full from Waller Brothers.

Instructions
Journalize the May transactions for Ord Company (seller) assuming that Ord uses a perpetual inventory system. You may omit explanations.

The income statement for Avery Company for the year ended December 31, 2008 is as follows:

Prepare the entries to close the revenue and expense accounts at December 31, 2008. You may omit explanations for the transactions.

Milton Company provides this information for the month of November, 2008: sales on credit $150,000; cash sales $50,000; sales discounts $2,000; and sales returns and allowances $8,000. Prepare the sales revenues section of the income statement based on this information.

During October, 2008, Katie's Catering Company generated revenues of $13,000. Sales discounts totalled $200 for the month. Expenses were as follows: Cost of goods sold of $7,000 and operating expenses of $2,000.

Calculate (1) gross profit and (2) income from operations for the month.

For each of the following, determine the missing amounts.

Assume that Guardian Company uses a periodic inventory system and has these account balances: Purchases $500,000; Purchase Returns and Allowances $14,000; Purchase Discounts $9,000; and Freight-in $15,000. Determine net purchases and cost of goods purchased.

Assume that Guardian Company uses a periodic inventory system and has these account balances: Purchases $600,000; Purchase Returns and Allowances $25,000; Purchase Discounts $11,000; and Freight-in $19,000; beginning inventory of $45,000; ending inventory of $55,000; and net sales of $750,000. Determine the cost of goods sold.

Waller Brothers Supply uses a periodic inventory system. During May, the following transactions and events occurred.

• May 13 Purchased 6 motors at a cost of $44 each from Ord Company, terms 1/10, n/30. The motors cost Ord Company $25 each.
• May 16 Returned 1 defective motor to Ord.
• May 23 Paid Ord Company in full.

Instructions
Journalize the May transactions for Waller Brothers. You may omit explanations.

For each of the following, determine the missing amounts.

On October 1, Taylor Bicycle Store had an inventory of 20 ten speed bicycles at a cost of $200 each. During the month of October, the following transactions occurred.

Oct. 4 Purchased 30 bicycles at a cost of $200 each from Mann Bicycle Company, terms 2/10, n/30.
6 Sold 18 bicycles to Team America for $300 each, terms 2/10, n/30.
7 Received credit from Mann Bicycle Company for the return of 2 defective bicycles.
13 Issued a credit memo to Team America for the return of a defective bicycle.
14 Paid Mann Bicycle Company in full, less discount.

Instructions
Prepare the journal entries to record the transactions assuming the company uses a perpetual inventory system.

On September 1, Snow Supply had an inventory of 15 backpacks at a cost of $25 each. The company uses a perpetual inventory system. During September, the following transactions and events occurred.

Sept. 4 Purchased 70 backpacks at $25 each from Jenks, terms 2/10, n/30.
Sept. 6 Received credit of $150 for the return of 6 backpacks purchased on Sept. 4 that were defective.
Sept. 9 Sold 40 backpacks for $35 each to McGill Books, terms 2/10, n/30.
Sept. 13 Sold 15 backpacks for $35 each to Calvin Office Supply, terms n/30.
Sept. 14 Paid Jenks in full, less discount.

Instructions
Journalize the September transactions for Snow Supply.

Tim Stark is a new accountant with Watts Company. Watts purchased merchandise on account for $9,000. The credit terms are 2/10, n/30. Tim has talked with the company's banker and knows that he could earn 8% on any money invested in the company's savings account.

Instructions

• (a) Should Tim pay the invoice within the discount period or should he keep the $9,000 in the savings account and pay at the end of the credit period? Support your recommendation with a calculation showing which action would be best.
• (b) If Tim forgoes the discount, it may be viewed as paying an interest rate of 2% for the use of $9,000 for 20 days. Calculate the annual rate of interest that this is equivalent to.

(a) Boden Company purchased merchandise on account from Office Suppliers for $86,000, with terms of 2/10, n/30. During the discount period, Boden returned some merchandise and paid $78,400 as payment in full. Boden uses a perpetual inventory system. Prepare the journal entries that Boden Company made to record:
(1) the purchase of merchandise.
(2) the return of merchandise.
(3) the payment on account.

(b) Boggs Company sold merchandise to Wilsey Company on account for $73,000 with credit terms of ?/10, n/30. The cost of the merchandise sold was $43,800. During the discount period, Wilsey Company returned $3,000 of merchandise and paid its account in full (minus the discount) by remitting $69,300 in cash. Both companies use a perpetual inventory system. Prepare the journal entries that Boggs Company made to record:
(1) the sale of merchandise.
(2) the return of merchandise.
(3) the collection on account.

Prepare the necessary journal entries to record the following transactions, assuming Barone Company uses a perpetual inventory system.

• (a) Purchased $30,000 of merchandise on account, terms 2/10, n/30.
• (b) Returned $500 of damaged merchandise for credit.
• (c) Paid for the merchandise purchased within 10 days.

Prepare the necessary journal entries to record the following transactions, assuming Moran Company uses a perpetual inventory system.

• (a) Moran sells $50,000 of merchandise, terms 1/10, n/30. The merchandise cost $30,000.
• (b) The customer in (a) returned $5,000 of merchandise to Moran. The merchandise returned cost $3,000.
• (c) Moran received the balance due within the discount period.

Rosen Company completed the following transactions in October:

Instructions
(a) Indicate the cash received for each collection. Show your calculations.
(b) Prepare the journal entry for the
(1) Oct. 17 sale. The merchandise sold had a cost of $3,500.
(2) Oct. 23 sales return. The merchandise returned had a cost of $140.
(3) Oct. 28 collection.

Rosen uses a perpetual inventory system.

The following information is available for Siler Company:

Instructions
Using the above information, prepare the closing entries for Siler Company.

The adjusted trial balance of Unruh Book Company appears below.

Instructions
Using the information given, prepare the year-end closing entries.

Deloy Company gathered the following condensed data for the year ended December 31, 2008:

Instructions

1. Prepare a single-step income statement for the year ended December 31, 2008.
2. Prepare a multiple-step income statement for the year ended December 31, 2008.

Instructions
State the missing items identified by ?.

1. Gross profit – Operating expenses = ?
2. ? + ? = Operating expenses
3. Sales – (? + ?) = Net sales
4. Income from operations + ? – ? = Net income
5. Net sales – Cost of goods sold = ?
6. Cost of goods sold + Gross profit on sales = ?

The adjusted trial balance of Notson Company contained the following information:

Instructions

1. Use the above information to prepare a multiple-step income statement for the year ended December 31, 2008.
2. Prepare a single-step income statement for the year ended December 31, 2008.

The following information is available for Miley Company:

Instructions
Compute each of the following:

• (a) Net sales
• (b) Gross profit
• (c) Income from operations

The income statement of Miller, Inc. includes the items listed below:

Instructions
Use the appropriate items listed above as a basis for determining:

• (a) Cost of goods sold.
• (b) Cost of goods available for sale.
• (c) Ending inventory.

Three items are missing in each of the following columns and are identified by letter.

Instructions
Calculate the missing amounts and identify them by letter.

Morton Supply Company uses a periodic inventory system. During September, the following transactions and events occurred.

Sept. 3 Purchased 80 backpacks at $20 each from Cole Company, terms 2/10, n/30.
Sept. 6 Received credit of $100 for the return of 5 backpacks purchased on Sept. 3 that were defective.
Sept. 9 Sold 15 backpacks for $40 each to Starr Books, terms 2/10, n/30.
Sept. 13 Paid Cole Company in full.

Instructions
Journalize the September transactions for Morton Supply Company.

The following information is available for Olson Company:

Instructions
Compute each of the following:

• (a) Net purchases
• (b) Cost of goods purchased
• (c) Cost of goods sold

The adjusted trial balance of Gorman Music Company appears below. Gorman Music Company prepares monthly financial statements and uses the perpetual inventory method.

Instructions
Complete the worksheet below.

GORMAN MUSIC COMPANY
Worksheet
For the Month Ended April 30, 2008

Prepare the necessary journal entries to record the following transactions, assuming a periodic inventory system:

• (a) Purchased $400,000 of merchandise on account, terms 2/10, n/30.
• (b) Returned $40,000 of damaged merchandise for credit.
• (c) Paid for the merchandise purchased within 10 days.

A _______________ buys and sells goods rather than performing services to earn a profit.

Cost of goods sold is deducted from net sales revenue for the period in order to arrive at _______________.

Merchandise Inventory on hand can be obtained from detailed inventory records when a _______________ inventory system is maintained.

The acquisition of merchandise inventory is debited to the _______________ account when a perpetual inventory system is used.

The freight cost incurred by a seller to deliver goods sold to a customer is called _______________.

When a customer returns merchandise previously purchased on credit, the entry to record the return requires a debit to the _______________ account and a credit to the _______________ account.

Sales Returns and Allowances and Sales Discounts are both _______________ accounts and have _______________ normal balances.

Every sales transaction should be supported by a _______________ that provides written evidence of the sale.

Gross profit is obtained by subtracting _______________ from _______________.

Income from operations is determined by subtracting total operating expenses from _______________.

Match the items below by entering the appropriate code letter in the space provided.

A. Net Sales
B. Sales discounts
C. Purchase invoice
D. Periodic inventory system
E. FOB destination
F. FOB shipping point
G. Freight-out
H. Gross profit
I. Selling expenses
J. Income from operations

☐ 1. An incentive to encourage customers to pay their accounts early.
☐ 2. Expenses associated with making sales.
☐ 3. Freight terms that require the seller to pay the freight cost.
☐ 4. Sales less sales returns and allowances and sales discounts.
☐ 5. A document that supports each credit purchase.
☐ 6. Net sales less cost of goods sold.
☐ 7. Freight cost to deliver goods to customers reported as a selling expense.
☐ 8. Requires a physical count of goods on hand to compute cost of goods sold.
☐ 9. Gross profit less total operating expenses.
☐ 10. Freight terms that require the buyer to pay the freight cost.

A merchandiser frequently has a need to use contra accounts related to the sale of goods. Identify the contra accounts that have normal debit balances and explain why they are not considered expenses.

In a single-step income statement, all data are classified under two categories: (1) Revenues, or (2) Expenses. If the income statement is recast in a multiple-step format, what additional information or intermediate components of income would be presented?

You are at a company picnic and the company president starts a conversation with you. The president says "Since we use the perpetual inventory system, there is no reason to take a physical count of our inventory." What is your response to the president's remarks?

The income statement for a merchandising company presents five amounts not shown on a service company's income statement. Identify and briefly explain the five unique amounts.

Feeney Corporation manufactures electronic components for use in many consumer products. Their raw materials are purchased literally from all over the world. Depending on the country involved, purchase terms vary widely. Some suppliers, for example, require full prepayment, while others are content to receive payment within six months of receipt of the goods.

Because of this situation, Feeney never closes its books until at least ten days after month end. In this way, it can sort out ownership of goods in transit, and document which goods were received by month end, and which were not.

Deb Rush, a new accountant, was asked to record about $50,000 in inventory as having been received before month end. She argued that the shipping documents clearly showed that the goods were actually received on the 8th of the current month. Her boss, busy with month-end reports, curtly tells Deb to check the shipping terms. She did so, and found the notation "FOB shipper's dock" on the document. She hadn't seen that particular notation before, but she reasoned that if the selling company considered it shipped when it reached their dock, Feeney should consider it received when it reached Feeney's dock. She did not record the sale until after month end.

Required:

1. Why are accountants concerned with the timing in the recording of purchases?
2. Was there a violation of ethical standards here? Explain.

Anne Stine and Rita Lott, two salespersons in adjoining territories, regularly compete for bonuses. During the last month, their dollar volume of sales, on which the bonuses are based, was nearly equal. On the last day of the month, both made a large sale. Both orders were shipped on the last day of the month and both were received by the customer on the fifth of the following month. Anne's sale was FOB shipping point, and Rita's was FOB destination. The company "counts" sales for purposes of calculating bonuses on the date that ownership passes to the purchaser. Anne's sale was therefore counted in her monthly total of sales, Rita's was not. Rita is quite upset. She has asked you to just include it, or to take Anne's off as well. She also has told you that you are being unethical for allowing Anne to get a bonus just for choosing a particular shipping method.

Write a memo to Rita. Explain your position.