FABM LESSON 5

• What is the primary purpose of a merchandising business?

  To buy goods and sell them for profit
• What are the two main activities of a merchandising business?

  • Purchasing activities
  • Selling activities
• What does purchasing activities refer to in merchandising?

  Buying and selling of finished products
• What is the account title used under the periodic inventory system for acquired goods?

  PURCHASES
• What account title is used in a perpetual inventory system for product acquisition?

  Merchandise inventory
• What does the Freight-In account represent?

  Transportation costs incurred by the buyer
• What type of balance does the Freight-In account have?

  Normal debit balance
• How is Freight-In related to the Purchases account?

  It is added to the Purchases account
• What is the purpose of the Purchase Returns account?

  To record returned merchandise to suppliers
• What type of balance does the Purchase Returns account have?

  Normal credit balance
• What is the function of the Purchase Allowances account?

  To record price reductions without returns
• What is a Purchase Discount?

  A cash discount for early payment
• How does a Purchase Discount affect the acquisition price?

  It reduces the acquisition price of merchandise
• How do you compute net purchases?

  Net Purchases = Purchases + Freight-In - Purchase Returns - Purchase Allowances - Purchase Discounts
• What does selling activities involve in merchandising?

  Transferring ownership of merchandise for value
• What is recorded when merchandise is sold?

  Sales revenue account is credited
• What does Gross Sales consist of?

  Total cash sales and credit sales
• What does the Freight-Out account represent?

  Transportation costs incurred by the seller
• How is Freight-Out treated in financial statements?

  As a selling expense under operating expenses
• What is the purpose of the Sales Returns account?

  To record merchandise returned by customers
• What type of balance does the Sales Returns account have?

  Normal credit balance
• What is the function of the Sales Allowances account?

  To record price reductions without returns
• What is a Sales Discount?

  A cash discount for early payment of sales
• How does a Sales Discount affect the sales price?

  It reduces the sales price of merchandise
• How is net sales calculated?

  Net Sales = Gross Sales - Sales Returns - Sales Allowances - Sales Discounts
• What is a trade discount?

  A discount to encourage bulk purchases
• How is a trade discount recorded in accounting?

  It is not recorded in buyer or seller's books
• What is a cash discount?

  A discount for prompt payment of accounts
• How is a cash discount recorded in accounting?

  It is recorded in buyer's or seller's books
• What are common cash discount terms?

  1. 2/10, n/30
  2. 3/15
  3. N/30
  4. EOM
  5. 2/10, n/45
  6. 3/10, n/30
  7. 3/20, n/60
  8. 2/EOM, n/45
• How do you calculate the purchase price after a trade discount?

  List price - Trade discount
• What is the journal entry for purchasing merchandise for cash?

  Debit Purchases, Credit Cash
• How do you compute the sales price after applying trade discounts?

  List price - Trade discounts
• What is the journal entry for selling merchandise for cash?

  Debit Cash, Credit Sales
• What are the steps to compute cash discounts?

  1. Identify the discount percentage
  2. Determine the payment terms
  3. Calculate the discount based on payment date
• What happens when a customer pays within the cash discount period?

  They receive a discount on the payment
• What is the effect of a credit memo issued for returned merchandise?

  It reduces the sales revenue
• How is the payment recorded when received from a customer?

  Debit Cash, Credit Accounts Receivable
• What is the significance of understanding trade and cash discounts?

  • Helps in pricing strategies
  • Affects cash flow management
  • Influences purchasing decisions
• What are the differences between trade discounts and cash discounts?

  Trade Discounts:

  • Encourages bulk purchases
  • Not recorded in books

  
  

  Cash Discounts:

  • Encourages prompt payment
  • Recorded in books