 In this presentation, we will take a look at multiple choice questions applicable to merchandising companies. First question. 2-10, N-30 means a. 2% discount if paid in 10 days or full balance due in 30 days b. 10% discount if paid in 2 days or full balance due in 30 days c. 20% discount if paid in 10 days or full balance due in 30 days or d. 10% discount if paid in 30 days or full balance due in 30 days So let's go through these one more time crossing out what we can using the process of elimination. Question once again. 2-10, N-30 means what? Now first we might want to think, okay what does that mean first to us and put that down in our minds and then go through these and see what closely matches what we believe it to mean. So when you see this, this is going to be terms typically terms of when payment should be due when we make a sale or purchasing terms. So it typically will be in this kind of format and we just got to know what this format means. Trickiest piece of it is this first number means the discount. Now the discount, they didn't put a percent on it. It's just they just basically put this 2 here and you got to know that it means 2%. So that's the trickiest piece of this kind of way they write this. So 2% and then what does the 10 mean? That means that we're going to give you a 2% discount and especially a cash discount. It's a discount related to getting paid sooner. So recognizing the time value of money, we're saying if you give us the money sooner then we'll give you a 2% discount meaning if you pay us within 10 days we'll give you that 2% discount. If not then comma, if not then the normal terms that means when you normally have to pay us is going to be the 30 days. So if you think about this, if you made a sale on account then we would typically say that we want to be paid within 30 days. That's standard at whatever that is. It could be 30, it could be 60, whatever the standard payment period is. Often 30 days. That'll be when we expect payment. If we don't get paid then then we might have collection action taken after that point. But if you pay earlier within two days we will give a discount for the time value of money for doing that. Alright so let's go through the answers. 2 slash 10 in slash 30 means process of elimination A, 2% discount if paid in 10 days or full balance due in 30 days. That seems exactly like what we're looking at so that looks like the one. Let's look at the rest of them to make sure that we're not messing anything up though. B, 10% discount if paid in two days or full balance due in 30 days. Now a 10% discount looks a little backwards. If we pay 10% discount in two days, you can think of that two ways. One, it's just backwards because if you read this it should be 2% discount in 10 days. And two, a 10% discount when you're talking about a cash discount is pretty big because typically we're talking about a fairly small discount that might be applied to a large sales for the time value of money for a cash discount. This isn't like a discount in a store where we might have marked up the merchandise and then mark it way down for discount. This isn't a negotiating the sales price discount. This is basically a cash discount to get paid a little bit sooner. So we're not going to give a huge 10% discount possibly just because we got paid 20 days sooner. That might be a sales thing within the store but that seems awfully high. So that's not going to be it. And then C says 20% discount if paid in 10 days or full-bounds due in 30 days. And that just seems, I don't see where the 20% came from at all so that doesn't seem right. And then D says 10% discount if paid in 30 days or full-bounds due in 30 days. And once again that 10% is backwards so we're going to say that doesn't seem right. So the answer looks like A so if we read through this once again we're going to say the question 2 slash 10 comma N slash 30 means what? A, 2% discount if paid in 10 days or full-bounds due in 30 days. Next question. The term cost of goods sold. A means sale of inventory. B is an asset. C is used in a service company. D is a revenue account. E is the expense related to inventory being used to generate revenue. Let's read through this one more time and see if we can cross any of this out. We're going to say the term cost of goods sold. Now again you might want to just kind of define that in your mind of course. What is cost of goods sold to you before we go through this? And note that it's going to be an income statement account. It's basically an expense account. It's going to therefore bring down net income and it's related to the inventory account. So it's related to inventory being used in order to help us generate revenue. So if we go through these then we're going to say the term cost of goods sold. A means sale of inventory. Now you might look at that and go kind of. I mean the cost of goods sold means that we did sell inventory. So because that's we're recording the cost of the sale of the inventory. So let's keep that for now and B says is an asset. So and we should be able to say well cost of goods sold not an asset. The related asset account is inventory an asset but cost of goods sold is an expense related to us consuming that asset. So I'm going to say that that doesn't sound right. C says is used in a service company. So C is used in a service company. The cost of goods sold relates to us selling inventory and a service company doesn't have any inventory. So we're going to say no it shouldn't be in a service company. They shouldn't have cost of goods sold. And then D is a revenue account. A revenue account cost of goods sold and it's an expense account. So cost of goods sold is decreasing net income. It relates to us consuming the inventory in order to generate revenue expense account not a revenue account. And then E says is the expense related to inventory being used to generate revenue and that sounds pretty good. So we're left with A and E. So if we read through this one more time. The term cost of goods sold either A or E means sale of inventory or E is the expense related to inventory being used to generate revenue. Now of those two if we record cost of goods sold it seems like we did sell inventory because that's why we're recording it. But E sounds better. And oftentimes if you look at these multiple choice questions when you see a really specific answer as opposed to answers that aren't as specific. That could mean that the person putting together the question is trying to you know make any make a make an answer that doesn't have any possibilities or times when it's not true and therefore they have to add a few more words. So if you see a really specific answer that sounds pretty good as compared to another answer which is a little too short and compared to it. It might be the more specific answer because the more specific answers designed to be right in all cases which means it might take a little more terminology. So we're going to say it's going to be E here. And so if we read through this we're going to say the term cost of good sold E is the expense related to inventory being used to generate revenue. Next question. A debit to the sales returns and allowance and a credit to accounts receivable one more time. A debit to sales returns and allowances and a credit to accounts receivable a makes accounts receivable go up B is part of a journal entry for a return of merchandise C is a journal entry related to a sale at a discount D is recorded when a customer takes a discount or E is a journal entry related to the payment of accounts receivable. So one more time this question will be a debit to sales returns and allowances and a credit to accounts receivable is what so before we go through these we might want to think about what that might be if we and to do this you might want to actually write this out. It's often helpful to see this in journal entry format. So you might just want to say OK accounts receivable and just make up a number possibly is going down or credit of 800 and then we debit something for the sales return. So sales return and that that might make it say if you've worked a couple problems you might say hmm you know I might have seen that somewhere one accounts receivable going down. Why would accounts receivable go down. Well typically we get paid and therefore the customer no longer owes us the money and we decrease the accounts receivable. However in this case we didn't debit cash meaning we didn't get paid we debited instead sales returns and allowances. Now what is that it's it's basically reversing. It's the sales account that is this contra account that reverses the sale. So what's happening is for whatever reason it's an income statement account we're reducing basically the sales here which possibly probably happened because of a return you know we had to reverse the sale for some happen something happened so the sale didn't really happen meaning we're basically not giving the money back they didn't give us money the customer didn't give us money we are saying you no longer owe us money because we're just whatever the sale just never happened basically we're taking it off the books. OK so a makes accounts receivable go up and we have a credit to accounts receivable that makes accounts receivable go down so that doesn't look right be is part of a journal entry to return or entry for a return of merchandise now that could be one reason why the accounts receivable would go down and we're not getting cash but in other words in instead recording something to the sales returned and allowance so that one looks like it's a possibility see is a journal entry related to a sales discount sale at a discount and this isn't really a sale happening because accounts receivable would be going up if we made a sale so whether it be a discount or not it's not really looking like that D is recorded when a customer takes a discount you know we might say if there's a discount we could say accounts receivable would go down but the other side going to sales returns doesn't look quite right if we had a discount so you might be question that could be some one that we would question say hmm you know it might be the case that if there's a discount we would decrease the receivable because they you know they don't always as much because they got a discount and then II so we'll keep that one for now he says is a journal entry related to the payment of accounts receivable and it does have accounts receivable going down so you think that seems kind of reasonable but we didn't get paid because that would be a debit to cash instead we got this the sales returns and allowances so I'm going to say that doesn't seem right because it didn't get cash so we're left with B and D reading the question one more time a debit to sales returns and allowances and a credit to accounts receivable is either a or D a is part of a journal entry for a return of merchandise or D is recorded when a customer takes a discount so I'm going to say that a sounds more reasonable because we're going to say that we reduce sales and we put the sales returns account here which typically you would think we're reverse in the sale if the merchandise was returned to us so the customer returned the merchandise we decrease the accounts receivable and record the other side there now so I'm going to say B is the answer now notice that D is similar to see here she says she says is a journal entry related to the sale at a discount and D says recorded when a customer takes a discount and if we think that those two are related they're not exactly related or not exactly the same but note that if you do see two that are kind of similar or pretty much the same thing that we can only choose one answer so you could use the process of elimination in cases like that okay reading the final answer then we have the question of a debit to sales returns and allowances and a credit to accounts receivable is a or B B is part of a journal entry for a return of merchandise next question which is true of inventory shrinkage a inventory shrinkage is the loss of inventory B inventory shrinkage can be found by comparing a physical count with amount on record C inventory shrinkage is recognized by debiting miscellaneous expense D inventory shrinkage is recognized by debiting cost of good sold and C inventory shrinkage can be caused by theft or deterioration one more time which is not true of inventory shrinkage so we got a first it might be helpful to see if we know the definition of inventory shrinkage and then go through and see if we can apply that definition out so inventory shrinkage usually has to do with the inventory going down for some reason reason other than a sale so remember that obviously inventory is going to go down when we make sales but there could be some other components decreasing inventory one of those components might be you know we just lot it spoiled we lost it could be theft or something like that that's that inventory would go down we'd have to of course record that when it happens so let's go through these and see if we can use the process of elimination once again question of which is not true of inventory shrinkage a inventory shrinkage is the loss of inventory so we're looking at something that's not true so inventory shrinkage is the loss of inventory so that's kind of true we lost something you know something it might have spoiled or something like that but we lost him and we didn't sell it in any case we so we lost it somehow we got to write it off in some way be so I'm going to I'm going to say that's true and I'm going to cross it out be says inventory shrinkage can be found by comparing a physical count with the amount on record and that isn't indeed the case of how we find the inventory shrinkage we're going to look at you know what we think we have in terms of our bookkeeping calculating what we are doing especially on a perpetual inventory system and compare that to a physical count the difference then if it's less than which it often is is due to something happening theft spoilage something so we're going to say that's that's looks correct so I'm going to cross that out see inventory shrinkage is is recognized by debiting the miscellaneous expense so that I mean if we don't know how to record that we might think I don't know because we're going to obviously have to decrease inventory and inventory is a debit balance we're going to decrease it with a credit and then we're going to debit something and I don't know miscellaneous expense possibly where do we want to put it don't know so I'm going to leave that for now the we're going to say inventory shrinkage is recognized by debiting cost of goods sold and we have the same kind of issue there well we know inventory kind of went down so we're probably have to credit inventory to decrease it we're going to debit something but cost of goods sold you might think well you know that relates to a selling inventory to help generate revenue and we didn't really sell it here it kind of got lost or something or stolen or or you know it's spoiled so I'm going to leave that for now he says inventory shrinkage can be caused by theft or deterioration and I believe that is correct it could deteriorate or be thefted or spoil or something like that and so I'm going to say that sounds correct so I'm not going to say it sounds so we're going to left with C and D reading the question one more time we have which is not true of inventory shrinkage C inventory shrinkage is recorded by debiting miscellaneous expense or D inventory shrinkage is recognized by debiting cost of goods sold so we're just basically down to what type of journal entry do we have we know we're going to credit inventory to decrease it where's the debit going to go now it could we could say miscellaneous or cost of goods sold now miscellaneous is where we put something that's small and we and we don't know where else to go so that seems like kind of reasonable that you know if it's this doesn't something not something that's going to happen normally so we might think that and the cost of goods sold is usually what we put when we make the sale so they both seem kind of you know if you didn't have any idea they both seem kind of reasonable but the cost of goods sold is actually what we're going to use here and whenever you think of inventory the the related expense account the inventory the asset account the related expense account is always cost of goods sold so that's going to be our first kind of go to area the reasoning that we're going to put it in the cost of goods sold even though it's not a sale is is because the same reason that we would put it into a miscellaneous is it's small and if it is small then we're just going to say it's immaterial to decision-making and therefore we're going to put it to the normal account that's related to inventory to the cost of goods sold account in this case.