1. What type of assets are included in the inventory?

Merchandise available for sale.

2. What are the fundamental differences in the income statement of a service company and a
commercial company?

In the trading company there is no income from services account, so the Sales account is used to record
merchandise sales transactions. In service companies there is no cost of sales account, since no tangible
product is sold, nor is there a purchase account, since this type of business does not purchase merchandise
because its objective is to provide service; the inventory account is not part of the company's service income
accounts.

3. List the five main differences between the accounting records of service and commercial
enterprises.

Income, 2. Cost of sales, 3.Purchases, 4.Expenses, 5.

4. Explain the two inventory recording systems that exist in commercial enterprises.

When the perpetual system is used, a current balance of inventories and cost of sales is maintained and can
be known at any time.

The periodic system does not maintain an updated balance, therefore, it is necessary to make a physical
count to determine the existence of goods at the end of the period.

5. Describe two ways in which perpetual and periodic systems differ in the preservation of
inventory records.

Perpetual system: maintains an updated balance of the quantity of goods in stock and the cost of goods
sold.

Periodic system: Does not maintain an updated balance of goods in stock.

6. Mention what is the formula to obtain the cost of goods sold.

Beginning inventory + Gross purchases + Freight on purchases - Discount on purchases - Returns and rebates
on purchases = Cost of goods on hand - Ending inventory = Cost of goods sold

7. What differences exist in the cost of sales section of the income statement when using the
periodic and perpetual inventory systems?

A trading company purchases goods for the purpose of resale. The cost of the purchased goods is taken to
an account called Purchases if it is the periodic system. If the perpetual system is used, the Purchases
account is replaced by the Inventory account. At the time of sale, purchases will become an expense even

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though they will be denominated and classified as Cost of Sales account. This account will appear in the
income statement and is closed at the end of the period against the Profit and Loss account.

8. Why does the Cost of Sales account not exist in a service company?

Because the service company does not sell any tangible product, and the service provided is not directly
identified with any specific cost.

9. Summarize the types of purchase discounts offered by companies.

2/10, n/30. The buyer can deduct 2% of the amount due if he pays within the first 10 days following the date
of the invoice. To take advantage of the discount it is necessary to pay the total amount of the invoice. If the
customer does not pay within 10 days, the net (n), i.e. the full amount, is due within 11 to 30 days after the
invoice date.

2/10, 1/15, n/30. The buyer may deduct 2% of the amount due if paying within 10 days of the invoice date;
1% if paying within 11 to 15 days, or pay the net amount within 16 to 30 days of the invoice date.

2/10 FDM, n/60. If the buyer pays within the first 10 days of the month following the invoice date, he gets a
2% discount. If you have not paid by the 10th day of the month following the month of sale, you must pay
the net amount from the 11th day until within 60 days from the date of the invoice.

10. What are the additional expenses that should be part of the product cost?

Freight, insurance and import taxes.

11. What negative effect can sales returns have on a company's sales?

Returns are costly to a company because of the extraordinary expense of registering, packing, handling and
shipping the goods. When the periodic system is used, no record is made of the entry into the warehouse for
a return, but in the perpetual recording system it is necessary to record the operation.

12. What are the commercial discounts offered by some companies?

Manufacturers or distributors offer their customers a reduction on list prices of merchandise to increase
customer purchases. The amount of the trade discount varies according to the quantity of merchandise
purchased. It is normal for larger orders to receive a larger discount than smaller orders.

13. What is the difference between the registration of a commercial discount and a cash discount?

A trade discount is given to increase customer purchases, while a cash discount is given to encourage
customers to pay their debts promptly.

14. How is the classification of income and expenses to be made in the income statement of
commercial companies?

Ordinary income.
2. Cost of sales.
3. Overhead costs.
4. Non-ordinary items.

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15. What types of expenses are related to administrative expenses?

Expenses for clerical salaries, administrative salaries, rents, utilities, depreciation, insurance and other
expenses related to the office and administrative function.

16. What is the nature of the Sales Returns account?

Revenues

17. Explain why the accounts for returns, rebates and discounts on sales are managed and the
amounts are not deducted directly to the Sales account.

18. Summarize the steps that must be followed to perform the accounting closing in commercial
enterprises.

1. Registration of transactions.
2. Adjustments.
3. Financial statements.
4. Closing.

Answer True or False; if false, explain why:

1. Normal accounting has three systems of record keeping related to inventory: periodic, average
and perpetual.

False, there is only the periodic and perpetual.

2. In the perpetual inventory system, the Sales, Banks and Operating Expenses accounts are used.

True.

3. In the perpetual inventory system, Purchases, Freight on purchases and Returns on purchases
accounts are not used.

True.

4. In the perpetual system, the account Returns on purchases is related to inventory.

False, because in the perpetual system the purchase returns account is not used.

5. The periodic inventory system has updated the balance of goods in stock.

False, this system does not maintain an updated balance, so it is necessary to make a physical count to
determine the existence of goods at the end of the period.

6. The beginning inventory of a period is the ending inventory of the previous period.

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True

7. The Sales discounts account is an expense clearing account.

False, it is an income equalization account.

8. As the Sales Returns account increases, the cost of goods sold in the income statement
increases.

False, the cost of sales account decreases.

9. As the Sales Discounts account increases, net sales decrease.

True

10. Import taxes are part of the cost of the product.

True

Select the correct answer:

1. It is a cost of the shipment paid by the seller or buyer, as agreed:

Freight.

2. It occurs when a company reduces its list prices:

Trade discount.

3. The name of the shipping agreements that exist in an accounting is:

LAB point of embarkation and LAB point of destination.

4. This account records the additional costs of goods purchased when a perpetual inventory
system is used:

Freight over purchases.

5. In this shipping agreement the seller accepts that the buyer pays the shipping costs:

LAB embarkation point.

6. It is an expense incurred to cover risks during the transportation of goods:

Insurance.

7. This cost is incurred when the product comes from another country:

Import tax.

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8. The Merchandise Inventory account is classified in:

Current assets.

9. Obtained before deducting all other expenses for the period to arrive at net income:

Gross profit.

10. These are accounts used to determine the cost of goods sold:

Inventories, purchases and discounts on purchases.

11. The sum of these items is known as net purchases:

Purchases, Freight on purchases, Discounts, returns and bonuses on purchases.

12. This accounting account does not appear on the balance sheet of service companies and is one
of the most important accounts for companies engaged in the purchase and sale of goods:

Purchases.

13. This account is used to record purchases of items to be sold as part of the company's normal
operations:

Purchases.

14. These accounts are classified as offsetting accounts and appear as a reduction of the cost of
purchased merchandise in the income statement:

Returns on purchases.

15. To encourage customers to pay their outstanding accounts promptly, companies use:

Discounts on purchases.

16. The terms of shipment or freight may be:

Free on board (LAB) embarkation point.

Free on board (LAB) destination point.

17. Sales returns may arise for reasons such as:

The goods are damaged, the customer does not want the product, the customer does not need the product,
the customer bought more than necessary.

18. Expenses that are directly related to the sales function, such as advertising, freight on sales and
others are called:

Cost of sales.

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19. This item represents total interest income or expense, foreign exchange gains or losses and the
monetary position result or monetary effect for the period:

None of the above.

20. These are items that do not meet the characteristics of being normal or frequent, such as
losses due to natural phenomena:

None of the above.

6. Answer and calculate as indicated. If a sale was made on May 4 for $700,000 with a trade
discount of 15%, payment terms of 2/10, 2/30 and freight LAB shipping point:

a) The value of the sale is $ 595 000 .00

b) The last day to grant the discount for prompt payment is: September 3.

c) Who must pay the freight? The seller or the buyer: The buyer.

7. A purchase was made on April 25 for $800,000, a 20% volume discount was obtained, payment
terms of 3/15, 2/30, n/45 and freight LAB point of destination:

a) The amount of the purchase is $ 640 000 .00

b) The deadlines to take advantage of the early payment discounts are as follows: To take
advantage of the 3% discount is until May 10 and for the 2% discount is until May 25.

c) The due date of the payment term is:

June 4.

d) Who must pay the freight? The seller.

8. At Boutique Exclusiva, S.A. the following occurred:

On August 6, marked merchandise was purchased at list price of $1,150,000, on which a 20%
discount was obtained, payment terms 4/7, 1/30, n/60 and freight LAB point of shipment. The
freight cost is $2 300.

Eight days later, some of the purchased goods were returned because they had manufacturing
defects; the returned merchandise had a list price of $250,000.

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Answer as indicated:

a) If you wish to take advantage of the maximum discount for prompt payment:

When is the last day to pay? August 13.

How much would have to be paid? 883,200.00 (because the return has not yet occurred).

b) Who must pay the freight? The buyer.

c) How much is the return worth? 200,000 .00 (because he had been given a 20% discount).

d) If the payment were to be made on September 5, how much would the payment amount be?
676 368 .00 (since goods have been returned and 1% has been deducted).

e) When and how much would you have to pay if you wait until the last day of the payment
period? On October 5, you would have to pay $ 683,200 .00

9. Proveedora del Constructor, S.A. sold $900,000 worth of goods to a construction company and
granted a 10% trade discount. Of the total amount purchased, the builder paid 40% cash and was
given payment terms of 3/15, n/30 for the remainder. The freight is agreed LAB point of
destination.

The builder returned a portion of what was purchased due to an error in the order, the returned
item has a list price of $130,000.

a) How much was sold on credit and how much cash? 486,000.00 on credit and $ 324,000.00 cash.

b) Who must pay the freight? The seller.

c) What is the value of the return? $ 117 000.00

d) How much does the construction company owe? $ 369 000 .00

e) If the builder takes advantage of the cash discount, how much would you pay? $ 357 930 .00

10. Identify temporary and permanent accounts. Note a T for temporary and a P for permanent.
Remember that temporary accounts are those that must be closed at the end of the accounting
period:

P Inventory P Customer advances

T Cost of sales T Shopping
P Suppliers T Freight over sales
T Discount on purchases P Retained earnings
T Sales T Sales discount
P Customers P Capital stock

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 T Freight on purchases T Returns on purchases
P Accumulated depreciation of furniture T Salary expense
T Dividends T Equipment depreciation expense

Reference:

Financial Accounting - Fifth Edition

Gerardo Guajardo Cantú
McGraw Hill Publishers

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