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Merchandising Company vs. Manufacturing Company quiz #1 Flashcards

Merchandising Company vs. Manufacturing Company quiz #1
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  • What is the primary difference between a merchandising company and a manufacturing company in terms of inventory accounts?
    A merchandising company maintains a single inventory account for finished goods, while a manufacturing company maintains three inventory accounts: Raw Materials, Work in Process, and Finished Goods.
  • How does a merchandising company record the purchase of inventory on account using a perpetual inventory system?
    The company debits the Inventory account and credits Accounts Payable, increasing both inventory and liabilities.
  • What are the three types of inventory accounts used by manufacturing companies?
    Manufacturing companies use Raw Materials, Work in Process, and Finished Goods inventory accounts.
  • What does the Raw Materials inventory account represent in a manufacturing company?
    It represents the initial inputs purchased for production, such as materials that will be used to create finished goods.
  • What is included in the Work in Process (WIP) inventory account?
    WIP includes goods that are currently being manufactured, incorporating costs like raw materials, labor, and overhead.
  • When are goods transferred from Work in Process to Finished Goods inventory in a manufacturing company?
    Goods are transferred from Work in Process to Finished Goods inventory once the manufacturing process is complete.
  • How is the sale of finished goods recorded in a manufacturing company?
    When finished goods are sold, their cost is recorded as Cost of Goods Sold (COGS) on the income statement.
  • What is the main function of a merchandising company?
    A merchandising company purchases finished goods and resells them to customers.
  • How does the inventory flow in a manufacturing company from purchase to sale?
    Inventory flows from Raw Materials to Work in Process, then to Finished Goods, and finally to Cost of Goods Sold when sold.
  • What is the typical label for the inventory account in a merchandising company?
    The inventory account is typically labeled as 'Inventory' or 'Merchandise Inventory.'
  • What happens to the cost of finished goods when they are sold by a manufacturing company?
    The cost is transferred from Finished Goods inventory to Cost of Goods Sold as an expense on the income statement.
  • Why do manufacturing companies need multiple inventory accounts?
    They need multiple accounts to track the different stages of production: raw materials, goods in process, and completed goods.
  • In a perpetual inventory system, what is the effect of purchasing inventory on account for a merchandising company?
    Inventory increases and Accounts Payable increases, reflecting the purchase and the obligation to pay.
  • What is the final destination of inventory costs in both merchandising and manufacturing companies after a sale?
    Inventory costs are ultimately recorded as Cost of Goods Sold on the income statement after a sale.