Purchase Returns and Allowances Decrease the Net Amount of Cash

question 125

True/False

Purchase returns and allowances decrease the net amount of cash that will be paid for the inventory,and so they should reduce the cost of the inventory as recorded in the Inventory account.

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Definitions:

Inventory Turnover Ratio

A measure of how efficiently a company turns its inventory into sales by comparing cost of goods sold to average inventory for a period.

Inventories

Inventories are the goods and materials a business holds for the purpose of resale or production in the ordinary course of business.

Cost of Goods Sold

The total cost directly involved in manufacturing or acquiring the products sold by a company during a particular period.

Acid Test Ratio

A liquidity ratio; those assets that are most easily converted to cash are divided by current liabilities to indicate ability to pay off short-term debt. Also called quick ratio.