Question

Sunrise Flowers sells flowers to a customer on credit for $130 on October 18, with a cost of sale to Sunrise of $50. What entry(s) to recognize this sale is (are) required if Sunrise Flowers uses a perpetual inventory system?

Unlike manufacturers and merchandisers, service companies do not incur operating expenses.

TRUE or FALSE and why

Answer 1

1. Under perpetual Inventory system, the sale of goods on account is recorded by debiting Accounts Receivable and crediting Sales with the amount of sales. Similarly, the cost of the goods sold is also recorded to effect the cost incurred for the goods sold and to reduce the cost of inventory sold from the inventory balance. For this, cost of goods sold is debited and inventory is credited with the cost of the goods sold.

Here, Sunrise Flowers' flower sales amount is $130 and cost of the flowers sold is $50. Therefore, the following journal entries are recorded to recognise the sale.

2. Unlike manufacturers and merchandisers, service companies do not incur operating expenses.
TRUE or FALSE and why?

The given statement is FALSE.

Reason: All types of companies incur operating expenses. Operating expenses are concerned with expenses incurred for the normal operations of the business. It includes, the costs associated with marketing, office administration, etc. Rent of the office building, insurance expenses, payroll expenses, etc. are common operating expenses for all types of companies. Operating expenses are not directly related with any product or service. But is related with the regular, day to day routine activities of the company. Such expenses are relevant for any type of companies. Therefore, it is a False statement, that service companies do not incur operating expenses.