Accounting - Chapter 4: Accounting for Merchandising Operations

On May 14, X-Mart purchased $500 of merchandise with terms of 3/15,n/40. If payment is made on May 28, calculate the purchase discount that may be taken by X-Mart.

$15 0.03 * 500 = 15

On June 5, X-Mart purchased $400 of merchandise with terms of 2/10,n/30. If payment is made on June 11, calculate the purchase discount that may be taken by X-Mart.

$8 0.02 * 400 = 8

Recall the formula for calculating a company's acid-test ratio.

(Cash plus Short-term investments plus Current receivables) divided by Current liabilities

The components of a merchandiser's multi-step income statement are shown below. In which order would they appear on the statement?

1. Net sales 2. Cost of goods sold 3. Gross profits 4. Expenses 5. Net income

Given the following information, calculate the acid-test ratio for XYZ Company: Year 2013 Cash $ 8,000 Short-term investments $10,000 Current receivables $12,000 Total current assets $40,000 Total current liabilities $22,000 Total liabilities $28,000

1.36 [Cash + Short term investments + Current receivables] / Liabilities

Review the following credit terms and identify the one that states that the buyer will receive a 3% discount if the payment is made within 15 days. Otherwise, full payment is expected within 45 days of the invoice date.

3/15,n/45

What is a purchase return?

A purchase return refers to merchandise a buyer acquires, but then returns to the seller.

Identify the statements below which summarize what cash discounts are. (Check all that apply.)

A reduced payment applies to the discount period. Cash discounts are described in the credit terms. A seller views a cash discount as a sales discount. A buyer views a cash discount as a purchase discount. Sellers can grant a cash discount to encourage buyers to pay earlier.

What is a sales return?

A sales return refers to merchandise that customers return to the seller after a sale.

Select the statements below that correctly describe the flow of costs in a merchandiser's accounting cycle. (Check all that apply.)

Beginning inventory + net purchases = Merchandise available for sale. Ending inventory + Cost of goods sold = Total merchandise available for sale. Merchandise that is sold becomes an expense reported on the income statement. Merchandise that is purchased becomes an asset reported on the balance sheet.

The discount period is the time (before/between) the invoice date and a specified date on which the payment amount owed can be (increased/reduced) because of early payment.

Between Reduced

A purchase return refers to merchandise a (buyer/seller/creditor) purchased, but then returns to the (buyer/seller/creditor) for a refund of the purchase price or reduction in the amount owed.

Buyer Seller

A cash discount can be summarized as a discount given to (buyers/creditors/sellers) to encourage them to pay (earlier/later/less/more).

Buyers Earlier

Describe good cash management practices involving inventory purchases. (Check all that apply.)

Buyers should take advantage of early payment discounts. Invoices should be paid on the last day of the discount period.

Show your understanding of a merchandiser by completing the following statement. Merchandisers earn net income by (buying/manufacturing) and (selling/purchasing) merchandise.

Buying Selling

A merchandiser has four closing journal entries at the end of an accounting cycle. Select the correct entries below. (Check all that apply.)

Close the income summary account. Close expense accounts. Close the dividends account. Close revenue accounts.

Cost of goods sold is characterized by which of the following statements? (Check all that apply.)

Cost of goods sold includes the expenses of buying and preparing an item for sale. Cost of goods sold is also called cost of sales. Cost of goods sold is used to figure gross profit. Cost of goods sold is an expense reported on the income statement.

Explain how to determine gross profit on an income statement by selecting the correct statement below.

Cost of goods sold is subtracted from net sales.

Which of the statements below are correct regarding cost of goods sold?

Cost of goods sold is the expense of buying and preparing merchandise.

Dogs R US uses the perpetual inventory system to account for its merchandise. A customer returned merchandise. Assuming that the purchase was originally bought on credit for $400 with a cost to Dogs R US of $100, demonstrate required journal entry of Dogs R US to record the return by selecting all of the correct actions below. (Check all that apply.)

Credit Cost of Goods Sold $100. Debit Sales Returns and Allowances $400. Debit Merchandise Inventory $100. Credit Accounts Receivable $400.

X-Mart uses the perpetual inventory system to account for its merchandise. On May 1, it sold $1,400 of merchandise on credit. The original cost of the merchandise to X-Mart was $500. Demonstrate the required journal entry to record the cost of the sale by selecting all of the correct actions below. (Check all that apply.)

Credit Merchandise Inventory $500. Debit Cost of Goods Sold $500.

A sales return refers to merchandise that (customers/sellers/creditors) return to the (customer/seller/creditor) after a sale for a refund of the purchase price or reduction in the amount owed.

Customers Seller

LOL Music Store uses the perpetual inventory system to account for its merchandise. On November 17, it purchased $1,000 of merchandise with terms of 2/5,n/60. If payment is made on November 21, demonstrate the required journal entry to record the payment by selecting all of the correct actions below. (Check all that apply.)

Debit Accounts Payable $1,000. Credit Cash $980. Credit Merchandise Inventory $20.

On Dec. 7, Toys R Fun purchased $1,000 of merchandise with terms of 2/10,n/30. If payment is made on December 16, demonstrate the required journal entry for Toys R Fun to record the payment under the perpetual inventory system.

Debit Accounts Payable $1,000; credit Cash $980; credit Merchandise Inventory $20.

On June 5, Jo's Market sold $1,000 of goods on credit with terms of 2/10,n/30. How will Jo's Market record the customer's payment on June 8?

Debit Cash $980; debit Sales Discounts $20; and credit Accounts Receivable $1,000

X-Mart uses the perpetual inventory system to account for its merchandise. On May 1, it sold $1,400 of merchandise for cash. The original cost of the merchandise to X-Mart was $500. Demonstrate the required journal entry to record the cost of the sale by selecting all of the correct actions below. (Check all that apply.)

Debit Cost of Goods Sold $500. Credit Merchandise Inventory $500.

X-Mart purchased $300 of merchandise and paid immediately. Demonstrate the journal entry to record this transaction, assuming the perpetual inventory system is used.

Debit Merchandise Inventory $300; credit Cash $300.

Sally Beauty Warehouse uses the perpetual inventory system to account for its merchandise. On Nov 2, it sold $700 of merchandise on credit with terms of 2/15,n/30. Demonstrate the required journal entry to record the receipt of payment from the customer on Nov 13, by selecting all of the correct actions below. (Check all that apply.)

Debit Sales Discounts $14. Debit Cash $686. Credit Accounts Receivable $700.

On Jan 5, a customer returned merchandise that had been purchased earlier on credit. The original sale was for $500, and the cost to the seller was $150. Demonstrate the required journal entry to record the return on the books of the seller, assuming the goods can be sold to another customer.

Debit Sales Returns and Allowances $500; debit Merchandise Inventory $150; credit Accounts Receivable $500; and credit Cost of Goods Sold $150.

Sticky Company's merchandise inventory balance at year end is $15,050, but a physical count reveals that only $15,000 of inventory exists. The adjusting entry to record the shrinkage includes: (Select all that apply).

Debit to Cost of Goods Sold for $50 Credit to Merchandise Inventory for $50

Determine which statements below are correct regarding merchandise available for sale during a period. (Check all that apply.)

Ending inventory + Cost of goods sold = Merchandise available for sale Beginning inventory + Net purchases = Merchandise available for sale

Identify the statements below which are correct regarding a merchandiser's multi-step income statement.

Expenses are subtracted from gross profit in order to calculate net income. Cost of goods sold is subtracted from net sales in order to determine gross profit.

If the seller is responsible for the shipping costs of merchandise sold, the shipping terms will be specified as:

FOB destination

True or false: Merchandise inventory is generally converted to cash more quickly than accounts receivable.

False

A single-step income statement can be identified by which of the following formats?

It shows only one total for all expenses.

Toys R Fun purchased $4,000 of merchandise and paid immediately. To record this transaction, Toys R Fun's accountant would debit the (Merchandise Inventory/Accounts Payable/Cash) account and credit the (Cash/Merchandise Inventory/Accounts Payable) account.

Merchandise Inventory Cash

Which statement below correctly explains what merchandise inventory is?

Merchandise inventory is an asset reported on the balance sheet and contains the cost of products purchased for sale.

Which of the following equations correctly identify the cost flow of a merchandising company?

Net purchases plus beginning inventory equals merchandise available for sale

Sales is a(n) ______ account.

Revenue

Sales Discounts is a contra- (expense/revenue/asset) account and is increased with a (debit/credit).

Revenue Debit

Identify the statements below that are correct regarding the closing entries for a merchandiser using the perpetual inventory system. (Check all that apply.)

Sales Returns and Allowances is closed with the expense accounts. Cost of goods sold is closed with the expense accounts. Sales is closed as a revenue account. Sales Discounts is closed with the expense accounts. The Dividends account is closed to Retained Earnings

Identify the statement below that is the correct definition of "shrinkage".

Shrinkage is the term used to refer to the loss of inventory due to theft, breakage or deterioration.

Which of the statements below summarize why a seller would give a sales allowance? (Check all that apply.)

Sold merchandise was defective or unacceptable. The seller wants to keep a customer happy. In order to entice a customer to keep damaged or defective merchandise, the seller is willing to decrease the selling price.

The buyer and seller of merchandise must agree on who is responsible for paying freight terms. Show your understanding of freight terms by selecting all of the correct statements below. (Check all that apply.)

Terms FOB destination means that the seller is responsible for shipping costs. Terms FOB shipping point means the buyer accepts ownership when the goods depart the seller's place of business. Revenue for the sale will be recorded after the goods reach their destination, if the goods are shipped FOB destination. When the shipping costs are the responsibility of the buyer, then the Merchandise Inventory account is debited for the freight charges.

Which of the statements below summarizes what the acid-test ratio measures?

The acid-test ratio measures a merchandiser's ability to pay its current liabilities.

Review the following statements and select the one that best describes a discount period.

The discount period is the time period in which a discount may be taken by the buyer.

Explain what the credit terms of 2/10,n/30 mean. (Check all that apply.)

The full payment is due within a 30-day credit period. The buyer can deduct 2% of the invoice amount if payment is made within 10 days of the invoice date.

Given the following information, analyze XYZ Company's liquidity. (Check all that apply.) Year 2013 Total quick assets $30,000 Total current assets $40,000 Total current liabilities $22,000 Acid-test ratio 1.36 Current ratio 1.82 Industry acid-test ratio .70 Industry current ratio 1.65

They are more liquid than others in their industry. They have sufficient quick assets to pay off short-term debt if needed.

True or false: A single-step income statement shows only one subtotal for expenses.

True

A sales allowance can be described as:

a reduction in the selling price of defective or unacceptable merchandise sold to customers

Merchandise inventory can be described as: (Check all that apply.)

an account increased with a debit. an account appearing on a balance sheet of a merchandiser. an asset account. products that a company owns and intends to sell.

Complete the following statement. Merchandise inventory that is still available for sale is considered a(n) ________ (asset/expense/revenue) and is reported on the ____________ (balance sheet/income statement) and merchandise that is sold during the period is considered a(n) _______ (asset/expense/liability) and reported on the ____________ (balance sheet/income statement).

asset -> balance sheet -> expense -> income statement

The formula for the acid-test ratio is computed as (________ + cash equivalents + short-term investments + current receivables)/current liabilities.

cash

Sales Discounts is a ______ account.

contra-revenue

The Merchandise Inventory account on a classified balance sheet is reported in the:

current assets section

The formula for the acid-test ratio is computed as (cash + short-term investments + current receivables)/__________.

current liabilities

Jo's Market makes a credit sale for $1,000 with terms of 2/10,n/30. The cost of the merchandise is $400. The required journal entry to record the sale and cost of the sale is:

debit Accounts Receivable $1,000; credit Sales $1,000; debit Cost of Goods Sold $400; and credit Merchandise Inventory $400

Jan's Jams makes a credit sale for $300 with terms of 2/10,n/30. The cost of the merchandise is $200. The required journal entry to record the sale and the cost of the sale is:

debit Accounts Receivable $300; credit Sales $300; debit Cost of Goods Sold $200; and credit Merchandise Inventory $200

Sales is a(n) (expense/revenue/asset) account and is reported on the (income/balance) (statement/sheet).

revenue income statement

Gross profit is computed as net (blank) minus cost of goods sold.

sales OR revenue