ACCT 206 Video Lecture & Assessment LO 4-4, 6, 7

Sales on account amounted to $80,000. Sales returns were $2,000 and sales discounts were $1,000. Cost of goods sold amounted to $45,000. Based on this information the amount of gross margin was

$32,000 (Net sales = $80,000 Sales revenue − $2,000 Sales returns − $1,000 Sales discounts = $77,000. Gross Margin = $77,000 Net sales − $45,000 Cost of goods sold = $32,000.)

Escrow Company's multistep income statement shows cost of goods sold of $60,000, a gross margin of $42,000, operating income of $12,000 and a $20,000 loss on the sale of land. Based on this information, the net income or (net loss) amounted to

($8000) (On a multistep income statement net income would be determined by subtracting the loss on the sale of land from the operating income. In this case, since the amount of the loss on the sale of the land is greater than the operating income, the company would experience a net loss rather than net income. Specifically, the net loss is $8,000 [$12,000 − $20,000 = ($8,000)].)

Walter Company's multistep income statement shows cost of goods sold of $60,000, a gross margin of $42,000, operating income of $12,000 and a $20,000 loss on the sale of land. Based on this information the sales revenue amounted to

$102,000 (The first step in a multistep income statement is to determine gross margin which is calculated as revenue minus cost of goods sold. Algebraically, if revenue − cost of goods sold = gross margin; then cost of goods sold + gross margin = revenue. In this case revenue is $102,000 ($60,000 cost of goods sold + $42,000 gross margin). Operating income and losses are shown after the computation of gross margin and therefore, are not relevant to the determination of revenue in this problem.)

During year 2, Omark Company sold merchandise costing $120,000 for $160,000. Customers returned 10% of the merchandise and a 2% cash discount was provided on $90,000 of the sales. Based on this information the amount of net sales is

$142,200 (The amount of net sales is $142,200 [$160,000 gross sales - ($160,000 gross sales x 10% sales returns) - ($90,000 x 2% cash discount)].)

Grayson Company sold merchandise on account for $5,000 under terms 2/10, n/30. The purchaser paid for the merchandise within the discount period. Which of the following journal entries would be necessary to recognize the sales discount on Grayson's books?

Sales Revenue- Debit 100 Accounts Receivable- Credit 100 (Since Grayson granted the discount, the amount of the previously recorded sale must be decreased. Likewise, the amount of the account receivable Grayson expects to collect must be decreased. Debit entries decrease revenue accounts and credit entries decrease asset accounts. In this case, the sales revenue account is debited and accounts receivable is credited.)

AmRon Company sold land that had cost $25,000 for $26,500. Based on this information, the company's year-end financial statements would show

a cash inflow from investing activities of $26,500 on the statement of cash flows. (The sale resulted in a $1,500 gain ($26,500 sales price - $25,000 cost). Even so, the amount of the cash inflow was $26,500 not $1,500. All of the inflow resulted from the sale of a long-term asset and is therefore an investing activity.)

Zack's, Inc. sold land that cost $85,000 for $70,000 cash. As a result of this event

total assets decreased (As a result of the sale one asset account (cash) increased by $70,000 and another asset account (land) decreased by $85,000. Therefore, total assets decreased by $15,000. The $15,000 decrease in assets is a loss. The loss would cause net income and ultimately equity (retained earnings) to decrease. Liabilities would not have been affected.)

Beachwood Clothing Company operates a chain of high end men's clothing stores. Beachwood owned land that was originally purchased as a store location. However, after abandoning the plan to build a new store, the land that had cost $5,000 was sold for $6,000 cash. Which of the following journal entries would be required to record the sale of the land?

Cash- Debit $6,000 Land- Credit $5,000 Gain from Sale of Land- Credit $1,000 (When Beachwood sold land with a cost of $5,000 for $6,000, the Company received a $1,000 increase in assets. Specifically, one asset account (cash) increased by $6,000 and another asset account (land) decreased by $5,000. The $1,000 benefit (increase in assets) is shown on the income statement which increases net income and ultimately stockholders' equity. Debits increase asset accounts. Credits decrease asset accounts and increase gain accounts. In this case, the cash (asset) account is debited, the land (asset) account is credited, and the gain on sale of land is credited.)

Which of the following financial statements will be affected by a sales return? Assume the original sale and the sales return were cash transactions.

all of these statements would be affected by the sales return (Recognizing a customer return of a cash sales transaction is a reversal of the original transaction. It causes cash and sales revenue to decrease thereby affecting the income statement, balance sheet and statement of cash flows. It also increases inventory and decreases cost of goods sold. This affects the income statement and the balance sheet. In summary, all three statements are affected.)

Taha Company purchased $8,000 of inventory under terms FOB destination. Freight cost amounted to $200. The cost of inventory and freight were paid with cash. Which of the following shows how the recognition of this purchase, including freight costs if applicable, will affect Taha's financial statements?

assets: (8000) lib: 8000 eq: NA rev:NA exp: NA net: NA cF: (8000) OA (Since the terms are FOB destination the seller owns the goods until they reach their destination. Therefore, the seller must pay the cost of delivering the goods to Taha. Since Taha did not have to pay the freight cost, the cost of the inventory is $8,000. The purchase is an asset exchange transaction. One asset account (cash) decreases and another asset account (inventory) increases. The income statement is not affected at the time inventory is purchased. Since the cash was paid to purchase a short-term asset used in the operations of the company, the cash outflow is an operating activity.)

Taha Company purchased $8,000 of inventory under terms FOB shipping point. Freight cost amounted to $200. The cost of inventory and freight were paid with cash. Which of the following shows how the recognition of this purchase, including freight costs if applicable, will affect Taha's financial statements?

assets: (8200) lib: 8200 eq: NA rev:NA exp: NA net: NA cF: (8200) OA (Since the terms are FOB shipping point, Taha (the buyer) takes ownership of the goods at the point where the goods are shipped. Since the buyer owns the goods before they are transported, the buyer is responsible for paying the cost of transporting the goods. In this case, Taha would classify the freight cost as transportation-in or freight-in. Since Taha had to pay the freight cost to obtain the inventory, the transportation-in cost is part of the cost of the inventory and is added to the inventory account. The cash purchase of inventory including freight cost is an asset exchange transaction. One asset account (cash) decreases and another asset account (inventory) increases. The income statement is affected when inventory is sold not when inventory is purchased. As a result, there is no impact on the income statement. Since the cash was paid to purchase a short-term asset used in the operations of the company, the cash outflow is an operating activity.)

Contours, Inc. sold merchandise that cost $6,000 to a customer on account for $9,000 under terms 2/10, n/30. Customers returned merchandise that had been sold for $1,000. This merchandise had originally cost Contours $700. The remaining receivables were collected after the discount period had expired. Which of the following shows how recognizing the collection of the receivables will affect a company's financial statements?

cash: 8000 ar: (8000) inv: NA liab: NA equit: NA N. Sales: NA Exp: NA net inc: NA CF: 8000 OA (The amount of accounts receivable after the sales return is $8,000 ($9,000 - $1,000). Since the collection occurs after the discount period has expired, there is no sales discount granted to the customers. The Company will collect the full $8,000 balance of the receivable. The collection is an asset exchange transaction. One asset account (cash) increases and another asset account (accounts receivable) decreases. There is no impact on the income statement because the sales revenue was recognized previously when the sales were made to the customers. The $8,000 cash collection from customers is an operating activity.)

Contours, Inc. sold merchandise that cost $6,000 to a customer on account for $9,000 under terms 2/10, n/30. Customers returned merchandise that had been sold for $1,000. This merchandise had originally cost Contours $700. The remaining receivables were collected within the discount period. Which of the following shows how recognizing the collection of the receivables will affect a company's financial statements?

cash: NA 7840 ar: (160) (7840) inv: NA NA liab: NA NA equit: (160) NA N. Sales: (160) NA Exp: NA NA net inc: (160) NA CF: NA 7840 OA (The amount of accounts receivable after the sales return is $8,000 ($9,000 - $1,000). The sales discount is $160 ($8,000 x .02). The discount will decrease the amount of accounts receivable and the amount of net sales. The decrease in net sales decreases net income and equity (retained earnings). The statement of cash flows is not affected because the Company did not collect or pay cash. After the discount the remaining balance in accounts receivable is $7,840 ($8,000 receivable balance - $ 160 discount). The collection of the receivable balance is an asset exchange transaction. One asset account (cash) increases and another asset account (accounts receivable) decreases. There is no impact on the income statement because the sales revenue was recognized previously when the sales were made to the customers. The $7,840 cash collection from customers is an operating activity.)

Contours, Inc. sold merchandise that cost $6,000 to a customer on account for $9,000 under terms 2/10, n/30. Customers returned merchandise that had been sold for $1,000. This merchandise had originally cost Contours $700. Which of the following shows how the sales return will affect the company's financial statements?

cash: NA NA ar: (1000) NA inv: NA 700 liab: NA NA equit: (1000) 700 N. Sales: (1000) NA Exp: NA (700) net inc: (1000) 700 CF: NA NA (When a customer returns sales items, Contours must decrease its accounts receivable because it no longer has the right to collect this cash from the customer. Likewise, the amount of net sales decreases due to the sales return. The decrease in net sales reduces the amount of net income and in turn equity (retained earnings). The cash flow statement is not affected because the company did not collect or pay cash. Contours would get the goods back thereby increasing its inventory account and reducing its cost of goods sold. The reduction in cost of goods sold would increase net income and equity (retained earnings). The cash flow statement is not affected because contours did not collect or spend cash.)

Contours, Inc. sold merchandise that cost $6,000 to a customer on account for $9,000 under terms 2/10, n/30. Which of the following shows how this event will affect a company's financial statements?

cash: NA NA ar: 9000 NA inv: NA (6000) liab: NA NA equit: 9000 (6000) N. Sales: 9000 NA Exp: NA 6000 net inc: 9000 (6000) CF: NA NA (Sales revenue is recorded at $9,000 thereby increasing net sales. The discount is not recognized until the receivable is collected. Sales revenue acts to increase net income which in turn increases equity (retained earnings). There is no effect on cash flow because the sale was made on account. The expense side of the event decreases assets (inventory) and increases cost of goods sold which decreases net income and ultimately equity (retained earnings). Again, cash flow is not affected because it is recognized when the Company paid for the inventory not at the time it is sold.)

Recognizing a sales discount will cause the amount of net sales to increase. This statement is

false (A sales discount effectively reduces the amount of the previously recorded sales event. In other words, it is viewed as if the original transaction overstated the actual sales. Actual sales revenue is the amount originally recorded (the gross amount) minus the amount that sales were discounted. Indeed, recognizing the sales discount reverses a portion of the original sales event. Specifically, accounts receivable and sales decrease by the amount of the discount. For example, assume a company recognizes a $5,000 sale on account under terms 1/10/n30. Recording the sale would increase accounts receivable and sales revenue by $5,000. If the discount is granted, accounts receivable and sales revenue will decrease by $50 ($5,000 x .01). So, recognizing a sales discount will cause the amount of net sales to decrease not increase.)

McDonald's will recognize a gain if it generates an amount of revenue that is higher than its operating expenses. This statement is

false (Gains are benefits that are generated from nonoperating activities. For example, McDonald's operates a fast food business. Its operation consist primarily of providing food to its customers. Even so, McDonald's engages in activities that are not related to selling hamburgers, french fries, etc. For example, while the company is not in the real estate business it does buy and sell land and buildings used to house its restaurants. If McDonald's were to sell a plot of land that cost $120,000 for $150,000, the company would experience a $30,000 benefit ($150,000 − $120,000). This $30,000 benefit resulting from a nonoperating activity is called a gain. Sacrifices occurring as a result of nonoperating activities are called losses. For example, if McDonald's had to sell the land that cost $120,000 for $100,000, the Company would experience a $20,000 ($100,000 − $120,000) loss. In summary, revenues and expenses result from normal operations, while gains and losses result from nonoperating events)

The amount of net income shown on a multi-step income statement will differ from the amount of net income shown on a single-step income statement.

false (The amount of net income is the same regardless of whether it is presented in a single-step or a multistep income statement. The difference between a single-step and a multistep income statement is in how the information is organized. How the information is organized does not affect the actual results of running the company.)

Smith Company sold inventory that cost $5,000 for $9,000 cash. Freight cost was $600 paid in cash. The freight terms were FOB shipping point. Based on this information,

gross margin would be $4,000. (Since the freight terms were FOB shipping point, the buyer takes ownership of the goods at the point where the goods are shipped. Since the buyer owns the goods before they are transported, the buyer is responsible for paying the transportation cost. Since Smith is not responsible for the shipping cost there are no operating expenses. The gross margin would be $4,000 (Revenue $9,000 - $5,000 cost of goods sold). The net income would also be $4,000 ($4,000 gross margin - zero operating expense).)

The amount of net sales is determined by which of the following formulas?

gross sales - sales returns and allowances - sales discounts

The following income statements were drawn from the annual report of The Western Sales Company. Year 2 Year 1 Sales 40,000 40,000 Cost of Goods Sold (25,000 ) (25,000 ) Gross Margin 15,000 15,000 Operating Expenses (7,000 ) (9,000 ) Operating Income 8,000 6,000 Gain on the sale of land 0 5,000 Net Income 8,000 11,000 If the trends continue, investors can expect the company's net income for Year 3 to

increase (By definition gains and losses are not expected to recur on a regular basis. Therefore, future expectations are established on the basis of operating (recurring) income rather than net income which includes the effects of gains and losses. Since the operating income increased from Year 1 to Year 2, the pattern of increasing operating income is expected to continue. Since operating income is expected to increase and no gains or losses are expected, net income is expected to increase.)

Which of the following events experienced by a department store would be presented in the operating section of a multistep income statement?

inventory sold for less than its cost (Dividends do not appear on income statements. The sale of equipment or land are activities that are not part of the normal operations of a department store. In contrast, selling inventory, regardless of whether it is sold for more or less than its cost, is part of normal operating activities of a department store. While interest is classified as an operating activity on the statement of cash flows, generally accepted accounting principles classifies it as a nonoperating activity on the income statement. Remember, accounting principles are established by people and people are sometimes inconsistent.)

Smith Company sold inventory that cost $5,000 for $9,000 cash. Freight cost was $600 paid in cash. The freight terms were FOB destination. Based on this information,

net income would $3,400 (Since the freight terms were FOB destination Smith owns the goods until they reach the destination point. Since Smith owns the goods until they reach their destination, Smith is responsible for paying the cost of transporting the goods to their destination. In this case, the freight cost would be classified as transportation-out which is an operating expense. The gross margin would be $4,000 (Revenue $9,000 - $5,000 cost of goods sold). The net income would be $3,400 ($4,000 gross margin - $600 transportation-out expense).)

Smith Company purchased inventory for $5,000 on account. Freight cost was $600 paid in cash. The freight terms were FOB destination. The inventory was sold to customers for $8,000. Freight cost was $600 paid in cash. The freight terms were FOB shipping point. Based on this information,

net income would be $3,000. (Smith would not be responsible for the shipping cost for the purchase or the sale. Freight terms for the purchase were FOB destination meaning the seller (not Smith) paid. The freight terms for the sale were FOB Shipping Point meaning the buyer (not Smith) paid. Therefore, net income would be $3,000 ($8,000 sales - $5,000 cost of goods sold).)