ACG 2021 Chapter 5

A company has the following accounts balances: Sales revenue $90,000; Sales Returns and Allowances $25,000; Sales Discounts $10,000; Cost of Goods Sold $20,000; and Net Income $7,000. How much is the gross profit rate? A. 20.0% B. 75.0% C. 63.6% D. 26.7% E. 46.7%

63.6% Solution: Net sales = Sales revenue - sales returns and allowances - sales discounts Net sales = 90,000 - 25,000 - 10,000 = 55,000 Gross profit = Net sales - cost of goods sold Gross profit = 55,000 - 20,000 = 35,000 Gross profit rate = Gross profit divided by net sales. Gross profit ratio = 35,000/55,000 = 63.63%

The operating cycle of a merchandising company has an extra asset account compared to a service company. What is that extra asset account? A. Operating Expense B. Revenue C. Inventory D. Accounts Receivable E. Income Summary

inventory

Which of the following will not be shown on the income statement for a merchandising company? A. Sales discounts B. Cost of goods sold C. Gross profit D. Revenue E. Retained earnings

retained earnings

If a company is using aggressive accounting techniques in order to accelerate income recognition then its quality of earnings ratio is A. equal to zero. B. significantly more than 100. C. significantly less than 1. D. significantly more than 1. E. below zero.

significantly less than 1.

Beginning inventory is $12,000; purchases are $34,000; sales revenue are $60,000; and cost of goods sold is $31,000. How much is ending inventory? A. $46,000 B. $15,000 C. $35,000 D. $14,000 E. $31,000

$15,000

Heflin Corporation has the following: Sales revenue, $430,000 Sales discounts, $10,000 Gross profit, $150,000 Operating expenses, $80,000 Other expenses, $30,000 How much is its cost of goods sold? A. $190,000 B. $270,000 C. $160,000 D. $280,000 E. $340,000

$270,000 Solution: Net sales = Sales - Sales returns and allowances - Sales discounts Net sales = $430,000 - 0 - 10,000 = $420,000 Cost of goods sold = Net sales- gross profit Cost of goods sold = $420,000 - 150,000 = $270,000

If beginning inventory is $80,000, cost of goods purchased is $400,000, sales revenue is $900,000 and ending inventory is $60,000, how much is cost of goods sold under a periodic system? A. $470,000 B. $420,000 C. $410,000 D. $390,000 E. $440,000

$420,000

Vetter Corporation reports the following: Sales revenue, $400,000; sales discounts, $20,000; operating expenses, $25,000; cost of goods sold, $310,000; income tax expense, $10,000. How much are gross profit and income from operations, respectively? A. $90,000 and $35,000 B. $70,000 and $45,000 C. $70,000 and $35,000 D. $90,000 and $45,000 E. $380,000 and $35,000

$70,000 & $45,000 Solution: Gross profit = Sales revenue - sales returns and allowances - cost of goods sold Gross profit =- $400,000 - 20,000 - 310,000 = $70,000 Income from operations = Gross profit - operating expenses Income from operations = $70,000 - 25,000 = $45,000

Arbor Corporation reports the following: Sales revenue $182,000; ending inventory $11,600; beginning inventory $21,700; purchases $64,000; purchases discounts $2,000; purchase returns and allowances $2,100; freight-in $900; freight-out $600. Calculate the company's cost of goods sold. A. $82,500 B. $70,300 C. $69,400 D. $50,700 E. $70,900

$70,900 Solution: Cost of goods sold equals beginning inventory plus purchases minus purchases discounts and purchases returns and allowances plus freight-in minus ending inventory. Cost of goods sold = 21,700 + 64,000 - 2,000 - 2,100 + 900 - 11,600 = 70,900.

Sales revenue totals $10,000. Sales returns and allowances are $500 and sales discounts are $1,000. The seller also pays $100 to ship the merchandise to the buyer. How much is net sales? A. $8,400 B. $10,000 C. $10,500 D. $9,500 E. $8,500

$8,500 Solution: Net sales equals sales revenue minus sales returns and allowances and sales discounts. Net sales = $10,000 - 500 - 1,000 = $8,500. Paying to ship merchandise to a buyer is a delivery expense rather than a part of net sales.

A company has the following: Sales revenue $95,000; Sales Returns and Allowances $15,000; Sales Discounts $5,000; Cost of Goods Sold $35,000; Operating Expenses $22,000; Other expenses $3,000. How much is the profit margin? A. 12.4% B. 34.6% C. 20% D. 16% E. 75%

20% Solution: Profit margin = Net income divided by net sales Net sales = Sales revenue minus sales returns and allowances minus sales discounts Net sales = 95,000 - 15,000 - 5,000 = 75,000 Net income = Net sales - cost of goods sold - operating expenses + other revenue - other expenses Net income = 75,000 - 35,000 - 22,000 + 0 - 3,000 = 15,000 Profit margin = Net income divided by net sales Profit margin = 15,000/75,000 = 20%

Helix Company purchased merchandise with an invoice price of $3,000 and credit terms of 2/10, n/30. Assuming a 360 day year, what is the implied annual interest rate inherent in the credit terms? A. 18% B. 54% C. 4% D. 2% E. 36%

36% Solution: The company buying merchandise can wait 10 days and still receive a 2% discount. Otherwise, it can wait an additional 20 days and pay the full invoice amount without being overdue. In other words, a 20-day difference produces 2% interest. An interest rate of 2% in 20 days is equivalent to an interest rate of 36% in 360 days (i.e., 2% x 360/20). Alternatively: The company must pay the invoice no later than 30 days after the sale. If it pays no later than 10 days after the invoice date, the company gets a 1% discount (i.e., 2% x $3,000 = $60). So, the company can save $60 if it pays 20 days before the due date. Interest = Principal x Interest rate x Time $60 = $3,000 x Interest rate x (30-10)/360 Solving for the interest rate: Interest rate = [360/(30-10)] x $60/$3,000 = 0.36 (i.e., 36%)

Jackson Company uses a perpetual inventory system. On November 30, it purchased $10,000 of merchandise and it must pay the $200 shipping charges. The credit terms for the merchandise were 2/10, n/30. The company paid for both the merchandise and the shipping charges nine days after their invoice dates. Which of the following is part of the required journal entry when Jackson pays the shipping charges of $200? A. A debit to Cash for $200 B. A debit to Inventory for $200 C. A credit to Accounts Payable for $200 D. A debit to Freight-out for $200 E. A debit to Freight-in for $200

A debit to Inventory for $200 Solution: In a perpetual inventory system, all of the cost of acquiring merchandise (including the cost of having the inventory delivered to the purchaser) is recorded as part of the cost of the inventory. The cost of the merchandise and the shipping charges should both be debited to the inventory account. Suppliers sometimes offer discounts (such as 2/10, n/30). However, discounts are offered by suppliers of merchandise and not by shippers. The journal entry for paying the shipping charges includes a debit to inventory for $200 and a credit to cash for $200.

Which of the following would affect the gross profit rate if sales remain constant? A. A decrease in insurance expense B. A decrease in depreciation expense C. An increase in advertising expense D. An increase in cost of goods sold E. All of these

An increase in cost of goods sold Solution: Learning objective 6 Gross profit rate is computed by dividing gross profit by net sales and any change in sales, sales returns in allowances, sales discounts, or the cost of goods sold will affect the ratio.

Which of the following will result in negative gross profits? A. Cost of goods sold exceeding operating expense B. Net sales revenue exceeding cost of goods sold C. Net sales revenue exceeding both cost of goods sold and operating expenses D. Cost of goods sold exceeding operating expenses E. Cost of goods sold exceeding sales revenue

Cost of goods sold exceeding sales revenue

Indicate which one of the following would not likely appear on both a multi-step income statement and a single-step income statement. A. Gross profit B. Net income C. Cost of goods sold D. None of these would appear on both types of income statement E. All of these would appear on both types of income statement

Gross profit Solution: Two formats for the income statement include: (1) single-step income statement and (2) multi-step income statement. Gross profit is reported exclusively on the multi-step income statement; gross profit is sales minus cost of goods sold. Many companies.that sell inventory use the multi-step income statement to highlight gross profit. Some companies that sell inventory continue to rely on the single-step income statement, so some companies that have cost of goods sold report cost of goods sold.

On what amount is a sales discount based? You Answered A. Invoice less discount B. Invoice price less returns and allowances C. Invoice price plus freight-out D. Invoice price plus returns and allowances. E. Invoice price plus freight-in

Invoice price less returns and allowances Solution: Learning objective 3 The buyer is permitted to take the discount on the invoice price less any returns and allowances, because this amount represents the buyer's obligation without a discount.

Which is true about a wholesaler? A.It conducts small sales for consumers on a nonrecurring basis. B. It sells to another business that will sell to the customer rather than sell directly to the consumer. C. It is a company that sells directly to consumers. D. It sells only to manufacturing companies. E. It is the same as a retailer.

It sells to another business that will sell to the customer rather than sell directly to the consumer.

Which of the following items does not result in an entry to the Inventory account under a perpetual system? A. A return of Inventory to the supplier B. Payment of freight costs for goods received from a supplier C. All of these result in an entry to the inventory account under a perpetual system. D. A purchase of merchandise E. Payment of freight costs for goods shipped to a customer

Payment of freight costs for goods shipped to a customer Solution: Learning objective 2 The entry to record the payment of freight costs for goods shipped to a customer requires a debit to Freight-out and a credit to cash. Freight-out is not part of the cost of inventory; it is a delivery expense and appears among the operating expenses on the income statement.

Under what inventory system is cost of goods sold determined at the end of an accounting period? A. Single entry inventory system B. Perpetual inventory system C. Periodic inventory system D. Double entry inventory system E. All inventory systems

Periodic inventory system

Which inventory system will likely be used by a company with merchandise that has a high per unit value? A. Cash basis system B. Perpetual inventory system C. Periodic inventory system D. Double entry inventory system E. Single entry inventory system

Perpetual inventory system

Which of the following would be classified as an operating expense on a multi-step income statement? A. Sales discounts B. Salaries and wages expense C. Income tax expense D. Gain on disposal of plant assets E. Interest expense

Salaries and wages expense Solution: Multi-step income statements report the following: Revenues minus cost of goods sold equals gross profit, and gross profit minus operating expenses (e.g., salaries & wages, advertising, utilities, depreciation, freight-out, insurance) equals income from operations, and income from operations minus non-operating income &/or expenses (e.g., interest revenue, interest expense, gain from sales of plant assets, losses from sales of plant assets) equals income before income taxes, and income before income taxes minus income taxes equals net income.

A company's gross profit rate is lower this year compared to the prior year. Which of the following would not be a possible cause for this decline in the gross profit rate? A. The company offered more sales discounts to customers in order to sell as many units of inventory as the prior year. B. All of the above would explain the decline in Bolton's gross profit rate. C. The cojmpany began paying higher prices to suppliers without passing these costs on to customers. D. The company began selling products with a higher markup. E. The company's average margin between selling price and inventory cost decreased.

The company began selling products with a higher markup.

Which statement is true when recording the sale of goods for cash in a perpetual inventory system? A. Two journal entries are necessary: one to record the payment of cash and reduction of inventory, and one to record the accounts receivable and sales revenue. B. Only one journal entry is necessary. It will record the receipt of cash and sales revenue. C. Only one journal entry is necessary. It will record cost of goods sold and reduce of inventory. D. Two journal entries are necessary: one to record the receipt of cash and sales revenue, and one to record the cost of goods sold and to reduce inventory. E. Two journal entries are necessary: one to record the receipt of cash and reduction of inventory, and one to record the cost of goods sold and sales revenue.

Two journal entries are necessary: one to record the receipt of cash and sales revenue, and one to record the cost of goods sold and to reduce inventory. Solution: Learning objective 3 In a perpetual inventory system, two journal entries are required at the time of each sale. One will record the sale with a debit to cash and a credit to sales revenue. The second entry is to reduce the inventory; debit cost of goods sold and credit inventory.

When a company using the periodic inventory system incurs and pays the freight costs when purchasing a shipment of inventory it debits A. its Inventory account. B. its Freight-In account. C. its delivery expense account. D. its Purchases account. E. its Freight-Out account.

its Freight-In account.