Ch. 5 Quiz Corrections

Vetter Corporation reports the following: Sales revenue, $450,000; sales discounts, $10,000; operating expenses, $35,000; cost of goods sold, $320,000; income tax expense, $10,000. How much is its gross profit and income from operations, respectively?

$120,000 and $85,000 -Gross profit = Sales revenue - sales discounts - sales returns and allowances - cost of goods sold -Income from operations = Gross profit - operating expenses

Heflin Corporation has the following: Sales revenue, $470,000 Sales returns and allowances, $20,000 Cost of goods sold, $320,000 Operating expenses, $100,000 Other expenses, $10,000 How much is its gross profit?

$130,000 -Net sales = Sales - Sales returns and allowances - Sales discounts -Gross profit = Net sales- Cost of goods sold

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?

$8,500

Given the following quality of earnings ratios, which suggests the company may be using the most conservative accounting techniques?

1.8 -Since this ratio is significantly greater than 1, it suggests the use of the most conservative accounting techniques.

Which statement is true when recording the sale of goods for cash in a perpetual inventory system?

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. -

COGS

Cost of goods sold equals the beginning inventory plus purchases minus purchases discounts and purchases returns and allowances plus freight-in minus ending inventory.

Which of the following would not be classified as an operating expense on a multi-step income statement?

Interest expense -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)

Marsh, Inc. uses the perpetual inventory system. It paid for freight costs to ship merchandise to a customer. Besides the cash account, what account will Marsh record?

Freight-out

Indicate which one of the following would not likely appear on both a multi-step income statement and a single-step income statement.

Gross profit

Under what inventory system is cost of goods sold determined after each sale?

Under the perpetual inventory system, cost of goods sold is determined with each sale.

Which factor would not affect the gross profit rate?

An increase in the cost of heating the store -An increase in the cost of heat (electricity) causes total expenses to increase. However, electricity is an operating expense and does not affect gross profit.

When a company using the periodic inventory system incurs and pays the freight costs when purchasing a shipment of inventory it debits

its Freight-In account.

How is gross profit measured?

Sales revenue minus cost of goods sold

If a company is using aggressive accounting techniques in order to accelerate income recognition then its quality of earnings ratio is

significantly less than 1. -In general, a ratio significantly less than one suggests that a company may be using more aggressive accounting techniques in order to accelerate income recognition.

Marsh, Inc. uses the perpetual inventory system. It paid for freight costs to ship merchandise to a customer. Besides the cash account, what account will Marsh record?

Inventory

Under what inventory system is cost of goods sold determined at the end of an accounting period?

Periodic inventory system -Under the periodic inventory system, cost of goods sold for the period is calculated by adding purchases for the period to the beginning inventory balance and subtracting the ending inventory balance.

Which statement is true when goods are purchased for resale by a company using a periodic inventory system?

Purchases on account are debited to the Purchases account. -In a periodic inventory system, all purchases of inventory are debited to the Purchases account and freight costs incurred when purchasing inventory are debited to the Freight-In account (or the Transportation-In account). Freight-In and Transportation-In are synonyms.

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?

Recall that gross profit rate equals gross profit divided by net sales. A decline in the gross profit rate suggest either a decline in gross profit and/or an increase in net sales. A decline in a company's gross profit rate may be caused by selling products with smaller gross margins (i.e., lower "mark-ups"), lowering prices and/or offering more price discounts due to increases in competition, or increases in sales allowances offered to customers.

Which of the following would be classified as an operating expense on a multi-step income statement?

Salaries and wages expense -operating expenses (e.g., salaries & wages, advertising, utilities, depreciation, freight-out, insurance)