Chapter 4 smart book

Calculate the total cost of merchandise purchased using the information in the following table: Invoice cost of merchandise purchases $40,000 ------------------------------------------------- Purchase discounts received $ 3,000 Cost of transportation-in (shipping) $ 500 Costs of purchase returns and allowances $ 100

$40,000 - $3,000 - $100 + $500 = $37,400.

Acid Test Ratio

(Cash + Accounts Receivable) / Current Liabilities

Cost of goods sold is characterized by which of the following statements?

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

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.)

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

single-step income statement

- Income statement format that subtracts total expenses, including cost of goods sold, from total revenues with no other subtotals. - It shows only one total for all expenses. - shows only one subtotal for expenses

The buyer and seller of merchandise must agree on who is responsible for paying freight terms.

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

credit terms of 2/10, n/30 mean

- 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.

discount period

- Time period in which a cash discount is available and the buyer can make a reduced payment. - The discount period is the time period in which a discount may be taken by the buyer.

Merchandise inventory can be described as:

- goods that a company owns and expects to sell to customers - it is converted less quickly to cash than accounts receivable because inventory first must be sold before cash can be received - also called merchandise or inventory - an asset account. - an account appearing on a balance sheet of a merchandiser. - an account increased with a debit. - products that a company owns and intends to sell. - Merchandise inventory is an asset reported on the balance sheet and contains the cost of products purchased for sale. - Ending inventory + Cost of goods sold = Merchandise available for sale - Beginning inventory + Net purchases = Merchandise available for sale

multiple-step income statement

- income statement format that shows subtotals between sales and net income, categorizes expense, and often reports the details of net sales and expenses. - has 3 main parts 1. gross profit (net sales - cost of goods sold) 2. income from operations (gross profit - operating expenses) 3. net income (income from operations + or - nonoperating items) - these would all appear -Cost of goods sold -Net sales -Selling expenses -Income from operations -General and administrative expenses -Gross profit

periodic inventory

- updates accounting records for purchases and sales of inventory only at the end of a period - The Purchases account is used during the period. - The Merchandise Inventory account is updated only at the end of the period. - The balance in the Merchandise Inventory account remains the beginning balance until the end of the period. - The Purchase Returns and Allowances account is used during the period. - The Purchase Discounts account is used during the period. - Cost of goods sold is computed at the end of the period. - when a sale is made the revenue but not the cost of goods sold is recorded

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

purchase return

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

X-Mart uses the perpetual inventory system to account for its merchandise. On June 1, it sold $7,000 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.)

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

Jerry's Flowers sold and shipped merchandise across the country to a buyer. The terms were FOB destination. Assuming it paid the bill immediately, demonstrate the journal entry required by Jerry's Flowers under the perpetual inventory system to record the freight charges.

Debit Delivery Expense, credit Cash.

ABC Mart received a $20 freight bill for merchandise it purchased with freight terms of FOB shipping point. ABC Mart uses a perpetual inventory system. Assuming it paid the bill immediately, demonstrate the journal entry required to record the freight charges.

Debit Merchandise Inventory $20; credit Cash $20.

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.

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.

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

FOB destination

Which of the following are the three main parts of a multiple-step income statement?

Gross profit Net income Income from operations

How do you compute net income for a merchandiser.

Net sales - cost of goods sold - other expenses.

cash discount

Reduction in the price of merchandise granted by a seller to a buyer when payment is made within the discount period. - granted by sellers to encourage buyers to pay earlier - A reduced payment applies to the discount period. - A buyer views a cash discount as a purchase discount. - Cash discounts are described in credit terms. - A seller views a cash discount as a sales discount.

Which are the two classifications of operating expenses on a multiple-step income statement?

Selling; general and administrative

sales discount

Term used by a SELLER to describe a cash discount granted to buyers who pay within the discount period.

Gross Profit

The difference between net sales and the cost of the goods sold; also called gross margins

credit period

Time period that can pass before a customer's payment is due.

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 discount period is the timeThe 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.(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

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

current assets section

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

credit terms of 2/10, n/60 mean

full payment is due within 60 day credit period, but the buyer can deduct 2% of the invoice amount if payment is made within 10 days of the invoice date

Cost of Goods Sold=

gross profit - net sales

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

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

revenue, income statement

Explain how to compute gross profit by completing the following sentence. Gross profit is calculated by taking the net ______________ (sales/costs) of a product and ______________ (adding/subtracting) the cost of the goods sold.

sales, subtracting

purchase discount

terms used by a PURCHASER to describe a cash discount granted to the purchaser for paying within the discount period

FOB shipping point (or factory)

the buyer pays shipping costs and accepts ownership of goods when the seller transfers goods to the carrier - buyer: debit merchandise inventory credits cash

FOB (free on board)

the point when ownership of goods passes to the buyer

FOB destination

the seller pays shipping costs and the buyer accepts the ownership of goods at the buyers place of buiz - seller debits delivery expense credits cash

perpetual inventory system

updates accounting records for each purchase and sale of inventory