Chapter 5 ACCT

"Cost of goods sold" and "gross profit" are part of which of the following?

income measurement for merchandising company

Some companies may prefer to use a periodic inventory system because they

prefer not to keep detailed records of inventory on hand.

Record purchases and sales of inventory under a periodic inventory system.

To record purchases, entries are required for (a) cash and credit purchases, (b) purchase returns and allowances, (c) purchase discounts, and (d) freight costs. To record sales, entries are required for (a) cash and credit sales, (b) sales returns and allowances, and (c) sales discounts.

Gains and losses in Comprehensive income?

-adjustments to pension plan assets -gains and losses on forge in currency translations -unrealized gains and losses on certain types of investments recorded on net of taxes

A merchandising company is

-buy and sell goods -primary source of revenue is sale revenue -(inventory)

when recording SALES under perpetual inventory system (recording sales of merchandise)...

-can be made using cash/credit -normally recorded when earned, usually when g goods transfer from seller to buyer -sales invoice should support each credit sale

periodic inventory system definiton

-do not keep detailed records of the goods on hand -cost of goods sold determine by count at the end of the accounting period

perpetual inventory system definition

-maintain detailed records of the cost of each inventory purchase and sale -records continuously show inventory that should be on had -comp determines cost of goods sold every time sale occurs

Freight cost incurred by the buyer... Freight cost incurred by

-the cost considered part of the cost of purchasing inventory -incurred by seller on outgoing merchandise are operating expense to the seller

1. what does Sauk's credit terms mean? 2/10 n/30 2. what is credit terms

1. 2% discount if paid in 10 days, if not net balance due in 30 days 2. credit terms permit buyer to claim a cash discount for prompt payment

1. Comprehensive income 2. Comprehensive income statement 3. Contra revenue account

1. An income measure that includes gains and losses that are excluded from the determination of net income. 2. A statement that presents items that are not included in the determination of net income, referred to as other comprehensive income. 3. An account that is offset against a revenue account on the income statement.

1. Gross profit 2. Income tax expense 3. Net sales 4. Purchase allowance 5. Purchase discount 6. Purchase invoice 7. Quality of earnings ratio 8. Sales invoice 9. Sales revenue

1. The excess of net sales over the cost of goods sold. 2. The product of a company's income before income taxes and its corporate income tax rate. 3. Sales less sales returns and allowances and sales discounts. 4. A deduction made to the selling price of merchandise, granted by the seller, so that the buyer will keep the merchandise. 5. A cash discount claimed by a buyer for prompt payment of a balance due. 6. A document that provides support for each purchase. 7. A measure used to indicate the extent to which a company's earnings provide a full and transparent depiction of its performance; computed as net cash provided by operating activities divided by net income. 8. A document that provides support for each sale. 9. Primary source of revenue for a merchandising company.

purchase return example purchase allowance example

1. return goods 2. keep goods with a price reduction

1. gross profit formula

1. sales revenue-cost of goods sold

1. Freight Cost 2. FOB means?

1. the sale agreement should indicate either the seller or buyer who pays the cost of transportation goods 2. Free on board

1. Measuring net income for a merchandiser is conceptually the same as for a service company. 2. For a merchandiser, sales less operating expenses is called gross profit. 3. For a merchandiser, the primary source of revenues is the sale of inventory. 4. Sales salaries and wages is an example of an operating expense. 5. The operating cycle of a merchandiser is the same as that of a service company. 6. In a perpetual inventory system, no detailed inventory records of goods on hand are maintained. 7. In a periodic inventory system, the cost of goods sold is determined only at the end of the accounting period. 8. A periodic inventory system provides better control over inventories than a perpetual system.

1. true 2. false 3. true 4. true 5. false 6. false 7. true 8. false

Example of Sauk Stereo pays balance due of 3500 on may 14, last day of discount period (2/10 n/30). prepare journal entry for Sauk Stereo on may 14.

5/14 Accounts Payable 3500 Cash 3430 (98% of 3500=3430) Inventory 70 (purchase discount)

Sauk didn't pay on 14th, so no discount on may 15. what's his entry?

5/15 Accounts Payable 3500 cash 3500

prepare entry for Audio supply to record the credit of returned goods that had a 300 selling price (140 cost of goods). (RETURNED GOODS ON SELLER'S END)

5/8 Sales Returns/allow 300 accounts receivable 300 5/8 Inventory 140 cost of goods sold 140

assumption returned goods were defective and had scrap value of 50. audio supply would make the following entries:

5/8 sales returns/allowances 300 accounts receivable 300 5/8 inventory 50 cost of goods sold 50

What is suggested by a quality of earnings ratio that is significantly less than 1?

A company may be using more aggressive accounting techniques in order to accelerate income recognition.

Recording sales of merchandise: when a sale on account occurs, the seller debits when cash discount taken by customers, the seller debits when a customer returns goods, the seller debits

AR Sales discounts inventory

Example of returning goods on purchaser's end. (Sauk Stereo returned Audio Supply's goods costing 300)

Accounts Payable 300 Inventory 300

FOB Shipping Point def FOB Destination def

FOB Shipping Point: seller places goods free on board the carrier, buyer pays freight cost, Freight terms indicating that ownership of goods passes to the buyer when the public carrier accepts the goods from the seller. FOB Destination: seller places the goods free on board to the buyer's place of business , seller pays freight cost, Freight terms indicating that ownership of goods remains with the seller until the goods reach the buyer.

CHAP 5 Joanie's Caterers bought 10 green tablecloths from Fabric Town for a reception planned for one of their clients. When the package arrived, there were 10 red tablecloths included, but no green. If Joanie's Caterers decides to keep the tablecloths, then

Fabric Town may grant a purchase allowance, which will reduce the caterer's accounts payable.

Is the price of goods keeping pace with changes in the cost of inventory?

Gross profit and net sales needed Gross profit rate=Gross profit/ Net sales Higher ratio suggests the average margin between selling price and inventory cost is increasing. Too high a margin may result in lost sales.

CHAP 5 ---- is shown on a multiple-step but not on a single-step income statement.

Gross profit is shown on a multi-step income statement. On the multi-step income statement, the important line items include gross profit, income from operations, and net income. A single-step income statement lists all revenues, then subtracts all expenses to arrive at net income.

Example of freight payment on purchaser's end. (assume Sauk Stereo pays Haul-It $150 for freight charges)

Inventory 150 Cash 150

5- When can sales revenues be recorded?

It is often proper to record sales revenue before the collection of cash. Selling on account is a common practice that allows the buyer a defined timeframe in which to pay for the merchandise.

5-What is the purpose of the 'explanation' of each transaction that appears in a journal entry?

It provides insight into the purpose of the activity recorded.

chap 5 Juanita owns a dress shop and she wants to determine if she is carrying any designers that are not selling well. In addition to gross sales for particular designer lines, what else should she review?

Juanita should review sales returns and allowances to determine if any designer's dresses are returned more frequently than others, thereby affecting the net sales amount.

CHAP 5 Nestor Company uses the periodic inventory system. Its purchases for the most recent year were $72,000, ending inventory was $18,000, and the cost of goods sold was $112,000. How much inventory was in stock at the beginning of the year?

KNOW cog sold formula!! 58,000 The cost of goods sold is calculated as follows: Cost of Goods Sold = Beginning Inventory + Cost of Goods Purchased - Ending Inventory. Restating to solve for beginning inventory: Beginning Inventory = Cost of Goods Sold - Cost of Goods Purchased + Ending Inventory.Using the restated formula, Nestor Company's beginning inventory equals $58,000 ($112,000 - $72,000 + $18,000).

is the company maintaining an adequate margin between sales and expenses?

Net income and net sales needed Profit margin=Net income/net sales Net salesHigher value suggests favorable return on each dollar of sales

CHAP 5 Two car dealerships have similar annual net sales. One car dealership has a gross profit rate of 52.6%, whereas the other car dealership has a gross profit rate of 23.7 percent. Which of the following explanations is the most likely reason for this difference?

The car dealership with a gross profit rate of 52.6% sells high-end sports and luxury vehicles, whereas the car dealership with a gross profit rate of 23.7% sells sedans and used vehicles.

At year-end, a department store shows a balance in the merchandise inventory account of $2 million and a physical inventory shows there is slightly less than $2 million in merchandise on hand. The beginning inventory was $1,000,000. The department store most likely uses a ________ inventory system.

The company likely uses a perpetual inventory system because the merchandise inventory per the books at year-end ($2 million) differed from the physical inventory (slightly less than $2 million). Under the periodic inventory system, the inventory per the books is adjusted to exactly equal inventory on hand, and it is not possible to determine shrinkage.

CHAP 5 Ace Corp. is a headhunting firm. Uno Corp. sells office furniture. Which firm has a longer operating cycle? Why?

Uno Corp. because it purchases and sells inventory Inventory adds additional steps to the operating cycle. The steps in the operating cycle for a service corporation are: 1. cash; 2. performance of service; 3. accounts receivable; 4. transfer of cash; and 5. receipt of cash. The steps in the operating cycle for a merchandising corporation are: 1. cash; 2. purchase of inventory; 3. receipt of inventory; 4. sale of inventory; 5. accounts receivable; 6. transfer of cash; and 7. receipt of cash. For this reason, the service corporation, Ace Corp., has a shorter inventory cycle than the merchandise corporation, Uno Corp.

5-When calculating the balance of the Sales Revenue account, you find that the balance is lower than expected. However, according to your Balance Sheet and your analysis of the accounting equation, all of your debits and credits are equal across accounts. What is the most likely explanation for this? What is the primary purpose of the recording process?

You failed to record a sales transaction in the journal, so it never got transferred to the ledger or financial documents. If a transaction is not posted in the journal, both debits and credits will be equally affected. Therefore, even though the Balance Sheet is in balance and the accounting equation is equal, the affected accounts and subsequent financial information will be incorrect. to get the accounts in the ledger updated with effects of transactions

measuring net income divided into 2 categories

cost of goods sold and operating expense

cost of goods sold definition operating expense definition

cost of goods sold= total cost of merchandise sold during period operating expense= expenses incurred in the process of earning sales revenue

CHAP 5 A company receives a discount for paying for merchandise purchased within the discount period. How will the amount of the discount be recorded in a perpetual inventory system?

credited to Inventory When the discount is taken, the company will debit (reduce) Accounts Payable for the full amount, credit (reduce) Inventory for the amount of the discount, and credit (reduce) Cash for the amount paid.

A company's profit margin is best described as the

percentage of each dollar of sales that results in net income.

CHAP 5 The journal entry to record a credit sale is a ---- to accounts receivable and a----- to sales revenue.

debit, credit

recording purchases of merchandise: inventory BLANK to record the purchase of inventory on account Accounts payable is BLANK to record goods returned by purchaser Inventory BLANK when the purchaser incurs freight charge

debited debited debited

under perpetual, a company records COG sold every time sale is made. for periodic...

for periodic, a company does not record COG sold until the end of period

By calculating the difference between the amounts in two journal entries for each sale of merchandise, ________ for each sale can be determined.

gross profit

CHAP 5 McCrary Company regularly analyzes its Sales Returns and Allowance account to address issues such as ________ and

inferior merchandise; billing errors. Sales Returns and Allowances provide valuable information to management. Higher than average returns and allowances can indicate problems, such as inferior merchandise, inefficiencies in filling orders, errors in billing customers, or delivery or shipment mistakes.

summary of purchasing transactions for Sauk studio?

inventory purchase may 4th: 3800 freight-in may 6th: 150 CR Purchase return may 8th: 300 Purchase discount may 14th: 70 balance: 3580 (3800+150=3950. 3950-370=3580)

name other revenues and gains name other expenses and losses

other revenues and gains -interest revenue: from notes receivable and marketable securities -dividend revenue: from investments in capital stock -rent revenue: from subleasing a portion of the store -gain from the sale of property, plant, and equipment other expenses and losses -interest expense: on notes and loans payable -casualty losses from such causes as vandalism and accidents -loss from the sale or abandonment of PPE -loss from strikes by employees and suppliers

when recording PURCHASES under perpetual inventory system, recording purchases...

recording purchases: -can be made using cash or credit -normally recorded when goods are received -purchase invoice should support each credit purchase

Contra revenue accounts include

sales discounts, sales returns, and sales allowances,

income measurement process// what's the formula for net income/loss

sales revenue-cost of goods sold= gross profit-operating expenses= net income/loss

net sales for audio supply?

sales revenue: 3800 sales returns and allowances: 300 sales discount: 70 3430 net sales

Which of the following would negatively affect the gross profit of a company?

selling products with lower markup lowering sales prices of merchandise to meet increasing competition selling overstocked inventory at sale prices

Net income for a merchandising enterprise is computed by

subtracting operating expenses from gross profit

what's non operating activities?

various revenues and expenses and gains and losses that are unrelated to company's main line of operation