Chapter 5

Purchase Discount

A cash discount claimed by a buyer for prompt payment of a balance due.

Perpetual Inventory System

A detailed inventory system in which a company maintains the cost of each inventory item, and the records continuously show the inventory that should be on hand.

Quality of Earnings Ratio

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.

Comprehensive income statement

A statement that presents items that are not included in the determination of net income, referred to as other comprehensive income.

The operating expenses section of an income statement for a merchandising company would NOT include A. Cost of goods sold. B. Freight-out. C. Insurance expense. D. Utilities expense.

A. Cost of goods sold.

Which of the following determines the quality of earnings ratio?

Net cash provided by operating activities divided by net income

Rains Company is a furniture retailer. On January 14, 2017, Rains purchased merchandise inventory at a cost of $60,000. Credit terms were 2/10, n/30. The inventory was sold on account for $100,000 on January 21, 2017. Credit terms were 1/10, n/30. The accounts payable was settled on January 23, 2017 and the accounts receivables were settled on January 30, 2017. Which statement is correct?

On January 30, 2017, customers should remit cash in the amount of $99,000. $100,000 × .99 = $99,000 (Sal. amount × (1−.01)) = cash

Which of the following is a merchandiser that sells directly to consumers? A. Retailer B. Wholesaler C. Customer D. Service enterprise

Retailer

When using the periodic inventory system, which of the following is NOT a step in determining cost of goods purchased? A. Add freight-in B. Subtract purchase returns and allowances C. Subtract cost of ending inventory D. All of these are necessary steps

Subtract cost of ending inventory

A credit sale of $1400 is made on July 15, terms 2/10, net/30, on which a return of $100 is granted on July 18. What amount is received as payment in full on July 24?

$1274 ($1400 - $100) × .98 = $1274 ((Cr. sale - ret.) × (1 - .02))

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?

$15,000 Beginning inventory plus purchases less equals ending inventory ($12,000 + $34,000 - $31,000 = $15,000).

American Importers reports net income of $60000 and cost of goods sold of $540000. If the company's gross profit rate was 40%, net sales were

$900000 $540000 ÷ (1 - 40%) = $900000 (COGS ÷ (1 - 40))

Financial information is presented below: Operating expenses $ 45000 Sales returns and allowances 3000 Sales discounts 7000 Sales revenue1 60000 Cost of goods sold 96000 The profit margin ratio would be

0.06 $160000 - $3000 - $7000 = $150000; ($150000 - $96000 - $45000) ÷ $150000 = 0.06 [(sal. rev. - sal. ret. /all. - sal. disc) - COGS - oper. exp.] ÷ Net sal.

Sales Returns and Allowances

Transactions in which the seller either accepts goods back from the purchaser (a return) or grants a reduction in the purchase price (an allowance) so that the buyer will keep the goods.

contra revenue account

an account that is offset against a revenue account on the income statement

Comprehensive Income

an income measure that includes gains and losses that are excluded from the determination of net income

The Sales Returns and Allowances account is classified as a(n)

contra revenue account.

Profit Margin

measures the percentage of each dollar of sales that results in net income, computed by dividing net income by net sales

The gross profit rate is computed by dividing gross profit by

net sales

Gross profit does NOT appear A. on either a multiple-step or single-step income statement. B. on a multiple-step income statement. C. on a single-step income statement. C. to be relevant in analyzing the operation of a merchandising company.

on a single-step income statement.

Sales Revenue

primary source of revenue for a merchandising company

Net Sales

sales less sales returns and allowances and sales discounts

Gross Profit

the excess of net sales over the cost of goods sold (net sales - cost of goods sold)

The primary source of revenue for a wholesaler is

the sale of merchandise.

Cost of goods sold

the total cost of merchandise sold during the period

A Sales Returns and Allowances account is NOT debited if a customer A. receives a credit for merchandise of inferior quality. B. utilizes a prompt payment incentive. C. returns defective merchandise. D. returns goods that are not in accordance with specifications.

utilizes a prompt payment incentive.

Periodic Inventory System

An inventory system in which a company does not maintain detailed records of goods on hand throughout the period and determines the cost of goods sold only at the end of an accounting period.

Which statement is incorrect? A. Computers and electronic scanners allow more companies to use a perpetual inventory system. B. Periodic inventory systems provide better control over inventories than perpetual inventory systems. C. Freight-in is debited to Inventory when a perpetual inventory system is used. D. Regardless of the inventory system that is used, companies should take a physical inventory count

B. Periodic inventory systems provide better control over inventories than perpetual inventory systems.

A retailer makes a $100 sale with terms of 2/10, n/30 on the first of the month. The customer returns $20 of merchandise for credit on account. What journal entry will the retailer record when payment is received within the discount period under a perpetual inventory system?

Cash 78.40 Sales Discounts 1.60 Accounts Receivable 80.00

Merchandising companies that sell to retailers are known as

Wholesalers

Purchase Allowance

a deduction made to the selling price of merchandise, granted by the seller, so that the buyer will keep the merchandise

Purchase Invoice

a document that provides support for each purchase

Sales Invoice

a document that provides support for each sale

Sales Discount

a reduction given by a seller for prompt payment of a credit sale

Purchase Return

a return of goods from the buyer to the seller for cash or credit