Chapter 5 HW Accounting

Gross profit is...

merchandising profit, but not a measure of the overall profit of a company.

Howe Corporation calculates inventory and cost of goods sold one time at the end of every accounting period. In contrast, Kelty Industries updates their inventory and cost of goods sold accounts multiple times in one day. What is the difference between Howe and Kelty?

Howe uses a periodic system of inventory, whereas Kelty uses a perpetual system of inventory.

Clark Incorporated purchased iron from Garret Industries. The purchase cost $54,730 with freight costs of $680 and a purchase discount of $5,473. If Clark Incorporated uses a periodic system of inventory, which accounts will Clark Incorporated use to account for this purchase?

Purchases, Freight-In, and Purchase Discounts Solution: In a periodic system, purchases, freight costs, and purchase discounts are recorded in separate accounts.

A wholesaler offers credit terms of 1/10, n/30. A fabric store bought goods worth $6,500 from the wholesaler. Within the discount period, the fabric store returned defective goods worth $300 and paid the amount owed. How much did the wholesaler receive as payment?

$6,138.00 Solution: The wholesaler must first reduce the sales amount by the amount of defective goods and then apply the discount taken to the new total sales amount to determine amount received as payment. The sales amount less the returned goods is $6,200 ($6,500 - $300). The new sales amount is reduced by the 1% discount since the invoice was paid within the discount period and resulted in a payment amount of $6,138 ($6,200 x (1 - 0.01)).

In April, Green Products received $62,000 in cash for its products and had returns totaling $2,000. Its gross profit rate was 45 percent. For the month of April, it will report net sales revenue and cost of goods sold of.....

$60,000 and $33,000. Solution: First, solve for net sales. Net Sales Revenue = Sales - Sales Returns and Allowances - Sales Discounts; Using this formula, Green Products' net sales revenue for April is $60,000 ($62,000 - $2,000 - $0). Next, calculate gross profit so that you can solve for the cost of goods sold. Gross Profit Rate = Gross Profit / Net Sales. Restating the formula to solve for gross profit: Gross Profit = Gross Profit Rate x Net Sales. Using this formula, Green Products' gross profit for April is $27,000 ($60,000 x .45). Finally, use the calculated amounts of net sales and gross profit to solve for the cost of goods sold. Gross Profit = Net Sales - Cost of Goods Sold. Restating the formula, Cost of Goods Sold = Net Sales - Gross Profit. Using this formula, Green Products' cost of goods sold is $33,000 ($60,000 - $27,000).

For Standing Bear Company, sales revenue is $200,000, sales returns and allowances are $5,000, sales discounts are $3,000, and cost of goods sold is $120,000. Gross profit is...

$72,000. Solution: the expanded formula for gross profit is Sales Revenue - Sales Returns and Allowances - Sales Discounts - Cost of Goods Sold. Using this expanded formula, Bear Company calculates gross profit as $200,000 - $5,000 - $3,000 - $120,000 = $72,000.

If sales revenues are $400,000, cost of goods sold is $310,000, and operating expenses are $60,000, the gross profit is...

90,000 Solution: The formula to determine gross profit is Net Sales Revenues - Cost of Goods Sold. Therefore the gross profit is calculated as $400,000 - $310,000 = $90,000.

At the beginning of the year, Paradise Co. had an inventory of $200,000. During the year, the company purchased goods costing $900,000. Paradise Co reported ending inventory of $300,000 at the end of the year. Their cost of goods sold is... a. $1,000,000 b. $800,000 c. $1,400,000 d. $400,000

B

Gross profit equals the difference between net sales and... a. operating expenses. b. cost of goods sold. c. net income. d. cost of goods sold plus operating expenses.

B

The entry to record the receipt of payment within the discount period on a sale of $10,000 with terms of 3/15, n/60 will include a a. credit to Sales Discounts for $300 b. debit to Cash for $9,700. c. credit to Accounts Receivable for $9,700. d. credit to Sales Revenue for $10,000.

B

Under a perpetual inventory system a. accounting records continuously disclose the amount of inventory. b. increases in inventory resulting from purchases are debited to purchases. c. there is no need for a year-end physical count. d. the account purchase returns and allowances is credited when goods are returned to vendors.

B

Under the perpetual inventory system, in addition to making the entry to record a sale, a company would.... a. debit Inventory and credit Cost of Goods Sold. b. debit Cost of Goods Sold and credit Purchases. c. debit Cost of Goods sold and credit Inventory. d. make no additional entry until the end of the period.

C

Under the perpetual system, cash freight costs incurred by the buyer for the transporting of goods is recorded in which account? a. Freight Expense b. Freight-In c. Inventory d. Freight-Out

C

Income from operations appears on.... a. both a multiple-step and a single-step income statement. b. neither a multiple-step nor a single-step income statement. c. a single-step income statement. d. a multiple-step income statement.

D

The entry for a buyer to record the return of goods under a perpetual inventory system assuming the purchase was made on account would include a.... a. debit to inventory b. debit to purchase returns and allowances c. credit to accounts payable d. debit to accounts payable

D

The entry to record a sale of $1,800 with terms of 2/10, n/30 will include a a. debit to Sales Discounts for $36. b. debit to Sales Revenue for $1,764. c. credit to Accounts Receivable for $1,800. d.credit to Sales Revenue for $1,800.

D

Under the perpetual system, cash freight costs incurred by the seller for the transporting of goods is recorded in which account? a. Freight Expense b. Freight-In c. Inventory d. Freight-Out

D

The perpetual inventory system requires two journal entries for each sale of merchandise. ________ for each sale is calculated by finding the difference between the amounts for each entry.

Gross profit

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

Gross profit

For Standing Bear Company, sales revenue is $200,000, sales returns and allowances are $5,000, sales discounts are $3,000, and cost of goods sold is $120,000. Net sales is...

$192,000. Solution: The formula for Net Sales is Sales Revenue - Sales Returns & Allowances - Sales Discounts. Using this formula, Bear Company calculates net sales as $200,000 - $5,000 - $3,000 = $192,000.

A company using a perpetual inventory system that returns goods previously purchased on credit would a. debit Accounts Payable and credit Inventory. b. debit Sales and credit Accounts Payable. c. debit Cash and credit Accounts Payable. d. debit Accounts Payable and credit Purchases.

A

Cost of goods sold can be calculating by which of the following formulas? a. Beginning Inventory + Net Purchases - Ending Inventory b. Ending Inventory + Net Purchases - Beginning Inventory c. Beginning Inventory + Sales - Ending Inventory d. Ending Inventory + Sales - Beginning Inventory

A

In the credit terms of 3/15, n/60, the "15" represents the a. number of days in the discount period b. full amount of the invoice. c. number of days when the entire amount is due. d. percent of the cash discount.

A

fIf the credit terms on a sales invoice read "2/10, n/30", what does this mean?

The buyer should pay within the discount period and recognize a savings.

The quality of earnings ratio is...

a. net cash provided by operating activities divided by net income.

How do you calculate the cost of goods available for sale?

by adding beginning inventory to cost of goods purchased

Sales of merchandise using the perpetual system of inventory include a second entry to increase ________ and decrease

cost of goods sold; the seller's inventory.

Although the perpetual inventory system updates accounting records after each sale, a physical count is necessary at year-end to address issues such as ________ and ________

customer theft; spoilage.

Leo's Grocery bought cakes and bread for resale worth $10,000. Assuming the net cost of goods is paid within the discount period, which of the following statements will be correct? a. If credit terms are 3/10, the net cost is $9,800. b. If credit terms are 3/10, the net cost is $9,600. c. If credit terms are 2/10, the net cost is $9,900. d. If credit terms are 2/10, the net cost is $9,800.

d. If credit terms are 2/10, the net cost is $9,800. Solution: If the credit terms are 2/10, the discount is 2%: $10,000 x (1.00 - 0.02) = $9,800. If the credit terms are 3/10, the discount is 3%: $10,000 x (1.00 - 0.03) = $9,700.

One advantage of using the multiple-step income statement is that it....

highlights the components of net income.

A company makes an entry to record a sale. Then it debits Cost of Goods sold and credits Inventory. Which inventory system is the company using?

perpetual inventory system

What is the transaction called when a customer agrees to retain defective merchandise because the seller is willing to reduce the selling price?

sales allowance

By using a perpetual inventory system, companies can better track when to replenish inventory, thus reducing...

storage costs.

A department store uses a perpetual inventory system. At year-end, it shows a balance in the merchandise inventory account of $2 million. Assuming that the inventory records have been maintained properly, a year-end physical inventory...

will most likely indicate less than $2 million in merchandise on hand due to handling and related losses.