GMU-Accounting 203 Chapter 4

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Gross Profit terms

Sales Sales returns and allowances Sales discounts Cost of Goods Sold

What is the contra account to revenue?

Sales returns and allowances.

A company reports net sales of $600,000, cost of goods sold of $200,000 and a net income of $100,000. It's gross margin/profit is:

$400,000

Luring Company had net sales of $600,000, the cost of goods sold of $200,000, and net income of $100,000. Its gross margin equals:

$400,000

The trial balance of a company included the following account balances: Cash, $25,000; Short-Term Investments, $10,000; Accounts Receivable, $40,000; Inventory, $90,000; and Prepaid Insurance, $12,000. Its quick assets total:

$75,000

Network Systems, Inc., had net sales of $750,000, the cost of goods sold of $562,500, and net income of $100,000. Its gross margin ratio is closest to:

0.25

Name accounting aspects regarding shrinkage in inventory and what accounts it corresponds with for accounting purposes.

1. Shrinkage refers to loss of inventory. 2. Shrinkage can be caused by theft or deterioration. 3. Shrinkage is computed by comparing a physical count of inventory with the recorded amount. 4. Shrinkage is recorded by debiting Cost of Goods Sold.

A single-step income statement:

A single-step income statement reports the same amount of net income as that reported on a multiple-step income statement. Both are permitted under generally accepted accounting principles. The single-step format includes a single subtotal for revenues and gains and a single subtotal for expenses and losses.

In order list the operating cycles of a merchandiser with credit sales.

A. Purchases B. Merchandise Inventory C. Credit Sales D. Accounts Receivable E. Cash Collection

Why do companies tend to keep their operating cycles short?

Assets tied up in inventory and accounts receivable are not productive.

Which financial statement does "merchandise inventory" appear if you are the merchandiser?

Balance Sheet

What is the closing entry for merchandise activities

Closing entry is as follows: Debit Revenue Credit Expense Credit Income Summary ____________________________________________ Debit Income summary Credit Retained Earnings

How does an operating cycle end for a merchandiser?

Collecting cash from sales of the merchandise

What is often the largest single expense on a merchandiser's income statement?

Cost of Goods Sold.

Gross profit, or gross margin, is:

Equal to net sales less cost of goods sold

True or False. Both Sales Discounts and Sales returns and Allowances accounts are closed to sales during the closing process.

False. Both the Sales discounts and allowances accounts are credited during the closing process.

Non-operating activities section

Gains from sale of building Interest Revenue Interest Expense Loss from sale of equipment

Income from operations section

Insurance expense Store supplies Advertising expense Depreciation expense - Office Equipment

What happens when a buyer pays for the shipping charges?

It adjusts the composition of assets by debiting Merchandise Inventory or just plain inventory and crediting cash.

Costs are removed from the balance sheet and reported on the income statement in Cost of Goods Sold when?

Merchandise is sold

How do you find gross profit

Net sales-Cost of Goods sold= Gross Profit

How does an operating cycle begin for a merchandiser?

Purchasing merchandise.

When a classified balance sheet is prepared, merchandise inventory is reported as an?

Reported as a current asset.

For inventory purposes the cost of this asset includes?

The cost incurred to buy the goods, any shipping costs to the store and any costs to prepare them for sale.

When merchandise is sold what happens to its costs? Where are they reported next?

They are removed from the balance sheet. Then reported on the income statement in cost of goods sold.

Cash sales shorten operating cycles. True or False.

True.

In regards to the closing process of a merchandiser is this statement true? The Cost of Goods Sold account is credited during the closing process.

True.


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