Smartbook Chapter 4

Select the statements below that correctly describe the flow of costs in a merchandiser's accounting cycle.

* Merchandise that is purchased becomes an asset reported on the balance sheet. * Beginning inventory + net purchases = Merchandise available for sale. * Merchandise that is sold becomes an expense reported on the income statement. * Ending inventory + Cost of goods sold = Total merchandise available for sale.

On June 5, X-Mart purchased $400 of merchandise with terms of 2/10,n/30. If payment is made on June 11, calculate the purchase discount that may be taken by X-Mart.

$8

Identify the statement below that is the correct definition of "shrinkage".

Shrinkage is the term used to refer to the loss of inventory due to theft, breakage or deterioration.

Complete the following statement. 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

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

The formula for the acid-test ratio is computed as (cash + short-term investments + current receivables)/__________.

current liabilities

A merchandiser has four closing journal entries at the end of an accounting cycle. Select the correct entries below.

* Close the dividends account. * Close the income summary account. * Close expense accounts. * Close revenue accounts.

Determine which of the definitions on the right go with the entity on the left.

* Retailer ----> An intermediary that buys products from manufacturers or wholesalers and sells them to consumers * Wholesaler ----> Choice An intermediary that buys products from manufacturers and sells them to retailers * Merchandiser ----> Choice Earns net income by buying and selling products

Identify the statements below that are correct regarding the closing entries for a merchandiser using the perpetual inventory system.

* Sales is closed as a revenue account. * Sales Discounts is closed with the expense accounts. * Sales Returns and Allowances is closed with the expense accounts. * Cost of goods sold is closed with the expense accounts. * The Dividends account is closed to Retained Earnings

The buyer and seller of merchandise must agree on who is responsible for paying freight terms. Show your understanding of freight terms by selecting all of the correct statements below.

* Terms FOB shipping point means the buyer accepts ownership when the goods depart the seller's place of business. * 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. * When the shipping costs are the responsibility of the buyer, then the Merchandise Inventory account is debited for the freight charges.

Given the following information, analyze XYZ Company's liquidity.

* They are more liquid than others in their industry. * They have sufficient quick assets to pay off short-term debt if needed.

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.

True or false: A single-step income statement shows only one subtotal for expenses.

True

Sales Discounts is a ______ account.

contra revenue

On May 14, X-Mart purchased $500 of merchandise with terms of 3/15,n/40. If payment is made on May 28, calculate the purchase discount that may be taken by X-Mart.

$15

Recall the formula for calculating a company's acid-test ratio.

(Cash plus Short-term investments plus Current receivables) divided by Current liabilities

Identify the statements below which summarize what cash discounts are.

* A reduced payment applies to the discount period. * A buyer views a cash discount as a purchase discount. * Cash discounts are described in the credit terms. * A seller views a cash discount as a sales discount. * Sellers can grant a cash discount to encourage buyers to pay earlier.

Merchandise inventory can be described as:

* An account appearing on a balance sheet of a merchandiser. * An asset account. * Products that a company owns and intends to sell. * An account increased with a debit

The components of a merchandiser's multi-step income statement are shown below. In which order would they appear on the statement?

1. Net Sales 2. Cost of goods sold 3. Gross profit 4. Expenses 5. Net Income

Given the following information, calculate the acid-test ratio for XYZ Company:

1.36

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

What is a purchase return?

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

What is a sales return?

A sales return refers to merchandise that customers return to the seller after a sale.

Explain how to determine gross profit on an income statement by selecting the correct statement below.

Cost of goods sold is subtracted from net sales.

Which of the statements below are correct regarding cost of goods sold?

Cost of goods sold is the expense of buying and preparing merchandise.

On Dec. 7, Toys R Fun purchased $1,000 of merchandise with terms of 2/10,n/30. If payment is made on December 16, demonstrate the required journal entry for Toys R Fun to record the payment under the perpetual inventory system.

Debit Accounts Payable $1,000; credit Cash $980; credit Merchandise Inventory $20.

On June 5, Jo's Market sold $1,000 of goods on credit with terms of 2/10,n/30. How will Jo's Market record the customer's payment on June 8?

Debit Cash $980; debit Sales Discounts $20; and credit Accounts Receivable $1,000

X-Mart purchased $300 of merchandise on credit. Demonstrate the journal entry to record this transaction, assuming the perpetual inventory system is used.

Debit Merchandise Inventory $300; credit Accounts Payable $300.

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

FOB destination

A single-step income statement can be identified by which of the following formats?

It shows only one total for all expenses.

Which statement below correctly explains what merchandise inventory is?

Merchandise inventory is an asset reported on the balance sheet and contains the cost of products purchased for sale.

Determine which of the following statements about merchandise is correct.

Merchandise is acquired for resale to customers.

Which of the following equations correctly identify the cost flow of a merchandising company?

Net purchases plus beginning inventory equals merchandise available for sale

Which of the statements below summarizes what the acid-test ratio measures?

The acid test ratio measures a merchandiser ability to pay its current liabilities

Explain what the credit terms of 2/10,n/30 mean.

The buyer can deduct 2% of the invoice amount if payment is made within 10 days of the invoice date. The full payment is due within a 30-day credit period.

Review the following statements and select the one that best describes a discount period.

The discount period is the time period in which a discount may be taken by the buyer.

The 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.

between, reduced

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

an'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

True or false: Merchandise inventory is generally converted to cash more quickly than accounts receivable.

false

Sales is a(n) ______ account.

revenue

Sales Discounts is a contra- ________ (expense/revenue/asset) account and is increased with a _______ (debit/credit).

revenue, debit

Gross profit is computed as net ________ minus cost of goods sold.

sales

Determine which statements below are correct regarding merchandise available for sale during a period.

* Beginning inventory + Net purchases = Merchandise available for sale * Ending inventory + Cost of goods sold = Merchandise available for sale

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

* Cost of goods sold is an expense reported on the income statement. * Cost of goods sold is also called cost of sales. * 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.

Identify the statements below which are correct regarding a merchandiser's multi-step income statement.

* Cost of goods sold is subtracted from net sales in order to determine gross profit. * Expenses are subtracted from gross profit in order to calculate net income.

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.

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

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.

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

Sticky Company's merchandise inventory balance at year end is $15,050, but a physical count reveals that only $15,000 of inventory exists. The adjusting entry to record the shrinkage includes

* Credit to Merchandise Inventory for $50 * Debit to Cost of Goods Sold for $50

LOL Music Store uses the perpetual inventory system to account for its merchandise. On November 17, it purchased $1,000 of merchandise with terms of 2/5,n/60. If payment is made on November 21, demonstrate the required journal entry to record the payment by selecting all of the correct actions below.

* Debit Accounts Payable $1,000. * Credit Cash $980. * Credit Merchandise Inventory $20.

Sally Beauty Warehouse uses the perpetual inventory system to account for its merchandise. On Nov 2, it sold $700 of merchandise on credit with terms of 2/15,n/30. Demonstrate the required journal entry to record the receipt of payment from the customer on Nov 13, by selecting all of the correct actions below.

* Debit Cash $686. * Credit Accounts Receivable $700. * Debit Sales Discounts $14.

Which of the statements below summarize why a seller would give a sales allowance?

* In order to entice a customer to keep damaged or defective merchandise, the seller is willing to decrease the selling price. * Sold merchandise was defective or unacceptable. * The seller wants to keep a customer happy.

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

A sales allowance can be described as:

a reduction in the selling price of defective or unacceptable merchandise sold to customers

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

Fill in the blank question. Show your understanding of a merchandiser by completing the following statement. Merchandisers earn net income by (buying/manufacturing) __________ and (selling/purchasing) ___________ merchandise.

buying, selling

The formula for the acid-test ratio is computed as ( __________ + cash equivalents + short-term investments + current receivables)/current liabilities.

cash

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

revenue, income, statement