Accounting 101 - Chapter 4

List the financial statements of a merchandiser.

1. Balance sheet 2. Income Statement 3. Statement of retained earnings

Dogs R Us uses the perpetual inventory system to account for its merchandise. On May 1, it returned $50 of merch due to a defect. Assuming that the purchase was originally bought on credit, demonstrate the required journal entry.

1. Credit Merchandise Inventory $50. 2. Debit Accounts Payable $50.

Identify the items or sub-headings below that would appear on a multi-step income statement. 1. Selling expenses 2. General and administrative expenses 3. Net sales 4. Total assets 5. Cost of goods sold 6. Income from operations 7. Gross profit

1. Selling expenses 2. General and administrative expenses 3. Net sales 5. Cost of goods sold 6. Income from operations 7. Gross profit

Which of the statements below summarize why a buyer would desire a purchase allowance? 1. The seller could not pay within the discount period. 2. In order to keep defective, but still marketable merchandise, the buyer would need a reduction in the purchase price. 3. The buyer purchased a large amount of merchandise and was elligible for a reduced purchase price. 4. Purchased merchandise was defective or unacceptable.

2. In order to keep defective, but still marketable merchandise, the buyer would need a reduction in the purchase price. 4. Purchased merchandise was defective or unacceptable.

What are the two types of inventory systems?

Perpetual inventory system & periodic inventory system.

True or False: Good cash management means that no invoice is paid until the last day of the discount or credit period.

True

On May 14, X Mart purchased $500 of merch 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.

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.

Select the statements below that correctly describe the flow of costs in a merchandiser's accounting cycle. 1. Beginning inventory + net purchases = Merchandise available for sale. 2. Ending inventory + cost of goods sold = Total merch available for sale. 3. Merch that is sold becomes an expense reported on the income statement. 4. Merch that is sold becomes an asset reported on the balance sheet. 5. Merch purchased is an expense and is reported on the income statement. 6. Merchandise that is purchased becomes an asset reported on the balance sheet.

1. Beginning inventory + net purchases = Merchandise available for sale. 2. Ending inventory + cost of goods sold = Total merch available for sale. 3. Merch that is sold becomes an expense reported on the income statement. 5. Merch purchased is an expense and is reported on the income statement. 6. Merchandise that is purchased becomes an asset reported on the balance sheet.

A merchandiser has four closing journal entries at the end of an accounting cycle. Select the correct entries below: 1. Close revenue accounts. 2. Close expense accounts. 3. Close the income summary account. 4. Close the merchandise inventory account. 5. Close asset accounts. 6. Close the dividends account.

1. Close revenue accounts. 2. Close expense accounts. 3. Close the income summary account. 6. Close the dividends account.

Dogs R Us uses the perpetual inventory system to account for its merch. A customer returned some merch due to a defect. Assuming the purchase was originally bought on credit for $400 with a cost to Dogs R Us of $100, and the defective, returned merch is only worth $30, demonstrate the required journal entry to record the return and to write down the defective merch.

1. Credit Accounts Receivable $400 2. Debit Sales Returns and Allowances $400 3. Credit Costs of Goods Sold $100 4. Debit Merch Inventory $30 5. Debit Loss from Defective Merch $70. (The merch had an original cost of $100 but needs to be written down to $30)

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 sale and cost of the sale.

1. Credit Sales $7,000. 2. Debit Cost of Goods Sold $500. 3. Credit Merchandise Inventory $500. 4. Debit Cash $7,000.

LOL Store uses the periodic inventory system to account for its merch. On 11/17, it purchased $1,000 of merchandise with terms of 2/5,n/60. If payment is made on 11/21, demonstrate the required journal entry to record the payment.

1. Debit Accounts Payable $1,000 2. Credit Cash $980 3. Credit Purchase Discounts $20

Which of the following items are included in a merchandising company's income statement BUT ARE NOT included in a service company's income statement? 1. Rent expense 2. Wages expense 3. Cost of goods sold 4. Sales returns 5. Sales discounts 6. Depreciation expense 7. Loss from defective merchandise 8. Gross profit

3. Cost of goods sold 4. Sales returns 5. Sales discounts 7. Loss from defective merchandise 8. Gross profit

The balance sheet of a merchandiser and a service business have one major difference. Select the item below that would appear ONLY on a merchandiser's balance sheet. 1. Cash 2. Owner, Capital 3. Accounts payable 4. Accounts receivable 5. Merchandise inventory

5. Merchandise Inventory

Explain how to determine gross profit on an income statement.

Cost of goods sold is subtracted from net sales.

Describe 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 items with terms of 2/10,n/30. If payment is made on December 16, demonstrate the required journal entry to record 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 record the customer's payment on June 8?

Debit Cash $980; debit Sales Discount $20; credit Accounts Receivable $1,000.

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 payment on June 8?

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

ABC Mart received a $20 freight bill for merchandise it purchased with freight terms of FOB shipping point. ABC Mart uses a perpetual inventory system. Assuming it paid the bill immediately, demonstrate the journal entry required to record the freight charges.

Debit Merchandise Inventory $20; credit Cash $20.

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 $150; credit Accounts Receivable $500; and credit Cost of Goods Sold $150.

Net sales - cost of goods sold =

GROSS PROFIT

Describe a periodic inventory system.

It is an inventory system that updates the accounting records for merchandise transactions ONLY at the end of a period.

A single-step income statement can be identified by...?

It shows only one total for all expenses.

Credit terms of n/15 EOM were printed on an invoice. Explain what this means.

The credit terms stand for net 15 days after end of month.

Define / describe gross profit.

The difference between net sales and the cost of the goods sold.

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

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

When a buyer returns or takes an allowance on merchandise, the _____ (buyer/ creditor/ seller) issues a debit memorandum to inform the _____ (seller/ creditor/ buyer) of a debit made to the seller's account in the buyer's records.

buyer / seller

For FOB shipping point, the transportation costs are paid by

buyer debits Merchandise Inventory and credits Cash.

A sale return refers to merchandise that _____ (customers/ sellers/ creditors) return to the _____ (customer/ seller/ creditor) after a sale for a refund of the purchase price or reduction in the amount owed.

customers / seller

Jo's Market sold $1,000 of goods on credit with terms of 2/10,n/30. The original cost of the goods was $400. The required journal entry to record the sale and cost of the sale would be:

debit Accounts Receivable $1,000; credit Sales $1,000; debit Cost of Goods Sold $400; and credit Merchandise Inventory $400.

To compute net income for a merchandiser, you will start with net sales, subtract cost of goods sold and subtract other _____.

expenses.

Sales Discount is a contra-_____ (expense/ revenue/ asset) account and is increased with a _____ (debit/ credit).

revenue / debit

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

revenue / debit

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

revenue / income / statement

Determine which of the following statements are correct regarding the adjusting entries for a merchandiser and a service business. 1. Service businesses make adjustments for shrinkage. 2. Merchandise businesses make adjustments for shrinkage. 3. Both types of business make adjustments for depreciation. 4. Both types of businesses make adjustments for accrued expenses. 5. Both types of businesses make adjustments for accrued revenue.

2. Merchandise businesses make adjustments for shrinkage. 3. Both types of business make adjustments for depreciation. 4. Both types of businesses make adjustments for accrued expenses. 5. Both types of businesses make adjustments for accrued revenue.

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 the required journal entry of Dogs R Us to record the return.

1. Debit Merchandise Inventory $100 2. Credit Cost of Goods Sold $100 3. Debit Sales Returns and Allowances $400 4. Credit Accounts Receivable $400

X Mart uses the perpetual inventory system to account for its merch. A customer who purchased merch on account requested an allowance on a merch purchase due to its poor quality, but he didn't return the merch. Demonstrate the required journal entry on X Mart's books to record the allowance.

1. Debit Sales Return and Allowances $50. 2. Credit Accounts Receivable $50.

Which of the following are included in merchandise inventory? 1. Purchase costs 2. Taxes assessed on the merchandise 3. Shipping fees charged by the vendor 4. Trade discounts given to customers 5. Costs necessary to ready the merchandise for sale 6. Advertising costs

1. Purchase costs 2. Taxes assessed on the merchandise 3. Shipping fees charged by the vendor 5. Costs necessary to ready the merchandise for sale

Demonstrate how to prepare a multi-step income statement by ranking the items below in the order they would appear on a multi-step income statement of a merchandiser. 1. Gross profit 2. Costs of good sold 3. Other revenues and expenses 4. Income from operations 5. Sales 6. Operating expenses

1. Sales 2. Cost of goods sold 3. Gross profit 4. Operating expenses 5. Income from operations 6. Other revenue and expenses

Closing Entries for Merchandisers List the temporary accounts unique to merchandisers.

1. Sales (of goods) 2. Sales discounts 3. Sales returns and allowances 4. Cost of goods sold

What are the two classifications of operating expenses on a multi-step income statement?

1. Selling 2. General and administrative

Determine which of the statements below are CORRECT, when a company, using the periodic inventory system, completes a worksheet. 1. The beginning balance in the Merchandise Inventory account will be reported in the credit column of the Income Statement columns. 2. The ending balance in the Merchandise Inventory account will appear in the debit column of the Balance sheet columns. 3. The ending balance in the Merchandise Inventory account will be reported in the credit column of the Income Statement columns. 4. Purchases will be reported in the debit column of the Income Statement columns. 5. Purchase Discounts will be reported in the credit column of the Income Statement columns.

2. The ending balance in the Merchandise Inventory account will appear in the debit column of the Balance sheet columns. 3. The ending balance in the Merchandise Inventory account will be reported in the credit column of the Income Statement columns. 4. Purchases will be reported in the debit column of the Income Statement columns. 5. Purchase Discounts will be reported in the credit column of the Income Statement columns.

Explain merchandise inventory.

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

True or False: Merchandise businesses make adjustments for shrinkage.

True.

True or False: Sales Discounts is a contra revenue account.

True.

True or False: Sales Discounts is a contra-revenue account, so it should be increased with a debit.

True.

True or False: Each sales transaction for a seller of merchandise involves two parts.

True. 1. For Revenue 2. For Cost

True or False: Sales Returns and Allowances are contra-revenue accounts.

True. They are increased with debits. They are also deducted from sales when computing net sales.

A purchase allowance can be described as

a reduction in the cost of defective or unacceptable merchandise that a buyer acquires.

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

Recall that the Merchandise Inventory is considered a(n) _____ (current/ plant/ intangible) asset on the _____ (balance /income) _____ (sheet/ statement) of a merchandiser using the periodic inventory system.

current / balance / sheet

The Merchandise Inventory account on a classified balance sheet is reported in the:

current assets section

When a seller grants an allowance on a previous sale, the _____ (customer/ creditor/ seller) issues a credit memo to inform the _____ (customer/ seller) of a credit made to the buyer's Accounts Receivable in the seller's records.

seller / customer

For FOB destination, the transportation costs are paid by

seller debits delivery expense and credits cash

Shrinkage is...

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