ACCT 101A - Study for Exam II (Ch. 5)

Interest expense would be classified on a multiple-step income statement under the heading

"Other expenses and losses"

The categories for non-operating activities

"Other revenues and gains" and "Other expenses and losses"

A credit sale of $1,600 is made on April 25, terms 2/10, net/30, on which a return of $100 is granted on April 28. What amount is received as payment in full on May 4?

(1,600-100)(1-0.02) = $1,470

A purchase invoice is a document that provides

Evidence of credit purchases

Stan's Market recorded the following events involving a recent purchase of inventory: - Received goods for $60,000, terms 2/10, n/30. - Returned $1,200 of the shipment for credit. - Paid $300 freight on the shipment. - Paid the invoice within the discount period. As a result of these events, the company's inventory

Increased by (60,000 - 1,200) * (1-0.02) + 300 = $57,924

Profit Margin Ratio

Net Income / Net Sales or Revenues

In the credit terms (discounts) of 1/10, n/30, the "1" represents the

Percent of the cash discount

Merchandising companies that sell directly to consumers

Retailers

Contra revenue account

Sales Returns and Allowances (the normal balance is debit)

Net sales =

Sales revenue - (Sales returns and allowances + Sales discounts)

Inventory becomes part of COGS when a company

Sells the inventory

FOB shipping point

The buyer pays the freight cost. In transit, the buyer has the ownership.

When using a perpetual inventory system, why are discounts credited to Inventory?

The discounts reduce the cost of the inventory

FOB destination

The seller pays the freight cost. In transit, the seller has the ownership.

Merchandising companies that sell to retailers

Wholesalers

Recording purchase returns and allowances

debit A/P credit Inventory

The distinction between operating and non-operating activities is crucial to

external users

Sales revenues are usually considered earned when

goods have been transferred from the seller to the buyer

Net income will result if gross profit exceeds

operating expenses

Freight costs incurred by a seller on merchandise sold to customers will cause an increase in

operating expenses for the seller

The primary source of revenue for a wholesaler

the sale of merchandise

Perpetual inventory system

1. Accounting records continuously disclose the amount of inventory 2. Keeps a record showing the inventory on hand at all time for each item 3. Provides better control over inventories 4. Records the cost of the sale on the date the sale is made 5. Companies that sell merchandise with high unit value (furniture, automobiles, etc.) have traditionally used perpetual system 6. Directly adjusts Inventory account 7. Reports Inventory in the current assets section in the BS

Periodic inventory system

1. Determines the inventory on hand only at the end of the accounting period. At that point, the company takes a physical inventory count. 2. Most commonly used by companies that sell low-priced, high-volume merchandise 3. Not directly adjust Inventory account, but creates different accounts for purchases, freight costs, returns and discounts 4. Does not affect the form of presentation in the BS

Multiple-step income statement

1. Highlights the components of net income 2. Includes gross profit, income from operations, net income

Gross Profit

1. Net sales revenues - COGS 2. Net income + Operating expenses 3. Gross Profit is not a measure of the overall profit because operating expenses have not been deducted.

Conway Company purchased merchandise inventory with an invoice price of $8,000 and credit terms of 2/10, n/30. What is the net cost of the goods if Conway Company pays within the discount period?

8,000 - (8,000*0.02) = $7,840

If a customer agrees to retain merchandise that is defective because the seller is willing to reduce the selling price, this transaction is known as a sales

Allowance

Cost of Goods Available for Sale

Beginning Inventory + Net Cost of Purchases

Two categories of expenses in merchandising companies are:

COGS and operating expenses

Cost of Goods Sold (COGS)

Cost of Goods Available for Sale - Ending Inventory

A sales invoice is used as documentation for a journal entry that requires a

debit A/R credit Sales Revenue

Recording sales of merchandise (on credit)

debit A/R credit Sales Revenue debit COGS credit Inventory

Recording sales discounts

debit Cash (price - discount) debit Sales Discount (cost*% discount) credit A/R

Recording purchases of merchandise

debit Inventory credit A/P

Recording of freight cost

debit Inventory credit Cash

A company that record cash purchases would

debit Inventory and credit Cash

Recording sales returns and allowances

debit Sales Returns & Allowances credit A/R debit Inventory credit COGS

Single-step income statement

1. Total revenue - Total expenses 2. Simple and easy to read 3. A company does not realize any type of profit or income until total revenues exceed total revenues

Gross Profit Rate

Gross Profit / Net Sales (%) Gross profit "rate" is more informative than the gross profit "amount" because GPR expresses a more meaningful (qualitative) relationship between gross profit and net sales

Income from operations

Gross profit - Operating expenses

Purchase Allowance (Seller grants a reduction of the purchase price)

debit A/P and credit Inventory

A decline in a company's gross profit could be caused by all of the following except a. increasing competition resulting in a lower selling price b. paying lower prices to its suppliers c. selling products with a lower markup d. clearance of discontinued inventory

b. paying lower prices to its suppliers

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

c. Subtract cost of ending inventory

For a jewelry retailer, which is an example of Other Revenues and Gains? a. discount received for paying for merchandise inventory within the discount period b. repair revenue c. gain on sale of display cases d. unearned revenue

c. gain on sale of display cases

Which of the following is not considered in computing net cost of purchases? a. Purchases returns and allowances b. Purchases c. Freight paid on purchased goods d. Freight paid on goods shipped to customers

d. Freight paid on goods shipped to customers

When using a periodic inventory system, which statement concerning the computation of cost of goods sold is correct? a. Freight in is ignored. b. Cost of Goods Available for Sale includes net purchases plus the ending inventory. c. Purchases represent cash paid for purchases during the accounting period. d. The amount of ending inventory is determined on the last day of the accounting period.

d. The amount of ending inventory is determined on the last day of the accounting period

All of the following statements are true regarding the periodic inventory system except: a. Under the periodic inventory system, the balance of cost of goods sold is calculated at the end of the period. b. Under the periodic inventory system, the balance in ending inventory is calculated at the end of the period. c. Under the periodic system, a company uses separate accounts to record freight costs, returns, and discounts. d. Using the periodic inventory system affects the balance sheet contents differently than when the perpetual system is used.

d. Using the periodic inventory system affects the balance sheet contents differently than when the perpetual system is used

Recording purchase discounts

debit A/P (price - returns & allowances) credit Cash (the amount of A/P above - discount) credit Inventory (the amount of A/P above*% discount)

A company using a perpetual inventory system that returns goods previously purchased on credit would

debit A/P and credit Inventory