ACCT 1110 Chapter 5 Review Questions

Describe the multi-step income statement.

A multi-step income statement lists several important subtotals. In addition to net income (the bottom line), it also reports subtotals for gross profit and income from operations.

What is a purchase return? How does a purchase allowance differ from a purchase return?

A purchase return is when businesses allow purchasers to return merchandise that is defective, damaged, or otherwise unsuitable. Purchase allowances are granted to the purchaser as an incentive to keep goods that are not "as ordered." Together, purchase returns and allowances decrease the buyer's cost of the inventory.

29B. Is an adjusting entry needed for inventory shrinkage when usign the periodic inventory system? Explain.

An adjusting entry is not needed for inventory shrinkage when using the periodic system. The merchandise inventory account will reflect it when the physical count is taken and the ending merchandise inventory is recorded in the merchandise inventory account.

What is an invoice?

An invoice is the seller's request for payment from the buyer. It is also called a bill.

What is the Cost of Goods Sold, and where is it reported?

Cost of Goods Sold is the cost of merchandise that has been sold to the customer. It is shown on the income statement as an expense.

Describe FOB shipping point and FOB destination. When does the buyer take ownership of the goods, and who tropically pays the freight?

FOB shipping point means the buyer takes ownership (title) to the goods after the goods leave the seller's place of business(shipping point). In this case, the buyer (owner of the goods while in transit) also pays the freight. FOB destination means the buyer takes ownership (title) to the goods at the delivery destination point. In this case, the seller (owner of the goods while in transit) usually pays the freight.

What is freight out and how is it recorded by the seller?

Freight out expense is one in which the seller pays freight charges to ship goods to customers. Freight out is a delivery expense to the seller.

How is gross profit calculated, and what does it represent?

Gross profit is calculated as Net Sales Revenue minus Cost of Goods Sold and it represents the mark-up on the merchandise inventory. It is the extra amount the company receives from the customer over what the company paid to the vendor.

What is inventory shrinkage? Describe the adjusting entry that would be recorded to account for inventory shrinkage.

Inventory shrinkage is the loss of inventory that occurs because of theft, damage, and errors. The adjusting entry for shrinkage would be a debit to Cost of Goods Sold and credit to Merchandise Inventory.

What financial statement is merchandise inventory reported on, and in what section?

Merchandise inventory is shown as a current asset on the Balance Sheet.

What are the two types of merchandisers? How do they differ?

Merchandisers are often identified as either wholesalers or retailers. A wholesaler is a merchandiser that buys goods from a manufacturer and then sells them to retailers. A retailer buys merchandise either from a manufacturer or a wholesaler and then sells those goods to customers.

31B. Describe the calculation of cost of goods sold when using the periodic inventory system.

The Cost of Goods Sold account is calculated by adding Beginning Merchandise Inventory plus Net Cost of Purchases less Ending Merchandise Inventory. Net Cost of Purchases is calculated by taking Purchases less Purchase Returns and Allowances less Purchase Discounts plus Freight In.

27B. What account is debited when recording the payment of freight in when using the periodic inventory system.

The Freight In account is debited when recording the payment of freight when using the periodic inventory system.

What account is debited when recording a purchase of inventory when using the perpetual inventory system?

The Merchandise Inventory account is debited when recording the purchase of inventory using the perpetual inventory system.

26B. When recording purchase returns and purchase allowances under the periodic inventory system?

The Purchase Returns and Allowances account is credited when recording purchase returns or purchase allowances when using the periodic inventory system.

25B. What account is debited when recording a purchase of inventory when using a periodic inventory system.

The Purchases account is debited when recording the purchase of inventory when using the periodic inventory system.

What would the credit terms of "2/10, n/EOM" mean?

The credit terms "2/10, n/EOM" means that the purchaser can deduct 2% from the total bill excluding freight if the company pays within 10 days of the invoice date. Otherwise the full amount is due by the end of the month.

What are the four steps involved in the closing process for a merchandising company?

The four-step closing process for a merchandising company are: Step 1: Make the revenue accounts equal zero via the Income Summary account.Step 2: Make expense accounts equal zero via the Income Summary account.Step 3: Make the Income Summary account equal zero via the Owner, Capital account.Step 4: Make the Owner, Withdrawals account equal zero via the Owner, Capital Account.

What does the gross profit percentage measure, and how is it calculated?

The gross profit percentage measures the profitability of each sales dollar above the cost of goods sold. The gross profit percentage is computed as follows: Gross Profit / Net Sales Revenue

How is the net cost of inventory calculated?

The net cost of inventory is calculated by taking the purchase cost of inventory less purchase returns and allowances less purchase discounts plus freight in.

Describe the operating cycle of a merchandiser?

The operating cycle of a merchandiser is as follows: It begins when the company purchases inventory from avendor, the company then sells the inventory to a customer, and finally, the company collects cash from customers.

Describe the single-step income statement.

The single-step income statement is the income statement format that groups all revenues together and all expenses together without calculating other subtotals.

What are the two journal entries involved when recording the sale of inventory when using the perpetual inventory system?

The two journal entries involved when recording the sale of inventory when using the perpetual inventory system are first the debit to Cash or Accounts Receivable and credit to Sales Revenue. The second entry debits Cost of Goods Sold and credits Merchandise Inventory.

30B. Highlight the difference in the closing process when using the periodic inventory system rather than the perpetual inventory system.

The two main differences in the closing entries are in the first two steps. With Step 1 in the periodic method, you not only close out Sales Revenue and Sales Discounts Forfeited but also Purchase Returns and Allowances and Purchase Discounts. In addition, the ending Merchandise Inventory and Estimated Returns Inventory accounts are recorded as a debit. In Step 2 you close out the beginning merchandise inventory, Purchases, and Freight In accounts.

What are the two types of inventory accounting systems? Briefly describe each.

The two types of inventory accounting systems are the periodic inventory system and the perpetual inventory system. The periodic inventory system requires businesses to obtain a physical count of inventory to determine the quantities on hand. It is normally used for relatively inexpensive goods. The perpetual inventory system keeps a running computerized record of merchandise inventory, including inventory units and dollars amounts.

When granting a sales allowance is there a return of merchandise inventory for the customer? Describe the journal entry(ies) that would be recorded.

There is not a return of merchandise when a sales allowance is granted. The journal entry would debit Refunds Payable and credit Cash or Accounts Receivable.

Under the new revenue recognition standard, what must companies do at the end of the period related to sales returns? Describe the journal entries that would be recorded.

Under the new revenue recognition standard, companies must estimate the amount of returns that the company will have. The first journal entry would debit Sales Revenue and credit Refunds Payable. The second journal entry would debit Estimated Returns Inventory and credit Cost of Goods Sold

Under the new revenue recognition standard, how is the sale of inventory recorded?

Under the new revenue recognition standard, the sale of inventory is recorded at the net amount, or the sales price less any applicable discount. Sales returns and allowances are also estimated and recorded.

28B. Describe the journal entry(ies) when recording a sale of inventory using the period inventory system.

When recording sales of merchandise inventory using the periodic system you will debit Cash or Accounts Receivable and credit Sales Revenue.

What is a merchandiser, and what is the name of the merchandise that is sells?

merchandiser is a business that sells merchandise, or goods, to customers. The merchandise that these types of businesses sell is called merchandise inventory.