ACG 2021 Chapter 5

If beginning inventory is $60,000, cost of goods purchased is $380,000, sales revenue is $800,000 and ending inventory is $50,000, how much is cost of goods sold under a periodic system?

$390,000 - Cost of goods sold is computed by adding beginning inventory and cost of goods purchased and then subtracting ending inventory, or $60,000 + $380,000 - $50,000 = $390,000.

Net income is $15,000, operating expenses are $20,000, and net sales total $75,000. How much is cost of goods sold?

$40,000 Gross profit - operating expenses = net income. Alternatively: Net income + operating expenses = gross profit. $15,000 + 20,000 = $35,000 Net sales - cost of goods sold = gross profit Alternatively: Net sales - gross profit = cost of goods sold $75,000 - 35,000 = $40,000.

Heflin Corporation has the following: Sales revenue, $430,000 Sales returns and allowances, $20,000 Sales discounts, $10,000 Cost of goods sold, $310,000 Operating expenses, $60,000 Other expenses, $10,000 How much is its gross profit?

$90,000 - Net sales = Sales - Sales returns and allowances - Sales discounts Net sales = $430,000 - 20,000 - 10,000 = $400,000 Gross profit = Net sales- Cost of goods sold Gross profit = $400,000 - 310,000 = $90,000

To determine the cost of goods sold under a periodic inventory system, the following steps are necessary:

1. Determine the cost of the goods on hand at the beginning of the accounting period. 2. Add to it that cost of goods purchased. 3. Subtract the cost of goods on hand at the end of the accounting period.

Under what inventory system is cost of goods sold determined after each sale?

Perpetual Inventory System

Sales Revenue (Sales)

Primary source of revenue for a merchandising company.

In a perpetual inventory system, which accounts will the seller credit when a customer returns merchandise after purchasing it on account?

(i) Accounts Receivable and (ii) Cost of Goods Sold

Arbor Corporation reports the following: Sales revenue $182,000; ending inventory $11,600; beginning inventory $21,700; purchases $64,000; purchases discounts $2,000; purchase returns and allowances $2,100; freight-in $900; freight-out $600. Calculate the company's cost of goods sold.

$70,900 - Cost of goods sold equals beginning inventory plus purchases minus purchases discounts and purchases returns and allowances plus freight-in minus ending inventory. Cost of goods sold = 21,700 + 64,000 - 2,000 - 2,100 + 900 - 11,600 = 70,900.

A company has the following balances: Sales revenue $312,000; Sales Returns and Allowances $2,000; Sales Discounts $4,000; Cost of Goods Sold $184,000; Operating Expenses $79,000; Other expenses $5,000. How much is the profit margin?

12.4% - Profit margin = Net income divided by net sales Net sales = Sales revenue minus sales returns and allowances minus sales discounts Net sales = 312,000 - 2,000 - 4,000 = 306,000 Net income = Net sales - cost of goods sold - operating expenses - other expenses Net income = 306,000 - 184,000 - 79,000 - 5,000 = 38,000 Profit margin = Net income divided by net sales Profit margin = 38,000/306,000 = 12.4%.

A company has the following accounts balances: Sales revenue $2,000,000; Sales Returns and Allowances $250,000; Sales Discounts $50,000; Cost of Goods Sold $1,275,000; and Net income $153,000. How much is the gross profit rate?

25% - Net sales = Sales revenue - sales returns and allowances - sales discounts Net sales = 2,000,000 - 250,000 - 50,000 = 1,700,000 Gross profit = Net sales - cost of goods sold Gross profit = 1,700,000 - 1,275,000 = 425,000 Gross profit divided by net sales equals the gross profit rate. Gross profit rate = 425,000 / 1,700,000 = 25%

Helix Company purchased merchandise with an invoice price of $2,000 and credit terms of 3/10, n/30. Assuming a 360 day year, what is the implied annual interest rate inherent in the credit terms?

54% The company saves $60 (i.e., $2,000 x .03) if they pay no later than 10 days after the sale. Also, the company must pay no later than 30 days after the sale. Thus, the company saves $60 if it pays 20 days before the final due date. Use the formula for interest: Interest = Principal x Interest rate x Time $60 = $2,000 x Interest rate x (30-10)/360 Interest rate = [360/(30-10)] x $60/$2,000 = 0.54 (i.e., 54%)

Purchase Discount

A cash discount claimed by a buyer for prompt payment of a balance due.

Purchase Invoice

A document that provides support for each purchase.

Sales Discount

A reduction given by a seller for prompt payment of a credit sale.

Purchase Return

A return of goods from the buyer to the seller for cash or credit.

Contra Revenue Account

An account that is offset against a revenue account on the income statement.

Which factor would not affect the gross profit rate?

An increase in the cost of heating the store

Which of the following would be classified as an operating expense on a multi-step income statement?

Freight - Out

Indicate which one of the following would not likely appear on both a multi-step income statement and a single-step income statement.

Gross Profit

The operating cycle of a merchandising company has an extra asset account compared to a service company. What is that extra asset account?

Inventory - The operating cycle of a service company involves performing services for customers and collecting (i.e., receiving) cash from customers. The operating cycle of a merchandising company includes these two steps and two additional two steps, including buying of inventory and delivering inventory. These extra steps create a need for two accounts not used by service companies: (i) inventory and (ii) cost of goods sold. Inventory is reported on the balance sheet, and cost of goods sold is reported on the income statement.

Profit Margin

Measures the percentage of each dollar of sales that results in net income, computed by dividing net income by net sales.

A decline in a company's gross profit could be caused by all of the following except

Paying lower prices to its suppliers

Gross Profit

The excess of net sales over the cost of goods sold.

Cost of Goods Sold

The total cost of merchandise sold during the period.

Purchase Allowance

A deduction made to the selling price of merchandise, granted by the seller, so that the buyer will keep the merchandise.

Perpetual Inventory System

A detailed inventory system in which a company maintains the cost of each inventory item, and the records continuously show the inventory that should be on hand. - Under a perpetual inventory system, a company determines the cost of goods sold each time a sale occurs.

Sales Invoice

A document that provides support for each sale.

Which of the following will result in negative gross profit?

Cost of goods sold exceeding sales revenue

Sales Returns and Allowances

Transactions in which the seller either accepts goods back from the purchaser (a return) or grants a reduction in the purchase price (an allowance) so that the buyer will keep the goods.

Which statement is true when recording the sale of goods for cash in a perpetual inventory system?

Two journal entries are necessary: one to record the receipt of cash and sales revenue, and one to record the cost of goods sold and to reduce inventory.

Quality of Earnings Ratio

A measure used to indicate the extent to which a company's earnings provide a full and transparent depiction of its performance; computed as net cash provided by operating activities divided by net income.

Sales revenue total $15,000. Sales returns and allowances are $750 and sales discounts are $1,000. The seller also pays $100 to ship the merchandise to the buyer. How much is net sales?

$13,250 - Net sales equals sales revenue minus sales returns and allowances and sales discounts. Net sales = $15,000 - 750 - 1,000 = $13,250.

Ending inventory is $12,000, cost of goods sold is $33,000, and the cost of goods purchased is $22,000. How much is beginning inventory?

$23,000 - Cost of goods sold = Beginning inventory + purchases - ending inventory. Solve for ending inventory. Beginning balance is equal to ending inventory ($12,000) plus the cost of goods sold ($33,000) less the cost of goods purchased ($22,000) for a total of $23,000.

Companies use one of two systems to account for inventory:

1. Perpetual Inventory System 2. Periodic Inventory System

Given the following quality of earnings ratios, which suggests the company may be using the most conservative accounting techniques?

1.8 - Since this ratio is significantly greater than 1, it suggests the use of the most conservative accounting techniques.

Which of the following statements about inventory systems is correct?

A perpetual inventory system provides better control over inventories than does a periodic inventory system. - Under periodic inventory, details about the cost of goods on hand is not available until the end of the accounting period. In contrast, perpetual inventory requires cost of goods sold to be recognized at the time of sale so it contains more accurate values of goods on hand at any time.

Periodic Inventory System

An inventory system in which a company does not maintain detailed records of goods on hand throughout the period and determines the cost of goods sold only at the end of an accounting period. - They determine the cost of goods sold only at the end of the accounting period - that is, periodically .

Cosmos Corporation, which uses a perpetual inventory system, purchased $2,000 of merchandise on July 5 on account. Credit terms were 2/10, n/30. It returned $400 of the merchandise on July 9. Which of the following is one effect when Cosmos pays its bill on July 21?

Credit to Cash for $1,600 - The discount terms are 2/10, n/30 which indicates a 2% discount if paid within 10 days but the full amount is due otherwise. Since the bill is paid after the discount period, the full invoice amount is $2,000 minus the returned goods of $400, or $1,600. The entry to record payment will debit Accounts Payable for $1,600 and credit Cash for $1,600.

Marsh, Inc. paid for freight costs on merchandise it shipped to a customer. In what account will Marsh record this cost in a perpetual inventory system?

Freight - Out - Freight-out is not part of the cost of inventory; it is a delivery expense and appears among the operating expenses on the income statement. In contrast, freight-in is used to record the shipping costs associated with acquiring inventory (note: when using a perpetual inventory system, the shipping cost associated with acquiring inventory is debited to Inventory).

Which of the following will be shown on the income statement for a merchandising company?

Gross Profit Cost of Goods Sold Revenue

Gross Profit Rate

Gross profit expressed as a percentage by dividing the amount of gross profit by net sales.

Which of the following is true about a merchandiser?

Its revenue primarily comes from the sale of merchandise - A merchandiser is a company that generates revenue through the sale of merchandise (i.e., inventory) rather than services.

Which statement is true when goods are purchased for resale by a company using a periodic inventory system?

Purchases on account are debited to the Purchases account - In a periodic inventory system, all purchases of inventory are debited to the Purchases account and freight costs incurred when purchasing inventory are debited to the Freight-In account (or the Transportation-In account). Freight-In and Transportation-In are synonyms.

Net Sales

Sales less sales returns and allowances and sales discounts.