Chapter 4: Accounting for Merchandising Businesses

Under the perpetual inventory system, purchasing merchandise inventory on account ______.

increases total assets and liabilities does not involve a cash outflow has no impact on the income statement

A company purchased $1,000 of goods under the terms 2/10, n/30. If the bill was paid within the discount period, how much cash did the company pay?

$980

Accounting for a sales discount affects the ______.

Balance sheet Income statement

Accepting a sales return or allowance on merchandise that had been sold on account affects the ______.

Balance sheet Statement of changes in stockholders' equity Income statement

Under the perpetual inventory system, the journal entry to recognize transportation-in costs includes a _____________to inventory and a ______________ to cash

Debit (inventory) Credit (cash)

Purchasing inventory for cash is a(n) ______ transaction.

asset exchange

Gross Margin Percentage

gross margin/net sales

The revenue recognition part of selling inventory for cash ______.

is an operating activity on the statement of cash flows increases net income on the income statement

Recording a purchase return for merchandise sold on account affects ______.

total liabilities total assets

When goods are shipped under the terms FOB shipping point, the freight-cost is referred to as ______.

transportation-in

What line item is used as the divisor when preparing a common size income statement for a retailer.

Net Sales

The base figure used for common size income statements is usually ______.

Net sales

The journal entry necessary to recognize cash paid for transportation-in costs would include what?

debit to inventory and credit to the cash account

Operating Income

gross profit - operating expenses amount of income that is generated from normal the normal recurring operations of a business

Inventory Cost/Product Cost

-reflects items held for sales or used in the manufacturing of products that will be sold -i.e. price of goods purchased, shipping and handling cost, transit insurance, storage cost -Expensed when inventory is sold, regardless of when it was purchased -Matched directly with Sales Revenue

A company purchased inventory under terms 2/10, n/30. The effective annual interest rate for the cash discount is ______.

36.5%

Which of the following is the calculation for Cost of Goods Available for Sale?

Beginning Inventory + Purchases - Ending Inventory Sales - COGS Beginning Inventory + Purchases Beginning Inventory + Purchases + Ending Inventory

The journal entry to recognize a sales return of merchandise sold on account includes a _____________ to Accounts Receivable and a _____________ to Sales Revenue. (Enter either debit or credit in each blank.)

Credit Debit

The journal entry to recognize a sales discount includes a ___________ to Accounts Receivable and a ______________ to Sales Revenue. (Enter either debit or credit in each blank.)

Credit Debit (sales revenue)

Under the perpetual inventory system, the journal entry to recognize the return of inventory previously purchased on account includes a ______________ to inventory and a ______________ to accounts payable.

Credit (inventory) Debit (accounts payable)

Annual interest rate (AIR)

Discount rate × (365 ÷ term of the loan); AIR = 2% × (365 ÷ 20); AIR = 36.5%.

Which of the following is a product cost?

Factory supervisor's salary Utility costs of the corporate headquarters Advertising

On a multi-step income statement, the difference between sales revenue and cost of goods sold is called

Gross profit

Multi-Step Income Statement

Income statement format that contains subtotals to highlight significant relationships. In addition to net income, it reports gross profit and operating income.

If a retailer purchases goods that are shipped FOB destination point, what account does the retailer use to record the shipping costs?

Inventory Transportation In The retailer does not record the shipping costs.

On a multi-step income statement, items that are not expected to recur on a regular basis are subtracted from ____________ income to determined the amount of _____________ income. (Enter only one word per blank.)

Operating Net

Operating Expenses

Period costs. These are the other expenses necessary to run the business. For a retailer these costs would be: sales clerks, cashiers, utilities to light the store, rent for the store space, administrative costs, shelves and display areas, janitors, etc.

Net Income

Revenues - Expenses Items that are not expected to recur on a regular basis are subtracted from the operating income

Merchandise inventory

The goods a business has on hand for sale to customers Asset on Balance Sheet

A company purchased merchandise under the terms FOB shipping point. How will the payment of freight costs affect the company's ledger accounts?

The total amount of assets will not be affected. Cash flows from operating activities will decrease. The merchandise inventory account will increase.

All other things being equal, a company is charging high prices in relation to its cost of goods sold when it reports a high

gross margin percentage

True or false: The income statement may be shown in a common size format.

True

Which of the following ratios helps explain a company's pricing strategy?

gross margin percentage

Ron Company sold land that cost $150,000 for $160,000. Also, the company sold inventory that cost $60,000 for $85,000. Based on this information, the company will report ______.

a gain of $10,000 gross margin of $25,000

Cost of goods available for sale

beginning inventory + cost of goods purchased Asset account: merchandise inventory Expense account: Cost of goods sold(COGS)

Cost of Goods Sold (COGS)

beginning inventory + purchases - ending inventory Expensed on Income Statement

The cost of merchandise inventory is increased by ______.

costs of getting the inventory ready for sale shipping costs to obtain the inventory for resale

Selling and administrative Costs/Period Costs

costs that are not included in inventory such as advertising expense and rent expense recognized as expenses in the period in which they are incurred -Matched with the period in which they areincurred

Green Company purchased merchandise inventory. Green is not responsible for the freight cost which means the goods were shipped FOB _________

destination

What type of account is Sales Returns & Allowances?

expense liability contra revenue permanent asset

Perpetual Inventory System

inventory system that maintains a continual record of inventory purchased and sold Each time merchandise is purchased, the inventory account is increased; each time it is sold, the inventory account is decreased.

Inventory shrinkage may be caused by ______.

lost or damaged inventory shoplifting

Under the perpetual inventory system, shrinkage is the balance in the inventory account ______.

minus the inventory on hand

Net Income Percentage (Return on Sales)

net income/net sales

Gross Profit / Gross margin

net sales minus cost of goods sold Selling and admin expenses (period costs) are subtracted from gross margin to obtain net income

The cost of shipping inventory to customers after it has been sold will ______ the cost of inventory.

not affect Reason: The cost of obtaining inventory or making it ready for sale are considered to be product costs. Since the cost of delivering inventory to customers occurs after the inventory has been sold, it cannot be considered to be part of the product cost

On a multi-step income statement, the amount of income generated from the normal daily activities of a business is called

operating

Sales / Sales revenue

the account that tracks the selling price of the goods sold. For a retailer it represents all the products sold times the ticket price that you see when shopping for merchandise.