Chapter 5 Quiz

How is gross profit measured? - Sales revenue minus operating expenses - Sales revenue minus cost of goods sold - Operating expenses minus net income - Operating expenses minus cost of goods sold - Sales revenue minus sales discounts and sales returns and allowances

Sales revenue minus cost of goods sold Solution: Learning objective 6 Gross profit equals net sales minus cost of goods sold.

If beginning inventory is $80,000, cost of goods purchased is $400,000, sales revenue is $900,000 and ending inventory is $60,000, how much is cost of goods sold under a periodic system? - $420,000 - $440,000 - $470,000 - $410,000 - $390,000

$420,000 Solution: Learning objective 5 Cost of goods sold is computed by adding beginning inventory and cost of goods purchased and then subtracting ending inventory, or $80,000 + $400,000 - $60,000 = $420,000.

If sales revenues totals $400,000, cost of goods sold is $310,000, operating expenses are $60,000, and nonoperating expenses are $10,000, how much is the gross profit? - $130,000 - $90,000 - $400,000 - $340,000 - $30,000

$90,000 Solution: Net sales revenue = Sales - Sales returns and allowances - Sales discounts Net sales revenue = $400,000 - 0 - 0 = $400,000 Gross profit = Net sales revenue - cost of goods sold Gross profit = $400,000 - 310,000 = $90,000 Chapter 5, Learning objective 6, Pool 2Q

Arbol Corporation reports the following: Sales revenue $181,000; ending inventory $12,600; beginning inventory $15,000; purchases $65,600; purchases discounts $2,500; purchase returns and allowances $1,500; freight-in $600; freight-out $800. Calculate the cost of goods sold. - $76,900 - $77,700 - $59,800 - $64,600 - $79,600

$64,600 Solution: Cost of goods sold equals the beginning inventory plus purchases minus purchases discounts and purchases returns and allowances plus freight-in minus ending inventory. Cost of goods sold = 15,000 + 65,600 - 2,500 - 1,500 + 600 - 12,600 = 64,600. Chapter 5, Learning objective 5, Pool 1

A company has the following: Sales revenue $300,000; Sales Returns and Allowances $30,000; Sales Discounts $3,000; Cost of Goods Sold $107,000; operating expenses $67,600; net cash provided by operating activities $108,900. How much is the company's profit margin? - 20% - 26.4% - 12.4% - 40.0% - 34.6%

34.6% Solution: Profit margin = Net income divided by net sales Net sales = Sales revenue minus sales returns and allowances minus sales discounts Net sales = 300,000 - 30,000 - 3,000 = 267,000 Net income = Net sales - cost of goods sold - operating expenses Net income = 267,000 - 107,000 - 67,600 = 92,400 Profit margin = Net income divided by net sales Profit margin = 92,400/267,000 = 34.6%. Chapter 5, Learning objective 6, Pool 4Q

A company has the following accounts balances: Sales revenue $100,000; Sales Returns and Allowances $20,000; Sales Discounts $5,000; and Cost of Goods Sold $40,000. How much is the gross profit rate? - 75.0% - 20.0% - 26.7% - 25% - 46.7%

46.7% Solution: Net sales = Sales revenue - sales returns and allowances - sales discounts Net sales = 100,000 - 20,000 - 5,000 = 75,000 Gross profit = Net sales - cost of goods sold Gross profit = 75,000 - 40,000 = 35,000 Gross profit rate = Gross profit divided by net sales. Gross profit ratio = 35,000/75,000 = 46.7% Chapter 5, Learning objective 6

Which of the following statements is correct about the periodic inventory system? - A company which uses a periodic inventory system needs only one journal entry when it sells merchandise. - None of these - A company that uses the periodic inventory system does not have an inventory account. - A company which uses a periodic inventory system needs exactly two journal entries when it sells merchandise. - A company which uses a periodic inventory system debits Cost of Goods Sold and credits Inventory each time it sells merchandise.

A company which uses a periodic inventory system needs only one journal entry when it sells merchandise. Solution: When a company uses a periodic inventory system, it needs only one journal entry to record a sale. That journal entry includes a debit to either cash or accounts receivable and a credit to sales revenue. A company using the periodic inventory system does not record the increase to cost of goods sold or the decrease to inventory until the end of the accounting period. Chapter 5, Learning objective 8

Which one of the following statements is correct? - A company which uses a perpetual inventory system debits inventory and credits cost of goods sold when it sells merchandise. - None of the answer choices are correct. - A company which uses a perpetual inventory system needs only one journal entry when it sells merchandise. - A company which uses a perpetual inventory system needs two journal entries when it sells merchandise. - A company which uses a perpetual inventory system does not record any journal entries when it sells merchandise.

A company which uses a perpetual inventory system needs two journal entries when it sells merchandise. Solution: Learning objective 3 When a perpetual inventory system is in use, one journal entry is made for the sale, and then a second is made for the cost of goods sold.

Which of the following would affect the gross profit rate if sales remain constant? - All of these - An increase in cost of goods sold - A decrease in depreciation expense - An increase in advertising expense - A decrease in insurance expense

An increase in cost of goods sold Solution: Learning objective 6 Gross profit rate is computed by dividing gross profit by net sales and any change in sales, sales returns in allowances, sales discounts, or the cost of goods sold will affect the ratio.

Which of the following is not a component or step of the operating cycle for a service company? - Record an increase to accounts receivable when services are performed for customers on account - Receive cash payments from customers - All of these are steps of the operating cycle of a service company - Buy inventory to be resold to customers - Perform services for customers

Buy inventory to be resold to customers Solution: The operating cycle of a service company involves performing services for customers who either pay cash immediately or pay later. If payment comes later, the service company records the sale on account (i.e., the service company increases accounts receivable), and later when the customer pays cash the service company increases cash and decreases accounts receivable. These steps do not including buying or selling inventory. Service companies do not sell inventory; they only sell services. Chapter 5, Learning objective 1

Cosmos Corporation uses the perpetual inventory system. It 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. On July 21, it pays the supplier. Which of the following is part of the journal entry Cosmos records when it pays the supplier? - Credit to Cash for $1,600 - Debit to Accounts Payable for $2,000 - Credit to Accounts Payable for $1,600 - Debit to Cash for $1,600 - Debit to inventory for $2,000

Credit to Cash for $1,600 Solution: The discount terms are 2/10, n/30 which indicates a 2% discount if paid within 10 days, but the full amount is due without a discount thereafter and payment is considered overdue 30 days after the invoice date. Since the bill is paid after the 10-day discount period, the full invoice amount minus the price of the returned goods is due (i.e., $2,000 - 400 = $1,600). The entry to record the payment includes a debit Accounts Payable for $1,600 and credit Cash for $1,600. Chapter 5, Learning objective 2

Which of the following is classified in an income statement as a non-operating activity? - Salaries and wages expense - Cost of goods sold - Advertising expense - Freight-out - Interest expense

Interest Expense Solution: Multi-step income statements report the following: Revenues minus cost of goods sold equals gross profit, and gross profit minus operating expenses (e.g., salaries & wages, advertising, utilities, depreciation, freight-out, insurance) equals income from operations, and income from operations minus non-operating income &/or expenses (e.g., interest revenue, interest expense, gain from sales of plant assets, losses from sales of plant assets) equals income before income taxes, and income before income taxes minus income taxes equals net income. Chapter 5, Learning objective 4, Pool 1

On what amount is a sales discount based? - Invoice price less returns and allowances - Invoice price plus freight-in - Invoice price plus freight-out - Invoice less discount - Invoice price plus returns and allowances.

Invoice price less returns and allowances Solution: Learning objective 3 The buyer is permitted to take the discount on the invoice price less any returns and allowances, because this amount represents the buyer's obligation without a discount.

On December 1, Marsh, Inc. sold inventory for $5,500 on account with terms 2/10 n/30. The customer pays nine days later. Marsh uses a periodic inventory system. What amount will Marsh record in its inventory account on December 1? - Debit of $5,500 - No entry will be made. - Debit of $5,390 - Credit of $5,390 - Credit of $5,500

No entry qill be made Solution: Under the periodic inventory system, all entries that will be made to the inventory account will be held at the end of the reporting period. Thus no entry will be made on the sale date or the cash received date. Chapter 5, Learning objective 2

Under what inventory system is cost of goods sold determined at the end of an accounting period? - Double entry inventory system - Single entry inventory system - All inventory systems - Perpetual inventory system - Periodic inventory system

Periodic inventory system Solution: Learning objective 5 Under the periodic inventory system, cost of goods sold for the period is calculated by adding purchases for the period to the beginning inventory balance and subtracting the ending inventory balance.

Indicate which one of the following would likely appear on both a multi-step income statement and a single-step income statement. - None of these would appear on both types of income statement - Gross profit - Income from operations - Cost of goods sold - All of these would appear on both types of income statement

Solution: Two formats for the income statement include: (1) single-step income statement and (2) multi-step income statement. Gross profit is reported exclusively on the multi-step income statement; gross profit is sales minus cost of goods sold. Many companies.that sell inventory use the multi-step income statement to highlight gross profit. Some companies that sell inventory continue to rely on the single-step income statement, so some companies that have cost of goods sold report cost of goods sold. Chapter 5, Learning objective 4, Pool 4

Helix Company purchased merchandise with an invoice price of $1,000 and credit terms of 1/10, n/30. Assuming a 360 day year, what is the implied annual interest rate inherent in the credit terms? - 2% - 54% - 1% - 18% - 36%

18% Solution: Learning objective 2 The company saves $10 (i.e., $1,000 x 1%) if it pays 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 $1% (10 if it pays 20 days before the final due date. Use the formula for interest: Interest = Principal x Interest rate x Time $10 = $1,000 x Interest rate x (30-10)/360 Solving for the interest rate: Interest rate = [360/(30-10)] x $10/$1,000 = 0.18 (i.e., 18%)

Jackson Company uses a perpetual inventory system. On November 30, it purchased $10,000 of merchandise and it must pay the $200 shipping charges. The credit terms for the merchandise were 2/10, n/30. The company paid for both the merchandise and the shipping charges nine days after their invoice dates. Which of the following is part of the required journal entry when Jackson pays the shipping charges of $200? - A debit to Inventory for $200 - A credit to Accounts Payable for $200 - A debit to Freight-in for $200 - A debit to Cash for $200 - A debit to Freight-out for $200

A debit to Inventory for $200 Solution: In a perpetual inventory system, all of the cost of acquiring merchandise (including the cost of having the inventory delivered to the purchaser) is recorded as part of the cost of the inventory. The cost of the merchandise and the shipping charges should both be debited to the inventory account. Suppliers sometimes offer discounts (such as 2/10, n/30). However, discounts are offered by suppliers of merchandise and not by shippers. The journal entry for paying the shipping charges includes a debit to inventory for $200 and a credit to cash for $200. Chapter 5, Learning objective 2

What type of account is Sales Returns and Allowances? - Expense account - Contra asset account - Contra revenue account - Contra expense account - Book value account

Contra revenue account Solution: Learning objective 3 Sales Returns and Allowances and Sales Discounts are contra revenue accounts.

Starlight Corporation uses a perpetual inventory system. It purchased $3,000 of merchandise on August 2 on account. Credit terms were 1/10, n/30. It returned $250 of the merchandise on August 4. On August 12, it pays the supplier. Which of the following is part of the journal entry Starlight records when it pays the supplier? - Credit to Cash for $2,750 - Credit to Accounts Payable for $2,722.50 - Credit Inventory for $27.50 - Debit to inventory for $3,000 - Debit to Accounts Payable for $3,000

Credit Inventory for $27.50 Solution: The discount terms are 1/10, n/30 which indicates a 1% discount if paid within 10 days, but the full amount is due without a discount thereafter and payment is considered overdue 30 days after the invoice date. Since the bill is paid 10 days after the invoice date, the discount applies. Payment requires paying the net purchase reduced by the discount (i.e., 99% x ($3,000 - 250) = $2,722.50). The discount is 1% of the bet purchase (i.e., 1% x ($3,000 - 250) - $27.50). The journal entry to record the payment includes a debit Accounts Payable for $2,750, a credit to Inventory for the discount (i.e., $27.50), and a credit to Cash for $2,722.50. Note that the discount reduces the inventory account balance because the company uses the perpetual inventory system. Chapter 5, Learning objective 2

Which of the following is a merchandising company that sells directly to consumers? - Service enterprise - All of these - Wholesaler - Retailer - Customer

Retailer Solution: A merchandising company sells directly to consumers is called a retailer. Chapter 5, Learning objective 1

Which of the following will not be shown on the income statement for a merchandising company? - Sales discounts - Revenue - Retained earnings - Cost of goods sold - Gross profit

Retained earnings Solution: Learning objective 4 The sales section appears first followed by cost of goods sold. The difference between sales and cost of goods sold is gross profit.

Ending inventory is $10,000, beginning inventory is $20,000, and the cost of goods purchased is $25,000. How much is cost of goods sold? - $35,000 - $45,000 - $15,000 - $25,000 - $30,000

$35,000 Solution: Learning objective 5 Cost of goods sold = Beginning inventory + purchases - ending inventory. Solve for ending inventory. Beginning balance ($20,000) plus purchases ($25,000) equals $45,000 in merchandise available, less ending inventory ($10,000) equals cost of goods sold of $35,000.

Martin Company purchases $4,200 of merchandise on March 1, with credit terms of 3/10, n/30. If Martin pays on March 11, Martin must pay - $4,200. - $4,520. - $3,780. - $4,074. - $3,864.

$4,074 Solution: Learning objective 2 The terms 3/10, n/30 indicate that the discount is 3% if payment is made within 10 days of the invoice date. This permits Martin Company to take a discount of $126 (3% x $4,200) on the invoice, $4,200 - 126 = $4,074.

Net income is $15,000, operating expenses are $20,000, and net sales total $75,000. How much is cost of goods sold? - $55,000 - $60,000 - $35,000 - $15,000 - $40,000

$40,000 Solution: 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. Chapter 5, Learning objective 4, Pool 2

A credit sale of $750 is made on June 13, terms 2/10, n/30. It is followed by a return of $50 on June 16. If payment is made on June 23, how much cash is received? - $686 - $650 - $685 - $700 - $735

$686 Solution: Learning objective 3 The amount to be received as payment in full on June 23 is $686. Because payment is made within the discount period of 10 days, the amount received as payment in full is $700 ($750 - return of $50) minus the discount of $14 ($700 x 2%), or $686.

Given the following quality of earnings ratios, which suggests the company may be using the most conservative accounting techniques? - 0.2 - 0.6 - 1.8 - 1.0 - 1.6

1.8 Solution: Learning objective 7 Since this ratio is significantly greater than 1, it suggests the use of the most conservative accounting techniques.

Which of the following statements about a periodic inventory system is true? - The increased use of computerized systems has increased the use of the periodic system. - Companies continuously maintain detailed records of the cost of each inventory purchase and sale. - Companies determine cost of goods sold only at the end of the accounting period. - The periodic system provides better control over inventories than a perpetual system. - None of these are true.

Companies determine cost of goods sold only at the end of the accounting period. Solution: Under the periodic inventory system, cost of goods sold is determined at the end of the accounting period using a formula: Beginning inventory + purchases - ending inventory = Cost of goods sold. Chapter 5, Learning objective 1

Wilma's Foods recorded the following events involving a recent purchase of inventory: Received goods for $45,000, terms 1/10, n/30. Returned $1,000 of the shipment for credit. Paid $250 freight on the shipment. Paid the invoice within the discount period. The company uses the perpetual inventory system. As a result of these events, the company's inventory - increased by $45,000. - increased by $43,916. - increased by $43,560. - increased by $43,810. - increased by $43,807.50.

increased by $43,810. Solution: Learning objective 2 [($45,000 - $1,000) x 0.99] + $250 = $43,810

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

paying lower prices to its suppliers. Solution: Recall that gross profit rate equals gross profit divided by net sales. An increase in the gross profit rate suggest either an increase in gross profit and/or a decrease in net sales. An increase in a company's gross profit rate may be caused by selling products with higher gross margins (i.e., higher "mark-ups"), raising prices and/or offering fewer price discounts due to less competition from other companies, or decreases in sales allowances offered to customers. Chapter 5, Learning objective 6