Chapter 6

Payment=

Amount Owed - Discount

Ending Inventory=

Beginning Inventory + Purchases - Cost of Goods Sold

Net Sales=

Sales Revenue − Sales discounts − Sales returns & allowances

Cash paid by customer=

Sales revenue − Sales return − Sales discount

Inventory

The merchandiser's total cost of acquiring goods that it has not yet sold

To determine how much inventory is on hand and how much inventory has been sold, periodic systems require that inventory be _______________ counted by the employees at the end of the period.

physically

What does an increasing gross profit percentage mean?

the company is selling products for a greater markup over its cost

Perpetual Inventory System

the inventory records are updated "perpetually," that is, every time inventory is bought, sold, or returned.

FOB destination

the sale is recorded when the goods reach their destination (the customer).

Bijoux Company has sales of $40,000, beginning inventory of $5,000, purchases of $25,000, and ending inventory of $7,000. The cost of goods sold is:

$23,000

A company has gross profit of $58,300 and a gross profit percentage of 25%. What were the company's net sales?

$233,200

A company reported a gross profit percentage of 25% with net sales of $347,800. What is the amount of cost of goods sold?

$260,850

Ace Electronics had cost of goods sold of $20,000. If purchases were $23,000 and ending inventory was $6,000, Ace's beginning inventory must have been:

$3,000

Boron Company has sales of $60,000, beginning inventory of $7,000, purchases of $35,000, and ending inventory of $5,000. The cost of goods sold is:

$37,000

Ace Electronics uses a perpetual inventory system. On May 1, beginning inventory was $100,000. During May, Ace purchased $35,000 of inventory and sold $71,000 of inventory. After the store closed on May 31, employees counted the inventory in the store and found that $60,000 of inventory remained unsold. What was Ace's inventory shrinkage?

$4,000

XYZ Company sold merchandise for $5,000, with payment terms of 2/10,n/30. If the customer pays within the discount period and takes the discount, XYZ will receive:

$4,900

The Ocho Co. had a beginning inventory of $25,000 and an ending inventory of $40,000. Its Cost of Goods Sold for the year was $485,000. What was the amount of purchases that it made for the year?

$500,000

The gross profit percentage for Elk Roofing Products is 25%. If the company has Net Sales of $850,000 for the year, what was the amount of Cost of Goods Sold?

$637,500

McLeod Corporation is a merchandising company. The year began with inventory of $27,000, Purchases for the year were $52,000, and the Ending Inventory was $14,000.What is the Cost of Goods Sold that would be reported on the income statement?

$65,000

On June 15, Oakley Inc. sells inventory on account to Sunglass Hut (SH) for $1,000, terms 2/10, n/30. On June 20, SH returns to Oakley inventory that SH had purchased for $300. On June 24, SH completely fulfills its obligation to Oakley by making a cash payment. What is the amount of cash paid by SH to Oakley?

$686

Gross profit percentage =

(Gross profit ÷ Net sales) × 100

Sales discount=

(Sale − Sales return) × Discount %

Gross profit =

(Sales Revenue − Sales discounts − Sales returns & allowances) − Cost of goods sold

`Using a perpetual inventory system, what is the correct journal entry when a customer returns a product that was purchased on account?

A debit to Sales Returns & Allowances and a credit to Accounts Receivable; and a debit to Inventory and a credit to Cost of Goods Sold

Beyer Company bought inventory FOB shipping point from Sellar Company for $4,000 cash, including shipping charges. On December 31, the last day of the accounting year, the goods were on a truck owned by Common Carrier, Inc., and not expected to arrive until January 3. Which company should include these goods in its December 31 inventory?

Beyer should include the $4,000 in its inventory

BI + P - EI =

CGS

Bennett's Clothing purchased goods on credit costing $50,000 with terms of 3/10 n/30. Payment is made to the seller 7 days after the purchase. How would the payment be recorded?

Debit Accounts Payable for $50,000 credit Cash for $48,500, and credit Inventory for $1,500

If merchandise costing $500 is sold on account for $620, how is this transaction recorded when using a perpetual inventory system?

Debit Accounts Receivable, credit Sales Revenue for $620; debit Cost of Goods Sold, and credit Inventory for $500

Tiger Co. sold merchandise on account to a customer. The customer returned some of that merchandise because it was not satisfactory. What journal entry will Tiger use to record the return?

Debit Sales Returns & Allowances and credit Accounts Receivable; and debit Inventory and credit Cost of Goods Sold

If merchandise costing $500 that was sold cash at a price of $620 is returned by the customer, how would this transaction recorded when using a perpetual inventory system?

Debit Sales Returns & Allowances and credit Cash for $620; debit Inventory and credit Cost of Goods Sold for $500

Merchandise Sold on Account and Returned:

Debit Sales Returns and Allowances and credit Accounts Receivable, debit Inventory and credit Cost of Goods Sold

Merchandise Sold on Cash and Returned:

Debit Sales Returns and Allowances and credit Cash, debit Inventory and credit Cost of Goods Sold

Gross Profit %=

Gross Profit/Net Sales x 100

Net Sales=

Gross profit ÷ Gross profit percentage × 100

Income from operations =

Income before income tax expense − Other revenues (expenses), net.

Net income =

Income from operations + Other revenues (expenses), net − Income tax expense

Purple Corp. purchased $10,000 of merchandise on June 3, subject to the terms, 2/10, n/30. On June 9, it pays for all the merchandise purchased on June 3. When the entry relating to this transaction is recorded, that entry will reduce:

Inventory by $200

The purchase of merchandise on account in a perpetual system is recorded with a debit to ______ and a credit to ______:

Inventory; Accounts Payable

Shrinkage=

Recorded amount - Actual count

Cost of Goods Sold

Total cost of all goods that the merchandiser did sell to customers

Allowance

a reduction in the selling price

After performing a physical count of inventory at the end of the accounting period, it was discovered that the amount of inventory on hand was less than the accounting records reported. The entry to record this inventory shrinkage includes:

credit to Inventory

If a company achieves a small increase in its gross profit percentage from one year to the next, the company:

might not have had a sales volume increase.

FOB Destination

ownership transfers to buyer at the destination when it arrives (transportation costs are on the supplier)

FOB shipping point

the sale is recorded when the goods leave the seller's shipping department.

Merchandisers earn revenues by:

transferring control of merchandise to a customer, either for cash or on credit.

Periodic Inventory System

updates the inventory records for merchandise purchases, sales, and returns only at the end of the accounting period.

Beginning inventory was $5,000. During the month, the company purchased an additional $25,000 of inventory and sold goods that cost $20,000. Ending inventory was:

$10,000

Inventory began with $30,000. During the period the company purchased $61,000 of merchandise. At the end of the period, inventory was $22,000. If the gross profit percentage was 40%, what was sales revenue?

$115,000

Etcetera Clothing sold merchandise inventory on account at a price of $16,000 with payment terms of 2/10, n/30. The merchandise cost Etcetera Clothing $11,000. If the customer paid for the merchandise 5 days after receiving the invoice, how much cash was collected by Etcetera Clothing?

$15,680

Bottom, Inc. paid an invoice for $1,000, with discount terms of 1/7, n/30, within the discount period and will write a check in the amount of:

$990

Cost of Goods Sold percentage=

100% − Gross profit percentage

Over a two-year period, Beneful Product's gross profit percentage went from 70.4% to 69.7%. Which of the following could not have been the cause of this change?

An increase in selling price

Cost of Goods Sold=

Beginning Inventory + Purchases - Ending Inventory

Gross Profit= Net Sales -

Cost of Goods Sold

Beginning Inventory=

Cost of Goods Sold - Purchases + Ending Inventory

Net Sales Percentage=

Cost of goods sold percentage + Gross profit percentage

BI + P - CGS =

EI

Purchases=

Ending Inventory - Beginning Inventory + Cost of Goods Sold

For a merchandiser who is shipping goods to a customer, the transfer of control occurs at one of two possible times:

FOB shipping point and FOB destination

Sales Revenue- Cost of Goods Sold=

Gross Profit

Income before Income Taxes:

Gross Profit- Operating expenses

Income from operations=

Net sales − Cost of goods sold − Selling, general, and administrative expenses

Angle Inc. announces that its gross profit rose 5% but its income before income taxes fell. Which of the following statements is correct?

This must mean that selling, general, and administrative expenses increased by more than 5%.

Sales Revenue

Total selling price of all goods that the merchandiser did sell to customers

End-of-year adjustment entries (are/are not) required using a perpetual inventory system.

are not

Transportation costs (are/are not) an expense.

are not

Perpetual systems often are combined with:

bar codes and optional scanners

The sales returns and allowances and sales discounts introduced in this section were recorded using _________-___________ accounts.

contra-revenue

Sales Returns & Allowances is a ______ account and is ______ when goods are returned by customers for a refund.

contra-revenue; debited

Assume that a company uses a perpetual inventory system and records the return of inventory previously purchased on account a debit to Accounts Payable and a credit to Inventory. This entry is:

correct

Merchandise Sold on Account:

debit Accounts Receivable and credit Sales Revenue, debit Cost of Goods Sold and credit Inventory

The entry to record shrinkage includes a:

debit to Cost of Goods Sold (to increase this expense account) and credit Inventory (to decrease this asset account).

If gross profit increases, income before income taxes will (increase/decrease) if operating expenses increase by a greater amount.

decrease

Every merchandise sale has two components, each of which requires an ________ in a perpetual inventory system.

entry

Where are transportation costs included?

in the value of the inventory

What three accounts are particularly important to a merchandiser?

inventory, revenue, and cost of goods sold

FOB Shipping Point

ownership of the goods transfers to buyer when shipped (transportation costs are on the buyer)

Ace Electronics, which uses a perpetual inventory system, recorded a debit to Sales Returns & Allowances and a credit to Accounts Receivable, along with a debit to Inventory and a credit to Cost of Goods Sold. What business event must have taken place?

The customer received a damaged product and returned it.

If gross profit percentage decreases, there must have been a (decrease/increase) in the selling price, an (decrease/increase) in the cost of the product, or some combination of the two.

decrease, increase

When goods sold to a customer arrive in damaged condition or are otherwise unsatisfactory, the customer can:

return them for a full refund or keep them and ask for a reduction in the selling price, called an allowance.

Acme Enterprises, which uses a perpetual inventory system, recorded a debit to Sales Returns & Allowances and a credit to Accounts Receivable. (No other accounts were affected.) What business event must have taken place?

The customer received a damaged product, but kept the product and asked for a reduction in the price.