Accounting CH 4 Smartbook

Wholesaler

An intermediary that buys products from manufacturers and sells them to retailers

Retailer

An intermediary that buys products from manufacturers or wholesalers and sells them to consumers

Merchandiser

Earns net income by buying and selling products

Sales is a(n) Blank______ account.

Revenue

The components of a merchandiser's multi-step income statement are shown below. In which order would they appear on the statement?

1. Net Sales 2. Cost of goods sold 3. Gross profit 4. Expenses 5. Net income

Review the following credit terms and identify the one that states that the buyer will receive a 3% discount if the payment is made within 15 days. Otherwise, full payment is expected within 45 days of the invoice date.

3/15,n/45

What is a purchase return?

A purchase return refers to merchandise a buyer acquires, but then returns to the seller.

What is a sales return?

A sales return refers to merchandise that customers return to the seller after a sale.

Select the statements below that correctly describe the flow of costs in a merchandiser's accounting cycle.

Beginning inventory + net purchases = Merchandise available for sale. Ending inventory + Cost of goods sold = Total merchandise available for sale. Merchandise that is purchased becomes an asset reported on the balance sheet. Merchandise that is sold becomes an expense reported on the income statement.

Toys R Fun purchased $4,000 of merchandise and paid immediately. To record this transaction, Toys R Fun would debit the Merchandise ____ account and credit the _____ account.

Blank 1: Inventory Blank 2: Cash

Complete the following statement. Merchandise inventory that is still available for sale is considered a(n) _____ and is reported on the ____ and merchandise that is sold during the period is considered a(n) ____ and reported on the ______

Blank 1: asset or assets Blank 2: balance sheet Blank 3: expense or expenses Blank 4: income statement

The formula for the acid-test ratio is computed as _____ + cash equivalents + short-term investments + current receivables)/current liabilities.

Blank 1: cash

A sales return refers to merchandise that ______ return to the __________ after a sale for a refund of the purchase price or reduction in the amount owed.

Blank 1: customers Blank 2: seller

Show your understanding of what merchandise is by completing the following sentence. Merchandise consists of _____ that a company acquires to resell to ____ Use one word for each blank.

Blank 1: products, goods, items, inventory, or assets Blank 2: customers, consumers, or buyers

Sales is a(n) ______ account and is reported on the ________________

Blank 1: revenue Blank 2: income Blank 3: statement

Gross profit is computed as net ____ minus cost of goods sold.

Blank 1: sales or revenue

XYZ Co. purchased merchandise on June 10 at a $5,000 invoice price with terms of 2/10,n/30 and paid for the merchandise on June 25. Illustrate the required entries to record and pay for this purchase under both the gross method and the net method by matching the action on the left with the method on the right. (Assume a perpetual inventory system is used.)

Cash would be credited for $5,000 on June 25. = Both methods Cash would be credited for $4,900 on June 25. = Neither method Discounts lost would be debited for $100 on June 25. = Net method Merchandise inventory would be debited for $5,000 for June 10. = Gross method

ABC Co. purchased merchandise on August 5 at a $1,000 invoice price with terms of 2/10,n/30 and paid for the merchandise on August 14. Determine its entry to record this purchase and the subsequent payment under both the gross method and the net method by matching the action on the left with the method on the right. (Assume a perpetual inventory system.)

Cash would be credited for $980 on August 14. = Both methods Discounts lost would be debited for $20 on August 14. = Neither method Merchandise inventory would be debited for $980 on August 5. = Net method Merchandise inventory would be credited for $20 on August 14. = Gross method

A merchandiser has four closing journal entries at the end of an accounting cycle. Select the correct entries below. (Check all that apply.)

Close expense accounts. Close the income summary account. Close revenue accounts. Close the dividends account.

Cost of goods sold is characterized by which of the following statements? (Check all that apply.)

Cost of goods sold is an expense reported on the income statement. Cost of goods sold is used to figure gross profit. Cost of goods sold includes the expenses of buying and preparing an item for sale. Cost of goods sold is also called cost of sales.

Identify the statements below that are correct regarding the closing entries for a merchandiser using the perpetual inventory system. (Check all that apply.)

Cost of goods sold is closed with the expense accounts. The Dividends account is closed to Retained Earnings Sales is closed as a revenue account. Sales Discounts is closed with the expense accounts. Sales Returns and Allowances is closed with the expense accounts.

Identify the statements below which are correct regarding a merchandiser's multi-step income statement.

Cost of goods sold is subtracted from net sales in order to determine gross profit. Expenses are subtracted from gross profit in order to calculate net income.

Explain how to determine gross profit on an income statement by selecting the correct statement below.

Cost of goods sold is subtracted from net sales.

Which of the statements below are correct regarding cost of goods sold?

Cost of goods sold is the expense of buying and preparing merchandise.

XYZ Company uses the periodic inventory system to account for its merchandise purchases. A physical count of inventory at year end revealed that $6,000 of inventory was on hand. Given the partial list of accounts below, show your understanding of the entry to close the temporary debit balance accounts and update the Merchandise Inventory account by selecting all of the correct answers below.

Credit Merchandise Inventory for the beginning balance $5,000. Credit Sales Discounts $500. Credit Purchases $36,000.

X-Mart purchased $300 of merchandise on credit. Demonstrate the journal entry to record this transaction, assuming the perpetual inventory system is used.

Debit Merchandise Inventory $300; credit Accounts Payable $300.

Q-mart uses the periodic inventory system. A physical count of inventory revealed it had $6,000 of inventory remaining at year end. Given the partial list of accounts below, the entry to close the temporary credit balance accounts and update the Merchandise Inventory account would include all of the following.

Debit Merchandise Inventory (ending balance) $6,000. Debit Purchase Discounts $1,000. Debit Sales $20,000.

Assume that X-Men has an unadjusted Accounts Receivable balance of $10,000 and Allowance for Sales Discounts balance of $0. $1,000 of accounts receivable are within the 2% discount period and X-Men expects that buyers will take $20 in future-period discounts arising from this period's sales. The adjusting entry for sales discounts is:

Debit Sales Discounts and credit Allowance for Sales Discounts for $20

Sticky Company's merchandise inventory balance at year end is $15,050, but a physical count reveals that only $15,000 of inventory exists. The adjusting entry to record the shrinkage includes: (Check all that apply.)

Debit to Cost of Goods Sold for $50 Credit to Merchandise Inventory for $50

If the seller is responsible for the shipping costs of merchandise sold, the shipping terms will be specified as:

FOB destination

Merchandise inventory is generally converted to cash more quickly than accounts receivable.

False

The Allowance for Sales Discounts account: (Check all that apply.)

Is reported on the balance sheet as a reduction to the Accounts Receivable account. Is a contra asset account.

A single-step income statement can be identified by which of the following formats?

It shows only one total for all expenses.

Which statement below correctly describes merchandise inventory?

Merchandise inventory is an asset reported on the balance sheet and contains the cost of products purchased for sale.

Which of the following equations correctly identify the cost flow of a merchandising company?

Net purchases plus beginning inventory equals merchandise available for sale

Identify the statement below that is the correct definition of inventory shrinkage.

Shrinkage is the term used to refer to the loss of inventory due to theft, breakage or deterioration.

The buyer and seller of merchandise must agree on who is responsible for paying freight terms. Show your understanding of freight terms by selecting all of the correct statements below. (Check all that apply.)

Terms FOB shipping point means the buyer accepts ownership when the goods depart the seller's place of business. Revenue for the sale will be recorded after the goods reach their destination, if the goods are shipped FOB destination. Terms FOB destination means that the seller is responsible for shipping costs. When the shipping costs are the responsibility of the buyer, then the Merchandise Inventory account is debited for the freight charges.

Explain what the credit terms of 2/10,n/30 mean. (Check all that apply.)

The full payment is due within a 30-day credit period. The buyer can deduct 2% of the invoice amount if payment is made within 10 days of the invoice date.

A single-step income statement shows only one subtotal for expenses.

True

Merchandise inventory can be described as: (Check all that apply.)

an account increased with a debit. products that a company owns and intends to sell. an asset account. an account appearing on a balance sheet of a merchandiser.

Complete the following statement. Merchandise inventory that is still available for sale is considered a(n) _______ and is reported on the ______ and merchandise that is sold during the period is considered a(n) _____ and reported on the ______.

asset -> balance sheet -> expense -> income statement

The Merchandise Inventory account on a classified balance sheet is reported in the:

current assets section

The formula for the acid-test ratio is computed as (cash + short-term investments + current receivables)/Blank______.

current liabilities

Jo's Market makes a credit sale for $1,000 with terms of 2/10,n/30. The cost of the merchandise is $400. The required journal entry to record the sale and cost of the sale is:

debit Accounts Receivable $1,000; credit Sales $1,000; debit Cost of Goods Sold $400; and credit Merchandise Inventory $400

Jan's Jams makes a credit sale for $300 with terms of 2/10,n/30. The cost of the merchandise is $200. The required journal entry to record the sale and the cost of the sale is:

debit Accounts Receivable $300; credit Sales $300; debit Cost of Goods Sold $200; and credit Merchandise Inventory $200

Determine which of the following statements below regarding a merchandiser are correct.

Merchandisers are often identified as retailers. A merchandiser earns net income by buying and selling merchandise. Merchandisers are also identified as wholesalers.