Accounting Chapter 5

list the three common subsidiary ledgers

-accounts receivable subsidiary ledger (customers ledger) -accounts payable subsidiary ledger (creditors ledger) -inventory subsidiary ledger (inventory ledger)

How do you find operating income for a service business?

Operating Income = Fees Earned - Operating Expenses

The accounts receivable subsidiary ledger lists the individual _________________ accounts in alphabetical order. The controlling account in the general ledger is ________________________

The accounts receivable subsidiary ledger, or customers ledger, lists the individual *customer* accounts in alphabetical order. The controlling account in the general ledger is *Accounts Receivable*.

The terms for when payments for merchandise are to be made are called the ________________

The terms for when payments for merchandise are to be made are called the *credit terms*

The terms of purchases on account are normally indicated on the _________________

The terms of purchases on account are normally indicated on the *invoice*

The two systems for accounting for merchandise transactions are _______________ and _________________

The two systems for accounting for merchandise transactions: perpetual and periodic

T/F: Almost all states levy a tax on sales of merchandise

True

T/F: Businesses that purchase merchandise for resale to others are normally exempt from paying sales taxes on their purchases. Only final buyers of merchandise normally pay sales taxes

True

T/F: Each merchandising transaction affects a buyer and a seller.

True

T/F: The activities of a service business differ from those of a merchandising business.

True

T/F: The liability for the sales tax is incurred when the sale is made.

True

T/F: The sum of the balances of the accounts in the subsidiary ledger must equal the balance of the related controlling account

True

T/F: When merchandise is purchased FOB shipping point, the buyer pays for the freight.

True

T/F: Under FOB shipping point terms, sometimes the seller will prepay the freight

True: The seller may prepay the freight, even though the terms are FOB shipping point. The seller will then add the freight to the invoice. The buyer debits Inventory for the total amount of the invoice, including the freight.

T/F: Sales may be made to customers using credit cards such as MasterCard or VISA. Such sales are recorded as cash sales.

True; This is because these sales are normally processed by a clearinghouse that contacts the bank that issued the card. The issuing bank then electronically transfers cash directly to the retailer's bank account. Thus, the retailer normally receives cash within a few days of making the credit card sale.

T/F: Even if the buyer has to borrow to pay within a discount period, it is normally to the buyer's advantage to do so.

True; because purchases discounts taken by a buyer reduce the cost of the merchandise purchased

T/F: Under the perpetual inventory system, the physical inventory on hand at the end of the accounting period is usually less than the balance of Inventory

True; this is because even though the inventory account is continually updated for purchase and sales transactions under the perpetual inventory system, retailers normally experience some loss of inventory due to shoplifting, employee theft, or error

Determine whether each expense is a selling expense (S) or an administrative expense (A) : advertising sales salaries depreciation of office equipment depreciation of store equipment office salaries store supplies used office supplies used delivery expense

advertising - (S) sales salaries - (S) depreciation of office equipment - (A) depreciation of store equipment - (S) office salaries - (A) store supplies used - (S) office supplies used - (A) delivery expense - (S)

The income statement in which the total of all expenses is deducted from the total of all revenues is termed the: a. multiple-step form. b. single-step form. c. account form. d. report form.

b

under FOB destination the ownership of the merchandise passes to the buyer when a. the payment for the merchandise is received b. the buyer receives the merchandise c. the seller delivers the merchandise to the freight carrier d. none of these options

b. the buyer receives the merchandise

If merchandise is sold on account to a customer for $1,000, terms FOB shipping point, 1/10, n/30, and the seller prepays $50 in freight, the amount of the discount for early payment would be: a. $0. b. $5.00. c. $10.00. d. $10.50.

c

On a multiple-step income statement, the excess of net sales over the cost of goods sold is called: a. operating income. b. income from operations. c. gross profit. d. net income.

c

under FOB shipping point the ownership of the merchandise passes to the buyer when a. the payment for the merchandise is received b. the buyer receives the merchandise c. the seller delivers the merchandise to the freight carrier d. none of these options

c. when the seller delivers the merchandise to the freight carrier

The amount of time the buyer is allowed in which to pay the seller is

credit period

Inventory is reported as a ____________________ on the balance sheet

current asset

Which of the following expenses would normally be classified as other expense on a multiple-step income statement? a. Depreciation expense—office equipment b. Sales salaries expense c. Insurance expense d. Interest expense

d

How is operating income calculated for a merchandising business?

operating income = gross profit - operating expenses

In a ___________________ system, the inventory does not show the amount of merchandise available for sale and the amount sold. Instead, a listing of inventory on hand, called a physical inventory, is prepared at the end of the accounting period

periodic inventory

In a __________________ system, each purchase and sale of merchandise is recorded in the inventory account and related subsidiary ledger. the amount of merchandise available for sale and the amount sold are continuously updated in the inventory records

perpetual inventory

what are special journals

Journals designed to be used for recording a single type of transaction.

T/F: The retained earnings statement for a merchandising business and a service business are prepared differently.

False; they are prepared the same

A large number of individual accounts with a common characteristic can be grouped together in a separate ledger, called a ____________________________.

A large number of individual accounts with a common characteristic can be grouped together in a separate ledger, called a *subsidiary ledger*.

Choose the correct option for the four closing entries for a merchandising business: 1. (Debit/Credit) each temporary account with a (debit/credit) balance, such as Sales, for its balance and (debit/credit) Income Summary. 2. (Debit/Credit) each temporary account with a (debit/credit) balance, such as the various expenses, and (debit/credit) Income Summary. 3. (Debit/Credit) Income Summary for the amount of its balance and (debit/credit) the retained earnings account. 4. (Debit/Credit) the retained earnings account for the balance of the dividends account and (debit/credit) the dividends account.

1. *Debit* each temporary account with a *credit* balance, such as Sales, for its balance and *credit* Income Summary. 2. *Credit* each temporary account with a *debit* balance, such as the various expenses, and *debit* Income Summary. 3. *Debit* Income Summary for the amount of its balance (net income) and *credit* the retained earnings account. 4. *Debit* the retained earnings account for the balance of the dividends account and *credit* the dividends account.

how would these terms be expressed: "2% discount if paid within 10 days, net amount due within 30 days"

2/10, n/30

In the adjusting entry for inventory shrinkage, what account is debited?

Cost of Goods Sold

T/F: The time in days to complete an operating cycle is relatively the same among merchandise businesses.

False; The time in days to complete an operating cycle differs significantly among merchandise businesses.

Discounts taken by the buyer for early payment of an invoice are called _____________________

Discounts taken by the buyer for early payment of an invoice are called *purchases discounts*

Each subsidiary ledger is represented in the general ledger by a summarizing account, called a _____________________________.

Each subsidiary ledger is represented in the general ledger by a summarizing account, called a *controlling account*.

Estimated returns inventory represents _____________________________________ and is recorded _____________________________________

Estimated returns inventory represents *an estimate of merchandise that will be returned by customers* and is recorded *at the end of the accounting period as part of the adjusting process*

FOB (free on board) shipping point

Freight terms in which the buyer pays the transportation costs from the shipping point to the final destination.

FOB (free on board) destination

Freight terms in which the seller pays the transportation costs from the shipping point to the final destination.

If payment is due within a stated number of days after the invoice date, such as 30 days the terms may be written as ________. If payment is due by the end of the month in which the sale was made, the terms are written as ________

If payment is due within a stated number of days after the invoice date, such as 30 days the terms may be written as *n/30*. If payment is due by the end of the month in which the sale was made, the terms are written as *n/eom*.

The accounts related to merchandising transactions are:

Inventory Estimated Returns Inventory Customer Refunds Payable Sales Cost of Goods Sold Delivery Expense

How do you find operating income for a merchandising business?

Sales - cost of goods sold = Gross profit Gross profit - Operating Expenses = Operating Income

Sellers are required to estimate returns and allowances at the end of an accounting period and prepare two adjusting entries: The first adjusting entry reduces ________________________ and creates ________________________. The second adjusting entry creates ________________________ and reduces ________________________.

Sellers are required to estimate returns and allowances at the end of an accounting period and prepare two adjusting entries: The first adjusting entry reduces *the sales account* and creates *a customer refund liability account.* The second adjusting entry creates *an estimated returns inventory account for merchandise that is expected to be returned* and reduces *cost of goods sold.*

The accounts payable subsidiary ledger lists the individual _________________ accounts in alphabetical order. The controlling account in the general ledger is ________________________

The accounts payable subsidiary ledger, or creditors ledger, lists *individual creditor* accounts in alphabetical order. The controlling account in the general ledger is *Accounts Payable*.

What is inventory shrinkage (sometimes called inventory shortage)

The amount by which the merchandise for sale, as indicated by the balance of the merchandise inventory account, is larger than the total amount of merchandise counted during the physical inventory

The differences between a service business and a merchandising business are reflected in their _________________________ and their ______________ statements.

The differences between a service business and a merchandising business are reflected in their *operating cycles* and their *financial statements*

The inventory subsidiary ledger lists the individual _________________ by item number. The controlling account in the general ledger is ________________________

The inventory subsidiary ledger, or inventory ledger, lists individual *inventory* by item (bar code) number. The controlling account in the general ledger is *Inventory*.

The only accounts that should appear on the post-closing trial balance are:

The only accounts that should appear on the post-closing trial balance are the asset, contra asset, liability, and stockholders' equity accounts with balances

define operating cycle

The operating cycle is the process by which a company spends cash, generates revenues, and receives cash either at the time the revenues are generated or later by collecting an accounts receivable

The primary ledger, which contains all of the balance sheet and income statement accounts, is called the ________________________.

The primary ledger, which contains all of the balance sheet and income statement accounts, is called the *general ledger*.

The single-step form emphasizes ________________ and ________________ in determining net income. A criticism of the single-step form is ________________ and __________________________ are not reported.

The single-step form emphasizes *total revenues* and *total expenses* in determining net income. A criticism of the single-step form is that *gross profit* and *income from operations* are not reported.

If merchandise purchased on account is returned, the buyer may inform the seller of the details by issuing a(n): a. debit memo. b. credit memo. c. invoice. d. bill.

a

describe the difference between the operating cycles of a service business and a merchandising business

a merchandising business must purchase merchandise for sale to customers, a service business does not

Estimated returns inventory is which of the following: a. current asset b. current liability c. noncurrent asset d. noncurrent liability

a. current asset

Discounts from the list prices in published catalogs or special discounts offered to certain classes of buyers are ___________________

trade discounts