ACCT 2000 Exam 2 AP 6

Bobbi's Boutique sells blue jeans. In 2017, Bobbi's gross profit rate was 41.3 percent. In 2018, the gross profit rate dropped to 33.1 percent. However, annual net sales was the same in both years. This change is likely the result of Bobbi's decision to switch from selling jeans with a ______ markup to selling jeans with a _______ markup.

High; Low

One advantage of using the multiple-step income statement is that it

Highlights the components of net income

Which situation will result in an operating income of more than $0.

If operating expenses are less than gross profit

Based on the net income of the shop, the sales staff at Francesca's Fashions receive performance bonuses. In periods of declining prices, which inventory costing method would bring the sales staff the most benefit?

LIFO

When prices are rising, which inventory cost flow assumption will result in the highest cost of goods sold?

LIFO

Which of the following statements is true regarding inventory cost methods?

Management may choose any inventory costing method it desires

Cost of goods sold should be subtracted from net sales on which of the following financial statements?

Multiple Step Income Statement

Cash realizable value is the term for the ________ amount expected to be received in cash from receivables.

Net

What happens if the amount of Bad Debt Expense is overstated at year end?

Net Accounts Receivable will be understated.

Cost of purchases plus freight paid on purchased goods, less purchase returns and allowances will result in

Net Cost of Purchases

Under a periodic system, cost of goods available for sale is sum of beginning inventory plus

Net Cost of Purchases

A merchandising company would be more likely to use a multiple-step income statement instead of a single-step income statement to keep better track of details about

Net Income

In a merchandising company, gross profit less operating expenses equals

Net Income

Which of the following pairs of terms are NOT synonyms?

Net income and comprehensive income

Casualty losses from vandalism are reflected on the income statement as part of

Non-operating Activities

Under the periodic inventory system, cost of goods sold is determined

On the last day of the accounting period.

External users of financial statements view _________ as sustainable and many ________ as non-recurring.

Operating Income; Non-operating Activities

All of the following will cause a decline in a company's gross profit EXCEPT

Paying lower prices to its suppliers

Which inventory system creates different accounts for purchases, freight costs, and purchase returns?

Periodic Inventory System

Under a _________ inventory system, accounting records continuously keep track of the amount of inventory on hand

Perpetual

If FIFO is used during a period of inflation, which of the following might occur?

Phantom or paper profits

The percentage of each dollar of sales that results in net income is commonly referred to as the

Profit Margin

The net amount expected to be received in cash from receivables is termed the cash ________ value.

Realizable

Which of the following should a merchandiser do at the point of sale?

Record an accounts receivable

A physical count of inventory at the end of the accounting period is _________ under the periodic system.

Required

Gross profit equals the difference between

Sales revenue and cost of goods sold.

MF, Inc. operates an import/export business. For the year ended December 31, 2018, MF's net sales were $1,251,000, gains on foreign currency translations were $6,800, cost of goods sold was $570,000, income tax expense was $40,350, other revenue was $7,050, and operating expenses were $180,000. What was MF's net income and comprehensive income, respectively for the year ended December 31, 2018?

$467,700; $474,500

Last month a company had net sales revenues of $10,000; Cost of goods sold of $4,000; other operating expenses of $3,000; non-operating expenses of $1,000; no non-operating revenues, gains or losses; and income taxes of $500. The gross profit was

$6,000

If Davidson has 7,000 units on hand at December 31, the cost of ending inventory under the average-cost method is

$75,250

If sales revenues are $400,000, cost of goods sold is $310,000, and operating expenses are $60,000, the gross profit is

$90,000

Information from JT Engineering's 2017 income statement is shown in the chart. Based on this information, what was JT's profit margin for 2017? Round to the nearest hundredth.

($51,500/$95,000=) 54.21%

A periodic inventory system requires a physical count of goods on hand to compute the _______. Select all that apply.

-Ending Inventory -Costs of Goods Sold

Which of the following are true of the multiple-step income statement?

-Gross profit is a separate line item -Details about revenues and expenses are included under separate headings. -It lists other gains and losses in a separate line item.

Which of the following are the result of credit sales to a company? Select all that apply.

-Notes Receivable -Accounts Receivable

Which of the following are considered in computing net cost of purchases?

-Purchases -Sales Tax on Purchased Goods -Purchases,Returns, and Allowances

Information from Haas Incorporated's 2017 income statement is shown in the chart. Based on this information, what was Haas' profit margin for 2017? Round to the nearest hundredth.

2.32% ($1,300/$56,000)

Trailhead Outfitters is a sporting goods store. Their net sales were $98,500 each year from 2016 to 2019. In which year would they have their highest profit margin, given the net income in the table below?

2018

Information from Gatsby Industries' 2017 income statement is shown in the chart. Based on this information, what was Gatsby's profit margin for 2017? Round to the nearest hundredth.

23.69% ($15,400/$65,000)

Information from Haas Incorporated's 2017 income statement is shown in the chart. Based on this information, what was Haas' gross profit rate for 2017? Round to the nearest hundredth.

43.75% ($56,000-$31,500/$56,000)

Information from Astro Apps' 2017 income statement is shown in the chart. Based on this information, what was Astro Apps' profit margin for 2017? Round to the nearest hundredth.

43.92%

Bryan's company uses the periodic inventory system and Bryan is attempting to determine cost of goods sold. His records show the company received $9,600 in purchase returns and allowances for the year ended December 31, but he is unsure whether to add or subtract this value. What should he do? Why?

He should subtract returns and allowances because they are contra purchase items.

A necessary risk of doing business on a credit basis is

Bad Debt Expense

Uncollectible Accounts Expense is another name for

Bad Debt Expense

Which of the following represents the cost of goods sold formula?

Beginning Inventory + Cost of Goods Purchased - Ending Inventory

The amount of cost of goods available for sale during the year depends on which of the following amounts?

Beginning merchandise inventory and net cost of purchases

A retailer acquires merchandise for resale. How would this be recorded in a perpetual inventory system?

By Increasing the Inventory Account

How do you calculate the cost of goods available for sale?

By adding beginning inventory to cost of goods purchased

How is profit margin computed?

By dividing net income by net sales

How is gross profit rate computed?

By dividing the amount of gross profit by net sales.

How does a merchandiser compute gross profit?

By subtracting cost of goods sold from sales revenue

The net amount expected to be received in cash from receivables is termed the ________ realizable value.

Cash

The net amount expected to be received in cash from receivables is termed the

Cash Realizable Value

The account Allowance for Doubtful Accounts is classified as a ________ account to Accounts Receivable.

Contra

How is the account Allowance for Doubtful Accounts Classified?

Contra account to Accounts Receivable

The formula Beginning Inventory + Cost of Goods Purchased - Ending Inventory results in finding the

Cost of Goods Sold

The entry to recognize the bad debt expense _________ current assets when the allowance is used.

Decreases

How does one compute the gross profit rate?

Divide gross profit by net sales

Which of the following explains how to compute the gross profit rate?

Divide gross profit by net sales.

Because it is not possible to know which accounts will not be collected, uncollectible accounts must be

Estimated

In addition to the purchase price of goods, the inventory account includes which cost?

Freight costs to acquire the inventory

In an income statement, which of the following is recorded as an operating expense?

Freight-Out

Which of the following items is excluded from net income but included in comprehensive income?

Gains and losses on foreign currency translations.

Greg's Groceries opened in 2016 and carried high-priced, hard-to-find specialty groceries with low turnover but high markup. In 2017, Greg's decided to begin carrying more low- to moderate-priced items with higher turnover but lower markup. In 2018, Greg's completely eliminated the high-priced specialty groceries. If net sales and all expenses except for cost of goods sold were equal in all three years, how did Greg's profit margins change from 2016 to 2018?

Greg's profit margins gradually decreased from 2016 to 2018

The effectiveness of a company's purchasing and pricing policies is reflected in its

Gross Profit

Which of the following gives the most accurate information about profits?

Gross Profit Rate

When gross profit equals operating expenses, a merchandiser will earn an operating income of

$0

Tinker Bell Company has the following: If Tinker Bell has 9,000 units on hand at December 31, the cost of the ending inventory under FIFO is

$113,000

At the beginning of January 2017, a company reported inventory of $4,000. During the month, the company made purchases of $17,800. On January 31, 2017, a physical count of inventory reported $4,200 on hand. Find the cost of goods sold for the month.

$17,600

Nick's Place recorded the following data: The weighted average unit cost of the inventory at January 31 is

$2.81

Sales Revenue for June 2018 $60,000 Cost of Goods Sold for June 2018 $25,000 Operating Expenses for June 2018 $10,600 Dividends for June 2018 $2,200 Profit for the month of June 2018?

$24,400

A _____ inventory system requires a physical count of goods on hand to compute the cost of goods sold.

A Periodic

In a periodic inventory system, what is needed in order to compute the cost of goods sold?

A Physical Inventory

Which of the following statements regarding the periodic inventory system is NOT true?

A company adjusts the inventory account for any transaction the affects inventory.

What is bad debt expense considered?

A necessary risk of doing business on a credit basis

Which statement is true about a perpetual inventory system?

Accounting records continuously disclose the amount of inventory.

_________ are also called trade receivables.

Accounts Receivable

A retailer increases in Inventory account. This indicates that items have been

Acquired for resale

On the income statement, Bad Dept Expense is reported as _______________.

An Operating Expense

How is Bad Dept Expense reported on the income statement?

As an operating expense

In an income statement, where does Freight-Out appear?

As an operating expense

Net income plus income tax expense plus other expenses and losses minus other revenues and gains equals

Income from Operations

Why is the multiple-step income statement considered more useful than the single-step income statement

It highlights the components of net income.

Why must uncollectible accounts be estimated?

It is not possible to know which accounts will not be collected.

Gross Profit will result if

Sales revenue is greater than cost of goods sold.

A company reports Sales Returns and Allowances of $40,000 and Net Sales of $680,000. It also reports Cost of Goods Sold of $350,000. Find the company's Sales and Gross Profit.

Sales: $720,000; Gross Profit: $330,000

The type of inventory costing method chosen by management ___________ be consistent with the physical movement of goods in the company.

Should Not

Net income for a merchandising enterprise is computed by

Subtracting Operating Expenses from Gross Profit

Merchandising companies such as wholesalers receive their primary source of revenue from

The Sale of Merchandise

What is the primary source of revenue for a wholesaler?

The Sale of Merchandise

Two car dealerships have similar annual net sales. One car dealership has a gross profit rate of 52.6%, whereas the other car dealership has a gross profit rate of 23.7 percent. Which of the following explanations is the most likely reason for this difference?

The car dealership with a gross profit rate of 52.6% sells high-end sports and luxury vehicles, whereas the car dealership with a gross profit rate of 23.7% sells sedans and used vehicles.

Dani's Denim sells blue jeans. In 2017, Dani's specialized in selling moderately priced jeans with a 25% markup. In 2018, Dani's management decided to sell more expensive designer jeans with a markup of 30% and eliminate the moderately priced options. If Dani's Denim has the same annual net sales in both years, how will Dani's gross profit rate in 2018 differ from its gross profit rate in 2017?

The gross profit rate in 2018 will be higher than the gross profit rate in 2017.

Two sporting goods stores have similar annual net sales. If one store sells mostly high-quality goods and the other store sells mostly moderate-quality goods, which store likely has the higher gross profit rate? Why?

The store that sells high-quality goods likely has the higher gross profit rate because markup tends to be higher for higher quality goods.

Why do merchandisers offer sales discounts?

To shorten their operating cycle.

What are notes or accounts receivable that result from sales transactions often called?

Trade Receivables

The gross profit rate is generally considered to be more informative than the gross profit amount.

True

What is another name for Bad Dept Expense?

Uncollectible Accounts Expense

If the allowance method is used to account for uncollectible accounts, when is bad debt expense increased?

When management estimates the amount of uncollectibles

When is the specific identification method of costing inventories used?

When the company sells a limited number of high-unit-cost items

An enterprise that sells merchandise directly to a retailer is called a

Wholesaler

What are merchandising companies that sell to retailers known as?

Wholesalers