ACG Ch 5

If beginning inventory is $100,000, cost of goods purchased is $500,000, sales revenue is $1,000,000 and ending inventory is $130,000, how much is cost of goods sold under a periodic system?

$470,000 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 $100,000 + $500,000 - $130,000 = $470,000.

Which one of the following equals cost of goods sold?

Sales revenue minus gross profit Solution: Learning objective 6 Gross profit is sales revenue less cost of goods sold. Therefore, cost of goods sold equals sales revenue less gross profit. Similarly, GP = SR - COGS, therefore COGS = SR - GP.

Heflin Corporation has the following: Sales revenue, $470,000 Sales returns and allowances, $20,000 Cost of goods sold, $320,000 Operating expenses, $100,000 Other expenses, $10,000 How much is its gross profit?

$130,000 Solution: Net sales = Sales - Sales returns and allowances - Sales discounts Net sales = $470,000 - 20,000 - 0 = $450,000 Gross profit = Net sales- Cost of goods sold Gross profit = $450,000 - 320,000 = $130,000 5,6,2

Beginning inventory is $12,000; purchases are $34,000; sales revenue are $60,000; and cost of goods sold is $31,000. How much is ending inventory?

$15,000 Solution: Learning objective 5 Cost of goods sold = Beginning inventory + purchases - ending inventory. Solve for ending inventory. Beginning inventory plus purchases less equals ending inventory ($12,000 + $34,000 - $31,000 = $15,000).

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

$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

Arbor Corporation reports the following: Sales revenue $183,000; ending inventory $12,600; beginning inventory $15,600; purchases $64,000; purchases discounts $4,000; purchase returns and allowances $1,500; freight-in $1,000; freight-out $500. Calculate the company's cost of goods sold.

$62,500 Solution: Cost of goods sold equals beginning inventory plus purchases minus purchases discounts and purchases returns and allowances plus freight-in minus ending inventory. Cost of goods sold = 15,600 + 64,000 - 4,000 - 1,500 + 1,000 - 12,600 = 62,500. Chapter 5, Learning objective 5, Pool 1

Sales revenue totals $10,000. Sales returns and allowances are $500 and sales discounts are $1,000. The seller also pays $100 to ship the merchandise to the buyer. How much is net sales? $8,400

$8,500 Solution: Net sales equals sales revenue minus sales returns and allowances and sales discounts. Net sales = $10,000 - 500 - 1,000 = $8,500. Paying to ship merchandise to a buyer is a delivery expense rather than a part of net sales. Q,5,3,2

Sales revenue totals $10,000. Sales returns and allowances are $500 and sales discounts are $1,000. The seller also pays $100 to ship the merchandise to the buyer. How much is net sales?

$8,500 Solution: Net sales equals sales revenue minus sales returns and allowances and sales discounts. Net sales = $10,000 - 500 - 1,000 = $8,500. Paying to ship merchandise to a buyer is a delivery expense rather than a part of net sales. Q,5,3,2

Indicate which one of the following would not likely appear on both a multi-step income statement and a single-step income statement.

Gross profit 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

On what amount is a sales discount based?

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.

Which of the following items does not result in an entry to the Inventory account under a perpetual system?

Payment of freight costs for goods shipped to a customer Solution: Learning objective 2 The entry to record the payment of freight costs for goods shipped to a customer requires a debit to Freight-out and a credit to cash. Freight-out is not part of the cost of inventory; it is a delivery expense and appears among the operating expenses on the income statement.

Under what inventory system is cost of goods sold determined at the end of an accounting period?

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.

A company's gross profit rate is lower this year compared to the prior year. Which of the following would not be a possible cause for this decline in the gross profit rate?

The company began selling products with a higher markup. Solution: Recall that gross profit rate equals gross profit divided by net sales. A decline in the gross profit rate suggest either a decline in gross profit and/or an increase in net sales. A decline in a company's gross profit rate may be caused by selling products with smaller gross margins (i.e., lower "mark-ups"), lowering prices and/or offering more price discounts due to increases in competition, or increases in sales allowances offered to customers. Chapter 5, Learning objective 6

If a company is using aggressive accounting techniques in order to accelerate income recognition then its quality of earnings ratio is

significantly less than 1. Solution: Learning objective 7 In general, a ratio significantly less than one suggests that a company may be using more aggressive accounting techniques in order to accelerate income recognition.

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 $60,000; Other expenses $7,600; Net Cash from Operating Activities $100,000. How much is the company's profit margin?

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 - other expenses Net income = 267,000 - 107,000 - 60,000 - 7,600 = 92,400 Profit margin = Net income divided by net sales Profit margin = 92,400/267,000 = 34.6%. 5,6,4

Helix Company purchased merchandise with an invoice price of $3,000 and credit terms of 2/10, n/30. Assuming a 360 day year, what is the implied annual interest rate inherent in the credit terms?

36% 2%/20 = x/360 (2 is over 20 bc the company has 20 days to pay in full)

Helix Company purchased merchandise with an invoice price of $2,000 and credit terms of 3/10, n/30. Assuming a 360 day year, what is the implied annual interest rate inherent in the credit terms?

54% Solution: The company buying merchandise can wait 10 days and still receive a 3% discount. Otherwise, it can wait an additional 20 days and pay the full invoice amount without being overdue. In other words, a 20-day difference produces 3% interest. An interest rate of 3% in 20 days is equivalent to an interest rate of 54% in 360 days (i.e., 3% x 360/20). Alternatively: The company must pay the invoice no later than 30 days after the sale. If it pays no later than 10 days after the invoice date, the company gets a 3% discount (i.e., 3% x $2,000 = $60). So, the company can save $60 if it pays 20 days before the due date. Interest = Principal x Interest rate x Time $60 = $2,000 x Interest rate x (30-10)/360 Solving for the interest rate: Interest rate = [360/(30-10)] x $60/$2,000 = 0.54 (i.e., 54%) Q,5,2,4

A company has the following accounts balances: Sales revenue $90,000; Sales Returns and Allowances $25,000; Sales Discounts $10,000; Cost of Goods Sold $20,000; and Net Income $7,000. How much is the gross profit rate?

63.6% Solution: Net sales = Sales revenue - sales returns and allowances - sales discounts Net sales = 90,000 - 25,000 - 10,000 = 55,000 Gross profit = Net sales - cost of goods sold Gross profit = 55,000 - 20,000 = 35,000 Gross profit rate = Gross profit divided by net sales. Gross profit ratio = 35,000/55,000 = 63.63% 5,6,3

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. 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 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 statements about inventory systems is correct?

A perpetual inventory system provides better control over inventories than does a periodic inventory system. Solution: Under periodic inventory, details about the cost of goods on hand is not available until the end of the accounting period. In contrast, perpetual inventory requires cost of goods sold to be recognized at the time of sale so it contains more accurate values of goods on hand at any time. Chapter 5, Learning objective 1

Which of the following would affect the gross profit rate if sales remain constant?

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.

Starlight Corporation, which uses a perpetual inventory system, 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. Which of the following is one effect when Starlight pays its bill on August 12?

Credit Inventory for $27.50 Solution: Learning objective 2 The discount terms are 1/10, n/30 which indicates a 1% discount if paid within 10 days but the full amount is due otherwise. Since the bill is paid on the tenth day (or sooner), the buyer gets the 1% discount. The balance due is $3,000 less the returned goods of $250, or $2,750, minus the discount on the net amount. The discount on $2,750 is $27.50, so $2,722.50 is due. The accounting entry will debit Accounts Payable for $2,750, credit Cash for $2,722.50, and credit Inventory for $27.50.