ACG Ch4

Toys R Fun purchased $4,000 of merchandise and paid immediately. To record this transaction, Toys R Fun's accountant would debit the (1) account and credit the (2) account.

(1) Merchandise Inventory (2) Cash

Toys R Fun purchased $4000 of merchandise and paid immediately. To record this transaction, Toys R Fun's accountant would debit the (1) account and credit the (2) account.

(1)Merchandise Inventory (2) cash

Merchandise inventory that is still available for sale is considered a(n) (1) and is reported on the (2) and merchandise that is sold during the period is considered a(n) (3) and reported on the (4).

(1)asset -> (2)balance sheet -> (3) expense -> (4)income statement

The discount period is the time (1) the invoice date and a specified date on which the payment amount owed can be (2) because of early payment.

(1)between (2)reduced

A cash discount can be summarized as a discount given to (1) to encourage them to pay (2).

(1)buyers (2) earlier

Recall that Merchandise Inventory is considered a(n) (1) asset on the (2)(3) of a merchandiser using the periodic inventory system.

(1)current (2)balance (3)sheet

Sales is a(n) (1) account and is reported on the (2)(3)

(1)revenue (2)income (3)statement

Recall the formula for calculating a company's acid-test ratio.

(Cash plus Short-term investments plus Current receivable) divided by Current liabilities

A purchase return refers to merchandise a (1) purchased, but then returns to the (2) for a refund of the purchase price or reduction in the amount owed.

1) buyer 2) seller

Review the following credit terms and identify the one 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

Why is it important for a business's success to have a high gross margin?

A merchandiser must make a sufficient profit on the sale of its merchandise to cover the other expenses of its business.

Merchandise inventory

An asset reported on the balance sheet and contains the cost of products purchased for sale.

Explain how to determine gross profit on an income statement:

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.

X-Mart uses the periodic inventory system to account for its merchandise. On May 1, it sold $1400 of merchandise on credit. The original cost of the merchandise to X-Mart was $500. Demonstrate the required journal entry to record the sale.

Credit Sales $1,400; Debit Accounts Receivable $1,400

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

Debit Merchandise Inventory $300; Credit Cash $300

Dogs R US uses the perpetual inventory system to account for its merchandise. A customer returned merchandise. Assuming that the purchase was originally bought on credit for $400 with a cost to Dogs R US of $100, demonstrate required journal entry of Dogs R US to record the return:

Debit Sales Returns and Allowances $400; Debit Merchandise Inventory $100; Credit Cost of Goods Sold $100; Credit Accounts Receivable $400

On Jan 5, a customer returned merchandise that had been purchased earlier on credit. The original sale was for $500, and the cost to the seller was $150. Demonstrate the required journal entry to record the return on the books of the seller, assuming the goods can be sold to another customer.

Debit Sales Returns and Allowances $500; debit Merchandise Inventory $150; credit Accounts Receivable $500; and credit Cost of Goods Sold $150

To compute net income for a merchandiser, you will start with net sales, subtract cost of goods sold and subtract other ___.

Expense(s)

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

FOB destination

T or F: Merchandise inventory is generally converted to cash mare quickly than accounts receivable.

False: Merchandise inventory is generally converted to cash less quickly than accounts receivable.

Identify the items or sub-headings below that would appear on a multiple-step income statement.

Gross Profit; Net sales; selling expenses; General and administrative expenses; Income from operations; Cost of goods sold

Which of the following items are included in a merchandising company's income statement but are not included in a service company's income statement?

Gross profit; Loss from defective merchandise; cost of goods sold; sales discounts; sales returns

Which of the following are the three main parts of a multiple-step income statement?

Income from operations; Net income; Gross profit

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

It shows only one total for all expenses.

Cost of goods sold is characterized by which of the following statements?

It's also called cost of sales; it's used to figure gross profit; it's an expense reported on the income statement; it includes the expenses of buying and preparing an item for sales.

How do you compute net income for a merchandiser.

Net sales - Cost of goods sold - other expenses

Identify the statements below which summarize what cash discounts are.

Sellers can grant a cash discount to encourage buyers to pay earlier; a buyer views a cash discount as a purchase discount; a seller views a cash discount as a sale discount; a reduced payment applies to the discount period; cash discounts are described in credit terms.

The buyer and seller of merchandise must agree on who is responsible for paying freight terms. What does freight term mean?

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; Revenue for the sale will be recorded after the goods reach their destination, if the goods are shipped FOB destination; Term FOB shipping point means the buyer accepts ownership when the goods depart the seller's place of business.

Summarize a periodic inventory system

The Purchase returns and Allowances account is used during the period; The balance in the Merchandise Inventory account remains the beginning balance until the end of the period; The Merchandise Inventory account is updated only at the end of the period; The Purchase Discounts account is used during the period; Cost of goods is computed at the end of the period; The purchases account is used during the period

Which of the statements below summarizes what the acid-test ratio measures?

The acid-test ratio measures a merchandiser's ability to pay its current liabilities.

Explain what the credit terms of 2/10, n/30 mean.

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

Discount period

The time period in which a discount may be taken by the buyer.

T or F: A single-step income statement shows only one subtotal for expenses.

True

Merchandise inventory can be described as:

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

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

current assets section

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

Under a periodic inventory system, a sale on account will result in the following journal entry:

debit to Account Receivable and a credit to Sales

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:

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

What is a purchase return?

it refers to merchandise a buyer acquires, but then returns to the seller.

Name the temporary accounts used to record the costs of merchandise purchased in a periodic inventory system.

purchases; purchase returns and allowances; purchase discounts; transportation-in

Under a periodic inventory system, purchases are

recorded in a separate temporary account which is closed at period end.

Sales is a(n) ___ account.

revenue

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

sales

Under a periodic inventory system when a sale is made:

the revenue but not the cost of goods sold is recorded