Ch.5/ Week 4 (part 2)

Show your understanding of a merchandiser by completing the following statement. Merchandisers earn net income by ______(buying/manufacturing) and ______(selling/purchasing) merchandise.

buying selling

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

cash

True or false: Merchandise inventory is generally converted to cash more quickly than accounts receivable.

false

A ______ discount benefits a seller through earlier cash receipts and reduced collection efforts.

sales or cash

Demonstrate how to prepare a multiple-step income statement by ranking the items below in the order they would appear on a multiple-step income statement of a merchandiser.

1. sales 2. Costs of goods sold 3. Gross proft 4. Operating expenses 5. Income from operations 6. Other revenues and expenses

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

Given the following information for Fawnworks, calculate its gross margin ratio.

83.9% $15,500 - $2,500= $13,000. $13,000/$15,500= 83.9%.

A cash discount can be summarized as a discount given to (buyers/creditors/sellers) to encourage them to pay (earlier/later/less/more).

buyers earlier

Sales Discounts is a ______ account.

contra revenue

Given the partial list of accounts below, the entry to close the temporary credit balance accounts would include a:

credit to Income Summary, $20,000.

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)/__________.

current liabilities

A journal entry for a sale of merchandise on account will result in all of the following: (Check all that apply).

Credit to Sales Debit to Cost of Goods Sold Credit to Merchandise Inventory Debit to Accounts Receivable

Show your understanding of what merchandise is by completing the following sentence. Merchandise consists of products that a company acquires to resell to (customers/sellers)______

Customers

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

FOB destination

Which of the following are the three main parts of a multiple-step income statement? (Check all that apply.)

Gross profit Income from operations Net income

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

net sales cost of goods sold gross profit expenses net income

A ______(periodic/perpetual) inventory system can be described as an inventory system that updates the inventory account only at the end of the ______(purchase/period).

periodic period

An invoice is referred to as a ______ invoice for a buyer and as a ______ invoice for the seller.

purchase sales

The discount period is the time between the invoice date and a specified date on which the payment amount owed can be ______(increased/reduced) because of early payment.

reduced

Sales is a(n) ______ account.

revenue

Sales Discounts is a contra ______(expense/revenue/asset) account and is increased with a _______(debit/credit).

revenue debit

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

sales

Gross profit is calculated by taking the net ______(sales/costs) of a product and ______(adding/subtracting) the cost of the goods sold.

sales subtracting

Identify the statements below which summarize what cash discounts are. (Check all that apply.)

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

Which statement below correctly explains what merchandise inventory is?

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

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).

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

On May 14, X-Mart purchased $500 of merchandise with terms of 3/15,n/40. If payment is made on May 28, calculate the purchase discount that may be taken by X-Mart.

$15 $500x0.3

Calculate the total cost of merchandise purchased using the information in the following table:

$37,400 $40,000 - $3,000 + $500 - $100

Jerry's Flowers had the following cost information related to its purchases of merchandise. Calculate the total cost of merchandise purchased using the information below:

$91,100 $100,000 - $9,000 - $400 + $500 = $91,100.

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

(Cash and cash equivalents plus Short-term investments plus Current receivables) divided by Current liabilities

What is a purchase return?

A purchase return refers to merchandise a buyer purchases, 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.

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

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

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

Cost of goods sold includes the expenses of buying and preparing an item for sale. Cost of goods sold is used to figure gross profit. Cost of goods sold is an expense reported on the income statement. 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. Sales Returns and Allowances is closed with the expense accounts. The Withdrawals account is closed to Owner, Capital. Sales Discounts is closed with the expense accounts. Sales is closed as a revenue account.

Identify the statements below which are correct regarding a merchandiser's income statement. (Check all that apply).

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

Sally Beauty Warehouse uses the perpetual inventory system to account for its merchandise. On Nov 2, it sold $700 of merchandise on credit with terms of 2/15,n/30. Demonstrate the required journal entry to record the receipt of payment from the customer on Nov 13, by selecting all of the correct actions below. (Check all that apply.)

Credit Accounts Receivable $700. Debit Sales Discounts $14. Debit Cash $686.

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 by selecting all of the correct actions below. (Check all that apply.)

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

X-Mart uses the perpetual inventory system to account for its merchandise. On May 1, it sold $1,400 of merchandise for cash. The original cost of the merchandise to X-Mart was $500. Demonstrate the required journal entry to record the sale and the cost of the sale by selecting all of the correct actions below. (Check all that apply.)

Credit Merchandise Inventory $500. Credit Sales $1,400. Debit Cost of Goods Sold $500. Debit Cash $1,400.

X-Mart uses the perpetual inventory system to account for its merchandise. On June 1, it sold $7,000 of merchandise for cash. The original cost of the merchandise to X-Mart was $500. Demonstrate the required journal entry to record the cost of the sale by selecting all of the correct actions below. (Check all that apply.)

Credit Merchandise Inventory $500. Debit Cost of Goods Sold $500.

X-Mart uses the perpetual inventory system to account for its merchandise. On May 1, it sold $1,400 of merchandise on credit. The original cost of the merchandise to X-Mart was $500. Demonstrate the required journal entry to record the cost of the sale by selecting all of the correct actions below. (Check all that apply.)

Credit Merchandise Inventory $500. Debit Cost of Goods Sold $500.

X-Mart uses the perpetual inventory system to account for its merchandise. On June 1, it sold $7,000 of merchandise for cash. The original cost of the merchandise to X-Mart was $500. Demonstrate the required journal entry to record the sale and the cost of the sale by selecting all of the correct actions below. (Check all that apply.)

Credit Merchandise Inventory $500. Debit Cost of Goods Sold $500. Credit Sales $7,000. Debit Cash $7,000.

On Dec. 7, Toys R Fun purchased $1,000 of merchandise with terms of 2/10,n/30. If payment is made on December 30, demonstrate the required journal entry for Toys R Fun to record the payment under the perpetual inventory system.

Debit Accounts Payable $1,000; credit Cash $1,000.

On Dec. 7, Toys R Fun purchased $1,000 of merchandise with terms of 2/10,n/30. If payment is made on December 16, demonstrate the required journal entry for Toys R Fun to record the payment under the perpetual inventory system.

Debit Accounts Payable $1,000; credit Cash $980; credit Merchandise Inventory $20.

On Dec. 20, X-Mart received a $100 allowance because the merchandise it purchased on account, earlier in the month, was of poor quality. Demonstrate the required journal entry on X-Mart's books for the allowance assuming the perpetual inventory method.

Debit Accounts Payable $100; credit Merchandise Inventory $100.

X-Mart uses the perpetual inventory system to account for its merchandise. On May 1, it purchased $400 of merchandise on account with terms of 2/15, n/40. On May 3, X-Mart returned $50 of merchandise due to defect. Assuming that the purchase was paid for within the discount period, demonstrate the required journal entry for X-Mart to record the payment by selecting all of the correct actions below. (Check all that apply.)

Debit Accounts Payable $350. Credit Cash $343. Credit Merchandise Inventory $7.

Dogs R US uses the perpetual inventory system to account for its merchandise. On May 1, it returned $50 of merchandise due to a defect. Assuming that the purchase was originally bought on credit, demonstrate the required journal entry to record the return by selecting all of the correct actions below. (Check all that apply.)

Debit Accounts Payable $50. Credit Merchandise Inventory $50.

X-Mart uses the perpetual inventory system to account for its merchandise. On May 1, it sold $1,400 of merchandise on credit. The original cost of the merchandise to X-Mart was $500. Demonstrate the required journal entry to record the sale and the cost of the sale by selecting all of the correct actions below. (Check all that apply.)

Debit Accounts Receivable $1,400. Credit Merchandise Inventory $500. Credit Sales $1,400. Debit Cost of Goods Sold $500.

X-Mart uses the perpetual inventory system to account for its merchandise. On May 1, it sold $1,400 of merchandise on credit with terms of 1/10, n/40. Demonstrate the required journal entry to record the receipt of payment on May 25 by selecting all of the correct actions below. (Check all that apply.)

Debit Cash $1,400. Credit Accounts Receivable $1,400.

On June 5, Jo's Market sold $1,000 of goods on credit with terms of 2/10,n/30. How will Jo's Market record the customer's payment on June 8?

Debit Cash $980; debit Sales Discounts $20; and credit Accounts Receivable $1,000

A purchase allowance can be described as:

a reduction in the cost of defective or unacceptable merchandise that a buyer acquires

Jerry's Flowers sold and shipped merchandise across the country to a buyer. The terms were FOB destination. Assuming it paid the bill immediately, demonstrate the journal entry required by Jerry's Flowers under the perpetual inventory system to record the freight charges.

Debit Delivery Expense; credit Cash.

ABC Mart received a $20 freight bill for merchandise it purchased with freight terms of FOB shipping point. ABC Mart uses a perpetual inventory system. Assuming it paid the bill immediately, demonstrate the journal entry required to record the freight charges.

Debit Merchandise Inventory $20; credit Cash $20.

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

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

X-Mart uses the perpetual inventory system to account for its merchandise. A customer who purchased merchandise on account requested an allowance on a merchandise purchase due to its poor quality, but he did not return the goods back to X-Mart. Assuming that X-mart gives an allowance of $50 on the merchandise, demonstrate the required journal entry on X-Mart's books to record the allowance by selecting all of the correct actions below. (Check all that apply.)

Debit Sales Returns and Allowances $50. Credit Accounts Receivable $50.

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.

Describe good cash management practices involving inventory purchases. (Check all that apply.)

Invoices should be paid on the last day of the discount period. Buyers should take advantage of early payment discounts.

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

It shows only one total for all expenses.

Which of the statements below explain why perpetual inventory systems are becoming more popular? (Check all that apply.)

Managers have immediate access to detailed information on sales and inventory levels. Technological advances have made it easier to use.

Toys R Fun purchased $4,000 of merchandise and paid immediately. To record this transaction, Toys R Fun's accountant would debit the ______(Merchandise Inventory/Accounts Payable/Cash) account and credit the _______(Cash/Merchandise Inventory/Accounts Payable) account.

Merchandise inventory Cash

Select the statements below that correctly describe the flow of costs in a merchandiser's accounting cycle. (Check all that apply.)

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

How do you compute net income for a merchandiser.

Net sales - cost of goods sold - other expenses.

Determine which of the definitions below describes gross profit.

Net sales minus cost of the goods sold

Which of the statements below summarize why a buyer would desire a purchase allowance? (Check all that apply.)

Purchased merchandise was defective or unacceptable. In order to keep defective, but still marketable merchandise, the buyer would need a reduction in the purchase price.

Which are the two classifications of operating expenses on a multiple-step income statement?

Selling; general and administrative

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

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

Which of the statements below summarize why a seller would give a sales allowance? (Check all that apply.)

Sold merchandise was defective or unacceptable. In order to entice a customer to keep damaged or defective merchandise, the seller is willing to decrease the selling price. The seller wants to keep a customer happy.

Which of the following costs are included in merchandise inventory? (Check all that apply.)

Taxes assessed on the merchandise Shipping fees charged by the vendor Costs necessary to ready the merchandise for sale Purchase costs

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.

Credit terms of 1/10, n/30 means.

The buyer will receive a 1% discount if they pay within 10 days of the date of the invoice.

Credit terms of n/60 were printed on an invoice. Explain what this means.

The credit terms stand for net 60 days.

Review the following statements and select the one that best describes a discount period.

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

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.

Given the following information, analyze XYZ Company's gross margin ratio. (Check all that apply.)

Their gross margin ratio has improved since last year. In the current year, they have approximately 30.7 cents of every dollar of sales to help cover the other expenses of running the business. Their gross margin has decreased since last year.

Given the following information, analyze XYZ Company's liquidity. (Check all that apply.)

They are more liquid than others in their industry. They have sufficient quick assets to pay off short-term debt if needed.

Review the statements below and select the one that explains the purpose of a sales discount.

They decrease the time that the seller has to wait for payment.

True or false: A single-step income statement shows only one subtotal for expenses.

True

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

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

Merchandise inventory that is available for sale is a(n) ______(asset/expense/revenue) and reported on the (balance sheet/income statement). Merchandise that is sold during the period is a(n) ______(asset/expense/liability) and reported on the ______(balance sheet/income statement).

asset balance sheet expense income statement

Merchandise inventory that is available for sale is a(n) ________ (asset/expense/revenue) and reported on the ____________ (balance sheet/income statement) and merchandise that is sold during the period is a(n) _______ (asset/expense/liability) and reported on the ____________ (balance sheet/income statement).

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

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

On June 5, Jo's Market sold $1,000 of goods on credit with terms of 2/10, n/30. The required journal entry to record Jo's Market customer's payment on July 6 would be:

debit Cash $1,000; credit Accounts Receivable $1,000

Given the partial list of accounts below, the entry to close the temporary debit balance accounts would include a:

debit to Income Summary, $3,700. $1,000+500+1,900+300=$3,700.

To compute net income for a merchandiser, start with net sales, subtract cost of goods sold and subtract other______

expenses

On June 5, X-Mart purchased $400 of merchandise with terms of 2/10,n/30. If payment is made on June 11, calculate the purchase discount that may be taken by X-Mart.

$8

Given the following information, calculate the acid-test ratio for XYZ Company:

1.36 ($8,000+$10,000 +$12,000)/$22,000

LOL Music Store uses the perpetual inventory system to account for its merchandise. On November 17, it purchased $1,000 of merchandise with terms of 2/5,n/60. If payment is made on December 21, demonstrate the required journal entry to record the payment by selecting all of the correct actions below. (Check all that apply.)

Debit Accounts Payable $1,000. Credit Cash $1,000.

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.)

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. Terms FOB destination means that the seller is responsible for shipping costs. Terms FOB shipping point means the buyer accepts ownership when the goods depart the seller's place of business.

A sales allowance can be described as:

a reduction in the selling price of defective or unacceptable merchandise sold to customers

A purchase return refers to merchandise a ______(buyer/seller/creditor) purchased, but then returns to the ______(buyer/seller/creditor) for a refund of the purchase price or reduction in the amount owed.

buyer seller

A sales return refers to merchandise that ______(customers/sellers/creditors) return to the ______(customer/seller/creditor) for a refund of the purchase price or reduction in the amount owed.

customers sellers

Jello's Market purchased $1,000 of goods on account with terms of 2/10,n/30. They returned $200 of the goods due to defect the next day. If Jello pays for the purchase within the discount period and uses the perpetual inventory system, the required journal entry to record the payment would:

debit Accounts Payable $800; credit Merchandise Inventory $16; and credit Cash $784

A multiple-step income statement will have all of the following main parts except:

net sales

Sales is a(n) ______(expense/revenue/asset) account and is reported on the ______(income/balance) ______(statement/sheet).

revenue income statement

When a seller grants an allowance to a customer for defective goods that were purchased on credit and that were not returned, the seller records a debit to the _ _ and _ account.

sales returns allowances