Chapter 3 Exercise
A company purchased inventory under terms 2/10, n/30. The effective annual interest rate for the cash discount is ______.
36.5%
A company purchased inventory under terms 4/10, n/30. What is the highest interest rate the company should pay to borrow money for the purpose of paying for the inventory within 10 days?
73% Explanation: Discount rate x (365 days / Term of loan) 4% x (365/20) 4% x (18.25) 0.73
Most companies report interest as ______.
a nonoperating item on the income statement and in operating activities on the statement of cash flows Reason: SFAS 15 requires that interest be reported as an operating cash flow on the statement of cash flows.
On a multistep income statement, gains and losses are shown ______.
after operating income
Merchandise inventory is a(n) ______ account. Multiple choice question.
asset
Merchandise inventory appears on the ______.
balance sheet
The Merchandise Inventory account appears on the ______.
balance sheet
To enable meaningful comparisons between companies of different sizes, analysts prepare _______ ____________financial statement.
common size
The formula for gross profit is sales revenue minus ______.
cost of goods sold
Gross margin appears on the ______.
income statement
When a company purchases inventory using the perpetual inventory system, the balance in the inventory account ______.
increase
When goods are delivered FOB shipping point and freight costs are paid in cash, the ______.
inventory account increases cash account decreases
The base figure used for common size income statements is usually ______.
net sales
Recording a purchase discount impacts ______.
only the balance sheet
Accepting a sales return or allowance on merchandise that had been sold on account affects ______.
only the balance sheet and income statement
Cash paid to purchase inventory appears in the ______ activities section of the statement of cash flows
operating
Income that is generated from the normal recurring activities of a business is called ________income. (Enter only one word per blank.)
operating
A company granted a sales discount under terms 2/10, n/30. Recognizing (recording) the cash payment after the sales discount has been recorded ______.
reduces accounts receivable increases cash
Price reductions offered by retailers to encourage buyers to pay promptly are called . (
sales discounts
If cost of goods available for sale is $60,000, beginning inventory is $10,000 and ending inventory is $12,000, cost of goods sold is ______.
$48,000
Jay Co. sold merchandise with a list price of $6,000 on account. The merchandise cost Jay $3,200 and was sold with payment terms of 2/10, n/30. Recording this transaction increases Accounts Receivable by ______.
$6,000
The Shoe Company had a $5,000 beginning balance in its inventory account. During the accounting period, inventory purchases amounted to $55,000. The ending inventory balance was $4,000. Based on this information, the cost of goods available for sale was ______.
$60,000
If beginning inventory is $14,000, ending inventory is $12,000, and purchases are $64,000, then cost of goods sold is ______.
$66,000
If cost of goods available for sale equals $80,000 and the beginning balance in the company's inventory account was $6,000, the amount of inventory purchases during the accounting period was ______. Multiple choice question.
$74,000
Under a periodic inventory system, cost of goods available for sale is calculated as beginning inventory + purchases ______.
- purchase discounts - purchase returns and allowances + transportation-in
How will the adjusting entry that recognizes the inventory shrinkage affect the statement of cash flows?
Cash flow from operating activities will not be affected.
Company ING made a cash payment for the $6,000 balance due on the account payable. What is the impact on the statement of cash flows?
Cash outflow for operating activities increases.
Which of the following items are subtracted from beginning inventory in order to determine the cost of goods available for sale?
Purchase returns and allowances Purchase discounts
Which of the following items are added to beginning inventory in order to determine the cost of goods available for sale?
Purchases Transportation-in
Which of the following real world companies are merchandising businesses?
Sears Target Sam's Club
Which of the following items appears on the income statement?
Selling and Administrative Expenses Gross Margin Cost of Goods Sold
A company granted a sales discount under terms 2/10, n/30. How will recognizing the sales discount affect the balance sheet? (Select all that apply.)
Stockholders' equity will decrease. Assets will decrease.
Paying cash for freight costs on inventory delivered to customers impacts ______.
all financial statements
When inventory is sold for cash, the sales part of the transaction impacts ______. Multiple choice question.
all financial statements
Gains and losses are shown on the income statement ____ included in the operating activities section of the statement of cash flows.
but not
The beginning balance in the inventory account plus the amount of inventory purchased during the accounting period is equal to ______. Multiple choice question.
cost of goods available for sale
To calculate the cost of goods sold under the periodic inventory system, ______ is subtracted from the amount of cost of goods available for sale.
ending inventory
Periodic inventory systems are most effective in ______ technology environments.
high volume, low Reason: When there is a large number of transactions that must be recorded (high volume) and there is limited technology (low technology) available to do the recording, determining cost of goods sold only once at the ending of the accounting period saves time and effort.
Company ING made a cash payment for the $6,000 balance due on the account payable. What is the impact on the statement of cash flows?
more likely to show a gross margin on the sale of inventory than a gain on the sale of land Reason: By definition gains and losses are unusual items that are not expected to recur frequently.
Recording the transactions for accepting a sales return of merchandise sold on account ______.
ncreases merchandise inventory both increases and decreases retained earnings
The gross amount of sales minus sales returns and allowances and sales discounts is called ______.
net sales
The adjusting entry for shrinkage impacts ______.
only the balance sheet and income statement
When inventory is sold for cash, the expense recognition part of the transaction impacts ______.
only the balance sheet and income statement
Paying the balance in accounts payable impacts ______.
only the balance sheet and statement of cash flows
Cash flow from the purchase or sale of inventory appears in the ________________-activities section of the statement of cash flows.
operating
Since selling and administrative expenses are usually recognized when they are incurred, they are sometimes called _ costs.
period
Inventory shrinkage may be caused by ______.
shoplifting lost or damaged inventory
A term that reflects decreases in inventory for reasons other than sales to customers is ______.
shrinkage
Income statements that display a single comparison of all revenues minus all expenses are called ______ income statements.
single-step
When a company sells inventory using the perpetual inventory system, the balance in the inventory account ______.
decreases
Recognizing transportation-out costs that are paid in cash decreases ______.
stockholders' equity assets
The purchase of merchandise on account affects ______.
total liabilities total assets
FOB shipping point establishes that the (buyer/seller) is responsible for shipping costs, while FOB destination established that the (buyer/seller) is responsible.
Blank 1: buyer Blank 2: seller
Advances in technology have spurred the growth of the inventory system
Blank 1: perpetual
True or false: Companies are required by GAAP to show sales returns and allowances and sales discounts on their income statements.
FalseReason:Because companies are not required to do this, most only show the amount of net sales on the income statement.
Which of the following items appear on the balance sheet?
Merchandise Inventory Cash
Which of the following define the terms 1/20, n/45?
The buyer will receive a 1% discount if payment is made within 20 days; otherwise the full payment is due in 45 days.
Which of the following define the terms 2/10, n/30?
The buyer will receive a 2% discount if payment is made within 10 days; otherwise the full payment is due in 30 days.
Cost of goods available for sale is allocated between Merchandise Inventory and an expense account called
cost of goods sold
Cost of goods available for sale is allocated between ending inventory and ______.
cost of goods sold
Recognizing transportation-in costs that are paid in cash ______ the amount of cash flow from operating activities.
decreases
Smith Company received a purchase allowance for damaged inventory that was purchased on account. The purchases allowance ______.
decreases assets and liabilities
A purchase discount ______.
does not impact the income statement decreases liabilities
True or false: Cost of Goods Sold is allocated between Cost of Goods Available for Sale and Merchandise Inventory.
false. Cost of Goods Available for Sale is allocated between Cost of Goods Sold and Merchandise Inventory.
If a merchandising company sells land for more than its cost, it will report a(n) ______.
gain on the sale of land
Revenue minus cost of goods sold is called: (Select all that apply.)
gross profit. gross margin.
Which financial statement is not affected when merchandise inventory is purchased for cash?
income statement
Recording the transactions for accepting a sales return of merchandise sold on account ______.
increases merchandise inventory both increases and decreases retained earnings
Period costs include ___.
interest administrative salaries sales commissions
The products that merchandising companies sell to their customers are called merchandise_________ .
inventory
When a company returns merchandise inventory that was originally purchased on account, net income ______.
is not affected
The products merchandising companies sell to customers are called ______.
merchandise inventory
Ernst and Young, a public accounting firm, is a service business, while Walmart is a real-world __________business.
merchandising, merchandise, or retail
Income statements that display additional relationships rather than a single comparison of all revenues minus all expenses are called income statements. (Enter only one word per blank.)
multistep
Advances in technology have spurred the growth of the Correct inventory system.
perpetual
When inventory is sold for cash, the sales part of the transaction represents a(n) ______.
source of assets
When goods are sold, the product cost transferred to Cost of Goods Sold includes a proportionate share of ______.
transportation-in adjustments for purchase returns and allowances
True or false: For most companies, there is an inconsistency in the way interest expense is reported on the income statement versus the statement of cash flows.
true
When merchandise inventory is purchased on account, total assets ______.
will increase
The chief advantage of the perpetual inventory system is ______.
inventory control
Assuming a low technology environment, the organization most likely to benefit from periodic inventory system is a ______.
convenience store Reason: Relative to home builders or car dealerships, a convenience store is a high volume business. In other words, the convenience store would sell many more food items than the dealership would sell cars or the builder would sell houses. Since the periodic system minimizes record keeping for sales transactions, it benefits high volume businesses.
When inventory is sold for cash, the expense recognition part of the transaction represents a(n) ______.
use of assets
True or false: When goods are sold, the product cost transferred to Cost of Goods Sold includes a proportionate share of both transferred-in and transferred-out costs.
False
When merchandise inventory is purchased for cash, total assets ______.
remain unchanged
True or false: Operating income is the amount of income that is generated from the normal recurring operations of a business.
true
Freight costs are titled transportation - when the buyer is responsible for shipping costs and transportation - when the seller is responsible.
Blank 1: in Blank 2: out
