Chapter 4 SmartBook (ACC 201)

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: Invoice cost of merchandise purchases = $100,000 Purchase discounts received = $9,000 Cost of transportation-in (shipping) = $500 Costs of purchase returns and allowances= $400

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

Which statement below correctly explains what merchandise inventory is?

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

Determine which of the following statements about merchandise is correct.

Merchandise is acquired for resale to customers.

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

True

In the operating cycle for a merchandiser with credit sales, after purchasing merchandise inventory for sale to customers, the next step is to make a _____sale.

credit

The cash operating cycle for a merchandiser begins with cash purchases of merchandise and ends with _____.

receipt of cash

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.

$400 x .02 =$8. Terms are 2/10 which means that they have 10 days in order to take the discount.

Identify the statements below which summarize what cash discounts are.

1) A seller views a cash discount as a sales discount. 2) A buyer views a cash discount as a purchase discount. 3) Sellers can grant a cash discount to encourage buyers to pay earlier. 4) A reduced payment applies to the discount period. 5) Cash discounts are described in credit terms.

Identify the statements below which are correct regarding a merchandiser's multi-step income statement.

1) All expenses are subtracted from gross profit in order to calculate net income. 2) Cost of goods sold is subtracted from net sales in order to determine gross profit.

Determine which statements below are correct regarding merchandise available for sale during a period.

1) Beginning inventory + Net purchases = Merchandise available for sale 2) Ending inventory + Cost of goods sold = Merchandise available for sale

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

1) Between 2) Reduced

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.

1) Buyer 2) Seller

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

1) Cost of goods sold is an expense reported on the income statement. 2)Cost of goods sold is also called cost of sales. 3) Cost of goods sold includes the expenses of buying and preparing an item for sale. 4) Cost of goods sold is used to figure gross profit.

A sales return refers to merchandise that ________ (customers/sellers/creditors) return to the ___________after a sale for a refund of the purchase price or reduction in the amount owed.

1) Customers 2) Sellers

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

1) Gross profit 2) Net income 3) Income from operations

Which of the statements below summarize why a seller would give a sales allowance?

1) In order to entice a customer to keep damaged or defective merchandise, the seller is willing to decrease the selling price. 2) The seller wants to avoid future lost sales. 3) Sold merchandise was defective or unacceptable. 4) The seller wants to keep a customer happy.

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

1) Net Sales 2) Cost of Goods Sold 3)Gross Profit 4) Expenses 5) Net Income

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

1) Net sales 2) Income from operations 3) Cost of goods sold 4) Gross profit 5) Selling expenses 6) General and administrative expenses

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

1) Revenue 2) Income 3) Statment

Sales Discounts is a contra-________(expense/revenue/asset) account and is increased with a _________(debit/credit).

1) Revenue 2) Debit

Which of the following costs are included in merchandise inventory?

1) Shipping fees 2) Purchase costs 3) Costs necessary to ready the merchandise for sale

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

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

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.

1) When the shipping costs are the responsibility of the buyer, then the Merchandise Inventory account is debited for the freight charges. 2)Terms FOB shipping point means the buyer accepts ownership when the goods depart the seller's place of business. 3) Revenue for the sale will be recorded after the goods reach their destination if the goods are shipped FOB destination. 4) Terms FOB destination means that the seller is responsible for shipping costs.

Complete the following statement. Merchandise inventory that is still available for sale is considered a(n) _______(asset/expense/revenue) and is reported on the________ (balance sheet/income statement) and merchandise that is sold during the period is considered a(n)__________(asset/expense/liability) and reported on the________ (balance sheet/income statement).

1) asset 2) balance sheet 3) expense 4) income statement

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.

1) merchandise Inventory 2) cash

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

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.

500*3%= $15

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.

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

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.

Accounts Payable . . . $1,000 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.

Accounts Payable . . . $1,000 Cash . . . . . . . . . . . . . . . . . . . . $980 Merch Inventory . . . . . . . . . $20

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 November 21, demonstrate the required journal entry to record the payment by selecting all of the correct actions below.

Accounts Payable . . . $1,000 Merch Inventory . . . . . . . . $20 Cash . . . . . . . . . . . . . . . . . . $980

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.

Accounts Payable . . . $100 Merch Inventory . . . . . .$100

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.

Accounts Payable . . . $50 Merch Inventory . . . . . .$50

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:

Accounts Receivable . . . $300 Sales . . . . . . . . . . . . . . . . . . . . $300 Cost of Goods Sold . . . $200 Merch Inventory . . . . . . . . . $200

Wholesaler

Buys products from manufacturers and sells them to retailers

Retailer

Buys products from manufacturers or wholesalers and sells them to consumers

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

Cash + Short-term investments + Current receivables/ Current liabilities

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.

Cash . . . $680 Sales Discount . . . $14 Accounts Receivable . . . . . . $700

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.

Cash . . . $7,000 Cost of Goods Sold . . . $500 Sales . . . . . . . . . . . . . . . . . . . . . .$7,000 Merch Inventory . . . . . . . . . . . $500

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?

Cash . . . $980 Sales Discount . . . $20 Accounts Receivable . . . . . . $1,000

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?

Cash . . . $980 Sales Discounts . . . $20 Accounts Receivable . . . . . $1,000

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.

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

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.

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

Current Assets Account

Merchandiser

Earns net income by buying and selling merchandise

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

FOB Destination

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

False

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

It shows only one total for all expenses.

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

Merchandise Inventory . . . $300 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 by selecting all of the correct actions below.

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

Sales is _______ account?

Revenue

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.

Sales Returns and Allowances . . .$500 Merchandise Inventory . . .$150 Accounts Receivable . . . . . . . . . . . .. . . . .. . . .$500 Cost of Goods Sold . . . . . . . . . . . . . . .. . .. . . $150

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

Selling; general and administrative

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.

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.

A sales allowance can be described as:

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