Chapter 5

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 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

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.

Which of the following is not a component or step of the operating cycle for a service company?

Buy inventory to be resold to customers.

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

Which of the following would not be classified as an operating expense on a multi-step income statement?

Interest expense

Which one of the following equals cost of goods sold?

Sales revenue minus gross profit

Which statement is true when recording the sale of goods for cash in a perpetual inventory system?

Two journal entries are necessary: one to record the receipt of cash and sales revenue, and one to record the cost of goods sold and to reduce inventory.

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 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.

Arbor Corporation reports the following: Sales revenue $182,000; ending inventory $11,600; beginning inventory $21,700; purchases $64,000; purchases discounts $2,000; purchase returns and allowances $2,100; freight-in $900; freight-out $600. Calculate the company's cost of goods sold.

$70,900 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 = 21,700 + 64,000 - 2,000 - 2,100 + 900 - 11,600 = 70,900.

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 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.

Vetter Corporation reports the following: Sales revenue, $450,000; sales discounts, $10,000; operating expenses, $35,000; cost of goods sold, $320,000; income tax expense, $10,000. How much is its gross profit and income from operations, respectively?

$120,000 and $85,000 Gross profit = Sales revenue - sales discounts - sales returns and allowances - cost of goods sold Gross profit =- $450,000 - 10,000 - 0 - 320,000 = $120,000 Income from operations = Gross profit - operating expenses Income from operations = $120,000 - 35,000 = $85,000

Ending inventory is $10,000, beginning inventory is $20,000, and the cost of goods purchased is $25,000. How much is cost of goods sold?

$35,000 Cost of goods sold = Beginning inventory + purchases - ending inventory. Solve for ending inventory. Beginning balance ($20,000) plus purchases ($25,000) equals $45,000 in merchandise available, less ending inventory ($10,000) equals cost of goods sold of $35,000.

Which inventory system will likely be used by a company with merchandise that has a high per unit value?

Perpetual inventory system

A company has the following balances: Sales revenue $312,000; Sales Returns and Allowances $2,000; Sales Discounts $4,000; Cost of Goods Sold $184,000; Operating Expenses $79,000; Other expenses $5,000. How much is the profit margin?

12.4% Profit margin = Net income divided by net sales Net sales = Sales revenue minus sales returns and allowances minus sales discounts Net sales = 312,000 - 2,000 - 4,000 = 306,000 Net income = Net sales - cost of goods sold - operating expenses - other expenses Net income = 306,000 - 184,000 - 79,000 - 5,000 = 38,000 Profit margin = Net income divided by net sales Profit margin = 38,000/306,000 = 12.4%.

Helix Company purchased merchandise with an invoice price of $3,000 and credit terms of 2/10, n/40. Assuming a 360 day year, what is the implied annual interest rate inherent in the credit terms?

24% The company buying merchandise can wait 10 days and still receive a 2% discount. Otherwise, it can wait an additional 30 days and pay the full invoice amount without being overdue. In other words, a 30-day difference produces 2% interest. An interest rate of 2% in 30 days is equivalent to an interest rate of 24% in 360 days (i.e., 2% x 360/30). Alternatively: The company must pay the invoice no later than 40 days after the sale. If it pays no later than 10 days after the invoice date, the company gets a 1% discount (i.e., 2% x $3,000 = $60). So, the company can save $60 if it pays 30 days before the due date. Interest = Principal x Interest rate x Time $60 = $3,000 x Interest rate x (40-10)/360 Solving for the interest rate: Interest rate = [360/(40-10)] x $60/$3,000 = 0.24 (i.e., 24%)

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% 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%

Cosmos Corporation, which uses a perpetual inventory system, purchased $2,000 of merchandise on July 5 on account. Credit terms were 2/10, n/30. It returned $400 of the merchandise on July 9. Which of the following is one effect when Cosmos pays its bill on July 21?

Credit to Cash for $1,600 The discount terms are 2/10, n/30 which indicates a 2% discount if paid within 10 days but the full amount is due otherwise. Since the bill is paid after the discount period, the full invoice amount is $2,000 minus the returned goods of $400, or $1,600. The entry to record payment will debit Accounts Payable for $1,600 and credit Cash for $1,600.

Which is true about a wholesaler?

It sells to another business that will sell to the customer rather than sell directly to the consumer.

Which of the following determines the quality of earnings ratio?

Net cash provided by operating activities divided by net income

Which of the following describes how to compute the gross profit rate?

Net sales minus cost of goods sold, divided by net sales

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

Periodic inventory system

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.

Myers and Company sold $1,800 of merchandise on account to Oscar, Inc. on March 1 with credit terms of 2/10, n/30. Oscar returned $500 of the merchandise due to poor quality on March 3. If Oscar pays for the purchase on March 11, what entry does Myers make to record receipt of the payment?

$1,274 debit to Cash, $26 debit to Sales Discount, and $1,300 credit to Accounts Receivable This entry correctly accounts for the check Oscar would be writing for this invoice after adjustment for the returned merchandise and the discount. ($1,800 - $500) - [($1,800 - $500) × 2%] = $1,274.

Marsh Company uses the perpetual inventory system. Which of the following transactions neither increases nor decreases its inventory account?

Marsh granted a customer an allowance by reducing the purchasing price.

Which of the following will not be shown on the income statement for a merchandising company?

Retained earnings