PCP - Chapter 4: Accounting for Merchandising Operations

Identify the statements below that are correct regarding the closing entries for a merchandiser using the perpetual inventory system.

Sales is closed as a revenue account. Sales Discounts is closed with the expense accounts. Sales Returns and Allowances is closed with the expense accounts. The Dividends account is closed to Retained Earnings Cost of goods sold is closed with the expense accounts.

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, breakage or deterioration.

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

Sales is a(n) ______ account.

revenue

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

revenue; income; statement

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

sales

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

What is a purchase return?

A purchase return refers to merchandise a buyer acquires, 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.

Merchandise inventory can be described as:

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

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. Cost of goods sold can be determined by subtracting the cost of a merchandise sold from its sales price. Cost of goods sold is an asset account reported on the balance sheet. Cost of goods sold is the price received from selling a product.

Cost of goods sold is the expense of buying and preparing merchandise.

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

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

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

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

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

FOB destination

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. Merchandise is sold by customers. Merchandise is acquired for use in the company, just like supplies. Merchandise is considered an expense in the period it is purchased.

Merchandise is acquired for resale to customers.

Select the statements below that correctly describe the flow of costs in a merchandiser's accounting cycle.

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

The components of a merchandiser's multi-step income statement are shown below. In which order would they appear on the statement? Net income Gross profit Net sales Expenses Cost of goods sold

Net sales Cost of goods sold Gross profit Expenses Net income

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.

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. When the shipping costs are the responsibility of the buyer, then the Merchandise Inventory account is debited for the freight charges. Terms FOB shipping point means the buyer accepts ownership when the goods depart the seller's place of business.

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

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.

A single-step income statement shows only one subtotal for expenses.

True

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).

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

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

Merchandisers earn net income by (buying/manufacturing) ____ and (selling/purchasing) ____ merchandise.

buying; selling

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

customers; seller

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