ACC Chapter 4

On May 14, X-mart purchased $500 worth 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.

$500 x 0.3= 15$

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

1. buyers 2. earlier

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

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

1. revenue 2. debit

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 sales return?

A sales return refers to merchandise that customers return to the seller after a sale.

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.

Blank 1: buyer Blank 2: seller

Identify the statements below which summarize what cash discounts are:

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

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

Cost of goods sold is an expense reported on the income statement. 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 also called cost of sales.

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.

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.

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

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:

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

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.

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

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.

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

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.

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

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

Debit Merchandise Inventory $300; credit Cash $300.

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

Ending inventory + Cost of goods sold = Merchandise available for sale. Beginning inventory + Net purchases = Merchandise available for sale.

To compute net income for a merchandiser, you will start with net sales, subtract cost of goods sold and subtract other _____

Expenses

Describe good cash management practices involving inventory purchases.

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.

The balance sheet of a merchandiser and a service business have one major difference. Select the item below that would appear only on a merchandiser's balance sheet.

Merchandise inventory

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.

How do you compute net income for a merchandiser.

Net sales - cost of goods sold - other expenses.

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, breakage or deterioration.

Identify the financial statements of a merchandiser.

Statement of retained earnings. Income statement. Balance sheet.

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.)

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

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.

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

The seller wants to avoid future lost sales. The seller wants to keep a customer happy. 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.

A sales allowance can be described as:

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

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).

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

Sales Discounts is a ______ account.

contra-revenue

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

Merchandise inventory can be described as:

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

Sales is a(n) ______ account.

revenue

Sales is a:

revenue account and is reported on the income statement.

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

sales

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

true