Acct Ch. 5

Expenses for a merchandising company are divided into two categories

(1) cost of goods sold and (2) operating expenses.

In a single-step statement of earnings, all data are classified into two categories which is

(1) revenues and (2) expenses

T/F Discounts taken by the buyer for early payment of an invoice are called sales discounts by the buyer.

False

When an invoice is paid within the discount period, the amount of the discount decreases the ___ account.

Merchandise Inventory

When inventory is sold, its cost is transferred from the ___ account to the account ___

Merchandise Inventory (an asset); Cost of Goods Sold (an expense

A statement of earnings that shows several steps to determine net earnings or net loss is know as

Multiple-step Statement of Earnings

Are quantity discounts recorded for separately?

No. For example, if 10% was offered on 25 units, only $2,070 ($2,300 × 90%) would be recorded

Expenses that are incurred in the process of earning sales revenue is know as

Operating expenses

Net earnings expressed as a percentage of net sales is know as

Profit Margin

Under a periodic system, purchases of merchandise are recorded in the expense account ___ and not the asset account Merchandise Inventory as in a perpetual system.

Purchases

purchase returns and allowances occurs when

goods are returned for cash or credit, or a deduction granted by the seller on the selling price of unsatisfactory merchandise.

What do gross profit margins indicate?

how much higher the selling price is than the cost of goods sold.

Typically, sales revenue is earned when

the goods are transferred from the seller to the buyer

Profit margin indicates how well

the selling price covers all expenses (including the cost of goods sold)

Two kinds of systems used to account for inventory and the cost of goods sold are

a perpetual inventory system or a periodic inventory system.

Purchases are normally recorded by the buyer when the goods

are received from the seller

Goods available for sale are reported as merchandise inventory, a current ___ on the balance sheet

asset

T/F Purchase Returns and Allowances and Purchase Discounts are accounts with credit balances and are subtracted from Purchases to produce net purchases.

True

Gross profit expressed as a percentage of sales is know as

Gross profit margin

T/F The terms 2/10, n/30 mean that a 2% discount is allowed on payments made over 10 days but within the discount period.

False

T/F When the terms of sale are FOB shipping point, the seller is responsible for any damages to the goods during shipping.

False

In a multiple-step SOE, the contra revenue accounts, ___ and ___ are deducted from gross sales in the statement of earnings to arrive at net sales.

Sales Returns and Allowances and Sales Discounts

Sales Discounts is a ___ account to Sales. It's normal balance is debit

contra revenue

Sales Returns and Allowances is a ___ account to Sales.

contra revenue

Profit margin is calculated by

dividing net earnings by net sales

In a periodic inventory system, he cost of goods sold is determined only at the ___ of the accounting period

end; Beginning inventory + cost of goods sold = cost of goods available for sale - end inventory = COST OF GOODS SOLD

Sales revenue less the cost of goods sold is called

gross profit

In a periodic inventory system, freight is part of the cost

of goods purchased

Goods sold are reported as cost ___ on the statement of ___

of goods sold; earnings

the cost of the merchandise sold is not recorded in a ___ inventory system

periodic

In a periodic inventory system, a ___ count is done at the___ of the period to determine the cost of the merchandise on hand (the ending inventory)

physical inventory; end

T/F purchase discounts are recorded separately.

True

What are the five main steps a multiple-step statement of earns show

Net Sales, Gross Profit, Earnings from Operation, Non-operating activities, and Net Earnings 1. Net sales: Sales returns and allowances and sales discounts are subtracted from gross sales to determine net sales. 2. Gross profit: Cost of goods sold is subtracted from net sales to determine gross profit. 3. Earnings from operations: Operating expenses are deducted from gross profit to determine earnings from operations. 4. Non-operating activities: The results of activities that are not related to operations are added (as other revenue) or subtracted (as other expenses) to determine earnings before income tax. 5. Net earnings: Income tax expense is subtracted from earnings before income tax to determine net earnings (loss).

The normal balance of the Sales Returns and Allowances account is a

Debit. It is used instead of decreasing (debiting) the Sales account

T/F Gross profit is a measure of the overall profit of a company.

False

T/F Sales minus operating expenses equals gross profit.

False

T/F Sales revenues are recorded by the seller when an order is placed by a buyer.

False

T/F Gross profit margin is calculated by dividing gross profit by net sales

True

T/F Under the perpetual inventory system, purchases of merchandise for sale are recorded in the Merchandise Inventory account.

True

T/F Gross profit is the difference between net sales and cost of goods sold.

True.

T/F Purchases of assets that the company will use rather than resell, such as supplies and equipment, are recorded as increases to specific asset accounts rather than as increases to the Merchandise Inventory account.

True. For example, Wal-Mart would increase the Supplies account to record the purchase of cash register receipt paper or materials that it uses to make shelf signs.

T/F If the gross profit margin is 35% and the cost of goods sold are $1,300,000, the net sales are $2,000,000.

True. Net Sales - Cost of Goods Sold = Gross Margin ($2,000,000 - $1,300,000 = $700,000. The gross profit margin is calculated as $700,000 ÷ $2,000,000 = 35%.

How many entries are made for each sale in a perpetual inventory system. Explain

Two. The first entry records the sales revenue: Cash (or Accounts Receivable, if it is a credit sale) is increased by a debit and Sales is increased by a credit for the selling (invoice) price of the goods. The second entry records the cost of the merchandise sold: Cost of Goods Sold is increased by a debit and Merchandise Inventory is decreased by a credit for the cost of the goods.

When FOB shipping point is used, the buyer/seller pays the freight charges and then increases (debited) its ___ account for the additional cost

buyer; Merchandise Inventory. Why? The cost principle dictates that assets should be stated at their cost. Consequently, the cost of inventory includes all costs of purchase and other costs that are incurred in bringing inventories to their present location and getting them ready for sale.

Cash purchases should be supported by a ___ and credit purchases should be supported by a ___

cash register receipt; purchase invoice

The total cost of the merchandise that was sold during the period is know as

cost of goods sold

Any freight paid by the buyer is recorded as being part of the ___ of the merchandise ___ .

cost; purchased

When inventory items are purchased under a perpetual inventory system, the purchased item is recorded by debiting/crediting the ___ account

debiting; Merchandise Inventory

When a purchase return or allowance occurs, the result is a ___ in cost of goods sold

decrease

Cash purchases are recorded by an increase (debit)/decrease (credit) in ___ and an increase (debit)/decrease (credit) in ___

increase (debit) in Merchandise Inventory and a decrease (credit) in Cash

A ___ is offered to customers for early payment of the balance due on account

purchase discount

In a perpetual inventory system, detailed records are maintained for the cost of each product that is

purchased and sold.

No separate entry is made to record a ___ discount

quantity

A price reduction that reduces the invoice price and is given to the buyer for volume purchases is know as a

quantity discount

FOB destination means the seller/buyer will pay for the shipping costs of the goods

seller

FOB (free on board) shipping point means the buyer/seller is responsible for the goods only until they reach their shipping point. The buyer/seller will pay for the shipping

seller; buyer

2/10, n/30, would read "___" which means

two-ten, net thirty; 2% cash discount may be taken on the invoice price, less ("net of") any returns or allowances, if payment is made within 10 days of the invoice date (the discount period).