Ch 4
When a classified balance sheet is prepared, merchandise inventory is:
reported as a current asset
Credit terms of "2/10, n/60" means:
the company will receive a 2 percent discount if paid within 10 days
Which of the following totals and subtotals are not found on a multiple-step income statement?
total current assets
Multiple-step income statements
contain more detail than a simple listing of revenues and expenses
Which of the following statements related to the multiple-step income statement is not true?
Shows only one total for expenses.
BALANCE SHEET Assets Current assets supplies 3000 inventory 5000 cash 2000 accounts receivable 8000 Total current assets 18000 Plant assets land 12000 buildings, net 24000 Total plant assets 36000 Total assets 54000 Liabilities Current liabilities accounts payable 5000 wages payable 2000 Total current liabilities 7000 Long-term liabilities notes payable 31000 Total liabilities 38000 Equity common stock 10000 retained earnings 6000 Total equity 16000 Total liabilities and equity 54000
Which of following actions would increase the amount of cash available to Telo? (Select all that apply) Reduce the credit period for its credit sales to customers Negotiating an increase in the credit period for purchases with suppliers. Which one of the following actions would most likely reduce sales returns and allowances? Restricting the return policy from 60 days to 15 days.
Gross profit is:
equal to net sales less cost of goods sold.
The amount recorded for merchandise inventory includes all of the following except:
freight costs paid by the seller
Liquidity problems are likely to exist when a company's acid-test ratio:
is substantially lower than 1
Allied Merchandisers was organized on May 1. Macy Co. is a major customer (buyer) of Allied (seller) products. 3 Allied made its first and only purchase of inventory for the period on May 3 for 2,000 units at a price of $9 cash per unit (for a total cost of $18,000). 5 Allied sold 1,000 of the units in inventory for $13 per unit (invoice total: $13,000) to Macy Co. under credit terms 2/10, n/60. The goods cost Allied $9,000. 7 Macy returns 100 units because they did not fit the customer's needs (invoice amount: $1,300). Allied restores the units, which cost $900, to its inventory. 8 Macy discovers that 100 units are scuffed but are still of use and, therefore, keeps the units. Allied gives a price reduction (allowance) and credits Macy's accounts receivable for $500 to compensate for the damage. 15 Allied receives payment from Macy for the amount owed on the May 5 purchase; payment is net of returns, allowances, and any cash discount. Prepare journal entries to record the following transactions for Allied assuming it uses a perpetual inventory system and the gross method.
merchandise inventory 18000 cash 18000 accounts receivable 13000 sales 13000 cost of goods sold 9000 merchandise inventory 9000 sales returns and allowances 1300 accounts receivable 1300 merchandise inventory 900 cost of goods sold 900 sales returns and allowances 500 accounts receivable 500 cash 10976 sales discounts 224 accounts receivable 11200 Explanation May 3: Purchased goods. (2,000 units × $9) = $18,000. May 5: Sold goods on credit. (1,000 units × $13) = $13,000. May 5: Record cost of sale. (1,000 units × $9) = $9,000. May 7: Accepted returns. (100 units × $13) = $1,300. May 7: Returned goods to inventory. (100 units × $9) = $900. May 15: Sales discount received payment within discount period. ($13,000 − $1,300 − $500) × 2% = $224. May 15: Accounts receivable balance as of May 15. ($13,000 − $1,300 − $500) = $11,200.
Sydney Retailing (buyer) and Troy Wholesalers (seller) enter into the following transactions. 11 Sydney accepts delivery of $36,500 of merchandise it purchases for resale from Troy: invoice dated May 11, terms 3/10, n/90, FOB shipping point. The goods cost Troy $24,455. Sydney pays $500 cash to Express Shipping for delivery charges on the merchandise. 12 Sydney returns $1,300 of the $36,500 of goods to Troy, who receives them the same day and restores them to its inventory. The returned goods had cost Troy $871. 20 Sydney pays Troy for the amount owed. Troy receives the cash immediately. (Both Sydney and Troy use a perpetual inventory system and the gross method.) 1. Prepare journal entries that Sydney Retailing (buyer) records for these three transactions.
merchandise inventory 36500 accounts payable 36500 merchandise inventory 500 cash 500 accounts payable 1300 merchandise inventory 1300 accounts payable 35200 merchandise inventory 1056 cash 34144 Explanation May 20: Accounts payable balance = $36,500 − $1,300 = $35,200. May 20: Early payment discount = ($36,500 − $1,300) × 3% = $1,056.
Cushman Company had $800,000 in sales, sales discounts of $12,000, sales returns and allowances of $18,000, cost of goods sold of $380,000, and $275,000 in operating expenses. Net income equals:
$115,000 Net Income = $800,000 − $12,000 − $18,000 − $380,000 − $275,000 = $115,000
A company has the following selected account balances: Sales $ 250,000 Sales Discounts 1,500 Sales Returns and Allowances 2,300 Sales Salaries Expense 56,000 Store Supplies Expense 15,000 Advertising Expense 8,000 Cost of Goods Sold 125,000 What is the gross profit that would appear on a multiple-step income statement:
$121,000
A company reports the following information: Beginning inventory $ 11,000 Ending inventory 13,000 Expenses 7,000 Net purchases 23,000 Net sales 38,000 The company's cost of goods available for sale equals:
$34,000
Jasper Company is a wholesaler that buys merchandise in large quantities. Its supplier's catalog indicates a list price of $500 per unit on merchandise Jasper intends to purchase, and offers a 30% trade discount for large quantity purchases. The cost of shipping for the merchandise is $7 per unit. Jasper's total purchase price per unit will be:
$357 Trade discount = $500 * 30% = $150 Total purchase price per unit = $500 − $150 + $7 = $357
Cushman Company had $800,000 in sales, sales discounts of $12,000, sales returns and allowances of $18,000, cost of goods sold of $380,000, and $275,000 in operating expenses. Gross profit equals:
$390,000 Gross Profit (Margin) = $800,000 − $12,000 − $18,000 − $380,000 = $390,000
A company reports net sales of $600,000, cost of goods sold of $200,000, and net income of $100,000. Its gross profit equals:
$400,000 Net Sales- Cost of goods sold= gross profit Gross profit-expenses= net income
Juniper Company uses a perpetual inventory system and the gross method of accounting for purchases. The company purchased $9,750 of merchandise on August 7 with terms 1/10, n/30. On August 11, it returned $1,500 worth of merchandise. On August 16, it paid the full amount due. The amount of the cash paid on August 16 equals:
$8167.50 Cash Paid = ($9,750 − $1,500) × 0.99 = $8,167.50
A company reports the following information: Invoice cost of merchandise purchases $ 110,000 Purchase discounts 15,000 Purchase returns and allowances 7,000 Transportation costs 3,000 The company's total cost of merchandise purchases equals:
$91,000 invoice cost of merchandise purchases-purchases discounts received-purchases returns and allowances+cost of transportation_in=total cost of merchandise purchases
Place the operating cycle for a merchandiser in the correct order.
(a) cash purchase of merchandise (b) inventory for sale (c) credit sales (d) accounts receivable (e) receipt of cash from credit sales
Accounting cycle
1. analyze transactions 2. journalize 3. post 4. prepare unadjusted trial balance 5. adjust 6. prepare adjusted trial balance 7. prepare statements 8. close 9. prepare post-closing trial balance 10.reverse (optional)
A company's current assets are $23,420, its quick assets are $13,890 and its current liabilities are $12,220. Its acid-test ratio equals:
1.14 Acid-Test Ratio = Quick Assets/Current Liabilities Acid-Test Ratio = $13,890/$12,220 = 1.14
A company reports the following information: Beginning inventory $ 11,000 Ending inventory 13,000 Expenses 7,000 Net purchases 23,000 Net sales 38,000 The company's cost of goods sold equals:
21,000 beginning inventory+net purchases=merchandise available for sale merchandise available for sale=ending inventory+cost of goods sold
Mega Skateboard Supplier had net sales of $2.8 million, its cost of goods sold was $1.6 million, and its net income was $0.9 million. Its gross margin ratio equals:
43% Gross Margin Ratio = (Net Sales − Cost of Goods Sold)/Net Sales Gross Margin Ratio = ($2.8 − $1.6)/$2.8 = 43%
A buyer uses a perpetual inventory system, and on December 7, it contacts its supplier to report that some of the merchandise purchased on December 5 was defective. The seller offered to reduce the merchandise price by $400. The buyer agreed to keep the defective merchandise under those terms. Complete the buyer's necessary journal entry by selecting the account names from the drop-down menus and entering the dollar amounts in the debit or credit columns.
Accounts payable: D $400 Merchandise inventory: C $400
December 15, the buyer pays the invoice in full. Complete the buyer's journal entry for payment by selecting the account names from the drop-down menus and entering the dollar amounts in the debit or credit columns.
Accounts payable: D.$4000 Merchandise inventory: C $80 Cash: C$3920
A seller uses a perpetual inventory system, and on April 4, it sells $5,000 in merchandise (its cost is $2,400) to a customer on credit terms of 3/10, n/30. Complete the two journal entries to record the sales transaction by selecting the account names from the drop-down menus and entering the dollar amounts in the debit or credit columns. The first journal entry is to record the revenue part of the transaction and the second journal entry is to record the cost part.
Accounts receivable: D 5000 Sales: C 5000 Cost of goods sold: D 2400 Merchandise inventory: C 2400
Which of the following statements is correct regarding the adjusting entries for a merchandiser versus a service company.
All of the statements are correct. A service company will have an adjusting entry for accrued expenses. A merchandising company will have an adjusting entry for accrued expenses. A service company will have an adjusting entry for unearned revenues. A merchandising company will have an adjusting entry for unearned revenues.
Which of the following statements is correct regarding inventory shrinkage?
All of the statements are correct. Shrinkage refers to the loss of inventory. Shrinkage can be caused by theft or deterioration. Shrinkage is computed by comparing a physical count of inventory with the recorded amount. Shrinkage is recorded by debiting Cost of Goods Sold.
Which statement is correct regarding the closing process of a merchandiser?
Both the Sales Discounts and the Sales Returns and Allowances accounts are credited during the closing process.
A seller uses a perpetual inventory system, and on April 4, it sells $5,000 in merchandise to a customer on credit terms of 3/10, n/30. On April 13, the seller receives payment from the customer. Complete the seller's April 13 journal entry by selecting the account names from the drop-down menus and entering the dollar amounts in the debit or credit columns.
Cash: D 4850 Sales Discount: D 150 Accounts receivable: C 5000
Juniper Company uses a perpetual inventory system and the gross method of accounting for purchases. The company purchased $9,750 of merchandise on August 7 with terms 1/10, n/30. On August 11, it returned $1,500 worth of merchandise. On August 26, it paid the full amount due. The correct journal entry to record the merchandise return on August 11 is:
Debit Accounts Payable $1,500; credit Merchandise Inventory $1,500
A company purchased $1,800 of merchandise on July 5 with terms 2/10, n/30. On July 7, it returned $200 worth of merchandise. On July 28, it paid the full amount due. Assuming the company uses a perpetual inventory system, and records purchases using the gross method, the correct journal entry to record the merchandise return on July 7 is:
Debit Accounts Payable $200; credit Merchandise Inventory $200
Juniper Company uses a perpetual inventory system and the gross method of accounting for purchases. The company purchased $9,750 of merchandise on August 7 with terms 1/10, n/30. On August 11, it returned $1,500 worth of merchandise. On August 16, it paid the full amount due. The correct journal entry to record the payment on August 16 is:
Debit Accounts Payable $8,250; credit Merchandise Inventory $82.50; credit Cash $8,167.50. Cash Paid = ($9,750 − $1,500) × 0.99 = $8,167.50
Juniper Company uses a perpetual inventory system and the gross method of accounting for purchases. The company purchased $9,750 of merchandise on August 7 with terms 1/10, n/30. On August 11, it returned $1,500 worth of merchandise. On August 16, it paid the full amount due. The correct journal entry to record the purchase on August 7 is:
Debit Merchandise Inventory $9,750; credit Accounts Payable $9,750.
Prepare journal entries to record the following merchandising transactions of Mannion's, which uses the perpetual inventory system and the gross method. (Hint: It will help to identify each receivable and payable; for example, record the purchase on July 1 in Accounts Payable—Lane.) Jul. 1 Purchased merchandise from Lane Company for $8,400 under credit terms of 1/15, n/30, FOB shipping point, invoice dated July 1. Jul. 2 Sold merchandise to King Co. for $2,100 under credit terms of 2/10, n/60, FOB shipping point, invoice dated July 2. The merchandise had cost $1,260. Jul. 3 Paid $605 cash for freight charges on the purchase of July 1. Jul. 8 Sold merchandise that had cost $2,500 for $4,100 cash. Jul. 9 Purchased merchandise from Sanchez Co. for $3,400 under credit terms of 2/15, n/60, FOB destination, invoice dated July 9. Jul. 11 Returned $700 of merchandise purchased on July 9 from Sanchez Co. and debited its account payable for that amount. Jul. 12 Received the balance due from King Co. for the invoice dated July 2, net of the discount. Jul. 16 Paid the balance due to Lane Company within the discount period. Jul. 19 Sold merchandise that cost $2,500 to Parker Co. for $3,600 under credit terms of 2/15, n/60, FOB shipping point, invoice dated July 19. Jul. 21 Gave a price reduction (allowance) of $700 to Parker Co. for merchandise sold on July 19 and credited Parker's accounts receivable for that amount. Jul. 24 Paid Sanchez Co. the balance due, net of discount. Jul. 30 Received the balance due from Parker Co. for the invoice dated July 19, net of discount. Jul. 31 Sold merchandise that cost $5,600 to King Co. for $9,400 under credit terms of 2/10, n/60, FOB shipping point, invoice dated July 31.
GENERAL JOURNAL merchandise inventory 8400 accounts payable-lane 8400 accounts receivable-king 2100 sales 2100 cost of goods sold 1260 merchandise inventory 1260 merchandise inventory 605 cash 605 cash 4100 sales 4100 cost of goods sold 2500 merchandise inventory 2500 merchandise inventory 3400 accounts payable-sanchez 3400 accounts payable-sanchez 700 merchandise inventory 700 cash 2058 sales discounts 42 accounts receivable-king 2100 accounts payable-lane 8400 merchandise inventory 84 cash 8316 accounts receivable-parker 3600 sales 3600 cost of goods sold 2500 merchandise inventory 2500 sales returns and allowances 700 accounts receivable-parker 700 accounts payable-sanchez 2700 merchandise inventory 54 cash 2646 cash 2842 sales discounts 58 accounts receivable-parker 2900 accounts receivable-king 9400 sales 9400 cost of goods sold 5600 merchandise inventory 5600 INCOME STATEMENT sales 19200 sales returns and allowances 700 sales discounts 100 net sales 18400 cost of goods sold 11860 gross profit 6540 IMPACT ON INCOME July 1) Purchased merchandise from Lane Company for $8,400 under credit terms of 1/15, n/30, FOB shipping point, invoice dated July 1. No impact on income July 2) Sold merchandise to King Co. for $2,100 under credit terms of 2/10, n/60, FOB shipping point, invoice dated July 2. Increases net income: $2,100 July 2) The cost of the merchandise sold to King Co. was $1,260. Decreases net income: (1,260) July 3) Paid $605 cash for freight charges on the purchase of July 1. No impact on income July 8) Sold merchandise for $4,100 cash. Increases net income: 4,100 July 8) The cost of the merchandise sold was $2,500. Decreases net income: (2,500) July 9) Purchased merchandise from Sanchez Co. for $3,400 under credit terms of 2/15, n/60, FOB destination, invoice dated July 9. No impact on income July 11) Received a $700 credit memorandum from Sanchez Co. for the return of part of the merchandise purchased on July 9. No impact on income July 12) Received the balance due from King Co. for the invoice dated July 2, net of the discount. Decreases net income:(42) July 16) Paid the balance due to Lane Company within the discount period. No impact on income July 19) Sold merchandise to Parker Co. for $3,600 under credit terms of 2/15, n/60, FOB shipping point, invoice dated July 19. Increases net income: 3,600 July 19) The cost of the merchandise sold to Parker Co. was $2,500. Decreases net income: (2,500) July 21) Issued a $700 credit memorandum to Parker Co. for an allowance on goods sold on July 19. Decreases net income: (700) July 24) Paid Sanchez Co. the balance due, net of discount. No impact on income July 30) Received the balance due from Parker Co. for the invoice dated July 19, net of discount. Decreases net income: (58) July 31) Sold merchandise to King Co. for $9,400 under credit terms of 2/10, n/60, FOB shipping point, invoice dated July 31. Increases net income: 9,400 July 31) The cost of the merchandise sold to King Co. was $5,600. Decreases net income: (5,600) Total gross profit:$6,540
The company's adjusted trial balance includes the following accounts balances: Cash, $15,000; Equipment, $85,000; Accumulated Depreciation, $25,000; Accounts Payable, $10,000; Retained earnings, $63,500; Dividends, $2,000; Sales, $56,000; Sales Returns and Allowances, $3,000; Sales Discounts, $1,500; Depreciation Expense, $25,000; and Salaries Expense, $23,000. All accounts have normal balances. Prepare the second closing entry by selecting the account names from the pull-down menus and entering dollar amounts in the debit and credit columns.
Income summary: D 52500 Sales discounts: C 1500 Sales returns and allowances: C 3000 Depreciation expense: C 25000 Salaries expense: C 23000
Which of the following statements regarding inventory shrinkage is not true?
Inventory shrinkage is recognized by debiting an operating expense.
On May 1, Anders Company purchased merchandise in the amount of $5,800 from Shilling, with credit terms of 2/10, n/30. Anders uses the perpetual inventory system and the gross method. The journal entry that Anders will make on May 1 is:
Merchandise Inventory 5800 accounts payable 5800
Roberto Company uses a perpetual inventory system. On December 1, the company purchased $3,300 of merchandise for cash. Complete the following journal entry by selecting the account names from the drop-down menus and entering the dollar amounts in the debit or credit columns.
Merchandise inventory D.3,300 Cash C.3,300
Which of the following statements regarding merchandise inventory is not true?
Merchandise inventory appears on the balance sheet of a service company.
A buyer uses a perpetual inventory system, and it purchases merchandise on terms of FOB shipping point. On December 20, the shipping company sends an invoice for $125 to the party responsible for the freight charges, and cash payment is made immediately. Complete the buyer's necessary journal entry by selecting the account names from the drop-down menus and entering the dollar amounts in the debit or credit column.
Merchandise inventory: D 125 Cash: C 125
Each of the following are examples of a merchandising company except:
Michael's Lawn mowing
The operating cycle for a merchandiser that sells only for cash moves from:
Purchases of merchandise to inventory to cash sales.
A single-step income statement
Reports the same amount of net income as that reported on a multiple-step income statement.
Which of the following statements regarding sales returns and allowances is not true?
Sales returns and allowances do not have an impact on gross profit.
A seller uses a perpetual inventory system, and on April 17, a customer returns $1,000 of merchandise previously purchased on credit on April 13. The seller's cost of the merchandise returned was $480. The merchandise is not defective and is restored to inventory. The seller has not yet received any cash from the customer. Complete the two journal entries to record the return transaction by selecting the account names from the drop-down menus and entering the dollar amounts in the debit or credit columns. The first journal entry is to record the revenue part of the transaction and the second journal entry is to record the cost part.
Sales returns and allowances: D 1000 accounts receivable: C 1000 merchandise inventory: D 480 cost of goods sold: C 480
A seller uses a perpetual inventory system, and on April 18, a customer discovers that merchandise previously purchased is defective. The buyer decides to keep the defective merchandise and the seller allows a $15 price reduction, paid in cash to the buyer. Complete the journal entry to record the allowance granted to the buyer by selecting the account names from the drop-down menus and entering the dollar amounts in the debit or credit columns.
Sales returns and allowances: D 15 Cash: C 15
Sydney Retailing (buyer) and Troy Wholesalers (seller) enter into the following transactions. 11 Sydney accepts delivery of $36,500 of merchandise it purchases for resale from Troy: invoice dated May 11, terms 3/10, n/90, FOB shipping point. The goods cost Troy $24,455. Sydney pays $500 cash to Express Shipping for delivery charges on the merchandise. 12 Sydney returns $1,300 of the $36,500 of goods to Troy, who receives them the same day and restores them to its inventory. The returned goods had cost Troy $871. 20 Sydney pays Troy for the amount owed. Troy receives the cash immediately. (Both Sydney and Troy use a perpetual inventory system and the gross method.) 2. Prepare journal entries that Troy Wholesalers (seller) records for these three transactions.
accounts receivable 36500 sales 36500 cost of goods sold 24455 merchandise inventory 24455 sales returns and allowances 1300 accounts receivable 1300 merchandise inventory 871 cost of goods sold 871 cash 34144 sales discount 1056 accounts receivable 35200 Explanation May 20: Early payment discount = ($36,500 − $1,300) × 3% = $1,056. May 20: Accounts receivable balance = $36,500 − $1,300 = $35,200.
On February 3, Smart Company sold merchandise in the amount of $5,800 to Truman Company, with credit terms of 2/10, n/30. The cost of the items sold is $4,000. Smart uses the perpetual inventory system and the gross method. Truman pays the invoice on February 8, and takes the appropriate discount. The journal entry that Smart makes on February 8 is:
cash 5684 sales discounts 116 accounts receivable 5800 Sales Discounts = $5,800 * 0.02 = $116 Cash = $5,800 - $116 = $5,684
Merchandise inventory includes:
costs to purchase shipping costs costs to prepare for sale
Allied Merchandisers was organized on May 1. Macy Co. is a major customer (buyer) of Allied (seller) products. 3 Allied made its first and only purchase of inventory for the period on May 3 for 2,000 units at a price of $9 cash per unit (for a total cost of $18,000). 5 Allied sold 1,000 of the units in inventory for $13 per unit (invoice total: $13,000) to Macy Co. under credit terms 2/10, n/60. The goods cost Allied $9,000. 7 Macy returns 100 units because they did not fit the customer's needs (invoice amount: $1,300). Allied restores the units, which cost $900, to its inventory. 8 Macy discovers that 100 units are scuffed but are still of use and, therefore, keeps the units. Allied gives a price reduction (allowance) and credits Macy's accounts receivable for $500 to compensate for the damage. 15 Allied receives payment from Macy for the amount owed on the May 5 purchase; payment is net of returns, allowances, and any cash discount. Prepare the appropriate journal entries for Macy Co. to record each of the May transactions. Macy is a retailer that uses the gross method and a perpetual inventory system; it purchases these units for resale. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field.)
no journal entry merchandise inventory 13000 accounts payable 13000 accounts payable 1300 merchandise inventory 1300 accounts payable 500 merchandise inventory 500 accounts payable 11200 cash 10976 merchandise inventory 224 Explanation May 7: Returned unwanted merchandise. (100 units × $13) = $1,300. May 15: Accounts payable paid for May 5 purchase less R&A. ($13,000 − $1,300 − $500) = $11,200. May 15: Merchandise inventory paid for May 5 purchase less R&A. ($13,000 − $1,300 − $500) × 2% = $224.
