Chapter 6: Merchandising Operations and the MultiStep Income Statement

Net Sales on an income statement equals Sales Revenue, gross minus Sales Returns and Allowances minus Sales

Discounts

Which of the following costs should be added to the buyer's Inventory account?

Freight-in with terms FOB shipping point

What does FOB shipping point mean?

Goods are owned by the buyer when they leave the seller's place of business.

Which line items are found on a multi-step but not on a single-step income statement?

Gross Profit Income from Operations

Any costs incurred to get the merchandise into a condition and location ready for sale should be debited to ______.

Inventory

Boopsie Agin, the company's bookkeeper, recorded the purchase of merchandise on account with a debit to Cost of Goods Sold and a credit to Cash. As a result,

Liabilities are understated Stockholders' equity is understated Assets are understated

<blank> companies sell goods that they have produced.

Manufacturing

On October 25, Yacht Doc received $200,000 for a yacht valued at $180,000 and a 4-month service contract. During November, the yacht was delivered and 1 month of the service contract was performed. The remaining services are to be performed evenly over the next 3 months. In what month should the $180,000 for the yacht be recognized as revenue?

November

Which of the following are found on the income statement of a merchandiser?

Sales Revenue Gross Profit Cost of Goods Sold

In a perpetual inventory system, which of the following statements are true?

The seller should record freight-out as a selling expense. The purchaser should record freight-in as an asset, Inventory.

Gross Profit

a subtotal on the income statement and is the amount earned from adding value to the inventory sold

The Inventory balance on the balance sheet reports the ______.

cost of goods available for sale

Cost of Goods Sold on the income statement reports the ______.

cost times the quantity of goods sold during the period

Merchandisers record revenue when they

fulfill their performance obligations by transferring control of the goods to customers

Sales Returns and Allowances are reported on the ______.

income statement

Boopsie Agin, the company's bookkeeper, recorded the purchase of merchandise on account with a debit to Cost of Goods Sold and a credit to Cash. As a result,

liabilities are understated assets are understated stockholders' equity is understated

If Accounts Payable is debited and Cash is credited, then the company is recording a ______.

payment of amounts owed for purchases made on account

Inventory consists of the purchase price ______.

plus freight-in

Which of the following should be debited to Inventory?

purchases of merchandise on account freight-in if shipped FOB shipping point

A multistep income statement is useful to financial statement users because it ______.

separates cost of goods sold from other operating expenses, which allows the calculation of gross profit separates income statement items into meaningful components

FOB ______ is the term used when ownership of the goods transfers to a buyer as soon as the goods leave the seller's place of business.

shipping point

FOB destination means that goods are owned by the buyer as soon as ______.

they arrive at the buyer's place of business

The journal entry to record the payment within the discount period for goods previously purchased on account causes _____.

total liabilities to decrease total assets to decrease

Acme, Inc. had cost of goods sold of $2,000. If beginning inventory was $2,100 and ending inventory was $500, Acme's purchases must have been

400; 600; 1600

What does the gross profit percentage tell you?

A higher ratio means that more is available to cover operating expenses

The journal entry to record the payment for merchandise previously purchased on account includes a debit to ______ and a credit to ______.

Accounts Payable; Cash

Cost of Goods Sold Equation

Beginning Inventory + Purchases - Ending Inventory

The purchaser of inventory pays for shipping if the shipping terms are FOB ______.

shipping point

XYZ Company sold merchandise for $5,000, with payment terms of 2/10,n/30. If the customer pays within the discount period and takes the discount, XYZ will receive ______.

$4,900; The customer can take a 2% discount and pay $4,900 (=$5,000 - (2% x $5,000)).

On October 25, Yacht Doc received $210,000 for a yacht valued at $190,000 and a service contract to be performed evenly from November through February. During November, the yacht was delivered and 1 month of the service contract was performed. The remaining services are to be performed evenly over the next 3 months. In what month should the service contract be recognized as revenue?

$5,000 in each month from November to February

The gross profit percentage is the ratio to watch if you are worried about increased competition. If the company lowers its prices to retain market share without lowering its cost of goods sold, its gross profit percentage will ______.

decrease

FOB ______ is the term used when ownership of the goods transfers to a buyer when the goods arrive at the buyer's place of business.

destination

A multistep income statement is useful to financial statement users because it ______. (Select all that apply.)

separates cost of goods sold from other operating expenses, which allows the calculation of gross profit separates income statement items into meaningful components

Every merchandise sale has 2 components which require an entry in a perpetual inventory system. Select these two components given the sale was made on account to a customer.

Debit Accounts Receivable and credit Sales Revenue in the amount of the selling price times the quantity sold Debit Cost of Goods Sold and credit Inventory in the amount of the cost times the quantity sold

True or false: Gross Profit is a stockholders' equity account and is credited when goods are delivered to customers.

False

When a seller fulfills its performance obligation, it credits ______.

Revenue

Sales Revenue

Selling price times the quantity sold

Alpha Company bought inventory from Omega Company, FOB shipping point. On December 31, the last day of the accounting year, the goods were on a truck owned by Theta, Inc., exactly half-way between Alpha and Omega. Which company should include these goods in its December 31 inventory?

Alpha

Bijoux Company has Net Sales of $40,000; Beginning Inventory of $5,000; Purchases of $25,000 and Ending Inventory of $7,000. Cost of Goods Sold equals ______.

Cost of Goods Sold of $23,000 = Beginning Inventory of $5,000 + Purchases of $25,000 - $7,000 of Ending Inventory.

On October 25, Yacht Doc received $200,000 for a yacht valued at $180,000 and a 4-month service contract. During November, the yacht was delivered and 1 month of the service contract was performed. The remaining services are to be performed evenly over the next 3 months. What is the entry Yacht Doc should record on October 25?

Debit Cash; Credit Deferred Revenue

Gross Profit is a stockholders' equity account and is credited when goods are delivered to customers.

False; Gross Profit is a subtotal, not an account, found on the income statement.

Which of the following items are netted against Sales Revenue to arrive at Net Sales (Sales Revenue, net)?

Sales Discounts Sales Allowances Sales Returns

What does the sales discount 2/10, n/30 mean?

You can take a 2% discount if you pay within 10 days, or the full amount is due within 30 days.

The journal entry to record the payment for merchandise previously purchased on account includes a ______.

credit to Cash debit to Accounts Payable

Sales Revenue reports the ______.

sales price times the quantity of goods sold

In a perpetual inventory system, the buyer of merchandise with the shipping terms FOB shipping point will ______.

add the transportation costs to its Inventory account

Breyer Company bought inventory FOB shipping point from Cellar Company for $4,000 cash, including shipping charges. On December 31, the last day of the accounting year, the goods were on a truck owned by Common Carrier Company, and not expected to arrive until January 3. Which company should include these goods in its December 31 inventory?

Breyer Company should include the $4,000 in its inventory.

On May 1, Doormart received an order from a customer. The goods were shipped FOB shipping point on May 3. The customer received the goods on May 5 and paid for the merchandise on June 1. When should Doormart record the sale?

May 3

In a perpetual system, the entry to record a purchase of merchandise on account includes a ______.

credit to Accounts Payable debit to Inventory

Bijoux Company has sales of $40,000, beginning inventory of $5,000, purchases of $25,000, and ending inventory of $7,000. The goods available for sale for the period equals ______.

$30,000; Goods available for sale equals $30,000 (= beginning inventory of $5,000 plus purchases of $25,000).

A sales discount with terms of 1/10,n/30 means the buyer receives a

1% discount in paid within 10 days

ABC Corp. sells a product for $1,000 cash that cost $600. The journal entry(ies) for this transaction using a perpetual inventory system include a debit to ______.

Cash of $1,000 and a credit to Sales Revenue of $1,000; a debit to Cost of Goods Sold of $600 and a credit to Inventory of $600

ABC Company had beginning inventory of $20,000, purchases of $81,000, and ending inventory of $24,000. Sales revenue was $160,000. What is ABC's gross profit percentage?

Cost of goods sold equals $77,000 (= $20,000 + 81,000 - 24,000). Gross profit percentage equals 52% (=$160,000 - $77,000)/$160,000.

Cost of goods sold

Cost times the quantity sold

Inventory

Current Asset on the balance sheet available for sale

Which of the following are reported on the income statement?

Sales Revenue Gross Profit Cost of Goods Sold

Place the income statement line items in the proper order from the top to bottom.

Sales Revenue; gross Sales Returns, Allowances and Discounts Sales Revenue, net Cost of Goods Sold Gross Profit

Which of these will require a credit to the inventory account in a perpetual inventory system?

Selling inventory for cash Selling inventory on account

What are the two stages of accounting for a purchase discount using the gross method?

The Inventory account is later reduced if payment is made within the discount period. The purchase is first recorded at full cost.

True or false: When a company sells different types of products, the income statement will report the Cost of Goods Sold for all of the products in one line item.

True

The entry to record the purchase of inventory on account causes ______.

an increase in assets and liabilities

Sales discounts should appear in the financial statements as a(n) ______.

deduction from sales

The gross profit percentage measures the percentage of profit earned on each dollar of sales before deducting all expenses other than cost of goods sold. This ratio is used to:

make comparisons over time. compare one company with another.

Service companies sell services rather than

merchandise

Net Sales on an income statement equals Sales Revenue ______.

minus Sales Returns, Allowances and Discounts