module 2: chapter 3 and 4 retail accounting

what term indicates that merchandise is free transportation charges to the buyer?

FOB destination

Which of the following is an example of other expense?

Loss from disposing of fixed assets

which of the following equations shows the relationship between markup percent and gross profit percent?

Markup Percent= Gross Profit Percent * (Selling Price/Cost)

Aries Inc. buys merchandise from Andy Co. on account, $1,900, terms free on board (FOB) shipping point and pays the freight cost of $50. Identify the transaction's effect on the working capital of Aries Inc.

There is no effect on the working capital; (since the net increase of $1,850($1,900-$50) in current assets equals the increase in current liabilities)

The revenue cycle of a business is the process it takes for the business to spend cash to generate revenue, and receive cash from customers

false

Under the accrual basis of accounting, net cash flows from operating activities on the statement of cash flows will normally be the same as net income.

false

a buyer who acquires merchandise under credit terms of 1/10, n/30 has 30 days after the invoice date to take advantage of the cash discount.

false

accused expenses are expenses that have been incurred and paid

false

inventory shirnkage will increase inventory

false

unearned revenue is a stockholders' equity

false

the difference between sales and cost of goods sold for a merchandising business is?

gross profit

Multi-Step Income Statement show

gross profit, cost of merchandise sold, income from operations, and net income

under which of the following situations does a business earn a gross profit but incur a net loss?

if the sum of its operating income and other revenue is less than its other expenses

The inventories of a retail business

include merchandise

For retailers, the physical inventory on hand at the end of an accounting period is usually less than the balance of the inventory account. This difference is referred to as _____.

inventory shrinkage

if seller pays the freight costs, in the seller's books of accounts, such cost are:

reported on the income statement as as an expense

the main sources of generating equity are:

retained earnings and contributed capital

the accrual basis of accounting recognizes ______

revenue when earned and expenses when incurred.

Demeter Inc. purchased merchandise on account from a supplier for $49,000, with credit terms of 3/10, n/30. If Demeter pays the invoice within the discount period, what is the amount that Demeter has to pay?

$47,530; (Amount Piad= $49,000-($49,000*3%)=$47,530)

which of the following is the formula for gross profit percent?

(Sales-Cost of Goods Sold)/sales

Although quick rations vary by industry, a quick ratio of at least _____ is normal.

1.0

Compute the quick ratio using the following information: Cash $50,000 Accounts receivable $130,000 Inventories $210,000 Prepaid Assets $15,000 Total Current Assets $405,000 Current Liabilities $160,000

1.13; (inventories and prepaid assets are not quick assets, excluding them from calculation. Quick ratio= Quick assets/Quick Liabilities= $50,000+$130,000/$160,000=1.13)

If Juan and Co.'s markup percent is 20 percent, selling price of its product is $1,500, and the cost of the product is $1,250, then Juan's gross profit percent is ____.

16.7 percent (20%*($1,250/$1,500)=16.7%)

in an invoice, the credit term is expressed as 2/10, n/30. the total amount invoice is due within

30 days; (the credit term expressed as 2/10, n/30 is read as 2% discount if paid within 10 days, net amount is due within 30 days)

Which of the following is true of quick ratio of a company?

The quick ratio is a better metic than quick assets for comparing among companies; (quick ratio is a better metric than quick assets for comparing among companies because as a ratio it eliminates the effect of six differences among companies)

Synergy Inc. purchased supplies for $240 on account. How does this transaction affect the financial statements?

The statement of cash flows and the income statement are unaffected; (since no cash is paid or received, there is no entries in the statement, likewise since no revenue or expenses are affected, there are no entires in the income statement)

Azure's Inc's inventory records indicate an inventory shrinkage of $2,500. What is the effect of inventory shrinkage on Azure's working capital?

The working capital decreases by $2,500

On November 1, Atlas Inc. paid a premium of $3,600 for a three-year general business insurance policy that covers risks from fire and theft. What amount of insurance will expire each month?

$100; (3,600 divided by 36 months/ 3 years=36 months)

Leto Inc. purchased merchandise on account from Metis Inc. for $25,000, credit terms being 2/10, n/30. If Leto pays the invoice within the discount period, what amount will Metis receive as payment?

$24,500; (amount of payment=$25,000($25,000-2%)=$24,500

Slateblue and Co. is a retail company. In 20Y5, it reported a gross profit of $1,000,000. If 60 % of the gross profit were operating expenses, calculate the operating income of Slateblue and Co. for 20Y5.

$400,000; (Operating Income= Gross Profit-Operating Expense=$1,000,000-$1,000,000*60%=$400,000)

the following data relates to Dory Inc. for the year ending December 31, 20Y6. Sales $5,000,000 Cost of goods sold $3,700,000 Selling Expenses $100,000 Administrative Expenses 150,000 Dory Inc.'s operating income is?

$1,050,000;( Operating income= $5,000,000-$3,700,000-$100,000-$150,000=$1,050,000)

Aztec Inc's inventory records indicate the following on December 31, 20Y7 Account balance of Inventory $70,500 Physical merchandise inventory on hand $69,000 Estimated customer refund $2,500 Aztec's inventory shrinkage is equal to?

$1,500; (Inventory shrinkage= Account balance of inventory ($70,500)- Physical merchandise inventory on hand($69,000)=$1,500)

which of the following concepts requires expenses to be recorded in the same period as the related revenues that they generate?

The matching concept

if a company issues a credit memo of $600 to a customer, what is its effect on the company's liquidity and profitability?

Both liquidity and profitability remain unchanged

what is unique about reporting current assets?

Current assets are reported in the order of their liquidity

Which of the following increases as a result of inventory shrinkage?

cost of goods sold

The quick ratios of Excellent Corp. and Synergy Inc. are 1.5 and 0.9, respectively. Which of the following inferences can be made from the information available?

Excellent Corp. is in a stronger liquidity position than Synergy Inc.; (the quick ratio is used to assess a company's ability to pay its short-term obligations. the quick ratio indicates that Excellent Corp. is in a stronger liquidity position than Synergy Inc.)

Citron Inc. pays transportation charges of $200 for delivery of the merchandise sold to Megaton Co. Identify the effect of this transaction in the books of Citron and Megaton.

In the books of Citron Inc. the retained earnings decrease by $200, and in the books of Megaton Co. there is no effect

On July 1, Tango Co. sold merchandise on account to Salsa Co, for $12,000. Which of the following is the adjustment in the books of Tango Co. and Salsa Co.?

In the books of Tango Co. there is an increase of $12,000 in the accounts receivable account, and is the books of Salsa Co. there is an increase of $12,000 in the accounts payable account

wellness heath care provided services of $750 to patients who had not yet been billed. How would you record this adjustment under the IFS Framework?

Increase accounts receivable and retained earnings by $750 under the balance sheet. Record $750 as fees earned under the income statement column.

Atlas Inc. purchased supplies for $300 on account. What is the effect of this transaction on Atlas's income statement and balance sheet?

The liability Accounts Payable increases $300 in the balance sheet.

Merchandise is ordered on November 12; the merchandise is shipped by the seller and the invoice is prepared, dated, and mailed by the seller on November 15; the merchandise is received by the buyer on November 17; the entry is made in the buyer's accounts on November 28. The credit period begins with what date?

November 15

which of the following is not a deferred expense?

Salaries payable, $220

Which of the following is true of the adjustment process?

The accounting records are normally updated just prior to preparing financial statements.

which of the following is an example of a long-term liability?

a note payable due in 3 years.

The fixed asset account is not reduced directly for depreciation because:

a record of the initial cost of a fixed asset needs to be maintained for tax and other purposes.

cash and other assets that are expected to be converted to cash or sold or used up within one year or less, through the normal operations of the business are called

current assets

if the books of a seller, which of the following account balances decreases when the seller issues a credit memo?

customer refunds payable

in ______ form balance sheet, the assets are listed _____ the liabilities and stockholders' equity

account; on the left hand side of

identify current liabilities from the following: accounts payable, bonds payable, accused expenses, notes payable, merchandise credit

accounts payable, accrued expenses, and merchandise credit

Shine invested $6,000 in a business in exchange for common stock. This transaction results in:

an increase in stockholders' equity and an increase in cash flows from financing activities; (investment in common stock increases stockholders' equity and investing in one's own business results in an increase in cash flows from financing activities)

which of the following statements is true about sales made to customers using credit cards?

any processing fees charged to a retailer for use of credit cards are recorded as an expense by the retailer

receivables are:

assets

which of the following is an example of cash flow from an investing activity for an insurance company?

cash paid for the purchase of office equipment.

which of the following financial statements groups together accounts of similar nature and reports them in a few major classifications?

classified-balance sheet

on October 1, collins company sold merchandise of $8,000 on account to James Company. The terms of FOB destination; 2/10, n/30. the cost of the merchandise sold was $5,200. which of the following is true of this transaction?

collins company will reduce Merchandise Inventory by $5,200

eagle eye, inc, received an additional investment of $6,000 cash in exchange for common stock. how does this transaction affect eagle eye accounts?

common stock increases by $6,000, and revenue increases by $6,000.

single-step income statement

contains the total of all expenses deducted from the total of all revenues, with no intermediate balances

Multiple-step income statement

contains various sections for revenues and expense, with intermediate balances, and concludes with net income

using a perpetual inventory system, the return of merchandise purchased on account includes a(n):

decrease in merchandise inventory

wellness health care purchased two policies on November 1, of which, $1,100 expired on November 30 How would you record this adjustment under IFS Framework?

decrease prepaid insurance and retained earnings by $1,100. record $1,100 as the insurance expense under the income statement.

_______ are created by recording a transaction in a way that delays recognition of an expense or revenue

deferrals

why is depreciation added to net income in determining net cash flows from operating activities?

depreciation is a non-cash expense needed to reconcile net income to cash flows from operations

which of the following best describes an accrual adjustment?

it is created when a revenue or expense has been earned or incurred but has not been recorded.

which of the following best describes accrual basis of accounting?

it records revenue as it is earned and matches expenses against the revenue they generate.

which of the following is the equation for calculating markup percent?

markup=gross profit?cost of goods sold

the ability of a company to pay debts as they become due is best analyzed using:

net cash flows from operating activities.

the ______ of a business is the process it takes for the business to spend cash to generate revenue, earn revenues, and receive cash from customers

operating cycle

which of the following is the correct equation for computing the operating income of a retail business

operating income=sales-cost of goods-operating expense

which of the following statements is true about other revenue?

other revenue is revenue from sources apart from the primary operating activity of a business

In the ______, inventory records consist of the inventory account, called the controlling account, and a subsidiary record of each item of inventory, called a subsidiary ledger.

perpetual inventory system

the quick ratio is computed as ______

quick assets divided by current liabilities

what is subtracted from the operating income to arrive at the net income?

tax expenses and interest expenses

which of the following is true of net cash flows from operating activities?

the ability of a company to pay debts as they become due is best analyzed using net cash flows from operating activities.

what is not true of adjustments?

the adjustment process takes place after the preparation of financial statements.

If the terms of invoice are FOB (free on board) shipping point, it means that _____.

the buyer pays the freight charges from the shipping point to the final destination

under the revenue recognition principle, revenue is recorded when services have been provided or when a product has been delivered to a customer.

true

which of the following is true of the cash basis of accounting?

under the cash basis of accounting, a company records only transactions involving increasing or decreases of cash.

which of the following statements is true of sales tac, if a sale is made on account?

the seller charges the buyer for sales tax by increasing the accounts recievable account

Inventory shortage is recorded when

there is a difference between a physical count of inventory and inventory records

disadvantages of a single-step form of income statement includes all of the following except

total revenues and total expenses are not indicated

Cost of sales is the cost of the inventory that was sold during an accounting period

true

In case of FOB shipping point, freight costs incurred by the buyer are added to the cost of the inventory by increasing inventory.

true

The quick ratio is a better metric than quick assets to compare companies.

true

Under the perpetual inventory system, the cost of merchandise sold is recorded when sales are made

true

a multi-step income statement calculates income by grouping certain revenues and expenses together and then calculating several subtotals of income

true

according to the matching principle, expense must be recorded in the period of the occurrence, regardless of the payment period.

true

cost of merchandise sold is used in accounting for transactions by sellers of merchandise

true

liabilities that will not be due for more than one year are called long-term liabilities

true

on the income statement in the single-step form, the Toal of all expenses is deducted fro the total of all revenues

true

the accrual basis of accounting requires revenue to be recorded when the service is performed.

true

the markup percent is calculated as gross profit divided by cost of goods sold

true

Using accrual accounting, expenses are recorded and reported

when they are incurred, whether or not cash is paid.

the accounting cycle is the process that begins with analyzing transactions and ends:

with preparing financial statements