Accounting Chapter 5

Purchase Discount

A cash discount claimed by a buyer for prompt payment of a balance due.

b) $15,000 Beginning inventory plus purchases less equals ending inventory 12,000 + $34,000 - $31,000 = $15,000

Beginning inventory is $12,000; purchases are $34,000; sales are $60,000; and cost of goods sold is $31,000. How much is ending inventory? a) $14,000 b) $15,000 c) $31,000 d) $46,000

D. Freight-out account Freight-out should be recorded in a separate account from freight-in since the cost of freight-in is inventoriable, while freight-out is an operating expense

Marsh, Inc. paid for freight costs on merchandise it shipped to a customer. In what account will Marsh record this cost in a perpetual inventory system? A. Inventory B. Cost of goods sold account C. Freight-in account D. Freight-out account

Gross Profit

The excess of net sales revenue over cost of goods sold

a) 20% Net income ($15,000) divided by net sales ($75,000) results in a profit margin ratio of 20%.

net income is $15,000, operating expenses are $20,000, net sales total $75,000, and sales revenues total $95,000. How much is the profit margin ratio? a) 20% b) 16% c) 75% d) 79%

Sales Returns and Allowances

transactions in which the seller either accepts goods back from the purchaser (a return) or grants a reduction in the purchase price (an allowance) so that the buyer will keep the goods

F This discount term means a 2% discount may be taken if paid within 10 days of the invoice date, and the entire invoice is due in 30 days.

T/F Discount term of 2/10, n/30 mean that a 10% cash discount is available if payment is made within 30 days.

T

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

F Sales Discounts is a contra account to Sales Revenue. It is reported on the income statement as a deduction from Sales Revenue.

T/F Sales Discounts is a contra asset account.

T Sales Returns and Allowances is reported on the income statement as a deduction from Sales Revenue.

T/F Sales Returns and Allowances is a contra-revenue account.

F

T/F The operating cycle of a merchandising company is ordinarily shorter than that of a service company.

Perpetual Inventory System

A detailed inventory system in which a company maintains the cost of each inventory item and the records continuously show the inventory that should be on hand.

Contra Revenue Account

An account that is offset against a revenue account on the income statement

C. 1.8 Since this ratio is significantly greater than 1, it suggests the use of the most conservative accounting techniques.

Given the following quality of earnings ratios, which suggests the company may be using the most conservative accounting techniques? A. 0.6 B. 1.0 C. 1.8 D. 0.2

True The quality of earnings ratio is net cash provided by operating activities divided by net income ($4,250,000 / $3,456,000 = 1.23).

If a company's net cash provided by operating activities is $4,250,000 and its net income is $3,465,000 then its quality of earnings ratio is 1.23. T/F?

$70,000-20,000-15,000= 40,000

Net income is $15,000, operating expenses are $20,000, and net sales total $75,000. How much is cost of goods sold?

B

Which statement is true when goods are purchased for resale by a company using a periodic inventory system? A. Purchases on account are debited to the Inventory account. B. Purchases on account are debited to the Purchases account. C. Purchase returns are debited to the Purchase Returns and Allowances account. D. Freight costs are debited to the Purchases account.

d) $74,100 Cost of goods available for sale equal the beginning inventory plus purchases minus purchases discounts and purchases returns and allowances plus freight-in $17,200 + $60,400 - $3,000 - $1,100 + $600 = $74,100.

Arbor Corporation had reported the following amounts at December 31, 2011: Sales $184,000; ending inventory $11,600; beginning inventory $17,200; purchases $60,400; purchases discounts $3,000; purchase returns and allowances $1,100; freight-in $600; freight-out $900. Calculate the cost of goods available for sale. a) $69,400 b) $197,700 c) $56,900 d) $74,100

C

To what is the gross profit rate equal? A. Net income divided by net sales B. Cost of goods sold divided by net sales C. Net sales minus cost of goods sold, divided by net sales D. Sales minus cost of goods sold, divided by cost of goods sold

A

Under IFRS, income statement items can be classified as which of the following? A. Nature or function B. Function or classification C. Function D. Classification or nature

A. Retailer

Which of the following is a merchandiser that sells directly to consumers? A. Retailer B. Wholesaler C. Customer D. Service enterprise

Sales Invoice

A document that provides support for each sale

Quality of Earnings Ratio

A measure used to indicate the extent to which a company's earnings provide a full and transparent depiction of its performance; computed as net cash provided by operating activities divided by net income.

Sales Discount

A reduction given by a seller for prompt payment of a credit sale

C. longer than

The operating cycle of a merchandising company is ordinarily ___________________ that of a service firm. A. the same as B. shorter than C. longer than D. has fewer steps than

B

Under what system is cost of goods sold determined at the end of an accounting period? A. Single entry inventory system B. Periodic inventory system C. Double entry inventory system D. Perpetual inventory system

B. 15 days The 1% discount can be taken if the invoice is paid within 15 days.

When credit terms of 1/15, n/60 are offered, how long is the discount period? A. 1 day B. 15 days C. 45 days D. 60 days

D. Freight-In When the purchaser directly incurs the freight costs and is using a periodic inventory system, Freight-in is debited

When using a periodic inventory system and the purchaser directly incurs the freight costs, which account is debited? A. Purchases B. Freight-out C. Inventory D. Freight-In

A

Which of the following is classified in an income statement as a nonoperating activity? A. Receiving dividend revenue from an investment B. Returning merchandise C. Receiving an allowance for merchandise damaged in shipment D. Paying for a purchase of inventory

Sales Revenue

Primary source of revenue in a merchandising company.

Profit Margin

Measures the percentage of each dollar of sales that results in net income, computed by dividing net income by net sales

Purchase Allowance

a deduction made to the selling price of merchandise, granted by the seller so that the buyer will keep the merchandise

d) 25% Gross profit = $1,700,000 ‒ $1,275,000 = $425,000 Net sales = $2,000,000 ‒ $250,000 ‒ $50,000 = $1,700,000 Gross profit rate = $425,000/$1,700,000 = 25%

A company has the following accounts balances: Sales $2,000,000; Sales Returns and Allowances $250,000; Sales Discounts $50,000; and Cost of Goods Sold $1,275,000. How much is the gross profit rate? a) 36% b) 64% c) 51% d) 25%

b) $686 The amount to be received as payment in full on June 23 is $686. Because payment is made within the discount period of 10 days, the amount received as payment in full is $700 ($750 - return of $50) minus the discount of $14 ($700 × 2%), or $686.

A credit sale of $750 is made on June 13, terms 2/10, n/30, on which a return of $50 is granted on June 16. What amount is received as payment in full on June 23? a) $700 b) $686 c) $650 d) $735

Purchase Invoice

A document that provides support for each purchase

C

A key difference between GAAP and IFRS would include which of the following? A. Inventories can be maintained under either a periodic or perpetual system. B. Income statement items can be classified under function. C. Revaluation of land is permitted. D. Comprehensive income is used for both GAAP and IFRS.

Cash 78.40 Sales Discounts 1.60 Accounts Receivable 80.00 The original sale is reduced from $100 to $80 as a balance due. The 2% discount is based on the $80 balance, which is $80 times 2%, or $1.60. This discount is a debit to Sales Discounts. The Cash debit is the difference, which is $78.40.

A retailer makes a $100 sale with terms of 2/10, n/30 on the first of the month. The customer returns $20 of merchandise for credit on account. What journal entry will the retailer record when payment is received within the discount period under a perpetual inventory system?

Periodic Inventory System

An inventory system in which a company does not maintain detailed records of goods on hand and determines the cost of goods sold only at the end of an accounting period.

d) $120,000 and $85,000 Sales revenue ($450,000) less sales returns and allowances($10,000) less cost of goods sold($320,000) = gross profit of $120,000. The difference between net income ($35,000) and gross profit($120,000) = operating expenses($85,000).

Assume that sales revenue are $450,000, sales discounts are $10,000, net income is $35,000, and cost of goods sold is $320,000. How much are gross profit and operating expenses, respectively? a) $130,000 and $95,000 b) $120,000 and $95,000 c) $130,000 and $85,000 d) $120,000 and $85,000

Net Sales

Sales less sales returns and allowances and sales discounts

b) $8,500 Net sales is sales revenue ($10,000) less both sales returns and allowances ($500) and sales discounts ($1,000), for a net sales total of $8,500.

Sales revenue total to $10,000. Sales returns and allowances are $500 and sales discounts are $1,000. How much is net sales? a) $10,500 b) $8,500 c) $11,500 d) $10,000

Cost of Goods Sold

The total cost of merchandise sold during the period.

A

Under IFRS, a number of inventory options are available. Which one of the following is not allowed under IFRS? A. Last in-first out B. Periodic C. Perpetual D. Including amounts held-for-sale in the ordinary course of business in the inventory account

D

Which of the following will be shown on the income statement for a merchandising company? A. Gross profit B. Cost of goods sold C. A sales revenue section D. All of the answer choices are correct.

C

Which of the following would affect the gross profit rate if sales remain constant? A. An increase in advertising expense B. A decrease in depreciation expense C. An increase in cost of goods sold D. A decrease in insurance expense

B

Which one of the following statements is correct? A. A company which uses a perpetual inventory system needs only one journal entry when it sells merchandise. B. A company which uses a perpetual inventory system needs two journal entries when it sells merchandise. C. A company which uses a perpetual inventory system debits inventory and credits cost of goods sold when it sells merchandise. D. None of the answer choices are correct.

C. Sales revenue less cost of goods sold

Which one of the following will result in gross profit? A. Operating expenses less net income B. Sales revenue less operating expenses C. Sales revenue less cost of goods sold D. Operating expenses less cost of goods sold

D. The Sales Returns and Allowances account is debited for defective merchandise returned by a customer. The seller of defective merchandise returned by a customer would debit Sales Returns and Allowances.

Which statement is true for the seller? A. The Sales Discounts account is credited for defective merchandise returned by a customer. B. The Sales Discounts account is debited for defective merchandise returned by a customer. C. The Sales Returns and Allowances account is credited for defective merchandise returned by a customer. D. The Sales Returns and Allowances account is debited for defective merchandise returned by a customer.

B

Under IFRS, how many years of comparative income statements must be presented for a complete set of financial statements? A. One year B. Two years C. Three years D. Four years

a) Credit to Cash for $1,600 Since the bill is paid after the discount period, the balance due is $2,000 less the returned goods of $400, or $1,600. The entry will debit Accounts Payable and credit Cash.

Cosmos Corporation, which uses a perpetual inventory system, purchased $2,000 of merchandise on July 5 on account. Credit terms were 2/10, n/30. It returned $400 of the merchandise on July 9. Which of the following is one effect when Cosmos pays its bill on July 21? a) Credit to Cash for $1,600 b) Debit to Cash for $1,600 c) Credit to Accounts Payable for $1,600 d) Debit to Accounts Payable for $2,000

c) $35,000 Beginning balance ($20,000) plus purchases ($25,000) equals $45,000 in merchandise available, less ending inventory ($10,000) equals cost of goods sold of $35,000.

Ending inventory is $10,000, beginning inventory is $20,000, and the cost of goods purchased is $25,000. How much is cost of goods sold? a) $25,000 b) $15,000 c) $35,000 d) $45,000

Gross Profit Rate

Gross profit expressed as a percentage by dividing the amount of gross profit by net sales.

b) $390,000 Cost of goods sold is computed by adding beginning inventory and cost of goods purchased and then subtracting ending inventory, or $60,000 + $380,000 - $50,000 = $390,000.

If beginning inventory is $60,000, cost of goods purchased is $380,000, sales revenue is $800,000 and ending inventory is $50,000, how much is cost of goods sold under a periodic system? a) $420,000 b) $390,000 c) $440,000 d) $410,000

d) $90,000 Gross profit is equal to sales revenue minus cost of goods sold($400,000 ‒ $310,000 = $90,000).

If sales revenues totals $400,000, cost of goods sold is $310,000, and operating expenses are $60,000, how much is the gross profit? a) $30,000 b) $340,000 c) $400,000 d) $90,000

B

In a periodic inventory system, when is the cost of the merchandise sold determined? A. At the time of the sale B. At the end of the period C. Periodically during the period D. Either at time of sale, end of period or periodically during the period.

B. Accounts Receivable and Cost of Goods Sold Credits to these accounts reduce accounts receivable and cost of goods sold.

In a perpetual inventory system, which accounts will the seller credit when merchandise is returned by a customer? A. Sales Returns and Allowances and Accounts Receivable B. Accounts Receivable and Cost of Goods Sold C. Inventory and Cost of Goods Sold D. Sales Returns and Allowances and Inventory

D. A debit to Inventory for $200 The cost of having merchandise delivered to the store is part of the cost of getting the inventory ready to sell. All costs incurred to get inventory ready to sell are included as part of Inventory account with a debit.

Jax Company uses a perpetual inventory system and on November 30 purchased merchandise for which it must pay the shipping charges. Which of the following is one part of the required journal entry when Jax pays the shipping charges of $200? A. A debit to Delivery Expense for $200 B. A debit to Cash for $200 C. A debit to Freight-out for $200 D. A debit to Inventory for $200

D. $4,074 The terms of 3% if paid within 10 days on the $4,200 invoice permits the buyer to take a discount of $126 on the invoice $4,200 - (3% × $4,200) = $4,074

Martin Company purchases $4,200 of merchandise on March 1, with credit terms of 3/10, n/30. If Martin pays on March 11, what is the cost of this purchase? A. $4,200 B. $3,864 C. $3,780 D. $4,074

Cash 1,274 Sales Discounts 26 Accounts Receivable 1,300

Myers and Company sold $1,800 of merchandise on account to Oscar, Inc. on March 1 with credit terms of 2/10, n/30. Oscar returned $500 of the merchandise due to poor quality on March 3. If Oscar pays for the purchase on March 11, what entry does Myers make to record receipt of the payment?

b) $40,000 Sales less cost of goods sold equals gross profit. Subtracting operating expenses from gross profit equals net income. Working backwards, net income ($15,000) plus operating expenses ($20,000) results in a gross profit of $35,000. Subtracting gross profit ($35,000) from net sales ($75,000) results in cost of goods sold of $40,000.

Net income is $15,000, operating expenses are $20,000, and net sales total $75,000. How much is cost of goods sold? a) $15,000 b) $40,000 c) $35,000 d) $60,000

d) 46.7% Net income ($15,000) plus operating expenses ($20,000) equals a gross profit of $35,000. The gross profit of $35,000 divided by net sales of $75,000 = gross profit ratio of 46.7%

Net income is $15,000, operating expenses are $20,000, and net sales total $75,000. How much is the gross profit rate? a) 75.0% b) 20.0% c) 26.7% d) 46.7%

D. Invoice price less returns and allowances The buyer is permitted to take the discount on the invoice price less any returns and oallowances, because this amount represents the buyer's current obligation.

On what amount is a sales discount based? A. Invoice price plus freight-in B. Invoice less discount C. Invoice price plus freight-out D. Invoice price less returns and allowances

B

What quality of earnings ratio might a company have if it is using more aggressive accounting techniques in order to accelerate income recognition? A. Significantly more than 1 B. Significantly less than 1 C. Approximately equal 1 D. Close to 0

C. Contra revenue accounts

What type of accounts are Sales Returns and Allowances and Sales Discounts? A. Contra asset accounts B. Expense accounts C. Contra revenue accounts D. Contra expense accounts

A

Which factor would not affect the gross profit rate? A. An increase in the cost of heating the store B. An increase in the sale of luxury items C. An increase in the use of "discount pricing" to sell merchandise D. An increase in the price of inventory items

A

Which inventory system will likely be used by a company with merchandise that has a high unit value? A. Perpetual inventory system B. Double entry inventory system C. Periodic inventory system D. Single entry inventory system

C. It sells to another business, which will sell to a consuming customer. A wholesaler is the intermediary. It buys from one business and sells to another business that will resell to customers.

Which is true about a wholesaler? A. It is a company that sells to consumers at a discount. B. It conducts large sales for consumers on a recurring basis. C. It sells to another business, which will sell to a consuming customer. D. It sells only to manufacturing companies.

C

Which of the following determines the quality of earnings ratio? A. Operating income divided by the net income B. Net cash provided by operating activities divided by operating income C. Net cash provided by operating activities divided by net income D. Net cash flow increase divided by the net income

B. Interest expense

Which of the following is classified in an income statement as a nonoperating activity? A. Advertising expense B. Interest expense C. Freight-out D. Cost of goods sold

C. Payment of freight costs for goods shipped to a customer This entry requires a debit to Freight-out and a credit to cash. Freight-out is not part of the cost of inventory.

Which of the following items does not result in an entry to the Inventory account under a perpetual system? A. A purchase of merchandise B. A return of Inventory to the supplier C. Payment of freight costs for goods shipped to a customer D. Payment of freight costs for goods received from a supplier

A. Companies determine cost of goods sold only at the end of the accounting period.

Which of the following statements about a periodic inventory system is true? A. Companies determine cost of goods sold only at the end of the accounting period. B. Companies continously maintain detailed records of the cost of each inventory purchase and sale. C. The periodic system provides better control over inventories than a perpetual system. D. The increased use of computerized systems has increased the use of the periodic system.

A

Which of the following statements is correct? A. A company which uses a periodic inventory system needs only one journal entry when it sells merchandise. B. A company which uses a periodic inventory system needs two journal entries when it sells merchandise. C. A company which uses a periodic inventory system debits Cost of Goods Sold and credits Inventory when it sells merchandise. D. None of the answer choices are correct.

B. A perpetual inventory system provides better control over inventories than does a periodic inventory system. Under periodic inventory, details of goods on hand are not available. Since perpetual inventory requires cost of goods sold to be recognized at the time of sale, it contains more accurate values of goods on hand at any time.

Which of the following statements is correct? A. A periodic inventory system provides better control over inventories than does a perpetual inventory system. B. A perpetual inventory system provides better control over inventories than does a periodic inventory system. C. A periodic inventory system computes cost of goods sold each time a sale occurs. D. A perpetual inventory system computes cost of goods sold only at the end of the accounting period.

C. Cost of goods sold

Which of the following would appear on both a single-step and a multiple-step income statement? A. Gross profit B. Income from operations C. Cost of goods sold D. Other expenses and losses

C. Both Sales Discounts and Sales Returns and Allowances Both Sales Discount and Sales Returns and Allowances are contra accounts to sales revenue and have a normal debit balance

Which of these accounts normally have a debit balance? A. Sales Discounts only B. Sales Returns and Allowances only C. Both Sales Discounts and Sales Returns and Allowances D. Neither Sales Discount nor Sales Returns and Allowances

C. Two journal entries are necessary: one to record the receipt of cash and sales revenue, and one to record the cost of goods sold and to reduce inventory.

Which statement is true when recording the sale of goods for cash in a perpetual inventory system? A. Only one journal entry is necessary. It will record cost of goods sold and reduce of inventory. B. Only one journal entry is necessary. It will record the receipt of cash and sales revenue. C. Two journal entries are necessary: one to record the receipt of cash and sales revenue, and one to record the cost of goods sold and to reduce inventory. D. Two journal entries are ncessary: one to record the receipt of cash and reduction of inventory, and one to record the the cost of goods sold and sales revenue.

Purchase Return

a return of goods from the buyer to the seller for cash or credit