Accounting Chapter 5

If beginning inventory is $60,000, cost of goods purchased is $380,000, and ending inventory is $50,000, what is cost of goods sold under a periodic system? (a) $390,000. (b) $370,000. (c) $330,000. (d) $420,000.

(a) $390,000. Beginning inventory ($60,000)+Cost of goods purchased ($380,000)−Ending inventory ($50,000)=Cost of goods sold ($390,000), not (b) $370,000, (c) $330,000, or (d) $420,000.

Gross profit rate

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

Profit margin

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

Sales revenue

Primary source of revenue for a merchandising company.

Net sales

Sales less sales returns and allowances and sales discounts.

Gross profit

The excess of net sales over the cost of goods sold.

Cost of goods sold

The total cost of merchandise sold during the period.

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.

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 continuously 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) Companies determine cost of goods sold only at the end of the accounting period. Under the periodic inventory system, cost of goods sold is determined only at the end of the accounting period. The other choices are incorrect because (b) detailed records of the cost of each inventory purchase and sale are maintained continuously when a perpetual, not periodic, system is used; (c) the perpetual system provides better control over inventories than a periodic system; and (d) the increased use of computerized systems has increased the use of the perpetual, not periodic, system.

Under a perpetual inventory system, when goods are purchased for resale by a company: (a) purchases on account are debited to Inventory. (b) purchases on account are debited to Purchases. (c) purchase returns are debited to Purchase Returns and Allowances. (d) freight costs are debited to Freight-Out.

(a) purchases on account are debited to Inventory. Under a perpetual inventory system, when a company purchases goods for resale, purchases on account are debited to the Inventory account, not (b) Purchases or (c) Purchase Returns and Allowances. Choice (d) is incorrect because freight costs are also debited to the Inventory account, not the Freight-Out account.

A company makes a credit sale of $750 on June 13, terms 2/10, n/30, on which it grants a return of $50 on June 16. What amount is received as payment in full on June 23? (a) $700. (b) $686. (c) $685. (d) $650.

(b) $686. The full amount of $686 is paid within 10 days of the purchase ($750−$50)−[($750−$50)×2%]. The other choices are incorrect because (a) does not consider the discount of $14; (c) the amount of the discount is based upon the amount after the return is granted ($700×2%), not the amount before the return of merchandise ($750×2%); and (d) does not constitute payment in full on June 23.

Bufford Corporation had reported the following amounts at December 31, 2017: sales revenue $184,000, ending inventory $11,600, beginning inventory $17,200, purchases $60,400, purchase discounts $3,000, purchase returns and allowances $1,100, freight-in $600, and freight-out $900. Calculate the cost of goods available for sale. (a) $69,400. (b) $74,100. (c) $56,900. (d) $197,700.

(b) $74,100. Beginning inventory ($17,200)+Purchases ($60,400)−Purchases discounts ($3,000)−Purchase returns and allowances ($1,100)+Freight-in ($600)=Cost of goods available for sale ($74,100). The other choices are therefore incorrect.

If net sales are $400,000, cost of goods sold is $310,000, and operating expenses are $60,000, what is the gross profit? (a) $30,000. (b) $90,000. (c) $340,000. (d) $400,000.

(b) $90,000. Gross profit=Net sales ($400,000)−Cost of goods sold ($310,000)=$90,000, not (a) $30,000, (c) $340,000, or (d) $400,000.

When goods are purchased for resale by a company using a periodic inventory system: (a) purchases on account are debited to Inventory. (b) purchases on account are debited to Purchases. (c) purchase returns are debited to Purchase Returns and Allowances. (d) freight costs are debited to Purchases.

(b) purchases on account are debited to Purchases. Purchases for resale are debited to the Purchases account. The other choices are incorrect because (a) purchases on account are debited to Purchases, not Inventory; (c) Purchase Returns and Allowances are always credited; and (d) freight costs are debited to Freight-In, not Purchases.

A quality of earnings ratio: (a) is computed as net income divided by net cash provided by operating activities. (b) that is less than 1 indicates that a company might be using aggressive accounting tactics. (c) that is greater than 1 indicates that a company might be using aggressive accounting tactics. (d) is computed as net cash provided by operating activities divided by total assets.

(b) that is less than 1 indicates that a company might be using aggressive accounting tactics. A quality of earnings ratio that is less than 1 indicates that a company might be using aggressive accounting tactics. The other choices are incorrect because (a) Quality of earnings=Net cash provided by operating activities÷Net income,not vice versa; (c) a ratio that is significantly greater than 1 suggests that a company is using conservative accounting techniques, and (d) Quality of earnings=Net cash provided by operating activities÷Net income (not Total assets).

Which of the following would affect the gross profit rate? (Assume sales remains 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.

(c) An increase in cost of goods sold. Gross profit rate=Gross profit÷Net sales. Therefore, any changes in sale revenue, sales returns and allowances, sales discounts, or cost of goods sold will affect the ratio. Changes in (a) advertising expense, (b) depreciation expense, or (d) insurance expense will not affect the computation of the gross profit rate.

Which sales accounts normally have a debit balance? (a) Sales Discounts. (b) Sales Returns and Allowances. (c) Both (a) and (b). (d) Neither (a) nor (b).

(c) Both (a) and (b). Both Sales Discounts and Sales Returns and Allowances normally have a debit balance. Choices (a) and (b) are both correct, but (c) is the better answer. Choice (d) is incorrect as both (a) and (b) are correct.

Gross profit will result if: (a) operating expenses are less than net income. (b) net sales are greater than operating expenses. (c) net sales are greater than cost of goods sold. (d) operating expenses are greater than cost of goods sold.

(c) net sales are greater than cost of goods sold. Gross profit will result if net sales are greater than cost of goods sold. The other choices are incorrect because (a) operating expenses and net income are not used in the computation of gross profit; (b) gross profit results when net sales are greater than cost of goods sold, not operating expenses; and (d) gross profit results when net sales, not operating expenses, are greater than cost of goods sold.

The gross profit rate is equal to: (a) net income divided by sales. (b) cost of goods sold divided by 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.

(c) net sales minus cost of goods sold, divided by net sales. Gross profit rate=Gross profit (Net sales−Cost of goods sold)÷Net sales. The other choices are therefore incorrect.

To record the sale of goods for cash in a perpetual inventory system: (a) only one journal entry is necessary to record cost of goods sold and reduction of inventory. (b) only one journal entry is necessary to record the receipt of cash and the 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 reduction of inventory. (d) two journal entries are necessary: one to record the receipt of cash and reduction of inventory, and one to record the cost of goods sold 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 reduction of inventory. 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 reduction of inventory. The other choices are incorrect because (a) only considers the recognition of the expense and ignores the revenue, (b) only considers the recognition of revenue and leaves out the expense or cost of merchandise sold, and (d) the receipt of cash and sales revenue, not reduction of inventory, are paired together, and the cost of goods sold and reduction of inventory, not sales revenue, are paired together.

During the year ended December 31, 2017, Bjornstad Corporation had the following results: net sales $267,000, cost of goods sold $107,000, net income $92,400, operating expenses $55,400, and net cash provided by operating activities $108,950. What was the company's profit margin? (a) 40%. (b) 60%. (c) 20.5%. (d) 34.6%.

(d) 34.6%. Net income ($92,400)÷Net sales ($267,000)=Profit margin of 34.6%, not (a) 40%, (b) 60%, or (c) 20.5%.

The multiple-step income statement for a merchandising company shows each of these features except: (a) gross profit. (b) cost of goods sold. (c) a sales section. (d) an investing activities section.

(d) an investing activities section. An investing activities section appears on the statement of cash flows, not on a multiple-step income statement. Choices (a) gross profit, (b) cost of goods sold, and (c) a sales section are all features of a multiple-step income statement.

Purchase discount

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

Purchase allowance

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

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.

Purchase invoice

A document that provides support for each purchase.

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.

Purchase return

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

Comprehensive income statement

A statement that presents items that are not included in the determination of net income, referred to as other comprehensive income.

Contra revenue account

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

Comprehensive income

An income measure that includes gains and losses that are excluded from the determination of net income.

Periodic inventory system

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