ACCT 201 CH 4

FOB

Free On Board

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

Markup Percent = Gross Profit / Cost of Goods Sold

Administrative Expense

Office Salaries Expense Rent Expense Depreciation Expense - Office Equipment Insurance Expense Office Supplies Expense Miscellaneous Administrative Expense

Perpetual Inventory System

each purchase and sale of merchandise is recorded in the inventory account and related subsidiary ledger.

Periodic Inventory System

the inventory does not show the amount of merchandise available for sale and the amount sold

Turquoise Inc. expects that customers of 20Y6 sales will be issued refunds or allowances of $8,000 in 20Y7. To make an adjustment for the expected refunds and allowances, Turquoise Inc. will _____.

increase the customer refunds payable account by $8,000 and decrease the sales account by $8,000 If it is expected that some of the sales of current year will have to be refunded during the next year, then an adjustment increasing the customer refunds payable account and decreasing the sales account by the estimated amount is necessary.

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 cost of goods sold is subtracted from sales to arrive at gross profit.

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

Markup Percent = Gross Profit Percent × (Selling Price / Cost) The markup percent is multiplied by a product's cost to determine the product's selling price.

Components Cost of Goods Purchased

Purchased - (Purchase Returns & Allowances + Purchase Discounts) = Net Purchases + Transportation In = Cost of Goods Purchased

Inventory Shrinkage

The loss of inventory that occurs because of theft, damage, and errors. Inventory and Retained Earnings are impacted

FOB Destination

The seller delivers the merchandise to the buyers final destination.

Other Revenue and Expenses

Rent Revenue Interest Expense

Purchase Returns and Allowances

Result when merchandise

FOB Shipping Point

The buyer pays the freight costs from the shipping point (Factory) to the final destination.

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 The ownership of the merchandise may pass to the buyer when the seller delivers the merchandise to the freight carrier or transportation company. In this case, the terms are said to be FOB (free on board) shipping point. In this case, the buyer pays the freight charges from the shipping point (factory) to the final destination.

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

$1,050,000 Operating Income = $5,000,000 - $3,700,000 - $100,000 - $150,000 = $1,050,000

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 Expenses = $1,000,000 - ($1,000,000 × 60%) = $400,000

If Daisy Inc.'s gross profit percent is 10 percent, selling price of its product is $500, and the cost of the product is $350, then Daisy's markup percent is _____.

11.1 percent The markup and gross profit percent are useful when comparing companies. The markup percent is multiplied by a product's cost to determine the product's selling price.

Floral white Inc. has sales of $6,500,000 and cost of goods sold of $5,000,000. Floral white's gross profit percent is _____.

23.1% Gross Profit Percent = (Sales - Cost of Goods Sold) / Sales = ($6,500,000 - $5,000,000) / = $6,500,000 = 23.1%

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. A seller must estimate the amount of refunds and allowances expected to be granted in the future. This estimate is then used in the adjusting process to record a liability, called customer refunds payable.

Operating Cycle

Cash Purchase of Merchandise Merchandise Sales Accounts Receivable Collect Accounts Receivable

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

Cost of good sold Since inventory shrinkage cannot be totally eliminated, it is considered a normal cost of operations and is included in the cost of goods sold.

The revenues from services are reported on the income statement of a service business as _____.

Fees Earned On the income statement of a service business, the revenues from services are reported as fees earned unlike a retail business which reports its revenues as sales.

Which of the following is reported on the income statement of a service business but not on that of a retail business?

Fees Earned The revenues from services are reported on the income statement as fees earned by a service business.

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 in the books of Salsa Co. there is an increase of $12,000 in the accounts payable account. Each merchandising transaction affects a buyer and a seller.

Debit Memorandum

Informs the seller of the amount the buyer proposes to decrease the account payable due to seller and why.

Components of Cost of Goods Sold

Inventory, Beginning of Period + Cost of Goods Purchased = Cost of Goods Available for Sale - Inventory, End Period = Cost of Goods Sold

Which of the following is the correct way to account for inventory shrinkage?

It is included in the cost of goods sold. Inventory shrinkage is considered a normal cost of operations and is included in the cost of goods sold.

Magenta Inc. buys merchandise worth $1,000 from Zeus Inc. on account, terms FOB (free on board) shipping point and pays the freight cost of $100. Based on this scenario, which of the following is the effect on the liquidity and profitability of Magenta Inc.?

Its liquidity as well as profitability remains unchanged. Working capital is not changed since the net increase of $1000 ($1,100 - $100) in current assets equals the increase in current liabilities, hence no change occurs in liquidity. Since no sale occurred, the gross profit percent is also unaffected.

Components of Net Income (From Operations)

Net Sales - Cost of Goods Sold = Gross Profit on Sales - Operating Expenses = Net Income(Loss) from Operations

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

Operating income = Sales - Cost of goods sold - Operating expenses To compute the operating income of a retail business, the cost of goods sold is subtracted from sales to arrive at gross profit or gross margin, and the operating expenses are subtracted from gross profit to arrive at operating income.

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. Other revenue is revenue from sources other than the primary operating activity of a business such as gains resulting from the sale of fixed assets.

Selling Expenses

Sales Salaries Expense Advertising Expense Depreciation Expense - Store Equipment Delivery Expense Miscellaneous Selling Expense

The seller issues a credit memo for $700 for damaged merchandise to the buyer, and the merchandise was not returned by the buyer. Which of the following is the effect on the financial statements of the selling company?

The accounts receivable account decreases by $700, and the customer refunds payable account decreases by $700. There is no effect of issuing a credit memo on the selling company's liquidity.

Identify the effect on the liquidity and profitability metrics of a seller, when the seller records receipt of the returned inventory and issues a credit memo to the buyer?

There is no effect on liquidity, but there is a decrease in the profitability of the seller. There is no effect on working capital, hence liquidity metric is not affected, but recording returned inventory affects the gross profit percent due to which there is a decrease in the profitability metric.

Water Source Inc. pays David and Co. a refund of $225 for merchandise damaged in shipment. David and Co. agrees to keep the merchandise. To account for this event, Water Source Inc.:

decreases the cash account and the customer refunds payable account. Refunds to customers are adjusted against the liability account called customer refunds payable.

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 In the perpetual inventory system, inventory records consist of the inventory account, called the controlling account, and a subsidiary record of each item of inventory, called a subsidiary ledger. The sum of the balances of the inventory items in the subsidiary ledger equals the balance of the inventory (controlling) account.

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

reported on the income statement as an expense. If the seller pays the freight costs, they are reported on the income statement as an expense.

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

(Sales - Cost of Goods Sold) / Sales

In an invoice, the credit term is expressed as 2/10, n/30. The total amount of 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 due within 30 days.

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

Which of the following is the correct statement regarding a single-step income statement?

A single-step income statement does not report gross profit and operating income.

Maroon Inc. made sales of $100,000 during 20Y7. The cost of goods sold was $75,000. The company calculated its gross profit ratio, but later its inventory records indicated an inventory shrinkage of $1,500. Identify the effect of inventory shrinkage on the gross profit percent.

There is a 1.5% decrease in the gross profit percent. Inventory shrinkage is considered a normal cost of operations.

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 of Aries Inc. Working Capital = Current Assets - Current Liabilities