Chapter 5

Clark Incorporated purchased iron from Garret Industries. The purchase cost $54,730 with freight costs of $680 and a purchase discount of $5,473. If Clark Incorporated uses a periodic system of inventory, which accounts will Clark Incorporated use to account for this purchase? Select answer from the options below A) Inventory and Cost of Goods Sold B) Inventory and Accounts Payable C) Purchases, Freight-In, and Purchase Discounts D) Purchases, Freight-In, and Cost of Goods Sold

In a periodic system, purchases, freight costs, and purchase discounts are recorded in separate accounts. They are not directly entered into the Inventory account. Therefore, Clark Incorporated will make entries in the Purchases, Freight-In, and Purchase Discounts accounts, which will be used to calculate the cost of goods purchased at the end of the period.

Under a perpetual inventory system, a company would debit the Inventory account when it Select answer from the options below A) calculates operating expenses. B) purchases merchandise for resale. C) records the cost of goods sold. D) records sales revenue.

Inventory is an asset account and is therefore increased by a debit. The purchase of items for resale represents an increase in inventory and consequently, a debit to the Inventory Account.

"Cost of goods sold" and "gross profit" are part of which of the following? Select answer from the options below - A) the income measurement process for a merchandising company B) the operating cycle for a service company C) the income measurement process for a service company D) the operating cycle for a merchandising company

A merchandising company has cost of goods sold, however a company providing services does not because it does not sell goods. For a merchandising company, net sales less cost of goods sold equals gross profit. Gross profit less operating expenses equals net income. These calculations are part of the income measurement process.

Although the perpetual inventory system updates accounting records after each sale, a physical count is necessary at year-end to address issues such as ________ and. A) customer theft; spoilage. B) management performance; employee discounts. C) failing to meet sales goals; employee discounts. D) management performance; inventory records systems.

A perpetual inventory system records sales of inventory through normal methods. However, often other causes affect inventory level, including handling losses, theft or "shrinkage," and spoilage.

What is a purchase invoice? Select answer from the options below A) a document that serves only as a customer receipt B) a document that provides support for goods purchased with cash C) a document that provides evidence of incurred operating expenses D) a document that provides evidence of credit purchases

A purchase invoice is a document that provides evidence of credit purchases. A canceled check or cash register receipt are documents that provide evidence of cash purchases.

Edward's Paints purchased $1,000 merchandise on account from a wholesaler. The wholesaler offered credit terms of 2/10, n/30. After the discount period, Edward's Paint returned $200 of damaged merchandise, and settled the account with a check. How much was the check for? Select answer from the options below - A) $800 B) $780 C) $980 D) $784

Edward settled the account after the discount period. He will only pay total merchandise less the return of damaged merchandise.($1,000 - $200) = $800

In an income statement, where does Freight-Out appear? Select answer from the options below A) as an operating expense B) in a contra revenue account C) as revenue D) as a loss

Freight out is an expense the company incurs during the normal course of operations. Therefore, freight out is reported with other operating expenses on the income statement.

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Gross profit is Select answer from the options below A) neither merchandising profit, nor a measure of the overall profit of a company. B) merchandising profit, and a measure of the overall profit of a company. C) merchandising profit, but not a measure of the overall profit of a company. D) a measure of the overall profit of a company, but not of the merchandising profit.

Gross Profit is a measure of merchandising profit, comprised of sales revenue less cost of goods sold. However, it is not a measure of the overall profit of the company as other components such as operating expenses and other revenues and expenses impact net income.

Assume that a company uses a periodic inventory system and has these account balances: Purchases $700,000, Purchase Returns and Allowances $30,000, Purchase Discounts $14,000, and Freight-in $35,000. Determine net purchases and cost of goods purchased. Select answer from the options below A) net purchases: $656,000, cost of goods purchased: $691,000 B) net purchases: $635,000, cost of goods purchased: $656,000 C) net purchases: $656,000, cost of goods purchased: $714,000 D) net purchases: $686,000, cost of goods purchased: $691,000

Net Purchases are comprised of purchases, less purchase returns and allowances, less purchase discounts. In this example, net purchases are $656,000 ($700,000 - $30,000 - $14,000). The cost of goods purchased equals net purchases plus freight-in. In this example, cost of goods purchased is $691,000 ($656,000 + $35,000).

One advantage of using the multiple-step income statement is that it Select answer from the options below A) is easier to prepare than the single-step income statement. B) requires less detail than a single-step income statement. C) highlights the components of net income. D) does not place gross profit as a separate item.

One benefit of the multi-step income statement is it highlights the components of net income. For merchandising companies, the components are broken out into gross profit, income from operating activities, and results of activities not related to operations, to arrive at net income.

Gadget Corp. recently reported sales revenue of $775,000, gross profit of $350,000, and net income of $64,000 for its most recent fiscal year. What were the firm's operating expenses for the year? Select answer from the options below - A) $425,000 B) $414,000 C) $711,000 D) $286,000

Operating expenses are the difference between gross profit and net income. $350,000 - 64,000 = $286,000.

The percentage of each dollar of sales that results in net income is commonly referred to as the Select answer from the options below A) profitability index. B) profit margin. C) gross profit rate. D) quality of earnings ratio.

Profit margin measures the percentage of each dollar of sales that results in net income. The formula is net income divided by net sales for the period.

If a company's net cash provided by operating activities is $4,250,000 and its net income is $3,465,000, then the company's quality of earnings ratio is Select answer from the options below A) 1.29. B) .65. C) 1.23. D) .62.

Quality of Earnings Ratio is net cash provided by operating activities divided by net income. $4,250,000 / $ 3,465,000 = 1.23

A company reports Sales Returns and Allowances of $86,000 and Net Sales of $700,000. It also reports Cost of Goods Sold of $370,000. Find the company's Sales and Gross Profit. Select answer from the options below A) Sales: $786,000; Gross Profit: $330,000 B) Sales: $614,000; Gross Profit: $330,000 C) Sales: $614,000; Gross Profit: $416,000 D) Sales: $786,000; Gross Profit: $416,000

Sales - Sales Returns and Allowances = Net Sales; Restated to solve for Sales: Net Sales + Sales Returns and Allowances = Sales. Therefore sales equals $786,000 ($700,000 + $86,000).Net Sales - Cost of Goods Sold = Gross Profit. Therefore gross profit is $330,000 ($700,000 - $370,000).

McCrary Company regularly analyzes its Sales Returns and Allowance account to address issues such as ________ and ________ Select answer from the options below A) sales trends; obsolete inventory. B) marketing trends; sales commissions. C) inferior merchandise; billing errors. D) cost of goods sold fluctuations; competitor's sales.

Sales Returns and Allowances provide valuable information to management. Higher than average returns and allowances can indicate problems, such as inferior merchandise, inefficiencies in filling orders, errors in billing customers, or delivery or shipment mistakes.

If there are no sales discounts, subtracting sales returns and allowances from sales revenue results in Select answer from the options below A) net sales. B) gross sales. C) net income. D) gross profit.

Sales revenue less sales returns and allowances, and sales discounts is equal to net sales.Both sales returns and allowances, and sales discounts are contra revenue accounts and decrease sales revenue.

Adding beginning inventory to the cost of goods purchased will give you Select answer from the options below - Correct! A) the cost of goods available for sale. B) the cost of goods sold. C) net purchases. D) gross profit.

The cost of goods available for sale is calculated as Beginning Inventory + Cost of Goods Purchased. Ending inventory can be subtracted from the cost of goods available to arrive at cost of goods sold.

For Standing Bear Company, sales revenue is $200,000, sales returns and allowances are $5,000, sales discounts are $3,000, and cost of goods sold is $120,000. Net sales is Select answer from the options below - Incorrect! A) $197,000. B) $192,000. C) $ 72,000. D) $195,000.

The formula for Net Sales is Sales Revenue - Sales Returns & Allowances - Sales Discounts. Using this formula, Bear Company calculates net sales as $200,000 - $5,000 - $3,000 = $192,000.

For Standing Bear Company, sales revenue is $200,000, sales returns and allowances are $5,000, sales discounts are $3,000, and cost of goods sold is $120,000. Gross profit is Select answer from the options below A) $192,000. B) $72,000. C) $75,000. D) $77,000.

The formula to calculate gross profit is Net Sales Revenue - Cost of Goods Sold. The formula to calculate Net Sales Revenue is Sales Revenue - Sales Returns and Allowances - Sales Discounts. Combining these formulas, the expanded formula for gross profit is Sales Revenue - Sales Returns and Allowances - Sales Discounts - Cost of Goods Sold. Using this expanded formula, Bear Company calculates gross profit as $200,000 - $5,000 - $3,000 - $120,000 = $72,000.

If sales revenues are $400,000, cost of goods sold is $310,000, and operating expenses are $60,000, the gross profit is Select answer from the options below A) $90,000. B) $30,000. C) $340,000. D) $400,000.

The formula to determine gross profit is Net Sales Revenues - Cost of Goods Sold. Therefore, the gross profit is calculated as $400,000 - $310,000 = $90,000.

How is the gross profit rate computed? Select answer from the options below A) by dividing the amount of gross profit by net sales B) by dividing net income by net sales C) by subtracting ending inventory from the goods available for sale D) by dividing net cash provided by operating activities by net income

The gross profit rate is calculated as gross profit divided by net sales. This expresses gross profit as a percentage. The gross profit rate is helpful to analysts as it represents a more meaningful relationship between gross profit and gross sales.

Duland Industries purchases inventory on account with terms 3/10, n/30 for $3,800 on July 15th. McLeod also pays shipping costs of $150 on July 15th. What would be the net cost of the inventory if McLeod pays the invoice on July 29th? Select answer from the options below A) $3,950.00 B) $3,650.00 C) $3,836.00 D) $3,764.00

The net Cost of the inventory includes shipping costs paid by the buyer, less any discount. Duland Industries paid the invoice after the discount date, so the net cost of the inventory would be $3,950 ($3,800 + $150).

The quality of earnings ratio is Select answer from the options below A) annual net income divided by average total assets. B) net cash provided by operating activities divided by net income. C) net income divided by net sales. D) net profit divided by net sales.

The quality of earnings ratio is calculated by measuring net cash provided by operating activities divided by net income. A measure of less than 1 could indicate the company is using aggressive accounting techniques for earlier income recognition.

A furniture maker purchased $650 of wood on March 1. The terms offered were 2/10, n/30. The furniture maker paid the total amount due on March 11. How much did the furniture maker pay? Select answer from the options below A) $640 B) $637 C) $650 D) $622

The terms to qualify for the discount are 2/10 (a 2% discount if paid within 10 days). As a result of the payment being made on the 10th day, the furniture maker qualifies for the discount. $650 x (1 - 0.02) = $637

Which of the following would NOT negatively affect the gross profit of a company? Select answer from the options below A) reducing the costs paid to suppliers for merchandise B) lowering sales prices of merchandise to meet increasing competition C) selling overstocked inventory at sale prices D) selling products with a lower markup

Gross profit is calculated by subtracting the cost of goods sold from net sales. Consequently, anything that either increases the cost of goods sold or decreases net sales negatively impacts a company's gross profit. Selling products with a lower markup results in a lower gross profit, as the difference between net sales and cost of goods sold is lower than the current products. Selling inventory at sales prices reduces net sales and, therefore, negatively impacts gross profit. Likewise, lowering sales prices to meet increasing competition results in lower net sales and consequently negatively impacts gross profit.

________ is shown on a multiple-step but not on a single-step income statement. Select answer from the options below A) Net sales B) Gross profit C) Net income D) Cost of goods sold

Gross profit is shown on a multi-step income statement. On the multi-step income statement, the important line items include gross profit, income from operations, and net income. A single-step income statement lists all revenues, then subtracts all expenses to arrive at net income.