Financial Accounting Chapter 5 Quiz

How does the income statement prepared for a company that sells goods differ from that prepared for a service business?

The income statement for a merchandiser includes different details. A merchandising income statement highlights cost of goods sold by showing the difference between sales revenue and cost of goods sold called gross profit.

Explain and prepare a classified multiple-step income statement for a merchandiser.

A classified mul ple-step income statement for a merchandiser is for internal use because of the detail provided. Sales, less sales returns and allowances and sales discounts, results in net sales. Net sales less cost of goods sold equals gross profit. Expenses are shown based on both their func on and nature. The func onal or group headings are: opera ng expenses, selling expenses, and general and administra ve expenses. Within each grouping, the nature of expenses is detailed including: deprecia on, salaries, adver sing, wages, and insurance. A specific expense can be divided between groupings.

Explain and identify the entries regarding purchase and sales transactions in a periodic inventory system.

A periodic inventory system maintains a Merchandise Inventory account but does not have a Cost of Goods Sold account. The Merchandise Inventory account is updated at the end of the account- ing period as a result of a physical inventory count. Because a merchandiser using a period system does not use a Merchandise Inventory account to record purchase or sales transac ons during the accoun ng period, it maintains accounts that are different than under a perpetual system, namely, Purchases, Purchase Returns and Allowances, Purchase Discounts, and Transporta on-in.

Record adjustments to merchandise inventory.

A physical count of merchandise inventory is performed and the total compared to the general ledger balance of Merchandise Inventory. Discrepancies are recorded as an adjus ng entry that debits cost of goods sold and credits Merchandise Inventory.

What contra accounts are used in conjunction with sales? What are their functions?

Accumulated depreciation, returns, sales/ discounts. Allows a company to report original amount and a reduction so the net amount can also be reported.

How is gross profit calculated? What relationships do the gross profit and gross profit percentage calculations express? Explain, using an example.

Gross Profit= Sales- Cost of Goods Sold A vehicle bought by the company is $3,000 but sells for $4,000. This results in a 25% gross profit exchange ($1,000/4,000). This means that for every $1 of sales, the company has $0.25 left to cover other expenses after deducting the cost of goods.

Analyze and record purchase transactions for a merchandiser.

In a perpetual inventory system, a merchandiser debits Merchandise Inventory regarding the pur- chase of merchandise for resale from a supplier. Any purchase returns and allowances or purchase discounts are credited to Merchandise Inventory as they occur to keep the accounts up-to-date.

Analyze and record sales transactions for a merchandiser.

In a perpetual inventory system, a merchandiser records two entries at the me of sale: one to record the sale and a second to record the cost of the sale. Sales returns that are returned to inventory also require two entries: one to reverse the sale by debi ng a sales returns and al- lowances account and a second to restore the merchandise to inventory by debi ng Merchandise Inventory and credi ng Cost of Goods Sold. Sales returns not restored to inventory as well as sales allowances are recorded with one entry: debit sales returns and allowances and credit cash or ac- counts receivable. Sales discounts are recorded when a credit customer submits their payment within the discount period specified.

Describe merchandising and explain the financial statement components of sales, cost of goods sold, merchandise inventory, and gross profit; differen - ate between the perpetual and periodic inventory systems.

Merchandisers buy and resell products. Merchandise inventory, an asset, is purchased from sup- pliers and resold to customers to generate sales revenue. The cost of the merchandise inventory sold is an expense called cost of goods sold. The profit realized on the sale of merchandise inven- tory before considering any other expenses is called gross profit. Gross profit may be expressed as a dollar amount or as a percentage. To track merchandise inventory and cost of goods sold in real me, a perpetual inventory system is used; the balance in each of Merchandise Inventory and Cost of Goods Sold is always up-to-date. In a periodic inventory system, a physical count of the inventory must be performed in order to determine the balance in Merchandise Inventory and Cost of Goods Sold.

Compare the perpetual and periodic inventory systems. What are some advantages of each?

The periodic system, relies on an occasional physical count of the inventory, while the perpetual system keeps continual track of inventory balances. Perpetual inventory systems provide the cost of goods sold amount without the necessity of taking a periodic inventory count. It also is readily adaptable to use of computers to process large quantities of inventory data. The periodic system are generally cheaper and more accurate.

Explain the closing process for a merchandiser.

The steps in preparing closing entries for a merchandiser are the same as for a service company. The difference is that a merchandiser will need to close income statement accounts unique to merchandising such as: Sales, Sales Returns and Allowances, Sales Discounts, and Cost of Goods Sold.

What are some common types of transactions that are recorded in the merchandise Inventory account?

To record sales or merchandise on account and to record the cost of the sale.