Smartbook: Chapter 5 Accounting for Merchandising Operations

Demonstrate how to prepare a multiple-step income statement by ranking the items below in the order they would appear on a multiple-step income statement of a merchandiser.

1. Sales 2. Cost of Goods Sold 3. Gross Profit 4. Operating Expenses 5. Income from Operations 6. Other Revenues and Expenses

Juice Drinks has beginning inventory of $10,000, purchases in the amount of $150,000, and ending inventory of $8,000. Juice Drinks cost of goods sold is $___.

152,000

Review the following credit terms and identify the one that states that the buyer will receive a 3% discount if the payment is made within 15 days. Otherwise, full payment is expected within 45 days of the invoice date.

3/15,n/45

What is a purchase return?

A purchase return refers to merchandise a buyer acquires, but then returns to the seller.

What is a sales return?

A sales return refers to merchandise that customers return to the seller after a sale.

Determine which statements below are correct regarding merchandise available for sale during a period.(Check all that apply.)

Beginning inventory + Net purchases = Merchandise available for sale Ending inventory + Cost of goods sold = Merchandise available for sale

A purchase return refers to merchandise a ___ (buyer/seller/creditor) purchased, but then returns to the ___ (buyer/seller/creditor) for a refund of the purchase price or reduction in the amount owed.

Buyer; seller

Show your understanding of a merchandiser by completing the following statement. Merchandisers earn net income by (buying/manufacturing) ___ and (selling/purchasing) ___ merchandise.

Buying; selling

A merchandiser has four closing journal entries at the end of an accounting cycle. Select the correct entries below. (Check all that apply.)

Close expense accounts. Close the income summary account. Close the withdrawals account. Close revenue accounts.

Which of the following items are included in a merchandising company's income statement but are not included in a service company's income statement? (Check all that apply.)

Cost of goods sold Sales returns Sales discounts Loss from defective merchandise Gross profit

Explain how to determine gross profit on an income statement by selecting the correct statement below.

Cost of goods sold is subtracted from net sales.

Which of the statements below are correct regarding cost of goods sold?

Cost of goods sold is the expense of buying and preparing merchandise.

Cost of goods sold is characterized by which of the following statements? (Check all that apply.)

Cost of goods sold is used to figure gross profit. Cost of goods sold is also called cost of sales. Cost of goods sold is an expense reported on the income statement. Cost of goods sold includes the expenses of buying and preparing an item for sale.

X-Mart uses the periodic inventory system to account for its merchandise. On May 1, it sold $1,400 of merchandise on credit. The original cost of the merchandise to X-Mart was $500. Demonstrate the required journal entry to record the sale by selecting all of the correct actions below. (Check all that apply.)

Credit Sales $1,400. Debit Accounts Receivable $1,400.

Sticky Company's merchandise inventory balance at year end is $15,050, but a physical count reveals that only $15,000 of inventory exists. The adjusting entry to record the shrinkage includes:

Credit to Merchandise Inventory for $50 Debit to Cost of Goods Sold for $50

Recall that Merchandise Inventory is considered a(n) (current/plant/intangible) ___ asset on the (balance/income) ___ (sheet/statement) ___ of a merchandiser using the periodic inventory system.

Current; balance; sheet

A sales return refers to merchandise that ___ (customers/sellers/creditors) return to the ___ (customer/seller/creditor) after a sale for a refund of the purchase price or reduction in the amount owed.

Customers; seller

X-Mart purchased $300 of merchandise on account. Demonstrate the journal entry to record this transaction, assuming the perpetual inventory system is used.

Debit Merchandise Inventory $300; credit Accounts Payable $300.

X-Mart purchased $300 of merchandise and paid immediately. Demonstrate the journal entry to record this transaction, assuming the perpetual inventory system is used.

Debit Merchandise Inventory $300; credit Cash $300.

Select the statements below that correctly describe the flow of costs in a merchandiser's accounting cycle. (Check all that apply.)

Ending inventory + Cost of goods sold = Total merchandise available for sale. Beginning inventory + net purchases = Merchandise available for sale. Merchandise that is purchased becomes an asset reported on the balance sheet. Merchandise that is sold becomes an expense reported on the income statement.

If the seller is responsible for the shipping costs of merchandise sold, the shipping terms will be specified as:

FOB destination

True or false: Merchandise inventory is generally converted to cash more quickly than accounts receivable.

False

Identify the financial statements of a merchandiser. (Check all that apply.)

Income statement Balance sheet Statement of owner's equity

A single-step income statement can be identified by which of the following formats?

It shows only one total for all expenses.

The balance sheet of a merchandiser and a service business have one major difference. Select the item below that would appear only on a merchandiser's balance sheet.

Merchandise inventory

Which statement below correctly explains what merchandise inventory is?

Merchandise inventory is an asset reported on the balance sheet and contains the cost of products purchased for sale.

Determine which of the following statements about merchandise is correct.

Merchandise is acquired for resale to customers.

Which of the following equations correctly identify the cost flow of a merchandising company?

Net purchases plus beginning inventory equals merchandise available for sale

Name the temporary accounts used to record the costs of merchandise purchased in a periodic inventory system. (Check all that apply.)

Purchase returns and allowances Purchases Purchase discounts Transportation-in

Sales is a(n) ______ account.

Revenue

Sales is a(n) ___ (expense/revenue/asset) account and is reported on the ___ (income/balance) ___ (statement/sheet).

Revenue; income; statement

Identify the statements below that are correct regarding the closing entries for a merchandiser using the perpetual inventory system. (Check all that apply.)

Sales Discounts is closed with the expense accounts. The Withdrawals account is closed to Owner, Capital. Cost of goods sold is closed with the expense accounts. Sales is closed as a revenue account. Sales Returns and Allowances is closed with the expense accounts.

Identify the statement below that is the correct definition of "shrinkage".

Shrinkage is the term used to refer to the loss of inventory due to theft, breakage or deterioration.

Summarize a periodic inventory system by selecting all of the correct statements below. (Check all that apply.)

The Merchandise Inventory account is updated only at the end of the period. The balance in the Merchandise Inventory account remains the beginning balance until the end of the period. The Purchase Discounts account is used during the period. The Purchase Returns and Allowances account is used during the period. Cost of goods sold is computed at the end of the period. The Purchases account is used during the period.

Which of the statements below summarizes what the acid-test ratio measures?

The acid-test ratio measures a merchandiser's ability to pay its current liabilities.

Explain what the credit terms of 2/10,n/30 mean. (Check all that apply.)

The buyer can deduct 2% of the invoice amount if payment is made within 10 days of the invoice date. The full payment is due within a 30-day credit period.

True or false: A single-step income statement shows only one subtotal for expenses.

True

The buyer and seller of merchandise must agree on who is responsible for paying freight terms. Show your understanding of freight terms by selecting all of the correct statements below. (Check all that apply.)

When the shipping costs are the responsibility of the buyer, then the Merchandise Inventory account is debited for the freight charges. Terms FOB destination means that the seller is responsible for shipping costs. Revenue for the sale will be recorded after the goods reach their destination, if the goods are shipped FOB destination. Terms FOB shipping point means the buyer accepts ownership when the goods depart the seller's place of business.

Complete the following statement. Merchandise inventory that is still available for sale is considered a(n) ________ (asset/expense/revenue) and is reported on the ____________ (balance sheet/income statement) and merchandise that is sold during the period is considered a(n) _______ (asset/expense/liability) and reported on the ____________ (balance sheet/income statement).

asset -> balance sheet -> expense -> income statement

The Merchandise Inventory account on a classified balance sheet is reported in the:

current assets section

Jo's Market makes a credit sale for $1,000 with terms of 2/10,n/30. The cost of the merchandise is $400. The required journal entry to record the sale and cost of the sale is:

debit Accounts Receivable $1,000; credit Sales $1,000; debit Cost of Goods Sold $400; and credit Merchandise Inventory $400

Jan's Jams makes a credit sale for $300 with terms of 2/10,n/30. The cost of the merchandise is $200. The required journal entry to record the sale and the cost of the sale is:

debit Accounts Receivable $300; credit Sales $300; debit Cost of Goods Sold $200; and credit Merchandise Inventory $200

Under the periodic inventory system, a sale on account will result in the following journal entry:

debit to Accounts Receivable and a credit to Sales

A multiple-step income statement will have all of the following main parts except:

net sales

Merchandise inventory can be described as: (Check all that apply.)

products that a company owns and intends to sell. an account increased with a debit. an account appearing on a balance sheet of a merchandiser. an asset account.

Under a periodic inventory system, purchases are

recorded in a separate temporary account which is closed at period end

Gross profit is computed as net ___ minus cost of goods sold.

sales

Under a periodic inventory system:

the revenue but not the cost of goods sold is recorded