Accounting Chapter 4

Debit Cash $980; debit Sales Discounts $20; and credit Accounts Receivable $1,000

In order to entice a customer to keep damaged or defective merchandise, the seller is willing to decrease the selling price. The seller wants to keep a customer happy. The seller wants to avoid future lost sales. Sold merchandise was defective or unacceptable.

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

It shows only one total for all expenses.

What is a purchase return?

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

Identify the statements below which are correct regarding a merchandiser's multi-step income statement.

Expenses are subtracted from gross profit in order to calculate net income. Cost of goods sold is subtracted from net sales in order to determine gross profit.

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

FOB destination

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

revenue income statement

A discount benefits a seller through earlier cash receipts and reduced collection efforts.

sales

Sally Beauty Warehouse uses the perpetual inventory system to account for its merchandise. On Nov 2, it sold $700 of merchandise on credit with terms of 2/15,n/30. Demonstrate the required journal entry to record the receipt of payment from the customer on Nov 13, by selecting all of the correct actions below. (Check all that apply.)

Debit Sales Discounts $14. Credit Accounts Receivable $700. Debit Cash $686.

Given the partial list of accounts below, the entry to close the temporary debit balance accounts would include a:

debit to Income Summary, $3,700.

Returned merchandise costing $50 is defective, but is estimated to be valued at $45. A Loss from Defective Merchandise is:

debited for $5

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

sales

Explain how to compute gross profit by completing the following sentence. Gross profit is calculated by taking the net (sales/costs) of a product and (adding/subtracting) the cost of the goods sold.

sales subtracting

Which of the following costs are included in merchandise inventory? (Check all that apply.)

Costs necessary to ready the merchandise for sale Purchase costs Shipping fees charged by the vendor Taxes assessed on the merchandise

X-Mart uses the perpetual inventory system to account for its merchandise. On May 1, it sold $1,400 of merchandise on credit with terms of 1/10,n/40. Demonstrate the required journal entry to record the receipt of payment on May 25 by selecting all of the correct actions below. (Check all that apply.)

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

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

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.

sales cost of goods sales gross profit operating expenses income from operations other revenues and expenses

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

Net purchases plus beginning inventory equals merchandise available for sale

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.

Credit terms of 1/10, net 30 means.

The buyer will receive a 1% discount if they pay within 10 days of the date of the invoice.

Determine which of the definitions below describes gross profit.

The difference between net sales and the cost of the goods sold

Review the following statements and select the one that best describes a discount period.

The discount period is the time period in which a discount may be taken by the buyer.

Review the statements below and select the one that explains the purpose of a sales discount.

They decrease the time that the seller has to wait for payment.

A purchase allowance can be described as:

a reduction in the cost of defective or unacceptable merchandise that a buyer acquires

A sales allowance can be described as:

a reduction in the selling price of defective or unacceptable merchandise sold to customers

Explain what a credit memorandum is by completing the following sentence. When a seller grants an allowance on a previous sale, the (customer/creditor/seller) issues a credit memorandum to inform the (customer/seller) of a credit made to the buyer's Account Receivable in the seller's records.

seller customer

On June 5, Jo's Market sold $1,000 of goods on credit with terms of 2/10,n/30. The required journal entry to record Jo's Market customer's payment on July 6 would be:

debit Cash $1,000; credit Accounts Receivable $1,000

On Dec. 7, Toys R Fun purchased $1,000 of merchandise with terms of 2/10,n/30. If payment is made on December 16, demonstrate the required journal entry for Toys R Fun to record the payment under the perpetual inventory system.

Debit Accounts Payable $1,000; credit Cash $980; credit Merchandise Inventory $20.

On Dec. 20, X-Mart received a $100 allowance because the merchandise it purchased on account, earlier in the month, was of poor quality. Demonstrate the required journal entry on X-Mart's books for the allowance assuming the perpetual inventory method.

Debit Accounts Payable $100; credit Merchandise Inventory $100

Which of the following are the three main parts of a multiple-step income statement? (Check all that apply.)

Income from operations Net income Gross profit

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

Income statement Statement of retained earnings Balance sheet

Describe good cash management practices involving inventory purchases. (Check all that apply.)

Invoices should be paid on the last day of the discount period. Buyers should take advantage of early payment discounts.

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 below regarding a merchandiser are correct. (Check all that apply.)

Merchandisers are often identified as retailers. Merchandisers are also identified as wholesalers. A merchandiser earns net income by buying and selling merchandise.

The components of a merchandiser's multi-step income statement are shown below. In which order would they appear on the statement? Gross profit Net sales Expenses Cost of goods sold Net income

Net sales Cost of goods sold Gross profit Expenses Net income

How do you compute net income for a merchandiser.

Net sales - cost of goods sold - other expenses.

On June 5, X-Mart purchased $400 of merchandise with terms of 2/10,n/30. If payment is made on June 11, calculate the purchase discount that may be taken by X-Mart.

8

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

net sales

A (periodic/perpetual) inventory system can be described as an inventory system that updates the inventory account only at the end of the (purchase/period).

periodic period

An invoice is referred to as a invoice for a buyer and as a invoice for the seller

purchase sales

Sales is a(n) ______ account.

revenue

Sales Discounts is a contra- (expense/revenue/asset) account and is increased with a (debit/credit).

revenue debit

Calculate the total cost of merchandise purchased using the information in the following table:

$37,400

Jerry's Flowers had the following cost information related to its purchases of merchandise. Calculate the total cost of merchandise purchased using the information below:

91,100

A journal entry for a sale of merchandise on account will result in all of the following:

Debit to Cost of Goods Sold Debit to Accounts Receivable Credit to Sales

Which of the statements below summarize why a buyer would desire a purchase allowance? (Check all that apply.)

Purchased merchandise was defective or unacceptable. In order to keep defective, but still marketable merchandise, the buyer would need a reduction in the purchase price.

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 Dividends account is closed to Retained Earnings Sales is closed as a revenue account. Cost of goods sold is closed with the expense accounts. Sales Returns and Allowances is closed with the expense accounts.

Which are the two classifications of operating expenses on a multiple-step income statement?

Selling; general and administrative

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

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 discount period is the time (before/between) the invoice date and a specified date on which the payment amount owed can be (increased/reduced) because of early payment.

between reduced

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

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

A cash discount can be summarized as a discount given to (buyers/creditors/sellers) to encourage them to pay (earlier/later/less/more).

buyers earlier

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

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.

LOL Music Store uses the perpetual inventory system to account for its merchandise. On November 17, it purchased $1,000 of merchandise with terms of 2/5,n/60. If payment is made on December 21, demonstrate the required journal entry to record the payment by selecting all of the correct actions below. (Check all that apply.)

Credit Cash $1,000. Debit Accounts Payable $1,000.

LOL Music Store uses the perpetual inventory system to account for its merchandise. On November 17, it purchased $1,000 of merchandise with terms of 2/5,n/60. If payment is made on November 21, demonstrate the required journal entry to record the payment by selecting all of the correct actions below. (Check all that apply.)

Credit Merchandise Inventory $20. Credit Cash $980. Debit Accounts Payable $1,000.

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:

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

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

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

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.

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.)

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

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.

Credit terms of n/15 EOM were printed on an invoice. Explain what this means.

The credit terms stand for net 15 days after end of month.

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

current assets section

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.

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

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

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

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

Given the partial list of accounts below, the entry to close the temporary credit balance accounts would include a:

credit to Income Summary, $20,000.

Jello's Market purchased $1,000 of goods on account with terms of 2/10,n/30. They returned $200 of the goods due to defect the next day. If Jello pays for the purchase within the discount period and uses the perpetual inventory system, the required journal entry to record the payment would:

debit Accounts Payable $800; credit Merchandise Inventory $16; and credit Cash $784

What is a sales return?

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

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

true

On May 14, X-Mart purchased $500 of merchandise with terms of 3/15,n/40. If payment is made on May 28, calculate the purchase discount that may be taken by X-Mart.

15

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

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

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

X-Mart uses the perpetual inventory system to account for its merchandise. A customer who purchased merchandise on account requested an allowance on a merchandise purchase due to its poor quality, but he did not return the goods back to X-Mart. Assuming that X-mart gives an allowance of $50 on the merchandise, demonstrate the required journal entry on X-Mart's books to record the allowance by selecting all of the correct actions below. (Check all that apply.)

Credit Accounts Receivable $50. Debit Sales Returns and Allowances $50.

X-Mart uses the perpetual 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 cost of the sale by selecting all of the correct actions below. (Check all that apply.)

Credit Merchandise Inventory $500. Debit Cost of Goods Sold $500.

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

Credit Merchandise Inventory $500. Debit Cost of Goods Sold $500. Debit Cash $1,400. Credit Sales $1,400.

On Dec. 7, Toys R Fun purchased $1,000 of merchandise with terms of 2/10,n/30. If payment is made on December 30, demonstrate the required journal entry for Toys R Fun to record the payment under the perpetual inventory system.

Debit Accounts Payable $1,000; credit Cash $1,000.

X-Mart uses the perpetual inventory system to account for its merchandise. On May 1, it purchased $400 of merchandise on account with terms of 2/15, n/40. On May 3, X-Mart returned $50 of merchandise due to defect. Assuming that the purchase was paid for within the discount period, demonstrate the required journal entry for X-Mart to record the payment by selecting all of the correct actions below. (Check all that apply.)

Debit Accounts Payable $350. Credit Cash $343. Credit Merchandise Inventory $7.

Dogs R US uses the perpetual inventory system to account for its merchandise. On May 1, it returned $50 of merchandise due to a defect. Assuming that the purchase was originally bought on credit, demonstrate the required journal entry to record the return by selecting all of the correct actions below. (Check all that apply.)

Debit Accounts Payable $50. Credit Merchandise Inventory $50.

X-Mart uses the perpetual inventory system to account for its merchandise. On June 1, it sold $7,000 of merchandise for cash. The original cost of the merchandise to X-Mart was $500. Demonstrate the required journal entry to record the sale and the cost of the sale by selecting all of the correct actions below. (Check all that apply.)

Debit Cash $7,000. Credit Merchandise Inventory $500. Credit Sales $7,000. Debit Cost of Goods Sold $500.

On June 5, Jo's Market sold $1,000 of goods on credit with terms of 2/10,n/30. How will Jo's Market record the customer's payment on June 8?

Debit Cash $980; debit Sales Discounts $20; and credit Accounts Receivable $1,000

X-Mart uses the perpetual inventory system to account for its merchandise. On June 1, it sold $7,000 of merchandise for cash. The original cost of the merchandise to X-Mart was $500. Demonstrate the required journal entry to record the cost of the sale by selecting all of the correct actions below. (Check all that apply.)

Debit Cost of Goods Sold $500. Credit Merchandise Inventory $500.

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

Debit Cost of Goods Sold $500. Credit Merchandise Inventory $500.

X-Mart uses the perpetual 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 and the cost of the sale by selecting all of the correct actions below. (Check all that apply.)

Debit Cost of Goods Sold $500. Credit Sales $1,400. Credit Merchandise Inventory $500. Debit Accounts Receivable $1,400.

Jerry's Flowers sold and shipped merchandise across the country to a buyer. The terms were FOB destination. Assuming it paid the bill immediately, demonstrate the journal entry required by Jerry's Flowers under the perpetual inventory system to record the freight charges.

Debit Delivery Expense; credit Cash

Dogs R US uses the perpetual inventory system to account for its merchandise. A customer returned merchandise. Assuming that the purchase was originally bought on credit for $400 with a cost to Dogs R US of $100, demonstrate required journal entry of Dogs R US to record the return by selecting all of the correct actions below. (Check all that apply.)

Debit Merchandise Inventory $100. Credit Cost of Goods Sold $100. Credit Accounts Receivable $400. Debit Sales Returns and Allowances $400.

ABC Mart received a $20 freight bill for merchandise it purchased with freight terms of FOB shipping point. ABC Mart uses a perpetual inventory system. Assuming it paid the bill immediately, demonstrate the journal entry required to record the freight charges.

Debit Merchandise Inventory $20; credit Cash $20.

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.

Dogs R US uses the perpetual inventory system to account for its merchandise. A customer returned this merchandise due to a defect. Assuming that the purchase was originally bought on credit for $400 with a cost to Dogs R US of $100, and the defective, returned merchandise is only estimated to be worth $30, demonstrate the required journal entry to record the return and to write down the defective merchandise by selecting all of the correct actions below. (Check all that apply.)

Debit Sales Returns and Allowances $400. Credit Accounts Receivable $400. Debit Loss from Defective Merchandise $70. Debit Merchandise Inventory $30. Credit Cost of Goods Sold $100.

On Jan 5, a customer returned merchandise that had been purchased earlier on credit. The original sale was for $500, and the cost to the seller was $150. Demonstrate the required journal entry to record the return on the books of the seller, assuming the goods can be sold to another customer.

Debit Sales Returns and Allowances $500; debit Merchandise Inventory $150; credit Accounts Receivable $500; and credit Cost of Goods Sold $150.

Identify the two types of inventory systems from the choices below.

Perpetual inventory system and periodic inventory system

Identify the statements below which summarize what cash discounts are. (Check all that apply.)

Sellers can grant a cash discount to encourage buyers to pay earlier. A buyer views a cash discount as a purchase discount. A seller views a cash discount as a sales discount. Cash discounts are described in credit terms. A reduced payment applies to the discount period.

Which of the statements below summarize why a seller would give a sales allowance? (Check all that apply.)

The seller wants to avoid future lost sales. The seller wants to keep a customer happy. Sold merchandise was defective or unacceptable. In order to entice a customer to keep damaged or defective merchandise, the seller is willing to decrease the selling price.

Sales Discounts is a ______ account.

contra-revenue

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

To compute net income for a merchandiser, you will start with net sales, subtract cost of goods sold and subtract other

expenses