acct test 2 study guide (CH 5)
which of the following statements about a periodic inventory system is true? (A) companies determine COGS sold only at the end of the accounting period (B) companies continuously maintain detailed records of the cost of each inventory purchase and sale (C) the periodic system provides better control over inventories than a perpetual system (D) the increased use of computerized systems has increased the use of the periodic system
(A) companies determine COGS only at the end of the accounting peiod
a company makes a credit sale of $750 on june 13, terms 2/10, n/30, on which it grants a return of $50 on june 16. what amount is received as payment in full on june 23? (A) 700 (B) 686 (C) 685 (D) 650
(B) 686 ((750-50) x .98)
which sales account normally has a debit balance? (A) sales discounts (B) sales returns and allowances (C) both (A) and (B) (D) neither (A) nor (B)
(C) both (A) and (B)
which of the following items does not result in an adjustment in the inventory account under a perpetual system? (A) a purchase of merchandise (B) a return of merchandise to the supplier (C) payment of freight costs for the goods shipped to a customer (D) payment of freight costs for goods received from a supplier
(C) payment of freight costs for the goods shipped to a customer
to record the sale of goods for cash in a perpetual inventory system: (A) only one journal entry is necessary to record cost of goods sold and reduction of inventory (B) only one journal entry is necessary to record the receipt of cash and the sales revenue (C) two journal entries are necessary: one to record the receipt of cash and sales revenue, and one to record the cost of goods sold and reduction of inventory (D) two journal entries are necessary: one to record the receipt of cash and reduction of inventory, and one to record the cost of goods sold and sales revenue
(C) two journal entries are necessary: one to record the receipt of cash and sales revenue, and one to record the cost of goods sold and reduction of inventory
If beginning inventory is $60,000, cost of goods purchased is $380,000, and ending inventory is $50,000, what is cost of goods sold under a periodic system? (a) $390,000. (b) $370,000. (c) $330,000. (d) $420,000.
(a) $390,000.
Bufford Corporation had reported the following amounts at December 31, 2014: sales revenue $184,000; ending inventory $11,600; beginning inventory $17,200; purchases $60,400; purchase discounts $3,000; purchase returns and allowances $1,100; freight-in $600; freight-out $900. Calculate the cost of goods available for sale. (a) $69,400. (b) $74,100. (c) $56,900. (d) $197,700.
(b) $74,100. (17,200+(60,400-3,000-1,100+600))
If sales revenues are $400,000, cost of goods sold is $310,000, and operating expenses are $60,000, what is the gross profit? (a) $30,000. (b) $90,000. (c) $340,000. (d) $400,000.
(b) $90,000.
When goods are purchased for resale by a company using a periodic inventory system: (a) purchases on account are debited to Inventory. (b) purchases on account are debited to Purchases. (c) purchase returns are debited to Purchase Returns and Allowances. (d) freight costs are debited to Purchases.
(b) purchases on account are debited to Purchases.
A quality of earnings ratio: (a) is computed as net income divided by net cash provided by operating activities. (b) that is less than 1 indicates that a company might be using aggressive accounting tactics. (c) that is greater than 1 indicates that a company might be using aggressive accounting tactics. (d) is computed as net cash provided by operating activities divided by total assets.
(b) that is less than 1 indicates that a company might be using aggressive accounting tactics.
Which of the following would affect the gross profit rate? (Assume sales remains constant.) (a) An increase in advertising expense. (b) A decrease in depreciation expense. (c) An increase in cost of goods sold. (d) A decrease in insurance expense.
(c) An increase in cost of goods sold.
The gross profit rate is equal to: (a) net income divided by sales. (b) cost of goods sold divided by sales. (c) net sales minus cost of goods sold, divided by net sales. (d) sales minus cost of goods sold, divided by cost of goods sold.
(c) net sales minus cost of goods sold, divided by net sales.
gross profit will result if: (a) operating expenses are less than net income. (b) sales revenues are greater than operating expenses. (c) sales revenues are greater than cost of goods sold. (d) operating expenses are greater than cost of goods sold.
(c) sales revenues are greater than cost of goods sold.
During the year ended December 31, 2014, Bjornstad Corporation had the following results: sales revenue $267,000; cost of good sold $107,000; net income $92,400; operating expenses $55,400; net cash provided by operating activities $108,950. What was the company's profit margin? (a) 40%. (b) 60%. (c) 20.5%. (d) 34.6%.
(d) 34.6%. (92,400/267,000)
The multiple-step income statement for a merchandising company shows each of these features except: (a) gross profit. (b) cost of goods sold. (c) a sales section. (d) All of these are present.
(d) All of these are present.
In a single-step statement, all data are classified into two categories:
1) REVENUES, WHICH INCLUDE BOTH OPERATING REVENUES AND NON OPERATING REVENUES AND GAINS (FOR EXAMPLE, INTEREST REVENUE AND GAIN ON SALE OF EQUIPMENT) 2) EXPENSES, WHICH INCLUDE COGS, OPERATING EXPENSES, AND NONOPERATING EXPENSES AND LOSSES (FOR EXAMPLE, INTEREST EXPENSE, LOSS ON SALE OF EQUIPMENT, OR INCOME TAX EXPENSE).
The multiple-step income statement has three important line items:
1)SUBTRACT COST OF GOODS SOLD FROM NET SALES TO DETERMINE GROSS PROFIT 2) DEDUCT OPERATING EXPENSES FROM GROSS PROFIT TO DETERMINE INCOME FROM OPERATIONS 3) ADD OR SUBTRACT THE RESULTS OF ACTIVITIES NOT RELATED TO OPERATIONS TO DETERMINE NET INCOME
List the steps to determine the cost of goods sold under a periodic inventory system:
1. Determine the cost of goods on hand at the beginning of the accounting period 2. Add to it the cost of goods purchased 3. Subtract the cost of goods on hand at the end of the accounting period
If the credit terms on a sales invoice read "2/10, n/30," what does this mean? A The buyer should pay within the discount period and recognize a savings. B The buyer should hold off on paying the bill until the end of the credit period while investing the money at 10% annual interest during this time. C The buyer should pay within the credit period but should not invest the cash while waiting to pay the bill. D The buyer should recognize that the supplier is desperate for cash and withhold payment until the end of the credit period while negotiating a lower sales price.
A The buyer should pay within the discount period and recognize a savings.
A company receives a discount for paying for merchandise purchased within the discount period. How will the amount of the discount be recorded in a perpetual inventory system? A credited to Inventory B debited to Cash C debited to Accounts Payable D credited to Accounts Payable
A credited to Inventory
sales discount
A REDUCTION GIVEN BY A SELLER FOR PROMPT PAYMENT OF A CREDIT SALE
At the beginning of January 2014, a company reported inventory of $4,000. During the month, the company made purchases of $17,800. On January 31, 2014, a physical count of inventory reported $4,200 on hand. Find the cost of goods sold for the month. A) $17,600 B) $21,800 C) $18,000 D) $17,800
A) $17,600
Why might a company choose to use the single-step income statement? Select all that apply. A) The company does not realize any type of profit or income until total revenues exceed total expenses. B) The single-step income statement is easier to read. C) The single-step income statement highlights the components of net income. D) The single-step income statement allows companies more flexibility in categorizing revenues.
A) The company does not realize any type of profit or income until total revenues exceed total expenses. B) The single-step income statement is easier to read.
________ requires a physical count of goods on hand to compute the cost of goods sold. A) periodic inventory system B) A pyramid inventory system C) A physical inventory system D) A perpetual inventory system
A) periodic inventory system
In a perpetual inventory system, when is the Cost of Goods Sold account used? A) whenever there is a sale of merchandise or a return of merchandise sold B) only when a credit sale of merchandise occurs C) only when a cash sale of merchandise occurs D) only when a sale of merchandise occurs
A) whenever there is a sale of merchandise or a return of merchandise sold
periodic system
An inventory system in which a company does not maintain detailed records of goods on hand throughout the period and determines the cost of goods sold only at the end of an accounting period
A retailer acquires merchandise for resale. How would this be recorded in a perpetual inventory system? A debited to the Supplies account B debited to the Inventory account C credited to the Supplies account D credited to the Inventory account
B debited to the Inventory account
Why is the gross profit rate considered more informative than the gross profit amount?
BECAUSE IT EXPRESSES A MORE MEANINGFUL (QUALITATIVE) RELATIONSHIP BETWEEN GROSS PROFIT AND NET SALES
How is income from operations computed?
BY SUPTRACTING OPERATING EXPENSES FROM GROSS PROFIT
All of the following would be considered merchandising companies EXCEPT A a wholesaler B a retailer C a service firm D a tech startup
C a service firm
A department store uses a perpetual inventory system. At year-end, the balance in the merchandise inventory account is $2 million. Assuming that the inventory records have been maintained properly, a year-end physical inventory A is unnecessary B will probably indicate more than $2 million in merchandise on hand C will probably indicate less than $2 million in merchandise on hand D is required to determine the cost of goods sold for the period
C will probably indicate less than $2 million in merchandise on hand
In which of the following scenarios would a Sales and Returns and Allowances account NOT be debited? A) A customer returns defective merchandise. B) A customer receives a credit for merchandise of inferior quality. C) A customer utilizes a prompt payment incentive. D) A customer returns goods that are not in accordance with specifications.
C) A customer utilizes a prompt payment incentive.
Which of the following is NOT a contra revenue account? You got it wrong : A) Sales Allowances B) Sales Discounts C) Sales Revenue D) Sales Returns
C) Sales Revenue
________ has a normal credit balance. A) Sales Returns and Allowances B) Selling Expense C) Sales Revenue D) Sales Discounts
C) Sales Revenue
formula for cost of goods using the periodic system
COGS purchased + COGS on hand at beginning = TOTAL - COG on hand at the end of the period
Sales Returns and Allowances is a __________ __________ account to Sales Revenue. What does this mean?
CONTRA REVENUE IT IS OFFSET AGAINST A REVENUE ACCOUNT ON THE INCOME STATEMENT What is this account's normal balance? DEBIT
What does the freight term "FOB destination" mean? A the buyer and seller split the freight costs B the freight costs are shifted to the consumer C the buyer pays the freight costs D the seller pays the freight costs
D the seller pays the freight costs
________ is shown on a multiple-step but not on a single-step income statement. A) Net sales B) Cost of goods sold C) Net income D) Gross profit
D) Gross profit
discount period
EXAMPLE: "2/10, n/30" means 2% cash discount may be taken on the invoice price, less ("net of") an returns or allowances, if payment is made within 10 days of the invoice date
sales discounts is a contra asset account. TRUE FALSE
FALSE
the operating cycle of a merchandising company is ordinarily shorter than that of a service company. TRUE FALSE
FALSE
FOB
FREE ON BOARD... freight terms are expressed as either FOB shipping point or FOB destination
FOB shipping point
FREE ON BOARD... freight terms are expressed as either FOB shipping point or FOB destination
What is the equation for Gross Profit Rate? Note that it's expressed as a %.
GPR= GROSS PROFIT / NET SALES
What is a purchase invoice?
It indicates the total purchase price and other relevant information
Gross profit represents the ______________ _____________of a company.
MERCHANDISING PROFIT
Because operating expenses have not been deducted, it is _____ a measure of the _________ of a company.
NOT OVERALL
At the end of the period, the company performs a _______ ________ _______ to determine the ______ __ ______ __ _____ of inventory.
PHYSICAL INVENTORY COUNT COST OF GOODS ON HAND
What is a profit margin? How is it computed?
PROFIT MARGIN= NET INCOME / NET SALES
gross profit
SALES LESS SALES RETURNS AND ALLOWANCES AND SALES DISCOUNTS
net sales
SALES LESS SALES RETURNS AND ALLOWANCES AND SALES DISCOUNTS
8. What are the two forms of the income statement? Which is considered more useful?
SINGLE-STEP INCOME STATEMENT OR MULTIPLE-STEP INCOME STATEMENT (1) A COMPANY DOES NOT REALIZE ANY TYPE OF PROFIT OR INCOME UNITL TOTAL REVENUES EXCEED TOTAL EXPENSES, SO IT MAKES SENSE TO DIVIDE THE STATEMENT INTO THESE TWO CATEGORIES. (2) THE FORM IS SIMPLE AND EASY TO READ.
why is it that a perpetual inventory system provides better control than a periodic system?
Since the inventory records show the quantities that should be on hand, the company can count the goods at any time to see whether the amount of goods actually on hand agrees with the inventory records. If shortages are uncovered, the company can investigate immediately.
credit terms
Specify the amount of the cash discount and time period during which it is offered. Also indicate the length of time in which the purchaser is expected to pay the full invoice price
purchase discount
The credit terms of a purchase on account may permit the buyer to claim a cash discount for prompt payment
purchase allowance
The purchaser may return the goods to the seller for credit if the sale was made on credit, or for a cash refund if the purchase was for cash.
purchase return
The purchaser may return the goods to the seller for credit if the sale was made on credit, or for a cash refund if the purchase was for cash.
FOB destination
The seller places the goods free on board to the buyer's place of business, and the seller pays the freight
What are sales returns and allowances?
These are transactions where the seller either accepts goods back from a purchaser (a return) or grants a reduction in the purchase price (an allowance) so that the buyer will keep the goods
Nonoperating activities consist of various revenues and expenses and gains and losses that are _______ to the company's main line of operations.
UNRELATED
What does the purchaser use as a purchase invoice?
Uses a purchase invoice the copy of the sales invoice sent by the seller
when is sales revenue recognized?
When they are realized or realizable, and are earned (usually when goods are transferred or services rendered), no matter when cash is received.
perpetual system
a detailed inventory system in which a company maintains the cost of each inventory item, and the records continuously show the inventory that should be on hand.
During the year, a company's inventory decreased by $20,000. If the company's cost of goods sold for the year was $400,000, find the amount for purchases. a) $380,000 B) $400,000 C) $20,000 D) $420,000
a) $380,000
net income is $15,000, operating expenses are $20,000, and net sales total $75,000. how much is COGS? a) 40,000 b) 35,000 c) 60,000 d) 15,000
a) 40,000
jax company uses a perpetual inventory system and on november 30 purchased merchandise for which it must pay the shipping charges. which of the following is one part of the required journal entry when jax pays the shipping charges of $200? a) a debit to inventory for $200 b) a debit to cash for $200 c) a debit to freight-out for $200 d) a debit to delivery expense for $200
a) a debit to inventory for $200
In a periodic inventory system, when is the cost of the merchandise sold determined? a) at the end of the period b) at the time of the sale c) periodically during the period d) either at the time of sale, end of period or periodically during the period
a) at the end of the period
how do you calculate the cost of goods for sale if closing inventory is nil? a) by adding beginning inventory to purchases and freight in b) by adding inventory cost of goods purchased c) by adding beginning inventory to net purchases d) by adding freight-in to net purchases
a) by adding beginning inventory to purchases and freight in
journal entry for purchase return
accounts payable xx inventory xx
journal entry for purchase discount
accounts payable xx cash xx inventory xx
A company using a periodic system does not determine cost of goods sold until __ ___ ___ ____ ___ ____________ ________.
at the end of the accounting period
How is the profit margin computed? a) by dividing the amount of gross profit by net sales b) by dividing net income by net sales c) by dividing net cash provided by operating activities by net income d) by subtracting ending inventory from the goods available for sale
b) by dividing net income by net sales
merchandising companies ____ & _____ __________ rather than perform services as their primary source of revenue
buy and sell merchandise
Under what system is cost of goods sold determined at the end of an accounting period? a) Single entry inventory system b) Double entry inventory system c) Periodic inventory system d) Perpetual inventory system
c) Periodic inventory system
how is the quality of earnings ratio computed? a) by dividing net income by net sales b) by subtracting ending inventory from the goods available for sale c) by dividing net cash provided by operating activities by net income d) by dividing the amount of gross profit by net sales
c) by dividing net cash provided by operating activities by net income
journal entry for sales discount
cash xx sales discount xx a/r xx
journal entry for COGS
cogs xx inventory xxx
A perpetual inventory system provides better ______ than a periodic system.
control
Net income is $15,000, operating expenses are $20,000, net sales total $75,000, and sales revenues total $95,000. How much is the profit margin? a) 16% b) 75% c) 79% d) 20%
d) 20%
Which statement is true when recording the sale of goods for cash in a perpetual inventory system? a) Only one journal entry is necessary. It will record cost of goods sold and reduce of inventory. b) Only one journal entry is necessary. It will record the receipt of cash and sales revenue. c) Two journal entries are necessary: one to record the receipt of cash and reduction of inventory, and one to record the the cost of goods sold and sales revenue. d) Two journal entries are necessary: one to record the receipt of cash and sales revenue, and one to record the cost of goods sold and to reduce inventory.
d) Two journal entries are necessary: one to record the receipt of cash and sales revenue, and one to record the cost of goods sold and to reduce inventory.
How is the gross profit rate computed? a) by subtracting ending inventory from the goods available for sale b) by dividing net income by net sales c) by dividing net cash provided by operating activities by net income d) by dividing the amount of gross profit by net sales
d) by dividing the amount of gross profit by net sales
the operating cycle of a merchandising company is ordinarily __________ that of a service firm. a) shorter than b) has fewer steps than c) the same as d) longer than
d) longer than
which one of the following will result in a gross profit? a) operating expenses less COGS b) operating expenses less net income c) sales revenue less operating expenses d) sales revenue less COGS
d) sales revenue less COGS
sales discount normal balance
debits
During FOB destination, what type of account is being debited?
freight-out
freight costs- fob destination journal entry
freight-out xx cash xx
When an invoice is paid within the discount period, the amount of the discount decreases ________. Why?
inventory Because the merchandiser records inventory at its cost and, by paying within the discount period, it has reduced that cost.
an allowance has no impact on __________ or________
inventory or COGS
journal entry for merchandise sold
inventory xx COGS xx
Under the perpetual inventory system, companies record purchases of merchandise for resale in the Inventory account.
inventory xx accounts payable xx
freight costs-fob shipping point journal entry
inventory xx cash xx
under a perpetual inventory system, a company determines the COGS by __________ ________ _________
performing physical inventories
In a _______ inventory system, the cost of goods is determined only at the end of the accounting period. periodic or perpetual
periodic
sales revenue
primary source of revenue for a merchandising company
journal entry for sales allowances
sales R&A xx a/r xx
journal entry for sale
sales r&A xxx accounts receivable xxx
Purchases of assets acquired for use and not for resale, such as supplies, equipment, and similar items are recorded as increases to __________ _________ __________ rather than to ___________
specific asset accounts && inventory
COGS
the total cost of merchandise sold during the period
Examples of Other Expenses and Losses:
• INTEREST EXPENSE: ON NOTES AND LOANS PAYABLE • CASUALTY LOSSES: FROM RECURRING CAUSES, SUCH AS VANDALISM AND ACCIDENTS • LOSS: FROM THE SALE OR ABANDONMENT OF PROPERTY, PLANT, AND EQUIPMENT • LOSS: FROM STRIKES BY EMPLOYEES AND SUPPLIERS
Examples of Other Revenues and Gains:
• INTEREST REVENUE: FROM NOTES RECEIVABLE AND MARKETABLE SECURITIES • DIVIDEND REVENUE: FROM INVESTMENTS IN CAPITAL STOCK • RENT REVENUE: FROM SUBLEASING A PORTION OF THE STORE • GAIN: FROM THE SALE OF PROPERTY, PLANT, AND EQUIPMENT
