ACTI- CH4
operating expenses
separated into selling expenses and general & administrative expenses
FOB shipping point
the buyer accepts ownership when the goods depart the seller's place of business
selling expenses
the expenses of advertising merchandise, making sales, and delivering goods to customers
Operating Cycle for a Merchandiser
(a) cash purchases of merchandise to (b) inventory for sale to (c) credit sales to (d) accounts receivable to (e) receipt of cash
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?
Cost of goods sold Loss from defective merchandise Sales discounts Gross profit Sales returns
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.
Debit Accounts Receivable $1,400. Credit Sales $1,400.
FOB (free on board)
point of transer
Gross Method
records the purchase at its gross (full) invoice amount
Credit Period
the amount of time allowed before full payment is due
Wholesaler
An intermediary that buys products from manufacturers and sells them to retailers
Retailer
An intermediary that buys products from manufacturers or wholesalers and sells them to consumers
On Dec. 20, X-Mart returned $100 of defective merchandise to its supplier. Demonstrate the required journal entry that X-Mart will record for the return, assuming the purchase was made on account and that X-Mart uses the periodic inventory system.
Debit Accounts Payable $100 and credit Purchase Returns $100.
Juice Drinks returned $25 of defective merchandise to its supplier. Demonstrate the required journal entry that Juice Drinks will record for the return, assuming the purchase was made on account and that Juice Store uses the periodic inventory system.
Debit Accounts Payable $25 and credit Purchases Returns and Allowances $25.
Q-mart uses the periodic inventory system. A physical count of inventory revealed it had $6,000 of inventory remaining at year end. Given the partial list of accounts below, the entry to close the temporary credit balance accounts and update the Merchandise Inventory account would include all of the following.
Debit Merchandise Inventory (ending balance) $6,000. Debit Purchase Discounts $1,000. Debit Sales $20,000.
X-Mart purchased $300 of merchandise on account. Demonstrate the journal entry to record this transaction, under the periodic inventory system.
Debit Purchases $300 and credit Accounts Payable $300.
The Sales Refund Payable account:
Is a current liability Is reported on the balance sheet
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
Merchandise cost flows
Net Purchases, Beginning Inventory ----> Merchandise available for sale ----> Cost of goods sold, Ending Inventory
Selling expenses
costs to market and distribute products and services such as advertising of merchandise, store supplies and rent, and delivery of goods to customers
Sales is
revenue account recorded on income statement
Sales
revenue from the sale of merchandise
sales discount
sellers view of cash discount
Select the statements below that correctly describe the flow of costs in a merchandiser's accounting cycle.
Merchandise that is sold becomes an expense reported on the income statement. Beginning inventory + net purchases = Merchandise available for sale. Ending inventory + Cost of goods sold = Total merchandise available for sale. Merchandise that is purchased becomes an asset reported on the balance sheet.
The Allowance for Sales Discounts account:
Is reported on the balance sheet as a reduction to the Accounts Receivable account. Is a contra asset account.
Define the Discounts lost account by selecting the statements below that correctly describe this account.
It is an expense account. It is debited when a discount is not taken and when using the net method of recording purchases. It is reported on the income statement.
Cost of Goods Sold
expense of buying and preparing the merchandise -Cost of goods sold is an expense reported on the income statement. -Cost of goods sold is used to figure gross profit. -Cost of goods sold is also called cost of sales. -Cost of goods sold includes the expenses of buying and preparing an item for sale.
Merchandise
goods that a company buys to resell
Credit Terms
include the amounts and timing of payments from a buyer to a seller
purchase allowance
seller grants reduction of the purchase price to a buyer of defective or unacceptable merchandise (buyer keeps merchandise)
Cash discount
sellers can grant this to encourage buyers to pay earlier
purchases discount
the buyers view of a cash discount
Inventory cost includes
the cost to buy the goods, ship them to the store, and make them ready for sale
inventory
costs of merchandise owned but not yet sold. It is a current asset on the balance sheet
general and administrative expenses
costs to administer a company's overall operations such as office salaries, office equipment, and office supplies
Sales discounts is
contra revenue account and is increased with debit
periodic inventory system
records cost of goods sold at the end of the period
perpetual inventory system
records cost of goods sold at the time of each sale
Gross Margin Ratio
(Net Sales - Cost of Goods Sold) / Net Sales
what are the four closing journal entries a merchandiser has at the end of an accounting cycle?
Close the dividends account. Close revenue accounts. Close the income summary account. Close expense accounts.
LOL Music Store uses the periodic 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.
Credit Cash $980. Credit Purchase Discounts $20. Debit Accounts Payable $1,000.
Juice Drinks uses the periodic inventory system to account for its merchandise purchases. On December 1, it purchased $250 of merchandise with terms of 4/10,n/30. If payment is made on December 5, demonstrate the required journal entry to record the payment by selecting all of the correct actions below.
Debit Accounts Payable $250. Credit Cash $240. Credit Purchase Discounts $10.
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
Debit Accounts Payable $50. Credit Merchandise Inventory $50.
Dogs R US uses the periodic inventory system to account for its merchandise. A customer returned merchandise purchased on credit for $400 with a cost to Dogs R US of $100 and the returned merchandise can be sold to other customers, demonstrate the required journal entry to record the return by selecting all of the correct actions below.
Debit Sales Returns and Allowances $400. Credit Accounts Receivable $400.
Identify the statements below that are correct regarding the closing entries for a merchandiser using the perpetual inventory system.
The Dividends account is closed to Retained Earnings Sales Returns and Allowances is closed with the expense accounts. Cost of goods sold is closed with the expense accounts. Sales Discounts is closed with the expense accounts. Sales is closed as a revenue account.
discount period
Time period in which a cash discount is available and the buyer can make a reduced payment.
The journal entry required when a customer is given an allowance in cash is the same under both a periodic and perpetual system.
True
The components of a merchandiser's multi-step income statement are shown below. In which order would they appear on the statement?
-Net Sales -Cost of Goods Sold -Gross profit -expenses -net income
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
Cash would be credited for $5,000 on June 25. Cash would be credited for $4,900 on June 25. Discounts lost would be debited for $100 on June 25. Merchandise inventory would be debited for $5,000 for June 10.
Both methods Neither method Net method Gross method
X-Mart uses the periodic inventory system to account for its merchandise. On May 1, it sold $400 of merchandise on account with terms of 2/15, n/40. On May 3, its customer returned $50 of merchandise due to defect. On May 11, its customer paid the remaining balance due. Demonstrate the required journal entry to record the receipt of payment by selecting all of the correct actions below.
Credit Accounts Receivable $350. Debit Sales Discounts $7. Debit Cash $343.
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
Credit Accounts Receivable $400. Credit Cost of Goods Sold $100. Debit Merchandise Inventory $100. Debit Sales Returns and Allowances $400.
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
Credit Sales $1,400. Debit Cash $1,400. Credit Merchandise Inventory $500. Debit Cost of Goods Sold $500.
Assume that X-Men estimates that future inventory returns to be $500 on the cost side. The beginning unadjusted balance is $400. The adjusting entry for expected returns on the cost side is:
Debit Inventory Returns Estimated and credit Cost of Goods Sold for $100
ABC Mart received a $20 freight bill for merchandise it purchased with freight terms of FOB shipping point. Assuming it paid the bill immediately, demonstrate the journal entry required to record the freight charges, assuming the periodic inventory system is used.
Debit Transportation-In $20 and credit Cash $20.
A journal entry for a sale of merchandise on credit will result in
Debit to Accounts Receivable Debit to Cost of Goods Sold Credit to Merchandise Inventory Credit to Sales
Merchandiser
Earns net income by buying and selling products AKA wholesalers & retailers
Computing net income (service company)
Revenues - Expenses = Net Income
Identify the items or sub-headings below that would appear on a multiple-step income statement.
Selling expenses General and administrative expenses Net sales Cost of goods sold Income from operations Gross profit
Inventory Shrinkage
adjusting entry to account for the loss of inventory due to theft or deterioration. It is computed by comparing a physical count of inventory with recorded amounts.
Nonoperating activities
consist of expenses, revenues, losses, and gains that are unrelated to a company's main operations
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
Multi-Step Income Statement
details net sales and expenses and reports subtotals for various types of items 3 main parts: (1) gross profit net sales - cost of goods (2) income from operation, which is gross profit - operating expenses (3) net income, which is income from operations plus or minus nonoperating items
perpetual accounting system requires
each sales transaction for a merchandiser, whether for cash or on credit, has two entries: one for revenue and one for cost 1. Revenue recorded (and asset increased) from the customer 2. Cost of goods sold incurred (and asset decreased) to the customer
net method
records sales at the net amount, which assumes that all discounts will be taken
Supplementary records
information outside the usual ledger accounts
total Cost of Merchandise purchase
invoice cost - purchase discounts - purchase returns and allowances + costs of transportation
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
-When the shipping costs are the responsibility of the buyer, then the Merchandise Inventory account is debited for the freight charges. -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. -Terms FOB shipping point means the buyer accepts ownership when the goods depart the seller's place of business.
Sales Discounts
is a contra revenue account, which means it is subtracted from the Sales account when computing net sales
single-step income statement
lists cost of goods sold as another expense and shows only one subtotal for total expenses
purchase return
merchandise a buyer acquires but then returns to the seller
The Discounts Lost account is used in the
net method for inventory.
Gross Profit (aka Gross Margin)
net sales - cost of goods sold
Computing net income (merchandiser)
net sales - cost of goods sold = gross profit - expenses = net income
FOB destination
ownership of goods transfers to the buyer when the goods arrive at the buyer's place of business
Merchandise Inventory
products that a company owns and intends to sell
Acid test ratio (quick ratio)
quick assets (cash + short-term investments + current receivables)/current liabilities
classified balance sheet
reports merchandise inventory as a current asset, usually after accounts receivable according to an asset's nearness to liquidity
