Bus 20: Ch 5

A company has a policy to sell goods on account with terms of 2/10, n/30. If a customer purchased $100 of merchandise from this company for cash instead of on account, the customer would pay

$100 Cash sales are not subjects to discount, so the original $100 would be paid at the time of purchase.

Gadget Corp. recently reported sales revenue of $775,000, gross profit of $350,000, and net income of $64,000 for its most recent fiscal year. What were the firm's operating expenses for the year?

$286,000 Operating expenses are the difference between gross profit and net income. $350,000 - 64,000 = $286,000.

Duland Industries purchases inventory on account with terms 3/10, n/30 for $3,800 on July 15th. Duland also pays shipping costs of $150 on July 15th. What would be the net cost of the inventory if Duland pays the invoice on July 24th?

$3,836 The net cost of the inventory includes shipping costs paid by the buyer, and is reduced by any discount taken. Duland paid within the discount period ($3,800 × .03 = $114). Net cost = ($3,800 + 150) - 114 = $3,836

A merchandiser purchased shirts for $650 on March 1. The terms offered were 2/10, n/30. The merchandiser paid the total amount due on March 9. How much did the merchandiser pay?

$637 $650 - ($650 x 0.02) = $637

Hale Company sells merchandise on account for $1,000 to Long Company with credit terms of 2/10, n/30. Long Company returns $200 of merchandise that was damaged, along with a check to settle the account within the discount period. What is the amount of the check?

$784 $1,000 - $200 = $800. $800 x .02 = $16. $800 - $16 = $784.

Clarkson Construction buys $800 of merchandise on account from Hillside Tools. Hillside Tools offers credit terms of 2/10, n/30. If Clarkson Construction pays the total amount due within 10 days, its payment will be

$784 $800 x .02 = $16. $800 - $16 = $784

During February, purchases were $100,000, all on account with terms 2/10, n/30. The cost to ship the purchases was $200 and the purchases were made FOB destination. Due to a problem in the color of some of the products, a purchase allowance was permitted in the amount of $1,000. All purchases were paid for in February, within the discount period. Total net activity in the inventory account in February was

$97,020 $100,000 - $1,000 = $99,000. Two percent of this amount is $1,980 (99,000 x .02 = 1,980). Deducting this amount from the $99,000 results in net purchases of $97,020 (99,000 - 1,980 = 97,020).

Stine Company purchased merchandise with an invoice price of $2,000 and credit terms of 1/10, n/30. Assuming a 365 day year, what is the implied annual interest rate inherent in the credit terms?

18.25%. The forgone discount is 1%. Deducting 10 days from 30 days results in 20 days of implied interest to be paid. .01 (365/20) = 18.25%.

Which of the following is a difference between the financial statements of a merchandising company and a service company?

A merchandising firm has an expense titled Cost of Goods Sold, while a service firm does not.

Cleveland Company purchased $2,700 of inventory on account from Pinto Industries on March 8th. The terms were 2/15, n/45. Cleveland also paid freight charges of $200 on March 9th and returned $450 of the inventory on March 13th. Journalize the entry to record the payment to Pinto on April 5th.

Accounts Payable $2900 Cash $2691 Inventory $209 Cleveland did not pay within the discount period, so the amount due is $2,700 - 450 = $2,250. Freight charges were paid in cash before payment of the invoice.

To make records agree with physical inventory on hand, merchandising companies require which of the following?

An adjusting entry.

Why are storage costs reduced under a perpetual inventory system?

Because companies can better determine when to replenish inventory. By replenishing inventory in a timely manner, storage costs can be minimized, resulting in a higher net income.

How do businesses sometimes encourage their customers to pay their accounts promptly?

By offering a sales discount.

On October 1st, Hines Industries sold $2,400 of merchandise on account to Franklin Company. The terms were 1/10, n/EOM. Journalize the payment entry for Hines if Franklin pays the invoice in full on October 17th.

Cash $2,400 Accounts Receivable $2,400 Franklin did not take advantage of the discount; therefore, Cash is debited and Accounts Receivable is credited for the amount of the purchase.

On November 1st, Meadows Manufacturing sold $3,200 of merchandise on account to Sparta Company. The terms were 1/10, n/EOM. Journalize the payment entry for Meadows Manufacturing if Sparta pays the invoice in full on November 30th.

Cash $3,200 Accounts Receivable $3,200 Sparta did not take advantage of the discount; therefore, Cash is debited and Accounts Receivable is credited for the amount of the purchase.

To make recorded inventory amount agree with the physical inventory on hand, the perpetual records are adjusted with entries to Inventory and

Cost of Goods Sold.

Which of the following is an adjusting entry used by a merchandiser?

Cost of goods sold Inventory

As the accountant for CM Coffee & Co., you prepare your trial balance and have an unadjusted Inventory balance of $15,650 and Cost of Goods Sold of $98,400. After your physical inventory count, you determine the actual Year-End Inventory is $15,000. Which of the following is the appropriate adjusting entry?

Cost of goods sold $650 Inventory $650 Because the book amount of inventory is higher than the inventory amount on hand, a credit (decrease) to Inventory (an asset) is needed, with a corresponding reduction (debit) to Cost of Goods Sold (an expense).

When an invoice is paid within the discount period, the amount of discount _________ Inventory.

Decreases

Sloan Industries purchases inventory from Harris Distributing. Harris will debit ________ when paying the freight costs. As a result, Sloan will probably pay a ____________ invoice price.

Delivery Expense; higher

Joanie's Caterers bought 10 green tablecloths from Fabric Town for a reception planned for one of their clients. When the package arrived, there were 10 red tablecloths included, but no green. If Joanie's Caterers decides to keep the tablecloths, then

Fabric Town may grant a purchase allowance, which will reduce the caterer's Accounts Payable.

The perpetual inventory system utilizes two journal entries for each sale of merchandise. ________ for each sale is calculated by determining the difference between the two amounts for each entry.

Gross Profit

Presented here are the components in Fancy Corp.'s income statement. What is Fancy's Sales Revenue and Operating Expenses? Sales Revenue: Cost of Goods Sold $175,000 Gross Profit $150,000 Operating Expense: Net Income $65,000

Sales Revenue = $325,000; Operating Expenses = $85,000 Sales = $175,000 + $150,000 Operation Expense = $150,000 - $65,000

Gross profit will result when

Sales Revenue is greater than Cost of Goods Sold.

Martha ordered $5,000 worth of supplies for her company. When they arrived, she discovered that some of the products were not specifically what she had ordered, and some were the wrong color. As a result, the supplier gave her company a purchase allowance of $800. What is the most likely result of this?

The purchase allowance will cause a decrease to the buyer's Accounts Payable and Inventory accounts.

Purchases were made on account on August 5th in the amount of $100,000 with terms of 1/10, n/30. The bill was paid on August 14th. In a perpetual inventory system the journal entry to record the payment would include

a credit to Inventory for $1,000 One percent of the purchases ($100,000 x .01 = $1,000) represents a discount, which will result in a credit to the Inventory account if the payment is made within 30 days.

Sotta, Inc. sold products to Buying, Inc. for $200,000 on account. The products cost Sotta, Inc. $120,000. The journal entries required by Sotta, Inc. to record this transaction would include

a debit to Cost of Goods Sold of $120,000

Which of the following would businesses use to encourage customers to pay their accounts promptly?

a sales discount

Two identical products were purchased and paid for at a total cost of $50,000 plus $100 of freight costs. One of the products was sold to a customer. Under a perpetual inventory system

at the time of sale, Cost of Goods Sold would be debited for $25,050 Total cost of inventory includes the freight cost. Half of the total amount of freight is (100 ÷ 2 = 50), therefore the total amount debited is $25,050.

You are an accountant at Smith Corp. and are completing the accounting cycle. Based on the adjusted trial balance, one of the accounts with a debit balance is Sales Discounts. To close this account, you will record a ________ to Sales Discounts and a ______ to Income Summary.

credit; debit

Although the perpetual inventory system updates accounting records after each sale, a physical count is necessary at year-end to address issues such as ________ and ________.

customer theft; spoilage Merchandising companies encounter limitations regardless of which inventory system is used. Spoilage of perishable products and customer theft, if undetected, can drastically change income.

Under a perpetual inventory system, a company that returns goods previously purchased on credit would

debit Accounts Payable and credit Inventory.

Under the perpetual inventory system, when a merchandising company purchases goods, it initially records them as ________, then as ________ when they are sold.

inventory (current asset); an expense (cost of goods sold)

The typical accounting cycle for a merchandising firm is generally

longer than for a service firm because of the additional steps to purchase and sell Inventory.

When a seller pays freight costs on outgoing merchandise, these costs are considered the seller's

operating expense.

FOB shipping point and FOB destination indicate which party in the transaction is responsible for

paying freight costs

A company makes an entry to record a sale. Then it debits Cost of Goods Sold and credits Inventory. What inventory system is the company using?

perpetual inventory system

According to the revenue recognition principle, when goods are transferred from the seller to the buyer, the seller typically

records the Sales Revenue.

Dave is shopping at a local store. If he takes advantage of the store's purchase discounts, this will ________ the inventory of the seller, and the store will ultimately receive ________ cash than if the discount had not been taken.

reduce; less

Which of the following sells merchandise directly to consumers?

retailer

Merchandisers that offer sales discounts to their customers could

shorten their operating cycle.