AC 224 (chapter 5)

Question 1

What are retailers?

Answer 1

Merchandising companies that purchase and sell directly to consumers.

Question 2

What are wholesalers?

Answer 2

Merchandising companies that purchase and sell to retailers.

Question 3

Define Sales Revenue.

Answer 3

Revenue from selling goods.

Question 4

What is Cost of Goods Sold?

Answer 4

The total cost of merchandise sold during the period.

Question 5

What are Operating Expenses?

Answer 5

Expenses incurred in the process of earning sales revenue.

Question 6

What is Gross Profit?

Answer 6

The difference between sales revenue and cost of goods sold.

Question 7

What is the formula for Gross Profit?

Answer 7

Gross Profit = Sales Revenue - Cost of Goods Sold

Question 8

Define Operating Cycle.

Answer 8

The measurement of time between buying inventory, selling the inventory, and collecting payment.

Question 9

What is Inventory?

Answer 9

The merchandise that companies buy and sell to customers.

Question 10

How is inventory categorized?

Answer 10

As a current asset (expect to sell within one year).

Question 11

What is the formula for calculating Ending Inventory?

Answer 11

Ending Inventory = Beginning Inventory + Purchases - Cost of Goods Sold

Question 12

What does the balance sheet equation represent?

Answer 12

Assets = Liabilities + Stockholders’ Equity

Question 13

What does the income statement equation represent?

Answer 13

Revenue - Expenses = Net Income

Question 14

Define Perpetual System.

Answer 14

A system in which the company keeps continuous, detailed records of the cost of each inventory purchase and sale.

Question 15

What is a Periodic System?

Answer 15

A system in which the company does not keep continuous, detailed records of the cost of each inventory purchase and sale.

Question 16

What are the disadvantages of a Perpetual System?

Answer 16

More work and expensive (tech).

Question 17

What are the advantages of a Periodic System?

Answer 17

Easier to maintain and less exact.

Question 18

What are the steps in the purchasing process under a Perpetual System?

Answer 18

• Place order
• Receive goods from seller
• Record goods in inventory

Question 19

Define Freight Costs.

Answer 19

The cost to ship the product from seller to purchaser, included in the cost of inventory.

Question 20

What does FOB Shipping Point mean?

Answer 20

The ownership of goods passes to the buyer when the carrier accepts the goods.

Question 21

What does FOB Destination mean?

Answer 21

The ownership of goods passes to the buyer when the carrier delivers and the buyer accepts the goods.

Question 22

What are Purchase Returns?

Answer 22

Return of goods for cash or credit.

Question 23

What is a Purchase Allowance?

Answer 23

When a buyer has an issue but is allowed to keep the product for a discount.

Question 24

What is a Purchase Discount?

Answer 24

A discount offered by the seller when the buyer pays for the inventory by a certain date.

Question 25

What is the credit term '2/10, net 30'?

Answer 25

If the buyer pays within 10 days, they get a 2% discount; total balance must be paid within 30 days.

Question 26

When is revenue recognized in a merchandising company?

Answer 26

When the goods transfer from the seller to the buyer.

Question 27

What are the two entries to record a sale?

Answer 27

* Entry to record revenue: Dr. Cash/Accounts Receivable, Cr. Sales Revenue * Entry to record associated expense: Dr. Cost of Goods Sold, Cr. Inventory

Question 28

What is a Sales Return?

Answer 28

Granted when a customer returns inventory for a refund.

Question 29

What is a Sales Allowance?

Answer 29

Granted when the customer keeps the goods in exchange for a price reduction.

Question 30

What is a Sales Discount?

Answer 30

Granted by the seller to the customer as an incentive for prompt payment.

Question 31

What is a Multi-Step Income Statement?

Answer 31

An income statement that shows several steps in determining net income.

Question 32

What are the key components of a Multi-Step Income Statement?

Answer 32

* Determination of Net Sales * Determination of Gross Profit * Determination of Operating Income

Question 33

What adjustments may be required under the perpetual inventory system?

Answer 33

Adjustments for recording errors, theft, or waste/damage.

Question 34

What is required at the end of a period for companies using both periodic and perpetual inventory systems?

Answer 34

A physical inventory count.

Question 35

What is the adjusting entry if the physical count of inventory is less than the recorded inventory?

Answer 35

Dr. Cost of Goods Sold, Cr. Inventory

Question 36

What is a Multi-Step Income Statement?

Answer 36

An income statement that shows several steps in determining net income ## Footnote It includes calculations for net sales, gross profit, operating income, non-operating income, and net income.

Question 37

What is the first step in preparing a Multi-Step Income Statement?

Answer 37

Determination of Net Sales ## Footnote This involves calculating sales revenue, deducting sales discounts, returns, and allowances.

Question 38

What is the formula for determining Net Sales?

Answer 38

Sales Revenue - Sales Discounts - Sales Returns and Allowances ## Footnote The result is the Net Sales figure.

Question 39

What is the second step in preparing a Multi-Step Income Statement?

Answer 39

Determination of Gross Profit ## Footnote This is calculated by subtracting the Cost of Goods Sold from Net Sales.

Question 40

How is Gross Profit calculated?

Answer 40

Net Sales - Cost of Goods Sold ## Footnote The Gross Profit Rate can also be determined using the formula: Gross Profit / Net Sales.

Question 41

What is the third step in preparing a Multi-Step Income Statement?

Answer 41

Determination of Operating Income ## Footnote This involves subtracting Operating Expenses from Gross Profit.

Question 42

What components are included in Operating Expenses?

Answer 42

* Selling Expenses * General and Administrative Expenses ## Footnote These expenses are deducted from Gross Profit to find Income from Operations.

Question 43

What is the fourth step in preparing a Multi-Step Income Statement?

Answer 43

Determination of Non-Operating Income ## Footnote This includes other revenues and gains, as well as other expenses and losses.

Question 44

What types of revenues are included in Non-Operating Income?

Answer 44

* Interest Revenue * Rent Revenue * Dividend Revenue * Gain on Sale/Other ## Footnote These are added to Income from Operations.

Question 45

What is the fifth step in preparing a Multi-Step Income Statement?

Answer 45

Determination of Net Income ## Footnote This is calculated by subtracting Income Tax from Income Before Income Tax.

Question 46

How is Net Income determined?

Answer 46

Income Before Income Tax - Income Tax ## Footnote The final amount represents the company's net earnings.

Question 47

True or False: The Multi-Step Income Statement only includes sales revenue.

Answer 47

False ## Footnote It includes several steps, including operating and non-operating income calculations.