Accounting 5

Question 1

Explain the recording of purchases under a perpetual inventory system

Answer 1

The inventory account is debited for all purchases of merchandise and for freight costs, and it is credited for purchase discounts and purchase returns and allowances

Question 2

Explain the recording of sales revenues under a perpetual inventory system.

Answer 2

When inventory is sold, Accounts Receivable (or Cash) is debited and Sales Revenue is credited for the selling price of the merchandise. At the same time Cost of Goods Sold is debited and Inventory is credited for the cost of inventory items sold. Separate contra revenue accounts are maintained for Sales Returns and Allowances and Sales Discounts. These accounts area debited as needed to record returns, allowances, or discounts related to the sale.

Question 3

Distinguish between a single-step and a multiple step income statement.

Answer 3

In a single step income statement- companies classify all data under 2 categories, revenue or expenses, and net income is determined in one step
A multiple step income statement- shows numerous steps in determining net income, including results of non-operating activities

Question 4

Determine cost of goods sold under a periodic system

Answer 4

The periodic system uses multiple accounts to keep track off transactions that affect inventory. To determine cost of goods sold, first calculate cost of foods purchased by adjusting purchases for returns, allowances, discounts, and freight in. Then calculate cost of goods sold by adding cost of goods purchased to beginning inventory and subtracting ending inventory.

Question 5

Explain the factors affecting profitability

Answer 5

affected by gross profit, as measured by the gross profit rate, and by management’s ability to control cost, as measured by the profit margin

Question 6

Identify a quality of earnings indicator

Answer 6

Earnings have high quality if they provide a full and transparent depiction of how a company performed. An indicator of the quality of earnings is the quality of earnings ration, which is net cash provided by operating activities divided by net income. Measures about 1 suggest the company is employing conservative accounting practices. Measures significantly below 1 might suggest the company is using aggressive accounting to accelerate the recognition of income

Question 7

What formula would you use to answer the question, “Is the price of goods sold keeping pace with changes in the cost of inventory?

Answer 7

Gross profit Rate= (Gross profit/ Net Sales)

• higher ratio=average margin between the selling price and inventory cost is increasing
• lower ratio= too high margin between the selling price and inventory cost is decreasing

Question 8

What formula would you use to answer the question, “Is the company maintaining an adequate margin between sales and expenses?”

Answer 8

Profit margin= (net income/ net sales)

-higher values=favorable returns on each dollar of sales

Question 9

What is the Quality of Earnings Ratio formula and what does it provide?

Answer 9

Quality of earnings ratio=
(net cash provided by operating activities/ net income)

-provides a depiction of how a company performed

Question 10

contra revenue account

Answer 10

an account that is offset against a revenue account on the income statement

Question 11

cost of goods sold

Answer 11

the total cost of merchandise sold during the period

Question 12

Gross profit

Answer 12

the excess of net sales over the cost of goods sold

Question 13

Gross profit rate

Answer 13

gross profit expressed as a percentage by dividing the amount of gross profit by net sales

Question 14

net sales

Answer 14

Sales less sales returns and allowances and sales discounts

Question 15

Periodic inventory system

Answer 15

an inventory system in which a company does not maintain detailed records of goods on hand throughout the period and determine the cost of goods sold only at the end of an accounting period

Question 16

Perpetual inventory system

Answer 16

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

Question 17

Profit margin

Answer 17

measures the percentage of each dollar of sales that results in net income, computed by dividing net income by net sales

Question 18

purchase allowance

Answer 18

a deduction made to the selling price of merchandise, granted by the seller, so that the buyer will keep the merchandise

Question 19

purchase discount

Answer 19

a cash discount claimed by a buyer for prompt payment of a balance due

Question 20

purchase invoice

Answer 20

a document that provides support for each purchase

Question 21

purchase return

Answer 21

a return of goods from the buyer to the seller for cash or credit

Question 22

Quality of earnings ratio

Answer 22

a measure used to indicate the extent to which a company’s earnings provide a full and transparent depiction of its performance; computed as net cash provided by operating activities divided by net income

Question 23

Sales discount

Answer 23

a reduction given by a seller for prompt payment of a credit sale

Question 24

sales invoice

Answer 24

a document that provides support for each sale

Question 25

sales returns and allowances

Answer 25

transactions in which the seller either accepts good back from the purchaser (a return) or grants a reduction in the purchase price (an allowance) so that the buyer will keep the goods

Question 26

sales revenue

Answer 26

primary source of revenue for the merchandising company

Question 27

What are the key components of a multiple step income statement?

Answer 27

• Sales, and sales discounts
  1) net sales
  2) cost of goods sold
  3) gross profit
  4) total operating expenses
• income from operations
  5) other revenues and gains
  - interest revenue
  6) other expenses and losses
  
  • interest expense
• income before income taxes
  7) income tax expenses
  8) net income (loss)

Question 28

What is an example of periodic inventory systems

Answer 28

when companies determine cost of goods sold only at the end of the accounting period

Question 29

What does not result in an adjustment in the inventory account under a perpetual system?

Answer 29

Payment of freight costs for goods shipped to a customer

Question 30

What sales account normally has a debit balance

Answer 30

• sales discounts

- sales returns and allowances

Question 31

A company makes a credit sale of $750 on June 13th, 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 23rd?

Answer 31

$686

(($750-$50)*.98)= $686

Question 32

To record the sale of goods for cash in a perpetual inventory system…

Answer 32

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

Question 33

Gross profit will result if

Answer 33

sales revenues are greater than cost of goods sold

Question 34

If sales revenues are $400,000 cost of goods sold is $310,000, and operating expenses are $60,000. What is the gross profit?

Answer 34

$90,000

($400,000- $310,000)= $90,000

Question 35

Multiple- step income statements for a merchandising company show what features?

Answer 35

gross profit
cost of goods sold
a sales section

Question 36

If the 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?

Answer 36

$390,000

($60,000+$380,000-$50,000)= $390,000

Question 37

Bufford Corporation had reported the following amounts at December 31, 2014; Calculate the cost of goods available for sale.
Sales revenue $184,000
ending inventory $11,600
beginning inventory $17,200
purchased $60,400
purchased discounts $3,000
purchased returns and allowances $1,100
freight in $600
freight out $900

Answer 37

$74,100

($17,200+ ($60,400-$3,000-$1,100+$600))=$74,100

Question 38

What would affect the gross profit rate?

Answer 38

an increase in cost of goods sold

Question 39

The gross profit rate is equal to

Answer 39

net sales minus cost of goods sold, divided by net sales

Question 40

During the year ended Dec 31, 2014, Bjornstad Corporation had the following results; What was the profit margin?
sales revenue $267,000
Cost of Goods sold $107,000
Net income $92,400
Operating Expenses $55,400
net cash provided by operating activities $108,950

Answer 40

34.6%

($92,400/ $267,000)*100= 34.6%

Question 41

a quality of earnings ratio that is less than 1…

Answer 41

indicates that a company might be using aggressive accounting tactics of

Question 42

When goods are purchased for resale by a company using a periodic inventory system:

Answer 42

purchases on accounts are debited to Purchases

Question 43

What are the 2 systems used by companies to account for inventory

Answer 43

Perpetual inventory

periodic inventory

Question 44

What is the flow of costs for a perpetual system

Answer 44

• maintain detailed records of the cost of each inventory purchase and sale
• records continuously show inventory that should be on hand for every item
• company determines cost of goods sold each time a sale occurs

Question 45

What is the flow cost of a periodic system

Answer 45

• dont keep detailed records of the goods on hand
• cost of goods sold determined by count at the end of the accounting period
• calculation of cost of goods sold=
  - beginning inventory
  - add:Purchases
  - net Goods available for sale
  - Less: Ending inventory
  - Costs of Goods sold

Question 46

When recording Purchases of Merchandise purchases are made using _____; normally recorded when _________, and the _______ should support each credit purchase

Answer 46

• cash or credit (on account)
• goods are received from the seller
• purchase invoice

Question 47

Freight costs incurred by the seller are an

Answer 47

operating expense

Question 48

what does the term n/10 EOM

Answer 48

the net amount is due within the first 10 days of the next month

Question 49

When recording sales of merchandise sales are made using ______; sales revenue is recorded when_________, performace obligation is satisfied when the goods are _______, sales invoice should support each _______

Answer 49

• cash or credit (on account)
• the performance obligation is satisfied
• transferred from the seller to the buyer
• credit sale

Question 50

What does the multiple step income statement provide and what are the 3 important line items

Answer 50

• highlights the components of net income
  1) gross profit
  2) income from operations
  3) net income

Question 51

Identify the difference between a service company and a merchandising company.

Answer 51

Because of the presence of inventory, a merchandising company has sales revenue, costs of goods sold, and gross profit. To account for inventory, a merchandising company must choose between a perpetual inventory system and a periodic inventory system.