Ch 5 Accounting for Merchandising Operations

Question 1

contra revenue account

Answer 1

An account with the opposite balance (debit) compared with its related revenue account, which has a credit balance. The contra revenue account is deducted from the revenue account on the income statement. (p. 248)

Question 2

control account

Answer 2

An account in the general ledger that summarizes the detail for a subsidiary ledger and controls it. (p. 242)

Question 3

cost of goods available for sale

Answer 3

The cost of the goods on hand at the beginning of the period (beginning inventory) plus the cost of goods purchased during the period. (p. 265)

Question 4

cost of goods purchased

Answer 4

Net purchases (purchases minus purchase returns and allowances and purchase discounts) plus freight in. (p. 264)

Question 5

cost of goods sold

Answer 5

The total cost of merchandise sold during the period. In a perpetual inventory system, it is calculated and recorded for each sale. In a periodic inventory system, the total cost of goods sold for the period is calculated at the end of the accounting period by deducting ending inventory from the cost of goods available for sale. (p. 238)

Question 6

FOB destination

Answer 6

A freight term indicating that the buyer accepts ownership when the goods are delivered to the buyer’s place of business. The seller pays the shipping costs and is responsible for damages to the goods during transit. (p. 243)

Question 7

FOB shipping point

Answer 7

A freight term indicating that the buyer accepts ownership when the goods are placed on the carrier by the seller. The buyer pays freight costs from the shipping point to the destination and is responsible for damages. (p. 243)

Question 8

function

Answer 8

A method of classifying expenses on the income statement based on which business function the resources were spend on (e.g., cost of sales, administration, and selling). (p. 255)

Question 9

gross profit

Answer 9

Sales revenue (net sales) less cost of goods sold. (p. 238)

Question 10

gross profit margin

Answer 10

Gross profit margin expressed as a percentage of net sales. It is calculated by dividing gross profit by net ales. (p. 259)

Question 11

gross sales

Answer 11

Total sales before deducting the contra revenue accounts. (p. 249)

Question 12

multiple-step income statement

Answer 12

An income statement that shows several steps to determine profit or loss. (p. 256)

Question 13

nature

Answer 13

A method of classifying expenses on the income statement based on what the resources were spent on (e.g., depreciation, employee costs, transportation, and advertising). (p. 255)

Question 14

net purchases

Answer 14

Purchases minus purchase returns and allowances and purchase discounts. (p. 264)

Question 15

net sales

Answer 15

Sales less sales returns and allowances and sales discounts. (p. 249)

Question 16

non-operating activities

Answer 16

Other revenues and expenses that are unrelated to the company’s main operations. (p. 257)

Question 17

operating expenses

Answer 17

Expenses incurred in the process of earning sales revenue. They are deducted from gross profit in the income statement. (p. 238)

Question 18

periodic inventory system

Answer 18

An inventory system where detailed inventory records are not updated whenever a transaction occurs. The cost of goods sold is determined only at the end of the accounting period. (p. 239)

Question 19

perpetual inventory system

Answer 19

An inventory system where detailed records, showing the quantity and cost of each inventory item, are updated whenever a transaction occurs. The records continuously show the inventory that should be on hand. (p. 239)

Question 20

profit from operations

Answer 20

Profit from a company’s main operating activity, determined by subtracting operating expenses from gross profit. (p. 257)

Question 21

profit margin

Answer 21

Profit expressed as a percentage of net sales. It is calculated by dividing profit by net sales. (p. 260)

Question 22

profitability ratios

Answer 22

Measures of a company’s profit or operating success (or shortcomings) for a specific period of time. (p. 259)

Question 23

purchase discount

Answer 23

A discount, based on the invoice price less any returns and allowances, given to a buyer for early payment of a balance due. (p. 244)

Question 24

purchase return (allowance)

Answer 24

The return, or reduction in price, of unsatisfactory merchandise that was purchased. They result in a debit to Cash or Accounts Payable. (p. 244)

Question 25

quantity discount

Answer 25

A cash discount that reduces the invoice price and is given to the buyer for volume purchases. (p. 244)

Question 26

sales discount

Answer 26

A reduction, based on the invoice price less any returns and allowances, given by a seller for early payment of a credit sale. (p. 249)

Question 27

sales returns (allowances)

Answer 27

The return, or reduction in price, of unsatisfactory merchandise that was sold. They result in a credit to Cash or Accounts Receivable. (p. 248)

Question 28

sales revenue

Answer 28

The main source of revenue in a merchandising company. (p. 238)

Question 29

single-step income statement

Answer 29

An income statement that shows only one step (revenues less expense) in determining profit (or loss). (p. 255)

Question 30

subsidiary ledger

Answer 30

A group of accounts that give details for a control account in the general ledger. (p. 242)