Chap 5

Question 1

Merchandise Inventory

Answer 1

Goods that a company owns and expects to sell to customers; also called inventory.

Question 2

Gross Method

Answer 2

Method of recording purchases at the full invoice price without deducting any cash discounts.

Question 3

Periodic Inventory System

Answer 3

Method that records the cost of inventory purchased but does not continuously track the quantity available or sold to customers; records are updated at the end of each period to reflect the physical count and costs of goods available.

Question 4

Perpetual Inventory System

Answer 4

Method that maintains continuous records of the cost of inventory available and the cost of goods sold.

Question 5

Net Method

Answer 5

Method of recording purchases at the full invoice price less any cash discounts.

Question 6

Merchandiser

Answer 6

Entity that earns income by buying and selling merchandise.

Question 7

Retailer

Answer 7

Intermediary that buys products from manufacturers or wholesalers and sells them to consumers.

Question 8

Wholesaler

Answer 8

Intermediary that buys products from manufacturers or other wholesalers and sells them to retailers or other wholesalers.

Question 9

Purchase Discount

Answer 9

Term used by a purchaser to describe a cash discount granted to the purchaser for paying within the discount period.

Question 10

Purchase Return and Allowance

Answer 10

One is to send the unsatisfactory goods back to the supplier. This is called a purchase return. The other is to keep the unsatisfactory merchandise in return for a price reduction from the supplier. The price reduction from the supplier is called an allowance.

Question 11

Cash Discount

Answer 11

Reduction in the price of merchandise granted by a seller to a buyer when payment is made within the discount period.

Question 12

Cost of Goods sold

Answer 12

Cost of inventory sold to customers during a period; also called cost of sales.

Question 13

Credit Period

Answer 13

Time period that can pass before a customer’s payment is due.

Question 14

Credit Term

Answer 14

Description of the amounts and timing of payments that a buyer (debtor) agrees to make in the future.

Question 15

Discount Period

Answer 15

Time period in which a cash discount is available and the buyer can make a reduced payment.

Question 16

FOB- Shipping Point

Answer 16

means the buyer pays shipping costs and accepts ownership of goods when the seller transfers goods to the carrier

Question 17

FOB- Destination

Answer 17

means the seller pays shipping costs and the buyer accepts ownership of goods at the buyer’s place of business.

Question 18

General and Administrative Expenses

Answer 18

Expenses that support the operating activities of a business.

Question 19

Sales Discount

Answer 19

Term used by a seller to describe a cash discount granted to buyers who pay within the discount period.

Question 20

Sales Return and Allowances

Answer 20

Refunds or credits given to customers for unsatisfactory merchandise are recorded (debited) in Sales Returns and Allowances, a contra account to Sales. In addition, estimates of future sales returns and allowances (related to current-period sales) are made with an adjusting entry that debits Sales Returns and Allowances; this results in sales being recorded net of expected returns and allowances. Sales Returns and Allowances is a temporary account that is closed each period.

Question 21

Selling Expenses

Answer 21

Expenses of promoting sales, such as displaying and advertising merchandise, making sales, and delivering goods to customers.

Question 22

Shrinkage

Answer 22

Inventory losses that occur as a result of theft or deterioration.

Question 23

Multiple Step Income Statement

Answer 23

Income statement format that shows subtotals between sales and net income, categorizes expenses, and often reports the details of net sales and expenses.

Question 24

Gross Profit

Answer 24

Net sales minus cost of goods sold; also called gross margin.

Question 25

Classified Balance Sheet

Answer 25

Balance sheet that presents assets and liabilities in relevant subgroups, including current and noncurrent classifications.