Chapter 3 Smartbook Flashcards
Merchandising businesses generate revenue by
Selling goods to customers
Product costs include
Shipping and handling costs
Price of goods purchased
The beginning inventory balance plus inventory purchased during the period is equal to
cost of goods available for sale
When a company purchases inventory using the perpetual inventory system, the balance in the inventory accoun
Increases
Cash paid to purchase inventory appears in the ____ activities section of the statement of cash flows
Operating
The products that merchandising companies sell to their customers are called merchandise
Inventory
When merchandise inventory is purchased on account, total assets
Will increase because inventory increases as well as account payable
Merchandise inventory is a(n) ______ account.
Asset
Cost of goods available for sale is allocated between Merchandise Inventory and
Cost of goods sold
The inventory system continually adjusts inventory throughout the accounting period is called the
Perpetual inventory system
The allocation of cost of goods available for sale results in amounts that appear on
the balance sheet and income statement
The purchase of merchandise on account affects
Total liabilities and total assets
Inventory costs are also called
Product costs
When a company purchases inventory using the perpetual inventory system, the balance in the inventory account
When a company returns merchandise that was previously purchased on account, cash flow from operating activities
Is not affected
When a company purchases inventory using the perpetual inventory system, the balance in the inventory account
Increases
Smith Company received a purchase allowance for damaged inventory that was purchased on account. The purchases allowance
decreases assets and liabilities
When merchandise inventory is purchased on account, total assets
will increase
The terms 2/10, n/30 mean
the buyer receives a 2% discount if payment is made within 10 days with the full payment due in 30 days
When a company returns merchandise inventory that was originally purchased on account, net income
is not affected
A company purchased inventory under terms 4/10, n/30. What is the highest interest rate the company should pay to borrow money for the purpose of paying for the inventory within 10 days?
Discount rate × (365 ÷ term of the loan) = 4% × (365 ÷ 20) or 73.00%
Under the perpetual inventory system, the inventory account is adjusted when
inventory is purchased
inventory is sold
When land is sold for less than it cost, the difference is called a(n)
Loss
Purchase allowances affect the financial statements the same way purchase returns do.
True
Operating income includes the amount of income generated from normal recurring operations and gains or losses of a business.
False, Operating income only includes normal, recurring operations.
Ron Company sold land that cost $150,000 for $160,000. The company also sold inventory that cost $60,000 for $85,000. Based on this information, the company will report
a gain of $10,000 and gross margin of $25,000
Income statements that display a single comparison of all revenues minus all expenses are called ______ income statements
single-step
For most companies, there is an inconsistency in the way interest expense is reported on the income statement versus the statement of cash flows.
True: SFAS 95 requires that interest expense be reported in the operating activities section of the statement of cash flows. Most companies report is as a nonoperating expense on the income statement.
Amounts in common size statements are normally shown in
Percentages
Income that is generated from the normal recurring activities of a business is called
Operating income
Income statements that display additional relationships rather than a single comparison of all revenues minus all expenses are called
multistep income statements
Most companies report interest as a(n) ____ item on the income statement and in ______ activities on the statement of cash flows.
nonoperating; operating
