Chapter 4 - Accounting For Merchandising Operations

Question 1

Operating Cycle for a Merchandiser

Answer 1

a) Purchase
b) Merchandise Inventory
c) Credit sales
d) Accounts receivable
e) Cash collection

Question 2

Perpetual inventory

Answer 2

Updates accounting records for purchases for EACH purchase

Question 3

Periodic inventory system

Answer 3

Updates accounting records for purchases and sales of inventory only at the END OF A PERIOD.

Question 4

Purchases returns

Answer 4

Full merchandise return to Seller

Question 5

Purchases allowances

Answer 5

Seller gives price reduction to buyer, merchandise not returned.

Question 6

Merchandise Inventory

Answer 6

aka CURRENT ASSET

Normal DEBIT balance

Question 7

FOB ship point

Answer 7

Buyer accepts ownership when goods leave factory.

BUYER pays shipping costs and has risk of loss in transit.

Question 8

FOB destination

Answer 8

Ownership of goods transfers to buyer when goods arrive at buyer’s place of business.

SELLER is responsible for paying shipping charges and has risk of loss in transit.

Question 9

Gross profit =

Answer 9

Net sales - Cost of goods sold

Question 10

When BUYER pays for transportation costs:

Answer 10

aka - FOB ship point

Record as
DEBIT to Merchandise Inventory
CREDIT to CASH

Question 11

When SELLER pays for transportation costs:

Answer 11

aka - FOB destination

Record as
DEBIT to Delivery Expense
CREDIT to Cash

Question 12

2 sides of merchandise sales accounting

Answer 12

Revenue side and cost side

Question 13

Sales discounts

Answer 13

A CONTRA REVENUE account

DECREASES sales

Normal DEBIT balance

Question 14

Sales return

Answer 14

Full refund to the customer

Question 15

Sales allowance

Answer 15

Partial refund to customer and they can keep merchandise.

Question 16

Sales Returns and Allowances

Answer 16

CONTRA REVENUE account

Decreases Sales

Normal DEBIT balance

Question 17

Cost of Goods Sold

Answer 17

An EXPENSE account for merchandise companies

DEBIT to increase

Question 18

Entry to record returns received by SELLER

Answer 18

Sale return
DEBITS the SALES RETURNS
CREDIT the AR or CASH account

Inventory Return
DEBIT the MERCHANDISE INVENTORY
CREDIT the COGS

Question 19

The account used when a SELLER buys merchandise for it’s inventory on a PERPETUAL SYSTEM.

Answer 19

Merchandise Inventory Account

Question 20

The account used when a SELLER buys merchandise for it’s inventory on a PERIODIC SYSTEM.

Answer 20

Purchases

Question 21

The two entries to record a SALE of merchandise to the customer on a PERPETUAL SYSTEM.

Answer 21

Sale
DEBIT the AR or CASH account
Credit the SALES account

Inventory
DEBIT the COGS account
CREDIT the MERCHANDISE INVENTORY

Question 22

The entry to record a SALE of merchandise to the customer on a PERIODIC SYSTEM.

Answer 22

1 entry for the sale

DEBIT the AR or CASH
CREDIT the SALES

Question 23

The entry to record a RETURN of merchandise to the seller on a PERIODIC SYSTEM.

Answer 23

DEBIT the SALES RETURNS

CREDIT the AR or CASH account

Question 24

The entry to record a PURCHASE of inventory on a PERPETUAL SYSTEM.

Answer 24

DEBIT the MERCHANDISE INVENTORY

CREDIT the AR or CASH account

Question 25

The entry to record a PURCHASE on a PERIODIC SYSTEM.

Answer 25

DEBIT the PURCHASES account

CREDIT the AR or CASH account

Question 26

Net sales =

Answer 26

Sales - Sales Discounts - Sales Returns and Allowances

Question 27

Cost of Goods =

Answer 27

Goods available for sale (Beginning inventory + Total purchases) - Ending inventory

Question 28

Acid Test Ratio

Answer 28

Quick assets (cash, short term investments, current receivables / current liabilities

Question 29

Gross margin

Answer 29

Net sales - COG / Net sales