Chapter 5

Question 1

Gross profit (gross margin) equation

Answer 1

Net sales - Cost of goods sold

Question 2

Perpetual inventory system

Answer 2

Records cost of goods sold at the time of each sale

Question 3

Periodic inventory system

Answer 3

Records cost of goods sold at the end of the period

Question 4

Goods available for sale equation

Answer 4

Beginning inventory + Net purchases

Question 5

Cost of goods sold equation

Answer 5

Beginning inventory + Net purchases - Ending inventory

Question 6

Net income of merchandiser equation

Answer 6

Net sales - Cost of goods sold - Expenses (general)

Question 7

Cash purchase without cash discounts

Answer 7

Merchandise Inventory DEBIT
Cash CREDIT

Question 8

Purchase on credit (Z-Mart makes purchase of $500 on credit)

Answer 8

Merchandise Inventory DEBIT
Accounts Payable CREDIT

Question 9

Credit payment received within discount period
(Z-Mart pays the credit amount on or before discount period)

Answer 9

Accounts Payable DEBIT
Merchandise Inventory CREDIT (the discount)
Cash CREDIT

Question 10

Buyer makes credit payment made after discount period (Z-Mart makes credit payment after discount period)

Answer 10

Accounts Payable DEBIT
CASH CREDIT

Question 11

Purchase allowances (Z-Mart (buyer) agrees to a $30 allowance from Trek for defective merchandise paid on credit)

Answer 11

Accounts Payable DEBIT
Merchandise Inventory CREDIT

Question 12

Purchase returns (if the Z-Mart initially put it on credit)

Answer 12

Accounts Payable DEBIT
Merchandise Inventory CREDIT

Question 13

Free on board point

Answer 13

Point of transfer

Question 14

FOB shipping point (transportation-in or freight-in)

Answer 14

Merchandise Inventory DEBIT
Cash CREDIT
**Buyer accepts ownership and pays for shipping when the goods depart

Question 15

FOB destination (transportation-out or freight-out)

Answer 15

Delivery Expense DEBIT
CASH CREDIT

**Buyer accepts ownership once it arrives at the destination point, seller pays shipping charges

Question 16

Each sales transaction for a merchandiser has 2 entries:

Answer 16

one for revenue and one for cost

Question 17

Inflow of assets (Z-Mart sold $100 of merchandise, revenue side)

Answer 17

Accounts Receivable DEBIT
Sales CREDIT

Question 18

Outflow of assets (merchandise sold, cost side)

Answer 18

Cost of Goods Sold DEBIT
Merchandise Inventory CREDIT

Question 19

Sales on credit with cash discount (Z-Mart makes credit payment within discount)

Answer 19

Cash DEBIT
Sales Discounts DEBIT
Accounts Receivable CREDIT

Question 20

Buyer returns goods previously purchased, the seller must: (revenue side)

Answer 20

Sales Returns and Allowances DEBIT
Cash CREDIT

Question 21

Buyer returns goods previously purchased, the seller must: (cost side)

Answer 21

Merchandise inventory DEBIT
Cost of Goods Sold CREDIT

Question 22

Buyer granted allowances (you provide an allowance on a previous sale)

Answer 22

Sales Return and Allowances DEBIT
Cash or Accounts Receivable CREDIT

Question 23

Inventory shrinkage

Answer 23

Cost of Goods Sold DEBIT
Merchandise Inventory CREDIT

Question 24

Closing temporary credit accounts for merchandise

Answer 24

Sales

Question 25

Closing temporary debit accounts for merchandise

Answer 25

Sales Discounts
Sales Returns and Allowances
Cost of Goods Sold
**Expense accounts

Question 26

Multiple-step income statement

Answer 26

1. Gross Profit
2. Income from operations = expenses (selling expenses & general and administrative expenses)
3. Net Income

Question 27

Selling expenses

Answer 27

Includes advertising of merchandise, store supplies and rent, and delivery of goods to customers

Question 28

General and administrative expenses

Answer 28

Includes office salaries, office equipment, rent and office supplies

Question 29

Gross margin ratio equation

Answer 29

Gross profit (net sales - cost of goods sold) / net sales

**For every dollar of revenue made, the ratio percentage is retained for profit and the rest is attributed to pay for costs of goods

Question 30

Gross method

Answer 30

Records purchases at its gross (full) invoice amount

Question 31

Shrinkage

Answer 31

Loss of inventory by comparing a physical count of inventory with recorded amounts

Question 32

Acid-test ratio (quick ratio) equation

Answer 32

• Includes quick assets (cash, short term investments, and current receivables) to cover liabilities

Cash + short-term investments + current receivables / current liabilities
***LESS THEN 1.0 raises liquidity