Chapter 5

Question 1

Revenue

Answer 1

come from sales of merchandise as the MAIN SOURCE

Question 2

How do we measure income for a merchandising company

Answer 2

Sales- COGS= Gross Profit

Gross Profit- Operating Expenses= Income before income tax

Income Before income Tax- Income tax= net income

Question 3

Formula for gross profit

Answer 3

Sales-COGS

Question 4

Income measurement process for a service company

Answer 4

Sales- Operating Expenses= Income before tax

Income before tax- income tax expense= net income

Question 5

How do we determine how many goods are avilable for sale

Answer 5

beginning inventory + cos of goods purchased during the period

Question 6

What is ending inventory?

Answer 6

goods left over (not sold)

Question 7

what is the flow of costs for a merchandising company

(how do we find cog available for sale) (how do we find the two distinctions of cog available for sale)

Answer 7

beginning inventory+ cogs purchased= cogs available for sale

cost of goods that are still available for sale= this will be recorded in two ways:
A) COGS (stamement of income since this is an expense)
B) Ending Inventory (SOFP as this is a current asset)

Question 8

How do we separate the cost of goods available for sale?

Answer 8

Into 2 categories:
a) SOI: COGS EXPENSE
b) SOFP: ENDING INVENTORY

A) IS FOR ALL THE GOODS SOLD
B) FOR ALL THE GOODS NOT SOLD

Question 9

Perpetual Inventory System

Answer 9

detailerd records must be kept, they are continuously updated

Question 10

how often do people do a physical count of inventory

Answer 10

at least once a year

Question 11

how to determine the ending inventory under a perpetual inventory system

Answer 11

begiining inventory+ cogs purchased= cogs available for sale

cogs avilable for sale- cogs= ending inventory

Question 12

how often is cogs determined

Answer 12

at each sale

Question 13

Periodic inventory system

Answer 13

detailed recrods of merch are not kept throughout the period (management does not know the ending inventory during the accounting period)

Question 14

how is inventory determined in the periodic inventory system

Answer 14

only once it is counted

Question 15

difference between periodic inventory system and perpetual inventory system

Answer 15

PERIODIC: count is done only at the end of period
PERPETUAL: count is done always

Question 16

How to determine cogs under periodci inventory system?

Answer 16

begiining inventory+ cogs purchased= cogs available for sale

cogs avilable for sale- ending inventory=cogs

Question 17

Perpetual vs Periodic which is better?

Answer 17

Cost benefit analysis

1)perpetual is more expensive but more information
2) periodic is cheaper but less information

Question 18

perpetual inventory system: how do you record purchases of merchandise

Answer 18

recorded in the inventory account

Question 19

GST AND HST NOT INCLUDED IN COGS

Answer 19

!!!

Question 20

fob

Answer 20

fre eon board-

this is where title or ownership of goods transfers!

FOB DESTINATION: buyers place of business (seller pays for shipping)
FOB Shipping point:seller place of business (buyer pays for shippin))

Question 21

FOB destination

Answer 21

Ownership of the goods does not pass from the seller to
the buyer until the goods are received by the buyer

seller owns goods during shipping

Question 22

Fob shipping point

Answer 22

ownership of the goods passes from the seller to buyer as soon as goods are purchased

buyer owns goods during shipping

Question 23

purchase returns and allownaces

Answer 23

purchaser returns the goods to the seller and receibves a cash/refund/credit

Question 24

Purchase discount

Answer 24

offered to encourage early paymbet of a balance due

EX: 2/10 n/30 (2/10 net 30)

If buyer pays within 10 days, they get a 2% discount

If a buyer pays after 10 days but within 20 days (0 discount)

Question 25

what is shrinkage

Answer 25

when there is less inventory on hand as compared to records! this should be investigaeted

Question 26

how to record shrinkage in JE

Answer 26

debit to cogs expense and credit to inventory

Question 27

one advantage of eprpetual inventory system

Answer 27

you can determine inventory shrinkage

Question 28

under perpetual inventory system when you are recording sales, how many entries are required

Answer 28

2

1) recird sales revenue:
Cash or A/R
Sales
Refund LIabilitity

2) record costs of merchandise sold
Cost of Goods Sold
Estimated inventory returns
Inventory

Question 29

What account do we record retunrs to

Answer 29

Estimated Inentory Returns (this is an asset account)

Question 30

Two types of statement of income

Answer 30

single step and multi step

Question 31

single step soi

Answer 31

all data classiied into two categories revenues and expenses; less subtotals and summaries

Question 32

multiple step soi

Answer 32

shows severak steos in determining net income or loss

1) Gross profit
2) income from operations
3) income before income tax
4)net income:

Question 33

what companies would have interest income or interest expense

Answer 33

for a bank/financial instutiton this will be in OPERATING EXPENSE

for another sort of company it would in OTHER INCOME/EXPESNES

Question 34

Statement of comprehensive income

Answer 34

items not inluded in net income, but in the broader catefory of comprehensive income

Question 35

Gross Profit Margin

Answer 35

gross profit/sales

higher is better

ratio –:–

Question 36

Profit Margin

Answer 36

Net Income/sales

higher is generally better

ratio –:–

Question 38

Buyer: purchase of 3500 of inventory for cash

Answer 38

Dr Inventeory 3500
Cr Cash 3500

Question 39

Buyer: return of 750 of inventory to seller for credit on account

Answer 39

Dr acc payable 750
Cr inventory 750

Question 40

buyer: purchase of 4000 inventory on account

Answer 40

dr inventory 4000
cr a/p 4000

terms don’t really matter

Question 41

buyer: payment of 400 cash for foreign on purchase of inventory (fob shipping point)

Answer 41

dr inventory 400
cr cash 400

Question 42

buyer: payment of amount owed for purchase of 3500 inventory terms 2/10 n/30 paid within discount period

Answer 42

Dr ap 3500
cr inventory 70 (2% of 3500)
cr cash 3430