Chapter 5

Question 1

Merchandise Inventory

Answer 1

• Purchased for resale
• For higher price

Question 2

Methods of merchandise inventory

Answer 2

• Periodic
• Perpetual
• They refer to how often the inventory account is verified and updated to reflect on the current value at hand

Question 3

Periodic System

Answer 3

• Inventory only counted 1 a year
• Result is used for calculation COGS
• No merchandise inventory account
• Instead: Purchases, R & A, discounts
• Calculates COGS at the end of the fiscal year

Question 4

Perpetual System

Answer 4

• Inventory counted every time a purchase and/or sale is made
• Uses Merchandise inventory
• (not purchases)
• Calculates COGS every time

Question 5

Freight Costs

Answer 5

FOB shipping point
- Buyer has to pay shipping costs
- Debit merch inv
FOB Destination
- Seller pays shipping costs
- Debit Freight-out
- Credit Cash

Question 6

Calculating Cost of Goods Purchased

Answer 6

Purchases + Freight In - Purchases R & A - Purchase Discounts

Question 7

Calculating Cost of Goods on Hand

Answer 7

Based on physical inventory at the beginning (Beginning Inventory) =

Question 8

Calculating COGS

Answer 8

(Beginning Inventory + Cost of goods Purchased) + Freight-in = Cost of goods available for sale - ending inventory = COGS

Question 9

Accounts to remember

Answer 9

Merchandise Inventory = Current Asset
Sales = Revenue
Sales R & A = Expense
Sales Discount = Expense
Purchases = COGS / Expense
Purchase R & A = Revenue
Purchase Discount = Revenue
Freight-in = Expense

Question 10

What are merchandising operations? (perpetual)

Answer 10

• purchasing products to resell
  Revenue account:
• Sales (mainly from merchandise sales)
  Expense accounts:
• COGS: cost of merch sold
• Operating expenses: Added in the process of earing revenue
  Gross Profit:
• Difference between Sales and COGS

Question 11

Which companies would chose which system?

Answer 11

Big companies:
- Perpetual
- Need to keep track of transactions
ex. Amazon
Small companies:
- Periodic system
- No need to track transactions every time if not many transactions

Question 12

Profitability ratios

Answer 12

-Measure profit or operating success for a specific time period
- Gross profit margin
- Profit margin

Question 13

Gross profit margin

Answer 13

Gross Profit / Net sales = %
- measures effectiveness of a company’s purchasing and pricing policies
(Net sales - COGS) = Gross profit

Question 14

Profit margin

Answer 14

Profit / Net sales = % of sales that result in profit
- Measures ability of a company to cover all expenses and provide a return to owners
- And how effectively a company can convert sales into net income

Question 15

When to use gross profit margin

Answer 15

• To see how to beat your competitors
• to see how well they are doing

Question 16

When to use profit margin

Answer 16

• To find if profits are high enough to distribute dividends
• To pay back its loans
• Low profit margin = expenses too high

Question 17

Completing accounting cycle

Answer 17

• Add one adjustment for inventory
  
  • To ensure the recorded inventory amount has the same amount of goods as the actual quantity at hand

Question 18

Physical count (in the cycle)

Answer 18

• Perpetual indicates what SHOULD exist
• But an inventory count shows what DOES exist

Question 19

Additional accounts to be closed (in the cycle)

Answer 19

• Sales
• Sales R & A
• Sales Discounts
• COGS
• Freight - out

Question 20

What are the 2 types of income statements?

Answer 20

• Single step
• Multi step

Question 21

Single step

Answer 21

Categories classified as Revenue and expenses
- Revenues : Net sales, interest revenue, rent revenue etc.
- Expenses: COGS, operating expenses…., Dep exp, freight out, Insurance exp, interest exp

Question 22

Multi step

Answer 22

5 steps involved:
1. Net sales = Sales - R & A + Discounts
2. Gross profit = Net sales - COGS
3. Profit from operations = Gross profit - operating expense
4. Non operating activities
5. Profit = Profit from operations + non operating activties