Chapter 5

Question 1

What is the primary source of revenue in a merchandising company?

Answer 1

The sale of merchandise, referred to as sales revenue or sales

Question 2

What is the income formula for a merchandise company?

Answer 2

(sales revenue - cost of goods sold) = Gross profit

(gross profit - operating expense) = Net Income/Loss

Question 3

What is the operating cycle for a merchandising company?

Answer 3

Cash, Buy inventory (Merchandise inventory), Sell inventory (Accounts Receivable), Receive cash (Cash)

Question 4

What is the operating cycle for a service company?

Answer 4

Cash, Perform Services (Accounts Receivable), Receive cash

Question 5

What does the perpetual inventory system do?

Answer 5

• Has detailed records of each inventory purchase and sale
• Records cost of goods sold each time a sale occurs
• Indicates the amount of inventory on hand at all times

Question 6

What does the periodic inventory system do?

Answer 6

• Does not keep detailed records of goods on hand throughout the period
• Determines the cost of goods on hand and cost of goods sold only at the end of an accounting period

Question 7

What is FOB shipping point?

Answer 7

1) Goods placed free on board the carrier by seller

2) Buyer pays freight costs

Question 8

What is FOB destination?

Answer 8

1) Goods placed free on board at buyer’s business

2) Seller pays freight costs

Question 9

How do you account for freight costs for the purchaser?

Answer 9

Merchandise Inventory is debited

Cash is credited

Question 10

How do you account for freight costs for the seller?

Answer 10

Freight-out (Delivery expense) is debited

Cash is credited

Question 11

How are purchase returns accounted for?

Answer 11

Accounts Payable is debited

Merchandise Inventory is credited

Question 12

What is a purchase discount?

Answer 12

When credit terms may permit the buyer to claim cash as discount for the prompt payment of a balance due
- The discount is calculated on the inventory and returns only

Question 13

How do you calculate purchase discount?

Answer 13

Invoice cost - Returns and allowances

Question 14

How do you account for a purchase discount?

Answer 14

Accounts payable is debited
Cash is credited
Merchandise Inventory is credited

Question 15

How do you account for a payment made after the discount period?

Answer 15

Accounts payable is debited

Cash is credited

Question 16

How is a sales discount accounted for?

Answer 16

Cash is debited
Sales discounts debited
Accounts Receivable credited

Question 17

What are two forms of income statements used by companies?

Answer 17

Single step and multiple step

Question 18

In the single step process, how do you calculate net income?

Answer 18

Revenues - expenses

Question 19

In the multi-step process, how do you calculate net income?

Answer 19

(Sales - Cost of goods sold) = gross profit

(gross profit - operating expense) = Income from operations (Plus or minus net income from nonoperating expenses

Question 20

What is the formula for cost of goods sold using the periodic system?

Answer 20

(Beg Inv + Net Purchases) = cogas

(cogas - end Inv) = cogs

Question 21

How do you calculate gross profit rate?

Answer 21

gross profit / net sales

Question 22

How do you calculate profit margin ratio?

Answer 22

(net income / net sales)

Question 23

How do you calculate the quality of earnings ratio?

Answer 23

(net cash provided by operating activities / net income)`

Question 24

What is the formula for the new income statement?

Answer 24

1) Sales - sales returns/allowances - sales disc = Net Sale
2) Net Sales - COGS = Gross Profit
3) Gross profit - operating expense = Inc from operations
4) Inc from operations +(-) other inc/exp = Inc before taxes
5) Inc before taxes - inc tax expense = net income