Chapter 5

Question 1

Gross Profit

Answer 1

difference between sales and cost of goods sold reported on the income statement as in intermediate amount

Question 2

Operating Expenses

Answer 2

General expense category for selling and administrative costs

Question 3

Sales Account

Answer 3

revenue account used for sales of merchandise recorded as cash or account receivable

Question 4

Sales Returns and Allowances

Answer 4

debit to Sales Returns and Allowances credit to cash/accounts receivable *contra revenue account that is deducted from sales to yield net sales

Question 5

Net Sales

Answer 5

sales - sales returns and allowances

Question 6

Credit Memorandum

Answer 6

sales returns on account are issued this indicates that a customer’s Account Receivable: credited (reduced) payment for returned goods not expected

Question 7

Allowance

Answer 7

discount instead of return of merchandise due to minor defect you can use a separate account from returns

Question 8

List Price

Answer 8

Product catalogs or general list price may bear little relation to selling price before any discounts

Question 9

Trade Discount

Answer 9

are not entered into accounting records not considered part to be part of sale because the exchange agreement was made on a reduced price customarily offered in “setting” the invoice amount

Question 10

Invoice Price

Answer 10

list price - trade discounts amount usually recorded in accounting records

Question 11

Credit Card Surcharge

Answer 11

merchants can record full amount of sale and recognize offsetting expense of surcharge

Question 12

Open Account

Answer 12

standing agreement to extend credit for purchases between merchants

Question 13

Cash or Sales Discount

Answer 13

Offer to give discount for prompt payment of open account terms vary: 2/10 n/30 2% discount is available if the purchaser pays the invoice within 10 days; otherwise, the net amount is expected to be paid within 30 days. terms placed in description of transaction in journal when paid cash and sales discount both debited accounts receivable credited

Question 14

Inventory

Answer 14

Goods held for resale to others

Question 15

Inventory Acquisition

Answer 15

first phase of merchandising cycle acquire goods to be stocked for resale to customer

Question 16

periodic inventory system

Answer 16

easier to implement not as robust An inventory system that utilizes a Purchases account and does not update inventory with each sale; inventory is updated by physical count at the end of accounting periods

Question 17

perpetual inventory system

Answer 17

involves more systemization far superior business management tool A “real-time” inventory system that updates inventory records with each purchase and sale

Question 18

Transactions on Periodic Inventory System

Answer 18

Uses Purchases Account-

Question 19

Purchases Account

Answer 19

not an expense or asset amount is total inventory purchased during a period apportioned between cost of goods sold on the income statement and inventory on the balance sheet based upon how much of purchased goods are resold vs how much in inventory

Question 20

PURCHASE RETURNS AND ALLOWANCES to vendors

Answer 20

Account Payable - debit Purchase returns and allowances - credit Subtracted from purchases to calculate Net Purchases

Question 21

Return Merchandise Authorization

Answer 21

customer may need from supplier to return

Question 22

Debit Memorandum

Answer 22

when merchandise is returned to supplier indicates purchaser is to debit -AP credit” purchase returns and allowances

Question 23

Cash Discounts with Vendor

Answer 23

sometime called purchase discounts typically favorable to purchaser same as other - 1/15, n/30 1% if paid in 15, net due in 30 days

Question 24

Gross Method

Answer 24

method of recording purchases of inventory at inventory price (total gross or full invoice amount)

Purchase Discount is separate account When we get the discount: Accounts Payable: Debit Purchase Discounts & Cash: Credit purchase discounts - purchases =net purchases

Question 25

Net Method

Answer 25

A method of recording purchases of inventory at invoice price less available cash discounts

When we get discount: recorded as that amount When we don’t: Accounts payable: debit discounted amount Purchase discounts lost: debit discount lost Cash: Credit purchase discounts lost- recorded as expense following gross profit margin for period

Question 26

FOB Destination

Answer 26

Free on Board transfer of the ownership of inventory will occur when the goods reach their destination Seller incurs freight charges Seller’s Journal: Account Receivable: debit Freight-out: Debit Cash: credit for freight charge Sales: Credit same as AR Buyer’s entry: no mention of freight charge use Purchases and AP

Question 27

FOB Shipping Point

Answer 27

Free on Board Transfer of ownership occurs when good are shipped Purchaser incurs the freight charges cost prepaid by seller Seller’s entry: AR and Sales Buyer’s entry: Purchases: Debit Freight-In: Debit Cash: Credit Freight Charge AP: Credit same as purchases

Question 28

Freight Out

Answer 28

incurred by seller reported as selling expense - from gp when calculation net income FOB Destination

Question 29

Freight In

Answer 29

incurred by purchaser + purchases when calculating net purchases Fob Shipping Point

Question 30

FOB Shipping point pre-paid

Answer 30

seller prepays freight and buyer reimburses Sellers entry: no entry for freight Buyers: Purchases and Freight in : Debit AP: Credit total amount

Question 31

CALCULATION OF NET PURCHASES

Answer 31

Add: Purchases
Freight In

minus

Less: Purchase discounts
Purchas returns and allowances

equals

Net Purchases

Question 32

Cost of Goods Sold

Answer 32

The total cost attributed to units of inventory actually sold during a period

Beginning inventory

Plus: Net Purchases

equal Goods available for sale

Less: ending inventory

equals: cost of goods sold

The cost of goods still held are assigned to inventory (an asset), and the remainder is attributed to cost of goods sold (an expense).

Question 33

Closing Entries

Answer 33

Remember objective of closing- transfer the net income to retained earnings and to reset the income statement accounts to zero in preparation for the next accounting period

income statement accounts with a credit balance must be debited and vice versa

only temp accounts

Inventory is closed to reflect ending balance on hand even though it is not a real account

Question 34

cost of sales amount

Answer 34

(beginning inventory + net purchases - ending inventory).

Question 35

Perpetual System

Answer 35

Purchases Account not needed

Invetnory account & Cost of Goods sold updated as transactions occur

nees a computer syytem

still need physical count at some point to account for theft, waste, errors,….

Question 36

single-step income statement

Answer 36

section for all revenues and another for all expenses

no direct association between specific revenue and expense components

Question 37

multiple-step income statement

Answer 37

divides business operating results into separate categories or steps, and enhances the financial statement user’s ability to understand the intricacy of an entity’s operations

can report unique losses and gains seperately

break out the financing costs (i.e., interest expense) from the other expense components. This tends to separate the operating impacts from the cost of capital needed to produce those operating results

Question 38

Gross Profit Margin

Answer 38

Gross Profit/Net Sales

%

Question 39

Net Profit on Sales

Answer 39

Net Income/Net Sales

%

Question 40

statement of recognized income and expense.

Question 41

Control Structure

Answer 41

depends on the accounting system
the control environment
and the control procedures

The control environment is the combined effect of a firm’s policies and attitudes toward control implementation.

Question 42

Control Procedures

Answer 42

limted access to assets

separation of duties

duty authoriztion

prenumbered docs

independent verification tof records

independent review by acccouting firm

Question 43

Purchasing cycle controls

Answer 43

only authorized employees

strong procedural rules

several bids

purchase order

inspect order upon arrival

match invoice with order

supervisor reviews before payment released