Chapter 5

Question 1

Retailers

Answer 1

Merchandising companies that purchase and sell dierectly to consumers

Question 2

Wholesalers

Answer 2

Merchandising companies that sell to retaliers

Question 3

Cost of goods sold

Answer 3

Total cost of merchandise sold during the period

Question 4

Gross profit

Answer 4

Sales revenue - Costs of goods sold

Question 5

Net income

Answer 5

Gross profit - operating expenses

Question 6

Perpetual inventory system

Answer 6

An inventory system in which a company maintains the cost of each inventory item and records continuously show the inventory that should be on hand

Question 7

Periodic inventory system

Answer 7

An invnentory system when a company does not maintain detalied records of goods on hand and determines the cost of goods sold only at the end of an accounting period

Question 8

Helpful hint: perpetual inv.

Answer 8

Under perpetual inventory systems, companies perform physical inventories

Done as a control to verify inventory levels, in order to detect theft or “shrinkage”

Question 9

Morrow Snowboards, Inc.

Answer 9

Investors were scared because of accounting problems

To reduce concerns, they implemented a perceptual inventory system

Question 10

Purchase invoice

Answer 10

Indicates the total purchase price and other relevant information

each purchase should have one

Question 11

purchases for merchandise (under perpetual)

Answer 11

Recorded in the Inventory Account

Question 12

FOB

Answer 12

free on board

Question 13

FOB shipping point

Answer 13

The seller places the goods free on board the carrier

Buyer pays freight costs

Question 14

FOB destination

Answer 14

Seller places good free on board to the buyer’s place of business

Seller plays the freight costs

Question 15

When buyer pays freight charges, _____________

“FOB shipping point”

Answer 15

Inventory is increased

Question 16

When seller incurrs the freight costs, _______________

Answer 16

They are an operating expense the seller

Increase in the “Freight-out” or “Delivery expense” accounts

*sellers often increase invoice price to cover

Question 17

Purchase return

Answer 17

A return of goods from the buyer to the seller for cash or credit

Question 18

Purchase allowance

Answer 18

A deduction made to the selling price of merchandise, granted by the seller so that the buyer will keep the merchandise

Question 19

purchase discount

Answer 19

A cash discount claimed by a buyer for prompt payment of a balance due

Question 20

credit terms

Answer 20

specify the amount of the cash discount and time period during which it is offered

Question 21

discount period

Answer 21

between the invoic date and the payment

Question 22

meaning of net in “net 30”

Answer 22

The remaining amount due after subtracting any returns and allowances and partial payments

Question 23

Sales invoice

Answer 23

A documentthat provides support for each sale

Question 24

Cash register tapes

Answer 24

Provide evidence of cash sales

Question 25

Business document

Answer 25

Provides written evidence of the sale

Question 26

Ethics note: General Electric

Answer 26

Try to improve quality of financial reporting Provides more detail on revenue and operating profits

Question 27

If the seller is granted an allowance, the company journals it as \_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_

Answer 27

Debit sales returns and Allowances Credit Accounts Receievable **\*FOR THE AMOUNT OF ALLOWANCE\***

Question 28

Sales Returns and Allowances Account

Answer 28

Contra revenue account to Sales Revenue Normal balance = debit

Question 29

Sales discount account

Answer 29

Given by seller for a prompt payment of balance due Contra revenue acocunt to sales revenue Normal balance = debit

Question 30

Single step income statement

Answer 30

Includes revenues and expenses \*company does not realize profit or income until total revenues exceed total expenses \*simple and easy to read

Question 31

Multi-step income statement components

Answer 31

Gross profit Income from operations Net income

Question 32

Gross profit

Answer 32

Net sales - cost of goods sold

Question 33

Income from operations

Answer 33

Gross profit - operating expenses

Question 34

International note: IASB and FASB

Answer 34

Working to evaluate format of financial statements Income statement format that better reflects how businesses are run

Question 35

Gross profit represents \_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_

Answer 35

Merchandising profit Comparrisons with past gross profit indicate the dffictiveness of a company's purchasing and pricing policies

Question 36

Nonoperating activities

Answer 36

Consists of various revenues and expenses and gains and losses that are unreleated to the company's main line of operations under "Income from operations"

Question 37

Ethics note: ConAgra

Answer 37

recorded a nonrecurring gain for $186 million from the sale of Pilgrim's Pride stock to help meet an earnings projection for the quarter

Question 38

Periodic system equation

Answer 38

Beginning inventory + Cost of Goods purchased = Cost of Goods available for sale - ending inventory = Cost of goods sold

Question 39

Gross profit rate =

Answer 39

_Gross profit_ Net sales

Question 40

Profit Margin Ratio

Answer 40

_Net income_ Net Sales

Question 41

What does the profit margin ratio measure?

Answer 41

Measures the extent by which selling price covers all expenses

Question 42

3.4% profit margin

Answer 42

Company generates 3.3 cents of profit on each dollar of sales

Question 43

Quality of earnings ratio =

Answer 43

_Net Cash provided by operating activities_ Net income

Question 44

A number significantly greater than one for quality of earnings ratio

Answer 44

suggests a company is using conservative accounting, delay the recognition of income

Question 45

A number significantly less than one quality of earnigs ratio

Answer 45

Comapny is using agressive accounting in order to accelerate income recognition

Question 46

Purchases of merchandise in a periodic system

Answer 46

Under Purchases account rather than inventory account

Question 47

Freight-in

Answer 47

Temporary account whose normal balance is debit \*a part of cost of goods purchaed\*

Question 48

Purchase Returns and Allowances

Answer 48

A temporary account Normal balance = credit

Question 49

Purchase Discounts

Answer 49

Temporary account Normal balance = credit