Chapter 5: Merchandising Operations and Multi-step Income Statement

Question 1

Comprehensive income

Answer 1

An income measure that includes gains and losses that are excluded from the determination of net income.

Question 2

Comprehensive income statement 

Answer 2

A statement that presents items that are not included in the determination of net income, referred to as other comprehensive income.

Question 3

Contra revenue account 

Answer 3

An account that is offset against a revenue account on the income statement.

Question 4

Cost of goods sold (GOGS)

Answer 4

The total cost of merchandise sold during the period.

1) Beginning Inventory
2) Add purchases (add freight in, subtract discounts, and returns/allowances)
3) Available to sell
4) Ending Inventory
5) COGS

Question 5

Gross profit rate 

Answer 5

Gross profit expressed as a percentage by dividing the amount of gross profit by net sales.

Gross profit/Net sales

Question 6

Gross profit

Answer 6

Gross Profit = Sales - COGS

Question 7

Net sales

Answer 7

Sales - sales returns and allowances and sales discounts

Question 8

Periodic inventory system

Answer 8

An inventory system in which a company does not maintain detailed records of goods on hand throughout the period and determines the cost of goods sold only at the end of an accounting period.

• COGS determined at end of accounting period
• Does NOT follow inventory
• Purchases of merchandise are recorded in the purchases account rather than the inventory account

Question 9

Perpetual inventory system 

Answer 9

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

• Follows and records inventory in detail
• Purchases of merchandise for sale are recorded in Inventory
• COGS recorded each time a sale occurs

Question 10

Profit margin

Answer 10

Measures the percentage of each dollar of sales that results in net income, computed by dividing net income by net sales.

Net income/net sales

Question 11

Purchase allowance 

Answer 11

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

Question 12

Purchase discount

Answer 12

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

Question 13

Purchase invoice

Answer 13

A document that provides support for each purchase.

Question 14

Purchase return

Answer 14

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

Question 15

Quality of earnings ratio 

Answer 15

A measure used to indicate the extent to which a company’s earnings provide a full and transparent depiction of its performance; computed as net cash provided by operating activities divided by net income

= Net cash/net income

<1 = indicates aggressive techniques
>1= indicates conservative techniques

Question 16

Sales discount

Answer 16

A reduction given by a seller for prompt payment of a credit sale.

Question 17

Sales invoice 

Answer 17

A document that provides support for each sale.

Question 18

Sales returns and allowances 

Answer 18

Transactions in which the seller either accepts goods back from the purchaser (a return) or grants a reduction in the purchase price (an allowance) so that the buyer will keep the goods.
- A purchaser, dissatisfied with merchandise received, may return the goods to the seller for credit.

Question 19

Sales revenue

Answer 19

Primary source of revenue for a merchandising company.

Question 20

Merchandise company

Answer 20

Sells products they didn’t create

• Income statement includes: Sales revenue, cost of goods sold, and gross profit
• Ex: Wal-Mart

Question 21

Business documents

Answer 21

Cash register tapes
Sales invoice
Canceled check

Question 22

2/10, n/30

Answer 22

2% reduction for ten days and if not paid in ten days then net amount within 30 days

Question 23

Merchandise inventory

Answer 23

Merchandise owned by the company and in a form ready for sale to customers in the ordinary course of business

Question 24

Manufacturing company

Answer 24

Sells products that they create

1. Raw Materials
2. Work in process
3. Finished goods

Question 25

Service company

Answer 25

Don’t sell products, provide services

Question 26

3 types of companies:

Answer 26

1. Merchandising companies: Those who sell products that have already been produced by someone else
2. Manufacturing companies: Those who sell products they create
3. Service companies: Those that don’t sell products but provide services