Chapter 5 Terms

Question 1

Contra Revenue Account

Answer 1

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

Question 2

Cost of Goods Sold

Answer 2

The total cost of merchandise sold during the period

Question 3

FOB Destination

Answer 3

Freight terms indicating the the seller places the goods free on board to the buyer’s place of business, and the seller pays the freight

Question 4

FOB Shipping Point

Answer 4

Freight terms indicating that the seller places the goods free on board the carrier, and the buyer pays the freight costs

Question 5

Gross Profit

Answer 5

The excess of sales revenue over the cost of goods sold

Question 6

Gross Profit Rate

Answer 6

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

Question 7

Income from Operations

Answer 7

Income from a company’s principal operating activity, determined by subtracting costs of goods sold and operating expenses from net sales

Question 8

Inventory

Answer 8

The asset that represents the merchandise that companies buy and sell to customers

Question 9

Multiple-Step Income Statement

Answer 9

An income statement that shows several steps in determining net income

Question 10

Net Sales

Answer 10

Sales and revenue less sales returns and allowances and sales discounts

Question 11

Non-operating Activities

Answer 11

Various revenues, expenses, gains, and losses that are unrelated to a company’s main line of operations

Question 12

Operating Expenses

Answer 12

Expenses incurred in the process of earning sales revenue

Question 13

Other Expenses and Losses

Answer 13

A non-operating activities section of the income statement that shows expenses and losses unrelated to the company’s main line of operations

Question 14

Other Revenues and Gains

Answer 14

A non-operating activities section of the income statement that shows revenues and gains unrelated to the company’s mainline of operations

Question 15

Periodic Inventory System

Answer 15

An inventory system under which the company does not keep detailed inventory records in the inventory account throughout the accounting period but determines the costs of goods sold only at the end of an accounting period

Question 16

Perpetual Inventory System

Answer 16

An inventory system under which the company keeps detailed records of the cost of each inventory purchase and sale in the inventory account, and the records continuously show the inventory that should be on hand

Question 17

Purchase Allowance

Answer 17

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

Question 18

Purchase Discount

Answer 18

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

Question 19

Purchase Invoice

Answer 19

A document that supports each credit purchase

Question 20

Purchase Return

Answer 20

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

Question 21

Sales Discount

Answer 21

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

Question 22

Sales Invoice

Answer 22

A document that supports each credit sale

Question 23

Sales and Returns and Allowances

Answer 23

Purchase returns and allowances from the seller’s perspective

Question 24

Sales Revenue (Sales)

Answer 24

The primary source of revenue in a merchandising company

Question 25

Single-Step Income Statement

Answer 25

An income statement that shows only one step in determining net income