Chapter 5 (Week 3)

Question 1

Merchandising companies

Answer 1

Buy and sell merchandise rather than perform services as their primary source of revenue
- Wholesaler: sells to retailers
- Retailers : purchase and sell directly to consumers

Question 2

Primary source of revenue and expenses for merchandising companies

Answer 2

Sale of merchandise - sales revenue or sales
Cost of goods sold and operating expenses

Question 3

Cost of goods sold

Answer 3

Total cost of merchandise sold during the period

Beginning inventory + cost of goods purchased

Question 4

Operating expenses

Answer 4

Expenses incurred in the process of earning sales revenue

Question 5

Perpetual inventory system

Answer 5

Companies keep detailed records of the cost of each inventory purchase and sale
- A company determines the cost of goods sold each time a sale occurs
Advantages:
–> Provides better control over inventories

Question 6

Periodic inventory system

Answer 6

Companies don’t keep detailed inventory records of the goods on hand throughout the period, but they do it at the end of the accounting period only

Question 7

Companies purchase inventory using — and they record the purchases when —

Answer 7

cash or credit

They receive the goods from the seller

Question 8

Purchase invoice

Answer 8

Should support each credit purpose - this invoice indicates the total purchase price and other information
The purchaser uses as a purchase invoice a copy of the sales invoice sent by the seller

Question 9

To record the purchase of inventory you

Answer 9

Debit inventory
Credit cash/accounts payable

Question 10

Business document

Answer 10

Should support every sales transaction to provide written evidence of the sale
–> Cash register documents provide evidence of cash sales

Question 11

Sales invoice

Answer 11

Should support each credit sale
–> The original copy goes to the customer and the seller keeps a copy for use in recording the sale

Question 12

Recording sales of Merchandise in two steps

Answer 12

1. Record the sale - how much he earned
   - seller debits cash and credits sales revenue
2. Records the cost of the merchandise sold - how much he paid
   - seller debits cost of goods sold and credit inventory for the cost of those goods sold

Question 13

Gross profit formula

Answer 13

Sales revenue - COGS

Question 14

Net income formula

Answer 14

Gross profit - Operating expenses