Chapter 6

Question 1

Cost of goods sold definition

Answer 1

The total cost of merchandise sold during the period

Question 2

FOB destination definition

Answer 2

Freight terms indicating that the ownership of goods remains with the seller until the goods reach the buyer

Question 3

FOB shipping point definition

Answer 3

Freight terms indicating that ownership of goods passes to the buyer when the public carrier accepts the goods from the seller

Question 4

Gross profit definition

Answer 4

The excess of net sales over the costs of goods sold

Question 5

Gross profit margin definition

Answer 5

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

Question 6

Income tax expense definition

Answer 6

The product of a company’s net income before income taxes and its corporate income tax rate

Question 7

Net sales definition

Answer 7

Sales less sales returns and allowances and sales discounts

Question 8

Periodic Inventory System definition

Answer 8

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

Question 9

Perpetual Inventory System definition

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

Question 10

Profit margin definition

Answer 10

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

Question 11

Purchase allowance definition

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 definition

Answer 12

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

Question 13

Purchase invoice definition

Answer 13

A document that provides support for each purchase

Question 14

Purchase return defintion

Answer 14

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

Question 15

Sales discount definition

Answer 15

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

Question 16

Sales Invoice defintion

Answer 16

A document that provides support for each sale

Question 17

Sales returns and allowances defintion

Answer 17

Transactions in which the seller either accepts goods back from the purchaser (a return) or grants a reduction in the purchase price (allowance) so that they buyer will keep the goods

Question 18

Sales revenue defintion

Answer 18

Primary source of revenue for a merchandising company

Question 19

Describe merchandising companies

Answer 19

They buy and sell merchandise rather than perform services as their primary source of revenue

Question 20

Retailers defintion

Answer 20

Merchandising companies that purchased and sell directly to consumers

Question 21

Wholesalers defintion

Answer 21

Merchandising companies that sell to retailers

Question 22

What are the two categories of expenses for a merchandising company?

Answer 22

1. Cost of goods sold

2. Operating expenses

Question 23

Which expense is directly related to the revenue recognized from the sale of goods?

Answer 23

Cost of goods sold

Question 24

Which two line items are expense items that are unique to a merchandising company and are not used by a service company?

Answer 24

1. Cost of goods sold

2. Gross profit

Question 25

Formula to calculate Net Income

Answer 25

Sales revenue
- COGS
= Gross profit
- Operating expenses
= net income