Chapter 7

Question 1

Permanent accounts

Answer 1

Accounts used for the life of a business to record the effect of its transactions in its balance sheet (assets, liabilities and owners capital accounts)

Question 2

Operating income

Answer 2

All the revenues earned less the expenses incurred in the primary operating activities of a business

Question 3

Other items

Answer 3

Revenues and expenses that are not directly related to the primary operations of a business

Question 4

Quantity discount

Answer 4

Reduction in the sales price of a good or service because of the number of items purchased or because of a sales promotion

Question 5

Sales discount

Answer 5

Percentage reduction of the invoice price if the customer pays the invoice within a specified period

Question 6

Cash discount

Answer 6

Percentage reduction of the invoice price if the customer pays the invoice within a specified period

Question 7

Sales return

Answer 7

When a customer returns previously purchased merchandise and receives a refund

Question 8

Sales allowance

Answer 8

When a customer agrees to keep damaged merchandise and the business refunds a portion of the original sales price

Question 9

Credit memo

Answer 9

Business document that lists the information for a sales return or allowance

Question 10

Cost of goods sold

Answer 10

Major expense of a retail business consisting of the cost of goods (merchandise) that it sells during the accounting period

Question 11

Perpetual inventory system

Answer 11

System that keeps a continuous record of the cost of inventory on hand and the cost of inventory sold

Question 12

Periodic inventory system

Answer 12

System that does not keep a continuous record of the inventory on hand and sold, but determines the inventory at the end of each accounting period by physically counting it

Question 13

Net purchases

Answer 13

Amount of merchandise purchases adjusted for purchase returns, allowances and discounts

Question 14

Cost of ending inventory

Answer 14

Dollar amount of merchandise on hand, based on a physical count, at the end of the accounting period

Question 15

Gross profit

Answer 15

Net sales minus cost of goods sold

Question 16

Operating expenses

Answer 16

Expenses (other than cost of goods sold) that a business incurs in its day-to-day operations

Question 17

Selling expenses

Answer 17

Operating expenses related to the sales activities of a business

Question 18

General and administrative expenses

Answer 18

Operating expenses related to the general management of a business

Question 19

Financial expenses

Answer 19

Expenses related to financing of the business and its operations, and to debt collection

Question 20

Ratio analysis

Answer 20

Calculations made in financial analysis in which an item on a business’ financial statements is divided by another related item

Question 21

Profit margin

Answer 21

Net income divided by net sales

Question 22

Gross profit percentage

Answer 22

Gross profit divided by net sales

Question 23

Statement of changes in owner’s equity

Answer 23

A summary of the changes in the shareholders (owner’s) equity in a company that have occurred during a specific period of time

Question 24

Temporary accounts

Answer 24

Accounts used for one accounting period to record the effects of a business’ transactions on its net income (revenues and expenses)