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FINANCIAL ACCOUNTING > Chapter V > Flashcards

Chapter V Flashcards

1
Q

Sales revenue (Sales)

A

The primary source of revenue in a merchandising company

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2
Q

Cost of goods sold

A

The total cost of merchandise sold during the period.

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3
Q

merchandise

A

buy and sell goods

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4
Q

Perpetual inventory system

A
  • Maintain detailed records of the cost of each inventory purchase and sale.
  • Records continuously show inventory that should be on hand for every item.
  • Company determines cost of goods sold each time a sale occurs.
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5
Q

Periodic System

A
  • Do not keep detailed records of the goods on hand.
  • A physical inventory count is made to determine the cost of goods on hand.
  • Calculation of Cost of Goods Sold:
    Beginning inventory
    Add: Purchases, net
    = Goods available for sale
    Less: Ending inventory
    = Cost of goods sold
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6
Q

Purchasing Inventory

A
  • Made using cash or credit (on account).
  • Normally record when goods are received from seller.
  • Purchase invoice should support each credit purchase.
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7
Q

operating expense

A

Freight costs incurred by the seller

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8
Q

FOB destination

A

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

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9
Q

FOB shipping point

A

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

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10
Q

Purchase return

A

Return goods for credit if the sale was made on credit, or for a cash refund if the purchase was for cash

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11
Q

Purchase allowance

A

May choose to keep the merchandise if the seller will grant a deduction from the purchase price.

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12
Q

Purchase Discounts

A

Credit terms may permit buyer to claim a cash discount for prompt payment.
=> Adv
- Purchaser saves money.
- Seller shortens the operating cycle by converting the accounts receivable into cash earlier.

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13
Q

Recording Sales of Merchandise

A
  • Sales revenue, like service revenue, is recorded when the performance obligation is satisfied.
  • Performance obligation is satisfied when the goods are transferred from the seller to the buyer.
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14
Q

Contra revenue account

A

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

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15
Q

Sales not reduced (debited) because ____

A
  • Would obscure importance of sales returns and allowances as a percentage of sales.
  • Could distort comparisons between sales in different accounting periods.
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16
Q

Sales invoice

A

A document that supports each credit sale

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17
Q

Sales Discount

A
  • Offered to customers for the prompt payment of the balance due.
  • Contra-revenue account (debit) to Sales Revenue
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18
Q

Single-step income statement

A

TR-TE

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19
Q

2 reasons for using the single-step format:

A
  • Company does not realize any profit until TR>TE.

- Format is simpler and easier to read.

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20
Q
  1. Gross profi t will result if:
    (a) operating expenses are less than net income.
    (b) sales revenues are greater than operating expenses.
    (c) sales revenues are greater than cost of goods sold.
    (d) operating expenses are greater than cost of goods sold.
A

c

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21
Q
  1. Under a perpetual inventory system, when goods are purchased for resale by a company:
    (a) purchases on account are debited to Inventory.
    (b) purchases on account are debited to Purchases.
    (c) purchase returns are debited to Purchase Returns and Allowances.
    (d) freight costs are debited to Freight-Out.
A

a

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22
Q
  1. The sales accounts that normally have a debit balance are:
    (a) Sales Discounts.
    (b) Sales Returns and Allowances.
    (c) Both (a) and (b).
    (d) Neither (a) nor (b).
A

c

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23
Q
  1. A credit sale of $750 is made on June 13, terms 2/10, net/30. A return of $50 is granted on June 16. The amount received as payment in full on June 23 is:
    (a) $700.
    (b) $686.
    (c) $685.
    (d) $650.
A

b (($750 - $50) x 0.98)

24
Q
  1. Which of the following accounts will normally appear in the ledger of a merchandising company that uses a perpetual inventory system?
    (a) Purchases. (c) Cost of Goods Sold.
    (b) Freight-In. (d) Purchase Discounts.
A

c

25
Q
  1. To record the sale of goods for cash in a perpetual inventory system:
    (a) only one journal entry is necessary to record cost of goods sold and reduction of inventory.
    (b) only one journal entry is necessary to record the receipt of cash and the sales revenue.
    (c) two journal entries are necessary: one to record the receipt of cash and sales revenue, and one to record the cost of goods sold and reduction of inventory.
    (d) two journal entries are necessary: one to record the receipt of cash and reduction of inventory, and one to record the cost of goods sold and sales revenue.
A

c

26
Q
  1. The steps in the accounting cycle for a merchandising company are the same as those in a service company except:
    (a) an additional adjusting journal entry for inventory may be needed in a merchandising company.
    (b) closing journal entries are not required for a merchandising company.
    (c) a post-closing trial balance is not required for a merchandising company.
    (d) a multiple-step income statement is required for a merchandising company.
A

a

27
Q
  1. The multiple-step income statement for a merchandising company shows each of the following features except:
    (a) gross profit.
    (b) cost of goods sold.
    (c) a sales revenue section.
    (d) an investing activities section.
A

d

28
Q
  1. If sales revenues are $400,000, cost of goods sold is $310,000, and operating expenses are $60,000, the gross profit is:
    (a) $30,000. (c) $340,000.
    (b) $90,000. (d) $400,000.
A

b ($400,000 - $310,000)

29
Q
  1. A single-step income statement:
    (a) reports gross profit.
    (b) does not report cost of goods sold.
    (c) reports sales revenues and “Other revenues and gains” in the revenues section of the income statement.
    (d) reports operating income separately.
A

c

30
Q
  1. Which of the following appears on both a single-step and a multiple-step income statement?
    (a) Inventory.
    (b) Gross profit.
    (c) Income from operations.
    (d) Cost of goods sold.
A

d

31
Q
    1. In a worksheet using a perpetual inventory system, Inventory is shown in the following columns:
      (a) adjusted trial balance debit and balance sheet debit.
      (b) income statement debit and balance sheet debit.
      (c) income statement credit and balance sheet debit.
      (d) income statement credit and adjusted trial balance debit.
A

a

32
Q
    1. In determining cost of goods sold in a periodic system:
      (a) purchase discounts are deducted from net purchases.
      (b) freight-out is added to net purchases.
      (c) purchase returns and allowances are deducted from net purchases.
      (d) freight-in is added to net purchases.
A

d

33
Q
    1. If beginning inventory is $60,000, cost of goods purchased is $380,000, and ending inventory is $50,000, cost of goods sold is:
      (a) $390,000. (c) $330,000.
      (b) $370,000. (d) $420,000.
A

a ($60,000 + $380,000 - $50,000)

34
Q
    1. When goods are purchased for resale by a company using a periodic inventory system:
      (a) purchases on account are debited to Inventory.
      (b) purchases on account are debited to Purchases.
      (c) purchase returns are debited to Purchase Returns and Allowances.
      (d) freight costs are debited to Purchases.
A

b

35
Q
  1. (a) “The steps in the accounting cycle for a merchandising company are different from the accounting cycle for a service company.” Agree or disagree?
    (b) Is the measurement of net income for a merchandising company conceptually the same as for a service company? Explain.
A

(a) Disagree. The steps in the accounting cycle are the same for both a merchandising company and a service company.
(b) The measurement of income is conceptually the same. In both types of companies, net income (or loss) results from the matching of expenses with revenues.

36
Q
  1. Why is the normal operating cycle for a merchandising company likely to be longer than for a service company?
A

The normal operating cycle for a merchandising company is likely to be longer than in a service
company because inventory must first be purchased and sold, and then the receivables must be collected.

37
Q
  1. (a) How do the components of revenues and expenses differ between merchandising and service companies?
    (b) Explain the income measurement process in a merchandising company.
A

Merchandise Service
Revenues Sales Fees, Rents, etc.
Expenses COGS and Operating Operating (only)

b. Sales Rev - COGS = Gross pi - Operating exp =NI

38
Q
  1. How does income measurement differ between a merchandising and a service company?
A

(a) sales are the primary source of revenue and

(b) expenses are divided into two main categories: cost of goods sold and operating expenses.

39
Q
  1. When is cost of goods sold determined in a perpetual inventory system?
A

In a perpetual inventory system, cost of goods sold is determined each time a sale occurs.

40
Q
  1. Distinguish between FOB shipping point and FOB destination. Identify the freight terms that will result in a debit to Inventory by the buyer and a debit to Freight-Out by the seller.
A

The letters FOB mean Free on Board. FOB shipping point means that goods are placed free on board the carrier by the seller. The buyer then pays the freight and debits Merchandise Inventory. FOB destination means that the goods are placed free on board to the buyer’s place of business. Thus, the seller pays the freight and debits Freight-out.

41
Q
  1. Explain the meaning of the credit terms 2/10, n/30.
A

Credit terms of 2/10, n/30 mean that a 2% cash discount may be taken if payment is made within 10 days of the invoice date; otherwise, the invoice price, less any returns, is due 30 days from the invoice date.

42
Q
  1. Goods costing $2,000 are purchased on account on July 15 with credit terms of 2/10, n/30. On July 18, a $200 credit memo is received from the supplier for damaged goods. Give the journal entry on July 24 to record payment of the balance due within the discount period using a perpetual inventory system.
A

July 24
Acc Payable ($2,000 – $200) ……………….. 1,800
Merchandise Inventory ($1,800 X 2%) …………………… 36
Cash ($1,800 – $36)…………………………………………………. 1,764

43
Q
  1. Ming Xu believes revenues from credit sales may be recorded before they are collected in cash. Do you agree? Explain.
A

Agree. In accordance with the revenue recognition principle, sales revenues are generally considered to be earned when the goods are transferred from the seller to the buyer; that is, when the exchange transaction occurs. The earning of revenue is not dependent on the collection of credit sales.

44
Q
  1. What is the primary source document for recording (1) cash sales and (2) credit sales?
A

The primary source documents are:

(1) cash sales—cash register tapes and
(2) credit sales— sales invoice.

45
Q
  1. A credit sale is made on July 10 for $900, terms 2/10, n/30. On July 12, $100 of goods are returned for credit. Give the journal entry on July 19 to record the receipt of the balance due within the discount period.
A

July 19
Cash ($800 – $16)…………………………………………. 784
Sales Discounts ($800 X 2%) …………………….. 16
Accounts Receivable ($900 – $100)………………. 800

46
Q
  1. Explain why the Inventory account will usually require adjustment at year-end.
A

The perpetual inventory records for merchandise inventory may be incorrect due to a variety of causes such as recording errors, theft, or waste.

47
Q
  1. Prepare the closing entries for the Sales Revenue account, assuming a balance of $200,000 and the Cost of Goods Sold account with a $145,000 balance.
A

Two closing entries are required:
(1) Sales………………………………………………… 200,000
Income Summary ……………………………………… 200,000
(2) Income Summary …………………………… 145,000
Cost of Goods Sold…………………………………… 145,000

48
Q
  1. What merchandising account(s) will appear in the post-closing trial balance?
A

Of the merchandising accounts, only Merchandise Inventory will appear in the post-closing trial balance

49
Q
  1. Minnick Co. has sales revenue of $105,000, cost of goods sold of $70,000, and operating expenses of $20,000. What is its gross profit and its gross profit rate?
A

Sales revenues ……………… ……………………………….. $105,000
Cost of goods sold ………………………………………… 70,000
Gross profit …………………………………………. …………. $35,000

Gross profit rate: $35,000 ÷ $105,000 = 33.3%

50
Q
  1. Paul Scott Company reports net sales of $800,000, gross profi t of $370,000, and net income of $240,000. What are its operating expenses?
A

Gross profit…………………………………………………………. $370,000
Less: Net Income…… ……………………….. …………….. 240,000
Operating expenses………………….. …………………….. $130,000

51
Q
  1. Identify the distinguishing features of an income statement for a merchandising company.
A

There are three distinguishing features in the income statement of a merchandising company: (1) a sales revenues section, (2) a cost of goods sold section, and (3) gross profit.

52
Q
  1. Identify the sections of a multiple-step income statement that relate to (a) operating activities, and (b) nonoperating activities.
A

(a) The operating activities part of the income statement has three sections: sales revenues, cost of goods sold, and operating expenses.
(b) The nonoperating activities part consists of two sections: other revenues and gains, and other expenses and losses.

53
Q
  1. How does the single-step form of income statement differ from the multiple-step form?
A

The functional groupings are selling and administrative. The problem with functional groupings is that some expenses may have to be allocated between the groups.

54
Q
  1. Determine Apple’s gross profit rate for 2011 and 2010. Indicate whether it increased or decreased from 2010 to 2011.
A

(1) all data are classified into two categories: revenues and expenses, and
(2) only one step, subtracting total expenses from total revenues, is required in determining net income (or net loss).

55
Q

*21. Indicate the columns of the worksheet in a perpetual system in which (a) inventory and (b) cost of goods sold will be shown.

A

Purchase Returns and Allowances Deducted
Purchase Discounts Deducted
Freight-in Added

56
Q

*22. Identify the accounts that are added to or deducted from Purchases in a periodic system to determine the cost of goods purchased. For each account, indicate whether it is added or deducted.

A

July 24
Acc Payable ($3,000 – $200) ……………… 2,800
Purchase Discounts ($2,800 X 2%) ………………… 56
Cash ($2,800 – $56)………………………………….. 2,744

57
Q

*23. Goods costing $3,000 are purchased on account on July 15 with credit terms of 2/10, n/30. On July 18, a $200 credit was received from the supplier for damaged goods. Give the journal entry on July 24 to record payment of the balance due within the discount period, assuming a periodic inventory system.

A

(a) Merchandise Inventory—Trial Balance (Dr.), Adjusted Trial Balance (Dr.), and Balance Sheet (Dr.).
(b) Cost of Goods Sold—Trial Balance (Dr.), Adjusted Trial Balance (Dr.), and Income Statement (Dr.).

FINANCIAL ACCOUNTING (5 decks)

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