Chp 5

Question 1

2 general categories of expenses for a merchandising company

Answer 1

1. COGS

2. operating expenses

Question 2

Def of COGS

Answer 2

Total cost of merchandise sold during the period. (Directly tied to the revenue.)

Question 3

The measurement process for a merchandising company

Answer 3

Sales Revenue
- COGS
= Gross Profit

Gross Profit
- Operating Expenses
= Net Income/Loss

(COGS and gross profit are unique to merchandising companies)

Question 4

2 alternate systems to account for inventory

Answer 4

perpetual inventory system and periodic inventory systems

Question 5

Def of perpetual inventory system

Answer 5

COGS are determined each time a sale occurs

Question 6

Def of periodic inventory systems

Answer 6

COGS only determined at end of the accounting period.

• Co does not keep detailed record of goods on hand
• Uses physical inventory to determine cost of goods on hand

Question 7

3 steps in the periodic inventory process

Answer 7

1. Determine the cost of goods on hand at beginning of the period
2. Add the cost of goods purchased
3. Subtract the cost of goods on hand at the end of the period.

Question 8

What the company uses to support each purchase of inventory on account

Answer 8

purchase invoice (usually they just use the sales invoice from the seller for this)

Question 9

The two K options for freight

Answer 9

FOB shipping point

FOB destination

Question 10

How does buyer record cost of FOB shipping point?

Answer 10

Debits inventory (To record payment of freight on goods purchased)

Question 11

What do COGS include?

Answer 11

All costs to acquire the inventory

Question 12

2 ways the buyer may account for unsatisfactory goods goods (what options the seller normally provides)

Answer 12

1. purchase return

2. purchase allowance (goods not returned, but seller deducts from the price)

Question 13

How to account for purchase allowance under perpetual inventory system

Answer 13

Reduce Payable and Inventory for the allowance amount.

Question 14

What is a purchase discount?

Answer 14

When a buyer on account claims cash discount for prompt payment.

Question 15

What is a the Sales Returns and Allowances account?

Answer 15

A contra revenue account for accounting for sales returns and allowances provided.

Question 16

What is the Sales Discount account?

Answer 16

A contra revenue account for sales discounts provided.

Question 17

What is sales revenue (net sales)?

Answer 17

Sales less returns, allowances, and discounts. (Shown on income statement.)

Question 18

How to calculate gross profit rate (and what does it tell you?)

Answer 18

gross profit/net sales (= what % of sales are net sales vs. COGS)

Question 19

Def of operating expenses

Answer 19

Expenses incurred in the process of earning revenue.

Question 20

Def of nonoperating activities

Answer 20

revenues and expenses, and gains/losses, unrelated to the main line of operations (Other Revenues and Gains or Other Expenses and Losses on the IS). Includes interest expense on notes and loans payable.

Question 21

Besides not keeping a COGS account, how does accounting differ under periodic from perpetual?

Answer 21

Purchases of merchandise, purchase returns and allowances, and purchase discounts are all recorded in separate accounts.

Question 22

Is the Purchases account temporary or permanent?

Answer 22

temporary

Question 23

Normal balance for the Purchases account

Answer 23

debit (credit Cash or Accounts Payable)

Question 24

What is the Freight-In account in a periodic inventory system?

Answer 24

A separate account, but still becomes part of COGS (FOB shipping point)