concepts in chapter 5

Question 1

A merchandising company has two categories of expenses

Answer 1

cost of goods sold and operating expenses.

Question 2

What is cost of goods sold

Answer 2

The total cost of merchandise sold during the period. This expense is directly related to the revenue recognized from the sale of goods.

Question 3

Perpetual inventory system

Answer 3

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 4

Periodic inventory system

Answer 4

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

Question 5

To determine the cost of goods sold under a periodic inventory system, the following steps are necessary:

Answer 5

1. Determine the cost of goods on hand at the beginning of the accounting period.
2. Add to it the cost of goods purchased.
3. Subtract the cost of goods on hand as determined by the physical inventory count at the end of the accounting period.

Question 6

How to figure gross profit in a merchandising company

Answer 6

gross profit = sales revenue - cost of goods sold

Question 7

Purchase invoice

Answer 7

A document that provides support for each purchase.

Question 8

how are purchases recorded

Answer 8

debit inventory, credit cash or accounts payable

Question 9

FOB (free on board) shipping point

Answer 9

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

Question 10

FOB (free on board) destination

Answer 10

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

Question 11

Purchase discount

Answer 11

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

Question 12

Purchase allowance

Answer 12

A deduction made to the selling price of merchandise, granted by the seller, so that the buyer will keep the merchandise.

Question 13

credit terms are 2/10, n/30

Answer 13

which is read “two-ten, net thirty.” This means that a 2% cash discount may be taken on the invoice price, less (“net of”) any returns or allowances, if payment is made within 10 days of the invoice date (the discount period). Otherwise, the invoice price, less any returns or allowances, is due 30 days from the invoice date.

Question 14

1/10 EOM

Answer 14

(end of month) means that a 1% discount is available if the invoice is paid within the first 10 days of the next month.

Question 15

Sales Returns and Allowances is a contra REVENUE account to

Answer 15

Sales Revenue, which means it is offset against a revenue account on the income statement.

Question 16

The normal balance of Sales Returns and Allowances is

Answer 16

a debit.

Question 17

Sales discount

Answer 17

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

Question 18

Sales Discounts is a contra revenue account to

Answer 18

Sales Revenue. Its normal balance is a debit.

Question 19

The normal balance of Sales Discounts is

Answer 19

debit.

Question 20

single-step income statement.

Answer 20

only one step, subtracting total expenses from total revenues, is required in determining net income (or net loss).

Question 21

What are the two categories in a single-step statement,

Answer 21

(1) revenues, which include both operating revenues and non-operating revenues and gains
(2) expenses, which include cost of goods sold, operating expenses, and nonoperating expenses and losses

Question 22

two primary reasons for using the single-step form.

Answer 22

(1) A company does not realize any type of profit or income until total revenues exceed total expenses, so it makes sense to divide the statement into these two categories. (2) The form is simple and easy to read

Question 23

The multiple-step income statement has three important line items:

Answer 23

gross profit, income from operations, and net income.

1. Subtract cost of goods sold from net sales to determine gross profit.
2. Deduct operating expenses from gross profit to determine income from operations.
3. Add or subtract the results of activities not related to operations to determine net income.

Question 24

Net sales

Answer 24

Sales less sales returns and allowances and sales discounts.

Question 25

Gross profit (gross margin)

Answer 25

The excess of net sales over the cost of goods sold.

Question 26

Comprehensive income

Answer 26

An income measure that includes gains and losses that are excluded from the determination of net income.

Question 27

Comprehensive income statement

Answer 27

A statement that presents items that are not included in the determination of net income, referred to as other comprehensive income.

Question 28

Gross profit rate

Answer 28

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

Question 29

Profit margin

Answer 29

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

Question 30

what does profit margin measure

Answer 30

The profit margin measures the extent by which selling price covers all expenses (including cost of goods sold).

Question 31

Quality of earnings ratio

Answer 31

Net cash provided by operating activities / net income.

In general, a measure significantly less than 1 suggests that a company may be using more aggressive accounting techniques in order to accelerate income recognition (record income in earlier periods). A measure significantly greater than 1 suggests that a company is using conservative accounting techniques, which cause it to delay the recognition of income.