Test 2

Question 1

Operating Cycle

Answer 1

Series of transactions through which a business generates its revenue and its cash receipts from customers.

Question 2

Operating Cycle of Merchandising Company

Answer 2

1. Purchase of merchandise
2. Sales of the merchandise, often on account
3. Collection of accounts receivable from customers.

Question 3

Operating Cycle of Manufacturing Company

Answer 3

Longer and more complex than that of a merchandising company - because of the first transaction - purchasing merchandise - is replaced by the many activities involved in manufacturing merchandise.

Question 4

Costs of Goods Sold

Answer 4

Expense - shown separately from other expenses in the company’s income statement.

Question 5

Gross Profit

Answer 5

Also called gross margin.
Difference between sales and the cost of goods sold.
Useful means of measuring the profitability of sales transactions, but it does NOT represent the overall profitability of the business.

Question 6

Control Accounts

Answer 6

General ledger accounts used to prepare financial statements that summarize the financial position of a business and the results of its operations.

Question 7

Subsidiary Ledgers

Answer 7

Contain information about specific control accounts in the company’s general ledger. Individual companies in accounts receivable and accounts payable.

Question 8

Perpetual Inventory System

Answer 8

All transactions involving costs of merchandise are recorded immediately as they occur.

Question 9

Inventory Subsidiary Ledger

Answer 9

Provides company personnel with up-to-date information about each type of product that the company buys and sells, including the per-unit cost and the number of units purchased, sold, and currently on hand.

Question 10

Inventory Shrinkage

Answer 10

Unrecorded decreases in inventory resulting from such factors as breakage, spoilage, employee theft, and shoplifting.

Question 11

Periodic Inventory System

Answer 11

No effort is made to keep up-to-date records of either the inventory or the cost of goods sold.

Question 12

Purchase Discounts Lost

Answer 12

Debit when payment made to Accounts Payable that was originally entered at discounted rate

Question 13

Purchase Discounts Taken

Answer 13

Reduction in the cost of goods sold.

Used when original purchase entered at Gross Invoice Price.

Question 14

Net Sales

Answer 14

Total sales revenue minus sales returns and allowances and minus sales discounts.

Question 15

Contra-Revenue Account

Answer 15

Deducted from gross sales revenue as a step in determining net sales.
Debit balance account that is offset against revenue in the income statement.

Question 16

Sales Returns and Allowances

Answer 16

Contra-Revenue Account
Using this account enables management to see both the total amount of sales and the amount of sales returns.
Gives indication of customer satisfaction.

Question 17

Gross Profit Margin

Answer 17

Also called gross profit rate.
Dollar amount of gross profit divided by net sales. Shown as a percentage.
Helps users of financial statements gain insight about a company’s pricing policies and the demand for its products.

Question 18

Special Journals

Answer 18

Accounting records or devices designed to record a specific type of transaction in a highly efficient manner.
Reduce the time, effort, and cost of recording routine business transactions.

Question 19

Comparable Store Sales

Answer 19

Helps determine whether customer demand is rising or falling at established locations.

Question 20

Sales per Square Foot of Selling Space

Answer 20

A measure of how effectively a merchandising business is using its facilities to generate revenue.

Question 21

Control Account

Answer 21

A general ledger account that summarizes the content of a specific subsidiary ledger.

Question 22

Point-of Sales (POS) Terminals

Answer 22

Electronic cash registers used for computer-based processing of sales transactions. The POS terminal identifies each item of merchandise from its bar code and then automatically records the sale and updates the computer-based inventory records. These terminals permit the use of perpetual inventory systems in many businesses that sell a high volume of low-cost merchandise.