ACCT 1130 Exam 2 Study Guide

Contains chapters 4 and 5

Merchandise

__________ refers to products, also called goods, that a company buys to resell.

Merchandiser

A(n) _________ earns net income by buying and selling merchandise.

Wholesaler

A(n) _________ buys products from manufacturers and sells them to retailers.

Retailer

A(n) _________ buys products from manufacturers or wholesalers and sells them to consumers.

Cost of Goods Sold

Revenue from selling merchandise is called sales, and the expense of buying and preparing merchandise is called ___________. (Some service companies use the term sales instead of revenues; ___________ is also called cost of sales.)

Gross Profit or Gross Margin

The merchandiser also reports ___________, which is net sales minus cost of goods sold.

Service Company

Is this net income is calculated for a Service Company or a Merchandising Company?

Merchandising Company

Is this net income is calculated for a Service Company or a Merchandising Company?

Service Company

Is this income statement for a Service Company or a Merchandising Company?

Merchandising Company

Is this income statement for a Service Company or a Merchandising Company?

Merchandise inventory or inventory

A merchandiser’s balance sheet has a current asset called __________, an item not on a service company’s balance sheet. __________, refers to products that a company owns and intends to sell. _________ cost includes the cost to buy the goods, ship them to the store, and make them ready for sale.

Two to Five Months

How long is the operating cycle for a Department Store

Two to Eight Weeks

How long is the operating cycle for a Grocery Store

Merchandiser’s Operating Cycle

What is this picture showing?

Merchandiser’s Cost Flow for a Single Time Period

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Perpetual inventory system

__________ records cost of goods sold at the time of each sale.

Periodic inventory system

__________ records cost of goods sold at the end of the period.

The cash purchase of merchandise without discount

This entry represents

Accounts	Debit	Credit
Merchandise Inventory	500
——Cash		500

Credit terms

The purchase of goods on credit requires _________. _________ include the amounts and timing of payments from a buyer to a seller.

Credit period

The amount of time allowed before full payment is due is the _________.

Cash discount

Sellers can grant a(n) _________ to encourage buyers to pay earlier.

Purchases discount

A buyer views a cash discount as a(n) _________.

Sales discount

A seller views a cash discount as a(n) __________.

2/10, n/60

What would the credit term be if there is a two percent discount on the invoice if payment is made within ten days or you have to make the full payment without discount in sixty day

4/15, n/30

What would the credit term be if there is a four percent discount on the invoice if payment is made within fifteen days or you have to make the full payment without discount in thirty days?

Discount Period

The buyer can deduct 2% of the invoice amount if payment is made within 10 days of the invoice date. This reduced payment is only for the _________.

Invoice

This form is a(n)

Gross method

The ________ records the purchase at its gross (full) invoice amount.

The credit purchase of merchandise

This entry represents

Accounts	Debit	Credit
Merchandise Inventory	500
——Account Payables		500

Full payment within discount period

This entry represents

Accounts	Debit	Credit
Account Payable	500
——Merchandise Inventory		10
——Cash		490

Full payment after discount period

This entry represents

Accounts	Debit	Credit
Account Payable	500
——Cash		500

Purchases returns

__________ are merchandise a buyer purchases but then returns.

Purchases allowances

__________ refer to a seller granting a price reduction to a buyer of defective or unacceptable merchandise.

Purchases Allowances

This entry represents

Accounts	Debit	Credit
Accounts Payable	30
——Merchandise Inventory		30

Allowance for defective goods

Purchases Returns

These entries Represent

June 1

Accounts	Debit	Credit
Merchandise Inventory	250
——Accounts Payable		250

Purchased goods, terms 2/10, n/60

June 3

Accounts	Debit	Credit
Accounts Payable	50
——Merchandise Inventory		50

Returned goods to seller

June 11

Accounts	Debit	Credit
Accounts Payable	200
——Merchandise Inventory		4
——Cash		196

Paid $200 of goods less $4 discount

FOB shipping point

__________ means the buyer accepts ownership when the goods depart the seller’s place of business. The buyer pays shipping costs and has the risk of loss in transit. The goods are part of the buyer’s inventory when they are in transit because ownership has transferred to the buyer.

FOB destination

__________ means ownership of goods transfers to the buyer when the goods arrive at the buyer’s place of business. The seller pays shipping charges and has the risk of loss in transit. The seller does not record revenue until the goods arrive at the destination.

FOB shipping point

What is this Shipping Term

Shipping Term	Ownership Transfers at	Goods in Transit Owned by	Transportation Cost Paid by
???	Shipping point	Buyer	Buyer Merchandise Inventory # Cash #

FOB destination

What is this Shipping Term

Shipping Term	Ownership Transfers at	Goods in Transit Owned by	Transportation Cost Paid by
???	Destination	Seller	Seller Delivery Expense # Cash #

Transportation-in or freight-in

When a buyer is responsible for paying transportation costs, the payment is made to a carrier or directly to the seller. The cost principle requires that transportation costs of a buyer be part of the cost of merchandise inventory.

Transportation-out or freight-out

When a seller is responsible for paying shipping costs, it records these costs in a Delivery Expense account. Delivery expense, also called __________ is reported as a selling expense in the seller’s income statement.

Itemized Costs of Merchandise Purchases

This table represents

Invoice cost of merchandise purchases	$235,800
Less: Purchases discounts received	(4,200)
Purchases returns and allowances	(1,500)
Add: Cost of transportation-in	$2,300
Total net cost of merchandise purchases	$232,400

Supplementary records or supplemental records

The accounting system described here does not provide separate records (accounts) for total purchases, total purchases discounts, total purchases returns and allowances, and total transportation-in. Many companies collect this information in _________ to evaluate these costs. __________ refer to information outside the usual ledger accounts.

Computation of Gross Profit

This table represents

Net sales (net of discounts, returns, and allowances)	$314,700
Cost of goods sold	$230,400
Gross profit	$84,300

Sales without Cash Discount

Revenue Side: Inflow of Assets

This entry represents

Nov. 12

Accounts	Debit	Credit
Accounts Receivable	1,000
——Sales		1,000

Goods sold on credit [Revenue recognition]

Sales without Cash Discount

Cost Side: Outflow of Assets

This entry represents

Nov. 12

Accounts	Debit	Credit
Cost of Goods Sold	300
——Merchandise Inventory		300

Record cost of Nov. 12 sale [Expense recognition]

Sales Discounts

__________ is a contra revenue account, meaning the __________ account is subtracted from the Sales account when computing net sales. The __________ account has a normal debit balance because it is subtracted from Sales, which has a normal credit balance.

Buyer pays within Discount Period

This entry represents

Nov. 22

Accounts	Debit	Credit
Cash	980
Sales Discounts	20
——Accounts Receivable		1,000

Received payment on Nov. 12 sale less discount

Buyer Pays after Discount Period

This entry represents

Dec. 27

Accounts	Debit	Credit
Cash	1,000
——Accounts Receivable		1,000

Received payment on Nov. 12 sale after discount period.

Sales Returns and Allowances

·       When a return occurs, the seller debits ___________, a contra revenue account to Sales. The ___________ account has a normal debit balance as it is subtracted from Sales.

Buyer Returns Goods: Revenue Side

This entry represents

Dec. 29

Accounts	Debit	Credit
Sales Returns and Allowances	15
——Cash		15

Goods returned from Nov. 12 sale.

Buyer Returns Goods: Cost Side

This entry represents

Dec. 29

Accounts	Debit	Credit
Merchandise Inventory	9
——Cost of Goods Sold		9

Returned goods are added back to inventory.

Buyer Granted Allowance

This entry represents

Nov. 24

Accounts	Debit	Credit
Sales Returns and Allowances	10
——Account Receivable		10

Sales allowance granted

Merchandising Cost Flow in the Accounting Cycle

What is this picture showing?

Shrinkage

__________ is the loss of inventory; it is computed by comparing a physical count of inventory with recorded amounts.

Inventory Shrinkage

This adjusting entry represents

Dec. 31

Accounts	Debit	Credit
Cost of Goods Sold	250
——Merchandise Inventory		250

Adjust for $250 shrinkage

Closing Entries for a Merchandiser

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Multiple-step Income Statement

A(n) __________ details net sales and expenses, and reports subtotals for various types of items. The statement has three main parts: (1) gross profit, which is net sales minus cost of goods sold; (2) income from operations, which is gross profit minus operating expenses; and (3) net income, which is income from operations plus or minus nonoperating items

Selling Expenses

__________ are costs to market and distribute products and services such as advertising of merchandise, store supplies and rent, and delivery of goods to customers.

General and administrative expenses

__________ are costs to administer a company’s overall operations such as office salaries, office equipment, and office supplies.

Multiple-step Income Statement

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Other revenues and gains

__________ commonly include interest revenue, dividend revenue, rent revenue, and gains from asset disposals.

Other expenses and losses

_________ commonly include interest expense, losses from asset disposals, and casualty losses.

Net income

When there are no reportable nonoperating activities, its income from operations is simply labeled __________.

Single-step Income Statement

A(n) __________ lists cost of goods sold as another expense and shows only one subtotal for total expenses. Expenses are commonly grouped into categories.

True

(True or False) Net income is the same in single- and multiple-step income statement, so management chooses the format that best informs users.

Single-step Income Statement

What is this picture showing?

Classified Balance Sheet (Partial) of a Merchandise

What is this picture showing?

False

(True or False) Statement of retained earnings is different for merchandisers and service companies

Acid-test Ratio

The _________, also called quick ratio, is defined as quick assets (cash, short-term investments, and current receivables) divided by current liabilities. It differs from the current ratio by excluding less liquid current assets such as inventory and prepaid expenses that take longer to be converted to cash.

Acid-test Ratio

This equation is for

??? = (Cash and cash equivalent + short-term investment + Current receivables)/Current liabilities

Gross Margin Ratio (or gross profit ratio)

The ________ helps understand this link. It differs from the profit margin ratio in that it excludes all costs except cost of goods sold. The __________ is defined as gross margin (net sales minus cost of goods sold) divided by net sales.

Gross Margin Ratio

This equation is for

??? = (Net sales - Cost of goods sold)/Net sales