Chapter 5 - Financial Accounting

The primary source of revenue for a merchandising company is called ___ revenue or ___.

sales

The total cost of merchandise sold during the period is called cost of ___ ___.

goods sold

The operating cycle of a ___ company is longer than that of a service company.

merchandising

Companies use either a ___ inventory system or a ___ inventory system to account for inventory.

perpetual; periodic

In a ___ inventory system, detailed records are maintained for each purchase and sale.

perpetual

In a perpetual system, the company determines cost of goods sold each time a ___ occurs.

sale

In a ___ inventory system, companies do not keep detailed records of goods on hand.

periodic

In a periodic system, cost of goods sold is determined by a ___ at the end of the accounting period.

physical count

The perpetual system is traditionally used for merchandise with ___ unit values.

high

The perpetual system provides better control over ___ than the periodic system.

inventories

Even under a perpetual system, companies still perform a ___ count at least once a year.

physical inventory

A physical count is needed because of possible ___ or ___ errors.

theft; recording

If employees make errors in recording sales or purchases, the perpetual inventory will be ___.

inaccurate

Purchases may be made using ___ or ___ (on account).

cash; credit

Purchases are normally recorded when goods are ___ from the seller.

received

A purchase ___ should support each credit purchase.

invoice

Freight costs incurred by the buyer are added to ___.

inventory

Freight costs incurred by the seller are recorded as an ___ expense.

operating

Under FOB ___ Point, the buyer pays freight costs.

shipping

Under FOB ___, the seller pays freight costs.

destination

If the buyer pays freight, it increases the cost of ___.

inventory

If the seller pays freight, it increases the seller’s ___ expense.

operating

A purchaser may return goods that are damaged or do not meet specifications. This is called a purchase ___.

return

When the purchaser keeps the goods but receives a reduction in price, it is a purchase ___.

allowance

In a perpetual system, when defective merchandise is returned, the buyer _____ inventory.

credits

Credit terms often allow the buyer to claim a ___ discount for prompt payment.

cash

Credit terms like “2/10, n/30” mean a ___% discount if payment is made within ___ days.

2; 10

The “n/30” means the net amount is due within ___ days.

30

Advantages of purchase discounts: the buyer saves ___, and the seller collects ___ sooner.

money; cash

Passing up a 2/10, n/30 discount is equivalent to paying an annual interest rate of about ___%.

36.5%

Formula for equivalent interest rate = (discount % × 365) ÷ (days difference between discount and full payment).

(2 × 365) ÷ 20 = 36.5%

When a buyer takes a purchase discount, the inventory account is reduced by the amount of the ___.

discount

Sales may be made using ___ or ___ (on account).

cash; credit

Sales revenue is recorded when the performance obligation is ___.

satisfied

The performance obligation is satisfied when goods are ___ from seller to buyer.

transferred

A sales ___ should support each credit sale.

invoice

For each sale, the seller makes ___ journal entries.

two

The first entry records the sale and increases ___.

Answer: Sales Revenue (and Accounts Receivable or Cash)

The second entry records the cost of goods sold and _____ inventory.

reduces

Sales Returns and Allowances is a ___-revenue account to Sales Revenue.

contra

Sales are not directly reduced for returns because doing so would obscure their relative importance between ___.

periods

If goods are returned and not defective, they are recorded at their original ___.

cost

If goods are defective, they are recorded in Inventory at their ___ value.

fair

The cost of goods sold is recorded each time a sale occurs only in a ___ inventory system.

perpetual

In a periodic system, cost of goods sold is determined only at the end of the ___.

accounting period

Sales Discounts are offered to promote ___ payment of receivables.

prompt

______ _______ are a contra-revenue account.

Sales Discount

Net Sales = Sales Revenue − Sales Returns and Allowances − Sales ___.

discounts

Adjusting entries for a merchandising company are generally the same as for a ___ company.

service

One additional adjustment is made to …

make the records agree with the actual inventory on hand.

The adjustment involves both the inventory account and …

the Cost of Goods Sold account.

If the physical count of inventory is less than the recorded balance, Inventory is ___ and Cost of Goods Sold is ___.

credited; debited

If the physical count of inventory is greater than the recorded balance, Inventory is ___ and Cost of Goods Sold is ___.

debited; credited

An adjusting entry corrects the general ledger so that it agrees with the actual inventory on ___.

hand

Closing entries for a merchandising company are similar to those for a service company except they include accounts like ___, ___, and ___.

Sales Revenue; Sales Returns and Allowances; Cost of Goods Sold

The income summary is used to close all temporary ___ and ___ accounts.

revenue; expense

Revenue accounts are closed by ___ them to Income Summary.

debiting

Expense accounts are closed by ___ them to Income Summary.

crediting

After closing, all temporary accounts should have a ___ balance.

zero

A multiple-step income statement shows several steps in determining ___ ___.

net income

Two steps relate to the company’s principal ___ activities.

operating

The multiple-step income statement distinguishes between ___ and ___ activities.

operating; non-operating

The first key item on a multiple-step income statement is ___ ___.

net sales

Net Sales = Sales Revenue − Sales Returns and Allowances − Sales ___.

discounts

Gross Profit = Net Sales − Cost of Goods ___.

sold

The gross profit represents the merchandising profit before deducting ___ expenses.

operating

The gross profit rate is calculated as Gross Profit ÷ …

Net Sales

Operating expenses are subtracted from gross profit to determine ___ from operations.

income

Nonoperating items include revenues and gains and expenses and losses not related to ___ activities.

main operating

Income from operations plus or minus nonoperating items equals ___ ___.

net income

The multiple-step income statement shows all of the following except an ___ activities section.

investing 

Nonoperating sections might include interest revenue, gain on sale of assets, or ___ expense.

interest

An example of a nonoperating gain would be selling equipment at a ___.

profit

IBM was criticized for including “Other gains and losses” in ___ expenses instead of showing them separately.

operating

Investors demanded more accurate classification between operating and ___ items.

non-operating

Accurate classification helps investors judge management’s ability to control …

operating expenses

A single-step income statement subtracts total ___ from total ___.

expenses; revenues

The single-step format is ___ and easier to read.

simpler

One reason for the single-step format is that a company does not realize a ___ until revenues exceed expenses.

profit

The second reason for the single-step format is that it is ___ to understand.

easier

Merchandising companies report inventory as a ___ asset.

current

Inventory appears directly below ___ ___ in the asset section of the balance sheet.

accounts receivable

The amount of inventory helps users evaluate how efficiently the company manages its ___.

merchandise 

A worksheet enables companies to prepare ___ before they journalize and post adjusting entries.

financial statements

The steps in preparing a worksheet for a merchandising company are the same as for a ___ company.

service

The unique accounts for a merchandiser using a perpetual inventory system include ___ and ___ ___.

inventory; costs of goods sold

A worksheet shows trial balance, adjustments, adjusted trial balance, income statement, and ___ ___ columns.

balance sheet

In a periodic system, there is no running record of …

inventory changes

Ending inventory is determined by a ___ count at the end of the period.

physical

Cost of goods sold is not recorded with each sale; instead, it’s calculated at the end of the ___ ___.

accounting period

Purchases of merchandise are recorded in the ___ account.

purchases

Freight-in (shipping costs) are recorded in a separate ___ account.

freight-in

Purchase Returns and Allowances and Purchase Discounts are recorded in their own ___ accounts.

separate

Revenue is recorded when sales are ___.

made

Under the periodic system, the cost of goods sold is computed as:

Beginning Inventory + Purchases − Ending Inventory = ___ ___.

costs of goods sold

No entry is made for cost of goods sold …

at the time of the sale

At period-end, a physical count determines the cost of goods ___ and the cost of goods ___.

on hand; sold

Under both GAAP and IFRS, companies can use either …

perpetual or a periodic inventory system.

The definition of inventories is basically the ___ under GAAP and IFRS.

same

Under both systems, basic accounting entries for merchandising are generally ___.

identical