Chapter 5

Question 1

What is the cost of goods sold?

Answer 1

The total cost of goods sold during the period.

Question 2

Sales revenue - Cost of goods sold =?

Answer 2

Gross profit.

Question 3

Describe the operating cycle of a service-based company and a merchandising-based company?

Answer 3

Merchandising:
Cash—> buy inventory —–> Sell inventory ——> accounts rec. —–> cash

Question 4

What is a perpetual inventory system?

Answer 4

• maintain detailed records of the cost of each inventory purchase and sale.
• records continuously show the inventory that is on hand per item.
• COST OF GOODS SOLD IS DETERMINED EVERY SALE.

Question 5

Gross profit - operating expenses= ?

Answer 5

Net income/ loss

Question 6

What are the advantages of perpetual opposed to periodic?

Answer 6

*Perpetual is typically used for items that cost a lot per unit, and it is easier to control inventory this way.

Question 7

What is the periodic system of accounting?

Question 8

In perpetual inventory, the purchase invoice should support each ________ purchase.

Answer 8

credit purchase.

Question 9

If something is an invoice you know the item was purchased on ________?

Answer 9

account.

Question 10

What is FOB shipping point?

- what happens to the finances in these situations?

Answer 10

• The BUYER adds the freight costs to the inventory
  ( Freight- in)

Question 11

What is FOB destination?

- what happens to the finances in these situations?

Answer 11

The freight costs are incurred by the seller and are registered as an OPERATING EXPENSE (freight-out)

Question 12

For returns:

• Cash purchases are returned for ______?
• Credit purchases are returned for _____?

Answer 12

• Cash

- Credit

Question 13

Assume Sauk Stereo returned goods costing 300$ to PW audio supply, What would the journal entry look like? (perspective of Sauk Stereo)

Answer 13

Account Payable: 300

Inventory: 300

Question 14

The example: 2/10, n/30 equates to what?

Answer 14

These are credit terms indicating that if the amount due is paid within 10 days a 2% discount will be made.
OTHERWISE, the amount is due in 30 days.

Question 15

What do the credit terms:

1. ) 1/10 EOM
2. ) n/10 EOM

Answer 15

1. ) 1% discount if paid within the first 10 days of the next month.
2. ) net amount due within the first 10 days of the next month.

Question 16

Describe how to make a purchase discount entry given the following information: (buyer)

• 3500 purchase.
• 7/10. n/30

Answer 16

Account payable: 3500
Inventory: 70 (3500 x .7 = 70)
Cash: 3430

Question 17

Describe how to make a purchase discount entry given the following information:

• 3500 purchase.
• Payment made on 30th day of month.

Answer 17

Account Payable: 3500

Cash: 3500

Question 18

How do you record a sale in a perpetual inventory system?

Answer 18

#1 Accounts receivable or Cash: xx
                               Sales Revenue:     xx

#2    Cost of Goods sold exp. xx
                                   inventory:       xx

Question 19

What would be the entry for the return of inventory that was sold for $300 and purchased for 140?

Answer 19

#1   Sales and return allowance: 300
                     Account Receivable:   300

#2    Inventory: 140
             Cost of Goods sold: 140

Question 20

What would the journal entry look like on discount purchase for a seller? ( 3500) 2/10, n/30?

Answer 20

Cash: 3430
Sales discount: 70
Accts. Receivable: 3,500

Question 21

What are the four most important components of a net income statement?

Answer 21

1. ) gross profit
2. ) Income after operational expense
3. ) income before taxes.
4. ) net income.

Question 22

Describe the order of items listen on the multi-step income statement?

Answer 22

1. ) Sales rev.
2. ) (less) Sales Discount + Returns
   - ———————————————————
   - ——————————————————————–
   * 3.) Net Sales:
   - ——————————————————————-
   - ———————————————————
3. ) (Less): Cost of goods sold
   - ———————————————————
   - ———————————————————
   * 5.) Gross Profit
   - ———————————————————-
   - ———————————————————
4. ) (Less) Other operating expenses
   - ———————————————————
   - ———————————————————
   * 7.) Income after operating expense
   - ———————————————————
   - ———————————————————
5. ) Other rev’s/ gains
6. ) (Less) other losses
   - ———————————————————
   - ———————————————————
   * 10.) Income before taxes.
   - ———————————————————
   - ———————————————————
7. ) (Less) Tax expense:
   - ———————————————————-
   - ———————————————————
   * 12.) Net Income

Question 23

What is the formula for Gross profit rate?

Answer 23

Gross Profit: Net Sales - Cost of goods sold / Net Sales

Question 24

What is the formula for Profit margin?

Answer 24

Net income: sales rev - (sales discount + returns) / Net sales.

Question 25

What is the quality of earnings ratio?

Answer 25

It provides proof that sales and purchases occurred.