Chapter 5

Question 1

Merchandising Companies

Answer 1

Buy and sell goods rather than perform services as their primary source of revenue

the primary source of revenues is referred to as sales revenue or sales

Question 2

Wholesaler

Answer 2

sell to retailers

Question 3

Retailer

Answer 3

purchase and sell directly to consumers

Question 4

perpetual system

Answer 4

1. maintain detailed records of the cost of each inventory purchase and sale
2. records continuously show inventory that should be on hand for every item
3. company determines cost of goods sold each time a sale occurs

Question 5

periodic system

Answer 5

1. do not keep detailed records of the goods on hand

2. costs of goods sold determined by count at the end of the accounting period

Question 6

advantage of the perpetual system

Answer 6

1. traditionally used for merchandise with high unit values
2. shows the quantity and cost of the inventory that should be on hand at any time
3. provides better control over inventories than a periodic system

Question 7

FOB shipping point

Answer 7

1. ownership of the goods passes to the buyer when the public carrier accepts the goods from the seller
2. buyer pays freight costs

Question 8

FOB Destination

Answer 8

1. Ownership of the goods remains with the seller until the goods reach the buyer
2. seller pays freight costs

Question 9

purchase return

Answer 9

return goods for credit if the sale was made on credit, or for a cash refund if the purchase was for cash

Question 10

purchase allowance

Answer 10

may choose to keep the merchandise if the seller will grant a reduction from the purchase price

Question 11

credit terms

Answer 11

may permit buyer to claim a cash discount for prompt payment

example : 2/10, n/30

Question 12

credit terms advantages

Answer 12

1. purchaser saves money

2. seller shortens the operating cycle by converting the accounts receivable into cash earlier