Accounting Chapter 6

Accounting Chapter 6

Merchandise inventory is reported as a(n)
current asset
During the month, merchandise is sold for $80,500 cash and for $119,000 on account. The cost of merchandise sold is $101,500. What is the amount of gross profit?
$98,000
The operating cycle of a business is comprised of
a. purchase activity.
b. sales activity.
c. All of these choices are correct.
d. collection activity.

Correct answer: C

Cost of merchandise sold is reported as a(n)
expense
The Banks Company sold merchandise on account for $35,000 with terms 2/10, n/30. The cost of merchandise sold was $27,600. If the invoice is paid in the discount period, what is the amount of cash received by Banks Company?
$34,300
Garden Company purchased merchandise on account from Parker Company for $88,000 with terms 1/15, net 45. Garden Company returned $12,000 of the merchandise and received full credit from Parker Company. If Garden Company pays within the discount period, what is the amount of cash required for payment?
$75,240
Garden Company sold merchandise to Mamouth Industries on account for $3,450 with terms 2/10, n/30. The cost of merchandise sold was $1,850. Garden Company refunded Mamouth Industries $900 for returned merchandise. The cost of merchandise sold was $600. Which of the following will be recorded by Mamouth Industries in the journal entry for the return using the perpetual inventory system?
Credit to Merchandise Inventory, $882
Credit terms are terms for
when the payments for merchandise are to made
In the multiple-step income statement, cost of merchandise sold is subtracted from
sales
Gross profit is sales
less cost of merchandise sold
Determine the income from operations using the following information:

Sales
$680,200

Cost of merchandise sold
504,000

Selling expenses
50,400

Administrative expenses
25,000

(Gross profit – operating expenses)

$100,800
Sales is equal to sales
less (sales returns and allowances plus sales discounts)
The first closing entry for a merchandising business will include which of the following?
Sales
After the first two closing entries have been posted, Income Summary has a debit of $153,690 and a credit of $98,475. Which of the following is true?
Net loss equals $55,215.
The inventory records of Global Company indicate that $76,800 of merchandise should be on hand at the end of the month. The physical inventory indicates that $74,900 is actually on hand. The journal entry to adjust inventory shrinkage will include
a debit to Cost of Merchandise Sold for $1,900

Feedback:
Cost of Merchandise Sold 1,900
Merchandise Inventory 1,900

After the second closing entry is posted, Income Summary is equal to
net income or loss
The following financial statement data for the year ending December 31 for Aero Company is shown below.

Sales $600,000
Total assets:
Beginning of year 380,000
End of year 420,000

1.50
A change in the ratio of sales to assets from 2.0 to 1.8 would indicate
an unfavorable trend in using assets to generate sales
The numerator in the ratio of sales to assets is
sales
When using the periodic inventory system, the first closing entry will include a
debit to Merchandise Inventory equal to the end-of period physical inventory amount
Operating Cycle
The process by which a company spends cash, generates revenues, and receives cash either at the time the revenues are generate or later by collecting an accounts receivable.
Gross Profit
Sales – Cost of merchandise
Merchandise inventory
Merchandise on hand (not sold) at the end of an accounting period
Perpetual inventory system
each purchase and sale of merchandise is recorded in the inventory account and related subsidiary ledger
Periodic inventory system
Inventory does not show the amount of merchandise available for sale and the amount sold
Physical inventory
used to determine the cost of merchandise on hand at the end of the period and the cost of merchandise sold during the period
Credit terms
Terms for when payments for merchandise are to be made
FOB Destination
The ownership of the merchandise may pass to the buyer when the buyer receives the merchandise
Income from operations
Determined by subtracting operating expenses from gross profit
Selling expenses
are incurred directly in the selling of merchandise
Administrative expenses
are incurred in the administration or general operation of the business
Inventory shrinkage
The physical inventory on hand at the end of the accounting period is usually less than the balance of Merchandise Inventory
Ratio of Sales of Assets
Sales / Average Total Assets
Sales-______________=GrossProfit
cost of merchandise sold
Merchandise Inventory account balance – physical merchandise inventory on hand =
___________
Inventory shrinkage
Sales/averagetotalassets=_______________
Ratio of sales to assets
Determine whether each of the following characteristics relates to a merchandising or service business.
a. At year end, the company holds merchandise inventory that was not sold during the year.
b. The company’s financial statements do not list cost of merchandise.
c. The company’s largest current asset is inventory that is listed on the company’s
balance sheet.
a. Merchandising
b. Service
c. Merchandising
Determine whether each of the following companies is a merchandising or service business.
a. Peters Paralegals’ revenue consists of mainly revenue from providing advice to clients, which is billed at an hourly rate.
b. Crawford Insurance Co. provides health and home insurance for clients, which is billed at a monthly rate.
c. Fire Armor has a high inventory turnover for the year for its No Spark Fire Strips.
a. Service
b. Service
c. Merchandising
Determine whether each of the following companies is a merchandising or service
business.
a. Classic Carpets’ Income Statement shows net income as gross profit less other operating expenses.
b. Chef Express provides restaurants with professional chefs to improve recipes.
c. Kittens Inc. sells cat accessories to large retailers at a large discount.
a. Merchandising
b. Service
c. Merchandising
Jeff’s Bikes had sales on account of $3,900 and cash sales of $1,200. If the company’s cost of the merchandise was $1,100, what is the company’s gross profit?
$4,000; [($3,900 + $1,200) – $1,100]
A company had a gross profit of $4,500. If the cost of the merchandise was $2,150, what were the company’s total sales?
$6,650; ($4,500 + $2,150)
Torti Co. had cash sales of $2,760 and sales on account of $8,200. The company’s gross profit at the end of the year totaled $5,590. What was the cost of the merchandise for Torti Co.?
$5,370; [($2,760 + $8,200) – $5,590]
A company’s manager would like to know how many of a certain product is on hand in order to fulfill a large upcoming order. If the manager can pull up a report to show the inventory on hand at any time, what kind of inventory system does the business use?
Perpetual inventory system because the information is up to date
Before preparing the balance sheet at year end, a company must count all inventory on hand. To find the cost of the merchandise sold, the accountants compare the inventory at the beginning of the year to the amount of inventory counted at the end of the year and purchases during the year. Does the company operate using a perpetual or periodic inventory system?
Periodic inventory system because the company must calculate the cost of merchandise sold
A company records the sales and purchases of merchandise as the transactions occur. The accountant also reviews the totals regularly to check the totals among journals. Does the company use a perpetual or periodic inventory system?
Perpetual inventory system because the information is updated as the transactions occur
Tools & More orders $40,000 of merchandise on account from Hammer Supply. Hammer Supply accepts the order by sending an invoice with the terms 2/10, n/30. Tools & More is considering taking the discount, but would have to borrow funds in order to pay within the discount period. The bank is charging a 5% annual interest rate. Assume a 360-day year.
a. What are the savings for Tools & More if it takes advantage of the discount? Round answers to the nearest whole dollar.
b. What would Tools & More’s interest rate be for the remainder of the credit period if the company does not take advantage of the discount? Round to the nearest whole percentage.
A.
Discount (2% × $40,000) $800
Interest ($39,200 × 5% × 20) 109
Savings from discount $691

B.
36%; 2% × (360 days/20 days)

U.S. Anchors ordered $24,000 of merchandise on account. The company receives an invoice on March 3 with the credit terms 3/15, n/45 from the supplier. To pay the amount owed during the discount period, U.S. Anchors would need to borrow funds at a 6% annual interest rate. Assume a 360-day year.
a. How much would U.S. Anchors save if the company pays by March 18? Round answers to the nearest whole dollar.
b. What would the interest rate be for the remainder of the credit period if the company does not take advantage of the discount? Round to the nearest whole percentage.
A.
Discount (3% × $24,000) $720 Interest ($23,280 × 6% × 30/360) 116 Savings from discount $604

B. 36%; 3% × (360 days/30 days)

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