Chapter 5

Question 1

List and describe the operating cycle of a merchandising business:

Answer 1

• It begins when the company purchases inventory from an individual or business, called a vendor
• The company sells the inventory to a customer
• Finally, the company collects cash from customers

Question 2

Define Cost of Goods Sold

Answer 2

-The cost of the merchandise inventory that the business has sold to customers

Question 3

Define Gross Profit and how is it calculated?

Answer 3

• Excess of net sales revenue over cost of goods sold
• The extra amount the company receives from the customer over what the company paid to the vendor
• Calculated by: Net Sales Revenue-COGS

Question 4

What is the difference between the period and perpetual inventory systems?

Answer 4

• Periodic inventory system: requires businesses to obtain a physical count of inventory to determine the quantities on hand (Ex. Restaurants and small retail stores)
• Perpetual inventory system: keeps a running computerized record of merchandise inventory; that is the number of inventory units and the dollar amounts associated with the inventory are perpetually (constantly) updated

Question 5

Using the perpetual system, Journalize for:

a) the purchase of merchandise inventory of $1,000 on account with the terms of 2/10 or n/30
b) the payment of the merchandise inventory within the discount period.

Answer 5

• a) Debit Merchandise Inventory $1,000 and Credit Accounts Payable $1,000
  b) Debit Accounts Payable $1,000, Credit Merchandise Inventory $20 and Cash $980

Question 6

Using the perpetual system, Journalize for:

a) the purchase of merchandise inventory of $1,000, with related freight charge of $100, on account with the terms of 2/10 or n/30. Terms of shipment are FOB shipping point and the seller prepays the freight charge
b) the payment of the merchandise inventory within the discount period.

Answer 6

• a) Debit Merchandise Inventory $1,100 and Credit Accounts Payable $1,000 and cash $100
• b) Debit Accounts Payable $1,000 and Credit Cash $980 and Merchandise Inventory $20

Question 7

Using the perpetual system, Journalize for:

a) the sale of merchandise inventory of $1,000 on account with the terms of 2/10 or n/30. Cost of goods sold is $550
b) the customer makes payment within the discount period.

Answer 7

• a) Debit Accounts Receivable $980 and Sales Revenue $980 then Debit COGS $550 and credit Merchandise Inventory $550
• b) Debit Cash $980, Credit Accounts Receivable $980

Question 8

Name five accounts that a merchandiser might have on the adjusted trial balance that needs to be closed out that a service business does not have on an adjusted trial balance:

Answer 8

-Merchandise Inventory, Estimated Returns Inventory, Refunds Payable, Sales Revenue, Cost of Goods Sold, Delivery Expense, and Sales Discount Forfeited

Question 9

Briefly describe the difference between the single-step and multi-step income statement.

Answer 9

• The single step income statement groups all revenues and expenses together without calculating other subtotals; there is no gross profit report
• The multi step income statement lists several important subtotals. In additions to net income, it reports gross profit and operating income

Question 10

What is the formula for gross profit percentage?

Answer 10

• Gross profit percentage measures the profitability of each sales dollar above the cost of goods sold
• Calculated by: Gross Profit/Net Sales Revenue

Question 11

If net sales are $100,000 and gross profit is $25,000, what is the gross profit percentage?

Answer 11

• GP%= GP/NS
• GP%=25,000/100,000
• GP%= .25 or 25%

Question 12

How do you calculate COGS?

Answer 12

-COGS= Beginning Merchandise Inventory+Purchases- Ending Merchandise Inventory