Chapter 4

Question 1

Differentiate between service businesses and merchandising businesses.

Answer 1

Merchandising businesses generate revenue by selling goods and service businesses are what they sound like, they provide a service.

Question 2

___________ businesses sell their goods to other businesses, while __________ businesses sell goods to the final consumer.

Answer 2

wholesale

retail

Question 3

When do retailers recognize revenue?

Answer 3

When they sell their products

Question 4

Inventory is _________, which means businesses constantly buy and sell and it changes throughout the year.

Answer 4

cyclical

Question 5

How is the inventory relayed on the income statement and balance sheet?

Answer 5

Products sold during the period is on the income statement and is called cost of goods sold.

Ending inventory (an asset) is on the balance sheet.

Question 6

What are costs of goods sold?

Answer 6

The price the selling company paid for the products that were sold during the period.

Question 7

Give the equation for cost of goods available.

Answer 7

Beginning inventory balance + inventory purchased during the period = cost of goods available

Question 8

________ inventory systems are more accurate than a _________ inventory system.

Answer 8

perpetual

periodic

Question 9

What is a perpetual inventory system?

Answer 9

Inventory account is updated continually throughout the accounting period.

Question 10

What is a periodic inventory system?

Answer 10

Updates inventory balance only at the end of the accounting period.

Question 11

What is the term for lost or stolen inventory?

Answer 11

shrinkage

Question 12

How can companies determine an amount of shrinkage?

Answer 12

By performing a physical count of their inventory on hand and comparing it to the amount of inventory balance in the accounting records.

Question 13

What is the difference between revenue and costs of goods sold?

Answer 13

Costs of goods sold is the amount that the retailer purchased their inventory for. Revenue is the amount of money that they made off of the sale of their inventory.

They are both reported on the income statement.

Question 14

______ _________ demonstrates a business’s ability to sell its products at a price higher than they paid for them.

Answer 14

gross profit

Question 15

How is operating income calculated?

Answer 15

Operating expenses - gross profit (gross margin) = operating income

Question 16

_________ _________ represents a business’s profitability from its core business operations.

Answer 16

operating income

Question 17

What are 4 nonoperating or peripheral activities that show up on the income statement?

Answer 17

+ Interest revenue
- Interest expense
+ Gains
- Losses

Question 18

What is the name for the expense that represents the portion of a business’s profit that is paid to the gov’t?

Answer 18

income tax expense

Question 19

If a company sells land for more than its cost, the difference in sales price and cost is called a ______.

Answer 19

gain

Question 20

What’s the difference between revenue and a gain?

Answer 20

A gain happens when you earn money from something outside of what you got into business to do. However, they both increase net income.

Question 21

Gain is a _________ _____ account.

Answer 21

stockholder’s equity

Question 22

What items indicate that the business activity are not part of their normal scope of business?

Answer 22

nonoperating activities

Question 23

How is gross profit (gross margin) calculated?

Answer 23

Revenue - cost of goods sold = gross margin

Question 24

How is operating income calculated?

Answer 24

gross margin - operating expenses = operating income

Question 25

What is the name of the expense that is reported when inventory is sold?

Answer 25

cost of goods sold

Question 26

Briefly describe the multi-step income statement.

Answer 26

Revenue
- COGS
= Gross Profit
- Operating Expenses
= Operating Income
+/- Nonoperating Expenses (Gains, losses, interest rev, interest exp)
- Income Tax Expense
= Net Income