Chapter 5

Question 1

An expense account that represents the cost of the actual goods sold.

Answer 1

COSTS OF GOODS SOLD

Question 2

The difference between sales revenue and cost of goods sold

Answer 2

GROSS PROFIT OR GROSS MARGIN

Question 3

Expresses the relationship of gross profit to sales (GROSS PROFIT / SALES)

Answer 3

GROSS PROFIT PERCENTAGE

Question 4

Goods held for resale by a merchandiser

Answer 4

MERCHANDISE INVENTORY

Question 5

One way merchandise inventory is managed: the merchandise account and cost of goods sold account are updated immediately when transactions occur

Answer 5

PERPETUAL INVENTORY SYSTEM

Question 6

One way merchandise inventory is managed: the purchase of merchandise inventory is debited to a temporary account called Purchases. At the end of the accounting period, inventory is counted and the merchandise inventory account is updated and cost of goods sold is calculated.

Answer 6

PERIODIC INVENTORY SYSTEM

Question 7

A type of adjustment for when merchandise is returned to a supplier or damaged in transit; this transaction is recorded as a credit to the Merchandise Inventory account and a debit to Account Payable.

Answer 7

PURCHASE RETURNS AND ALLOWANCES

Question 8

Affects the purchase price of merchandise if payment is made within the time period specified in the supplier’s invoice.

Answer 8

PURCHASE DISCOUNTS

Question 9

The normal selling price of a supplier’s goods to merchandisers.

Answer 9

LIST PRICE

Question 10

What suppliers give to merchandisers that buy a large quantity of goods.

Answer 10

TRACE DISCOUNTS

Question 11

Shipping terms that say the purchaser is responsible for transportation costs

Answer 11

FOB (FREE ON BOARD) SHIPPING POINT

Question 12

Shipping terms that say the seller is responsible for transportation costs.

Answer 12

FOB DESTINATION POINT

Question 13

When merchandise inventory that has been sold is returned to the merchandiser by the customer, this contra account is debited.

Answer 13

SALES RETURN AND ALLOWANCES

Question 14

A contra revenue account records reductions in sales amounts when a customer pays within a certain time period

Answer 14

SALES DISCOUNTS

Question 15

When a physical count of inventory is conducted and a discrepancy is found from theft or deterioration of merchandise inventory for example

Answer 15

SHRINKAGE

Question 16

To record the purchase of merchandise inventory from a supplier on account:

Answer 16

DEBIT: MERCHANDISE INVENTORY
CREDIT: ACCOUNTS PAYABLE

Question 17

To record purchase return and allowances:

Answer 17

DEBIT: ACCOUNTS PAYABLE
CREDIT: MERCHANDISE INVENTORY

Question 18

To record purchase discounts if payment is made within the time period specified in the supplier’s invoice:

Answer 18

DEBIT: ACCOUNTS PAYABLE
CREDIT: MERCHANDISE INVENTORY & CASH

Question 19

To record shipping costs from supplier to merchandiser:

Answer 19

DEBIT: MERCHANDISE INVENTORY
CREDIT: ACCOUNTS PAYABLE OR CASH

Question 20

To record sale of merchandise inventory and cost of the sale:

Answer 20

DEBIT: ACCOUNTS RECEIVABLE OR CASH
CREDIT: SALES

AND

DEBIT: COST OF GOODS SOLD
CREDIT: MERCHANDISE INVENTORY

Question 21

To record sales returns restored to inventory:

Answer 21

DEBIT: SALES RETURNS AND ALLOWANCES
CREDIT: ACCOUNTS RECEIVABLE OR CASH

AND

DEBIT: MERCHANDISE INVENTORY
CREDIT: COST OF GOODS SOLD

Question 22

To record sales returns and allowances (where returns are not restored to inventory):

Answer 22

DEBIT: SALES RETURNS AND ALLOWANCES
CREDIT: ACCOUNTS RECEIVABLE OR CASH

Question 23

To record sales discounts:

Answer 23

DEBIT: SALES DISCOUNTS
DEBIT: CASH
CREDIT: ACCOUNTS RECEIVABLE

Question 24

To record adjustment for shrinkage at the end of the accounting period:

Answer 24

DEBIT: COST OF GOODS SOLD
CREDIT: MERCHANDISE INVENTORY

Question 25

Describes the grouping of expenses based on their basic characteristics (what it is).

Answer 25

NATURE OF AN EXPENSE

Question 26

Describes the grouping of expenses based on their purpose (what they relate to)

Answer 26

FUNCTION OF AN EXPENSE

Question 27

The generally accepted accounting principle that requires financial statements to report all relevant information about the operations and financial position of the entity.

Answer 27

FULL DISCLOSURE PRINCIPLE