chapter 5

Question 1

perpetual inventory system

Answer 1

• Ongoing tracking of inventory, use Merchandise Inventory account
  -Cost of Goods Sold recorded with each sale

Question 2

Periodic Inventory System

Answer 2

Use Purchases account to record inventory
Costs of Goods Sold recorded at end of accounting period

Question 3

merchandise inventory is

Answer 3

• an asset - normal debit balance
• debit beggining inventory + purchases
• credit cost of goods sold
  = ending inventory

Question 4

purchase discounts (buyer)
periodic buyers vs perpetual

Answer 4

• periodic system credit purchase discounts
• perpetual system credits merchandise inventory

Question 5

Purchase Returns and Allowances (Buyer)

Answer 5

Buyer receives cash or credit for the goods returned
-perpetual system buyer:
DR. Accounts Payable or cash
CR. merchandise inventory to reduce inventory amount
- periodic system - buyer credits purchase return and allowances

Question 6

Journal entry for Sales Returns and Allowances (seller)

Answer 6

For both Inventory systems Seller:
DR. Sales Return and Allowances Account (contra account)
CR. accounts receivable or Cash

If Perpetual Inventory system, second entry is needed to record useable goods added back to inventory.
DR. Merchandise inventory
CR. Cost of goods sold

Question 7

profit calculation for merchandising company

Answer 7

Net sales ( sales - returns, discounts & allowances)
minus Cost of goods sold
= gross profit
minus operating expenses
= profit or loss

Question 8

what is gross profit

Answer 8

sales revenue - cost of goods sold

not the most accurate measurement of profit as operating expenses arent deducted

Question 9

Cost of goods sold

Answer 9

an expense account
debited everytime there is a sale

Question 10

companies cash purchase journal entry

Answer 10

DR. merchandise inventory
CR. cash

Question 11

companies purchase on account journal entry

Answer 11

DR. MI
CR. Accounts payable

Question 12

Control account

Answer 12

The general ledger account that summarizes the subsidiary ledger data
ex: accounts payable, this account is the control account for all the subsidiary ledgers

Question 13

Fob shipping point means:

Answer 13

• Ownership changes from the seller to the purchaser when the goods are provided to the carrier by the seller—the “shipping point.”
• The purchaser pays the freight costs and is responsible for damages.

Question 14

Fob destination means:

Answer 14

Ownership changes from the seller to the purchaser when the goods are delivered by the carrier to the purchaser’s place of business—the “destination.”
The seller pays the freight and is responsible for damages.

Question 15

purchaser journal entry for Fob shipping point
sale 5000
shipping 600

Answer 15

DR. purchases (MI)5000
DR. MI 600
CR. Cash or accounts payable 5600
Shipping costs need to be included into inventory

Question 16

Seller journal entry for fob destination
sale 5000
shipping 600

Answer 16

DR. accounts receivable or Cash 5000
CR. sales revenue 5000

DR. delivery expense 600
CR. cash 600

(buyer only makes an entry for the cost of goods bought)

Question 17

purchase allowance

Answer 17

when the purchaser keeps goods they are unsatisfied with for a discounted price instead of returning.

Question 18

journal entry for purchaser who returned goods

Answer 18

DR. accounts payable or cash
CR. merchandise inventory
(The same for purchase allowance and returns)

Question 19

purchase discount terms

Answer 19

2/10 = 2% discount if payed within 10 days
n/30 = net sales price due within 30 days, interest applied if payed after

Question 20

buyer journal entry to record purchase of inventory with purchase discount

Answer 20

DR. Accounts payable 500
CR. MI 20
CR. Cash 480

merchandise needs to be credited to show the reduced cost of the inventory that was purchased

cash is the tonal that was spend after discount

Question 21

the two entries made for a sale in a perpetual inventory system

Answer 21

1. record revenue
   Dr. Cash or accounts recievable
   Cr. sales revenue
2. record cost of goods sold
   Dr. Cost of goods sold
   Cr. Merchandise inventory

Question 22

Seller journal entry for FOB shipping

Answer 22

seller only records sales revenue, as purchaser covered shipping costs

Question 23

what is a contra account

Answer 23

an account that is deducted from its related account in the financial statements
“normal balances” are opposite of the account the are corresponded to

Question 24

when is sales returns and allowances acount used

Answer 24

used by seller as a contra account to rmake sure sales arent overstated due to returned items or discounts given.

Question 25

term used when referring to buyer journal entries

Answer 25

purchase

Question 26

term used when referring to seller journal entries

Answer 26

sales

Question 27

normal balance of accounts receivable

Answer 27

debit

Question 28

Sales returns and allowances journal entry (seller accepted returned goods)

Answer 28

Dr. Sales returns and allowances Cr. accounts receivable or cash

Question 29

if returned goods can be sold again, what is the required second entry for the seller

Answer 29

Dr. MI Cr. cost of goods sold

Question 30

what type of account is cost of goods sold

Answer 30

Expense account Debit balance

Question 31

how are sales discounts recorded by the seller

Answer 31

sales revenue journal entry is recorded at original sale prices if a sales discount has been applied the seller then has to record loss in revenue - this is done by using sales discounts which is a contra account Dr. cash what was paid by customer Dr. sales discounts for discount Cr. accounts receivable for full amount

Question 32

what are net sales

Answer 32

gross sales minus returns, allowances and discounts

Question 33

what are gross sales

Answer 33

total sales before deducting contra revenue accounts

Question 34

pst is paid by?

Answer 34

the final consumer only

Question 35

sales tax are recorded?

Answer 35

as liabilities and are paid periodically

Question 36

adjusting entry for an overstated MI account

Answer 36

Dr. Cos of goods sold Cr. MI

Question 37

gross profit

Answer 37

net sales minus cost of goods sold

Question 38

what is gross profit margin

Answer 38

Gross profit / Net sales higher number the better

Question 39

what is profit margin?

Answer 39

total Profit / net sales more accurate representation than gross profit as operation expenses have been deducted - Percentage of each dollar in sales that result in profit

Question 40

gross profit

Answer 40

(net) sales - cost of goods sold

Question 41

where is merchandise inventory on the classified balance sheet

Answer 41

current asset immediately under accounts receivable less liquid than notes or cash

Question 42

what is the difference between a purchase discount and a quantity discount in journal entries (for the buyer)

Answer 42

- a quantity discount is a reduction on the initial invoice price, therefore there is not separate entry -purchase discount requires a separate entry to reduce the merchandise inventory by the amount of the discount. this is because after taking the discount, the original inventory cost is now overstated.