Chapter 5

Question 1

Retailers

Answer 1

Merchandising companies that purchase and sell directly to consumers

Question 2

Wholesalers

Answer 2

Merchandising companies that sell to retailers

Question 3

Sale/sale revenue

Answer 3

Primary source of revenues for merchandising companies is the sale of merchandise

Question 4

Cost of goods sold

Answer 4

total cost of merchandise sold during the period

Question 5

Operating cycle

Answer 5

of merchandising com pay is LONGER than that of service company

Question 6

Flow of costs-Perpetual inventory system

Answer 6

Companies maintain detailed records of the cost of each inventory purchase and sale

Question 7

Purchase invoice

Answer 7

total purchase price and other relevant information

Question 8

Freight cost: FOB shipping point

Answer 8

The seller places the goods free on board the carrier, and the buyer pays the freight cost (Debit inventory to buyer)

Question 9

Freight cost: FOB destination

Answer 9

The seller places the goods free on board to the buyers place of business, and the seller pays the freight cost (Debit operating expense to seller)

Question 10

Purchase return

Answer 10

Customer wasn’t satisfied with good.

Get credit or cash back

Question 11

Purchase allowance

Answer 11

Purchaser choses to keep merchandise if the seller is willing to grand reduction in price

Question 12

Purchase Discounts

Answer 12

Claim cash discount for prompt payment (advantage for both parties)

Question 13

Credit terms

Answer 13

specify the amount of cash discount and time period during which it is offered

Question 14

2/10

Answer 14

2% cash discount if paid in 10 days

Question 15

1/10 EOM

Answer 15

1% cash discount available if paid with in the first 10 days of next month

Question 16

n/30

Answer 16

Net amount in 30 days??

Question 17

Paying interest

Answer 17

If discount is passed up it is equivalent to paying an interest rate

Question 18

Sales Returns Allowances (Seller)

Answer 18

transactions where the seller either accepts goods back from purchaser (return) or grants a reduction (allowance0

Question 19

Contra accounts:

Answer 19

accumulated depreciation and sales, returns, allowances

Question 20

Single-Step income statement

Answer 20

Total expense-Total revenue=net income

Question 21

Multiple- Step income statement (more useful)

Answer 21

highlights components of net income

1. gross profit
2. income from operations
3. net income

Question 22

Gross Profit Ratio

Answer 22

Gross profit(sales revenue-cost of goods) /net sales=%
decrease in ratio implies
1. selling products with lower mark ups
2. increased competition leads to lower selling price
3. company is forced to pay higher prices to its suppliers without being able to pass these cost to consumers

Question 23

Profit Margin Ratio

Answer 23

Net income/ Net sales
higher than 1=good- using conservative techniques
Lower than 1=bad-using aggressive acc techniques

Question 24

Profit Margin Ratio #2

Answer 24

Net cash provided by operating activities/ net income

above 1=good below 1=bad

Question 25

Gross profit=

Answer 25

net sales-cost of goods

Question 26

Income from operations=

Answer 26

Gross profit-operating expense

Question 27

Net income (multiple income statement)=

Answer 27

Income from operations-other expenses + other revenues

Question 28

Net sales=

Answer 28

Sales Revenue- Sales Returns/Allowances/Discounts