Chapter 5 Flashcards Preview

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Flashcards in Chapter 5 Deck (73):

Q 5.21: Using the periodic inventory system requires more record keeping than the perpetual inventory system.

False --


Q 5.22: In a ________ inventory system, the cost of goods is determined only at the end of the accounting period.



Q 5.23: What is the result if cost of goods sold is subtracted from net sales revenue?

Gross Profit


Q 5.24: What will be the result if gross profit exceeds operating expenses?

Net Income


Q 5.25: In a service enterprise, to find the net income, operating expenses are subtracted from

Service Revenue


Q 5.26: An inventory system that determines cost of goods sold only at the end of the accounting period is called a

periodic inventory system


Q 5.27: Adding beginning inventory to the cost of goods purchased will give you

the cost of goods available for sale


A department store uses a perpetual inventory system. At year-end, the balance in the merchandise inventory account is $2.5 million. Assuming that the inventory records have been maintained properly, a year-end physical inventory

will probably indicate less than $2.5 million in merchandise on hand


Q 5.29: Gross profit is calculated by

deducting Cost of Goods Sold from Sales Revenue


Q 5.30: When gross profit equals operating expenses, a merchandiser will earn an operating income of

$0 --


Q 5.31:  An enterprise that sells merchandise directly to a retailer is called a



Q 5.32: Why doesn’t a service company need to measure the cost of goods sold?

Service companies do not sell goods.


Q 5.33: Which of the following are NOT a primary source of revenue for a wholesaler? Select all that apply.

the sale of plant assets the company owns
No alt text provided for this image B service revenue
No alt text provided for this image C investment income


Q 5.34: Which of the following would NOT be considered a merchandising company?

a barber shop


Q 5.35: Which statement is true about a perpetual inventory system?

Accounting records continuously disclose the amount of inventory.


Q 5.36: What is the revenue account of a merchandising enterprise generally called?

sales revenue or sales


Q 5.37: The cost of goods sold is determined each time a sale occurs under a(n)

perpetual inventory system


Q 5.38: Gross profit equals the difference between sales revenue and operating expenses.



Q 5.39: Some companies may prefer to use a periodic inventory system because they

prefer not to keep detailed records of inventory on hand


Q 5.40: The difference between wholesalers and retailers is that wholesalers are merchandising companies and retailers are service companies.



Q 5.41: A high profit margin suggests that there is a good return on each dollar of sales.



Q 5.42: Goods that have been transferred from the seller to the buyer are usually considered

earned sales revenues


Q 5.43: Under a perpetual inventory system, what account would a company debit when it purchases merchandise for resale?

the Inventory account


Q 5.44: Clarkson Construction buys $800 of merchandise on account from Hillside Tools. Hillside Tools offers credit terms of 2/10, n/30. If Clarkson Construction pays the total amount due within 10 days, its final cost will be



Q 5.45: Sales Returns is a(n)

contra revenue account


Q 5.46: Gross profit divided by ________ equals gross profit rate.

net sales ---


Q 5.47: To calculate the profit margin, you divide net income by net sales.



Q 5.48: To record a credit sale, a merchandising company records sales revenue under Accounts Receivable.



Q 5.49: Barrow Company purchased merchandise from Perth Company with freight terms of FOB shipping point. The freight costs will be paid by the



Q 5.50: The gross profit rate is

gross profit divided by net sales


Merchandising companies that purchase and sell directly to consumers are called ____.



Merchandising companies that sell to retailers known as___



The primary source of revenues for merchandising companies is the sale of merchandise, often referred simply as ____.

Sales revenue or Sales.


What are the two categories of expenses for a merchandising company?

Cost of goods sold.
Operating Expenses.


The ______ is the total cost of merchandise sold during the period. This expense is directly related to the revenue recognized from the sale of goods.

Cost of goods sold.


Flow of costs for a merchandising company

Beginning Inventory + Cost of goods purchased = Goods available for sale.
As goods are sold , they are assigned to cost of goods sold. (the goods not sold by the end of the accounting period represent ending inventory.)


Companies use one of two systems to account for inventory: _____ or _____

Perpetual inventory system ; Periodic inventory system.


Perpetual system

Companies maintain detailed records of the cost of each inventory purchase and sale. These records perpetually show the inventory that should be on hand for every item.


Under a ________, a company determines the cost of goods sold EACH TIME A SALE OCCURS.

Perpetual inventory system.


Periodic Inventory System

Companies do not keep detailed inventory records of the goods on hand throughout the period. They determine the cost of goods sold ONLY AT THE END OF THE ACCOUNTING PERIOD. - that is, periodically. At that point the company takes a physical inventory count to determine the cost of goods on hand.


What steps are necessary to determine the cost of goods sold under a periodic inventory system?

1. Determine the cost of goods on hand at the beginning of the accounting period.
2. Add it to the cost of goods purchased.
3. Subtract the cost of goods on hand at the end of the accounting period.


What are some advantages of the perpetual inventory system?

Ideal for companies that sell merchandise with high unit values (such as automobiles, furniture and major home appliances)
- The growing use of computers and electronic scanners enables more companies to install perpetual inventory systems.
- The records continuously show the quantity and cost of the inventory that should be on hand at any given time.
- Provides better control over inventories than a periodic system. What the company can count the goods at any time


Companies record Cash purchases by an _____ in Inventory an a ____ in Cash.

Increase (Debit) ; decrease (credit)


Each purchase should be supported by a _____, which indicates the total purchase price and other relevant information.

Purchase invoice.


Purchases of assets for use and not for resale, such as supplies, equipment and similar items are recorded as _____ rather than _____

Debit supplies ; Debit Inventory


Under the perpetual inventory system, companies record purchases of merchandise for resale in the _____ account.

(debit) Inventory account.


What is FOB

Free On Board


____ means that the seller places the goods FOB the carrier, and the buyer pays the freight costs.

FOB Shipping point.


_____ means that the seller places the goods FOB to the buyer's place of business, and the seller pays the freight.

FOB Destination.


Freight costs incurred by buyer

When buyer pays the transportation costs, these are part of the cost of purchasing inventory. (inventory is increased, debited)


Freight costs incurred by seller

Incurred on outgoing merchandise are an operating expense to the seller. These costs increase an expense account titled FREIGHT-OUT or Delivery Expense.


Purchase Return

A sale refund of credit or cash.


Purchase allowance

The purchaser may choose to keep the merchandise if the seller is willing to grant a reduction of the purchase price.


Purchase discount

The credit terms of a purchase discount may permit the buyer to claim a cash discount for prompt payment.
(This incentive offers advantages to both parties) The buyer saves money, and the seller is able to shorten Operating cycle by converting the accounts receivable into cash.


What does 2/10, n/30 mean?

it reads "two - ten, net thirty" ; it means that a 2% cash discount may be taken on the invoice price, less ("net of") any returns or allowances, if payment is made within 10 days of the next month. (the discount period) Otherwise, the invoice price, less any returns or allowances is due 30 days from the invoice date.


the discount period.

credit payments done within 10 days


net 30

means the remaining amount due after subtracting any returns and allowances and partial payments.


Paying interest

Passing up the discount may be viewed as paying interest.


Business Document

Every sales transaction should be supported by this so that it provides written evidence of the sale.


Cash register documents

provide evidence of cash sales. A sales invoice provides support for each sale.


Contra revenue account

Sales returns and allowances is a contra revenue account to sales revenue which means it is offset against a revenue account on the income statement.


Profit margin

Net income / net sales


Gross profit rate

Gross profit / net sales


How to get cost of goods sold in a periodic inventory system?

Beginning Inventory + Cost of goods Purchased = Cost of goods available for sale - Ending Inventory =
Cost of goods sold.


Example of Other Revenues and Gains

Interest Revenue, Dividend Revenue, Rent Revenue, Gain


Examples of Other Expenses and Losses

Interest Expense, Casualty Loss, Loss of property, plant and equipment, Theft or accidents.


What are net sales?

The company deducts sales returns and allowances and sales discounts (both contra accounts ) from sales revenue in the income statement.


Gross profit

The excess of net sales over the cost of goods sold. We deduct Cost of Goods sold from Sales revenue.


Quality of Earnings Ratio:

Earnings have high quality if they provide a full and transparent depiction of how a company performed. Net Cash Provided by Operating Activities / (Net income)


Which of the following statements about periodic inventory system is true?

Companies determine cost of goods sold at the end of the accounting period.


Which of the following items does not result in an adjustment in the inventory account under a perpetual system?

A payment of freight costs for goods shipped to a customer. ( The payment of freight costs for goods shipped to a customer is an operating expense of the seller company. The freight-out expense is NOT included in the inventory costs of the company and hence does not result in adjustment to the inventory account)


The perpetual inventory system

under the perpetual system the inventory account is updated perpetually after each sale; A purchase of merchandise increases the inventory account; a return of merchandise inventory to supplier decreases the inventory account as it constitutes purchase return;The payment of freight costs for goods shipped to a customer is an operating expense of the seller company. The freight-out expense is NOT included in the inventory costs of the company and hence does not result in adjustment to the inventory account)


The following sales accounts normally have a debit balance:

Sales discounts, Sales returns and allowances.