unit 4

Question 1

Service organizations sell time to

earn revenue.

Answer 1

Examples: Accounting firms, law firms,

and plumbing services

Question 2

Merchandising companies sell products to

earn revenue.

Answer 2

Examples: sporting goods, clothing, and auto parts stores

Question 3

Perpetual systems

Answer 3

updates accounting
records for each
purchase and sale of
merchandising

Question 4

Periodic systems

Answer 4

Updates records for
purchase and sale of
merchandise only at the
end of the accounting
period

Question 5

Credit Terms

Answer 5

A deduction from the invoice price granted

to induce early payment of the amount due.

Question 6

Purchase Discounts

Answer 6

2/10,n/30
Discount
Percent
Number of
Days
Discount Is
Available
Otherwise,
Net (or All)
Is Due in 30
Days
Credit
Period

Question 7

Purchase Return:

Answer 7

Merchandise returned by the purchaser to the

supplier.

Question 8

Purchase Allowance:

Answer 8

A price reduction to the buyer of defective or

unacceptable merchandise.

Question 9

Each sales transaction for a seller of

merchandise involves two parts:

Answer 9

1.Revenue received
in the form of an
asset from a
customer.
2.Recognition of the
cost of merchandise
sold to a customer.

Question 10

Sales discounts on credit sales can benefit a seller by

Answer 10

decreasing the delay in receiving cash and reducing future

collection efforts.

Question 11

Shrinkage:

Answer 11

adjustment to reflect loss of merchandise:

Question 12

New revenue recognition rules require reporting of sales at

net amount expected. Adjusting entries required for:

Answer 12

1. Expected sales discounts
2. Expected returns and allowances (revenue side)
3. Expected returns and allowances (cost side)

Question 13

Gross margin ratio =

Answer 13

Net sales - Cost of goods sold divided by

Net sales

Question 14

Acid-test

ratio

Answer 14

Cash + Short-term investments + Receivables/
Current liabilities

A common rule of thumb is the acid-test ratio should have a
value of at least 1.0 to conclude a company is unlikely to
face liquidity problems in the near future.

Question 15

Gross
margin
ratio

Answer 15

Net sales - Cost of goods sold/
Net sales

Percentage of dollar sales available to
cover expenses and provide a profit.

Question 16

Merchandise inventory includes

Answer 16

all goods that a
company owns and holds for sale, regardless of where
the goods are located when inventory is counted.

Question 17

Internal Controls and Taking a Physical Count

Answer 17

 Most companies take a
physical count of
inventory at least once
each year.

 When the physical count
does not match the
Merchandise Inventory
account, an adjustment must
be made.

Question 18

Good internal controls over count include:

Answer 18

1. Pre-numbered inventory tickets.
2. Counters have no inventory responsibility.
3. Counters confirm existence, amount, and
   quality of inventory item.
4. Second count is taken.
5. Manager confirms all items counted.

Question 19

Management decisions in accounting for inventory

involve the following:

Answer 19

1. Items included in inventory and their costs.
2. Costing method (specific identification, FIFO, LIFO,
   or weighted average).
3. Inventory system (perpetual or periodic).
4. Use of market values or other estimates.

Question 20

Sales discount

Answer 20

Term used by a seller to describe a cash discount granted to buyers who pay within the discount period.

Question 21

Credit period

Answer 21

Time period that can pass before a customer’s payment is due.

Question 22

Discount period

Answer 22

Time period in which a cash discount is available and the buyer can make a reduced payment.

Question 23

FOB(free on board) destination

Answer 23

the seller pays shipping costs and the buyer accepts ownership of goods at the buyer’s place of business

Question 24

FOB(free on board) shipping point

Answer 24

the buyer pays shipping costs and accepts ownership of goods when the seller transfers goods to the carrier

Question 25

Gross profit

Answer 25

Net sales minus cost of goods sold; also called gross margin.

Question 26

Merchandise inventory

Answer 26

Goods that a company owns and expects to sell to customers; also called merchandise or inventory.

Question 27

Purchase discount

Answer 27

Term used by a purchaser to describe a cash discount granted to the purchaser for paying within the discount period.

Question 28

Cash discount

Answer 28

Reduction in the price of merchandise granted by a seller to a buyer when payment is made within the discount period.

Question 29

Trade discount

Answer 29

Reduction from a list or catalog price that can vary for wholesalers, retailers, and consumers.

Question 30

Sales returns refer | to

Answer 30

merchandise that customers return to the seller after a sale.

Question 31

Sales allowances | refer to

Answer 31

reductions in the selling price of merchandise sold to customers.

Question 32

International Accounting Standards Board (IASB)

Answer 32

independent group (consisting of individuals from many countries), issues International Financial Reporting Standards (IFRS) that identify preferred accounting practices. These standards are in many ways similar to, but sometimes different from, U.S. GAAP. Differences between U.S. GAAP and IFRS have been decreasing in recent years as the FASB and IASB pursued a process aimed at reducing inconsistencies.

Question 33

generally accepted accounting principles (GAAP).

Answer 33

GAAP aims to make information relevant, reliable, and comparable. Relevant information affects decisions of users. Reliable information is trusted by users. Comparable information aids in contrasting organizations.

Question 34

Accounting Principles

Answer 34

measurement principle Revenue recognition Expense recognition Full disclosure

Question 35

measurement principle( also called the cost principle)

Answer 35

prescribes that accounting information is based on actual cost (with possible later adjustments to market). Cost is measured on a cash or equal-to-cash basis. This means if cash is given for a service, its cost is measured by the cash paid. If something besides cash is exchanged (such as a car traded for a truck), cost is measured as the cash value of what is given up or received. The cost principle emphasizes reliability and verifiability, and information based on cost is considered objective. Objectivity means that information is supported by independent, un-biased evidence; it is more than an opinion. Later chapters introduce fair value

Question 36

revenue recognition principle

Answer 36

prescribes that revenue is recognized (1) when goods or services are provided to customers and (2) at the amount expected to be received from the customer. The amount received is usually in cash, but it is also common to receive a customer’s promise to pay at a future date, called credit sales. (To recognize means to record it.)

Question 37

expense recognition principle(also called the matching principle)

Answer 37

prescribes that a company record the expenses it incurred to generate the revenue reported. The principles of matching and revenue recognition are key to modern accounting.

Question 38

Accounting Assumptions There are four accounting assumptions.

Answer 38

going-concern assumption monetary unit assumption business entity assumption time period assumption

Question 39

going-concern assumption

Answer 39

means that accounting information reflects a presumption that the business will continue operating instead of being closed or sold. This implies, for example, that property is reported at cost instead of, say, liquidation value, which assumes closure.

Question 40

monetary unit assumption

Answer 40

means that we can express transactions and events in monetary, or money, units. Money is the common denominator in business. Examples of monetary units are the dollar in the United States and the peso in Mexico.

Question 41

time period assumption

Answer 41

presumes that the life of a company can be divided into time periods, such as months and years, and that useful reports can be prepared for those periods.

Question 42

business entity assumption

Answer 42

means that a business is accounted for separately from other business entities, including its owner. A business entity can take one of three legal forms: proprietorship, partnership, or corporation.

Question 43

Market value

Answer 43

price of unit