Unit 8

Question 1

What does a merchandise business do?

Answer 1

Sell inventory

Question 2

What is a retail company?

Answer 2

A type of merchandising business that buys inventory from a wholesaler and resells it at a higher price

Question 3

What are the 2 types of inventory systems? Describe each + their pros and cons

Answer 3

Perpetual inventory system: Inventory is updated whenever a transaction occurs
- Pros: more efficient and reliable, get instant info about quantities/costs of inventory

Periodic inventory system: Inventory is updated at certain times during accounting period (e.g. when decisions are to be made)
- Pros: less expensive to set up in the past because technology was costly

Question 4

Name 3 examples of technology that might be used in a perpetual inventory system

Answer 4

POS terminals
Computerized cash registers
Scanners

Question 5

Which inventory system is most often used by companies?

Answer 5

Perpetual

Question 6

What type of business sells inventory to merchandising companies?

Answer 6

Wholesalers

Question 7

4 reasons for returning inventory

Answer 7

Unsatisfied with inventory (e.g. poor quality, didn’t meet specifications, etc)
Inventory was defective (e.g. broken)
Difficult to resell (low demand)
Competitors offering lower price

Question 8

Define discount

Answer 8

Amount deducted from the price of inventory sold

Question 9

Define purchase discount

Answer 9

Offered to a buyer who makes a purchase on account and pays within the discount period

Question 10

Define quantity discount

Answer 10

Discount on bulk purchases

Question 11

Define purchase allowance

Answer 11

Reduction in the price of unsatisfactory inventory that was purchased (provided as an incentive for the buyer to keep the inventory)

Question 12

What are 5 accounts used to record transactions for a merchandising business? Describe each.

Answer 12

Merchandise inventory (short-term asset)
Cost of goods sold (expense)
Sales (revenue)
Sales discount (contra-revenue)
Sales returns and allowance (contra revenue)

Question 13

What source documents are used to record the sale of inventory?

Answer 13

Cash sales slip
Sales invoice

Question 14

How is profit calculated for a merchandising business?

Answer 14

Net sales - cost of goods sold = gross profit
Gross profit - operating expenses = profit (or loss)

Question 15

How are net sales calculated?

Answer 15

Net sales = sales - sales returns and allowances - sales discounts

Question 16

How is gross profit calculated?

Answer 16

Net sales - cost of goods sold

Question 17

What is the difference between a single-step income statement and a multiple-step income statement?

Answer 17

Single-step income statement: Shows 1 step (revenue - expenses) in determining profit/loss
Multiple-step income statement: Shows several steps in determining profit/loss (used for merchandising business)

Question 18

What is ONE benefit of the single-step income statement and multiple-step income statement?

Answer 18

Single-step: easy to read
Multiple-step: gives more info about the company’s profitability and distinguishes between its operating and non-operating activities

Question 19

How is the Statement of Owner’s Equity prepared for a merchandising business?

Answer 19

In the same way as a service business

Question 20

Where is merchandise inventory recorded on a balance sheet?

Answer 20

Below accounts receivable and above supplies & prepaid expenses

Question 21

What is the one adjusting entry specific to a merchandising business? Why is this adjusting entry required?

Answer 21

Inventory on hand at the end of the fiscal year
WHY: to ensure that inventory records are accurate (no errors / theft)

Question 22

How do you journalize this entry?

Answer 22

DR: Cost of Goods Sold
CR: Merchandise Inventory

Question 23

What are 4 reasons why merchandise inventory might be > than inventory on hand

Answer 23

Inventory was…
Stolen, destroyed, damaged, thrown out

Question 24

What are the 6 accounts specific to merchandising businesses? (these will be listed on the adjusted trial balance)

Answer 24

Merchandise inventory
Sales
Sales discounts
Sales returns and allowances
Freight Out
Cost of Goods Sold

Question 25

Closing entries are made at the end of the accounting period to close the balances of the Temporary Accounts. What are 3 revenue accounts and 2 expense accounts specific to merchandising businesses?

Answer 25

Revenues: Sales, Sales Returns and Allowances, Sales Discounts
Expenses: Cost of Goods Sold, Freight Out

Question 26

What is the ONLY new account listed in the post-closing trial balance for a merchandising business?

Answer 26

Merchandise Inventory