Question 1

Faust Company uses the perpetual inventory system.Faust sold goods that cost $2,300 for $3,600.The sale was made on account.What is the net effect of the sale on the company's financial statements? (Consider the effects of both parts of this event.)

Accepted Answer

Recording the sale increases assets (accounts receivable) and stockholders' equity (retained earnings) by $3,600. Sales revenue and net income increase. Recording the $2,300 cost of the merchandise decreases assets (merchandise inventory) and stockholders' equity (retained earnings). The expense (cost of goods sold) increases and net income decreases by that same amount. The net effect on assets and stockholders' equity is an increase to each of $1,300 (or selling price of $3,600 ? cost of goods sold of $2,300).

Question 2

[The following information applies to the questions displayed below.]
Sanchez Company engaged in the following transactions during Year 1:
1) Started the business by issuing $42,000 of common stock for cash.
2) The company paid cash to purchase $26,400 of inventory.
3) The company sold inventory that cost $16,000 for $30,600 cash.
"4) Operating expenses incurred and paid during the year, $14,000.
Sanchez Company engaged in the following transactions during Year 2:"
1) The company paid cash to purchase $35,200 of inventory.
2) The company sold inventory that cost $32,800 for $57,000 cash.
"3) Operating expenses incurred and paid during the year, $18,000.
Note: Sanchez uses the perpetual inventory system."
-What is the amount of retained earnings that will be shown on the balance sheet at December 31,Year 2?

Accepted Answer

Net income = Sales ? Cost of goods sold ? Operating expenses +/? Nonoperating items (which are zero here)
Year 1 Net income = $30,600 ? $16,000 ? $14,000 = $600
Year 2 Net income = $57,000 ? $32,800 ? $18,000 = $6,200
Retained earnings at end of Year 2 = Retained earnings at beginning of Year 1 + Net income for Years 1 and 2 ? Dividends (which are zero here)
Retained earnings at end of Year 2 = $0 + $600 + $6,200 = $6,800

Question 3

Flagler Company purchased $4,000 of merchandise on account.Flagler sold the merchandise to a customer for $7,000 cash.What is the increase in gross margin and the net change in cash flow from operating activities as a result of these transactions? (Consider the effects of both parts of this event.)

Accepted Answer

Gross margin = Net sales ? Cost of goods sold
Gross margin = $7,000 ? $4,000 = $3,000
The sale of the inventory generates a cash inflow from operating activities of $7,000. Since it was purchased on account, the purchase of the inventory for $4,000 does not affect the statement of cash flows.

Question 4

[The following information applies to the questions displayed below.]
Sanchez Company engaged in the following transactions during Year 1:
1) Started the business by issuing $42,000 of common stock for cash.
2) The company paid cash to purchase $26,400 of inventory.
3) The company sold inventory that cost $16,000 for $30,600 cash.
"4) Operating expenses incurred and paid during the year, $14,000.
Sanchez Company engaged in the following transactions during Year 2:"
1) The company paid cash to purchase $35,200 of inventory.
2) The company sold inventory that cost $32,800 for $57,000 cash.
"3) Operating expenses incurred and paid during the year, $18,000.
Note: Sanchez uses the perpetual inventory system."
-What is the amount of inventory that will be shown on the balance sheet at December 31,Year 2?

Accepted Answer

Inventory at end of Year 2 = Inventory at beginning of Year 1 + Purchases during Years 1 and 2 ? Cost of goods sold during Years 1 and 2
Inventory at end of Year 2 = $0 + ($26,400 + $35,200) ? ($16,000 + $32,800) = $12,800

Question 5

Middleton Company uses the perpetual inventory system.The company purchased an item of inventory for $130 and sold the item to a customer for $200.How will the sale affect the company's Inventory account?

Accepted Answer

The sale will cause the Inventory account to decrease by $130, the cost of the item sold.

Question 6

[The following information applies to the questions displayed below.]
A company's chart of accounts includes, in part, the following account numbers and corresponding account titles:
 
-Which accounts would affect gross margin?

Accepted Answer

Gross margin is calculated as sales (9) minus cost of goods sold (3).

Question 7

[The following information applies to the questions displayed below.]
A company's chart of accounts includes, in part, the following account numbers and corresponding account titles:
 
-Which accounts would affect operating income?

Accepted Answer

Operating income is the amount of income that is generated from the normal recurring operations of a business. Items that are not expected to recur on a regular basis are subtracted from the operating income to determine the amount of net income. Here, operating income includes sales (9), cost of goods sold (3), transportation-out (4) and selling expense (7). The loss on the sale of the land (8) would not be expected to recur on a regular basis; thus, it does not affect operating income.

Question 8

What happens when merchandise is delivered FOB shipping point?

Accepted Answer

If goods are delivered FOB shipping point, the buyer is responsible for the freight cost.

Question 9

What is the effect of recording the purchase of inventory on account under the perpetual inventory system?

Accepted Answer

The purchase of inventory on account increases assets (merchandise inventory) and liabilities (accounts payable).

Question 10

When using a perpetual inventory system,which of the following events is an asset use transaction?

Accepted Answer

Paying cash for transportation-out decreases assets (cash) and decreases stockholders' equity (retained earnings). Transportation-out is a period cost, which increases expenses and decreases net income.

Question 11

What happens when merchandise is delivered FOB Destination?

Accepted Answer

If goods are delivered FOB destination, the seller is responsible for the freight costs. The seller will record an expense (transportation-out).

Question 12

Leonard Company paid freight costs to have goods shipped to one of its customers.What effect will the payment of these freight costs have on the company's financial statements?

Accepted Answer

Paying for transportation-out decreases assets (cash) and stockholders' equity (retained earnings). It increases expenses (transportation-out), which decreases net income. It is reported as a cash outflow for operating activities.

Question 13

[The following information applies to the questions displayed below.]
A company's chart of accounts includes, in part, the following account numbers and corresponding account titles:
 
-Which accounts would appear on the balance sheet?

Accepted Answer

Cash (1), merchandise inventory (2), and common stock (6) appear on the balance sheet. The remaining accounts appear on the income statement, except for dividends which appear on the statement of changes in stockholders' equity.

Question 14

Howell Company granted a sales allowance of $360 to a customer who was not totally satisfied with the quality of goods received.The customer did not return the goods and had not yet paid for them.Which of the following reflects the effects of this event on the financial statements?

Accepted Answer

Granting a sales allowance to a customer decreases assets (accounts receivable) and stockholders' equity (retained earnings). It decreases revenue and net income. It does not affect the statement of cash flows.

Question 15

Ramirez Company returns merchandise previously purchased on account.It had not yet been paid for.Ramirez uses the perpetual inventory system.Which of the following reflects the effects on the financial statements of only the purchase return?

Accepted Answer

The purchase return will decrease assets (inventory) and liabilities (accounts payable). It will not affect net income or the statement of cash flows.

Question 16

Foote Company was granted a purchase discount of $200 on merchandise the company had purchased a few days ago.Foote uses the perpetual inventory system.Which of the following reflects the effects of this event on the financial statements?

Accepted Answer

A purchase discount reduces the cost of the inventory and the associated account payable on the balance sheet. A purchase discount does not directly affect the income statement or the statement of cash flows.

Question 17

Ballard Company uses the perpetual inventory system.The company purchased $16,000 of merchandise from Andes Company under the terms 2/10,net/30.Ballard paid for the merchandise within 10 days and also paid $500 freight to obtain the goods under terms FOB shipping point.All of the merchandise purchased was sold for $30,000 cash.What is the amount of gross margin that resulted from these business events?

Accepted Answer

Note that the cost of inventory sold is the list price less any purchase returns and allowances and purchase discounts, plus transportation-in costs.
Cost of goods sold = List price of purchase ? Purchase discount + Transportation-in
Cost of goods sold = $16,000 ? ($16,000 × 0.02) + $500 = $16,180
Gross margin = Net sales ? Cost of goods sold
Gross margin = $30,000 ? $16,180 = $13,820

Question 18

What do the credit terms,2/15,n/30 mean?

Accepted Answer

These terms mean the seller will allow a 2 percent cash discount if the purchaser pays cash within 15 days from the date of purchase. The amount not paid within the first 15 days is due at the end of 30 days from date of purchase.

Question 19

What is (are)the term(s)used to describe a discount given to encourage prompt payment?

Accepted Answer

The same cash discount is treated as a sales discount by the seller and as a purchase discount by the buyer.

Question 20

[The following information applies to the questions displayed below.]
Sanchez Company engaged in the following transactions during Year 1:
1) Started the business by issuing $42,000 of common stock for cash.
2) The company paid cash to purchase $26,400 of inventory.
3) The company sold inventory that cost $16,000 for $30,600 cash.
"4) Operating expenses incurred and paid during the year, $14,000.
Sanchez Company engaged in the following transactions during Year 2:"
1) The company paid cash to purchase $35,200 of inventory.
2) The company sold inventory that cost $32,800 for $57,000 cash.
"3) Operating expenses incurred and paid during the year, $18,000.
Note: Sanchez uses the perpetual inventory system."
-What is Sanchez's gross margin for Year 2?

Accepted Answer

Gross margin = Net sales ? Cost of goods sold
Gross margin = $57,000 ? $32,800 = $24,200

Quiz 4: Accounting for Merchandising Businesses