Question 1

Accounting terminology
Listed below are nine technical accounting terms introduced in this chapter:
Gross profit
Gross profit rate
General ledger
Cost of goods sold
Physical inventory
Subsidiary ledger
Perpetual inventory system
Periodic inventory system
Inventory shrinkage
Each of the following statements may (or may not)describe one of these technical terms.In the space provided below each statement,indicate the accounting term described,or answer "None" if the statement does not correctly describe any of the terms.
________ a.An approach to accounting for inventories and the cost of goods sold used primarily in small businesses with manual accounting systems.
________ b.A reason why perpetual inventory records may not be entirely accurate.
________ c.The difference between the revenue earned by selling merchandise and the cost of goods sold.
________ d.Gross profit divided by average total stockholders' equity.
________ e.An accounting procedure used in both perpetual and periodic inventory systems.In a perpetual system,this procedure brings to light the amount of inventory shrinkage.In a periodic system,it is the basis for computing the cost of goods sold.
________ f.An accounting record showing the individual items comprising the balance of a general ledger account.
________ g.The accounting record in which transactions initially are recorded.

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Listed below are nine technical accounting...

Question 2

Inventory systems
Bookmarks,Inc.sells used books at its store in the resort community of Lake Bryn Mawr.The owner maintains a large inventory of used books purchased from estate sales,flea markets,and customers.During the tourist seasons of summer and winter,the store is exceptionally busy with customers.Each customer usually makes small purchases ranging in amount from one to twenty dollars.What type of inventory system would you recommend to the owner of Bookmarks,Inc.? Explain the reasoning behind your advice.

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Bookmarks,Inc.sells used books at its store...

Question 3

A customer purchased merchandise for $400,which cost the seller $200.The customer was dissatisfied with some of the goods and thus returned $100 worth of merchandise and received a cash refund.
(a)What journal entries should the seller make when the merchandise is sold and at the time of the return? Assume that the seller uses a perpetual inventory system.
(b)If the seller uses a periodic inventory system,what entries would be made?

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Question 4

Effects of transactions upon the accounting equation
Listed below are selected transactions of Simon's,a retail store that uses a perpetual inventory system:
(a)Purchased merchandise on account.
(b)Made an entry to recognize the revenue from a sale of merchandise on account.(Ignore the cost of goods sold. )
(c)Recognized the cost of goods sold relating to the sale in Transaction b.
(d)Collected in cash the account receivable from the customer in Transaction b.
(e)Following the taking of a physical inventory at year-end,made an adjusting entry to record a normal amount of inventory shrinkage.
Indicate the effects of each of these transactions upon the elements of the company's financial statements.Organize your answer in tabular form,using the column headings shown below.(Notice that the cost of goods sold is shown separately from all other expenses. )Use the code letters I for increase,D for decrease,and NE for no effect.The answer for Transaction a is provided as an example.

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Listed...

Question 5

Gross profit
The table below contains information from a recent annual report of Molloy,Inc.(Dollar amounts are stated in millions. )Fill in the missing amounts.

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The table below contains information from...

Question 6

Net sales and gross profit
Mayflower Supply House had gross sales revenue of $1,700,000,cost of goods sold of $950,000,sales returns and allowances of $52,500,and allowed sales discounts of $30,000.
Compute for the year:

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Mayflower Supply House...

Question 7

If costs of goods sold is $560,000 and its gross profit rate is 20%,what is the gross profit?

Accepted Answer

Gross profit is calculated as sales minus the cost of goods sold. Given a gross profit rate of 20%, it means that gross profit is 20% of sales. To find the sales, we can set up the equation: Sales - Cost of Goods Sold = Gross Profit, where Gross Profit = 20% of Sales. Rearranging the equation to solve for Sales gives us Sales = Cost of Goods Sold / (1 - Gross Profit Rate). Plugging in the numbers: Sales = $560,000 / (1 - 0.20) = $560,000 / 0.80 = $700,000. Therefore, Gross Profit = Sales - Cost of Goods Sold = $700,000 - $560,000 = $140,000.

Question 8

Inventory systems
Indicate whether you would expect each of the following businesses to maintain a perpetual or a periodic inventory system.Explain the reasoning behind your answers:
(a)A jewelry store.
(b)A roadside vegetable stand.

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Indicate whether you would expect each...

Question 9

Perpetual inventory system: basic entries
Renato Company uses a perpetual inventory system.A partial chart of accounts is shown below,followed by a series of merchandising transactions.Indicate the accounts that should be debited and credited in recording each transaction.(Ignore sales taxes. )

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Renato Company uses...

Question 10

At the beginning of 2018,Wilson Stores has an inventory of $300,000.Because sales growth was strong during 2018,the owner wants to increase inventory on hand to $450,000 at December 31,2018.If net sales for 2018 are expected to be $2,600,000,and the gross profit rate is expected to be 35%,compute the cost of the merchandise the owner should expect to purchase during 2018.

Accepted Answer

Beginning inventory = $300,000
Desired ending inventory = $450,000
Cost of goods sold = Net sales x Gross profit rate
= $2,600,000 x 35% = $910,000
Cost of goods available for sale = Beginning inventory + Purchases
= $300,000 + Purchases
Purchases = Cost of goods available for sale - Beginning inventory
= $1,160,000 ($450,000 + $910,000) - $300,000 
= $860,000

Therefore, the owner should expect to purchase merchandise worth $860,000 in 2018.

Question 11

Journal entries for merchandising transactions
Shown below is a partial chart of accounts for Main Street Markets,followed by a series of merchandising transactions.The company uses a perpetual inventory system,records purchases at net cost,and records sales at the full invoice price.Sales taxes are collected on all sales,and the sales tax liability is recorded immediately.Freight charges on inbound shipments are recorded in the Inventory account.  Indicate the accounts that should be credited in recording each transaction by placing the appropriate account number(s)in the space provided.

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Shown below is...

Question 12

If cost of goods sold is $360,000 and the gross profit rate is 40%,what is the gross profit?

Accepted Answer

Gross profit is calculated by deducting cost of goods sold from revenue. Gross profit rate is the percentage of gross profit out of revenue. 
Let's assume revenue is X.
Gross profit rate = Gross profit / Revenue
 40% = Gross profit / X
Gross profit = 0.4X
We know cost of goods sold = X - Gross profit
Substituting the given values and solving, we get:
$360,000 = X - 0.4X
$360,000 = 0.6X
X = $600,000
Therefore, Gross profit = 0.4X = 0.4($600,000) =$240,000. Option A is the correct answer.

Question 13

Subsidiary ledgers
Explain the nature of subsidiary ledgers,and give two specific examples.For each of these examples,explain (1)the unit of organization within this ledger,and (2)the usefulness of this ledger in business operations.

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Explain the nature of subsidiary ledgers,and...

Question 14

Periodic inventory system
Soundview Centre uses a periodic inventory system.At the end of 2018,the accounting records include the following information:
  Compute the following for 2018:

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Soundview Centre uses a periodic...

Question 15

Perpetual inventory system: transactions and closing entries
Danny's Wholesale Company uses a perpetual inventory system.A partial chart of accounts is shown below,followed by a series of merchandising transactions.Indicate the accounts that should be debited and credited in recording each transaction.(Ignore sales taxes. )

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Danny's...

Question 16

Subsidiary ledgers
Listed below are several merchandising transactions of Siegel's Garden Center,a garden supply store.
(a)Purchased merchandise from Bayview Wholesale on account.
(b)Sold merchandise for cash.
(c)Sold merchandise on account to Dom's Landscaping Co.
(d)Paid the account payable to Bayview Wholesale.
(e)Collected the account receivable from Dom's Landscaping Co.
Among the accounting records maintained by Siegel's are subsidiary ledgers for inventory,accounts receivable,and accounts payable.
For each of the five transactions,you are to indicate any subsidiary ledger (or ledgers)to which the transaction would be posted.Use the code:
Inv = Inventory subsidiary ledger
AR = Accounts receivable subsidiary ledger
AP = Accounts payable subsidiary ledger
Also indicate whether each posting causes the balance in the subsidiary ledger account to increase or decrease.Organize your answer in tabular form as illustrated below.The answer for transaction a is provided as an example.

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Listed below are several merchandising transactions...

Question 17

Prepare journals entries for the following,assuming the company uses a perpetual inventory method and records purchases at their net amounts.

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Question 18

Using gross profit rates
Explain how the gross profit rate for a particular product is determined.How would you expect the manager of a large department store to use these gross profit rates in deciding which products to feature in the store's window displays and in determining the location of various types of merchandise within the store? Explain.

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Explain how the gross...

Question 19

Inventory systems
Briefly distinguish between a perpetual inventory system and a periodic inventory system.

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Briefly distinguish between a perpetual inventory...

Question 20

Periodic inventory system
Armstrong Creation uses a periodic inventory system.During the current year,the company purchased merchandise at a cost of $245,000.You are to compute the cost of goods sold under each of the following alternative assumptions:

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Armstrong Creation uses a periodic...

Quiz 6: Merchandising Activities

Gross profit The table below contains information from a recent annual report of Molloy,Inc.(Dollar amounts are stated in millions. )Fill in the missing amounts.

Net sales and gross profit Mayflower Supply House had gross sales revenue of $1,700,000,cost of goods sold of $950,000,sales returns and allowances of $52,500,and allowed sales discounts of $30,000. Compute for the year:

If costs of goods sold is $560,000 and its gross profit rate is 20%,what is the gross profit?

Inventory systems Indicate whether you would expect each of the following businesses to maintain a perpetual or a periodic inventory system.Explain the reasoning behind your answers: (a)A jewelry store. (b)A roadside vegetable stand.

Perpetual inventory system: basic entries Renato Company uses a perpetual inventory system.A partial chart of accounts is shown below,followed by a series of merchandising transactions.Indicate the accounts that should be debited and credited in recording each transaction.(Ignore sales taxes. )

If cost of goods sold is $360,000 and the gross profit rate is 40%,what is the gross profit?

Subsidiary ledgers Explain the nature of subsidiary ledgers,and give two specific examples.For each of these examples,explain (1)the unit of organization within this ledger,and (2)the usefulness of this ledger in business operations.

Periodic inventory system Soundview Centre uses a periodic inventory system.At the end of 2018,the accounting records include the following information: Compute the following for 2018:

Prepare journals entries for the following,assuming the company uses a perpetual inventory method and records purchases at their net amounts.

Inventory systems Briefly distinguish between a perpetual inventory system and a periodic inventory system.

Periodic inventory system Armstrong Creation uses a periodic inventory system.During the current year,the company purchased merchandise at a cost of $245,000.You are to compute the cost of goods sold under each of the following alternative assumptions: