Question 1

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 as Revenue - Cost of Goods Sold (COGS). Since we don't have the revenue information here, we can't directly calculate gross profit. However, we are given the gross profit rate, which is the percentage of revenue that is gross profit.

So, if gross profit rate is 40%, that means 40% of revenue is gross profit and 60% of revenue is COGS.

We can set up an equation:

Gross Profit Rate = Gross Profit / Revenue

0.40 = Gross Profit / Revenue

We know COGS is $360,000, which is also 60% of revenue.

So:

0.60 x Revenue = $360,000

Revenue = $600,000

Now that we know revenue, we can calculate gross profit:

Gross Profit = Revenue x Gross Profit Rate

Gross Profit = $600,000 x 0.40

Gross Profit = $240,000

Therefore, the answer is A, $240,000.

Question 2

Note to instructor: The following exercise requires students to use gross profit rates in a manner not specifically illustrated in the chapter. We view this as an exercise in critical thinking and, as such, it is more challenging than the typical exercise. Part d requires an expository answer. Some instructors may choose to omit part d.
Gross profit rates a practical application
Your store sells computers and software. The average computer sells for $13,500, but the customer buying a computer also buys an average of $7,500 in software. You earn only 10% gross profit rate on sales of computers, but you make a 40% gross profit rate on software. You currently are selling 150 computers per month.
(a) What is the total amount of your monthly gross profit? $________________
(b) To increase sales, you are thinking about selling computers at cost ($12,150.) This would be the "cheapest price in town," and should attract more customers. You expect each customer who buys a computer to also buy $7,500 worth of software. Under these assumptions, how many computers must you sell each month in order to earn the same amount of gross profit as you are earning now?
(c) Assume that as a result of reducing the sales price of computers to cost ($12,150), you are able to sell 250 computers each month, and that each customer now buys $8,500 worth of software. What will be the total amount of your monthly gross profit?
(d) Assume that you achieve the results specified in part c (250 sales transactions per month, including an average of $8,500 in software). Would you consider the policy of selling computers at cost successful or unsuccessful? Explain specifically why this strategy is working out favorably or unfavorably.

Accepted Answer

The answer of Note to instructor: The following exercise requires...

Question 3

Periodic inventory system
Armstrong Creation uses a periodic inventory system. During the current year, the company purchased goods at a cost of $245,000. You are to compute the cost of goods sold under each of the following alternative assumptions: $$\begin{array} { | l | l | l | } 
\hline & & \text { Cost of Goods Sold } \
\hline \text { A } & \text { No beginning inventory; ending inventory } \$ 18,000 \ldots \ldots \ldots \ldots \ldots \ldots & \$ \
\hline \text { B } & \text { Beginning inventory } \$ 15,000 \text {; no ending inventory } \ldots \ldots \ldots \ldots \ldots \ldots & \$\ 
\hline \text { C } & \text { Beginning inventory } \$ 12,000 \text {; ending inventory, } \$ 9,000 \ldots \ldots \ldots & \$ \
\hline \text { D } & \text { Beginning inventory } \$ 11,000 \text {; ending inventory } \$ 17,000 \ldots \ldots \ldots \ldots & \$ \
\hline & & \$ \
\hline
\end{array}$$

Accepted Answer

The answer of Periodic inventory system
Armstrong Creation uses a periodic...

Question 4

Bremmer uses a periodic inventory system and the following information is available:
 $\begin{array} { | l | l | } 
\hline \text { Sales } & \$ 230,400 \
\hline \text { Inventory - Beginning } & 21,200 \
\hline \text { Inventory - Ending } & 19,800 \
\hline \text { Purchases } & 132,200 \
\hline
\end{array}$

-What is the cost of goods sold?

Accepted Answer

The cost of goods sold (COGS) is calculated based on the inventory at the beginning of the period, plus purchases during the period, minus the inventory at the end of the period. Without specific numbers provided for these components, it's not possible to directly calculate COGS or explain why $133,600 is the correct answer. However, in a typical scenario, if $133,600 is identified as the correct choice, it would be based on applying the formula: COGS = Beginning Inventory + Purchases - Ending Inventory.

Question 5

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 goods and the cost of goods sold.
d. Gross profit divided by average total shareholders' 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.

Accepted Answer

The answer of Accounting terminology
Listed below are nine technical accounting...

Question 6

Pet Foods Plus purchased bagged dog food at an invoice price of $6,000 and terms of 2/10, n/30. Half of the bags had been damaged in shipment and delivery was refused. If Pet Foods Plus pays the remaining amount of the invoice within the discount period, the amount paid should be:

Accepted Answer

The answer of Pet Foods Plus purchased bagged dog food...

Question 7

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: 
$\begin{array}{|l|l|}
\hline\text { (a) Net sales. } & \$\underline{\quad\quad} \
\hline\text { (b) Gross profit. } & \$\underline{\quad\quad} \
\hline\text { (c) Gross profit rate. } &\underline{\quad\quad}\% \
\hline
\end{array}$

Accepted Answer

The answer of Net sales and gross profit
Mayflower Supply House...

Question 8

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.) $$\begin{array} { | l | l | l | l | } 
\hline 1 & \text { Cash } & 50 & \text { Sales } \
\hline 2 & \text { Accounts Receivable } & 60 & \text { Cost of Goods Sold } \
\hline 5 & \text { Inventory } & \text { XX } & \text { All other expense accounts } \
\hline 30 & \text { Accounts Payable } & & \
\hline
\end{array}$$ $$\begin{array} { | l | l | c | c | } 
\hline &{ \text { Tranfactions } } & \begin{array} { c } 
\text { Accounte(s) } \
\text { Debited }
\end{array} & \begin{array} { c } 
\text { Account(s) } \
\text { Credited }
\end{array} \
\hline & \text { Exarnple: Sold goods for cash } & 1,60 & 50,5 \
\hline \text { A } & \text { Purchared goods on accourt } & & \
\hline \text { B } & \text { Sold goods on accourt } & & \
\hline \text { C } & \text { Collected cash from the customer in transaction A } & & \
\hline \text { D } & \text { Collected cash from the customer in trarsaction B } & & \
\hline \text { E } & \begin{array} { l } 
\text { The physical irventory at year-end disclosed } \
\text { a nomal amount of irventory shrirkage }
\end{array} & & \
\hline
\end{array}$$

Accepted Answer

The answer of Perpetual inventory system: basic entries
Renato Company uses...

Question 9

Subsidiary ledgers
Listed below are several merchandising transactions of Siegel's Garden Center, a garden supply store.
(a) Purchased goods from Bayview Wholesale on account.
(b) Sold goods for cash.
(c) Sold goods 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. $$\begin{array} { | c | c | c | } 
\hline & \text { Subsidiary } & \text { Effect upon subsidiary } \
\hline \text { Transaction } & \text { Ledger(s) } & \text { Account Balance } \
\hline \text { A } & \text { Inv } & \text { Increase } \
& \text { AP } & \text { Decrease[Increase] } \\hline \mathrm{B} & \
\hline \mathrm{C} & \
\hline \mathrm{D} & \
\hline \mathrm{E} & \
\hline

\end{array}$$

Accepted Answer

The answer of Subsidiary ledgers
Listed below are several merchandising transactions...

Question 10

If Bounder Dog Supplies, Inc purchased inventory at $2,200 list price and the terms were 3/10 n/30, what would be the value associated with the inventory if payment was made within 10 days?

Accepted Answer

The value associated with the inventory would be $2,134 because Bounder Dog Supplies, Inc. would take advantage of a 3% discount for paying within 10 days. The discount would be $2,200 * 0.03 = $66, so the payment would be $2,200 - $66 = $2,134.

Question 11

World of Sound is a small retail business that specializes in the sale of top-of-the-line sound systems. This year, the store has begun to carry the Surround Sound manufactured by Carp Co. Thus far, World of Sound has recorded the following transactions involving the Surround Sound
5 May Purchased 18 units at a unit cost of $2,400
18 May Purchased 15 additional units at $2,550 each
12 June Sold 19 units to the Davies Theater

-If World of Sound uses a perpetual inventory system, the journal entry to record the sale on 12th February would include which of the following?

Accepted Answer

If World of Sound uses a perpetual inventory system, the cost of goods sold is debited at the time of sale for the cost of the goods sold. Therefore, the journal entry should include a debit to the Cost of Goods Sold for $45,750. Option B is incorrect because it suggests a credit to Cost of Goods Sold, which is incorrect. Option C is incorrect because it suggests a credit to purchases which has already been recorded earlier. Option D is also incorrect because it suggests a debit to inventory that would increase the inventory value instead of reducing it.

Question 12

. Periodic inventory system
Soundview Centre uses a periodic inventory system. At the end of 2010, the accounting records include the following information:
 $\begin{array}{|l|r|}
\hline \text { Inventory, 31 December 2009 } & \$ 23,100 \
\hline \text { Inventory, 31 December 2010 } & \$ 15,900 \
\hline \text { Net sales } & \$ 318,000 \
\hline \text { Purchases } & \$ 183,000 \
\hline
\end{array}$ Compute the following for 2010: $\begin{array}{|l|l|}
  \hline \text {a) Cost of goods sold.  } &\$\underline{\quad\quad}\
\hline  \text { b) Gross profit. } &\$\underline{\quad\quad}\
\hline 
\end{array}$

Accepted Answer

The answer of . Periodic inventory system
Soundview Centre uses a...

Question 13

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. $$\begin{array} { | l | r | r | } 
\hline & 2009 & 2010 \
\hline \text { Net sales } & \$ 28,800 & \$ 32,200 \
\hline \text { Cost of goods sold } & ? & \$ 16,600 \
\hline \text { Gross profit } & \$ 12,200 & ? \
\hline
\end{array}$$

Accepted Answer

The answer of Gross profit
The table below contains information from...

Question 14

At the beginning of 2013, Wilson Stores has an inventory of $300,000. Because sales growth was strong during 2013, the owner wants to increase inventory on hand to $450,000 at December 31, 2013. If net sales for 2013 are expected to be $2,600,000, and the gross profit rate is expected to be 35%, compute the cost of the goods the owner should expect to purchase during 2013.

Accepted Answer

The answer of At the beginning of 2013, Wilson Stores...

Question 15

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.

Accepted Answer

The answer of Inventory systems
Indicate whether you would expect each...

Question 16

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.) $$\begin{array} { | l | l | l | l | } 
\hline 1 & \text { Cash } & 50 & \text { Sales } \
\hline 2 & \text { Accounts Receivable } & 60 & \text { Cost of Goods Sold } \
\hline 5 & \text { Inventory } & 99 & \text { Income Summary } \
\hline 30 & \text { Accounts Payable } & & \
\hline 40 & \text { Retained Earnings } & & \
\hline
\end{array}$$ \(\begin{array}{|l|l|l|l}
\hline & { \text { Transartions } } & \begin{array} { c } 
\text { Accounts(s) } \
\text { Debited }
\end{array} & \begin{array} { c } 
\text { Account(g) } \
\text { Credited }
\end{array} \
\hline & \text { Example: Sold goods for cash } & 1,60 & 50,5 \
\hline \text { A } & \text { Purchased goods on account } & & \
\hline \text { B } & \text { Sold goods on account } & & \
\hline \text { C } & \text { Paid the supplier of the goods in transaction A } & & \
\hline \text { D } & \text { Collected cash from the customer in transaction B } & & \
\hline \text { E } & \begin{array}{l}
\text { The physical inventory taken at year-end } \
\text { disclosed a normal amount of inventory shrinkage }
\end{array} & & \
\hline \text { F } & \text { Made an entry to close the revenue account } & & \
\hline \text { G } & \begin{array}{l}
\text { Made an entry at year-end to close the Cost of } \
\text { Goods Sold account }
\end{array} & & \
\hline \text { H } & \begin{array}{l}
\text { Closed the Income Summary account at the end of } \
\text { an unprofitable year }
\end{array} & &\
\hline
\end{array}\)

Accepted Answer

The answer of Perpetual inventory system: transactions and closing entries
Danny's...

Question 17

Bremmer uses a periodic inventory system and the following information is available:
 $\begin{array} { | l | l | } 
\hline \text { Sales } & \$ 230,400 \
\hline \text { Inventory - Beginning } & 21,200 \
\hline \text { Inventory - Ending } & 19,800 \
\hline \text { Purchases } & 132,200 \
\hline
\end{array}$

-What is the gross profit?

Accepted Answer

The answer of Bremmer uses a periodic inventory system and...

Question 18

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 Transportation-in account. $$\begin{array} { | l | l | l | l | } 
\hline 1 & \text { Cash } & 50 & \text { Sales } \
\hline 2 & \text { Accounts Receivable } & 51 & \text { Sales Discounts } \
\hline 5 & \text { Inventory } & 52 & \text { Sales Returns \& Allowances } \
\hline 30 & \text { Accounts Payable } & 60 & \text { Cost of Goods Sold } \
\hline 35 & \text { Sales Taxes Payable } & 62 & \text { Transportation-in } \
\hline 39 & \text { Income Taxes Payable } & \text { XX } & \text { All other expense account } \
\hline
\end{array}$$ Indicate the accounts that should be credited in recording each transaction by placing the appropriate account number(s) in the space provided.

Accepted Answer

The answer of Journal entries for merchandising transactions
Shown below is...

Question 19

Effects of transactions upon the accounting equation
Listed below are selected transactions of Simon's, a retail store which uses a perpetual inventory system:
(a) Purchased goods on account.
(b) Made an entry to recognize the revenue from a sale of goods 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. +

Accepted Answer

The answer of Effects of transactions upon the accounting equation
Listed...

Question 20

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

Accepted Answer

The answer of Inventory systems
Briefly distinguish between a perpetual inventory...

Quiz 6: Merchandising Activities

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

Pet Foods Plus purchased bagged dog food at an invoice price of $6,000 and terms of 2/10, n/30. Half of the bags had been damaged in shipment and delivery was refused. If Pet Foods Plus pays the remaining amount of the invoice within the discount period, the amount paid should be:

If Bounder Dog Supplies, Inc purchased inventory at $2,200 list price and the terms were 3/10 n/30, what would be the value associated with the inventory if payment was made within 10 days?

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.

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