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Exam 4: Accounting for Merchandising Businesses

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Question 61

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Costs charged to the Merchandise Inventory account are product costs.

A) True
B) False

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Question 62

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Net income is not affected by a purchase of merchandise.

A) True
B) False

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Question 63

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Explain the difference between "transportation-in" and "transportation-out." Also, indicate whether each is a product cost or period cost, and in which account the costs are recorded.

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

The beginning inventory plus cost of goods sold equals the cost of goods available for sale during the period.

Indicate whether each of the following statements is true or false.________ a)A multistep income statement separates product from period costs.________ b)A single-step income statement shows the computation of gross margin.________ c)Interest is normally shown as a separate item on the multistep income statement.________ d)The treatment of interest on the multistep income statement is consistent with the treatment of interest on the statement of cash flows.________ e)Gains and losses are included in operating income on a multistep income statement.

Discuss the major differences between a perpetual inventory system and a periodic inventory system.

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?

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

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?

Merchandising businesses include retail companies and manufacturing companies.

Indicate how each event affects the elements of financial statements. Use the following letters to record your answer in the box shown below each element. You do not need to enter dollar amounts. If an event increases one account and decreases another account equally within the same element (such as an asset exchange event), record I/D. If an event has no impact on the element, record NA.Increase = I Decrease = D Not Affected = NAA customer returned goods to Wetzel Company that had been purchased for $60 on account. The goods had originally cost Wetzel $35. Wetzel credited the customer's account for the return. (Consider the effects of both parts of this event.)

With a perpetual inventory system, assets and stockholders' equity increase by the amount of the gross margin when inventory is sold. (Consider the effects of both parts of this event.)

Darlington Company entered into the following business events during its first month of operations. The company uses the perpetual inventory system.1) The company purchased $12,500 of merchandise on account under terms 2/10, n/30.2) The company returned $1,200 of merchandise to the supplier before payment was made.3) The liability was paid within the discount period.4) All of the merchandise purchased was sold for $18,800 cash.What is the gross margin that results from these four transactions?

The current year income statements for the Alpha Company and the Omega Company appear below: Required:Prepare common size income statements for the Alpha Company and the Omega Company.What is the gross margin percentage for each company?What is the net income percentage for each company?Briefly comment on the pricing policies of each company as well as the ability to control expenses. Disregarding the difference in size, which company appears to be doing a better job?

Star Company recognized $500 of cost of goods sold. Note that Star is only recording the cost of goods sold part of the transaction and not the sales revenue. Star uses the perpetual inventory system. Which of the following answers reflects the effect of recognizing the cost of goods sold on the financial statements?

How do gains and losses differ from revenues and expenses? How are they similar?

Garrett Company uses the perpetual inventory system. The company's records showed a book balance of $18,000 in the Merchandise Inventory account, and a physical count finds only $16,250 of inventory. Which of the following represents the financial statement effect of writing-down the inventory?

Sanchez Company engaged in the following transactions during Year 1:1) Started the business by issuing $13,500 of common stock for cash.2) The company paid cash to purchase $8,100 of inventory.3) The company sold inventory that cost $5,500 for $11,400 cash.4) Operating expenses incurred and paid during the year, $5,000.Sanchez Company engaged in the following transactions during Year 2:1) The company paid cash to purchase $11,800 of inventory.2) The company sold inventory that cost $9,700 for $18,000 cash.3) Operating expenses incurred and paid during the year, $6,000.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?

Galaxy Company sold merchandise costing $1,700 for $2,600 cash. The merchandise was later returned by the customer for a refund. The company uses the perpetual inventory system. What effect will the sales return have on the financial statements?(Consider the effects of both parts of this event.)