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Merchandizing Operations...

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CHAPTER 5 MERCHANDISING OPERATIONS SUMMARY OF QUESTIONS BY STUDY OBJECTIVES Item

SO

Item

SO

1. 2. 3. 4. 5. 6. 7. 8. 9.

1 1 1 1 1 1 1 1 1

10. 11. 12. 13. 14. 15. 16. 17. 18.

2 2 2 2 2 2 2 2 2

58. 59. 60. 61. 62. 63. 64. 65. 66. 67. 68. 69. 70. 71. 72.

1 1 1 1 1 1 1 1 1 1 1 1 1 1 1

73. 74. 75. 76. 77. 78. 79. 80. 81. 82. 83. 84. 85. 86. 87.

1 1 1 1 1 1 1 1 1 2 2 2 2 2 2

167. 168. 169. 170. 171.

2 2,3 3 3 4

192. 193.

1 4

162. 2,3 163. 2,3 164. 2,3 165. 2,3 *166. 2,3,6 189.

1-6

190. 191.

1 1

Item

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Item

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True-False Statements 2 28. 3 37. 2 29. 3 38. 3 30. 3 39. 3 31. 4 40. 3 32. 4 41. 3 33. 4 42. 3 34. 4 43. 3 35. 4 44. 3 36. 4 45. Multiple Choice Questions 88. 2 103. 3 118. 89. 2 104. 3 119. 90. 2 105. 3 120. 91. 2 106. 3 121. 92. 2 107. 3 122. 93. 2 108. 3 123. 94. 3 109. 3 124. 95. 3 110. 3 125. 96. 3 111. 3 126. 97. 3 112. 3 127. 98. 3 113. 3 128. 99. 3 114. 3 129. 100. 3 115. 3 130. 101. 3 116. 3 131. 102. 3 117. 3 132. Exercises 172. 4,5 177. 4 *182. 173. 4,5 178. 5 *183. 174. 4 *179. 6 *184. 175. 4,5 *180. 5, 6 *185. 176. 4,5 *181. 6 *186. Matching 19. 20. 21. 22. 23. 24. 25. 26. 27.

194. 195.

4 4

SA-E 196. 4 197. 4,5

*This topic is dealt with in an Appendix to the chapter.

198. 199.

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SO

Item

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4 4 4 5 5 5 5 5 5

46. 47. *48. *49. *50. *51. *52. *53. *54.

5 5 6 6 6 6 6 6 6

*55. *56. *57.

6 6 6

4 4 4 4 4 4 4 4 4 4 4 4 4 4 4

133. 134. 135. 136. 137. 138. 139. 140. 141. 142. 143. 144. 145. 146. 147.

4 4 4 4 5 5 5 5 5 5 5 5 5 5 5

*148. *149. *150. *151. *152. *153. *154. *155. *156. *157. *158. *159. *160. *161.

6 6 6 6 6 6 6 6 6 6 6 6 6 6

6 6 6 6 6

*187. *188.

6 6

4 5

*200.

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6

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T e s tBa nkf orFi n a nc i a l Ac c o un t i n g:T o o l sf o rBu s i n e s sDe c i s i o nMa k i ng, 5 t hCa na di a nEd i t i o n

SUMMARY OF STUDY OBJECTIVES BY QUESTION TYPE Item 1. 2. 3. 4. 5. 6. 10. 11. 12. 13. 14. 21. 22. 23. 24. 25. 26. 27.

Type TF TF TF TF TF TF TF TF TF TF TF TF TF TF TF TF TF TF

Item 7. 8. 9. 58. 59. 60. 15. 16. 17. 18. 10. 28. 29. 30. 94. 95. 96. 97.

Type TF TF TF MC MC MC TF TF TF TF TF TF TF TF MC MC MC MC

Item

Item

Type

Item

Type

Item

Type

Item

Type

61. 62. 63. 64. 65. 66.

Study Objective 1 MC 67. MC MC 68. MC MC 69. MC MC 70. MC MC 71. MC MC 72. MC

73. 74. 75. 76. 77. 78.

MC MC MC MC MC MC

79. 80. 81. 189. 190. 191.

MC MC MC M SAE SAE

192.

SAE

20. 82. 83. 84. 85.

Study Objective 2 TF 86. MC 91. MC 87. MC 92. MC 88. MC 93. MC 89. MC 162. MC 90. MC 163.

MC MC MC EX EX

164. 165. 166. 167. 168.

EX EX EX EX EX

189.

M

98. 99. 100. 101. 102. 103. 104.

Study Objective 3 MC 105. MC 112. MC 106. MC 113. MC 107. MC 114. MC 108. MC 115. MC 109. MC 116. MC 110. MC 117. MC 111. MC 162.

MC MC MC MC MC MC EX

163. 164. 165. 166. 168. 169. 170.

EX EX EX EX EX EX EX

189.

M

MC MC MC MC EX EX

173. 174. 175. 176. 177. 189.

EX EX EX EX EX M

193. 194. 195. 196. 197. 198.

SAE SAE SAE SAE SAE SAE

EX EX EX EX EX

189. 197. 199.

M SAE SAE

EX EX EX EX EX EX

184. 185. 186. 187. 188. 189.

EX EX EX EX EX M

200.

SAE

31. 32. 33. 34. 35. 36.

TF TF TF TF TF TF

37. 38. 39. 118. 119. 120.

TF TF TF MC MC MC

121. 122. 123. 124. 125. 126.

40. 41. 42. 43. 44.

TF TF TF TF TF

45. 46. 47. 137. 138.

TF TF TF MC MC

139. 140. 141. 142. 143.

48. 49. 50. 51. 52. 53.

TF TF TF TF TF TF

54. 55. 56. 57. 148. 149.

TF TF TF TF MC MC

150. 151. 152. 153. 154. 155.

Note: TF = True-False MC = Multiple Choice

Type

Study Objective 4 MC 127. MC 133. MC 128. MC 134. MC 129. MC 135. MC 130. MC 136. MC 131. MC 171. MC 132. MC 172. Study Objective 5 MC 144. MC 173. MC 145. MC 175. MC 146. MC 176. MC 147. MC 178. MC 172. EX 180. *Study Objective 6 MC 156. MC 166. MC 157. MC 179. MC 158. MC 180. MC 159. MC 181. MC 160. MC 182. MC 161. MC 183.

M = Matching EX = Exercise

*This topic is dealt with in an Appendix to the chapter.

SAE = Short answer essay

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Merchandising Operations

CHAPTER STUDY OBJECTIVES 1.

Identify the differences between service and merchandising companies. A service company performs services. It has service or fee revenue and operating expenses. A merchandising company sells goods. It has sales revenue, cost of goods sold, and gross profit in addition to operating expenses. Both types of company may also report non-operating items and each would report income tax expense.

2.

Prepare entries for purchases under a perpetual inventory system. The Merchandise Inventory account is debited for all purchases of merchandise and for freight costs if they are paid by the buyer (shipping terms FOB shipping point). It is credited for purchase discounts, and purchase returns and allowances.

3.

Prepare entries for sales under a perpetual inventory system. When inventory is sold, two entries are required: (1) Accounts Receivable (or Cash) is debited and Sales is credited for the selling price of the merchandise, and (2) Cost of Goods Sold is debited and Merchandise Inventory is credited for the cost of inventory items sold. Contra revenue accounts are used to record sales returns and allowances and sales discounts. Two journal entries are also required for sales returns so that both the selling price and the cost of the returned merchandise are recorded. Freight costs paid by the seller (shipping terms FOB destination) are recorded as an operating expense.

4.

Prepare a single-step and a multiple-step income statement. In a single-step income statement, all data (except for income tax expense) are classified under two categories— revenues or expenses—and profit before income tax is determined in one step. Income tax expense is separated from the other expenses and reported separately after profit before income tax to determine profit (loss). A multiple-step income statement shows several steps in determining profit. Step 1 deducts sales returns and allowances and sales discounts from gross sales to determine net sales. Step 2 deducts the cost of goods sold from net sales to determine gross profit. Step 3 deducts operating expenses (which can be classified by nature or by function) from gross profit to determine profit from operations. Step 4 adds or deducts any non-operating items to determine profit before income tax. Finally, step 5 deducts income tax expense to determine profit (loss).

5.

Calculate the gross profit margin and profit margin. The gross profit margin, calculated by dividing gross profit by net sales, measures the gross profit earned for each dollar of sales. The profit margin, calculated by dividing profit by net sales, measures the profit earned for each dollar of sales. Both are measures of profitability that are closely watched by management and other interested parties.

*6.

Prepare entries for purchases and sales under a periodic inventory system and calculate cost of goods sold (Appendix 5A). Unlike recording purchases in a perpetual inventory system, in a periodic system separate temporary accounts are used to record (1) purchases, (2) purchase returns and allowances, (3) purchase discounts, and (4) freight costs that are paid by the buyer (shipping terms FOB shipping point). The formula for cost of goods purchased is as

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T e s tBa nkf o rF i n a n c i a l Ac c o unt i n g:T o ol sf o rBu s i ne s sDe c i s i on Ma k i n g, 5 t hCa na di a nEd i t i o n follows: Purchases – purchase returns and allowances – purchase discounts = net purchases; and net purchases + freight in = cost of goods purchased. In a perpetual inventory system, temporary accounts are used to record (1) sales, (2) cost of goods sold, (3) sales returns and allowances, and (4) sales discounts. However, in a periodic inventory system, only one journal entry is made to record a sale of merchandise as the cost of goods sold is not recorded throughout the period as it is in a perpetual inventory system. Instead, the cost of goods sold is determined only at the end of the period. To determine the cost of goods sold, first calculate the cost of goods purchased, as indicated above. Then, calculate the cost of goods sold as follows: Beginning inventory + cost of goods purchased = cost of goods available for sale; and cost of goods available for sale – ending inventory = cost of goods sold.

Merchandising Operations

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TRUE-FALSE STATEMENTS 1.

A physical inventory count should be done at least once a year regardless of whether a perpetual or periodic inventory system is being used.

2.

The operating cycle of a merchandising company is generally shorter than that of a service company.

3.

Sales less operating expenses equal gross profit.

4.

Under a perpetual inventory system, the cost of goods sold is determined each time a sale occurs.

5.

Inventory is usually the largest current asset for a merchandiser.

6.

Cost of Goods Sold is considered an operating expense for a merchandising company.

7.

Operating expenses are subtracted from revenue for a service company and from gross profit for a merchandising company.

8.

Gross sales less cost of goods sold is called gross profit.

9.

Cost of goods available for sale is considered an operating expense for a merchandising company.

10.

When the terms of sale are FOB shipping point, the seller is responsible for any damages to the goods during shipping.

11.

Freight terms will specify the point at which ownership of the goods is transferred from the seller to the buyer.

12.

Under a perpetual inventory system, freight costs incurred by the buyer are added to the Merchandise Inventory account.

13.

Under the perpetual inventory system, purchases of merchandise for sale are recorded in the Merchandise Inventory account.

14.

Freight costs incurred on incoming merchandise are an operating expense to the buyer.

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T e s tBa nkf o rF i n a n c i a l Ac c o unt i n g:T o ol sf o rBu s i ne s sDe c i s i on Ma k i n g, 5 t hCa na di a nEd i t i o n

15.

The terms 2/10, n/30 mean that a 2% discount is allowed on payments made over 10 days but within the credit period.

16.

Discounts taken for early payment of an invoice are called sales discounts by the buyer.

17.

If merchandise costing $2,500, terms 2/10 n/30, is paid within 10 days, the amount of the purchase discount is $250.

18.

Under the perpetual inventory system, a discount taken for early payment is credited to the Merchandise Inventory account.

19.

A quantity discount is recorded separately, the same way as a purchase discount.

20.

If a quantity discount of 10% is received on a purchase of $10,000, inventory would be recorded at $9,000.

21.

Sales revenues are earned when the goods are transferred from buyer to seller.

22.

Sales revenues are recorded by the seller when an order is placed by a buyer.

23.

The Sales Returns and Allowances account and the Sales Discounts account are both classified as expense accounts.

24.

When goods are shipped FOB shipping point, freight costs are an operating expense for the seller.

25.

Sales Allowances and Sales Discounts are both designed to encourage customers to pay their accounts promptly.

26.

Sales Discounts is a contra revenue account to Sales.

27.

The normal balance of Sales Returns and Allowances is a credit.

28.

When the terms of sale include a sales discount, it usually is advisable for the buyer to pay within the discount period.

Merchandising Operations

5-7 29.

Merchandise is sold for $2,500 with terms 1/10, n/30. If $500 of the merchandise is returned prior to payment and the invoice is paid within the discount period, the amount of the sales discount is $20.

30.

When returned merchandise is defective, the seller’s sales account is debited.

31.

The multiple-step income statement is considered more useful than the single-step income statement for a merchandising company because it highlights the components of profit.

32.

Operating expenses are similar in merchandising and service companies.

33.

Gross profit appears on both the single-step and multiple-step forms of the income statement.

34.

Non-operating activities include revenues and expenses that are related to the company’s main operations.

35.

Corporations following IFRS must classify their expenses either by nature or by function.

36.

Profit from operations appears on both the single-step and multiple-step forms of the income statement.

37.

A merchandising company’s profit from operations is determined by subtracting cost of goods sold from net sales.

38.

Interest revenue for a merchandising company is usually reported in the non-operating activities section of the income statement.

39.

Companies following ASPE may classify their expenses by nature, but not by function.

40.

Gross profit is a measure of the overall profit of a company.

41.

Gross profit is expressed as a percentage of gross sales.

42.

Gross profit margin is the same as the gross profit amount.

43.

If net sales are $1,000,000 and cost of goods sold is $800,000, the gross profit margin is 20%.

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T e s tBa nkf o rF i n a n c i a l Ac c o unt i n g:T o ol sf o rBu s i ne s sDe c i s i on Ma k i n g, 5 t hCa na di a nEd i t i o n

44.

The gross profit amount is generally considered to be more informative than the gross profit margin.

45.

Gross profit margin is calculated by dividing cost of goods sold by net sales.

46.

Profit margin indicates whether a company is controlling operating expenses relative to sales.

47.

Profit margin is calculated by dividing profit by net sales.

*48.

Under a periodic inventory system, purchase of inventory is debited to the Purchases account.

*49.

Under a periodic inventory system, freight incurred on merchandise purchases by the buyer should be debited to the Merchandise Inventory account.

*50.

Under a periodic inventory system, purchases of merchandise are usually credited to the Purchases account.

*51.

Under a periodic inventory system, freight incurred on merchandise sales by the seller should be debited to the Freight In account.

*52.

Purchase Returns and Allowances and Purchase Discounts are contra-expense accounts with normal credit balances.

*53.

Freight In is subtracted from the Purchases account to arrive at cost of goods purchased.

*54.

A key difference between the periodic and perpetual inventory systems is the timing of the calculation of cost of goods sold.

*55.

The cost of goods sold section of an income statement prepared under a periodic inventory system will contain more detail than under a perpetual inventory system.

*56.

On the income statement for a company using the periodic inventory system, the inventory at the beginning of the period is added to the cost of merchandise purchased for the period to calculate the cost of goods available for sale during the period.

*57.

Compared to a perpetual inventory system, the use of the periodic inventory system will result in a different value for inventory on the statement of financial position.

Merchandising Operations

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ANSWERS TO TRUE-FALSE STATEMENTS Item 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12.

Ans. T F F T T F T F F F T T

Item 13. 14. 15. 16. 17. 18. 19. 20. 21. 22. 23. 24.

Ans. T F F F F T F T F F F F

Item 25. 26. 27. 28. 29. 30. 31. 32. 33. 34. 35. 36.

Ans. F T F T T F T T F F T F

Item 37. 38. 39. 40. 41. 42. 43. 44. 45. 46. 47. *48.

Ans. F T F F F F T F F T T T

Item *49. *50. *51. *52. *53. *54. *55. *56. *57.

Ans. F F F T F T T T F

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T e s tBa nkf o rF i n a n c i a l Ac c o unt i n g:T o ol sf o rBu s i ne s sDe c i s i on Ma k i n g, 5 t hCa na di a nEd i t i o n

MULTIPLE CHOICE QUESTIONS 58. The time it takes to go from cash to cash in producing revenues is called the (a) accounting cycle. (b) purchasing cycle. (c) operating cycle. (d) merchandising cycle. 59. Which of the following is not true for a company using a periodic inventory system? (a) Cost of goods sold is calculated for each sale. (b) Cost of goods sold is calculated at the end of the accounting period. (c) A physical inventory count is performed at the end of the accounting period. (d) Cost of goods available for sale is calculated at the end of the accounting period. 60. Gross profit equals the difference between net sales and (a) profit. (b) cost of goods sold. (c) operating expenses. (d) cost of goods sold plus operating expenses. 61. Each of the following companies is a merchandising company except a (a) wholesale parts company. (b) candy store. (c) moving company. (d) furniture store. 62. Profit will result if gross profit exceeds (a) cost of goods sold. (b) operating expenses. (c) purchases. (d) cost of goods sold plus operating expenses. 63. A merchandiser will have profit from operations of exactly $0 when (a) net sales equals cost of goods sold. (b) cost of goods sold equals gross profit. (c) operating expenses equal net sales. (d) gross profit equals operating expenses. 64. The largest current asset for a merchandiser is usually (a) inventory. (b) prepaid expenses. (c) cash. (d) accounts receivable.

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Merchandising Operations

65. The primary source of revenue for a wholesaler is generated by (a) investments. (b) providing services. (c) the sale of merchandise...