Accounting Chapter on Gross Profit and Inventory

Questions and Answers

What is gross profit?

Equal to net sales less cost of goods sold.

If a company reports net sales of $600,000, cost of goods sold of $200,000, and net income of $100,000, what is its gross profit?

$400,000

Match the components of a merchandiser's operating cycle:

Cash purchase of merchandise = Item a Inventory of sale = Item b Credit sales = Item c Accounts receivable = Item d Receipt of cash from credit sales = Item e

A perpetual inventory system updates the accounting records ____.

for each purchase and each sale. Signup and view all the answers

A periodic inventory system updates the accounting records ____.

at the end of the period. Signup and view all the answers

Which of the following statements is correct regarding the adjusting entries for a merchandiser versus a service company?

A service company will have an adjusting entry for accrued expenses. Signup and view all the answers

Which of the following statements is correct regarding inventory shrinkage?

Shrinkage can be caused by theft or deterioration. Signup and view all the answers

What is the correct statement regarding the closing process of a merchandiser?

Both the Sales Discounts and the Sales Returns and Allowances accounts are credited during the closing process. Signup and view all the answers

Which of the following totals and subtotals are not found on a multiple-step income statement?

Total current assets Signup and view all the answers

What does a single-step income statement report?

Reports the same amount of net income as that reported on a multiple-step income statement. Signup and view all the answers

When a classified balance sheet is prepared, how is merchandise inventory reported?

Reported as a current asset. Signup and view all the answers

Which of the following accounts would not be used to compute the acid-test ratio?

Plant Assets Signup and view all the answers

Study Notes

Gross Profit

Gross profit is calculated as net sales minus cost of goods sold (COGS).
Example: With net sales of $600,000 and COGS of $200,000, gross profit equals $400,000.

Merchandiser's Operating Cycle

The cycle consists of:
- Cash purchase of merchandise
- Inventory for sale
- Credit sales
- Accounts receivable
- Receipt of cash from credit sales

Inventory Systems

Perpetual inventory systems update records with every purchase and sale.
Periodic inventory systems update records only at the end of the period.

Adjusting Entries

An adjusting entry for accrued expenses is necessary for both service and merchandising companies.
Merchandising companies also require adjustments for unearned revenues.

Inventory Shrinkage

Inventory shrinkage denotes a loss of inventory, often due to theft or deterioration.
It is determined by comparing the physical count of inventory to recorded amounts.
Record shrinkage by debiting Cost of Goods Sold.

Closing Process for Merchandisers

During the closing process, both Sales Discounts and Sales Returns and Allowances accounts are credited.

Income Statements

Total current assets are not reported on a multiple-step income statement.
A single-step income statement yields the same net income as a multiple-step income statement.

Classified Balance Sheet

Merchandise inventory is categorized as a current asset on a classified balance sheet.

Acid-Test Ratio

Plant assets are not included in the calculation of the acid-test ratio.

Description

This quiz covers essential accounting concepts such as gross profit calculation, the merchandiser's operating cycle, and inventory systems. It also touches on adjusting entries and inventory shrinkage, crucial for maintaining accurate financial records. Test your understanding of these key topics in accounting for merchandising companies.