BUSN 201 Chapter 4 Part A Flashcards

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Questions and Answers

Which of the following statements about merchandise is correct?

Merchandise is written off as an expense immediately.

Merchandise has no value until sold.

Merchandise is only for internal use.

Merchandise is acquired for resale to customers. (correct)

Cost of goods sold is characterized by which of the following statements? (Check all that apply.)

Cost of goods sold includes the expenses of buying and preparing an item for sale. (correct)

Cost of goods sold is used to figure gross profit. (correct)

Cost of goods sold is an expense reported on the income statement. (correct)

Cost of goods sold is also called cost of sales. (correct)

What describes gross profit?

The difference between net sales and the cost of the goods sold.

How do you compute net income for a merchandiser?

Net sales - cost of goods sold - other expenses. Signup and view all the answers

Which of the following describe merchandise inventory? (Check all that apply.)

An asset account. Signup and view all the answers

Merchandise consists of _, that a company acquires to resell to __.

products, consumers Signup and view all the answers

Merchandise inventory that is still available for sale is considered a(n) (asset/expense/revenue) and is reported on the (balance sheet/income statement) and merchandise that is sold during the period is considered a(n) (asset/expense/liability) and reported on the (balance sheet/income statement).

asset, balance sheet, expense, income statement Signup and view all the answers

What is the expense of buying and preparing merchandise called?

Cost of goods sold. Signup and view all the answers

Gross profit is calculated by taking the net (sales/costs) of a product and (adding/subtracting) the cost of the goods sold.

sales, subtracting Signup and view all the answers

What best describes a perpetual inventory system?

It is an inventory system that continually updates accounting records for merchandise transactions. Signup and view all the answers

To compute net income for a merchandiser, you will start with net sales, subtract cost of goods sold and subtract ______.

expenses Signup and view all the answers

To record a transaction where Toys R Fun purchased $4,000 of merchandise, would debit the Merchandise (Inventory/Payable/Cash) account and credit the (Cash/Inventory/Accounts Payable) account.

Inventory, Cash Signup and view all the answers

How is merchandise inventory described?

Merchandise inventory is an asset reported on the balance sheet and contains the cost of products purchased for sale. Signup and view all the answers

Which statements accurately describe merchandise available for sale during a period? (Check all that apply.)

Beginning inventory + Net purchases = Merchandise available for sale. Signup and view all the answers

What do the credit terms of n/15 mean?

The credit terms stand for net 15 days. Signup and view all the answers

What do the credit terms of 2/10,n/30 mean? (Check all that apply.)

The full payment is due within a 30-day credit period. Signup and view all the answers

Which of the following statements explain why perpetual inventory systems are becoming more popular? (Check all that apply.)

Technological advances have made it easier to use. Signup and view all the answers

A cash discount can be summarized as a discount given to (buyers/creditors/sellers) to encourage them to pay (earlier/later/less/more).

buyers, earlier Signup and view all the answers

What is the journal entry for recording the purchase of $300 of merchandise with a perpetual inventory system?

Debit Merchandise Inventory $300; credit Cash $300. Signup and view all the answers

The discount period is the time (before/between) the invoice date and a specified date on which the payment amount owed can be (increased/reduced) because of early payment.

between, reduced Signup and view all the answers

Which of the following costs are included in merchandise inventory? (Check all that apply.)

Costs necessary to ready the merchandise for sale Signup and view all the answers

Calculate the purchase discount for X-Mart if they purchase $400 of merchandise with terms of 2/10,n/30 and payment is made on June 11.

$8 Signup and view all the answers

Demonstrate the required journal entry for LOL Music Store's payment of merchandise with terms of 2/5,n/60. (Check all that apply.)

Debit Accounts Payable $1,000. Signup and view all the answers

Which of the statements below summarize what cash discounts are? (Check all that apply.)

Sellers can grant a cash discount to encourage buyers to pay earlier. Signup and view all the answers

What is a discount period?

The discount period is the time period in which a discount may be taken by the buyer. Signup and view all the answers

Demonstrate the journal entry for Toys R Fun to record the payment of $1,000 of merchandise with terms of 2/10,n/30 if payment is made on December 30. (Check all that apply.)

Debit Accounts Payable $1,000. Signup and view all the answers

An invoice is referred to as a invoice for a buyer and as a _ invoice for the seller.

purchase, sales Signup and view all the answers

Calculate the purchase discount for X-Mart if they purchase $500 of merchandise with terms of 3/15,n/40 and payment is made on May 28.

$15 Signup and view all the answers

A purchase return refers to merchandise a (buyer/seller/creditor) purchased, but then returns to the (buyer/seller/creditor) for a refund of the purchase price or reduction in the amount owed.

buyer, seller Signup and view all the answers

What is a purchase return?

A purchase return refers to merchandise a buyer acquires, but then returns to the seller. Signup and view all the answers

What is the required journal entry for a $100 allowance received by X-Mart?

Debit Accounts Payable $100; credit Merchandise Inventory $100. Signup and view all the answers

Study Notes

Merchandise

Merchandise is products acquired for resale to customers.
Merchandise inventory is an asset account that appears on the balance sheet.

Cost of Goods Sold (COGS)

COGS is used to calculate gross profit and includes expenses related to purchasing and preparing items for sale.
Also known as cost of sales, it is classified as an expense on the income statement.

Gross Profit and Net Income

Gross profit is calculated by subtracting COGS from net sales.
Net income for a merchandiser is computed as: Net sales - COGS - other expenses.

Inventory Systems

A perpetual inventory system continuously updates accounting records for merchandise transactions and is increasingly popular due to technological advances providing real-time sales and inventory data.

Credit Terms

"n/15" means payment is due in 15 days; "2/10, n/30" allows a 2% discount if paid within 10 days, with the full payment due in 30 days.
A cash discount incentivizes buyers to pay early.

Journal Entries

For a $300 merchandise purchase, the journal entry under a perpetual inventory system would be: Debit Merchandise Inventory $300; Credit Cash $300.
To record payment after a discount, debit Accounts Payable, credit Cash for the payment amount, and credit Merchandise Inventory for the discount taken.

Inventory Available for Sale

The total merchandise available for sale is calculated as: Beginning inventory + Net purchases.
Ending inventory + COGS = Merchandise available for sale.

Purchase Returns and Allowances

A purchase return refers to merchandise returned to the seller for a refund or reduction in liability.
A purchase allowance is a reduction in the cost for defective or unacceptable merchandise.

Cash Management Practices

Effective management involves monitoring inventory levels, evaluating supplier terms, and planning for discounts to optimize cash flow.

Key Calculations

Discounts can be calculated based on terms; for example, a purchase of $400 with terms of 2/10 can yield an $8 discount if paid within the discount period.
A purchase discount for $500 with terms of 3/15 results in a possible $15 discount if paid within the specified period.

Additional Notes

Shipping fees, taxes, and preparation costs are included in merchandise inventory.
Merchandise that has not been sold during the period is deemed an asset, while sold merchandise is classified as an expense reported on the income statement.

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Test your knowledge of key concepts from BUSN 201 Chapter 4 with these flashcards! Focus on understanding merchandise and cost of goods sold, including their definitions and characteristics. Perfect for quick review before exams or studying sessions.