Merchandising Company Operations Quiz
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Questions and Answers

What is the primary operation of a merchandising company?

  • Purchase finished products for resale (correct)
  • Manage inventory for other businesses
  • Provide services to customers
  • Convert raw materials into products

Wholesalers sell finished products in large volumes directly to consumers.

False (B)

What are the three primary steps in the operating cycle of a merchandising firm?

Purchase merchandise, sell merchandise, payment from customer

A _______ company typically buys products from wholesalers for sale to the general public.

<p>retailer</p> Signup and view all the answers

What system provides greater control over inventory?

<p>Perpetual System (D)</p> Signup and view all the answers

The actual balance of inventory is known at all times during the periodic inventory system.

<p>False (B)</p> Signup and view all the answers

When Kali Company purchases 200 cameras on account, what account is credited?

<p>Accounts payable</p> Signup and view all the answers

Match the type of company to its primary operation:

<p>Manufacturer = Converts raw materials into products Merchandiser = Buys finished products for resale Service Company = Performs services for customers Wholesaler = Sells products in bulk to retailers</p> Signup and view all the answers

What is the total cost of the cameras purchased by Kali Company?

<p>$42,000 (C)</p> Signup and view all the answers

Transportation costs are not included in the cost of inventory.

<p>False (B)</p> Signup and view all the answers

What is the journal entry used to record the return of 20 cameras?

<p>Accounts Payable (-L) 4,200; Inventory (-A) 4,200</p> Signup and view all the answers

If a buyer pays within 10 days on terms of 2/10, the buyer receives a ______ discount.

<p>2%</p> Signup and view all the answers

What is the net cash payment Kali Company made after returning cameras and applying the discount?

<p>$37,044 (A)</p> Signup and view all the answers

What is the cash payment made by Kali after returning the cameras and taking the discount?

<p>$37,044</p> Signup and view all the answers

Match the following terms with their definitions:

<p>Purchase Returns = Reduction in the purchase price Purchase Allowances = Return of merchandise by the buyer Purchase Discounts = Incentive for faster payment Transportation Costs = Costs incurred to get merchandise ready for resale</p> Signup and view all the answers

The payment due after returns and before discounts is $______.

<p>37,800</p> Signup and view all the answers

What does the term 'free on board' (FOB) destination imply?

<p>Seller pays shipping costs until delivered. (D)</p> Signup and view all the answers

The periodic inventory method keeps a real-time record of inventory levels.

<p>False (B)</p> Signup and view all the answers

What is the journal entry made to correct an inventory balance that is overstated by $800?

<p>Debit Cost of Goods Sold $800, Credit Inventory $800.</p> Signup and view all the answers

The _____ method assumes that the oldest inventory items are sold first.

<p>First-In, First-Out (FIFO)</p> Signup and view all the answers

Match the following inventory costing methods with their descriptions:

<p>Specific Identification = Used for unique, high-cost items. FIFO = Oldest costs are matched with oldest inventory. LIFO = Recent costs are matched with newest inventory. Weighted-Average = All costs averaged for goods sold and ending inventory.</p> Signup and view all the answers

Which method assumes that the last units purchased are the first units sold?

<p>LIFO (C)</p> Signup and view all the answers

GAAP allows for assumed cost flows that can differ from actual goods flows.

<p>True (A)</p> Signup and view all the answers

Name one reason why actual inventory might differ from accounting records.

<p>Theft, spoilage, errors, or use of the periodic inventory method.</p> Signup and view all the answers

What is subtracted from gross sales revenue to yield net sales?

<p>Sales returns and allowances (B), Sales discounts (D)</p> Signup and view all the answers

A periodic inventory system continuously updates the inventory account during transactions.

<p>False (B)</p> Signup and view all the answers

What is the formula to calculate gross profit percentage?

<p>Gross Profit / Net Sales</p> Signup and view all the answers

The ___ recognition standard is the principle stating that revenue should be recognized when goods or services are transferred to a customer.

<p>revenue</p> Signup and view all the answers

Match the following financial metrics with their definitions:

<p>Gross Profit Percentage = Indicates a company's ability to sell products at acceptable prices Return on Sales Ratio = Reveals the net income earned on each dollar of sales Sales Returns = Contra-revenue account reducing total sales Net Income = Profit after all costs have been subtracted from revenue</p> Signup and view all the answers

Using Kali Company’s data, what is the gross profit on sales?

<p>$7,355 (C)</p> Signup and view all the answers

Sales discounts are typically assumed to not be taken by the majority of customers.

<p>False (B)</p> Signup and view all the answers

What effect do sales returns and allowances have on net sales?

<p>They decrease net sales.</p> Signup and view all the answers

The gross profit percentage for Kali Company is ___%.

<p>58.8</p> Signup and view all the answers

What is the primary difference between perpetual and periodic inventory systems?

<p>Perpetual updates inventory continuously; periodic updates at the end of the period (D)</p> Signup and view all the answers

What is Kanzu Co.'s inventory turnover?

<p>25 times (D)</p> Signup and view all the answers

Inventory turnover indicates how many times a year, on average, a firm sells its inventory.

<p>True (A)</p> Signup and view all the answers

What is the formula for calculating Days’ Sales in Inventory?

<p>365 / Inventory Turnover</p> Signup and view all the answers

Kanzu Co. has an average inventory level of ______.

<p>$300</p> Signup and view all the answers

What happens to profitability as days’ sales in inventory decreases?

<p>Profitability increases (A)</p> Signup and view all the answers

Match the inventory system type with its description:

<p>Periodic = Inventory computed at the end of the period Perpetual = Inventory updated after every transaction</p> Signup and view all the answers

A perpetual inventory system does not require a physical count of ending inventory.

<p>False (B)</p> Signup and view all the answers

What is the net realizable value for the inventory in the example provided?

<p>$264</p> Signup and view all the answers

What is the primary purpose of the allowance for doubtful accounts?

<p>To estimate uncollectible accounts receivable (C)</p> Signup and view all the answers

A seller receives cash from the customer immediately after a credit card sale.

<p>False (B)</p> Signup and view all the answers

What is the typical fee charged by a credit card company for processing sales?

<p>1-5%</p> Signup and view all the answers

The formula to calculate interest on notes receivable is: Principal x Interest Rate x __________.

<p>Interest time</p> Signup and view all the answers

Match the following terms with their appropriate definitions:

<p>Bad debt expense = An expense reflecting uncollectible accounts Promissory note = A written promise to pay a sum of money Credit card fee = A charge for processing credit card transactions Allowance for doubtful accounts = Estimates the amount of receivables that will not be collected</p> Signup and view all the answers

How much will Hillside Farms receive after the issuance of a $10,000 promissory note at an interest rate of 6% for 3 months?

<p>$10,150 (D)</p> Signup and view all the answers

Sellers benefit from credit card sales by avoiding the risk of non-collection from customers.

<p>True (A)</p> Signup and view all the answers

The journal entry to record Coronado Resorts' credit card sales includes a line for __________ fee expense.

<p>credit card</p> Signup and view all the answers

Flashcards

Merchandising Company vs. Service Company

Merchandising companies buy and resell finished goods, while service companies provide services. Merchandisers have a step where they buy inventory.

Merchandiser Operations (Wholesaler/Retailer)

Wholesalers buy from manufacturers and sell to retailers, retailers buy from wholesalers to sell to customers.

Merchandising Operating Cycle (3 Steps)

Purchase inventory, sell inventory, receive payment. Distinct from service companies.

Service Firm Operating Cycle (2 Steps)

Perform service, receive payment.

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Perpetual Inventory System

Keeps track of inventory levels constantly after each sale, and calculates cost of goods sold.

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Periodic Inventory System

Calculates cost of goods sold periodically, typically at the end of the period; not continuous calculation.

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Inventory Accounting (Purchase)

Increases the inventory account with the cost of the acquired merchandise; journal entry depends on payment type (cash or account).

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Accounts Payable

Liability account; increases when buying on credit (or when you are accountable to another party).

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Purchase of Inventory

Recording the cost of goods acquired for resale.

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Shipping Costs

Costs associated with getting goods ready for resale; part of the cost of inventory.

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Purchase Returns

Returned merchandise to the supplier for credit or refund.

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Purchase Allowances

Reduction in the purchase price to keep unwanted merchandise.

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Purchase Discounts

Incentive for early payment, a percentage taken off the total.

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2/10, n/30 terms

A 2% discount if paid within 10 days, otherwise the full amount is due in 30 days.

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Inventory

Goods held for sale in the ordinary course of business.

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Net Sales

Gross sales revenue minus sales returns, allowances, and discounts.

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Gross Profit Percentage

Gross profit divided by net sales, expressed as a percentage.

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Return on Sales Ratio

Net income divided by net sales, expressed as a percentage.

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Sales Returns and Allowances

Reductions in sales revenue due to returned or discounted goods.

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Sales Discounts

Reductions in sales revenue given for early payment.

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Revenue Recognition Standard

Revenue is recorded when goods/services are transferred to a customer.

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End-of-Period Adjustments

Adjusting entries to reflect net sales instead of gross sales.

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Cost of Goods Sold

Direct costs attributable to producing the goods sold.

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Gross Profit

Net Sales minus Cost of Goods Sold.

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Free on Board (FOB) Destination

The seller is responsible for the shipping costs and the ownership of the goods transfers to the buyer upon delivery at the buyer's destination.

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Physical Inventory Count

A physical count of all available inventory items at a given moment to verify the inventory balance in the accounting records.

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Why Physical Inventory Differs from Records?

Discrepancies between the physical inventory count and accounting records can arise due to factors like using the periodic inventory method, theft, spoilage, or errors.

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Goods Flow

The actual physical movement of goods through the different stages of inventory, from purchase to sale.

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Cost Flow

An accounting method that assumes a specific movement of costs through inventory, even if it doesn't reflect the actual physical flow of goods.

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Specific Identification Method

This method tracks the actual cost of each individual item sold, making it ideal for unique, high-value items.

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FIFO (First-In, First-Out)

Assumes that the oldest inventory units purchased are the first ones sold, leaving the newest units in ending inventory.

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Net Realizable Value

The estimated selling price of inventory less any costs to sell (e.g., transportation, commissions). It's the maximum amount a company can expect to receive from selling inventory.

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Inventory Write-Down

An accounting adjustment that reduces the value of inventory on the balance sheet when its net realizable value is lower than its original cost. This reflects the anticipated loss from selling the inventory.

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Inventory Turnover

A measure of how efficiently a company is managing its inventory. It calculates how many times inventory is sold and replaced within a specific period (usually a year).

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Days' Sales in Inventory

Indicates the average number of days it takes a company to sell its inventory. It helps assess how long inventory sits before being sold.

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Specific Identification

An inventory costing method that tracks the specific cost of each individual item sold. Used when items are unique or easily identifiable.

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Bad Debt Expense

The cost of uncollectible accounts receivable. It's recorded when a company determines that a customer is unlikely to pay their outstanding balance.

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Allowance for Doubtful Accounts

A contra asset account that reduces the balance of Accounts Receivable to reflect estimated uncollectible amounts. It's a provision set aside to cover potential losses from bad debts.

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Credit Card Sale?

When a customer uses a credit card to make a purchase, the seller receives payment from the credit card company, not the customer directly. The customer later pays the credit card company.

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What is the benefit for the seller when a customer uses a credit card?

The seller doesn't need to assess the customer's creditworthiness, reducing the risk of non-payment. They also receive cash more quickly than if they had extended trade credit.

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What are the costs for the seller when a customer uses a credit card?

The seller is charged a fee by the credit card company, typically a percentage of the purchase amount (1-5%).

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What is a promissory note?

A written promise to pay a specific amount of money on a specific date, with interest. Essentially, it's a formal agreement to repay a loan.

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How to Calculate Interest on a Note

Interest is calculated using the formula: Principal x Interest Rate x Time (in years)

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Issuing Notes Receivable

When a company receives a promissory note as payment for a sale or service, it's considered issuing Notes Receivable. It represents the company's right to receive the principal and interest.

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Study Notes

Chapters 5-8 Financial Accounting (Binghamton University)

  • This document is a student study guide for Financial Accounting, covering chapters 5-8.
  • The material is from Binghamton University.
  • The document contains a QR code that leads to Studocu.
  • Studocu is not sponsored nor endorsed by any college or university.
  • The document was downloaded by Bala Abubakr ([email protected]).

Merchandising Operations

  • Manufacturers transform raw materials and components into finished products.
  • Merchandisers purchase finished products to resell.
  • Wholesalers buy from manufacturers in bulk and sell to retailers.
  • Retailers acquire products from wholesalers and sell them to the public.

Operating Cycle of a Merchandising Firm

  • Purchase merchandise (inventory).
  • Sell merchandise (accounts receivable).
  • Receive payment from customers (cash).

Operating Cycle of a Service Firm

  • Perform services (accounts receivable).
  • Receive payment from customers (cash).

Cost Flows

  • Beginning Inventory + Cost of Goods Purchased = Cost of Goods Available for Sale
  • Cost of Goods Available for Sale - Ending Inventory = Cost of Goods Sold

Inventory Systems

  • Perpetual System: Tracks inventory changes in real-time.
  • Periodic System: Calculates cost of goods sold periodically.

Accounting for Purchases of Merchandise

  • Debit inventory for the cost of merchandise purchased.
  • Credit cash if payment is made in cash.
  • Credit accounts payable if payment is made on credit.
  • Transportation costs (getting merchandise ready for sale) are included in the inventory cost.

Purchase Returns and Allowances

  • Purchase returns: Returning merchandise for a credit.
  • Purchase allowances: Reducing the purchase price to keep merchandise.

Purchase Discounts

  • Credit period: Time given for payment.
  • Purchase discount: Incentive for early payment.

Accounting for Sales of Merchandise

  • Perpetual System: Updates inventory and cost of goods sold after each sale.
  • Record revenue and cost of goods sold (COGS) for sales.
  • Credit sales revenue and debit cash (or accounts receivable).
  • Debit COGS, credit inventory.

Sales Returns and Allowances

  • Sales returns: Customers returning merchandise.
  • Sales allowances: Reducing the price for merchandise kept.

Sales Discounts

  • Incentive for early payment.
  • Calculated on net sales.

Gross Profit Percentage

  • Measures profitability.
  • Gross Profit/Net Sales = Gross Profit Percentage.

Return on Sales Ratio

  • Net Income/Net Sales = Return on Sales Ratio
  • Measures profitability on each dollar of sales.

Periodic Inventory System

  • Inventory and cost of goods sold are updated periodically at the end of the accounting period.

Inventory Costing Methods

  • Specific Identification
  • First-In, First-Out (FIFO)
  • Last-In, First-Out (LIFO)
  • Weighted-Average Cost

Inventory Errors

  • Errors can arise from miscounting inventory, affecting cost of goods sold and ending inventory
  • Inventory errors affect reported income in the current and following periods

Lower-of-Cost-or-Net Realizable Value (LCNRV) Method

  • Use the lower value between cost and net realizable value to value inventory for financial reporting.

Accounts Receivable

  • Created when a company extends credit to customers for goods or services.

Losses from Uncollectible Accounts

  • Estimated credit losses are recognized when revenue is earned.
  • Allowance Method: A method for estimating and recording anticipated losses.
  • Write offs of bad debts occur when a customer defaults
  • Recovery of accounts written off: When a previously written off account is subsequently collected.

Recovery of accounts written off

  • Reverse the original write off
  • Record the cash collected

Accounts Receivable Aging Method

  • Estimates bad debt expense using an aging schedule.

Credit Card Sales

  • Companies utilize credit cards to facilitate sales and reduce risk to the seller
  • Credit card companies deduct a fee from sales revenue

Notes Receivable

  • Written promise to pay a specific amount at a future date, plus interest

Recording Notes

  • Record notes receivable, and interest on notes receivable.

Effective Cash Management

  • Manage accounts receivable faster
  • Decrease inventory levels
  • Manage payables effectively

Auditing

  • Auditing examines the financial statements to provide an independent opinion to stakeholders.
  • Financial statement audits: Ensure the accuracy of reported information.
  • Operational audits: Assess the effectiveness of operational processes.

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Financial Accounting (Binghamton University) Chapters 5-8 PDF

Description

Test your knowledge on the primary operations of merchandising companies, including inventory management and financial transactions. This quiz covers key concepts such as the operating cycle, inventory valuation, and journal entries. Assess your understanding of the financial aspects related to purchasing and selling goods in a merchandising context.

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