Deck 3: Accounting for Merchandising Businesses

Question 1

Explain the major difference between a merchandising business and a service business.

Answer 1

A merchandising business earns revenue by selling goods to customers while a service business earns revenue by providing services to its customers.

Question 2

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. 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. You do not need to enter amounts. Assume that Whetzel Company uses a perpetual inventory system.Increase = I Decrease = D Not Affected = NAWhetzel Company returned some defective merchandise it had previously purchased on account from a supplier,

Answer 2

The purchase return decreases assets (merchandise inventory) and decreases liabilities (accounts payable). It does not affect the income statement or the statement of cash flows.

Question 3

Why are cash discounts given, who benefits by these discounts, and what are the benefits of those discounts?

Answer 3

Cash discounts are given to encourage prompt payment of accounts and to avoid excess overdue accounts. Both the buyer and seller will benefit. The buyer benefits by paying a lower price for the goods. The seller benefits by collecting cash sooner. It also benefits the seller by reducing collection costs.

Question 4

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. 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. You do not need to enter amounts. Assume that Whetzel Company uses a perpetual inventory system.Increase = I Decrease = D Not Affected = NAAfter a physical count of its inventory, Whetzel Company discovered that $400 of inventory is missing. Show how the required adjusting entry would affect Whetzel Company's statements.

Question 5

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. 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. You do not need to enter amounts. Assume that Whetzel Company uses a perpetual inventory system.Increase = I Decrease = D Not Affected = NAA customer returned goods to Whetzel Company that had been purchased for $60 on account. The goods had originally cost Whetzel $35. Whetzel reduced the customer's account balance for the return.

Question 6

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. 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. You do not need to enter amounts. Assume that Whetzel Company uses a perpetual inventory system.Increase = I Decrease = D Not Affected = NAWhetzel Company granted a $70 allowance 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.

Question 7

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. 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. You do not need to enter amounts. Assume that Whetzel Company uses a perpetual inventory system.Increase = I Decrease = D Not Affected = NAWhetzel Company sold merchandise to a customer for $1,400 cash. The merchandise had originally cost Whetzel $850.

Question 8

Give three examples of product costs. At what time are product costs recognized as expenses? What is the name of the expense account?

Question 9

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. 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. You do not need to enter amounts. Assume that Whetzel Company uses a perpetual inventory system.Increase = I Decrease = D Not Affected = NAWhetzel Company paid $40 of freight cost to have merchandise shipped to one of its customers under terms FOB destination.

Question 10

Give three examples of selling and administrative costs. At what time are these costs recognized as expenses?

Question 11

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. 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. You do not need to enter amounts. Assume that Whetzel Company uses a perpetual inventory system.Increase = I Decrease = D Not Affected = NAWhetzel Company sold merchandise to a customer for $950 on account. Whetzel's cost of the merchandise was $600.

Question 12

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. 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. You do not need to enter amounts. Assume that Whetzel Company uses a perpetual inventory system.Increase = I Decrease = D Not Affected = NAWhetzel Company recorded a cash discount on goods recently purchased on account.

Question 13

Xavier Company sold goods with the terms 2/15, n/30. What do the terms mean?

Question 14

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. 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. You do not need to enter amounts. Assume that Whetzel Company uses a perpetual inventory system.Increase = I Decrease = D Not Affected = NAWhetzel Company paid $100 cash to a freight company for delivering inventory that Whetzel had purchased from Jacobs Company with freight terms FOB shipping point.

Question 15

On June 1, Year 1, merchandise subject to terms 2/10, n/30 was sold on account to a customer for $26,500. On June 3, the customer returned $5,800 of that merchandise to the seller. This was prior to payment by the customer.What is the amount of cash collected by the seller if the payment is made by the customer on June 8, Year 1?What is the amount of cash collected by the seller if payment is made by the customer on June 21, Year 1?

Question 16

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. 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. You do not need to enter amounts. Assume that Whetzel Company uses a perpetual inventory system.Increase = I Decrease = D Not Affected = NAOn April 1, Year 1, Wetzel Co. paid a supplier, Jacobs Company, the amount owed on account related to a purchase of inventory on account with terms of 2/10, net/30. The inventory was purchased on March 1, Year 1.

Question 17

If goods are shipped FOB destination, who is responsible for the shipping costs?

Question 18

When merchandise inventory is purchased on account, how is the accounting equation affected? (Assume a perpetual inventory system is in use.)

Question 19

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. 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. You do not need to enter amounts. Assume that Whetzel Company uses a perpetual inventory system.Increase = I Decrease = D Not Affected = NAWhetzel Company discovered that a recent shipment of merchandise it had purchased was not of the same quality it had expected. The seller agreed to grant Whetzel an allowance of $250. Whetzel had not yet paid the amount owed on the shipment.

Question 20

If the buyer is to pay the transportation cost of delivering merchandise, the freight or shipping terms would be stated as:

Question 21

What is a common size income statement? Explain how a common size income statement is useful to financial statement users.

Question 22

The following is a partial list of account balances for the Fisherman's Supply at December 31, Year 1:
$\begin{array}{lr}\text { Cash } & 87,450 \\\text { Accounts receivable } & 24,800 \\\text { Inventory } & 197,450 \\\text { Supplies } & 3,600\\\text { Land } & 134,800 \\\text { Accounts payable } & 47,500 \\\text { Common stock } & 30,000 \\\text { Retained earnings } & 78,250 \\\text { Sales revenue } & 490,350\\\text { Cost of goods sold }&399,250 \\\text { Salaries expense } & 36,250 \\\text { Utilities expense } & 9,500 \\\text { other operating expense } &30,000\\\text { Gain on sale of land }&7,000\end{array}$ After the temporary accounts are closed, what is the balance of Retained Earnings?From the above information, prepare a multistep income statement.

Question 23

What is the effect on the accounting equation of the seller for granting an "allowance" for merchandise that the customer is not satisfied with?What is the effect of the above situation on the accounting equation of the purchaser?For both questions, assume that the merchandise had been sold on account, and the invoice had not yet been paid.

Question 24

The following is a list of selected events for Outdoor World for Year 1. Outdoor World uses a perpetual inventory system and had an inventory balance of zero prior to these transactions.Purchased merchandise on account for $170,000.Sold inventory costing $124,000 for $208,000 on account.Paid transportation-out cost of $7,000 on goods sold.Paid other operating expense of $55,200.Sold land for $45,400 that had cost $50,000.A count of the inventory revealed that there was $45,800 of inventory on hand at the end of Year 1.
Required:Answer the following questions based on the above information.What was Outdoor World's net income for Year 1?Compute gross margin and the gross margin percentage that would be shown on the common size income statement for Year 1.What amount of inventory will appear on the balance sheet for December 31, Year 1?Based on the above information, prepare a multistep income statement for Year 1.

Question 25

On April 6, Year 1, Gringot Company purchased $140,000 of merchandise inventory. Terms of the purchase included a discount of 3/20, n/30 and the freight terms were FOB destination. Freight costs amounted to $4,600. Gringot paid the account payable on April 24. Gringot sold all inventory for $189,500.
Required:Determine the amount of gross margin that Gringot would report on its income statement.

Question 26

What type of financial statement matches sales revenue items with related expense items and distinguishes between recurring operating activities and nonoperating items such as gains and losses?

Question 27

The following events apply to Deb's Dance Wholesalers.Sold merchandise to a customer. The goods were shipped FOB destination, with a freight cost of $50.Purchased merchandise with freight cost of $75, shipped with the terms FOB shipping point.Sold merchandise to a customer with freight cost of $40, shipped FOB shipping point.
Required:Based on the above events, what is the total amount of freight that will be paid by Deb's Dance Wholesalers?How much of the freight cost will be recorded as an expense when incurred?

Question 28

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

Question 29

Below are the income statements of two competitive companies, Green Company and Black Company, for the current year.
$\begin{array}{l}&\text { Green Company}&\text { Black Company }\\ \text { Net Sales } & \$ 6,200 & \$ 3,440 \\\text { Cost of goods sold } & \underline{3,880 }& \underline{2,030} \\\text { Gross margin } & \underline{2,320} & \underline{1,410} \\\text { Operating expenses: }\\\\\text { Selling expenses } & \$ 1,220 & 660 \\\text { Administrative expenses } &\underline{ 875} & \underline{505} \\\text { Total Operating expenses } & \underline{2,095 }& \underline{1,165} \\\text {Net Income } &\underline{ \$ 225} & \underline{\$ 245}\end{array}$ Required:Based on the above statements, determine:The gross margin percentage for each company.The net income percentage for each company.Which company is selling their products for lower prices (at a lower markup).

Question 30

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

Question 31

The following events pertain to The Craft Shop, which began operations in October. The company uses the perpetual inventory method.
October 1 Issued common stock to investors for $15,000October 2 Purchased $12,000 of inventory on account with terms 2/10, n/30October 3 Sold on account for $18,000 merchandise that had cost $10,000; terms 1/10, n/30October 4 Returned defective merchandise with list price of $1,000 from October 2 purchaseOctober 5 Paid freight of $100 on goods sold to customers, FOB destinationOctober 10 Paid the amount due on the merchandise purchased October 2October 12 Received cash from customer in settlement of October 3 sale
Required:
What was the amount of cash that The Craft Shop paid on October 10?
What was the amount of cash that The Craft Shop collected on October 12?
What was the balance in The Craft Shop's cash account at the end of the day on October 12?

Question 32

The income statements for the Alpha Company and the Omega Company for the current year appear below:
$$\begin{array} { l r r } & { \text { Alpha Company } } & \text { Omega Company } \\\text { Net sales } & \$ 1,050,000 & \$ 260,000 \\\text { Cost af goods sold } & 475,000 & 107,500 \\\text { Operating expenge } & 367,500 & 73,000\end{array}$$ Required:Prepare common size income statements for the Alpha Company and the Omega Company.

Question 33

Indicate how the determination of the amount of lost, damaged, destroyed, or stolen merchandise differs between firms using a perpetual inventory system and those using a periodic inventory system. Which inventory system provides the best way to account for lost, damaged, destroyed, or stolen merchandise and why?

Question 34

Jackson Medical Supply, which uses the perpetual inventory system, experienced the following events during June Year 1.Issued common stock for cash.Purchased inventory on account, terms 2/10, n/30, FOB shipping point.Paid the shipping charges on the purchase in event number 2.Sold merchandise to a customer on account, terms 2/10, n/30, FOB destination. Record the revenue recognition as 4(a) and the expense recognition as 4(b).Paid the shipping charges on goods sold in event number 4.Customer returned some of the merchandise sold in event number 4. Record the effect on revenue as 6(a) and the effect on expenses as 6(b).Recorded discount granted to the customer in event number 4.Recorded payment received from the customer in event number 4.Recorded discount received on purchase in event number 2.Recorded payment of amount due on purchase in event number 2.
Required:
Identify each event as asset source (AS), asset use (AU), asset exchange (AE), or claims exchange (CE). Also explain how each event affects the financial statements by placing a + for increase, − for decrease, or NA for not affected under each of the components of the following statements model. If the element both increases and decreases, mark with "+−". Also, indicate in the cash column if the event would be recorded as an operating activity (OA), an investing activity (IA) or a financing activity (FA). In the cash column, use + to indicate a cash inflow and − to indicate a cash outflow. The first event is recorded as an example.

Question 35

If a company uses the perpetual inventory method, when would it normally discover that merchandise inventory has been lost or stolen?

Question 36

Mattress Warehouse, which uses the perpetual inventory system, experienced the following events during December Year 1:
Issued common stock for cash.Borrowed money from the Star City Bank issuing a note payable.Purchased inventory on account, terms 2/10, n/30, FOB shipping point.Returned part of the merchandise purchased in event number 3.Paid shipping costs on merchandise purchased in event number 3.Sold merchandise for cash. Label the revenue recognition 6(a) and the expense recognition 6(b).Paid shipping costs to deliver goods sold in event number 6.Recorded the discount allowed in event number 3.Recorded the payment for goods purchased in event number 3.Accrued interest on the note payable issued in event number 2 (note is not due for several months).
Required:Identify each event as asset source (AS), asset use (AU), asset exchange (AE), or claims exchange (CE). Also explain how each event affects the financial statements by placing a + for increase, − for decrease, or NA for not affected under each of the components of the following statements model. If an element both increases and decreases, mark with "+−". Also, indicate in the cash flow column if the event would be recorded as an operating activity (OA), an investing activity (IA) or a financing activity (FA). In the cash flow column, use + to indicate a cash inflow and − to indicate a cash outflow. The first event is recorded as an example.

Question 37

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.

Question 38

At the beginning of the year, Superior Sales had $7,500 of merchandise inventory. During the year, the company purchased $72,000 of inventory. At the end of the year, a count of the inventory revealed that the business had $11,640 of inventory on hand. Superior uses the periodic inventory system.What is cost of goods sold for the year?What is the amount of goods available for sale?What amount of inventory will be shown on the year-end balance sheet?