Exam 4: Accounting for Merchandising Businesses

Sales discounts affect net sales, but purchase discounts do not.

With a perpetual inventory system, the cost of merchandise inventory is recognized at the time of sale.

The term "FOB shipping point" indicates that the seller is responsible for transportation costs.

Sales discounts adversely affect a company's gross margin percentage.

Which accounts would affect operating income?

What effect will the return of merchandise to the supplier have on the accounting equation?

Net sales is calculated by subtracting cost of goods sold from sales revenue.

The following is a list of selected events for Sunglass Shack for 2013. Sunglass Shack uses a perpetual inventory system and had a zero inventory balance prior to these transactions. 1) Purchased merchandise on account for $85,000. 2) Sold inventory costing $62,000 for $104,000 on account. 3) Paid transportation-out cost of $3,500 on goods sold. 4) Paid operating expense of $27,600. 5) Sold land for $22,700 that had cost $25,000. 6) A count of the inventory revealed that there was $22,900 of inventory on hand at the end of 2013. Required: Answer the following questions based on the above information. a) What was Sunglass Shack's net income for 2013? b) Compute gross margin and the gross margin percent for 2013. c) What amount of inventory will appear on the balance sheet for December 31, 2013? d) Based on the above information, prepare a multistep income statement for 2013.

The following entry is taken from the journal of a merchandising company: This entry results in

Flowers Company purchased $4,000 of merchandise on account. Flowers sold the merchandise to a customer for $7,000 cash. What is the increase in gross margin and the net change in cash flow from operating activities as a result of these transactions?

After a physical count of its inventory, Frank Co. discovered that $500 of inventory is missing. Show how the required write-down of inventory would affect Frank Co.'s statements.

Ragged Mountain Running Shop, which uses the perpetual inventory system, experienced the following events during December 2013: 1. Issued common stock for cash. 2. Borrowed money from the Star City Bank issuing a note payable. 3. Purchased inventory on account, terms 2/10, n/30, FOB shipping point. 4. Returned part of the merchandise purchased in event #3. 5. Paid shipping costs on merchandise purchased in event #3. 6. Sold merchandise for cash. Label the revenue recognition 6(a) and the expense recognition 6(b). 7. Paid shipping costs for goods sold in event #6. 8. Recorded the discount allowed in event #3. 9. Recorded the payment for goods purchased in event #3. 10. Accrued interest on the note payable issued in event #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, NA for not affected under each of the components of the following statements model. 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). The first event is recorded as an example.

Fox Company recorded a purchase discount of $200 on merchandise the company had purchased a few days ago. Fox uses the perpetual inventory system. Which of the following answers reflects the effects of this event on the financial statements?

Frank Co. sold merchandise to a customer for $900 on account. Frank's cost of the merchandise was $550.

A company using the perpetual inventory method paid cash for freight costs to purchase merchandise. Which of the following answers reflects the effects of this event on the financial statements?

Frank Co. returned some defective merchandise it had previously purchased on account from a supplier, Jansen Company. Jansen Company agreed to credit Frank's account.

Ryland Company returns merchandise previously purchased on account. It had not yet been paid for. Ryland uses the perpetual inventory system. Which of the following answers reflects the effects of the purchase return on the financial statements?

The following data is from the income statement of Randall Company: The company's gross margin percentage is:

The net cash flow from operating activities as a result of the four transactions is:

Which of the following is considered a product cost?