ch05 - CHAPTER 5 ACCOUNTING FOR MERCHANDISING BUSINESSES...

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Unformatted text preview: CHAPTER 5 ACCOUNTING FOR MERCHANDISING BUSINESSES CLASS DISCUSSION QUESTIONS 1. Merchandising businesses acquire mer- chandise for resale to customers. It is the selling of merchandise, instead of a service, that makes the activities of a merchandising business different from the activities of a service business. 2. Yes. Gross profit is the excess of (net) sales over cost of merchandise sold. A net loss arises when operating expenses exceed gross profit. Therefore, a business can earn a gross profit but incur operating expenses in excess of this gross profit and end up with a net loss. 3. a. Increase c. Decrease b. Increase d. Decrease 4. Under the periodic method , the inventory records do not show the amount available for sale or the amount sold during the peri- od. In contrast, under the perpetual meth- od of accounting for merchandise inventory, each purchase and sale of merchandise is recorded in the inventory and the cost of merchandise sold accounts. As a result, the amount of merchandise available for sale and the amount sold are continuously (per- petually) disclosed in the inventory records. 5. The multiple-step form of income statement contains conventional groupings for reven- ues and expenses, with intermediate bal- ances, before concluding with the net in- come balance. In the single-step form, the total of all expenses is deducted from the total of all revenues, without intermediate balances. 6. The major advantages of the single-step form of income statement are its simplicity and its emphasis on total revenues and total expenses as the determinants of net in- come. The major objection to the form is that such relationships as gross profit to sales and income from operations to sales are not as readily determinable as when the multiple-step form is used. 7. Revenues from sources other than the prin- cipal activity of the business are classified as other income. 8. Sales to customers who use bank credit cards are generally treated as cash sales. The credit card invoices representing these sales are deposited by the seller directly into the bank, along with the currency and checks received from customers. Sales made by the use of nonbank credit cards generally must be reported periodically to the card company before cash is received. Therefore, such sales create a receivable with the card company. In both cases, any service or collection fees charged by the bank or card company are debited to ex- pense accounts. 9. The date of sale as shown by the date of the invoice or bill. 10. a. 2% discount allowed if paid within ten days of date of invoice; entire amount of invoice due within 60 days of date of in- voice. b. Payment due within 30 days of date of invoice....
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This note was uploaded on 06/27/2008 for the course ACCY 201 taught by Professor ? during the Spring '07 term at Ole Miss.

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ch05 - CHAPTER 5 ACCOUNTING FOR MERCHANDISING BUSINESSES...

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