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Chapter 5 homework solution - Solutions to Questions and...

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Solutions to Questions and Multiple Choice Questions 1. 2. 3. 4. 5. 6. 7. Purchases returns and allowances reduce the cost of inventory. 8. 9. 10. 11. 12. Sales returns and allowance reduce sales revenue. 13. 14. 15. Inventory shrinkage is a reduction in the physical inventory due to causes other than sales. Merchandising firms purchase goods (inventory) that they resell to customers. Service firms provide services to their customers. An operating cycle is a series of business activities in which the company takes cash and turns it in to more cash by providing goods and services. A purchase requisition is prepared by the employee requesting goods or services and sent to the purchasing agent. The purchasing agent prepares the purchase order, which is a record of the company's request to a vendor for the goods or services. FOB shipping point means that title to the goods passes to the buyer at the shipping point and the buyer is responsible for the shipping costs. FOB destination means that the title passes to the buyer when the goods reach their destination and the seller pays the shipping costs. FOB shipping point increases the cost of the inventory to the buyer. Freight-in is transportation costs paid on goods purchased and is included as part of the cost of the goods. Freight out is transportation costs paid on goods sold and is an operating expense. A purchase return is when goods previously purchased are returned to the seller. A purchase allowance is when the cost of damaged or defective goods is reduced, but the goods are retained by the purchaser. A purchase discount is a reduction in the purchase price granted to a customer for prompt payment. A purchase discount reduces the cost of the inventory to the buyer. The terms 1/10, n/45 mean that the customer will get a purchase discount of 1% of the purchase price if the customer pays within 10 days of the invoice date. Otherwise, the entire amount is due within 45 days. A contra revenue account is an account with a debit balance in which reductions to revenue are recorded. A contra revenue account reduces revenue. Two examples are sales returns and allowances and sales discounts. The sales returns and allowances account allows the company to keep tract of customer returns and allowances for damaged merchandise. A sales discount is a reduction in the sales price for prompt payment. Sales discounts reduce sales revenue. A perpetual inventory system is continuously updated for sales and purchases of inventory. A periodic inventory system is only updated at the end of the accounting period.
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16. The risks of holding inventory include inventory shrinkage and obsolescence. 17. 18. 19. 20. Multiple Choice 1. a 2. b 3. b 4. d 5. d 6. b 7. b 8. a 9. b 10. b A multiple-step income statement is one that highlights the components of net income: (1) gross profit, (2) operating income, and (3) other revenues and expenses.
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