Solutions Chapter 5 - ANSWERS TO QUESTIONS 1. (a) Disagree....

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Unformatted text preview: ANSWERS TO QUESTIONS 1. (a) Disagree. The steps in the accounting cycle are the same for both a merchandising company and a service enterprise. (b) The measurement of income is conceptually the same. In both types of companies, net income (or loss) results from the matching of expenses with revenues. 2. The components of revenues and expenses differ as follows: Merchandising Service Revenues Expenses Sales Cost of Goods Sold and Operating Fees, Rents, etc. Operating (only) 3. Under a periodic inventory system the company does not keep track of how many units are on hand. Instead it takes a physical count at the end of the period to determine ending inventory and cost of goods sold. Under a perpetual system the company adjusts its inventory account each time it purchases or sells inventory. Thus it always has a record of its available inventory. Having knowledge of inventory balances helps a company avoid lost sales due to stock-outs as well as carrying too much inventory on hand (which results in additional storage and handling costs). The purchasing department can make better decisions with the aid of perpetual inventory records. 4. (a) The income measurement process is as follows: Sales Revenue Less Cost of Goods Sold Equals Gross Profit Less Operating Expenses Equals Net Income (b) Income measurement in a merchandising company differs from a service company as follows: (a) sales are the primary source of revenue and (b) expenses are divided into two main categories: cost of goods sold and operating expenses. 5. Sales revenue......................................................................................................................... $100,000 Cost of goods sold.................................................................................................................. 68,000 Gross profit............................................................................................................................ $ 32,000 6. Agree. In accordance with the revenue recognition principle, sales revenues are generally considered to be earned when the goods are transferred from the seller to the buyer; that is, when the exchange transaction occurs. The earning of revenue is not dependent on the collection of credit sales. 7. (a) The primary source documents are (1) cash salescash register tapes and (2) credit salessales invoice. (b) The entries are: Debit Credit Cash sales Cash Sales.................................................................... Cost of Goods Sold...................................................... Merchandise Inventory....................................... XX XX XX XX Credit sales Accounts Receivable......................................................
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Solutions Chapter 5 - ANSWERS TO QUESTIONS 1. (a) Disagree....

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