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Unformatted text preview: CHAPTER 6 ACCOUNTING FOR MERCHANDISING BUSINESSES EYE OPENERS 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 system , the inventory re- cords do not show the amount available for sale or the amount sold during the period. In contrast, under the perpetual system of ac- counting for merchandise inventory, each purchase and sale of merchandise is recor- ded in the inventory and the cost of mer- chandise 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. Examples would include rent revenue and interest revenue. 8. Examples of such accounts include the fol- lowing: Sales, Sales Discounts, Sales Re- turns and Allowances, Cost of Merchandise Sold, Merchandise Inventory. 9. Sales to customers who use MasterCard or VISA cards are recorded as cash sales. 10. The date of sale as shown by the date of the invoice or bill. 11. a. 1% discount allowed if paid within 15 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. c. Payment due by the end of the month in which the sale was made. 12. a. A credit memo issued by the seller of merchandise indicates the amount for which the buyer's account is to be cred- ited (credit to Accounts Receivable) and the reason for the sales return or allow- ance....
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- Spring '10