ch05 - 5-1CHAPTER 5Accounting for Merchandising...

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Unformatted text preview: 5-1CHAPTER 5Accounting for Merchandising OperationsANSWERS TO QUESTIONS1.(a)Disagree. The steps in the accounting cycle are the same for both a merchandiser and aservice 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 normal operating cycle for a merchandiser is likely to be longer than in a service companybecause inventory must first be purchased and sold, and then the receivables must be collected.3.(a)The components of revenues and expenses differ as follows:MerchandiserServiceRevenuesExpensesSalesCost of Goods Sold and OperatingFees, Rents, etc.Operating (only)(b)The income measurement process is as follows:SalesRevenuesLessCost ofGoodsSoldEqualsGrossProfitLessOperatingExpensesEqualsNetIncome4.Income measurement for a merchandiser differs from a service company as follows: (a) sales arethe primary source of revenue and (b) expenses are divided into two main categories: cost of goodssold and operating expenses.5.In a perpetual inventory system, cost of goods sold is determined each time a sale occurs.6.The letters FOB mean Free on Board. FOB shipping point means that goods are placed free onboard the carrier by the seller. The buyer then pays the freight and debits Merchandise Inventory.FOB destination means that the goods are placed free on board at the buyers place of business.Thus, the seller pays the freight and debits Freight-out.7.Credit terms of 2/10, n/30 mean that a 2% cash discount may be taken if payment is made within10 days of the invoice date; otherwise, the invoice price is due 30 days from the invoice date.8.July 24Accounts Payable ($2,000 $200) ...............................................1,800Merchandise Inventory ($1,800 X 2%) ..................................36Cash ($1,800 $36) .............................................................1,7649.Agree. In accordance with the revenue recognition principle, sales revenues are generally consid-ered to be earned when the goods are transferred from the seller to the buyer; that is, when theexchange transaction occurs. The earning of revenue is not dependent on the collection of creditsales.5-210.(a)The primary source documents are: (1) cash salescash register tapes, (2) credit salessales invoice, and (3) sales returns and allowancescredit memoranda.(b)The entries are:DebitCreditCash salesCash..............................................................Sales .....................................................Cost of Goods Sold .......................................Merchandise Inventory...........................XXXXXXXXCredit salesAccounts Receivable ........................................
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ch05 - 5-1CHAPTER 5Accounting for Merchandising...

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