Financial Accouting Midterm Practice Part 3

Gross margin is the correct answer because it represents the difference between sales revenue and the cost of goods sold. It is a measure of profitability that indicates how much money is left after subtracting the direct costs associated with producing or delivering a product or service. Gross margin is important for businesses to assess their pricing strategy, production efficiency, and overall profitability. It does not include other operating expenses such as overhead costs or taxes, which are deducted to calculate net income.

Merchandise inventory is reported on the balance sheet as a current asset because it represents goods that are expected to be sold within one year or one operating cycle. Current assets are resources that are expected to be converted into cash or used up within a short period of time. Since merchandise inventory is a key component of a company's operations and can be readily converted into cash through sales, it is classified as a current asset on the balance sheet.

The discount period refers to a specific period of time during which a customer can make payment and receive a cash discount on the invoice price. This means that if the customer pays within the discount period, they are eligible to deduct a certain amount from the total invoice price. The discount period incentivizes prompt payment and allows customers to save money on their purchases.

Gross profit is calculated by subtracting the cost of goods sold from the sales revenue. This is because the cost of goods sold represents the direct expenses incurred in producing or acquiring the goods that are sold. By deducting these costs from the sales revenue, we can determine the profit generated solely from the production and sale of goods, before considering other expenses such as operating expenses or selling expenses. Therefore, the cost of goods sold is the correct answer for calculating gross profit.

When a merchandising business purchases goods for resale, those goods are recorded as inventory on the balance sheet. This is because inventory represents the goods that the business has on hand and is available for sale. It is an asset that is expected to be converted into cash in the future. The cost of goods sold is the expense that is recognized when the goods are sold to customers, and it is recorded on the income statement. Therefore, the correct answer is inventory on the balance sheet.

Gibbson Company sold inventory to Garrison Company for $6,000, and the receivable was collected within the discount period. The terms of the sale were 1/10, n/30, meaning that Garrison Company is entitled to a 1% discount if they pay within 10 days. Since the receivable was collected within the discount period, Garrison Company would receive a $60 discount (1% of $6,000). Therefore, the amount Gibbson Company would collect from Garrison Company is $6,000 - $60 = $5,940.

Under a perpetual inventory system, the accounting records for inventory are continuously updated. This means that every time a purchase is made, the purchases account is debited, and the inventory account is credited. This allows for real-time tracking of inventory levels and costs. Unlike periodic inventory systems, there is no need for a physical inventory count at the end of an accounting period, as the inventory records are always up to date. This system provides more accurate and timely information for inventory management and financial reporting.

FOB Destination indicates to a buyer that merchandise is free of transportation charges. This means that the seller is responsible for the cost of shipping the goods to the buyer's designated location. The buyer does not have to pay for the transportation fees, as it is included in the selling price.

Gross margin refers to the difference between sales revenue and the cost of goods sold. It represents the amount of money left over after deducting the direct costs associated with producing the goods or services. Gross margin is an important financial metric that helps businesses assess their profitability and efficiency in generating revenue. It does not include other expenses such as operating expenses, taxes, or interest, which are considered in calculating net income.

Merchandise inventory is reported on the balance sheet as a current asset because it is expected to be sold within one year or one operating cycle. Current assets are those that are expected to be converted into cash or used up within a short period of time, typically within one year. Since merchandise inventory is held for the purpose of sale, it is considered a current asset as it is expected to be sold and converted into cash in the near future.

The cost of goods sold can be calculated by subtracting the gross profit from the gross sales. In this case, the cost of goods sold would be $675,000 - $270,000 = $405,000. The gross profit ratio is calculated by dividing the gross profit by the gross sales and multiplying by 100. In this case, the gross profit ratio would be ($270,000 / $675,000) * 100 = 40%. Therefore, the correct answer is $405,000, 40%.

FOB shipping point indicates that the buyer will be responsible for transportation charges for goods purchased. This means that the buyer will bear the cost and risk of transporting the goods from the seller's location to the buyer's specified destination. Therefore, FOB shipping point is the correct term that indicates the buyer's responsibility for transportation charges.

The net sales shown on the company's income statement can be calculated by subtracting the sales returns and allowances and sales discounts from the total sales. In this case, the sales returns and allowances are $13,000 and the sales discount is $6,000. Therefore, the net sales would be $150,000 - $13,000 - $6,000 = $131,000.

Cost of Goods Sold is an account that represents the direct costs incurred in producing or purchasing the goods that a merchandising company sells. It includes the cost of materials, labor, and overhead directly related to the production of goods. Since a service company does not sell goods, it does not have any costs directly associated with producing goods, and therefore, Cost of Goods Sold would not appear on its income statement. Instead, a service company would typically have expenses related to providing services, such as Payroll Tax Expense and Selling & Administrative Expenses, along with revenue from providing those services.

FOB Destination is the correct answer because it indicates to the buyer that the merchandise is free of transportation charges. FOB stands for "Free On Board" and it is a shipping term that determines who is responsible for the transportation costs. In this case, FOB Destination means that the seller is responsible for the transportation costs until the merchandise reaches the buyer's specified destination. Therefore, the buyer can be assured that they will not have to pay any additional transportation charges for the merchandise.

Jones Company would record the transaction by debiting accounts receivable to reflect the increase in the amount owed by Jacob Company, and crediting revenue to recognize the sale. Additionally, Jones Company would debit cost of goods sold to account for the expense of the merchandise sold, and credit inventory to reduce the quantity of goods on hand. This reflects the perpetual inventory system, where inventory is continuously updated to reflect sales and purchases.

Sales revenues are usually considered earned when legal ownership of goods has been transferred from the seller to the buyer. This means that the buyer has taken possession of the goods and has the right to use them as they see fit. This is the point at which the seller can recognize the revenue from the sale, as they have fulfilled their obligation to deliver the goods to the buyer. The other options, such as when the goods leave the seller's business or when cash is received from a sale on account, do not necessarily indicate that legal ownership has been transferred.

Based on the information provided, the gross margin percentage can be calculated by subtracting the cost of goods sold from the sales and dividing the result by the sales. For Holland Company, the gross margin percentage would be (1,300,000 - 1,100,000) / 1,300,000 = 0.1538 or 15.38%. For Tilburg Company, the gross margin percentage would be (1,600,000 - 1,200,000) / 1,600,000 = 0.25 or 25%. Therefore, Tilburg has a higher gross margin percentage than Holland does.

This transaction affects the accounting equation by decreasing both assets and equity. The cost of goods sold represents the expense incurred by the company to produce or purchase the goods that were sold. This expense reduces the value of the merchandise inventory, which is an asset. Additionally, since equity is calculated as assets minus liabilities, a decrease in assets will also result in a decrease in equity. Therefore, the correct answer is that assets and equity will decrease.

The correct equation is "Beginning Inventory + Purchases = Ending Inventory". This equation represents the calculation of ending inventory by adding the beginning inventory to the purchases made during a specific period.

The gross profit is calculated by subtracting the cost of goods sold from the sales. In this case, the cost of goods sold is $77,000 and the sales are $150,000. Therefore, the gross profit is $150,000 - $77,000 = $73,000. However, the sales returns and allowances ($13,000) and sales discount ($6,000) need to be deducted from the gross profit. Therefore, the final gross profit amount shown on the company's income statement would be $73,000 - $13,000 - $6,000 = $54,000.

When using a perpetual inventory system, each sale must be recorded immediately in the accounting records. This means that when a sale is made, the company must also make an entry to debit the cost of goods sold and credit the merchandise inventory. This entry is necessary to accurately track the cost of goods sold and the remaining inventory.

The net income shown on the company's income statement can be calculated by subtracting all the expenses from the total sales. In this case, the sales returns and allowances, sales discount, selling expenses, and administrative expenses need to be subtracted from the sales. Therefore, the calculation would be: $150,000 - $13,000 - $6,000 - $15,000 - $30,000 = $96,000. Therefore, the correct answer is $9,000.

Sales Returns and Allowances is classified as a Contra revenue account because it represents the reduction in sales revenue due to returns or allowances granted to customers. Contra revenue accounts are used to offset the revenue accounts and show the net amount of revenue earned. In this case, Sales Returns and Allowances account is subtracted from the Sales Revenue account to calculate the net sales.

The correct answer is to debit inventory and credit cash. This is because in a perpetual inventory system, the cost of freight is added to the cost of the inventory. By debiting inventory, Sebastian Merchandising increases the value of their inventory to reflect the cost of the goods and the freight charges. By crediting cash, they show that they have paid for the goods and the freight charges.

Chanelle's gross margin can be calculated by subtracting the cost of goods sold from the sales revenue. In this case, the sales revenue is $100,000 and the cost of goods sold is $60,000, so the gross margin is $40,000. The total amount of merchandise purchased for the year can be calculated by adding the beginning inventory to the cost of goods sold and subtracting the ending inventory. In this case, the beginning inventory is $8,000, the ending inventory is $6,000, and the cost of goods sold is $60,000, so the total amount of merchandise purchased is $58,000.

The gross profit ratio is calculated by dividing the gross profit by the net sales and multiplying by 100. In this case, the net sales can be calculated by subtracting the ending merchandise inventory ($492) from the total sales ($8,000). The gross profit can be calculated by subtracting the cost of goods sold from the net sales. Since the cost of goods sold is not provided, it cannot be calculated accurately. However, the gross profit ratio can still be estimated by assuming a reasonable cost of goods sold. Therefore, the correct answer is 38% based on this estimation.

The gross margin is calculated by subtracting the cost of goods sold from the sales revenue. In this case, the sales revenue is $6,000, which is the amount received from selling the inventory. The cost of goods sold is the cost of the inventory, which is $4,000. Since the inventory was sold within the discount period, the company would receive a 1% discount on the sales price, which is $60. Therefore, the cost of goods sold would be $4,000 - $60 = $3,940. The gross margin would be $6,000 - $3,940 = $2,060. However, since the question asks for the amount of gross margin that would show up on Gibbson's income statement, we need to subtract the freight costs of $200 that were paid in cash. Therefore, the correct answer is $2,060 - $200 = $1,860.

Sebastian Company would include a debit to accounts receivable for $750 because this represents the amount that Sam owes to the company for the merchandise purchased. By debiting the accounts receivable, the company records the increase in the amount owed to them by the customer.

When Kohen Sales Company purchased the merchandise on account, they would debit accounts payable for the full amount of $1,900. However, since they paid within the discount period, they are eligible for a discount. The discount is calculated as 2% of the purchase amount, which is $38. This discount is credited to the merchandise inventory account. The remaining amount of $1,862 is the cash paid to settle the account, which is also credited to the cash account. Therefore, the correct entry would be to debit accounts payable for $1,900, credit merchandise inventory for $38, and credit cash for $1,862.

In a perpetual inventory system, freight charges for goods purchased FOB destination are not recorded separately in the accounting records. Instead, they are included in the cost of the inventory. Therefore, the correct answer is that the freight charges would not be included in Sebastian's accounting records.

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The cost of goods sold for this period can be calculated by adding the beginning inventory ($2,000) to the purchases ($4,000) and subtracting the returned goods ($400) and ending inventory ($492). Therefore, the cost of goods sold is $5,000.

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In a perpetual inventory system, the return of goods is recorded by reducing the inventory value and reducing the accounts payable. Since Sebastian returned $300 worth of goods, the inventory should be credited to decrease its value, and the accounts payable should be debited to reflect the reduction in the amount owed to Nemo Incorporated.

The estimated inventory loss that Holland will incur is $45,000. This can be calculated by finding the cost of goods sold (COGS) for the first six months, which is the sum of the beginning inventory ($34,000) and the purchases ($275,000), and then subtracting the gross profit from the net sales. The gross profit is calculated by multiplying the net sales ($440,000) by the gross profit ratio (40%). Therefore, the COGS is $309,000 and the gross profit is $176,000. Subtracting the gross profit from the net sales gives us the estimated inventory loss of $45,000.

The beginning inventory can be calculated by subtracting the purchases, freight-in, returns, and ending inventory from the cost of goods sold. In this case, the calculation would be: $78,000 - $80,000 - $300 - $500 - $11,900 = $10,100. Therefore, the beginning inventory must have been $10,100.

The inventory value on Garrison Company's balance sheet would be $6,140. This is because the inventory was sold for $6,000, but since the receivable was collected within the discount period, a 1% discount of $60 would be applied. Additionally, the freight costs of $200 would also be included in the inventory value. Therefore, the total inventory value would be $6,000 + $60 + $200 = $6,260.