Chapter 5
Accounting for Merchandising
Operations
QUESTIONS
1. Merchandising companies report Merchandise Inventory on the balance sheet,
2. Additional accounts of a merchandising company likely include Merchandise
3. A company can have a net loss if its expenses (absent cost of goods sold) are
4. A cash discount can be offered to encourage customers to promptly pay. This
5. For a perpetual inventory system, inventory shrinkage is determined by taking a
6. Cash discounts are granted in return for early payment and reduce the amount
paid below the negotiated price. Cash discounts are recorded in the accounting
7. Sales discount is a term used by a seller to describe a cash discount granted to a
8. A manager is concerned about the quantity of its purchase returns because the
9. The sender (maker) of a debit memorandum records a debit in an account of the
recipient; and the recipient records a credit in an account maintained for the sender.
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10. The single-step income statement format presents cost of goods sold and expenses
in one list, totals the list, and subtracts the total from net sales in one step. The
11. Apple calls its inventory account “Inventories.” A detailed calculation of
cost of goods sold is not presented by Apple.
12. Google titles its cost of sales accounts as “Cost of revenues” Google
13. Samsung titles its cost of goods sold account “Cost of sales.”
15. A buyer should attempt to negotiate the shipping terms FOB destination. In
QUICK STUDIES
Quick Study 5-1 (10 minutes)
1. G. 6. H.
Quick Study 5-2 (5 minutes)
Answer: d
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Quick Study 5-3 (15 minutes)
Computation of net income:
Krug Service Co.
Revenues………………………………………….. $14,000
Kleiner Merchandising Co.
Sales………………………………………………… $ 9,500
*Computation of cost of goods sold: _
Beginning inventory $ 5,000
Quick Study 5-4 (15 minutes)
Nov. 5 Merchandise Inventory ………………………………. 6,000
Nov. 7 Accounts Payable ……………………………………… 250
Nov. 15 Accounts Payable …………………………………….. 5,750
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Quick Study 5-5 (10 minutes)
a)
Aug. 1 Merchandise Inventory……………………………….. 60,000
b)
Aug. 11 Accounts Payable………………………………………. 60,000
Quick Study 5-6 (10 minutes)
a)
Sept. 15 Merchandise Inventory……………………………….. 35,000
b)
Sept. 28 Accounts Payable………………………………………. 35,000
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Quick Study 5-7 (10 minutes)
Apr. 1 Accounts Receivable ……………………………… 3,000
Sales ……………………………………………… 3,000
To record credit sale.
11 Cash ……………………………………………………… 2,352
Sales Discounts* ……………………………………. 48
Quick Study 5-8 (10 minutes)
July 31 Cost of Goods Sold …………………………….. 1,900
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Quick Study 5-9 (10 minutes)
July 31 Sales …………………………………………………….. 160,200
Income Summary……………………………. 160,200
To close temporary accounts with credit balances.
July 31 Income Summary …………………………………… 165,900
Quick Study 5-10 (10 minutes)
Quick Study 5-11 (10 minutes)
Explanation of acid-test ratio: The acid-test ratio is used to evaluate (reflect on)
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Quick Study 5-12 (10 minutes)
Similarities: Both the acid-test ratio and current ratio are used to assess
liquidity. Both ratios are computed with current liabilities as the denominator.
Differences: The current ratio includes all current assets in the numerator.
The acid-test ratio includes current assets less inventories and prepaids in its
numerator (leaving cash & equivalents, current receivables, and short-term
investments).
Comparison and Description: Compared with the current ratio, the acid-test
ratio is a more stringent test of a company’s ability to meet its current
obligations. The acid-test ratio is more stringent as it does not assume a
company relies on prepaids and inventory to pay current liabilities. This is
because prepaids and inventory assets are not generally available to satisfy
current obligations.
Quick Study 5-13 (10 minutes)
(a) (b) (c) (d)
Sales…………………………………….$150,000 $550,000 $38,700 $255,700
Interpretation of gross margin ratio for case a: The ratio of 36.2% implies
that for each dollar in net sales the company earns 36.2 cents in gross
profit. The company must still deduct other expenses that it incurs in
running the business when computing net income.
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Quick Study 5-14 (20 minutes)
1. Multiple-step income statement
adidas Group
Income Statement (€ millions)
For Year Ended December 31, 2013
Net sales………………………………………………………….. €14,492
Cost of sales…………………………………………………….. 7,352
Gross profit………………………………………………………. 7,140
2. Single-step income statement
adidas Group
Income Statement (€ millions)
For Year Ended December 31, 2013
Revenues
Net sales……………………………………………………….. €14,492
Expenses
Cost of sales…………………………………………………. €7,352
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Quick Study 5-15A (5 minutes)
a. Periodic inventory system
Quick Study 5-16A (10 minutes)
Nov. 5 Purchases…………………………………………………. 6,000
7 Accounts Payable………………………………………. 250
15 Accounts Payable………………………………………. 5,750
Quick Study 5-17A (10 minutes)
Apr. 1 Accounts Receivable …………………………………. 3,000
4 Sales Returns and Allowances …………………… 600
11 Cash …………………………………………………………. 2,352
Sales Discounts* ……………………………………….. 48
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Quick Study 5-18 (10 minutes)
a. Both U.S. GAAP and IFRS include broad and similar guidance for the
accounting of merchandise purchases and sales.
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