3-1
ANSWERS TO QUESTIONS – CHAPTER 3
1. Merchandise inventory is finished goods that are held for sale to customers. Costs that are
2. Product costs are costs associated with goods for resale, usually inventory costs. Selling and
3. Cost of goods available for sale is the total of inventory on hand at the beginning of the period plus
inventory purchased during the period.
4. The cost of the items that have not been sold are allocated to merchandise inventory (asset) and are
goods sold (expense) and are shown on the income statement.
5. Period costs are expensed in the period they are incurred or used. Product costs are expensed in
the period in which the inventory is sold.
6. Net Sales $600,000
Ending Merchandise Inventory $ 75,000 (shown in balance sheet)
7. Under a perpetual inventory system, the balance in the inventory account is increased each time
goods are purchased and decreased each time goods are sold. The major advantage of the
8. a. Assets increase, stockholders’ equity increases – The balance sheet, statement of cash flows,
and statement of changes in stockholders’ equity are affected.
b. Assets increase, stockholders’ equity increases – This is similar to an acquisition of cash
affected.
3-2
d. Assets both increase and decrease (cash increases, inventory decreases) and stockholders’
statement of cash flows are affected.
9. Assets would both increase and decrease (cash increases by $20,000 and inventory decreases by
10. If goods are shipped FOB shipping point, the buyer is responsible for the shipping costs.
12. The $80 transportation-in is a product cost and is added to the Merchandise Inventory account.
The $135 transportation-out is a period cost and is added to the expense account Transportation-out.
13. When allowances are granted it is usually because the customer received inferior or damaged
14. 2/10 n/30 means that a 2% discount may be taken off of the selling price if payment is made
30 days.
15. If the $5,000 is for the purchase of inventory, this is an asset exchange in that inventory is
16. Cash discounts are offered to customers to encourage prompt payment.
18. The net amount of $4,000 will be added to the inventory account. If the invoice is paid within the
19. Purchase returns refer to the situation where the buyer of the goods returns them. Sales returns
refer to the situation where goods sold by the seller are returned to the seller. A sales return on the
3-3
20. Gross margin is net sales less cost of goods sold and relates the sales of primary products. Gain
21. The multistep income statement provides more information on the results of various business
22. Common size income statements covering several accounting periods help management identify
have been rising disproportionately with sales and take corrective action.
23. When using the periodic method of accounting for inventory, the schedule of cost of goods sold is
24. When using the periodic inventory system, a temporary account, Purchases, is used to accumulate
the purchases transactions for the year. Inventory is not adjusted until the end of the accounting
The periodic inventory system is easy to use in that when goods are sold, the cost of goods sold
One of the primary disadvantages of the periodic system is that the business owner has no account
of the amount of lost, stolen or damaged goods. Also, it is difficult to determine the amount of
25. The periodic inventory system does not separate the cost of lost, damaged, or stolen merchandise
3-4
SOLUTIONS TO EXERCISES – CHAPTER 3
EXERCISE 3-1
a.
Laura’s Flowers Effect of Events on the Accounting Equation
Assets
=
Equity
No.
Cash
+
A. Rec.
+
Inv.
=
C. Stock
+
Ret. Earn.
1.
20,000
NA
NA
20,000
NA
2.
(14,000)
NA
14,000
NA
NA
3a.
NA
18,000
NA
NA
18,000
3b.
NA
NA
(8,000)
NA
(8,000)
4.
15,000
(15,000)
NA
NA
NA
5.
(3,750)
NA
NA
NA
(3,750)
Tot.
17,250
+
3,000
+
6,000
=
20,000
+
6,250
3-5
EXERCISE 3-1 (cont.)
b.
Laura’s Flowers
Income Statement
For the Year Ended December 31, 2014
Net Sales
$18,000
Cost of Goods Sold
(8,000)
Gross Margin
10,000
Operating Expenses
(3,750)
Net Income
$ 6,250
Laura’s Flowers
Balance Sheet
As of December 31, 2014
Assets
Cash
$17,250
Accounts Receivable
3,000
Merchandise Inventory
6,000
Total Assets
$26,250
Liabilities
$ -0-
Stockholders’ Equity
Common Stock
$20,000
Retained Earnings
6,250
Total Stockholders’ Equity
26,250
Total Liabilities and Stockholders’ Equity
$26,250
EXERCISE 3-1 b. (cont.)
Laura’s Flowers
Statement of Cash Flows
For the Year Ending December 31, 2014
3-6
Cash Flows From Operating Activities:
Inflow from Customers
$15,000
Outflow for Inventory
(14,000)
Outflow for Expenses
(3,750)
Net Cash Flow from Operating Activities
$(2,750)
Cash Flows From Investing Activities
-0-
Cash Flows From Financing Activities:
Cash Inflow from Stock Issue
20,000
Net Change in Cash
17,250
Plus: Beginning Cash Balance
-0-
Ending Cash Balance
$17,250
c. Yes, Laura could recover more than half of her investment in the common stock ($20,000). She
collected $15,000 of the sales on account and paid $3,750 in operating expenses. Her ending cash
EXERCISE 3-2
a.
Lewis CPAs
Income Statement
For the Year Ended December 31, 2014
Revenue
Service Revenue
$60,000
Expenses
Salaries Expense
(40,000)
Net Income
$20,000
Lewis CPAs
Balance Sheet
As of December 31, 2014
Assets
Cash*
$100,000
3-7
Total Assets
$100,000
Liabilities
Notes Payable
$80,000
Total Liabilities
$80,000
Stockholders’ Equity
Retained Earnings
$20,000
Total Stockholders’ Equity
20,000
Total Liab. and Stockholders’ Equity
$100,000
*$80,000 + $60,000 − $40,000 = $100,000
EXERCISE 3-2 a. (cont.)
Lewis CPAs
Statement of Cash Flows
For Year Ended December 31, 2014
Cash Flows From Operating Activities:
Inflow from Clients
$60,000
Outflow for Salaries
(40,000)
Net Cash Flow from Operating Activ.
$20,000
Cash Flows From Investing Activities
-0-
Cash Flows From Financing Activities:
Inflow from Loan
$80,000
Net Cash Flow from Financing Activ.
80,000
Net Increase in Cash
100,000
Plus: Beginning Cash Balance
-0-
Ending Cash Balance
$100,000
EXERCISE 3-2 a. (cont.)
Casual Clothing
Income Statement
For the Year Ended December 31, 2014
Net Sales Revenue
$60,000
Cost of Goods Sold
(32,000)
3-8
Gross Margin
28,000
Expenses
Operating Expenses
(7,200)
Net Income
$20,800
Casual Clothing
Balance Sheet
As of December 31, 2014
Assets
Cash*
$82,800
Merchandise Inventory**
18,000
Total Assets
$100,800
Liabilities
Notes Payable
$80,000
Total Liabilities
$ 80,000
Stockholders’ Equity
Retained Earnings
$20,800
Total Stockholders’ Equity
20,800
Total Liab. and Stockholders’ Equity
$100,800
EXERCISE 3-2a. (cont.)
Casual Clothing
Statement of Cash Flows
For the Year Ended December 31, 2014
Cash Flows From Operating Activities:
Inflow from Customers
$60,000
Outflow for Inventory
(50,000)
Outflow for Expenses
(7,200)
Net Cash Flow from Operating Activities
$ 2,800
Cash Flows From Investing Activities
-0-
Cash Flows From Financing Activities:
Inflow from Loan
80,000
3-9
Net Cash Flow from Financing Activities
80,000
Net Increase in Cash
82,800
Plus: Beginning Cash Balance
-0-
Ending Cash Balance
$82,800
b. Casual Clothing is a merchandising business and has inventory and cost of goods sold — product
costs. Lewis is a service business and does not have product costs.
d. The asset in common is cash. The only asset that Lewis has is cash. Casual Clothing has cash but
3-10
EXERCISE 3-3
a.
Justin Swords Merchandising Effect of Events on Fianancial Statements
Assets
=
Equity
Rev.
−
Exp.
=
Net. Inc.
Cash Flow
No.
Cash
+
Inv.
=
C. Stock
+
Ret. Earn.
1.
70,000
NA
70,000
NA
NA
NA
NA
70,000 FA
2.
(60,000)
60,000
NA
NA
NA
NA
NA
(60,000) OA
3a.
82,000
NA
NA
82,000
82,000
NA
82,000
82,000 OA
3b.
NA
(48,000)
NA
(48,000)
NA
48,000
(48,000)
NA
Tot.
92,000
+
12,000
=
70,000
+
34,000
82,000
−
48,000
=
34,000
92,000 NC