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Merchandise Inventory 2000 Accounts Payable 2000: Account Titles Debit Credit

The document discusses key concepts for merchandising companies including: 1) The difference between service and merchandising companies, with the latter selling physical products. 2) How to calculate cost of goods sold and gross profit, with the former being expenses to buy and prepare merchandise and the latter being net sales minus cost of goods sold. 3) The journal entry to record a purchase of $2,000 of merchandise on account using perpetual inventory, debiting merchandise inventory and crediting accounts payable.

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Asfawosen Dingama
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49 views

Merchandise Inventory 2000 Accounts Payable 2000: Account Titles Debit Credit

The document discusses key concepts for merchandising companies including: 1) The difference between service and merchandising companies, with the latter selling physical products. 2) How to calculate cost of goods sold and gross profit, with the former being expenses to buy and prepare merchandise and the latter being net sales minus cost of goods sold. 3) The journal entry to record a purchase of $2,000 of merchandise on account using perpetual inventory, debiting merchandise inventory and crediting accounts payable.

Uploaded by

Asfawosen Dingama
Copyright
© © All Rights Reserved
Available Formats
Download as DOC, PDF, TXT or read online on Scribd
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1.

What is the difference between a merchandising company and a service


based company?

Service based companies sell their often intangible services while a


merchandising company sells a physical product.

2. What is the definition of cost of goods sold and how do you calculate
gross profit?

The expense of buying and preparing merchandise


Net sales – Cost of goods sold = Gross profit

3. We will be using the perpetual inventory system in this class to account


for inventory. If a company purchases $2,000 worth of merchandise on
account, what would the journal entry be to record that purchase using
the perpetual inventory system?

Account Titles Debit Credit


Merchandise Inventory 2000
Accounts Payable 2000

4. What does the term "2/15,n/45" mean?

Payment is due within a 45 day period, but the buyer can deduct 2%
of the invoice amount if payment is made within 15 days of the
invoice date.
5. What is the difference between a purchase return and a purchase
allowance?

Purchase returns refer to merchandise a buyer acquires but then


returns to the sellers. A purchase allowance is a reduction in the cost
of defective or unacceptable merchandise that a buyer acquires.
6. If you purchased merchandise for $1,500 with credit terms of 2/10,n/30
and you paid within the 10 day discount period, how much would the
discount be and to which account would the discount be credited ?

$30 to Accounts Payable


7. If you purchase goods with the shipping terms "FOB shipping point"
when does the ownership of the goods pass to the buyer and who pays for
the transportation and insurance costs of the goods while in transport?
Ownership transfers to the buyer when the product leaves the original
shipping point and the buyer pays for the transportation and insurance of the
goods while in transport.
8. What is the formula to calculate Net Sales?
Sales – Sales discounts – Sales returns and allowances
9. What are the two journal entries that must be made by the seller of
merchandise when a sale of goods is made using the perpetual inventory
system?
Account Titles Debit Credit
Accounts Receivable X
Sales X
Sold merchandise on credit

Cost of goods sold X


Merchandise Inventory X
To record the cost of sale
10.Why are sales discounts and sales returns and allowances recorded as
Contra Revenue accounts instead of directly in the Sales account?
If they were put in revenue then net sales wouldn’t equal the amount
customers paid for goods kept.
11. Most merchandising companies use the Multi-Step Income Statement
when preparing their financial statements. In this format Operating
Expenses are separated into two main categories. Identify the two
categories and describe what type of expenses go in each category.

Selling expenses- include the expenses of promoting sales by


displaying and advertising merchandise, making sales, and delivering
goods to customers.
General and administrative expenses- support a company’s overall
operations and include expenses related to accounting, human
resource management, and financial management.
12.What category is Merchandise Inventory reported under using the
classified balance sheet?

Current Assets

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