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Exam 3: Accounting for Merchandising Businesses

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Question 1

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Explain the major difference between a merchandising business and a service business.

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A merchandising business earns...

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Question 2

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Indicate how each event affects the elements of financial statements. Use the following letters to record your answer in the box shown below each element. If an event increases one account and decreases another account equally within the same element (such as an asset exchange event), record I/D. If an event has no impact on the element, record NA. You do not need to enter amounts. Assume that Whetzel Company uses a perpetual inventory system.Increase = I Decrease = D Not Affected = NAWhetzel Company granted a $70 allowance to a customer who was not totally satisfied with the quality of goods received. The customer did not return the goods and had not yet paid for them.

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The purchase allowance decreases asse...

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Question 3

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What type of financial statement matches sales revenue items with related expense items and distinguishes between recurring operating activities and nonoperating items such as gains and losses?

The following is a list of selected events for Outdoor World for Year 1. Outdoor World uses a perpetual inventory system and had an inventory balance of zero prior to these transactions.Purchased merchandise on account for $170,000.Sold inventory costing $124,000 for $208,000 on account.Paid transportation-out cost of $7,000 on goods sold.Paid other operating expense of $55,200.Sold land for $45,400 that had cost $50,000.A count of the inventory revealed that there was $45,800 of inventory on hand at the end of Year 1. Required:Answer the following questions based on the above information.What was Outdoor World's net income for Year 1?Compute gross margin and the gross margin percentage that would be shown on the common size income statement for Year 1.What amount of inventory will appear on the balance sheet for December 31, Year 1?Based on the above information, prepare a multistep income statement for Year 1.

The income statements for the Alpha Company and the Omega Company for the current year appear below: $\begin{array} { l r r } & { \text { Alpha Company } } & \text { Omega Company } \\\text { Net sales } & \$ 1,050,000 & \$ 260,000 \\\text { Cost af goods sold } & 475,000 & 107,500 \\\text { Operating expenge } & 367,500 & 73,000\end{array}$ Required:Prepare common size income statements for the Alpha Company and the Omega Company.

Indicate how each event affects the elements of financial statements. Use the following letters to record your answer in the box shown below each element. If an event increases one account and decreases another account equally within the same element (such as an asset exchange event), record I/D. If an event has no impact on the element, record NA. You do not need to enter amounts. Assume that Whetzel Company uses a perpetual inventory system.Increase = I Decrease = D Not Affected = NAWhetzel Company paid $40 of freight cost to have merchandise shipped to one of its customers under terms FOB destination.

Explain the difference between "transportation-in" and "transportation-out". Also indicate whether each is a product cost or period cost, and in which account the costs are recorded.

What is the effect on the accounting equation of the seller for granting an "allowance" for merchandise that the customer is not satisfied with?What is the effect of the above situation on the accounting equation of the purchaser?For both questions, assume that the merchandise had been sold on account, and the invoice had not yet been paid.

Why are cash discounts given, who benefits by these discounts, and what are the benefits of those discounts?

If a company uses the perpetual inventory method, when would it normally discover that merchandise inventory has been lost or stolen?

How do gains and losses differ from revenues and expenses? How are they similar?

Indicate how each event affects the elements of financial statements. Use the following letters to record your answer in the box shown below each element. If an event increases one account and decreases another account equally within the same element (such as an asset exchange event), record I/D. If an event has no impact on the element, record NA. You do not need to enter amounts. Assume that Whetzel Company uses a perpetual inventory system.Increase = I Decrease = D Not Affected = NAWhetzel Company returned some defective merchandise it had previously purchased on account from a supplier,

Indicate how each event affects the elements of financial statements. Use the following letters to record your answer in the box shown below each element. If an event increases one account and decreases another account equally within the same element (such as an asset exchange event), record I/D. If an event has no impact on the element, record NA. You do not need to enter amounts. Assume that Whetzel Company uses a perpetual inventory system.Increase = I Decrease = D Not Affected = NAWhetzel Company recorded a cash discount on goods recently purchased on account.

On April 6, Year 1, Gringot Company purchased $140,000 of merchandise inventory. Terms of the purchase included a discount of 3/20, n/30 and the freight terms were FOB destination. Freight costs amounted to $4,600. Gringot paid the account payable on April 24. Gringot sold all inventory for $189,500. Required:Determine the amount of gross margin that Gringot would report on its income statement.

Indicate how each event affects the elements of financial statements. Use the following letters to record your answer in the box shown below each element. If an event increases one account and decreases another account equally within the same element (such as an asset exchange event), record I/D. If an event has no impact on the element, record NA. You do not need to enter amounts. Assume that Whetzel Company uses a perpetual inventory system.Increase = I Decrease = D Not Affected = NAAfter a physical count of its inventory, Whetzel Company discovered that $400 of inventory is missing. Show how the required adjusting entry would affect Whetzel Company's statements.

Indicate how each event affects the elements of financial statements. Use the following letters to record your answer in the box shown below each element. If an event increases one account and decreases another account equally within the same element (such as an asset exchange event), record I/D. If an event has no impact on the element, record NA. You do not need to enter amounts. Assume that Whetzel Company uses a perpetual inventory system.Increase = I Decrease = D Not Affected = NAOn April 1, Year 1, Wetzel Co. paid a supplier, Jacobs Company, the amount owed on account related to a purchase of inventory on account with terms of 2/10, net/30. The inventory was purchased on March 1, Year 1.

What is a common size income statement? Explain how a common size income statement is useful to financial statement users.

If goods are shipped FOB destination, who is responsible for the shipping costs?

Indicate how each event affects the elements of financial statements. Use the following letters to record your answer in the box shown below each element. If an event increases one account and decreases another account equally within the same element (such as an asset exchange event), record I/D. If an event has no impact on the element, record NA. You do not need to enter amounts. Assume that Whetzel Company uses a perpetual inventory system.Increase = I Decrease = D Not Affected = NAWhetzel Company sold merchandise to a customer for $1,400 cash. The merchandise had originally cost Whetzel $850.

On June 1, Year 1, merchandise subject to terms 2/10, n/30 was sold on account to a customer for $26,500. On June 3, the customer returned $5,800 of that merchandise to the seller. This was prior to payment by the customer.What is the amount of cash collected by the seller if the payment is made by the customer on June 8, Year 1?What is the amount of cash collected by the seller if payment is made by the customer on June 21, Year 1?