Rent Revenue, Interest Revenue, Investment Income, Gains. Interest Expense, Losses

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1 Chapter 5 Assigned Questions: 1, 4, 5, 7, 9, 11, 16, 17, 19, The components of revenues and expenses differ as follows: Merchandising Revenue Sales Service Service Revenue, Fees Earned, Rent Revenue, Interest Revenue, Investment Income, Gains Other Revenue Rent Revenue, Interest Revenue, Investment Income, Gains Expenses Cost of Goods Sold, Operating Expenses All expenses Other Expense Interest Expense, Losses 4. Under a perpetual inventory system, inventory quantities and amounts are updated continually. At any point in time, the Cost of Goods Sold and Inventory accounts represent what has been sold to date, and what remains. Under a periodic inventory system, temporary accounts are used t example). 5. Computer technology enables perpetual inventory systems to be used by any company that requires timely information about the quantities of inventory on hand. It is more complex and costly to maintain a perpetual inventory record of costs, so companies with point of sale systems integrated with their inventory systems tend to be larger.

2 7. The letters FOB mean free on board. FOB shipping point means that the goods are placed free on board the carrier by the seller, and the buyer pays the freight costs. FOB shipping point will result in a debit to the Inventory account by the buyer. FOB destination means that the goods are placed free on board to the buyer s place of business, and the seller pays the freight. FOB destination will result in a debit to the Freight Out account by the seller. 9. Sales returns are not debited directly to the Sales account because this would not provide information on the cost of the goods returned. This information can be useful in making decisions. Debiting returns directly to sales may also cause problems in comparing sales for different periods. 11. A physical count is an important control feature. Using a perpetual inventory system a company knows what should be on hand. Performing a physical counts and checking it to the perpetual records is necessary to detect any errors in record keeping and/or shortages in stock. 16. The single-step income statement differs from the multiplestep income statement in that (1) all data are classified into two categories: Revenues and expenses; and (2) only one step, subtracting total expenses from total revenues, is required in determining net income (or net loss).

3 17. Sales revenues $100,000 70,000 Gross profit... 30,000 Operating expenses... 20,000 Net income... $ 10,000 Gross profit margin = $30,000 $100,000 = 30% Profit margin = $10,000 $100,000 = 10% 19. Managing inventory is critical to a company s success. It is often the largest current asset (inventory) and the largest expense (cost of goods sold) on the income statement. Companies must manage the quantity of inventory on hand to avoid excessive cost and to ensure they can meet demand. 20. An increase in days sales in inventory would be viewed as a deterioration because it means there is more inventory on hand in relation to sales. Chapter 5 Assigned Brief Exercises 1, 5, 7, 9, 10, 11 BRIEF EXERCISE 5-1 (a) = $43,500 ($75,000 $31,500) Operating expenses = $20,700 ($31,500 $10,800) (b) Gross profit = $38,000 ($108,000 $70,000) Operating expenses = $8,500 ($38,000 $29,500) (c) Sales = $181,500 ($71,900 + $109,600) Net income = $70,100 ($109,600 $39,500)

4 BRIEF EXERCISE 5-5 March 3 Merchandise Inventory (20 X $25) Accounts Payable March 6 Accounts Payable Merchandise Inventory (3 X $25) March 21 Accounts Receivable (15 X $45) Sales Cost of Goods Sold (15 x $25) Merchandise Inventory Quantity: = 2 units remaining Cost: $500 - $75 - $375 = $50 Proof: 2 units x $25 = $50 BRIEF EXERCISE 5-7 July 31 Sales ,000 Prasad, Capital ,000 Prasad, Capital ,000 Sales Returns and Allowances... 2,000 Cost of Goods Sold ,000 Ending capital balance (not required): $150,000 + $180,000 - $102,000 = $228,000 Merchandise Inventory is a balance sheet (permanent) account and is not closed.

5 BRIEF EXERCISE 5-9 (1) Multiple-Step Income Statement Item Section a. Gain on sale of equipment Other revenues and gains b. Interest expense Other expenses and losses c. d. Rent revenue Other revenues and gains (2) Single-Step Income Statement Item a. Gain on sale of equipment Revenues b. Interest expense Expenses c. d. Rent revenue Expenses Revenues Section BRIEF EXERCISE 5-10 (a) Net sales = $485,000 ($500,000 $15,000) (b) Gross profit = $145,000 ($485,000 $340,000) (c) Net income = $35,000 ($145,000 - $70,000- $40,000) BRIEF EXERCISE 5-11 (a) Gross profit margin = 45% [($550,000 $300,000) $550,000] (b) Inventory turnover = 12 times ($300,000 $25,000) (c) Days sales in inventory = 30 days (365 12)