Question

Progress Check

(Answers to Progress Checks are provided at the end of the chapter.)

5–1 Which of the following items is not unique to the financial statements of merchandising companies? (a) Cost of goods sold; (b) Accounts receivable; (c) Merchandise inventory.

5–2 What is a merchandising company’s gross profit?

5–3 Why are sales returns and allowances and sales discounts recorded in contrarevenue accounts instead of in the Sales account? Is this information likely to be reported outside the company?

5–4 How long are the credit and discount periods under credit terms of 2/10, n/60?

5–5 Which of the following items is subtracted from the list price of merchandise to determine the actual sales price? (a) Freight-in; (b) Trade discount; (c) Purchases discount; (d) Purchases return and/or allowance.

5–6 How is the cost of goods sold determined with a periodic inventory accounting system?

5–7 What is the meaning of the abbreviation FOB? What is the meaning of the term FOB destination?

Answer 1

5-2) Accounts receivable is not unique to Merchandising co. When a co sells on credit, the due of trade debtors are mentioned in balance sheet as Accounts receivable

5-2) Merchandising co gross profit arises out Net Sales - Cost of Goods Sold

proforma

Sales    XXX

Less: Returns & discounts    XXX

Add: Closing Stock XXX

Less Openning Stock XXX

Less: Purchases    XXX

(Excluding returns & discounts)

Gross Profit XXX

5-3) Sales account is a revenue generation activity and rest are expenses/adjustments and needs to be deducted from sales. They are not shown outside the company. They will be shown as deductible items as mentioned above

5-4) The discount period is 10 days and anyone who pays within 10 days will get 2% and the credit term is 60 days and all dues by debtors needs to be paid by 60th day

5-5) List price less purchase & trade discount is sales price

5-6) Opening stock+Purchases-Closing stock= COGS. But here the closing stock for each period or Quarter as decided by management/policy is arrived by physical verification and this is perpetual inventory system, where you keep checking the physical inventory periodically

5-7) FOB=Free On Board & FOB destination is where the buyer takes the delivery of goods and the title to goods are transferred to him.