Acct1110 Ch05 Solutions Douglas College
Chapter 5
6.
7.
Merchandising Operations and the Accounting Cycle
8.
9.
Questions
1. Gross margin measures the entity’s ability to buy inventory at one price and sell it at a higher price. This process is important because it is fundamental to the profit motive of business. The flow of resources for the purchase and cash sale of inventory is from cash to inventory and back to cash. For the purchase and sale of inventory on account, the flow is from cash to inventory to accounts receivable and back to cash. Ten items on the invoice are (1) seller name, (2) invoice date, (3) purchaser name, (4) credit terms of the transaction, such as 3/10 n/30, (5) items ordered by the purchaser, (6) items shipped by the seller and invoiced to the purchaser, (7) quantity discount, if any, (8) total invoice amount in dollars, (9) date of payment, and (10) dollar amount paid by the purchaser. Note: Items (9) and (10) appear once payment has been received. They are not part of the original invoice data. a. Credit purchase Inventory ................................. XXX of inventory: Accounts Payable ........... XXX Subsequent cash payment: b. Credit sale of inventory: Accounts Payable .................... XXX Cash ................................ Accounts Receivable .............. XXX Sales Revenue ................. Cost of Goods Sold ................. XXX Inventory ......................... XXX XXX XXX
10.
2.
11.
3.
12.
4.
13.
14.
5.
Subsequent Cash ......................................... XXX cash receipt: Accounts Receivable ...... XXX On August 6, within the discount period, the payment would be $3,880 ($4,000 – 3% of $4,000, or $4,000 – $120). On August 9, which is after the discount period, payment would be the full amount of $4,000. The three-day difference is crucial: August 6 is within the discount period, but August 9 is too late to earn the 3 percent discount. The latest acceptable payment date under the sale terms would be
6.
7.
Merchandising Operations and the Accounting Cycle
8.
9.
Questions
1. Gross margin measures the entity’s ability to buy inventory at one price and sell it at a higher price. This process is important because it is fundamental to the profit motive of business. The flow of resources for the purchase and cash sale of inventory is from cash to inventory and back to cash. For the purchase and sale of inventory on account, the flow is from cash to inventory to accounts receivable and back to cash. Ten items on the invoice are (1) seller name, (2) invoice date, (3) purchaser name, (4) credit terms of the transaction, such as 3/10 n/30, (5) items ordered by the purchaser, (6) items shipped by the seller and invoiced to the purchaser, (7) quantity discount, if any, (8) total invoice amount in dollars, (9) date of payment, and (10) dollar amount paid by the purchaser. Note: Items (9) and (10) appear once payment has been received. They are not part of the original invoice data. a. Credit purchase Inventory ................................. XXX of inventory: Accounts Payable ........... XXX Subsequent cash payment: b. Credit sale of inventory: Accounts Payable .................... XXX Cash ................................ Accounts Receivable .............. XXX Sales Revenue ................. Cost of Goods Sold ................. XXX Inventory ......................... XXX XXX XXX
10.
2.
11.
3.
12.
4.
13.
14.
5.
Subsequent Cash ......................................... XXX cash receipt: Accounts Receivable ...... XXX On August 6, within the discount period, the payment would be $3,880 ($4,000 – 3% of $4,000, or $4,000 – $120). On August 9, which is after the discount period, payment would be the full amount of $4,000. The three-day difference is crucial: August 6 is within the discount period, but August 9 is too late to earn the 3 percent discount. The latest acceptable payment date under the sale terms would be