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Accounting Chapter 6

Perpetual System
an inventory in which each purchase and sale is recorded to an inventory account, and the inventory records keep a running balance of merchandise on hand and merchandise sold
Periodic System
an inventory system that makes no attempt to keep a running balance of inventory
Sales Allowance
a price reduction from the initial price because goods received by a retailer are defective
FOB Shipping Point
shipping terms when the buyer bears the transportation costs
FOB destination
shipping terms when the seller bears the transportation costs
Net Sales (Formula)
Sales- Sales returns and allowances -Sales Discounts
Gross Profit
Net Sales- Cost of Merchandise Sold
Total Operating Expenses
Selling Expenses + Administrative expenses
Income from Operations
Gross Profit- Operating Expenses
Net Income
Income from Operations+ Other Income- Other Expenses
DQ#2
Can a business earn a gross profit but incur a net loss? Explain
Yes. Gross profit is the excess of (net) sales over cost of merchandise sold. A net loss arises when the operating expenses exceed gross profit. Therefore, a business can earn a gross profit but incur operating expenses in excess of this gross profit and end up with a net loss.
DQ#3
Name atleast three accounts that would normally appear in the chart of accounts of a merchandising business would not appear in the chart of accounts of a service business.
Examples of such accounts include the following: Sales, Sales Discounts, Sales Returns and Allowances, Cost of Merchandise Sold, Merchandise Inventory
DQ#4
How are Sales to customers using MasterCard and VISA recorded?
Sales to customers who use MasterCard or VISA cards are recorded as cash sales
DQ#5
The credit period during which the buyer of merchandise is allowed to pay usually begins with what date?
The date of sale as shown by the date of the invoice or bill.
DQ#6
What is the meaning of (a) 1/15,n/60; (b) n/30; (c) n/eom?
a) 1% discount allowed if paid within 15 days of date invoice; entire amount of invoice due within 30 days of date of invoice
b) Payment due within 30 days of date of invoice
c) Payment due by the end of the month in which the sale was made
Exercise 6-2
For the year ended February 28, 2009, Best Buy reported revenue of $45,015 million. Its gross profit was $10,998 million. What was the amount of Best Buy’s cost of merchandise sold?
$34,017
($45,015 million- $10,998 million)
Exercise 6-3 Page 290
a) Net Sales: $6,540,000
($6,750,000-$120,000- $90,000)
b) Gross Profit: $2,540,000
($6,540,000-$4,000,000)
c) No, there could be other income and expense items that could affect the amount of net income.
Exercise 6-4 Page 290
a) Selling Expense, (1), (2), (7), (8)
b) Administrative Expense, (3), (5), (6)
c) Other expenses, (4)

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