The Solutions
CHAPTER 5
Merchandising Operations and the Multiple-Step Income Statement
ANSWERS TO QUESTIONS
1. (a) Disagree. The steps in the accounting cycle are the same for both a merchandising company and a service company.
(b) The measurement of income is conceptually the same. In both types of companies, net income (or loss) results from the matching of expenses with revenues.
2. The components of revenues and expenses differ as follows:
| | Merchandising | | Service | RevenuesExpenses | | SalesCost of Goods Sold and Operating | | Fees, Rents, etc.Operating (only) |
3. Under a periodic inventory system the company does not keep track of how many units are on hand. Instead it takes a physical count at the end of the period to determine ending inventory and cost of goods sold. Under a perpetual system the company adjusts its inventory account each time it purchases or sells inventory. Thus it always has a record of its available inventory. Having knowledge of inventory balances helps a company avoid lost sales due to “stock-outs” as well as carrying too much inventory on hand (which results in additional storage and handling costs). The purchasing department can make better decisions with the aid of perpetual inventory records.
4. (a) The income measurement process is as follows:
SalesRevenue | Less | Cost ofGoodsSold | Equals | GrossProfit | Less | OperatingExpenses | Equals | NetIncome |
(b) Income measurement in a merchandising company differs from a service company as follows: (a) sales are the primary source of revenue and (b) expenses are divided into two main categories: cost of goods sold and operating expenses.
5. Sales revenue $100,000 Cost of goods sold 70,000 Gross profit $ 30,000
6. Agree. In accordance with the revenue recognition principle, sales revenues are generally considered to be earned when the goods are transferred from the seller to the buyer; that is, when the exchange transaction
Merchandising Operations and the Multiple-Step Income Statement
ANSWERS TO QUESTIONS
1. (a) Disagree. The steps in the accounting cycle are the same for both a merchandising company and a service company.
(b) The measurement of income is conceptually the same. In both types of companies, net income (or loss) results from the matching of expenses with revenues.
2. The components of revenues and expenses differ as follows:
| | Merchandising | | Service | RevenuesExpenses | | SalesCost of Goods Sold and Operating | | Fees, Rents, etc.Operating (only) |
3. Under a periodic inventory system the company does not keep track of how many units are on hand. Instead it takes a physical count at the end of the period to determine ending inventory and cost of goods sold. Under a perpetual system the company adjusts its inventory account each time it purchases or sells inventory. Thus it always has a record of its available inventory. Having knowledge of inventory balances helps a company avoid lost sales due to “stock-outs” as well as carrying too much inventory on hand (which results in additional storage and handling costs). The purchasing department can make better decisions with the aid of perpetual inventory records.
4. (a) The income measurement process is as follows:
SalesRevenue | Less | Cost ofGoodsSold | Equals | GrossProfit | Less | OperatingExpenses | Equals | NetIncome |
(b) Income measurement in a merchandising company differs from a service company as follows: (a) sales are the primary source of revenue and (b) expenses are divided into two main categories: cost of goods sold and operating expenses.
5. Sales revenue $100,000 Cost of goods sold 70,000 Gross profit $ 30,000
6. Agree. In accordance with the revenue recognition principle, sales revenues are generally considered to be earned when the goods are transferred from the seller to the buyer; that is, when the exchange transaction