chapter  6        Accounting  for merchandising businesses
Class  Discussion Questions
1.    Merchandising businesses acquire merchandise for resale to customers. It is the selling of merchandise, instead of a service, that makes the activities of a merchandising business different from the activities of a service business.
2.    Yes. Gross profit is the excess of (net) sales over cost of merchandise sold. A net loss arises when 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.
3.    a.    Increase    c.    Decrease
    b.    Increase    d.    Decrease
4.    Under the periodic method, the inventory records do not show the amount availabl
e for sale or the amount sold during the period. In contrast, under the perpetual method of accounting for merchandise inventory, each purchase and sale of merchandise is recorded in the inventory and the cost of merchandise sold accounts. As a result, the amount of merchandise available for sale and the amount sold are continuously (perpetually) disclosed in the inventory records.
5.    The multiple-step form of income statement contains conventional groupings for revenues and expenses, with intermediate balances, before concluding with the net income balance. In the single-step form, the total of all expenses is deducted from the total of all revenues, without intermediate balances.
6.    The major advantages of the single-step form of income statement are its simplicity and its emphasis on total revenues and total expenses as the determinants of net income. The major objection to the form is that such relationships as gross profit to sales and income from operations to sales are not as readily determinable as when the multiple-step form is used.
7.  a.    2% discount allowed if paid within ten days of date of invoice; entire amount of invoice due within 60 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.
8.    a.    A credit memorandum issued by the seller of merchandise indicates the amount for which the buyer's account is to be credited (credit to Accounts Receivable) and the reason for the sales return or allowance.
    b.    A debit memorandum issued by the buyer of merchandise indicates the amount for which the seller's account is to be debited (debit to Accounts Payable) and the reason for the purchases return or allowance.
9.    a.    The buyer
    b.    The seller
10.    Examples of such accounts include the following: Sales, Sales Discounts, Sales Returns and Allowances, Cost of Merchandise Sold, Merchandise Inventory.
Ex. 6–1
a.    $490,000 ($250,000 + $975,000 – $735,000)        b.    40% ($490,000 ÷ $1,225,000)
c.    No. If operating expenses are less than gross profit, there will be a net income. On the other hand, if operating expenses exceed gross profit, there will be a net loss.
Ex. 6–2 :    $15,710 million  ( $20,946 million – $5,236 million )
Ex. 6–3
a. Purchases discounts, purchases returns and allowances        b.    Transportation in;
c. Merchandise available for sale        d. Merchandise inventory (ending)
Ex. 6–4
1.    The schedule should begin with the January 1, not the December 31, merchandise inventory.
2.    Purchases returns and allowances and purchases discounts should be deducted from (not added to) purchases.
3.    The result of subtracting purchases returns and allowances and purchases discounts from purchases should be labeled “net purchases.”
4.    Transportation in should be added to net purchases to yield cost of merchandise purchased.
5.    The merchandise inventory at December 31 should be deducted from merchandise available for sale to yield cost of merchandise sold.
    A correct cost of merchandise sold section is as follows:
Cost of merchandise sold:
    Merchandise inventory, January 1, 2006                $132,000
    Purchases            $600,000
for the sale    Less:    Purchases returns and allowances    $14,000
            Purchases discounts            6,000        20,000
    Net purchases            $580,000
    Add transportation in                7,500
        Cost of merchandise purchased                    587,500
    Merchandise available for sale                $719,500
    Less merchandise inventory,
        December 31, 2006                    120,000
    Cost of merchandise sold                $599,500
Ex. 6–5
Net sales: $3,010,000  ( $3,570,000 – $320,000 – $240,000 )
Gross profit: $868,000 ( $3,010,000 – $2,142,000 )
Ex. 6–6
THE MERIDEN COMPANY
Income Statement
For the Year Ended June 30, 2006
Revenues:
    Net sales            $5,400,000
    Rent revenue                30,000
        Total revenues            $5,430,000
Expenses:
    Cost of merchandise sold        $3,240,000
    Selling expenses        480,000
    Administrative expenses        300,000
    Interest expense            47,500
        Total expenses                4,067,500
Net income            $1,362,500
Ex. 6–7
1.    Sales returns and allowances and sales discounts should be deducted from (not added to) sales.

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