Chapter 4: Q3DQ (page 205)
Explain how a business can earn a positive gross profit on its sales and still have a net loss.
A business can earn a positive gross profit on its sales and still have a net lossin situations where theexpenses are higher than gross profit.
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The following list includes selected permanent accounts and all of the temporary accounts from the December 31, 2017, unadjusted trial balance of Emiko Co. Use these account balances along with the additional information to journalize (a) adjusting entries and (b) closing entries. Emiko Co. uses a perpetual inventory system.
Debit | Credit | |
Merchandise inventory | \(30,000 | |
Prepaid selling expenses | 5,600 | |
Dividends | 33,000 | |
Sales | \)529,000 | |
Sales return and allowances | 17,500 | |
Sales discount | 5,000 | |
Cost of goods sold | 212,000 | |
Sales salaries expenses | 48,000 | |
Utilities expenses | 15,000 | |
Selling expenses | 36,000 | |
Administrative expenses | 105,000 |
Additional Information
Accrued sales salaries amount to \(1,700. Prepaid selling expenses of \)3,000 have expired. A physical count of year-end merchandise inventory shows $28,700 of goods still available.
Refer to QS 4-9 and prepare journal entries to close the balances in temporary revenue and expense accounts. Remember to consider the entry for shrinkage that is made to solve QS 4-9.
Enter the letter for each term in the blank space beside the definition that it most closely matches.
A. Sales discount | E. FOB shipping point | H. Purchase discount |
B. Credit period | F. Gross profit | I. Cash discount |
C. Discount period | G. Merchandise inventory | J. Trade discount |
D. FOB destination |
1. Goods a company owns and expects to sell to its customers.
2. Time period that can pass before a customer’s payment is due.
3. Seller’s description of a cash discount granted to buyers in return for early payment.
4. Reduction below list or catalog price that is negotiated in setting the price of goods.
5. Ownership of goods is transferred when the seller delivers goods to the carrier.
6. Purchaser’s description of a cash discount received from a supplier of goods.
7. Reduction in a receivable or payable if it is paid within the discount period.
8. Difference between net sales and the cost of goods sold.
9. Time period in which a cash discount is available.
10. Ownership of goods is transferred when delivered to the buyer’s place of business.
A retail company recently completed a physical count of ending merchandise inventory to use in preparing adjusting entries. In determining the cost of the counted inventory, company employees failed to consider that $3,000 of incoming goods had been shipped by a supplier on December 31 under an FOB shipping point agreement. These goods had been recorded in Merchandise Inventory as a purchase, but they were not included in the physical count because they were in transit.
a. Explain how this overlooked fact impacts the company’s balance sheet and income statement.
b. Indicate whether this overlooked fact results in an overstatement, understatement, or no effect on the following separate ratios: return on assets, debt ratio, current ratio, and acid-test ratio.
Refer to the information in Exercise 4-12 and indicate whether the failure to include in-transit inventory as part of the physical count results in an overstatement, understatement, or no effect on the following separate ratios: (a) gross margin ratio and (b) profit margin ratio.
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