ACC 100 Lecture Notes - Lecture 5: Gross Profit, Gross Margin, Net Income

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corallion790

13 Nov 2017

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Inventory: finished goods that are purchased by a merchandiser and will be resold for a profit. Markup: the difference between the cost of inventory and the price it is sold for (amount added to the cost of inventory in order to make profit) i. e. retail sells laptop has mark up of 15%. The retailer will buy the laptop from supplier for and sell it for ( * 1. 15%). The 15% is the mark up on the cost of the laptop. Selling price = cost + (cost x markup %) Sp = 500 + ( 500 x 15%) The difference is called the gross profit (or gross margin) between the selling price of inventory and the cost of the retailer paid to buy the inventory. Product costs: costs that are incurred to purchase inventory (includes the cost of actual inventory and the costs to get inventory onto self, like shipping)

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1. How should the balances of Progress Billings and Constructionin Progress be shown at reporting dates prior to completion of along-term contract

a. Progress billings as income, construciton in progress asinventory

b. Net , as income from construction if credit balance, and lossfrom construction if debit balance

c. Progress Billings as deferred income, Construction inProgress as a current asset

d. Net, as a current asset if debit balance and currentliability if credit balance

3. the competed-contract method of accounting for long-termconstruction-type contracts is preferable when

a. a contractor is involved in numerous projects

b. the contracts are of a relatively long duration

c. estimates of costs to complete and extent of progress towardcompletion are reasonably dependable

d. there are inherent uncertainties in the contract beyondnormal business risks

4. C & J Construction has consistently used the percentageof completion method of recognizing income. Last year C & Jstarted work on a $4,500,000 constuction contract, which wascompleted this year, the accounting records desclosed the followingdata for the last year

Progress billings - $1,650,000

Costs incurred - 1,350,000

Collections - 1,050,000

Estimated cost to complete - 2,700,000

How much income should C & J have recognized on thiscontract last year?

a. 105,000

b. 150,000

c. 300,000

d. 350,000

6. The use of the gross profit assumes

a. the amount of gross profit is the same as in prior years

b. sales and cost of goods sold have not changed from previousyears

c. inventory values have not increased from previous years

d. the relationship between selling price and cost of goods soldis similar to prior years

7. the gross profit method of inventory valuation is not validwhen

a. there is substantial increase in the quantity of inventoryduring the year

b. there is substantial increase in the cost of inventory duringthe year

c. the gross margin percentage changes significantly during theyear

d. all ending inventory is destroyed by dire before it can becounted

8. When the current year's ending inventory amount isoverstated,

a. the current year's cost of goods sold is overstated

b. the current year's total assets are understated

c. the current year's net income is overstated

d. the next year's income is overstated

9. If the ending inventory balance is understated, net income ofthe same period

a. will be overstated

b. will be understated

c. will be unaffected

d. cannot be determined from the above information

10. An overstatement of ending inventory in Period 1 wouldresult in income of Period 2 being

a. overstated

b. understated

c. correctly stated

d. the answer cannot be determined from the informationgiven

11. what is the maximum amount at which inventory can be valuedwhen the goods have experienced a permanent decline in value

a. historical cost

b. sales price

c. net realizable value

d. net realizable value reduced by a normal profit margin

12. Net realizable value can be defined as

a. selling price

b. selling price less costs to complete and sell

c. selling price plus costs to complete and sell

d. acquisition cost plus costs to complete and sell

13. Miller company needs an estimate of its ending inventorybalance. The following information is available

Cost Retail

sales revenue - 180,000

beginning inventory - 35,000 62,000

net purchases - 100,000 135,000

gross margin percentage - 30%

Given this information, when using the gross margin estimationmethod, ending inventory is approx

a. 1,000

b. 9,000

c. 19,000

d. 11,650

14. Which of the following would not be reported asinventory?

a. land acquired for resale by a real estate firm

b. stocks and bonds held for resale by a brokerage firm

c. partially completed goods held by a manufacturing company

d. machinery acquired by a manufacturing company for use in theproduction process

15. Cost of goods sold is equal to

a. the cost of inventory on hand at the end of a period plus netpurchases minus the cost of inventory on hand at the beginning

b. the cost of inventory on hand at the beginning of a periodminus net purchases plus the cost of inventory on hand at the endof a period

c. the cost of inventory on hand at the beginning of a periodplus net sales minus the cost of inventory on hand at the end of aperiod

d. the cost of inventory on hand at the beginning of a periodplus net purchases minus the cost of inventory on hand at the endof a period

17. In a period of falling prices, the use of which of thefolliwng inventory cost flow methods would typically result inhighest cost of goods sold?

a. FIFO

b. LIFO

c. Weighted average cost

d. Specific identification

18. In a period of rising prices, the inventory cost allocationmethod that tends to result in the lowest reported net incomeis

a. LIFO

b. FIFO

c. Moving average

d. Weighted average

19. The LIFO inventory cost flow method may be applied to whichof the following inventory systems?

Periodic Perpetual

a. no no

b. no yes

c. yes yes

d. yes no

tanrabbit20

1. Inventory is classified on the balance sheet as a

a.current liability

b.long-term asset

c.current asset

d.long-term liability

2. What is the term applied to the excess of sales over the cost of goods sold?

a.net income

b.gross profit

c.operations

d.gross sales

3. The inventory system employing accounting records that continuously disclose the amount of inventory is called

a.periodic

b.retail

c.perpetual

d.physical

4. Calculate the gross profit for Jefferson Company based on the following:

Sales $764,000

Selling Expenses $42,500

Cost of Goods Sold $538,000

a.$183,500

b.$721,500

c.$495,500

d.$226,000

5. Calculate income from operations for Jonas Company based on the following data:

Sales $764,000

Selling Expenses $52,500

Cost of Goods Sold $538,000

a.$226,000

b.$711,500

c.$485,500

d.$173,500

6. The primary difference between the periodic and perpetual inventory systems is that a

a.periodic system keeps a record showing the inventory on hand at all times

b.periodic system determines the inventory on hand only at the end of the accounting period

c.periodic system records the cost of the sale on the date the sale is made

d.periodic system provides an easy means to determine inventory shrinkage

7. In credit terms of 3/15, n/45, the "3" represents the

a.percent of the cash discount

b.full amount of the invoice

c.number of days when the entire amount is due

d.number of days in the discount period

8. Which of the following accounts has a normal credit balance?

a.Inventory

b.Accounts Receivable

c.Sales

d.Delivery Expense

9. Using a perpetual inventory system, the entry to record the purchase of $30,000 of merchandise on account would include a

a.debit to Inventory

b.debit to Accounts Payable

c.credit to Sales

d.credit to Inventory

10. Which of the following accounts usually has a debit balance?

a.Sales

b.Inventory

c.Accounts Payable

d.Sales Tax Payable

11. If title to merchandise purchases passes to the buyer when the goods are shipped from the seller, the terms are

a.n/30

b.consigned

c.FOB shipping point

d.FOB destination

12. When goods are shipped FOB destination and the seller pays the freight charges, the buyer

a.does not take a discount

b.journalizes a reduction for the cost of the merchandise

c.makes no journal entry for the freight

d.journalizes a reimbursement to the seller

13. When the perpetual inventory system is used, the inventory sold is debited to

a.Supplies Expense

b.Cost of Goods Sold

c.Sales

d.Inventory

14. Generally, the revenue account for a merchandising business is entitled

a.Gross Sales

b.Sales

c.Gross Profit

d.Fees Earned

lemonpug879

Concepts: Variable cost Fixed cost Total cost Average total cost Marginal cost

Total revenue Average revenue Marginal revenue Demand Curve

1. Mark Sampson, President of Sampson Switch Company must consider the pricing and production for the Ultra Switch Model B, one of the companyâs top selling models. Switch production includes grinding and assembly of finished components. Marketing efforts consist primarily of print ads in trade publications. Last year the Model B produced a profit of $8,000.

Production facts. Sampson hires part time workers on an âas neededâ basis to do the grinding task. On average, a grinder is paid $8.00 per hour and s/he is expected to produce 200 switch plates per each 8-hour day. Switch assemblers, also part-time workers, are paid $50 per day and they are expected to assemble 5 switches per hour. Each switch consists of two switch plates and assorted other components (the cost of the âother componentsâ is $3.11 per switch).

Fixed Costs. Other costs include the year-long contract for the rental of the assembly line equipment ($1,000 per month).

Marketing facts. According to next yearâs plan, Mark expects to place 10 black and white print ads (each $500) and two special feature, color ads (each $2,500) for the Model B. Salaries for the marketing sales force that are allocated to the Model B will total $18,000 next year.

1a. What is the cost to produce one switch? (i.e., the unit variable cost)?

1b. What and how much are the items composing the total âfixedâ costs for next year?

1c. Graph the relationship between quantity produced (on the X-axis) and Total Cost (on the Y-axis).

1d. How much is the per-unit contribution if the product is priced at $15 a unit?

1e. What was the profit last year? What will be the change in profitability for the Model B if the product is priced at $15 per unit and 2,500 units are sold?

1f. What is the breakeven point if the product is priced at $15? How many must be sold next year in order to produce the same profit level as last year?

1g. Assume that Mark has $50,000 in equity invested in the Model B line. How many units must be sold in order to return 25% on his equity?

2. Answer qs 1a-g assuming that the selling price is reduced to $10 and demand increases by a factor of four.

3. After much investigation, the marketing research department tells Mark that they expect the âdemand curveâ to be. Compare the expected demand with the breakeven point for each price point. Knowing this information, what price should Mark charge in order to maximize profits on the Model B ?

selling price	units demanded	break even point
$15	2,500	...
$10	10,000	...
$9	13,000	....
$8	14,000	.....
$7	15,000	.....

4a. Create a graph showing âQuantity Demandedâ on the X-axis and âTotal Revenue $â on the Y-axis for each of the five priceâquantity demanded points listed in q 3 above.

4b. Create a graph that superimposes the Total Revenue for the five points of the âDemand Curveâ on the âBreakevenâ Chart of the Model B (note the $$ Y -axis will represent Total Revenue for the Demand curve and will represent Total Cost for the Breakeven chart). { 01.81 gif k&b785 g pees ]

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ACC 100 Lecture Notes - Lecture 5: Gross Profit, Gross Margin, Net Income

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