RETL 261 1st Edition Exam 2 Study Guide Chapters 4 6 Chapter 4 Completing the Accounting Cycle True or False Income Summary is a temporary account only used for the closing process True Revenue accounts should begin each accounting period with zero balances True A classified balance sheet organizes assets and liabilities into important subgroups that provide more information to decision makers True A work sheet is a tool to help organize information needed in adjusting accounts and preparing financial statements True A work sheet is a required report False When closing entries are made are temporary accounts are closes but not permanent accounts True Assets liabilities and equity accounts are not closes these accounts are called temporary accounts False Permanent accounts Chapter 5 Accounting for Merchandising Operations Merchandise inventory consists of products that a company acquires to resell to customers True A wholesalers is an intermediary that buys products from manufacturers or other wholesalers and sells them to consumers False A company had sales and cost of goods sold of 350 000 and 200 000 respectively Its gross profit equals 150 000 True Gross profit net sales costs of goods sold Gross profit is gross margin True Credit terms for a purchase include the amounts and timing of payments from a buyer to a seller True Purchase allowances refer to merchandise a buyer acquires but then returns to the seller False Credit terms of 2 10 n 30 imply that the seller offers the purchaser a 2 cash discount if the amount is paid within 10 days of the invoice date Otherwise the full amount is due in 30 days True The seller is responsible for paying shipping charges and bears the risk of damage or loss in transit if goods are shipped FOB destination True What are the two types of inventory systems Perpetual systems and Periodic systems What is FOB Shipping Point and FOB Destination Point FOB Shipping Point buyer is responsible for shipping costs and insuring freight as it moves FOB Destination Point Seller s have to arrange transportation and insure they arrive safely at the customer s door Chapter 6 Inventories and Cost of Sales True or False The cost of an inventory item includes its inventory cost minus any discount and plus any added or incidental costs necessary to put it in place and in condition to sale True Goods on consignment are goods shipped by their owner called the consignee to another party called the consignor False Incidental costs often added to the costs of inventory include import duties freight storage and insurance True The consistency concept prescribes that a company use the same accounting methods period after period so that financial statements are comparable across periods True A company has inventory with a market value of 217 000 and a cost of 241 000 According to the lower of cost or market the inventory should be written down to 217 000 True The days sales in inventory ratio is computed by dividing ending inventory by cost of goods sold and multiplying the result by 365 True Damaged and obsolete goods that can be sold are included in inventory at their net realizable value True An advantage of LIFO is that it assigns the most recent costs to cost of goods sold and does a better job of matching current costs with revenues on the income statement True Merchandise inventory includes all goods owned by a company and held for sale True