ACCT 2010 Chapter 6 Review Questions and Correct Answers

What is the operating cycle? series of activities that a company undertakes to generate revenues and ultimately cash Service company -Sells services rather than physical goods -No inventory Merchandising company -Sells goods that have been obtained from a supplier -Purchase a finished good and re-sell it Inventory assets acquired for resale to customers Inventory consists of? all costs needed to get the inventory ready for sale Manufacturing company -Three types of inventory: raw materials, work in progress, finished goods -Beyond scope of introductory course Three key differences in the B/S and I/S of a service company and a merchandising company 1. Merchandisers report Inventory as an asset, whereas service companies do not 2. Service companies earn revenue from services, merchandisers from sales 3. Merchandisers report an expense Cost of Goods Sold, service companies do not because they do not sell goods What is the difference between inventory and supplies? Supplies are goods acquired for internal use while inventory are goods acquired for resale to customers What are three accounts that are important to a merchandiser? -Inventory (total cost of acquiring goods that it has not yet sold, B/S) -Sales Revenue (total selling price of all goods that were sold, I/S) -Cost of Goods Sold (total cost of all goods that were sold, I/S) Gross profit/margin = Sales Revenue - Cost of Goods Sold -Profit earned from just selling inventory, no other expenses taken into account Goods available for sale = Beginning Inventory + Purchases -The sum of beginning inventory and purchases for the period