Chapter 6 questions

1. Explain the difference between sales revenue and net sales

a. Sales revenue is the total amount of money generated from the sale of a product. Unlike
net sales, sales revenue does not take into account sales returns and allowances and
sales discounts.
2. What is gross profit or gross margin on sales? In your explanation, assume that net sales
revenue was $100,000 and cost of goods sold was $60,000.
a. Gross profit = net sales revenue – cogs / revenue so (100k-60k) / 100k = 40% = 40,000
b. Net sales - COGS
3. What is a credit card discount? How does it affect amounts reported on the income statement?
a. A credit card discount is the fee the credit card company chargers the retailer. It is
reduced from gross sales to find net sales revenue.
4. What is a sales discount? Use 1/10, n/30 in your explanation.
a. A sales discount is a discount if a company pays the invoice in a specified amount of
time. In this scenario, if the company pays the bill within 10 days, they will receive a 1%
discount.
5. What is the distinction between sales allowances and sales discounts?
a. Sales allowances are involved with the returns of items whereas sales discounts are
involved with the supplier giving the retailer a discount on the purchase of goods
6. Differentiate accounts receivable from notes receivable.
a. Notes receivable are a written promise to pay a certain amount of money by a certain
date in time. An accounts receivable are usually involved with invoices to suppliers.
7. Which basic accounting principle is the allowance method of accounting for bad debts designed
to satisfy?
a. The revenue recognition principle
8. Using the allowance method, is bad debt expense recognized in the period in which sales related
to the uncollectible account are made or the period in which the seller learns that the customer
is unable to pay?
a. The period in which sales related to the uncollectible account are made
9. What is the effect of the write-off of bad debts on net income and net accounts receivable?
a. No effect
10. Ten goes here
11. Define cash and cash equivalents in the context of accounting. Indicate the types of items that
should be included and excluded
a. Cash equivalents are liquid assets with a maturity date of 3 months or less. Examples
include bank deposits and treasury bills
12. Summarize the primary characteristics of an effective internal control system for cash.
a. Separation of duties
b. Prescribed policies and procedures
13. Why should cash-handling and cash-recording activities be separated? How is this separation
accomplished?
a. To avoide any fraud that may occur. This can be done using prenumbered checks
 14. What are the purposes of a bank reconciliation? What balances are reconciled?
a. To compare a companys cash record to bank statements
15. Briefly explain how the total amount of cash reported on the balance sheet is computed
a. Idek what this means

Chapter 7 Questions
1. Why is inventory an important item to both internal (management) and external users of
financial statements?
a. Inventory can be used
2. What are the general guidelines for deciding which items should be included in inventory?
3. Explain the application of the cost principle to an item in the ending inventory.
4. Define goods available for sale. How does it differ from cost of goods sold?
5. Define beginning inventory and ending inventory.
6. The chapter discussed four inventory costing methods. List the four methods and briefly explain
each
7. Explain how income can be manipulated when the specific identification inventory costing
method is used.
8. Contrast the effects of LIFO versus FIFO on reported assets when prices are rising and prices are
falling
9. Contrast the effects of LIFO versus FIFO on cash outflow and inflow.
10. Explain briefly the application of the lower of cost or net realizable value concept to ending
inventory and its effect on the income statement and balance sheet when net realizable value is
lower than cost.
11. When a perpetual inventory system is used, unit costs of the items sold are known at the date of
each sale. In contrast, when a periodic inventory system is used, unit costs are known only at
the end of the accounting period. Why are these statements correct?