Midterm #2 Content Coverage:
In-Class Demo Questions: Additional Exercises and
Topics & Learning Problems
Chapter 5 Chapter 5 Questions: 7, 9
Merchandising Operations Exercises: 5-3
Learning Objectives LO1: E5-1 Problems: 5-1, 5-1A, 5-3,
1, 2, 3: Understand LO2: E5-2 5-3A
LO3: - PLUS:
Instructor Provided Other: E5-6, E5-8, E6-13, P6- Instructor Provided
Summary: Master 1, Instructor Provided Student Questions on Blackboard
Read: pages 203 - 210 Worksheets (located under under Course Materials,
ONLY in Chapter 5 Course Materials, Chapter 5) Chapter 5.
Chapter 6 Chapter 6 Questions: 1, 3, 5, 7 (but
Inventory Costing Methods change from LIFO to WA), 11
Learning Objectives LO2: E6-5, E6-14 (omit Part Exercises: 6-3, 6-13 (b)
3: Understand (2)) ONLY
2, 4 (LCM): Master LO3: E6-6 (omit LIFO) Problems: 6-7, 6-9, 6-7A,
Read page 251 - 257 and LO4: E6-15 (Lower of Cost of 6-9A
261-262 Market ONLY)
Chapter 7 Chapter 7 Questions: 1, 7,
Liquid Assets and Internal Exercises: E7-5
Controls LO2: E7-6, P7-4, P7-5 Problems: P7-2, P7-3, P7-
Learning Objectives LO3: - 3A, P7-4A, P7-5A
3: Scan NOTE: in the AFDA, a debit
2: Master balance is '+' and a credit
Read page 304 - 312 balance is a '-'
Additional Theory Questions:
Below are listed additional theory questions that you may wish to consider while
studying for the final exam. Remember that these theory questions are NOT a total
list of all theory questions that may show up on the final exam. However, they may
help you to tackle the 50% theory that will be on the final exam.
1. What is FOB destination? Who owns inventory while it is in transit if it has been
shipped FOB destination? Who pays for the freight? How is the freight recorded
in the financial statements when it is paid by the appropriate party? Does it
affect the balance sheet only or the balance sheet and income statement?
• FOB destination means that the seller pays the freight costs from the shipping point until the goods reach their destination
• Seller owns inventory while in transit
• Seller pays for freight
• CIF destination
• Cost of freight is an expense on the income statement for the seller
• Cash goes down, Freight out expense goes up
• Affects both balance sheet (cash) and income statement (expense)
2. What is FOB shipping point? Who owns the inventory while it is in transit if it
has been shipped FOB shipping point? Who pays for the freight? How is the
freight recorded in the financial statements when it is paid by the appropriate
party? Does it affect the balance sheet only or the balance sheet and income
• FOB shipping point means that the buyer pays the freight costs, the seller
pays the costs incurred until the goods reach the point of shipping and the
buyer pays the costs incurred from the shipping point to the buyers
• Buyer owns the goods while in transit
• The buyer pays the freight and it increases the inventory
• Affects only the balance sheet (cash goes down and inventory goes up)
3. What is the revenue recognition principle and why is it important? What criteria
guide accountants as to when revenue should be recognized?
• Revenue recognition principle: revenues are recognized in the income
statement when they are earned
• Revenue is recognized when:
o Performance is achieved
o Amount is reasonably measurable (the price to be received from
customer must be known)
o Collection of cash is reasonably assured
4. Define the matching principle. Why is the matching principle important when
considering the recognition of expenses?
• Matching principle: the revenues for the period are associated with the
costs of generating those revenues. (expenses follow revenues)
o Used up/consumed
o When sold (transferred)
o When incurred (passage of time)
• Inventory, supplies (prepaid), plant and equipment
2 5. What is the difference between the single step income statement and the
multiple step income statement? What type of company is the multiple step
income statement used for?
• Single-step income statement: an income statement in which all expenses
are added together and subtracted from revenues
• Multi-step income statement: an income statement that shows
classifications of revenues and expenses as well as important subtotals
• Used in merchandising companies
6. You are selling inventory to a customer. Why would you offer a sales discount?
What are the benefits and drawbacks of offering this discount?
• Sales discounts: contra-revenue account used to record discounts given to
customers for their account
• Given to encourage payer to pay on time
• Benefit: payer pays on time
• Drawbacks: lose some money and chance the payer will not pay back
• Expanse on income statement
7. Define the account sales returns and allowances. Is this account an expense
account on the income statement? Why or why not?
• Contra-revenue account used to record both refunds to customers and
reductions of their accounts
• Expense on the income statement
• 2 entry’s
o Sales returns and allowances decrease, and cash or accounts
o Increase merchandise inventory and increase cost of goods sold
8. What is gross profit and how is it calculated?
• Sales – cost of goods sold = gross profit
• The difference between net sales and the cost of goods sold
9. What is the difference between the periodic and perpetual inventory system?
Give an example of a company that would use the periodic inventory system
and explain why.
o Detailed records of the cost of each inventory purchase and sale are
3 o Cost of goods sold is determined each time a sale occurs
o Provides better control over inventory
o Ex. appliance stores, car dealerships, furniture stores
o Detailed records are not kept though out the period
o Cost of goods sold determined only at t