A merchandising business will earn an income before income taxes of exactly $O w

ID: 2331131 • Letter: A

Question

A merchandising business will earn an income before income taxes of exactly $O when net sales equals cost of goods sold. operating expenses equal net sales. gross margin equals operating expenses. d. cost of goods sold equals gross margin. Under the perpetual inventory system, in addition to making the entry to r b. ecord a sale, a company would record an increase in inventory corresponding to the amount of the record a decrease in inventory and an increase in cost of goods sold for the cost of the merchandise sold. record an increase in inventory corresponding to the cost of the inventory make no additional entry until the end of the period. sale. Assuming that net cost of purchases was $90,000 during the year and that ending merchandise inventory was $2,000 less than the beginning merchandise inventory of $25,000, how much was cost of goods sold? a. $117,000 b. $67,000 c. $ 92,000 d. $113,000 er

Explanation / Answer

Question 1

Correct Answer—Gross margin Equals Operating Expenses

Explanation

A merchandising company’s Net income before taxes will equal $0 when Gross margin is equal to Operating Expenses. Gross margin is Sales minus Cost of Goods sold. Net income before taxes is calculated by Deducting Operating expenses from Gross margin and if gross margin is equal to Operating income, the resulting net income before taxes is zero.

An income statement is given below as an example to understand this more clearly:

Income Statement

Sales

$ 387,500.00

Cost of goods sold

$ 191,500.00

Gross profit

$ 196,000.00

Operating Expenses:

Salaries

$ 81,398.00

Repairs

$ 76,752.00

Rent

$ 18,650.00

Depreciation

$ 17,100.00

Supplies

$ 2,100.00

Total Operating Expenses

$ 196,000.00

Operating Icome

$ 0.00

Question 2

Correct Option—Record a Decrease in Inventory and an Increase in Cost of Goods sold for the cost of merchandise sold.

Explanation

In perpetual Inventory system every time sales is done, it is recorded in inventory ledgers to record the cost of goods sold and decrease in inventory to update Inventory records. Perpetual inventory is a system where each sales and purchase in recorded and updated as soon as transaction is complete so when Sales is made a decrease in inventory as well as increase in Cost of Goods sold is recorded.

Question 3

Correct Option-- $ 92,000

Cost of goods sold is calculated as follows

Beginning Inventory

$ 25,000.00

Add: Purchases

$ 90,000.00

Goods Available for sale

$ 115,000.00

Less : Ending Inventory

$ 23,000.00

Cost of Goods Sold

$ 92,000.00

Ending Inventory=$25000-$2000=$23000