Question

Chapter 5: 1. Gross profit is often mentioned in the business What does gross profit mesure, and why is it important? Importante 2 Identify ten items of information on an invoice 3. Inventory costing $1,000 is purchased and invoiced on July 28 under terms of 3/10 n/30. Compute the payment amount on August 6. How much would the payment be on August 9? What explains the difference? What is the latest acceptable payment date under the terms of sale? 4. Why is the title Cost of Goods Sold especially descriptive? What type of account is Cost of Goods Sold? beginning inventory is $5.000, net purchases total 30,000, and freight in is 1,000 tanding inventory is $8,000, what is the cost of goods sold?

Answer 1

1) Gross profit is an important measure for the company because in computing gross profit the major costs are involved like direct material, labour costs etc. This margin is very important as it denotes the efficiency of the management of these costs. The indirect costs which does not include in gross profit computation has got less importance. It denotes the difference between revenue and cost of production.

2) Invoice should contain the below items

a. Unique Invoice serial number

b. Date of invoice

c. Description of goods

d. Quantity of goods

e. Price of goods

f. Bank account details

g. Tax registration number

h.Credit period

i. Discount if applicable

j. Name of the company, address

K. Customer name

l.Customer Contact number

3. 3/10 n/30 means that if the customer pays in 10 days he would get 3% discount on the invoice value if not he will have to pay with in 30 days without any discount. In the question if paid on 6th August then the amount to be paid is 1000*97% is $970. The difference amount is the discount for early payment. the last date the payment can be made is with in 30 days from the date of sale i.e 27-Aug

4. The cost of goods sold is descriptive because it is not an individual account and it is the combination of various amounts

i.e Opening stock + Purchases - closing stock. This not a specific type of account how ever this will always have a debit balance

5. Cost of goods sold includes freight incurred to bring the purchases to the factory

= 5000+30000+1000-8000

=28000