A single-step income statement includes cost of goods sold as another expense, and shows only one subtotal for total expenses. 2. Operating expenses are classified into two categories: selling expenses and cost of goods sold. 3. Sales of $350,000 and net sales of $323,000 could reflect sales discounts of $27,000. 4. A journal entry with a debit to cash of $980, a debit to Sales Discounts of $20, and a credit to Accounts Receivable of $1,000 means that a customer has taken a 10% cash discount for early payment. 5. FOB (Free on board) shipping point implies that ownership of merchandise transfers to the buyer at the buyer’s place of business.
The Correct Answer and Explanation is :
Here are the answers to the true/false statements along with explanations:
- True. A single-step income statement presents all revenues together and all expenses together without breaking down the categories into specific subtotals. It includes the cost of goods sold as one of the expenses. Then, a single total expense is subtracted from total revenues to calculate net income. This format simplifies the financial statement but provides less detailed information compared to a multi-step income statement, where operating and non-operating expenses are separated.
- False. Operating expenses are generally classified into two categories: selling expenses and general and administrative expenses (not cost of goods sold). Selling expenses include costs associated with marketing, selling, and distributing products, such as advertising and sales commissions. General and administrative expenses include costs related to the overall operation of the business, such as salaries of management and office supplies. Cost of goods sold (COGS) is an expense related to the production or purchase of the goods sold, but it is not classified under operating expenses in this context.
- True. Net sales are calculated by subtracting any discounts, returns, and allowances from the total sales. If total sales were $350,000 and net sales were $323,000, the difference of $27,000 could indeed reflect sales discounts, assuming there are no other factors such as returns or allowances. This implies that the sales discounts totaled $27,000, which reduced the gross sales to net sales.
- True. This journal entry represents a situation where a customer took a 2% cash discount for early payment. If the original amount due was $1,000, a 2% discount would be $20 (i.e., 1,000 * 0.02 = 20). The payment received is $980, and the discount is recorded separately in the “Sales Discounts” account, reducing the overall amount of revenue recognized.
- False. FOB shipping point means that ownership of goods transfers to the buyer at the point of shipment (i.e., when the goods leave the seller’s premises), not at the buyer’s place of business. Under FOB shipping point, the buyer assumes responsibility for the goods once they are shipped, including any risk of loss or damage during transportation. In contrast, under FOB destination, ownership transfers when the goods arrive at the buyer’s location.
These explanations help clarify the concepts behind each statement in accounting, particularly around income statements, sales, and freight terms.