True/False 1. For merchandising companies, operating expenses are expenses that

Question

True/False 1. For merchandising companies, operating expenses are expenses that are incurred in the process of earning sales revenue 2. Cost of goods sold is a contra revenue account 3. Cost of goods sold is subtracted from gross profit to determine operating income. 4. Under IFRS, companies must classify operating and other expenses based on either the nature of the expenses or the function within the company. . 5. In a perpetual Inventory system, the Merchandise Inventory account acts as a control account for the Individual inventory accounts in the subsidiary ledger 6. Froight costs for items shipped FOB destination are pald by the buyer. 7 A niantitu dieeniint le nffarad to rustamars who nau thair

Explanation / Answer

1. True Operating Expenses are expenses incurred in the process of earning sales revenue .

Operating expense are the costs which is incurred by the company other than cost related to the production of a product. Examples are rent, utilities, insurance etc. In other words these are the cost to keep the business running.Therefore these expenses are incurred in the process of earning sales revenue.

2 False COGS is not contra revenue account .COGS is the cost of inventory which we have sold.

Contra account is that account which reduces balance of related account.Example: Contra revenue reduces revenue. Sales return and allowances is a contra revenue account.

3. False

Gross profit = Revenue - Cost of goods sold

Operating income = Gross profit - Operating expense( i.e. day to day expense of business)

4. True

Under IFRS, companies must classify expenses by either nature or function.

5.True

Inventory is a control account that is supported by a subsidiary ledger of individual inventory records. The subsidiary records show the quantity and cost of each type of inventory on hand.

6.False

The seller usually pays shipping costs in an FOB destination arrangement unless specified.

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