[jamesk486]

Kirby, Inc. records a sale with a gross margin of $1,400. Which one of the followingstatements correctly describes the effect of such a sale on its balance sheet?
A. The gross margin account increases by $1,400
B. Common stock increases by $1,400
C. The retained earnings accounts increases by $1,400
D. The sales revenue account increases by $1,400

Since gross margin is sales -cogs
I thought the answer would be c, but apparently it is incorrect

[morgaine300]

The answer is c. Who said it was incorrect?

[jamesk486]

Lol.. im sorry.. I thought the answer was b, not c... c is the right answer... but why cs over retained earnings?

[morgaine300]

A gross profit of $1400 means you have some sales amount higher than that, and some cost of goods sold which brought it down to $1400. i.e. a net effect of $1400 on net income. And net income is closed out to retained earnings. Net income does not affect stock at all. Stock is only the investment the shareholders have made.

[ravi_soft8400]

Can you please tell me why a is wrong? Gross profit may not be equal to net profit since other expenses have to be deducted.

[ArcSine]

I agree with you that "C" would only be correct if Gross Margin = Net Profit, and that's frequently not the case (expenses deducted from gross margin, as you've noted).

But the question's asking for the effect on the balance sheet, and "A" refers to an income statement item. That narrows it down to "B" and "C", and "B" is clearly not correct.

Still, the question seems poorly worded.