Deck 5: Accounting for Merchandising Activities

Question 1

Cost of goods sold is reported on both the income statement and the balance sheet.

Answer 1

False

Question 2

A wholesaler is a company that buys products from manufacturers and sells them to consumers.

Answer 2

False

Question 3

Y-Mart had sales of $350,000. Its cost of goods sold was $200,000. Its gross profit was $550,000.

Answer 3

False

Question 4

Y-Mart had net sales of $645,000. Its cost of goods was $445,000. Its gross margin was $200,000.

Question 5

Merchandise inventory is included in the Plant and Equipment section of the balance sheet.

Question 6

A merchandiser earns profit by buying and selling merchandise.

Question 7

Gross profit is also called gross margin.

Question 8

Companies try to lengthen their operating cycles to increase profit.

Question 9

A retailer is a middleman that buys products from manufacturers and sells them to wholesalers.

Question 10

Cost of goods sold represents the cost of buying and preparing merchandise for sale.

Question 11

A periodic inventory system requires updating the inventory account at the beginning of an accounting period.

Question 12

Z-Mart had a gross profit of $340,000 based on sales of $700,000. Its cost of goods sold was $350,000.

Question 13

Merchandise inventory refers to products a company owns for purposes of selling to customers.

Question 14

In a perpetual inventory system, the cost of inventory purchased is recorded in the Purchases account.

Question 15

A perpetual inventory system gives a continuous record of the amount of inventory on hand.

Question 16

Assets tied up in inventory are not productive assets.

Question 17

A company's cost of merchandise available for sale consists of beginning inventory plus the net cost of purchases minus ending inventory.

Question 18

Merchandise inventory includes merchandise and office supplies.

Question 19

A service company earns profit by buying and selling merchandise.

Question 20

A merchandising company's operating cycle begins with the sale of merchandise and ends with the collection of cash from the sale.

Question 21

Sellers offer a purchase discount to buyers for prompt payment for purchases on account.

Question 22

A sales discount of 1/15 means the seller will receive 85% of the selling price.

Question 23

Periodic inventory systems were historically used by companies that sold large quantities of low-value items.

Question 24

The terms 2/10, n/30 means that the seller offers the purchaser a 2% cash discount if the amount is paid in full within 10 days. Otherwise, the full amount is due in 30 days.

Question 25

The Merchandise Inventory account balance at the end of one period is the amount of beginning inventory in the next period.

Question 26

In a perpetual inventory system, the net cost of purchases is accumulated in the Inventory account.

Question 27

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.

Question 28

The purchaser usually records a purchase return by a credit memorandum.

Question 29

In a periodic inventory system, cost of goods sold is not recorded as each sale occurs.

Question 30

Transportation-in increases cost of goods purchased.

Question 31

Each sales transaction for sellers using a perpetual inventory system involves recognizing revenue and cost of goods sold.

Question 32

Trade discounts are entered into the accounting system.

Question 33

A perpetual inventory system is able to directly measure shrinkage.

Question 34

In a periodic inventory system, Purchases is a temporary account.

Question 35

Sales of $350,000 and net sales of $323,000 may reflect sales discounts of $27,000.

Question 36

A debit to Sales Returns and Allowances and a credit to Accounts Receivable mean that a customer may have returned merchandise.

Question 37

Z-Mart did not take advantage of a supplier's offer of 2/10, n/30, and paid the invoice at the end of the month. By not taking the discount Z-Mart lost the equivalent of 18% annual interest on the amount of the purchase.

Question 38

A credit memorandum informs a customer of a credit to its Accounts Payable account from a sales return or allowance.

Question 39

FOB shipping or FOB factory means ownership of goods transfers to the buyer at the buyer's place of business.

Question 40

Credit terms are the listing of the amounts and timing of payments between a buyer and a seller.

Question 41

The periodic inventory system is superior to the perpetual inventory system in preventing shrinkage.

Question 42

When a single goods and services tax (GST) or Harmonized Sales Tax (HST) account is used, a debit balance in the account means the government owes money to the business.

Question 43

A classified multiple-step income statement is a format that shows intermediate totals between sales and profit and detailed calculations of net sales and cost of goods sold.

Question 44

Merchandising sales and costs reported on the income statement usually differ from cash receipts and payments for the period.

Question 45

A merchandising company

A) Earns profit from buying and selling merchandise
B) Buys products from manufacturers and sells to retailer
C) Buys products from manufacturers and sells them to consumers
D) Reports cost of goods sold on the income statement
E) All of the above

Question 46

Goods and services tax (GST) or Harmonized Sales Tax (HST) is calculated on the original purchase price plus the provincial sales tax (PST).

Question 47

Businesses normally get a full credit for the provincial sales tax (PST) they have paid.

Question 48

Businesses normally get a full credit for the goods and services tax (GST) and/or Harmonized Sales Tax (HST) that they have paid.

Question 49

Generally accepted accounting principles require companies to use a specific format for financial statements.

Question 50

For a business, provincial sales tax (PST) paid is included in the amount recorded as an asset or an expense when a purchase is made.

Question 51

When a single goods and services tax (GST) or Harmonized Sales Tax (HST) account is used, a credit balance in the account means that the government owes money to the business.

Question 52

For a business, goods and services tax (GST) and/or Harmonized Sales Tax (HST) paid is included in the amount recorded as an asset or an expense when a purchase is made.

Question 53

The cost of goods sold section of a multiple-step income statement includes beginning and ending inventories, goods available for sale and operating expenses.

Question 54

The adjustment to reflect shrinkage is a debit to Income Summary and a credit to Shrinkage Expense.

Question 55

Some businesses use only one account to keep track of the amount of goods and services tax (GST) and/or Harmonized Sales Tax (HST) owed or owing.

Question 56

Merchandisers

A) Earn profit from buying and selling merchandise
B) Receive fees in exchange for services
C) Earn profit from commissions
D) Earn profit from fare
E) Do not report gross profit

Question 57

Operating expenses are classified into two categories: selling expenses and cost of goods sold.

Question 58

The amount of gross profit for a merchandising business will be the same under both the accrual basis and the cash basis of accounting.

Question 59

Provincial sales tax (PST) is normally calculated on the original purchase price plus the goods and services tax (GST) or Harmonized Sales Tax (HST).

Question 60

Businesses normally get a full credit for both the goods and services tax (GST) and/or Harmonized Sales Tax (HST), and the provincial sales tax (PST) that they have paid.

Question 61

Merchandise inventory is

A) Reported on the balance sheet under plant and equipment
B) Products a company owns for resale to customers
C) Reported on the income statement as an expense
D) Includes supplies
E) Included on a service company's balance sheet

Question 62

To calculate the total cost of a merchandise purchase, the invoice account must be adjusted for which of the following?

A) Any discounts given to a purchaser by a supplier
B) Any returns and allowances received from a supplier
C) Any freight costs paid by a purchaser
D) Any taxes or other costs necessary to make the goods ready for sale
E) All of the above

Question 63

Z-Mart had sales of $572,300. Gross profit was $239,106. What is the cost of goods sold?

A) $279,194
B) $333,194
C) $360,194
D) $811,406
E) $40,088

Question 64

On December 5, Z-Mart purchased $1,800 worth of merchandise. On December 7, Z-Mart returned $800 worth of merchandise. On December 8, it paid the balance in full after taking a 2% discount. The amount of the payment was

A) $200
B) $980
C) $1,000
D) $1,600
E) $1,800

Question 65

Z-Mart uses the perpetual inventory system and recorded the following journal entry: The transaction was

A) A purchase
B) A return
C) A return and payment of the account payable
D) A payment of the account payable and recognition of a cash discount taken
E) A purchase and recognition of a cash discount taken

Question 66

2/10, n/30 is interpreted as

A) 2% cash discount if the whole amount is paid within 10 days, the balance is due in 30 days
B) 10% cash discount if the whole amount is paid within 2 days, the balance is due in 30 days
C) 30% discount if paid within 2 days
D) 30% discount if paid within 10 days
E) 2% discount if paid within 30 days

Question 67

A trade discount is

A) A term used by a purchaser to describe a cash discount given to customers for prompt payment
B) A reduction below a list price
C) A term used by a seller to describe a cash discount granted to customers for prompt payment
D) A reduction in price for prompt payment
E) Also called a rebate

Question 68

Wholesalers

A) Buy products from manufacturers and sell to retailer
B) Buy products from other wholesalers and sell to consumers
C) Buy products from manufacturers and sell to consumers
D) Buy products from retailers and sell to consumers
E) All of the above

Question 69

A periodic inventory system

A) Gives more timely information
B) Is widely used in practice
C) Was historically used by companies that sold large quantities of low-value items
D) Provides point of sale data
E) Does not use a Purchases account

Question 70

Z-Mart had sales of $500,100. Cost of goods sold was $143,400. What is the gross profit?

A) $216,600
B) $217,100
C) $356,700
D) $503,900
E) $213,300

Question 71

The cash sales operating cycle moves from

A) Purchases to inventory for sale to cash sales
B) Purchases to inventory for sale to accounts receivable to cash sales
C) Inventory for sale to cash sales to purchases
D) Accounts receivable to purchases to inventory for sale to cash sales
E) Accounts receivable to inventory for sale to cash sales

Question 72

Merchandise inventory

A) Is a capital asset
B) Is a current asset
C) Can include supplies
D) Is a type of long-term investment
E) Is an expense

Question 73

Cost of goods sold is

A) Another term for net sales
B) The term used for the cost of buying and preparing merchandise
C) An operating expense
D) Also called gross margin
E) The cost of goods sold to customers

Question 74

A perpetual inventory system

A) Gives a continuous record of the amount of inventory on hand
B) Uses a Purchases account for the cost of new merchandise purchased
C) Was historically used by companies that sold large quantities of low-value items
D) Is not widely used in practice
E) All of the above

Question 75

A periodic inventory system

A) Requires updating the inventory account every month
B) Records the cost of new merchandise purchased in a permanent account
C) Does not require a physical count of inventory
D) Records the cost of new merchandise purchased in a temporary account
E) All of the above

Question 76

Gross profit is

A) The same as profit
B) Subtracted from operating income to get profit
C) Net sales less cost of goods sold
D) A special general ledger account
E) Only calculated when using the perpetual inventory system

Question 77

Z-Mart purchased $3,000 worth of merchandise on credit. Transportation costs were an additional $100, paid cash to the cartage company on delivery. Z-Mart returned $300 worth of merchandise and paid the invoice on time, and took a 2% purchase discount. The amount of this payment was

A) $2,744
B) $2,700
C) $3,000
D) $3,100
E) $2,900

Question 78

The operating cycle of a merchandising company

A) Begins with the purchase of merchandise
B) Ends with the collection of cash from the sale of merchandise
C) Varies among types of businesses
D) Applies to both cash and credit sales
E) All of the above

Question 79

Retailers

A) Buy products from manufacturers and sell to wholesalers
B) Buy products from wholesalers and sell to other wholesalers
C) Buy products from manufacturers and wholesalers and sell to consumers
D) Buy only from wholesalers
E) All of the above

Question 80

In a periodic inventory system

A) The company records the cost of new merchandise in the permanent Purchases account
B) The cost of merchandise on hand is determined by relating the quantities on hand to records showing each item's original cost
C) The inventory value is not based on a physical count
D) A continuous record of the amount of inventory on hand is maintained
E) None of these